Bank of New York Mellon, the world's largest custody bank, reported a first-quarter loss after the U.S. Tax Court disallowed certain tax credits.
BNY Mellon had a net loss of $266 million, or 23 cents a share, compared with a profit of $619 million, or 52 cents, a year earlier, the New York-based bank said today in a statement. Earnings were cut by $854 million, or 73 cents, because it wasn't allowed to take foreign tax credits. Excluding the item, BNY Mellon earned $588 million, or 50 cents a share. Analysts had expected BNY Mellon to report an adjusted profit of 52 cents a share, the average of 22 estimates in a Bloomberg survey.
Custody banks such as BNY Mellon have been hurt by interest rates that have hovered near zero since December 2008, which force them to waive fees on money funds, hold down revenues from securities lending and cut yields on their investment portfolios. BNY Mellon in February was prohibited by the tax court from claiming foreign tax credits from a complex financial dealing known as a STARS transaction, or Structured Trust Advantaged Repackaged Securities.
"All of the custody banks are struggling in this interest rate environment," Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview before results were announced. "It is a real challenge to offset that pressure."
Revenue for the quarter fell 1 percent to $3.6 billion from a year earlier, driven mainly by a 6 percent decline in net interest revenue. Fees for overseeing and managing client money rose as assets under custody advanced 2 percent to $26.3 trillion. Assets under management climbed 9 percent to $1.4 trillion.
BNY Mellon is focused on increasing the assets it oversees, cutting costs and raising prices to existing customers to combat the impact of low rates. In 2011, Chief Executive Officer Gerald Hassell trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements. 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 been able to negotiate higher prices with 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 MSCI World Index climbed 13 percent in the 12 months ended March 31, boosting the assets the bank oversees and manages. About one-third of BNY Mellon's money-management assets were in equities at year-end, the bank said.
BNY Mellon has drawn the interest of value investors, including billionaire Warren Buffett. His Omaha-based Berkshire Hathaway Inc. owned 19.6 million shares as of Dec. 31, according to data compiled by Bloomberg.
Of 28 analysts rating the stock, 19 recommend a hold, 6 a buy and 3 a sell.
BNY Mellon reported results before the start of regular U.S. trading. The shares gained 8 percent this year through yesterday, compared with a gain of 17 percent for the 20-member Standard & Poor's Index of asset managers and custody banks.
