Bloomberg News

BNY Mellon Profit Declines 37% as Low Rates Hurt Revenue

July 18, 2012

Bank of New York Mellon Corp. (BK:US), the world’s largest custody bank, said second-quarter earnings fell 37 percent as low interest rates and declining stock markets cut into revenue and the bank settled a lawsuit.

Net income declined to $466 million, or 39 cents a share, from $735 million, or 59 cents, a year earlier, the New York- based bank said today in a statement. Earnings were reduced by $212 million, or 18 cents a share, for a previously announced settlement of a lawsuit over losses tied to Sigma Finance Inc., the operator of a structured investment vehicle that collapsed in 2008.

“The macro environment for all the custody banks is challenging,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview. “That said, Bank of New York put up better numbers than its competitors.”

BNY Mellon, led by Chief Executive Officer Gerald Hassell, has cut jobs and set a target to save as much as $700 million by 2015 through operational improvements, as the Federal Reserve’s decision to keep rates exceptionally low through at least late 2014 hurts revenue at custody banks. State Street Corp. (STT:US), the third-largest custody bank, yesterday agreed to buy the hedge- fund administration unit of Goldman Sachs Group Inc. for $550 million to boost growth as revenue and assets fell.

Low Rates

Low rates force custody banks to waive fees on money-market funds, erode yields on its portfolio and reduce revenue from securities lending. Goldman Sachs Group Inc. (GS:US) and Bank of America Corp. (BAC:US) said this month that the Fed won’t move on its benchmark interest rate until the middle of 2015 as the economy slows.

Declining stock prices also cut into revenue because custody banks earn a fee based on the assets they oversee and manage. The MSCI ACWI Index (MXWD) of global stocks fell 8.7 percent in the 12 months ended June 30.

BNY Mellon fell 0.1 percent to close at $21.69 in New York. It has gained 8.9 percent this year, compared with a 9.4 percent increase for the 20-member Standard & Poor’s index of custody banks and asset managers.

Northern Trust Corp. (NTRS:US), the third-largest U.S. independent custody bank, today announced an 18 percent increase in second- quarter profit, to $179.6 million, helped by new business and a reduction in compensation expenses. The Chicago-based firm fell 1.8 percent to $46.24, after earnings missed estimates. It has climbed 17 percent this year.

State Street

At State Street, second-quarter profit on an operating basis rose 2.3 percent to $494 million, or $1.01 a share, after the firm sold investment securities for a gain. Revenue declined 1.9 percent to $2.43 billion on lower assets and fees, sending the shares down by the most in seven months yesterday.

BNY Mellon’s assets under custody rose 1.9 percent from the previous quarter to a record $27.1 trillion, while assets under management decreased 0.7 percent to $1.3 trillion.

Custody banks including BNY Mellon have talked about offsetting the profit squeeze by raising the prices they charge clients, said Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida. Those efforts may not come to pass.

“The price competition in this business continues to be intense,” Bove said in a telephone interview. Banks such as New York-based Citigroup Inc. (C:US) and San Francisco-based Wells Fargo & Co. (WFC:US) are trying to expand in the custody field, he said.

Service Fees

Investment service fees dropped 5.4 percent from a year earlier, the result of higher money market fee waivers and the sale in the fourth quarter of the Shareowner Services business. Investment-management fees rose 2.3 percent, driven by higher performance fees and $26 billion in long-term deposits. Foreign exchange revenue dropped 15 percent on lower trading volumes.

BNY Mellon said in November it plans to save as much as $700 million before taxes by 2015 through operational improvements such as consolidating applications, insourcing software development and combining locations.

The bank said at the time it expected its fee revenue to grow 3 percent to 5 percent per year from 2012 to 2014, outpacing a projected 2 percent to 3 percent annual increase in expenses.

In August, BNY Mellon said it planned to cut 1,500 jobs, or 3 percent of its workforce. State Street and Chicago-based Northern Trust Corp. have taken similar steps.

BNY Mellon has been sued by several states and the U.S. Attorney in Manhattan over pricing of foreign-currency trades on behalf of clients.

Foreign Exchange

The cases center on the pricing of small foreign-exchange transactions handled automatically on behalf of pension funds, a service known as standing instruction. The plaintiffs say the bank misled and overcharged them on standing instruction trades. BNY Mellon said it acted properly and offered clients competitive foreign-exchange services.

The bank doesn’t have to face a Virginia lawsuit over the issue, a state judge ruled in May. Brian Gottstein, a spokesman for Virginia Attorney General Ken Cuccinelli, said the court ruling didn’t absolve the bank of wrongdoing.

Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for individuals and institutions.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • BK
    (Bank of New York Mellon Corp/The)
    • $40.85 USD
    • -0.26
    • -0.64%
  • STT
    (State Street Corp)
    • $79.73 USD
    • 0.26
    • 0.33%
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