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UPDATE 4-BNY Mellon Q1 profit drops amid forex hit
April 18, 2012 / 11:05 AM / 5 years ago

UPDATE 4-BNY Mellon Q1 profit drops amid forex hit

* 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 (Reuters) - 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 currency trades.

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 year-to-year decline.

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.

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