Bank of New York Mellon Corp., the world's largest custody bank, reported a first-quarter profit after a loss a year ago as rising stock markets lifted assets and fees for overseeing them.

Net income rose to $661 million, or 57 cents a share, compared with a loss of $266 million, or 23 cents a share, in the same period last year that was caused by a tax court decision, the New York-based bank said today in a statement. Analysts had expected a profit of 53 cents a share.

Assets under custody and administration rose 1.1 percent from the prior quarter to $27.9 trillion, lifting fees and helping offset the impact of low interest rates, which erodes revenue from lending. Chief Executive Officer Gerald Hassell is cutting real-estate holdings in New York and reducing the number of computer platforms the bank uses to boost profitability.

"This is a critical year for BNY Mellon's management," Marty Mosby, an analyst with Guggenheim Securities LLC in Hernando, Mississippi, said in a telephone interview. "They need to get their expenses down." Mosby has a buy rating on the stock.

BNY Mellon reported earnings before the start of trading in New York. The stock has lost 3.5 percent this year through yesterday, compared with a decline of 6 percent for the 18-member Standard & Poor's index of asset managers and custody banks.

Stock Rally

Assets under management reached $1.62 trillion, up 2.3 percent for the quarter and 14 percent over 12 months. Assets under management were boosted by $21 billion of long-term deposits in the quarter. Clients withdrew $7 billion from short-term vehicles such as money funds.

Fee revenue increased 1.7 percent from a year earlier to $2.86 billion, helped by a 4.1 percent jump in asset servicing fees. Net interest revenue rose 0.4 percent to $746 million, after provisions for credit losses. Non-interest expenses fell 3.1 percent.

The MSCI World Index, which tracks stock markets in the developed world, gained 21 percent, including reinvested dividends, over the past 12 months. Higher stock prices lift fees for servicing and managing client money.

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

Trailing Peers

At the bank's annual meeting earlier this month, Michael Mayo, at analyst at CLSA Ltd. in New York, said the bank was lagging behind rivals in profitability measures, a criticism he also made in a February research report.

"The company has underperformed," Mayo wrote in the report. On a number of key measures of profitability, including pretax margin, BNY Mellon trails Boston-based State Street Corp. (STT), the third-largest custody bank, he wrote. Pretax margin is a company's earnings before tax as a percentage of total revenue.

State Street's pretax margin was 27.2 percent last year, compared with 24.8 percent for BNY Mellon, according to data compiled by Bloomberg. Over the past three years, State Street shares gained 53 percent compared with 23 percent for BNY Mellon.

Hassell, at the annual meeting, blamed low interest rates because they hold down revenue from securities lending, cut income from the investment portfolio and force the bank to waive fees on money funds.

"When rates ultimately rise, we will see very positive impact to our earnings," Hassell said.

Bank of New York Mellon said in December that it plans to sell 1 Wall Street in Manhattan, the Art Deco skyscraper that serves as its corporate headquarters, and has hired brokers to find a smaller amount of space to lease elsewhere.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.