After Bank of New York Mellon Corp. posted its second consecutive quarter of writedowns related to subprime mortgage investments, its top executive said the company wants to take a “laser focus” on its asset management and servicing businesses and plans to continue pruning units that fall outside those circles.
Robert P. Kelly, Bank of New York Mellon’s chief executive, said it has already started to indicate “where it wants to invest, why it want to invest,” and the criteria it is considering in terms of revenue growth, globalization, capital use, and expense and revenue synergies with its other businesses.
“We are in interesting times and have businesses that don’t fit our model, and we have been dealing with them, and we will continue to, and at the same token we are going to redeploy some capital into those businesses where we clearly have some long-term competitive advantages and therefore some superior shareholder returns,” he said during his company’s quarterly earnings call Thursday.
Bruce W. Van Saun, Bank of New York Mellon’s chief financial officer, said it is “not black and white, but it is pretty clear” which business lines it plans to divest, because of the amount of capital it needs to allocate versus the revenue it generates and synergies with asset management and servicing.
The company has started to show its hand with some of its decisions this year, he said.
During the quarter it moved some of its trading and execution businesses into its BNY ConvergEx arm. Last month it announced plans to sell Mellon 1st Business Bank of California, a middle-market bank with offices in Southern California, to U.S. Bancorp. After that announcement, David Holst, an executive director of the BNY Mellon Wealth Management division and the head of BNY Mellon West, said the proceeds would be used to buy wealth managers in Texas, Arizona, and San Diego.
Mr. Kelly said his company continues to consider acquisitions to beef up its asset management and servicing business. “Even though the environment is tough, we can get some interesting things done at the margins,” he said.
Mr. Van Saun said Bank of New York Mellon has reviewed its businesses and will announce its strategy at its investor day June 17.
“The process has worked nicely and has really accelerated our ability to understand each of our businesses,” he said. “We understand where we can make money and where we can get more revenue and expense synergies. … We are not going to advertise which businesses we are going to get rid, because that is not fair to those businesses or our people, but I think we will make pretty clear [at the investor day] what our criteria is and which ones we will grow, including what geographies.”
Mark Fitzgibbon, the head of research at Sandler O’Neill & Partners LP, said in an interview Thursday that Mr. Kelly will continue to examine Bank of New York Mellon’s operations and look to exit businesses that are not strategically and economically attractive and expand in others. “He really didn’t highlight any specifics, but certainly things that are credit-related and businesses that aren’t tied to its core businesses are the types of businesses that could be sold,” Mr. Fitzgibbon said.
Mr. Kelly said the company plans to “continue to sharpen its focus” over the next few quarters.
It reported Thursday that first-quarter net income increased 9%, to $746 million, or 65 cents a share, over the pro forma results a year earlier for Bank of New York Co. and Mellon Financial Corp. (This is the third quarter since the companies closed their July deal.)
A $74 million writedown in the value of structured investment vehicles and other asset-backed securities, and a $25 million writeoff of some investments managed by a former hedge fund unit reduced Bank of New York Mellon’s earnings by 4 cents a share. The company also spent $12 million to support a cash fund that had invested in SIVs.
For the fourth quarter, the company registered $118 million of writedowns for investments linked to collateralized debt obligations.
Mr. Van Saun said it has “very safe mortgage securities” in its portfolio, with 99% carrying double-A or triple-A ratings.
“We are dealing with highly illiquid market conditions, and we have the ability and the intent to hold these securities until prices recover or until maturity,” he said.
Mr. Fitzgibbon said Bank of New York Mellon has hinted that it may need to provide “additional capital support” for different investments in its portfolio.
“The company is being very cautious right now, both in terms of where they are investing and what they may divest, because of this difficult environment,” he said. “They have had good expense controls to offset these writedowns.”
Mr. Kelly said an overall increase in fees from asset management and an increase in net interest income have offset the writedowns. Asset and wealth management fees increased 5%, to $842 million, while net interest income rose 39%, to $773 million. During the first quarter the company cut expenses by 5%. “We are dealing with a challenging economy, and most of the financial markets are in distress, but against that backdrop, we were able to perform well in a tough environment,” he said.
Bank of New York Mellon continues to expand internationally. Foreign businesses generated 33% of its overall revenue last quarter, versus 28% a year earlier.
In January the company completed its purchase of Arx Capital Management, a Rio de Janeiro asset manager, to expand its Brazilian asset management arm, and this month it announced it will open an office in Hong Kong.
Excluding merger costs and other charges, the company earned 78 cents per share, beating the average analyst estimate by a nickel, Thomson Financial Inc. said.
Assets under custody rose 45%, to $23.1 trillion, and revenue almost doubled, to $3.75 billion.
State Street Corp. and Northern Trust Corp. reported higher first-quarter earnings Tuesday, but State Street’s stock fell the most in five years on concerns about exposure to mortgage-backed debt that, according to the company, may generate $1.49 billion of losses.
Thomas McCrohan, an analyst at Janney Montgomery Scott LLC, wrote in a research note issued Thursday that Bank of New York Mellon’s results “will not result in a similar sell-off as witnessed by State Street earlier in the week,” since the New York company “does not have similar capital ‘issues’ nor any remaining off-balance-sheet commercial paper conduits.”
By midday Thursday, Bank of New York’s stock had fallen 2.66% from Wednesday’s close, to $42.83 with investors’ concerned about its financial strength.
“We cannot control the market environment,” Mr. Kelly said. “We have had strong revenue growth and good expense control. We continue to maintain good capital and good liquidity.”
