BNY Mellon Has Net Loss of $266 Million on Tax Expense

Bank of New York Mellon Corp., the world’s largest custody bank, said earnings were weighed down by low interest rates and asset growth was curbed by the loss of a big client.

BNY Mellon reported a net loss for the quarter after earnings were cut by $854 million, or 73 cents a share, because it wasn’t allowed to take foreign tax credits. Income excluding the tax cost was $588 million, or 50 cents a share, compared with $619 million, or 52 cents, a year earlier, the New York-based bank said today in a statement. BNY Mellon missed analysts’ estimates for adjusted profit of 52 cents a share, the average of 22 estimates in a Bloomberg survey.

Custody banks such as BNY Mellon have been hurt by interest rates that have hovered near zero since December 2008, which force them to waive fees on money funds, hold down revenues from securities lending and cut yields on their investment portfolios. BNY Mellon’s Chief Executive Officer Gerald Hassell said assets under custody trailed the broader markets after the bank lost a “significant” client that he didn’t name.

“Low interest rates continue to be a challenge for the custody banks,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview. “The situation won’t get better until we see rates move higher.”

BNY Mellon fell 2.1 percent to close at $27.19 in New York. The shares rose 5.8 percent this year, compared with a gain of 14 percent for the 20-member Standard & Poor’s Index of asset managers and custody banks.

Client Loss

Revenue for the quarter fell 1 percent to $3.6 billion from a year earlier, driven mainly by a 6 percent decline in net interest revenue, which is earned from lending or investing client deposits. Assets under management climbed 9 percent to $1.4 trillion. Assets under custody advanced 2 percent to $26.3 trillion as of March 31, trailing the 14 percent increase in the Standard & Poor’s 500 Index in the same period.

BNY Mellon executives said custody assets were hurt by the loss of a client in a competitive environment and the firm’s fixed-income tilt.

“We hate to lose,” Hassell said today in a conference call discussing first-quarter earnings. “We are kicking ourselves for losing,” he said.

BNY Mellon in February was prohibited by the U.S. Tax Court from claiming foreign tax credits from a complex financial dealing known as a STARS transaction, or Structured Trust Advantaged Repackaged Securities. BNY Mellon reported a net loss of $266 million, or 23 cents a share, because of the decision.

Cutting Costs

BNY Mellon is focused on increasing the assets it oversees, cutting costs and raising prices to existing customers to combat the impact of low rates. In 2011, Hassell trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements. 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 been able to negotiate higher prices with 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.

BNY Mellon has drawn the interest of value investors, including billionaire Warren Buffett. His Omaha-based Berkshire Hathaway Inc. owned 19.6 million shares as of Dec. 31, according to data compiled by Bloomberg.

Of 28 analysts rating the stock, 19 recommend a hold, 6 a buy and 3 a sell.