Bank of New York Mellon Corp. (BK), the world’s largest custody bank, may get more aggressive in cutting costs after the sudden departure of Chief Executive Officer Robert P. Kelly, according to Wall Street analysts.
Kelly, 57, who had run the company since 2007, stepped down in “mutual agreement” with the board, the firm said yesterday. His successor is Gerald L. Hassell, 59, who has been president of New York-based BNY Mellon since 1998.
“While the exact reasons behind Mr. Kelly’s departure are unclear, we believe the firm’s focus under the new leadership could shift to more aggressive cost management and business rationalization and away from acquisitions,” Alexander Blostein, an analyst at Goldman Sachs Group Inc. (GS) in New York, wrote yesterday in note to clients. Blostein has a “neutral” rating on the shares.
BNY Mellon fell 4 cents, or 0.2 percent, to $20.63 at 4:15 p.m. in New York Stock Exchange composite trading, after rising as much as 5.7 percent. The stock has dropped 32 percent in 2011, compared with the 18 percent decline by the Standard & Poor’s financial-services index.
The bank, in a statement, said Kelly left “due to differences in approach to managing the company,” without explaining what those differences were.
In a conference call with investors in July, Kelly described expense growth at the bank as “too high,” citing rising costs for pensions, compensation, health care and legal bills. The bank said Aug. 10 it planned to cut 1,500 jobs, or 3 percent of the workforce, to address escalating expenses.
Rival State Street Corp. (STT), the third-largest custody bank, moved earlier and more dramatically to cut costs, said John Stilmar, an analyst with SunTrust Robinson Humphrey Inc. in Atlanta.
“If State Street can do it, so can BNY Mellon,” Stilmar said today in a telephone interview.
State Street, based in Boston, said in November it would cut 1,400 jobs, or 5 percent of the workforce, by the end of this year as part of an effort to slash as much as $625 million in expenses annually. The bank said it would take other measures including trimming real estate costs and investing in technology initiatives to increase efficiency.
State Street said in July it would eliminate an additional 850 jobs over 20 months by laying off 530 information technology employees and transferring 320 to outside vendors.
Low Interest Rates
Custody banks have been hurt by persistent low interest rates, which reduce income from lending cash and securities and cut fees from money-market funds. The U.S. Federal Reserve has kept its main lending rates close to zero since December 2008 to try to revive the economy.
Weak capital markets have also reduced revenue from securities lending and foreign-exchange trading, said Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine. In this environment cost-cutting becomes more critical, he said.
“BNY Mellon has been a little slow to jump on the bandwagon,” Cassidy said today in a telephone interview.
Kelly, who came from Pittsburgh-based Mellon Financial Corp. when it was acquired in July 2007 by Bank of New York Co., was thought of as someone willing to spend money to expand the bank, Cassidy said. Hassell, his successor, has been a career employee at Bank of New York, an institution known for frugality, Cassidy said.
Under Kelly, BNY Mellon grew by buying PNC Financial Services Group Inc. (PNC)’s investment-servicing business for $2.31 billion and Germany’s BHF Asset Servicing GmbH for 253 million euros ($361 million) in 2010.
‘No Free Lunch’
Both Bank of New York and State Street have spoken about the need to raise prices to offset increased expenses.
At a May 24 presentation, Bank of New York Vice Chairman Timothy Keaney said customers were being told, “There is no free lunch here,” and that the bank’s higher costs are “going to be translated back to the clients.”
On an April 19 conference call, State Street Chief Executive Officer Joseph “Jay” Hooley talked about improving the “economics,” of the business, “given some of the falloff in market-based revenues.” Hooley said conversations with customers had resulted in some fee increases.
State Street shares have declined 25 percent this year. Chicago-based Northern Trust Corp. (NTRS), the third-largest independent custody bank, has fallen 31 percent.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. They also manage investments for individuals and institutions.
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