BNY Mellon Profit Falls as Record-Low Rates Cut Returns

Bank of New York Mellon Corp., the world’s largest custody bank, said first-quarter earnings fell 1 percent as revenue lost from the sale of a unit and lower foreign-exchange trading offset gains from rising assets.

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 (BK) 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.

“The quality of the earnings was mediocre,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, wrote in an e-mail, to explain the decline in the stock. Profits were boosted by a lower than expected tax rate and gains on security sales, Cassidy said.

BNY Mellon, which joins Boston’s State Street Corp. in reporting lower profit, said revenue from foreign exchange trading, the subject of lawsuits against the bank, declined 21 percent from a year earlier. Chief Executive Officer Gerald Hassell, who in November outlined expense cuts designed to save as much $700 million before taxes by 2015, said some savings are already materializing as compensation and software expenses fell.

“We are seeing the early results of our operational excellence initiatives as we generated significant positive operating leverage relative to the fourth quarter,” Hassell said in the statement.

Record Assets

In August, the bank said it planned to cut 1,500 jobs, or 3 percent, of its workforce. State Street (STT) and Chicago-based Northern Trust Corp. (NTRS) have taken similar steps.

BNY Mellon fell 3 percent, paring gains this year to 16 percent. That compares with a gain of 15 percent for the Standard & Poor’s index of asset managers and 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.

Assets under custody and administration rose 4 percent to a record $26.6 trillion, and assets under management climbed 6 percent to $1.3 trillion, also an all-time high, the bank said.

Fees from investment services fell 3.6 percent as the result of the fourth-quarter sale of the Shareholder Services business to Computershare Ltd. (CPU) Investment management fees dropped 2.4 percent because of higher money-market waivers, the bank said in its statement.

State Street

Earnings per share climbed as the number of shares outstanding declined.

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.

Custody banks have been hurt by the Federal Reserve’s decision to keep rates exceptionally low through at least late 2014. Low rates forced BNY Mellon 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.

BNY Mellon’s net interest revenue rose 9.6 percent to $765 million on higher average client deposits.

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.

Forex Lawsuits

BNY Mellon said the drop in foreign-exchange revenue to $136 million in the first quarter was due to lower volumes and decreased volatility.

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.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

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

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