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Tags: bank | new | york | earnings

BNY Mellon Profit Falls 37% as Low Interest Rates Hurt Revenue

Wednesday, 18 July 2012 07:18 AM EDT

Bank of New York Mellon Corp., the world’s largest custody bank, said second-quarter earnings fell 37 percent as low interest rates and declining stock markets cut into profits.

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 in a statement. Earnings were reduced by $212 million, or 18 cents a share, to settle a lawsuit the bank announced earlier this month.

“In this kind of environment, it is hard for banks like BNY Mellon to generate much growth,” Marty Mosby, an analyst with Guggenheim Securities LLC in Memphis, Tennessee, said in a telephone interview before results were released. Mosby has a buy rating on the stock.

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. Low rates force BNY Mellon to waive fees on money-market funds, erode yields on its portfolio and reduce revenue from securities lending.

Goldman Sachs Group Inc. and Bank of America Corp. 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 of global stocks fell 8.7 percent in the 12 months ended June 30.

State Street

BNY Mellon announced earnings before the start of trading. The shares have gained 9.1 percent this year, compared with a 9 percent gain for the 20-member Standard & Poor’s index of custody banks and asset managers.

State Street Corp., the third-largest custody bank, has agreed to buy the hedge-fund administration unit of Goldman Sachs Group Inc. for $550 million to boost growth as revenue and assets under custody fell. Second-quarter profit rose 2.3 percent to $494 million, or $1.01 a share, after the firm sold investment securities for a gain.

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. and San Francisco-based Wells Fargo & Co. are trying to expand in the custody field, he said.

Job Cuts

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.

Virginia Ruling

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. The company had $26.6 trillion in assets under custody or administration and $1.3 trillion under management as of March 31, according to its website.

© Copyright 2022 Bloomberg News. All rights reserved.

Wednesday, 18 July 2012 07:18 AM
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