Updated Wednesday, November 26, 2014 as of 3:20 PM ET

BNY Mellon Profit Rises 23% as Stock Market Gains Add Assets

(Bloomberg) -- Bank of New York Mellon Corp., the world’s largest custody bank, said fourth-quarter earnings rose 23 percent as higher client assets boosted revenue.

Net income climbed to $622 million, or 53 cents per share, from $505 million, or 42 cents, a year earlier, the New York- based bank said today in a statement. Earnings a year earlier were reduced by expenses tied to job reductions. Analysts had expected BNY Mellon to report a profit of 54 cents a share, the average of 17 estimates in a Bloomberg survey.

BNY Mellon is focusing on increasing the assets it oversees and manages for customers as sustained low interest rates worldwide erode yields, Chief Executive Officer Gerald L. Hassell said at a December investment conference. The company attracted $190 billion in custody assets in the quarter and $1.5 trillion during 2012, according to today’s statement.

“The day-to-day business is still difficult, but the bank has been winning new accounts and has been aggressively reducing costs,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in a telephone interview before results were released.

BNY Mellon and custody banks State Street Corp. and Northern Trust Corp. have responded to near-zero interest rates by reducing staff and expenses to protect profit margins. In 2011, BNY Mellon trimmed jobs and set a target to save as much as $700 million by 2015 through operational improvements.

Northern Trust

Northern Trust, the third-biggest independent custody bank, said today fourth-quarter net income rose 29 percent to $167.7 million, or 69 cents a share, from $130.2 million, or 53 cents, a year earlier. The results missed the 75-cent average estimate of 14 analysts surveyed by Bloomberg.

Rising equity markets helped boost custody assets 13 percent to $4.8 trillion and the amount of money Northern Trust invests for clients by 14 percent to $758.9 billion. Revenue climbed 1.5 percent to $969.7 million. Net income a year earlier was reduced by $39.8 million when the firm booked costs related to 700 planned job cuts.

At BNY Mellon, assets under custody rose 0.4 percent in the quarter and 8.5 percent from a year ago, to $26.7 trillion, helped by higher market values. Assets under management increased 2 percent and 10 percent, respectively, to $1.4 trillion.

The banks announced earnings before the start of trading in New York. BNY Mellon has advanced 25 percent in the 12 months ended Jan. 15, the same as Northern Trust and just below the 26 percent increase for the Standard & Poor’s index of 20 asset managers and custody banks.

Declining Volumes

BNY Mellon’s foreign exchange revenue fell 42 percent from a year earlier to $106 million, a decline the bank said reflected a “sharp decline” in volatility and a decrease in volumes.

The net interest margin, the difference between what a bank pays on deposits and receives on loans and investments expressed as a percentage, fell to 1.09 percent from 1.27 in the same quarter a year ago. Lower reinvestment yields and the elimination of interest on European Central Bank deposits contributed to the drop, the bank said.

Custody banks keep records, track performance and lend securities for institutional investors, and they also manage money for investors. The banks have been affected by competing forces as gains in stock prices increase fees for overseeing and managing money while low interest rates force them to waive fees on money funds and reduce returns on securities lending.

‘Challenging Environment’

The Standard & Poor’s 500 Index gained 16 percent, including reinvested dividends, in 2012, according to data compiled by Bloomberg. The Federal Reserve has maintained interest rates near zero since 2008, and has indicated it will keep rates there as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and long- term price expectations are well-anchored.

At the December conference, Hassell said the bank faced headwinds including Europe’s debt criss, fighting over the U.S. budget and an investor aversion to taking risks.

“Let’s face it, we are in a challenging environment,” he said. “And it has been one for quite some time.”

The bank has said a 1 percentage point increase in short- term interest rates would lift pretax income by $600 million a year.

“The custody banks are sensitive to rates and investors are starting to anticipate that rates will rise,” said Cassidy, citing an 18 percent gain in BNY Mellon’s stock price since Sept. 30.

Raising Prices

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 won higher prices from 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.”

Keaney was given his current title in December when the bank named Brian Shea president of investment services. Karen Peetz was named president of BNY Mellon, a title previously held by Hassell.

The bank, whose shares trade at a lower price than they did 15 years ago, has drawn the interest of value investors, including billionaire Warren Buffett. His Omaha-based Berkshire Hathaway Inc. bought 914,000 shares in the third quarter, raising its stake to 19.6 million shares, according to data compiled by Bloomberg.

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