After announcing a decline in third-quarter earnings Thursday, Bank of New York Mellon Corp.'s chief executive said the financial services company is looking for ways to cut expenses.
Robert Kelly, the New York financial services company's CEO, said during its earnings conference call he has been working on a budget for the rest of this year and next year. "Anything that is a variable expense we are looking at closely," he said. This includes the company's head count.
"We are working very hard on our 2009 business plan, but we are doing so in one of the most uncertain environments that we have ever seen," Mr. Kelly said. "One thing that is certain is that we have lots of expense and lots of ways to work those down."
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview on Thurdsay that he thinks expense-cutting is a trend that the industry should expect from the financial services sector going forward.
Another custody bank, State Street Corp., which posted a 33% rise in third-quarter profits on Wednesday. said it was also considering ways to cut expenses.
"I think all of the custodial trust-oriented banks will have to focus on expense control in 2009, and head count is the biggest expense for financial institutions," Mr. Cassidy said. "Banks are going to consider reducing head count as a way to [control] expenses as a way of boosting profits for 2009. This goes for not just Bank of New York Mellon but all companies, and I expect it will spread to the commercial banking industry as a whole."
The company is preparing its budget for 2009 with three scenarios in mind, Mr. Kelly said, "business as usual, what if things are weaker, and what if things are stronger." He said he thinks things might strengthen after "another quarter or two of issues."
Bank of New York Mellon may consider more cutting. "We will continue to reshape the company over the next few years," he said.
Net income declined 53% in the third quarter, to $303 million, or 26 cents a share, from a year earlier as the company absorbed a $433 million charge associated with the bailout of 10 money market funds that had invested in Lehman Brothers Holdings securities.
It planned to support four Dreyfus money market funds, five commingled funds used mainly to hold overnight cash, and an institutional fund.
Excluding the charges for keeping its money funds from "breaking the buck," merger and integration expenses, and an Internal Revenue Service tax settlement, the company earned 72 cents a share in the quarter, topping the 69-cent average of analyst estimates compiled by Thomson Reuters.
Analysts said that BNY Mellon's losses were well anticipated and its 8.1% revenue gain, to $3.9 billion, was a better indication of financial strength in the difficult market environment.
Mr. Cassidy, the RBC Capital Markets analyst, wrote in a research note that Bank of New York Mellon "beat our estimate due to tight expense controls in terms of employee compensation and benefits."
In the interview Mr. Cassidy said that Bank of New York Mellon posted "respectable" quarterly results.
"The company showed that, even though markets were extremely volatile, their core businesses continued to grow, albeit the market value of client [asset]s declined, hurting their overall revenue growth," he said.
Analysts said that the Bank of New York Mellon is well-capitalized — its Tier 1 capital ratio was 9.33% at Sept. 30 — even before it gets the $3 billion equity investment from the Treasury announced this week.
Bank of New York Mellon also was chosen to administer the Treasury's purchases of toxic securities from financial institutions.
Mr. Kelly said the company does not need more capital. He said that he expects its Tier 1 capital to be about 12% by yearend, including the government's infusion.
It is still a little early to decide how to handle the capital injection, he said. But considering that the coupon goes to 9% if the government's preferred shares are not repurchased within five years, the company hopes to do so by then.
"We have some flexibility going forward," he said. "I view this as pretty cheap capital. This is pretty attractive capital. This is a vote of confidence in the financial system and a good thing for us to participate in."
"This will be something that we use to strengthen balance sheet, and I don't plan to use it," Mr. Kelly said of the Treasury funding. "We don't have any acquisitions on the front burner or on the back burner either," he said.