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Bank of New York Mellon Facing Challenges

By    |   Thursday, 23 February 2012 10:50 AM

Bank of New York Mellon (BK), the world’s biggest custody bank, is facing challenges in a mixed banking environment. Interest rates near zero hurt the bank, yet the recent strength in financial markets helps it.

In addition to custody services, BNY Mellon offers issuer services, asset management, and private banking services to institutional investors and wealthy individuals around the world.

The bank’s profits come primarily from the custody and issuer services. With 75 percent of the global custody business held by just six firms, size does matter. BNY Mellon’s ability to offer the full range of custody services throughout the world gives it a leg up.

The 2008 to 2009 financial crisis led asset managers to shy away from commercial banks and brokerage firms as their custody service providers. It’s becoming difficult for asset managers to perform custody services for themselves. Those factors should bring more business to BNY Mellon.

When it comes to equity and fixed-income issuer services, BNY Mellon has no competitors at the global or national level. That’s obviously a position of strength.

As for the mixed environment, low interest rates hurt the bank by lowering returns on its investments and loans. The bank has had to waive fees for some of its money market funds, for instance.

The equalizer

If financial markets can sustain their gains, that should offset the effect of low rates. BNY Mellon charges fees based on the amount of assets it manages. Appreciating financial markets boost asset totals, increasing revenue for the bank.

Government prosecutors charged the bank last year with overcharging customers on currency transactions, but it recently reached a partial settlement.

Standard & Poor’s analyst Sonia Parechanian has a hold rating on BNY Mellon shares. The European financial crisis and low interest rates will continue to weigh, she says.

The bank’s earnings dropped 26 percent in the fourth quarter to $505 million from a year earlier. Revenue fell 6 percent to $3.5 billion.

BNY Mellon next reports earnings April 19.

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Thursday, 23 February 2012 10:50 AM
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