Bank of New York Mellon Corp., the world's largest custody bank, said fourth-quarter earnings rose 23% as higher client assets boosted revenue.
Net income climbed to $622 million, or 53 cents per share, from $505 million, or 42 cents, a year earlier, the New York-based bank said Wednesday. Profit a year earlier was reduced by expenses tied to a cost-cutting initiative. Analysts had expected BNY Mellon to report a profit of 54 cents a share, the average of 17 estimates in a Bloomberg survey.
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 $500 billion in custody assets in the third quarter of 2012, the most since 2007, Hassell said.
"The day-to-day business is still difficult, but the bank has been winning new accounts and has been aggressively reducing costs," Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview before earnings results were released.
BNY Mellon and custody banks State Street Corp. (STT) andNorthern Trust Corp. (NTRS) have responded to near-zero interest 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.
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 (SPX) gained 16%, 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%, inflation is projected to be no more than 2.5% and long-term price expectations are well-anchored.
At the December 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."
The bank has said a 1 percentage point increase in short-term interest rates would lift pretax income by $600 million a year.
"The custody banks are sensitive to rates and investors are starting to anticipate that rates will rise," said Cassidy, citing an 18% gain in BNY Mellon's stock price since Sept. 30.
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. (BRK/A) bought 914,000 shares in the third quarter, raising its stake to 19.6 million shares, according to data compiled by Bloomberg.
BNY Mellon has advanced 25% in the 12 months ended Jan. 15, compared with a 26% increase for the Standard & Poor's index of 20 asset managers and custody banks.