* Forex volume declines from year-ago levels
* Revenue climbs 6 percent, excluding asset sale
* Assets under custody and administration increase 4 percent
* Stock price sags in midday trade
April 18 Bank of New York Mellon Corp
said on Wednesday its first-quarter profit declined slightly
while its foreign exchange revenue slid 21 percent and legal
expenses surged as it battled clients' claims of overcharging on
BNY Mellon's forex business has been the subject of several
lawsuits in which the bank has been accused of overcharging
pension fund clients on certain trades. The bank has denied any
wrongdoing, but it is paying out considerable sums to defend its
position in courtrooms across the country.
The bank's litigation and legal expenses have weighed on
results. Those expenses climbed by $70 million from year-ago
levels. Executives declined to say what types of legal matters
had caused the increase, but forex lawsuits, including one by
the U.S. Justice Department, have become a key factor.
BNY Mellon Chief Financial Officer Todd Gibbons said the
bank is operating in a "very litigious state" because of the
fallout from the credit crisis.
"It's not permanent, but it's not going away next month,"
Gibbons said during a telephone interview.
Meanwhile, BNY Mellon and State Street Corp. have
rolled out new forex products as clients become more attuned to
their trading costs. BNY Mellon's new fixed-spread option, for
example, offers a defined price based off a market rate at
specific times during the day.
Clients still use the banks' so-called standing instruction
trading service, which is the subject of the pension fund
lawsuits. Both custody banks have been accused of using standing
instruction, or non-negotiated trades, to conceal price markups
on small transactions. The banks say those claims are untrue.
Nevertheless, some state pension funds, including
Massachusetts, have dropped BNY Mellon as their forex bank,
saying they can get better pricing elsewhere. Last month, four
Ohio pension funds said they are cutting ties with BNY Mellon
and State Street because of the forex fallout.
In midday trading on Wednesday, BNY Mellon shares fell 2.4
percent to $23.22. The stock has recovered somewhat in 2012, but
it is off 20 percent over the past 12 months while the S&P 500
Index has climbed 6 percent.
The world's largest custody bank reported net income of $619
million, or 52 cents a share, compared with $625 million, or 50
cents a share, a year earlier. That matched the average
estimates of analysts.
Nomura bank analyst Glenn Schorr said in a research note
that the bank's results got a lift from a resurgent stock
market. That helped drive up revenue 6 percent, when excluding
the impact of an asset sale late last year.
"Importantly, expenses were controlled, though we would like
to see more," Schorr said.
BNY Mellon said foreign exchange revenue totaled $136
million in the first quarter, a decline of 21 percent from the
year-ago period and a 26 percent drop from the fourth quarter.
The bank blamed lower volumes and less market volatility for the
Assets under custody and administration, a key driver of
fees, totaled $26.6 trillion at the end of March, 4 percent
higher than the year-ago period.
The bank's total fee revenue, which includes forex, service
fees and investment management fees, dropped 1 percent to $2.8
billion. But that figure reflects the sale of the bank's
shareowner services business in the fourth quarter. Otherwise,
revenue was up 6 percent in the quarter.
Since the fourth quarter, the bank said it had to waive
fewer fees related to its money market fund business. Money
market fund sponsors have been waiving fees so investors can
have some yield in a near-zero interest rate environment.
Gibbons said the decline in waivers was only slight. In the
first quarter, fee waivers still shaved about six cents, or
about $70 million pretax, from profits.
Net interest revenue, meanwhile, surged 10 percent to $765
million as average client deposits increased $28 billion, or 73
percent, from the year-ago period. But since the end of the
fourth quarter, those deposits have declined $10 billion, or 13
percent, as clients put more cash to work.