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Tags: BNY | Mellon | Profit | earnings

BNY Mellon Profit Falls as Record-Low Rates Cut Investment Gains

Wednesday, 18 April 2012 08:57 AM EDT

Bank of New York Mellon Corp., the world’s largest custody bank, said first-quarter earnings fell 1 percent as interest rates near record lows eroded income from lending and investing.

Net income fell to $619 million, or 52 cents a share, from $625 million or 50 cents, a year earlier, BNY Mellon said today in a statement. Analysts had expected the New York-based company to report a profit of 51 cents a share, according to the average of 15 estimates in a Bloomberg survey.

“It is a challenging environment for all the custody banks because low interest rates limit what they can make on their short term assets,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview before earnings were announced.

BNY Mellon follows Boston’s State Street Corp., the third- largest custody bank, in reporting lower earnings as the Federal Reserve’s decision to keep interest rates near zero since 2008 hurt custody banks. BNY Mellon, which earns fees on assets it manages and oversees for clients, was helped by a 12 percent gain in the Standard & Poor’s 500 Index in the first quarter and cost-cutting measures.

“We are seeing the early results of our operational excellence initiatives as we generated significant positive operating leverage relative to the fourth quarter,” Chief Executive Officer Gerald Hassell said in the statement. Hassell in November outlined expense cuts designed to save as much $700 million before taxes by 2015. The bank said at that time it expected fee revenue to grow 3 percent to 5 percent a year from 2012 to 2014.

Cost Cuts

The cost savings will come from operational improvements such as consolidating applications, insourcing software development and combining locations. In August, the bank 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.

State Street said yesterday that first-quarter profit on an operating basis fell 6.6 percent to $410 million, or 84 cents a share, as expenses rose faster than revenue. Northern Trust’s net income rose 6.8 percent to $161.2 million, as rising assets helped offset higher expenses.

“We should start to see the benefits of that cost- cutting” at BNY Mellon, Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee said in a telephone interview. Mosby has a buy recommendation on all three custody banks.

The Federal Reserve has pledged to keep rates exceptionally low through at least late 2014. Because of the low rates, BNY Mellon has been forced to waive fees on money market funds, accept declining yields on its portfolio and endure a drop-off in securities-lending revenues because returns have shrunk on the cash collateral the bank gets to invest.

Forex Lawsuits

BNY Mellon will face a jury trial in a lawsuit brought by Virginia which claims that the bank defrauded state pension funds in foreign currency trades. Attorneys general in Ohio, New York and Florida as well as U.S. Attorney Preet Bharara in Manhattan have sued over the same issue. Massachusetts filed an administrative action against the banks.

All the cases center on the pricing of small foreign- exchange transactions handled automatically on behalf of the pension funds, a service known as standing instruction. State Street is being sued in similar cases in Arkansas and California. Northern Trust has not been accused of wrongdoing in foreign exchange transactions.

The states say BNY Mellon misled and overcharged them on standing instruction trades. The bank said it acted properly and that it offered clients competitive foreign-exchange services.

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

Before today, BNY Mellon shares rose 20 percent this year compared with a gain of 17 percent for the Standard & Poor’s index of asset managers and custody banks.

© Copyright 2022 Bloomberg News. All rights reserved.

Wednesday, 18 April 2012 08:57 AM
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