Bank of New York Mellon Corp. said fourth-quarter profit unexpectedly fell 18 percent as revenue missed analysts’ estimates and the world’s largest custody bank wrote down its investment in ConvergEx Group LLC, a brokerage that last month admitted to defrauding customers of millions of dollars.
BNY Mellon dropped the most in nine months as net income declined to $513 million, or 44 cents per share, from $622 million, or 53 cents, a year earlier. Excluding the $115 million after-tax loss, the bank earned $628 million, or 54 cents a share, meeting the estimate of 12 analysts in a Bloomberg survey. Fourth-quarter revenue of $3.59 billion fell short of analysts’ estimates of $3.7 billion.
Chief Executive Officer Gerald Hassell is focusing on winning new business and cutting costs to boost profit to combat the impact of low interest rates. Low rates force custody banks to waive fees on money funds, while eroding yields on portfolios and reducing returns on securities lending. BNY Mellon’s assets under custody rose less than 1 percent in the quarter, as the MSCI World Index advanced 7.6 percent.
“The growth in assets under custody was sluggish and there were misses in a number of the fees,” Luke Montgomery, an analyst with Sanford C. Berstein & Co. wrote in an e-mail.
BNY Mellon dropped 3.6 percent, the most since April 15, to close at $32.70 in New York. The shares advanced 30 percent in the 12 months through yesterday, as the Standard & Poor’s 20-company index of asset managers and custody banks rose 38 percent.
ConvergEx and two former employees last month admitted to defrauding customers of millions of dollars and agreed to pay more than $150 million to resolve civil and criminal claims by U.S. authorities. ConvergEx, which executes trades for hedge funds and endowments, bilked institutional clients from 2006 to 2011, telling them it would trade stock for them at market rates and then sending the orders to a subsidiary that inflated prices, the U.S. Securities and Exchange Commission said at the time.
Assets under custody rose 4.9 percent from a year earlier and 0.7 percent from the prior quarter to $27.6 trillion. Money managed for clients climbed 14 percent from the prior year and 3.3 percent in the quarter to $1.58 trillion. Both gains were driven by new business and higher stock prices.
BNY Mellon said its net interest margin, the spread it makes on loans compared with what it pays on what it borrows, was 1.09 percent, unchanged from the fourth quarter of 2012.
Hassell, on a conference call, said BNY Mellon was spending money to expand investment-management products with retail investors, citing the higher profitability that come with those assets. About 80 percent of the bank’s money-management business comes from institutional investors.
“We are underexposed to the retail investor,” he said.
Like BNY Mellon, rival custody banks State Street Corp. and Northern Trust Corp. have responded to near-zero rates by reducing staff and expenses to protect profit margins. In 2011, BNY Mellon trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements. The bank, in a release today accompanying the earnings statement, said it has already met the savings target.
An emphasis on efficiency is critical, in part, because of cost pressures in the custody business, Hassell said in a presentation to analysts in New York last month.
“Pure custody is commoditized,” Hassell said in December.
Hassell said to grow its business, BNY Mellon would concentrate on selling more services to the investment managers, endowments and pension funds it counts among its clients.
The bank plans to sell 1 Wall Street in Manhattan, the Art Deco skyscraper that serves as its corporate headquarters, and has hired brokers to find a smaller amount of space to lease elsewhere.
“We will only make the move if it makes sense financially,” BNY Mellon spokesman Kevin Heine said in an interview last month.
He said the bank was exploring the possibility of shifting its headquarters to another location in downtown Manhattan, 101 Barclay Street.
Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for individuals and institutions.