U.S. custody managers' assets rise, outlook diverges

NEW YORK (Reuters) - Bank of New York Mellon Corp (BK.N) and rival State Street Corp (STT.N) are not generating the profits that many analysts expected from one of their key businesses -- hanging onto assets on behalf of other banks and investors.

Both banks are failing to win the profits that were hoped from the custody business, in part because their customers -- fund managers and banks that entrust assets to State Street and BNY Mellon -- are not trading nearly as much as experts had forecast.

Bank of New York on Tuesday reported a quarterly loss driven by charges from restructuring its investment portfolio, but noted also that fee income from servicing clients' securities dropped due to a decline in securities lending among other activities.

State Street said it would earn less this year than analysts had on average expected, and investors' concerns about its fee income pushed the company's shares down as much as 9.6 percent.

The news isn't all bad for the trust banks. Both are earning solid revenue from their investment management businesses. BNY Mellon managed to shed $3.6 billion of its worst mortgage-backed securities and said its loan losses have peaked. Its shares rose 7 percent.

Investors have seen State Street and BNY Mellon as bastions of safety in the financial sector, because they take less credit risk, and instead just collect fees from providing back-office services to Wall Street.

The banks are gaining more assets to hold in custody -- State Street said its assets under custody rose 9.4 percent to $17.9 trillion over the third quarter, while BNY Mellon said assets under custody increased 7 percent to $22.1 trillion.

But as clients trade those assets less frequently, the banks' fee income growth is lagging, said Marty Mosby, analyst at FTN Equity Capital Markets.

"They're not getting 100 percent of what we expected in this climate," Mosby said, explaining he had expected a double-digit increase in fee income.

At State Street, total fee revenue slipped 3 percent to $1.47 billion from $1.52 billion at the end of the second quarter, while at BNY Mellon total fee revenue climbed 4 percent to $2.6 billion from $2.5 billion in the second quarter.

BNY Mellon Chief Executive Robert Kelly is optimistic this will improve as the economic recovery gains strength.

"In subsequent quarters, we're going to see more activity in terms of flows across borders ... and that usually implies higher fee revenue," he said on a call with Reuters.

The share price movement on Tuesday also reflected the companies' varying performance year-to-date; while BNY Mellon shares are down about 3 percent since the start of the year, State Street's shares have climbed 34 percent since January.

JPMORGAN CHASE

JPMorgan Chase & Co (JPM.N), which reported third quarter results last Wednesday, said that while assets under custody climbed 8 percent to $14.9 trillion from the end of June, net income in its treasury and securities services unit fell 26 percent on the year earlier quarter to $302 million on a decline in securities lending activity.

Boston-based State Street, which also earns fees for offering services like record-keeping to mutual and hedge funds, said third-quarter earnings rose to $516 million from $477 million a year earlier,

Per-share earnings declined to $1.04 from $1.09 because of an increase in shares outstanding. Analysts had expected $1.04 per share. Revenue fell 19 percent to $2.24 billion.

BNY Mellon, the world's largest trust bank, said it lost a net $2.5 billion, or $2.05 per share, in the quarter, compared with earnings of $303 million, or 26 cents a share, a year earlier.

State Street shares were down 8.1 percent to $48.00, BNY Mellon shares were up nearly 7 percent to $29.08 and JPMorgan shares were almost flat up 0.35 percent at $46.14 in early afternoon trade on the New York Stock Exchange.

(Reporting by Elinor Comlay and Svea Herbst-Bayliss in Boston, Joe Rauch in Charlotte; Editing by Leslie Gevirtz, Bernard Orr)