The three stand-alone custody banks are under pressure to cut expenses as weak equity markets take a big bite out of fee revenue.
Executives at Bank of New York Mellon, Northern Trust and State Street all said on fourth-quarter earnings calls that they are hyperfocused on cutting expenses in 2016. Challenging global equity markets, persistent low interest rates, a strengthening U.S dollar and heightened regulatory expectations are crimping revenue and profit margins.
A major challenge for the trust banks is whether they can cut expenses enough while also investing in new technologies and products to remain competitive.
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State Street reported a 17% increase in fourth-quarter profit as it cut expenses, offsetting a decline in revenue.
January 27 -
Bank of New York Mellon has become a big believer in reverse mortgages, particularly home equity conversion mortgages insured by the Federal Housing Administration.
January 25 -
Unfavorable equity markets and lower transaction volumes led Northern Trust Corp. to report a 2% drop in fourth-quarter profit.
January 20 -
An international regulatory body said this week that they are looking at setting new, enhanced leverage ratio requirements for the largest global banks, a move that echoes the higher standards in the U.S.' supplemental leverage ratio and demonstrates why going beyond international accords can influence the rest of the world.
January 14
Jay Hooley, the chairman and CEO of State Street in Boston, described the tough conditions State Street faces and told analysts on a conference call Wednesday that he was "disappointed" with the firm's 2015 performance. State Street fell short of analysts' earnings expectations and its stock suffered, plunging more than 7% in heavy trading Wednesday.
"Knowing we are off to a difficult start in 2016, we're focused on identifying levers to improve our performance in 2016 and help us outperform in the current macro environment," Hooley said. "This includes a focus on managing expenses."
State Street has a multiyear cost-cutting program called State Street Beacon that is expected to generate $550 million in expense savings by the end of 2020, with roughly $75 million in savings this year. State Street has taken a more aggressive approach than its peers to shrink its balance sheet and reach certain capital ratio targets, analysts said.
Jeffery Harte, a principal at Sandler O'Neill & Partners, said that expense cuts have been a recurring theme for the major custody banks since the financial crisis.
"It seems like there's a lot of redoubling effort on expenses, implying that the revenue outlook is not as good as we hoped," he said. "They're once again focusing on expense to maintain or modestly improve margins. It's the situation we've been in since the crisis: low activity levels, risk aversion and low interest rates. It's a tough environment."
Though executives talked about ways to improve fee growth in the year ahead, "positive operating leverage has been dialed back," Harte said.
Custody banks manage investments for individuals and institutions. There are only a handful of large custodians, including JPMorgan Chase and Citigroup, and expenses are tough to cut since the banks are operating in multiple countries, currencies and tax codes.
With the bulk of their revenues tethered to global equity markets, revenue growth was anemic in the fourth quarter.
BNY Mellon, in New York, reported a 1% increase in total revenue to $3.7 billion. Northern Trust, in Chicago, reported a 2% increase in revenue to $1.2 billion, while revenue at State Street, of Boston, fell 3.3% to $2.5 billion.
Assets under management also are dropping because sovereign wealth funds, particularly from oil producing countries, are continuing to make withdrawals, said Gerard Cassidy, a managing director of equity research at RBC Capital Markets.
"We expect continued withdrawals by the sovereign wealth funds from the custody banks as the money is being used to fund deficits in oil-producing countries," Cassidy said.
Assets under management fell 4% at BNY Mellon to $1.6 trillion, 6% at Northern Trust to $875.3 billion and 8.3% at State Street to $2.2 billion.
BNY Mellon and Northern Trust both saw an increase in fees, driven in part by lower money market fund fee waivers. The Federal Reserve's hike in interest rates allowed the banks to recoup fee waivers more quickly, but as expectations for additional rate increases get pushed out, there is less benefit to net interest income.
Fee revenue in the fourth quarter rose 1% at BNY Mellon to $2.9 billion. Northern Trust's fees jumped 5% to $427.9 million while State Street's fee revenue dipped 2.7% to $2 billion.
"Prior to the Fed funds rate going higher, the banks were unable to charge their customers for their money market and mutual savings accounts because they weren't earning anything on those accounts," Cassidy said.
