Bank of New York Mellon, under pressure from activist investors to improve results, reported a 16% increase in first-quarter profit as the stock market rally lifted assets and fees for overseeing them, and expenses declined.

Net income rose to $766 million, or 67 cents a share, from $661 million, or 57 cents, a year earlier, the New York-based bank said in a statement today. Analysts had expected earnings of 59 cents a share, according to the average of 14 estimates compiled by Bloomberg.

The boost from the six-year stock market rally has been a rare bright spot for BNY Mellon, which has had to contend with persistently low interest rates, litigation and pressure from hedge funds Marcato Capital Management and Trian Fund Management. The two investors have targeted the bank after it lagged behind competitors in key measures of profitability. Marcato has called for the ouster of the bank's chief executive officer, Gerald Hassell, while Trian is backing him.

BNY Mellon, the biggest custody bank, reported earnings before the start of regular trading in New York. Before today, the shares gained 1.2% this year, compared with an increase of 0.7% for the 18-member Standard & Poor's index of custody banks and asset managers.

Revenue, Expenses

The bank's revenue increased 5.6% from a year earlier to $3.85 billion, driven by higher fees for investment services and money management. In both areas fee growth was curbed by the strong U.S. dollar.

Foreign exchange revenue climbed 67% to $217 million, reflecting higher volume and increased market volatility, BNY Mellon said.

On the expense side, a focus of the activist investors, the bank reported a 1.4% decline in noninterest expense. BNY Mellon said it had 50,500 full-time employees at the end of the first quarter, a drop of 900 from the year before.

Assets under management rose 1.8% from the previous quarter, to $1.74 trillion.

Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for individuals and institutions.

Settlement, Fine

BNY Mellon last month agreed to pay $714 million to settle allegations by the U.S. and New York state that it defrauded clients in foreign-exchange transactions for as long as a decade.

This month, it was fined a record 126 million pounds ($189 million) for failing to adequately safeguard client assets, the U.K. Financial Conduct Authority said April 15.

Those costs have added to the headwinds from low interest rates, which have reduced returns on deposits and forced the bank to waive fees on money-market funds. Hassell has responded by cutting costs and selling assets, including the bank's headquarters, an Art Deco skyscraper at 1 Wall Street.

The pace of change has not been fast enough to satisfy Marcato. In a slide presentation last month, San Francisco-based Marcato said BNY Mellon could "reduce headcount aggressively," from what it called a "bloated employee base." The bank could start with a 10% to 20% cut, Marcato said.

Trian's Support

Trian, the activist firm founded in 2005 by Nelson Peltz, Peter May and Ed Garden, has taken a different approach and pledged to work with management.

"The board supports Gerald and the management team," Garden, a member of the board, said at BNY Mellon's annual meeting last week.

Trian previously lobbied for change at State Street, the second-largest custody bank. The firm sold its positions in State Street in the third quarter of 2013, about two years after admonishing State Street's board of directors for poor performance. State Street cut costs and returned capital to shareholders during the two-year period and the shares more than doubled.

Garden has said Trian would work to boost margins at BNY Mellon, much as it did at State Street.

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