Bank of New York Mellon, the world's largest custody bank, reported that second-quarter profit rose 79% as the stock-market rally boosted assets and fees for overseeing them.
Net income rose to $833 million, or 71 cents a share, from $466 million, or 39 cents, a year earlier, when costs from a legal settlement hurt earnings, the New York-based bank said today in a statement. BNY Mellon was expected to earn 59 cents a share, according to the average estimate of 15 analysts surveyed by Bloomberg. Profit in this year's second quarter included an after-tax gain of $109 million, or 9 cents a share, related to an equity investment.
Rising markets and investor deposits lifted fees for servicing and managing client money during the quarter. Chief Executive Officer Gerald Hassell has been focused on increasing the assets the bank oversees, cutting costs and raising prices to existing customers to combat the impact of lower interest rates. In 2011, Hassell trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements.
"They put up a very solid quarter," Gerard Cassidy, an analyst with RBC Capital Markets, said today in a telephone interview. "Rising rates moving forward will be positive for them."
Assets under custody rose 4% to $26.2 trillion compared with a year earlier, while falling about 0.4% compared with the prior quarter because of lower values in the fixed-income market. Assets under management increased by 10% to $1.43 trillion compared with a year earlier, and rose 0.2% from the previous quarter as investors deposited $21 billion into liability-driven investments, equity and bond funds.
Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for individuals and institutions.
Investment-servicing fees rose 4.4% from a year earlier and investment-management fees increased 6.4% as the market rally lifted assets and the bank won new business. Revenue increased 11% to $4 billion on higher assets and fees.
BNY Mellon shares gained 18% this year before today, trailing the performance of competitors Boston-based State Street Corp., up 46%, and Chicago-based Northern Trust Corp., which rose 21%.
The MSCI All Country World Index rose 14% in the 12 months ended June 28, and fell 1.2% in the second quarter. The Standard & Poor's 500 Index rose 18% in the 12 months ended June 28, and increased 2.4% in the second quarter.
BNY Mellon was one of eight large U.S. banks told by regulators on July 9 they needed to meet higher capital requirements by 2018. The firms would need to retain capital equal to at least 5% of assets, and their banking units would have to hold a minimum of 6%, under the proposal.
A July 10 research note from Goldman Sachs Group Inc. estimated that BNY Mellon would fall short under both measures. The bank could easily come into compliance with the rules by selling some of the securities on its balance sheet, Richard Bove, an analyst with Rafferty Capital Markets LLC, said in a telephone interview before the earnings were announced.
BNY Mellon has struggled to boost profit over the past two years as near-zero interest rates have held down revenue from securities lending, cut income from its investment portfolio and forced it to waive fees on money funds.
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."