After reporting disappointing first-quarter results, top executives at the two largest custody banks tried to remain positive but realistic about this year and next year.
Both State Street Corp and Bank of New York Mellon Corp. reported declines in net income and revenue Tuesday.
Ronald Logue, State Street's chairman and chief executive officer, said during an interview Tuesday that it remains "cautious" about this year but wants to find ways to develop its infrastructure, so that it can be in a position to gather assets when the markets recover.
"We know that the resurgence isn't around the corner, but we have to plan for it now," he said. "Obviously, markets have to recover, but we want to be positioned so that we can generate revenue from new business when things do recover, whether that is 2009 or 2010" or later.
"Things are not good now, but we are trying to make the best of a difficult situation," he said. "We are laying the seeds for a strong recovery."
Thomas P. Gibbons, Bank of New York Mellon's chief financial officer, said during an interview, "Who knows if we've hit a bottom, but if we haven't, we have gotten awfully close."
He said that he does not expect another "precipitous drop," and that Bank of New York Mellon is working to position itself for both "organic and inorganic" growth.
State Street's net income fell 10% from a year earlier, to $476 million, or $1.02 a share. The Boston company attributed the decline to loan-loss provisions related to mortgages acquired in the fourth quarter.
Revenue fell 22%, to $2 billion.
The average estimate of analysts surveyed by Thomson Reuters had called for earnings of $1.02 a share on revenue of $2.29 billion.
State Street's tangible common equity ratio grew 127 basis points from the fourth quarter and 257 basis points from a year earlier, to 5.87%.
The ratio has "transformed from a blemish to a bright spot," because of "greater cost discipline," said Isabel Schauerte, an analyst at Celent, a financial research and consulting unit of Marsh & McLennan Cos. "This portion of first-quarter results should be well received, especially given the role that TCE is believed to play in the stress tests."
Logue said his company is moving in the right direction. "We are generating some new business, and we have an improved TCE. There are a lot of positives."
Bank of New York Mellon's tangible capital equity ratio fell 20 basis points from a year earlier but rose 40 basis points from the fourth quarter, to 4.2%.
Its first-quarter net income fell 51% from a year earlier, to $370 million, or 28 cents a share. Revenue declined 24%, to $2.85 billion.
The average estimate of analysts polled by Thomson Reuters called for earnings of 63 cents a share on revenue of $3.66 billion.
Assets under management fell 20%, to $881 billion. Bank of New York Mellon reported $12 billion of net outflows during the quarter. It cut its quarterly dividend by 15 cents, to 9 cents a share.
Robert P. Kelly, Bank of New York Mellon's chairman and CEO, said during its earnings call that the dividend was cut so that the company could repay its $3 billion capital injection from the Troubled Asset Relief Program more quickly.
Bank of New York Mellon expects to save $660 million annually by cutting its dividend. Kelly said it wants to repay the Tarp money as quickly as possible.
Logue would not set a repayment time line for State Street, which also received a Tarp infusion.
"We, like everyone else, want to pay back Tarp," he said.
"But there is a process we have to go through, and at an appropriate time, we'll make those decisions. As soon as we are eligible to give it back, we will give it back. We are being pragmatic. I could sit here and say I am going to give it back tomorrow, and yes, I want to, but it is a question of eligibility."
Gibbons said he expects the Treasury Department to wait until after it completes its stress tests of banks before setting a time line for capital repayment. "We are in a much better position now that we have cut dividends to repay as early as possible."
Both Logue and Gibbons said that they will continue to look for ways to control expenses this year. During the fourth quarter and the first quarter, State Street eliminated 2,200 positions, reducing its staffing by 8%. Logue said he does not expect to eliminate any more jobs.
"These are permanent savings," he said. "You can look at a lot of the earnings from other banks, and their savings weren't permanent. We have stressed expense controls that can be permanent."
State Street still has some "savings levers left," including some smaller items "on the margin," Logue said, but he is confident the company is in a better position for growth when markets recover. "This is still a period to build market share."
Gibbons said reducing its head count by 4% this year has enabled Bank of New York Mellon has to reduce compensation 15%.
"Still, we haven't done anything crazy," he said. "We want to continue to attract people and remain competitive from a market perspective."
Logue said State Street wants to be opportunistic and could look to expand its investment management and investment servicing capabilities.
"We have worked to reallocate capital away from administration and into improving our investment performance and fund distribution," he said. "We are all fighting for share, and I think there is a resurgence in interesting for other providers in outsourcing. That plays right to our sweet spot."
Gibbons said Bank of New York Mellon is "picking up share nicely across the board." and is interested in developing its asset management and securities servicing capabilities.
"There are going to be opportunities for organic and inorganic growth."
