BNY Mellon Profit Rises 23% as Stock Market Boosts AssetsCharles Stein and Christopher Condon
Bank of New York Mellon Corp., the world’s largest custody bank, and Northern Trust Corp. relied on rising stock markets and cost cuts to increase earnings as fees were hurt by low interest rates.
BNY Mellon said fourth-quarter net income climbed 23 percent, and Northern Trust reported a 29 percent increase from a year earlier. Revenue at both custody banks rose about 2 percent amid declining net interest income, sending the shares down. Northern Trust fell by the most in more than a year, and BNY Mellon’s decline was the biggest in two months.
BNY Mellon and Northern Trust have responded to near-zero interest rates by reducing staff and expenses to protect profit margins. While the banks benefited from rising stock prices, which increase fees for overseeing and managing investor money, low interest rates and declining trading volumes have hurt their ability to expand earnings.
“We expected a difficult environment, but things have turned out even worse than we anticipated,” Todd Gibbons, chief financial officer at New York-based BNY Mellon, said in a telephone interview. “A number of the key drivers of our business continue to do poorly,” he said, citing low interest rates, a lack of volatility in foreign exchange and depressed transaction volumes in financial markets around the world.
BNY Mellon fell 2.8 percent, the most since Nov. 7, to close at $26.04 in New York. Northern Trust declined 5.7 percent to $49.78, the biggest drop since Aug. 10, 2011.
BNY Mellon’s net income rose to $622 million, or 53 cents per share, from $505 million, or 42 cents, a year earlier, when earnings were reduced by expenses tied to job reductions. Analysts had expected BNY Mellon to report a profit of 54 cents a share, the average of 17 estimates in a Bloomberg survey.
Net income at Northern Trust rose to $167.7 million, or 69 cents a share, from $130.2 million, or 53 cents a share, a year earlier. Results at Northern Trust, the third-biggest independent custody bank, missed the 75-cent average estimate of 14 analysts surveyed by Bloomberg.
BNY Mellon’s foreign exchange revenue fell 42 percent from a year earlier to $106 million, a decline the bank said reflected a “sharp decline” in volatility and a decrease in volumes.
Net interest revenue, closely tied to interest rates, fell 7 percent to $725 million from $780 million in the fourth quarter of 2011. BNY Mellon’s Chief Executive Officer Gerald Hassell said net interest margin was hurt in the quarter by a surge in cash deposits toward the end of the year from investors nervous about the fiscal cliff in the U.S. Lawmakers agreed on a compromise budget to avoid scheduled tax increases and spending cuts.
The net interest margin, the difference between what a bank pays on deposits and receives on loans and investments expressed as a percentage, fell to 1.09 percent from 1.27 in the same quarter a year ago. Lower reinvestment yields and the elimination of interest on European Central Bank deposits contributed to the drop, the bank said.
Northern Trust’s revenue from foreign-exchange trading declined 43 percent to $40.8 million. Net interest income fell 14 percent to $234.2 million, the Chicago-based firm said today in a statement.
BNY Mellon is focusing on increasing the assets it oversees and manages for customers as sustained low interest rates worldwide erode yields, Chief Executive Officer Gerald L. Hassell said at a December investment conference.
The company attracted $190 billion in custody assets in the quarter and $1.5 trillion during 2012, according to today’s statement. Assets under custody rose 0.4 percent in the quarter and 8.5 percent from a year ago, to $26.7 trillion, helped by higher market values. Assets under management increased 2 percent and 10 percent, respectively, to $1.4 trillion.
In 2011, BNY Mellon trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements.
Northern Trust cut 700 jobs in the fourth quarter of 2011, a move designed to lift annual pretax income by $250 million by the end of 2013, the company said at the time.
Rising equity markets helped boost custody assets at Northern Trust by 13 percent to $4.8 trillion and the amount of money Northern Trust invests for clients by 14 percent to $758.9 billion. Revenue climbed 1.5 percent to $969.7 million. Net income a year earlier was reduced by $39.8 million when the firm booked costs related to 700 planned job cuts.
Custody banks keep records, track performance and lend securities for institutional investors, and they also manage money for investors. The banks have been affected by competing forces as gains in stock prices increase fees for overseeing and managing money while low interest rates force them to waive fees on money funds and reduce returns on securities lending.
The Standard & Poor’s 500 Index gained 16 percent, including reinvested dividends, in 2012, according to data compiled by Bloomberg. The Federal Reserve has maintained interest rates near zero since 2008, and has indicated it will keep rates there as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and long-term price expectations are well-anchored.
At a December investment conference, Hassell said the bank faced headwinds including Europe’s debt crisis, fighting over the U.S. budget and an investor aversion to taking risks.
“Let’s face it, we are in a challenging environment,” he said. “And it has been one for quite some time.”
BNY Mellon has said a 1 percentage point increase in short-term interest rates would lift pretax income by $600 million a year.
The bank has tried with mixed results to raise prices. Timothy Keaney, CEO of investment services, said at an investor conference in September that BNY Mellon had won higher prices from some of its smaller customers.
“The bad news is on the strategic client base,” he said. “We do not have any pricing power today. These are huge clients.”
Keaney was given his current title in December when the bank named Brian Shea president of investment services. Karen Peetz was named president of BNY Mellon, a title previously held by Hassell.
The bank, whose shares trade at a lower price than they did 15 years ago, has drawn the interest of value investors, including billionaire Warren Buffett. His Omaha-based Berkshire Hathaway Inc. bought 914,000 shares in the third quarter, raising its stake to 19.6 million shares, according to data compiled by Bloomberg.