Bank of New York Mellon Corp., the world's largest custody bank, said third-quarter profit unexpectedly rose, helped by a tax court decision.

Net income increased 34 percent to $967 million, or 82 cents a share, from $720 million, or 61 cents a share, a year earlier, the New York-based bank said today in a statement. Excluding the one-time tax benefit, BNY Mellon earned $706 million, or 60 cents a share, compared with the 58-cent estimate by 14 analysts surveyed by Bloomberg.

Chief Executive Officer Gerald Hassell has been focused on increasing the assets the bank oversees, cutting costs and raising prices for existing customers to combat the impact of interest rates that have been near zero since 2008. Low rates have held down revenue from securities lending, cut investment income and forced BNY to waive fees on money funds. Hassell said today that clients increasingly are moving into cash as the U.S. government approaches a potential default on its debt.

"They are showing positive momentum in a difficult environment," Marty Mosby, an analyst with Guggenheim Securities LLC in Hernando, Mississippi said in a telephone interview. He has a buy recommendation on the stock.

BNY Mellon rose 1.1 percent to $31.20 at 10:42 a.m., bringing the gain for the year to 21 percent. That trails the 46 percent increase by its biggest rival, Boston-based State Street Corp. (STT) Among the analysts who follow BNY Mellon, 9 have buy ratings while 15 recommend that investors hold the shares, according to data compiled by Bloomberg.

State Street's more aggressive approach to cost-cutting has made the company more attractive to investors, said Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, who has an "outperform," rating on that stock and a "sector perform," rating on BNY Mellon. State Street is scheduled to report earnings next week.

Northern Trust Corp. (NTRS), the third-biggest independent U.S. custody bank, said today that third-quarter profit rose 15 percent as cost cuts combined with rising stock markets pushed revenue higher.

Net income at the Chicago-based bank increased to $203 million, or 84 cents a share, from $176 million, or 73 cents, a year earlier. Assets under custody rose 10 percent to $5.24 trillion. The amount of money the company invests for clients increased 13 percent to $846 billion.

Northern Trust rose the most in more than a year, climbing as much as 4.5 percent, and traded 3.5 percent higher at $56.39 at 10:43 a.m.

Custody banks keep records, track performance and lend securities for institutional investors. They also manage investments for individuals and institutions.

BNY Mellon earnings benefited after a U.S. Tax Court judge ruled in September that the bank was entitled to deduct interest on a loan linked to a transaction with a British bank that generated disallowed tax credits.

Assets under custody rose 4 percent from a year earlier and 5 percent from the previous quarter, to $27.4 trillion. Assets under management rose 13 percent from last year's third quarter and 7 percent from June 30, to $1.53 trillion, driven by higher market values and new business. The asset-management unit attracted $32 billion in long-term deposits in the quarter.

The MSCI All-Country World Index, which tracks stock markets in the emerging and developed world, gained 18 percent in the 12 months ended Sept. 30. Higher stock prices lift fees for servicing and managing client money.
Foreign exchange revenue rose 27 percent from last year to $154 million as a result of greater volatility. The bank's net interest margin, the difference between what it pays on deposits and receives on loans, fell to 1.16 percent from 1.20 percent in the third quarter of 2012.

Hassell, on a conference call today, said the bank's clients are getting more defensive as the U.S. is moving closer to a possible default.

BNY Mellon is taking the threat of a default "very seriously," and has contingency plans should lawmakers fail to reach an agreement, he said.

In 2011, Hassell trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements. The payoff for those cuts should show up in the form of better earnings next year, said Mosby.

BNY Mellon earlier this month was one of 11 large U.S. lenders that submitted "living wills" to regulators which show how they would wind-down if they should ever go bankrupt.

The bank said in any of its scenarios, "the core business lines and critical operations would continue in operation in substantially the same manner as prior to resolution."

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