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BNY Mellon Earnings Drop as Weak Markets Drag Down Fees

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The Bank of New York Mellon Corp Headquarters
Bank of New York Mellon Corp., the world’s biggest custody bank, said fourth-quarter earnings declined 26 percent on a restructuring charge and as interest rates near record lows held back profit. Photographer: Jonathan Fickies/Bloomberg

Jan. 18 (Bloomberg) -- Bank of New York Mellon Corp., the world’s biggest custody bank, said fourth-quarter earnings declined 26 percent on a restructuring charge and lower revenue from businesses tied to financial markets.

Net income fell to $505 million, or 42 cents a share, from $679 million or 54 cents, a year earlier, BNY Mellon said today in a statement. Analysts had expected the New York-based company to report a profit of 52 cents a share, according to the average of nine estimates in a Bloomberg survey.

Custody banks have been hurt as interest rates near zero reduce income from investments and lending. The bank, led by Gerald Hassell since his predecessor, Robert P. Kelly, stepped down at the end of August, booked a charge of $107 million, or 6 cents a share, for operational improvements designed to save as much as $700 million before taxes by 2015.

“It was a weak quarter driven by conditions of the capital markets, including low interest rates,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview after earnings were released. Most analysts probably didn’t include a one-time charge for restructuring in their estimates, Cassidy said.

Cost Savings

BNY Mellon fell 4.6 percent to close at $20.30 in New York trading. The shares have declined 37 percent over the past 12 months, compared with a 21 percent drop by the Standard & Poor’s 20-company index of asset managers and custody banks.

State Street Corp., based in Boston and the third-largest custody bank, saved about $80 million last year through job cuts and investments in technology and will save an estimated $170 million this year, Robert Lee, an analyst with Keefe Bruyette & Woods Inc. in New York, wrote in a Jan. 9 research note.

BNY Mellon’s assets under custody rose 3 percent to $25.8 trillion while assets under management gained 8 percent to $1.26 trillion, the bank said in its statement. Total revenue fell 6 percent to $3.5 billion as both of the bank’s main businesses, asset servicing and asset management, reported a drop in fees.

The bank cited higher money-market fee waivers, weak international equity markets and a seasonal dip in its depositary receipts business for the decline in fees.

Foreign exchange revenue fell 11 percent to $183 million.

‘Difficult Markets’

Earnings were hurt by a $23 million provision for credit losses tied to “a broker-dealer customer that filed for bankruptcy in the fourth quarter of 2011,” the bank said in its statement. Cassidy said the customer probably was MF Global Holdings Ltd., which filed for bankruptcy protection Oct. 31.

The Federal Reserve’s decision to keep its main lending rate close to zero has eroded margins on lending and forced the bank to waive fees on money-market funds. BNY Mellon’s net interest margin, the difference between what it pays on deposits and receives on loans and investments, fell to 1.27 percent in the fourth quarter from 1.54 percent a year earlier.

In the third quarter of 2011, the squeeze from rates was exacerbated by institutional investors, nervous about the fight over raising the debt ceiling in the U.S., depositing more cash with the bank, Hassell said in November.

“We believe we are going to face slow growth and difficult markets, so we have to go after the expense base,” Hassell said. The bank said it expected its fee revenue to grow 3 percent to 5 percent per year from 2012 to 2014.

Partial Settlement

The Standard & Poor’s 500 Index finished 2011 at 1257.60, roughly where it began the year. Like other custody banks, BNY Mellon earns fees on the assets it oversees and manages.

BNY Mellon has been sued by the attorneys general of New York, Virginia and Florida, who say the bank overcharged and misled their pension funds in the pricing of foreign-exchange transactions. The bank has defended its practices and has said it will defend itself against the allegations.

BNY Mellon said yesterday it agreed to change its disclosure statements for so-called standing instruction foreign exchange transactions to partly resolve lawsuit by U.S. prosecutors. The U.S. won’t seek a court order forcing the bank to disclose how it prices the transactions, according to a filing.

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

To contact the reporter on this story: Charles Stein in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at

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