Despite a heavy charge that led to a decline in quarterly profits, Bank of New York Mellon Corp.'s top executive said he remains confident the company can take advantage of current market conditions to expand each of its business units.
Robert P. Kelly, the New York company's chairman and chief executive officer, said during its earnings call Thursday that the pipeline for new business remains strong and he expects better results as the company reduces expenses.
Bank of New York Mellon recorded a $380 million after-tax charge related to lease transactions in the second quarter that reduced net interest revenue by $377 million. As result, it said, profits fell 57% from a year earlier, to $309 million, or 27 cents per share.
Excluding merger costs and other special charges, the bank earned 74 cents per share, a penny below the average of analysts' estimates compiled by Thomson Reuters.
Bank of New York Mellon's profit fell in a quarter when other custody banks' earnings grew. On Tuesday, State Street Corp. reported a profit 50% higher than a year earlier, at $548 million, or $1.35 a share. On Wednesday, Northern Trust Corp. said its net income had grown 4.2%, to $215.6 million, or 96 cents a share.
"We are a lot bigger than our peers," Mr. Kelly said. "We have a lot more business lines than our peers. We are just a much more complex player. We are a lot more diversified. So in stressful periods we are more stable, but the downside is, we are harder to understand."
He said that he remains encouraged by growth in the company's asset servicing business and remains confident the asset management business can handle some of the stress in the equity markets. Wealth management fees declined only slightly in the quarter because of strong inflows into its money market funds and international portfolios. "At some point, people are going to get tired of putting money in short-term, low-risk products," he said. "It is hard to predict when that will occur, but we expect it will."
Revenue declined 3%, to $3.41 billion. During the quarter, net interest revenue fell due to $152 million of writedowns. Excluding these items, revenue grew 12%. Total noninterest expenses rose 4.39% from a year earlier, to $2.76 billion, and were up 5.3% since March 31.
Thomas P. "Todd" Gibbons, Bank of New York Mellon's chief financial officer, said during the earnings call that the second quarter was "an aberration in terms of expense control" and he expects the company will be able to reduce expenses in the third quarter.
Mr. Kelly said, "Expenses looked good year-over-year, but not on a linked-quarter basis, and we are working on that."
When the company gets expenses in line, it will be able to focus on expansion. During an investor day in June, Mr. Kelly said Bank of New York Mellon remained well-positioned for double-digit growth in most of its businesses during the next year despite economic volatility.
He said during the investor day that in the preceding six to 12 months Bank of New York Mellon had illustrated the types of businesses it wants to buy and sell. During the first quarter it moved some trading and execution businesses into its BNY ConvergEx unit and announced a deal to sell Mellon 1st Business Bank of California, a middle-market bank with branches in Southern California, to U.S. Bancorp. After the deal was announced, executives at the BNY Mellon Wealth Management division said the proceeds would be used to buy wealth management firms in Texas, Arizona, and San Diego.
In January the company bought Arx Capital Management, a Rio de Janeiro asset manager, to expand its Brazilian asset management arm, and in April it announced plans to open an office in Hong Kong.
David F. Lamere, the chief executive officer of BNY Mellon Wealth Management, said during the earnings call Thursday that the quest to reduce expenses will not affect his division's expansion plan. The unit opened a private banking branch in Tampa during the second quarter and continues to consider expanding in the Southeast, West, and in New York City. Mr. Kelly said he would also like to add in Texas.
Mr. Lamere said his unit will focus on adding to its sales staff, which has grown by 32.5%, to 106 people, in the past 12 months. He said he expects to reach 120 by yearend.
"We don't necessarily have to add locations," he said. "It is going to be more important and more accretive to add talented people."
The company continues to see strong growth overseas. Mr. Kelly said 35% of its revenue is from non-U.S. customers, up from 31% at Dec. 31.
The company continues to face litigation with Russia, which is suing it for $22.5 billion in a money laundering case. The plaintiff's attorneys held a press conference Wednesday night to address the case before Bank of New York Mellon's earnings call.
Mr. Kelly said that the plaintiff's attorneys say they are interested in settling but that he has "never received a legitimate settlement offer." In the press conference Russia's attorney said Bank of New York Mellon has been uncooperative and the plaintiff does not plan to seek a settlement.
"I want to put this behind us as much as you do," Mr. Kelly said. "But we really want to protect our assets around the world. … We are prepared for an adverse decision given the irregularities of this particular court. … But this case is absolutely not in the best interest of Russia."
Bank of New York Mellon continues to grapple with difficult economic conditions, he said. "We are in the midst of a bizarre period that none of us ha[s] experienced before. We are going to have to wait and see what happens over the next six to 12 months."
