Bank of New York Mellon Corp., under pressure from Trian Fund Management LP to lift its share price, said second-quarter net income declined as the world’s largest custody bank eliminated jobs to cut costs.
Net income fell 33 percent to $554 million, or 48 cents a share, from $831 million or 71 cents a share a year earlier, when the company benefited from a one-time investment gain, the New York-based bank said in a statement today. Earnings were reduced by $161 million, or 14 cents a share, by costs related to investment funds and severance. The bank beat the 44 cents-a-share estimate for net income of seven analysts surveyed by Bloomberg.
BNY Mellon, like other custody banks, has been under pressure to trim costs as low interest rates have cut income from its investment portfolio, held down revenue from securities lending and forced it to waive fees on money-market funds.
“The expense reduction programs will really start to kick in and show some progress going forward,” Erik Oja, an equities analyst at Standard & Poor’s in New York, said today in a telephone interview. He’s maintaining a “buy” recommendation on the shares even as results fell short of his expectations.
BNY Mellon’s total revenue fell 6.9 percent to $3.7 billion from a year earlier as declines in its corporate-trust services, foreign exchange and trading income offset increases in fees for managing investor money in its asset-management unit. Assets under custody or administration increased 2 percent in the quarter to $28.5 trillion, and 9 percent from a year earlier, according to the statement.
BNY Mellon shares rose 0.8 percent to $38.32 as of 12:50 p.m. in New York. The shares had risen 9.8 percent, including reinvested dividends, this year through yesterday, compared with a 0.8 percent increase for the 18-member Standard & Poor’s Index of custody banks and asset managers.
Trian, the activist investment firm founded by Nelson Peltz, Peter May, and Ed Garden in 2005, said last month it acquired a 2.5 percent stake and was seeking talks with management. Trian stepped in after BNY Mellon’s pretax margin was smaller than rivals State Street Corp. and Northern Trust Corp. in four of the past five fiscal years, according to data compiled by Bloomberg.
Even before Peltz bought shares, BNY Mellon Chief Executive Officer Gerald Hassell was selling assets and cutting costs to boost profitability. In May, the bank said it would book $80 million to $100 million in severance costs in the second quarter for unspecified cuts to its workforce. BNY Mellon said the move would save $100 million on an annual basis. The bank said today noninterest expenses fell 3.7 percent from a year earlier to $2.64 billion.
“The bank was already focused on becoming more efficient, but Peltz’s involvement may accelerate that process,” Marty Mosby, an analyst with Vining Sparks in Memphis, Tennessee, said in a telephone interview before the results were announced. Mosby has a “market perform” rating on the stock.
BNY Mellon bought back 12.6 million shares for $431 million in the second quarter, and “it’s our intention to continue with that in the third quarter,” Chief Financial Officer Todd Gibbons said today in a telephone interview. The buyback will be “in that ballpark,” he said, referring to the amount spent in the second quarter.
The company will continue to reduce the number of employees as it seeks to cut expenses, the largest of which is compensation.
“The idea is we want to continue to grow, but lower the pace of growth of headcount with that growth,” he said.
The bank also said it was exploring a sale of its corporate trust business, which Bloomberg News reported in April. BNY Mellon executives said today in a conference call with investors and analysts that the bank concluded after a review that it will retain its corporate-trust unit.
“We would only sell it if, in fact, someone would pay us the premium of what we believe this business is worth,” Hassell said on the call. “It’s a challenging environment for someone to acquire something of this size and complexity and so we decided that we couldn’t get the kind of premium that we thought this business was worth, and we think it’s much more valuable in our hands.”
The bank said in a filing in May that it expected an after-tax charge of about $100 million in the second quarter, linked to administrative errors in certain funds it manages. The errors, first disclosed in 2013, relate to questions about the resident status of the funds, potentially exposing the firm to tax liability for the funds’ earnings.
Before those adjustments, earnings were $715 million, or 62 cents a share, beating analysts’ projections for adjusted earnings.
Earnings in the second quarter of 2013 received a boost from some one-time investment gains, including $109 million after tax related to an equity investment, and a $21 million after-tax recovery related to investment management funds.
The bank agreed to sell its headquarters at 1 Wall Street in lower Manhattan to a joint venture led by Harry Macklowe’s Macklowe Properties for $585 million. BNY Mellon said it would move to lower Manhattan’s Brookfield Place as part of an effort to scale down its office space and streamline operations.
Hassell in June gave two of his top deputies, Curtis Arledge and Brian Shea, added duties as part of what he called a strategic realignment. Arledge, chief executive officer of investment management, was given oversight of a newly formed markets group. Shea, who had been president of investment services, became CEO of that division. Tim Keaney, who had led investment services, will leave the bank Sept. 30 to pursue other opportunities.
Peltz in October 2011 disclosed a stake in State Street, criticizing the Boston-based custody bank for poor performance and urging it to adopt a plan to raise profits, including a possible sell-off of its money-management unit. Street Street, which didn’t sell its asset-management arm, cut costs and returned capital to shareholders. By the time Peltz sold his holdings in the third quarter of 2013, the shares had more than doubled.
Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for institutions and individuals.