BNY Mellon, State Street Assets Rise to Records on Acquisitions, Markets

Bank of New York Mellon Corp. and State Street Corp., the two biggest independent custody banks, said client assets rose to a record last quarter, helped by higher stock markets and acquisitions.

BNY Mellon, the largest custody bank, said assets under custody and administration rose 12 percent to $25 trillion, lifting revenue and fueling a 15 percent gain in fourth-quarter net income. State Street said assets under custody increased 15 percent to a $15.9 trillion, also a record. Net income fell 84 percent because of costs stemming from job cuts and the sale of securities to bolster capital.

Both companies signaled they aim to restore dividends this year, after spending at least $4.4 billion in total on acquisitions last year. BNY, led by Robert Kelly, bought PNC Financial Service Group Inc.’s investment-servicing business for $2.31 billion, and State Street acquired the securities- servicing unit of Italy’s Intesa Sanpaolo SpA for 1.28 billion euros ($1.72 billion).

“Management know their shareholders want dividends and most likely will try to move forward with dividend increases” in the first and second quarters of this year, Tom Lewandowski, an analyst at Edward Jones & Co. in St. Louis, said in an interview.

BNY Mellon fell 54 cents, or 1.7 percent, to $31.48 at 4:15 p.m. in New York Stock Exchange composite trading. State Street declined $2.06, or 4.1 percent, to $48. Northern Trust Corp., which reported a 22 percent decline in profit, fell $3.15, or 5.7 percent, to $52.49, the most since Oct. 21, 2009.

Job Cuts

BNY Mellon’s net income climbed to $679 million, or 54 cents a share, from $593 million, or 49 cents, a year earlier. Analysts had expected the New York-based company to report a profit of 56 cents a share, according to the average of 14 estimates in a Bloomberg survey.

State Street’s net income fell to $81 million, or 16 cents a share, from $498 million, or $1, a year earlier, the Boston- based company said today in statement. Operating profit of 87 cents a share beat the 86-cent average estimate of 20 analysts surveyed by Bloomberg.

Net income was reduced by $156 million, or 21 cents a share, because of restructuring costs connected to its decision to cut 1,400 jobs. The move will save as much as $625 million annually before taxes by the end of 2014 while triggering $450 million in restructuring expenses over four years, the company has said.

Basel Rules

BNY Mellon and State Street said they should be able to raise payouts to shareholders, even as they prepare to comply with tougher capital requirements under the Basel III banking rules agreed to last year. The new rules more than triple the highest-quality capital banks must hold.

State Street sold $11 billion of mortgage-backed and other asset-backed securities in December, replacing them with less- risky investments, to boost its capital ratios. The sale reduced earnings by $344 million in the fourth quarter, or 67 cents a share.

The firm’s tier 1 common ratio was 18 percent under current rules and an estimated 9.4 percent under Basel III requirements. Basel III rules require banks to have a ratio of tier 1 common equity to risk-weighted assets of 7 percent by 2019, according to BNY Mellon.

Raising Dividends

“We’re in a position to comply with Basel III requirements far ahead of their implementation dates,” State Street Chief Executive Officer Joseph “Jay” Hooley said during a conference call with analysts. Raising State Street’s dividend to the pre- crisis level of 24 cents a share is his “first priority,” Hooley said.

The firm cut the quarterly dividend to a penny in February 2009 to preserve capital as deteriorating global credit markets created unrealized losses in the company’s investment portfolio. BNY Mellon lowered its dividend to 9 cents a share from 24 cents in April 2009.

“We are well-positioned for the new capital regime,” Chief Executive Officer Robert Kelly said in a telephone interview. He said the company could comply by the end of this year and should still be able to return cash to investors.

Both companies are waiting for permission from the Federal Reserve before taking action to boost dividends or start stock buybacks. Kelly said he hoped to hear back from the Fed in the first half of the year.

Squeezed

Custody banks have been squeezed for the past two years by record low interest rates, which reduce the profit margins they earn when investing or lending cash deposited by fund clients, and when lending securities. The Fed has kept its benchmark lending rate at between zero and 0.25 percent since December 2008.

Kelly estimated that every 1 percentage point increase in short-term interest rates would add almost $500 million to his company’s pre-tax income.

BNY Mellon and State Street have compensated for low interest rates through acquisitions. In addition to the PNC deal, Kelly last year bought BHF Asset Servicing GmbH for 253 million euros ($341 million) to expand in Europe. State Street finished the purchase of Mourant International Finance Administration in the U.K.’s Channel Islands in April.

Northern Trust, which hasn’t been able to offset the impact of low interest rates with acquisitions, reported a 22 percent drop in fourth-quarter net income. Assets under custody rose 12 percent to $4.08 trillion.

Northern Trust

Net income fell to $157.1 million, or 64 cents a share, from $200.3 million, or 82 cents a share, a year earlier, the Chicago-based company said today in a statement. Profit missed the 71-cent average estimate of 14 analysts surveyed by Bloomberg.

Northern Trust derives the highest portion of its revenue, 26 percent, from net interest income among the three largest independent custody banks. For BNY Mellon, that number is 20 percent.

Rising markets helped all three banks as the average value of the Standard & Poor’s 500 Index in the fourth quarter was 11 percent higher than a year earlier. Fee revenue at BNY Mellon jumped 16 percent to $2.97 billion. Fee revenue at State Street rose 14 percent to $1.74 billion.

Custody banks keep records, track performance and lend securities to institutional investors including mutual funds, pension funds and hedge funds. They also manage investments for individual and institutions. Including competitors owned by larger financial institutions, JPMorgan Chase & Co. is the second largest custody bank.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net Charles Stein in Boston at cstein4@bloomberg.net Sree Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

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

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