July 17 (Bloomberg) -- Bank of New York Mellon Corp., the world’s largest custody bank, rose to its highest price in more than two years after first-quarter earnings beat analysts’ estimates.
Net income rose 79 percent to $833 million, or 71 cents a share, from $466 million, or 39 cents, a year earlier, as a stock-market rally boosted fees for overseeing client assets. BNY Mellon beat the 59-cent-a-share average estimate of 15 analysts surveyed by Bloomberg.
Rising markets and investor deposits lifted fees for servicing and managing client money during the quarter. Chief Executive Officer Gerald Hassell has been focused on increasing the assets the bank oversees, cutting costs and raising prices to existing customers to combat the impact of lower interest rates. In 2011, Hassell trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements.
“They put up a very solid quarter,” Gerard Cassidy, an analyst with RBC Capital Markets, said today in a telephone interview. “Rising rates moving forward will be positive for them.”
BNY Mellon shares rose 1.9 percent to close at $30.92, the highest price since Feb. 18, 2011. They earlier increased as much as 4.7 percent, the biggest jump since October 2012. The shares gained 20 percent this year, compared with the 48 percent increase at Boston-based State Street Corp. and the 18 percent advance by Chicago-based Northern Trust Corp.
Custody banks keep records, track performance and lend securities for institutional investors. They also manage investments for individuals and institutions.
Northern Trust, the third-largest independent U.S. custody bank, said today that second-quarter profit rose 6.2 percent to $187.9 million, or 78 cents a share, from $176.9 million, or 73 cents, a year earlier. Earnings missed the 83-cents-a-share average estimate of fifteen analysts surveyed by Bloomberg, sending shares down by the most since Jan. 16.
Higher-than-anticipated expenses “lowered earnings per share by about 4 cents compared to the market expectation,” Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee, said in an e-mailed statement.
At BNY Mellon, assets under custody rose 4 percent to $26.2 trillion compared with a year earlier, while falling about 0.4 percent compared with the prior quarter because of lower values in the fixed-income market. Assets under management increased by 10 percent to $1.43 trillion compared with a year earlier, and rose 0.2 percent from the previous quarter as investors deposited $21 billion into liability-driven investments, equity and bond funds.
Investment-servicing fees rose 4.4 percent from a year earlier and investment-management fees increased 6.4 percent as the market rally lifted assets and the bank won new business. Revenue increased 11 percent to $4 billion on higher assets and fees.
Profit in this year’s second quarter included an after-tax gain of $109 million, or 9 cents a share, related to an equity investment.
The MSCI All Country World Index rose 14 percent in the 12 months ended June 28, and fell 1.2 percent in the second quarter. The Standard & Poor’s 500 Index rose 18 percent in the 12 months ended June 28, and increased 2.4 percent in the second quarter.
BNY Mellon was one of eight large U.S. banks told by regulators on July 9 they needed to meet higher capital requirements by 2018. The firms would need to retain capital equal to at least 5 percent of assets, and their banking units would have to hold a minimum of 6 percent, under the proposal.
A July 10 research note from Goldman Sachs Group Inc. estimated that BNY Mellon would fall short under both measures. The bank could easily come into compliance with the rules by selling some of the securities on its balance sheet, Richard Bove, an analyst with Rafferty Capital Markets LLC, said in a telephone interview before the earnings were announced.
“The easiest thing to do is nothing” since the Federal Reserve’s monetary policy has resulted in cash sitting on the bank’s balance sheet that would be reinvested as interest rates rise, Todd Gibbons, BNY Mellon’s chief financial officer, said today in a telephone interview. He said the rules are uncertain and changing, so it’s difficult for the firm to actually calculate the ratio.
BNY Mellon’s Hassell and Gibbbons said today in a conference call with analysts that it doesn’t make sense for U.S. regulators to include cash held at central banks as part of its balance sheet.
“It’s kind of perverse to think that we have to hold capital against cash that we hold at central banks,” Hassell said.
BNY Mellon has struggled to boost profit over the past two years as near-zero interest rates have held down revenue from securities lending, cut income from its investment portfolio and forced it to waive fees on money funds.
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