Analysis: BNY Mellon, State St get beat up on "soft" quarter

A woman walks past a logo at the office of the Bank of New York Mellon in Brussels, February 25, 2010.

BOSTON (Reuters) - When Bank of New York Mellon's top executives began looking at the company's fourth-quarter results, they quickly saw the ill-effect of clients dodging the risk that continues to rattle global financial markets.

"We knew when we added up the numbers in the quarter they weren't going to be pretty," BNY Mellon Corp (BK.N) Chief Financial Officer Todd Gibbons told Reuters in a telephone interview on Wednesday.

BNY Mellon Chief Executive Gerald Hassell called the results a "soft" quarter during a conference call.

BNY Mellon's stock was down about 4 percent on Wednesday afternoon following a downward trend that has cut the company's share price 36 percent over the past year. Gibbons said if declines in revenue from slack global market activity continues, more cost cutting will be needed.

"If we see further declines in revenue ... you'll definitely see further actions," Gibbons said.

BNY Mellon and Boston-based State Street Corp (STT.N), the world's No. 1 and No. 3 custody banks, respectively, are leaning heavily on cost-cutting to maintain profits because their clients - everyone from public pension plans to large hedge funds - are not too interested in taking risk, which has hurt fee revenue.

JPMorgan's custody bank business ranks as the world's second by assets under custody and administration.

State Street Chief Executive Jay Hooley said his company accelerated some cost cutting because of the continued softness in global capital markets. That spooked investors, sending State Street shares down about 6 percent to $40.10 on the New York Stock Exchange. The stock has fallen about 20 percent over the past year.

Custody bank activities include managing investments, lending stocks, trading foreign currencies, tracking asset valuations and providing accounting services to mutual funds. They also offer money market products, but rock-bottom yields have forced them to waive fees to keep investors from bolting.

State Street's fourth-quarter earnings missed the average estimate of analysts by a penny a share. BNY Mellon missed by 11 cents a share, according to Thomson Reuters I/B/E/S.

Nomura analyst Glenn Schorr described State Street's fourth-quarter revenue as "Okay" in a research note, saying a drop in fees from the third quarter was a negative.

State Street's fourth-quarter servicing fees, for example, fell 4.4 percent to $1.06 billion compared with the third quarter. The year-over-year decline was 1 percent.

At BNY Mellon, asset servicing fees in the fourth quarter declined 3 percent to $885 million from the year-ago period. Those fees declined 4 percent from the third quarter.

Hassell said clients are in "risk-off mode" as they plow more assets into deposits.

"And so you don't get an asset-under-custody fee if it's in a bank deposit," Hassell said on a conference call. "The same would hold true in the asset management side. So I think we just saw as the year end approached last year a complete risk-off mode."

State Street and BNY Mellon also have been the target of litigation by pension fund clients and authorities, which have accused the banks of overcharging on non-negotiated foreign currency trades. Both deny any wrongdoing.

BNY Mellon recently reached a partial settlement with the U.S. Attorney's office in Manhattan, but no monetary settlement was involved. The bank, however, will have to change some of its marketing. It can no longer describe its non-negotiated trades as "free" or represent that its service applies "best execution" standards.

Gibbons said BNY Mellon's legal defense remains "rock solid."

But the banks' forex business is not, thanks to a reduction in global trade volume and some change in behavior by clients. In the fourth quarter, BNY Mellon's foreign exchange revenue totaled $183 million, a decline of 11 percent from the year-ago period. At State Street, foreign exchange trading revenue fell 12 percent from year-ago levels.

And last month, the $48 billion Massachusetts pension fund dropped BNY Mellon as the manager on non-negotiated forex trades and hired Russell Investments in its place. The fund also has told its investment managers to negotiate more forex trades to lower costs.

On the conference call, Hooley acknowledged a change in behavior on foreign exchange markets, but said "we have all the options that are necessary, so no customers are leaving."

(Reporting By Tim McLaughlin; editing by Walden Siew and Andre Grenon)