BNY Mellon Earnings Rise as Custody Banks Profit From Fed

  • Bank recouped half its money market fee waivers last quarter
  • CEO shrunk real estate, streamlined technology to cut costs

The Fed’s quarter-point rate increase is proving a boon to custody banks.

On Thursday, Bank of New York Mellon Corp. reported a 5 percent increase in first-quarter profit as higher interest rates boosted income from investments and allowed the bank to recoup some fee waivers on money market funds. Earlier in the week Chicago-based Northern Trust Corp. said its first quarter profit rose 4.8 percent, in part because of the benefits of higher short-term interest rates.

Custody banks have trimmed expenses since the financial crisis as years of low interest rates reduced returns on client deposits and forced them to forgo fees. After the Fed’s move in December, BNY Mellon said it’s recouped about half of the money market fee waivers and recorded a 5.2 percent increase in net interest revenue. The gains more than offset the impact of the stock market slump at the start of the year, which reduced fees for overseeing client money and pushed earnings at other investment managers lower in the quarter.

“The December rate hike provided a meaningful benefit and the bank’s past investments in expense savings and productivity seem to be paying off,” said Marty Mosby, an analyst with Vining Sparks in Memphis, Tennessee.

Net income at BNY Mellon, which is led by Chief Executive Officer Gerald Hassell, rose to $804 million, or 73 cents a share, from $766 million, or 67 cents, a year earlier. Analysts had expected earnings of 67 cents a share, the average of 12 estimates compiled by Bloomberg.

Shares Rise

BNY Mellon climbed 2.5 percent, the biggest gainer in the 19-member Standard & Poor’s index of asset managers and custody banks. The stock lost 1.3 percent this year, compared with a gain of 0.4 percent for the index.

Custody banks such as BNY Mellon, Northern Trust and State Street Corp. keep records, track performance and lend securities for institutional investors. BNY Mellon, like State Street, also manages investments for individuals and institutions.

The asset-management unit recently went through a change, as Curtis Arledge, who headed it since 2010, left the company in February to pursue other opportunities. He was replaced by Mitchell Harris, who already oversaw the day-to-day management of the investment businesses across the globe.

Fees for managing client money at BNY Mellon fell 6.3 percent as stock markets slumped in January and February. The Standard & Poor’s 500 Index, a proxy for major U.S. stocks, dropped 11 percent this year through Feb. 11 before recouping the loss by the end of the first quarter.

Trian’s Role

Money managers typically earn revenue on the average level of assets under management in a period, so that kind of volatility can be costly. Profit at BlackRock Inc., the world’s largest asset manager, fell 20 percent in the first three months of the year, the company said last week.

Trian Fund Management, the activist investment firm founded in 2005 and headed by Nelson Peltz, owns about 3 percent of BNY Mellon and its co-founder Ed Garden sits on the board of directors. Trian built its stake in the custody bank in 2014, seeing potential for improvement at a company that had lagged behind rivals in key measures of profitability.

Hassell, 64, sold the bank’s headquarters at 1 Wall St. in New York and reduced the real estate his employees occupy by about 1.3 million square feet. He also streamlined the bank’s technology operations.

BNY Mellon’s assets under custody rose 2.1 percent from the first quarter of 2015 to $29.1 trillion. Investment and other income climbed to $105 million from $60 million, driven by lease-related gains. Non-interest expenses fell 2.6 percent, helped by a stronger dollar.

Garden, at the company’s annual meeting last week, praised the progress Hassell has made at increasing profit margins.

“It’s clear management is performing at a high level,” he said.

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