UPDATE 3-Bank of NY Mellon cuts dividend as profit falls

* Dividend lowered 63 percent

* Profit falls more than expected

* Bank changes strategy, reduces risk

* Shares fall 12.9 percent in early trading (Adds CEO comments throughout, byline)

By Jonathan Stempel

NEW YORK, April 21 (Reuters) - Bank of New York Mellon Corp BK.N lowered its dividend 63 percent to build capital and said a decline in fees resulting from falling equity markets caused first-quarter profit to drop more than expected.

The bank’s shares fell $3.61, or 12.9 percent, to $24.42 in early trading on the New York Stock Exchange.

Chief Executive Robert Kelly said the decision to cut the quarterly payout to 9 cents per share from 24 cents was “not made lightly.” He said the reduction will save $700 million a year and help the bank repay more quickly the $3 billion of taxpayer money received under the government’s Troubled Asset Relief Program.

“It’s a challenging environment on the revenue side,” Kelly said in an interview.

Quarterly net income attributable to common shareholders declined 57 percent to $322 million, or 28 cents per share, from $746 million, or 65 cents per share, a year earlier.

Excluding writedowns for goodwill and investments as well as merger costs, profit was 53 cents per share, below the average analyst forecast of 63 cents, Reuters Estimates said.

Revenue, excluding investment writedowns, fell 14 percent to $3.28 billion, short of the average forecast of $3.67 billion. Expenses fell 10 percent, in part because of 900 job cuts. A total of 1,800 job cuts are planned this year.

Kelly said the bank could have posted better results but chose to reduce balance sheet risk, citing fallout from Lehman Brothers Holdings Inc's LEHMQ.PK bankruptcy in September.

“We have been managing our company extraordinarily conservatively: it is a change in strategy,” he said in the interview. “A year ago, about one-third of our balance sheet was in short-term liquid instruments. Today, it is 49 percent. The result is that we don’t earn as much net interest income. And I think at the margin, most investors want us to do that.”

Bank of New York Mellon's main rivals, State Street Corp STT.N and Northern Trust Corp NTRS.O, also reported lower quarterly profits on Tuesday. State Street lowered its dividend in February.

Custodial banks provide processing and back-office services to institutional clients. Bank of New York Mellon, Northern Trust and State Street are also large asset managers.


Bank of New York Mellon said total fee revenue fell 20 percent from a year earlier to $2.43 billion. This included a 20 percent decline from securities servicing to $1.23 billion, and a 28 percent drop from asset and wealth management to $609 million.

Fees also declined 20 percent from the 2008 fourth quarter, including a 40 percent drop in foreign exchange.

The bank’s ratio of tangible common equity to tangible assets was 4.2 percent, close to what many analysts prefer.

Kelly said it is too soon to say when the bank will repay TARP. “It has been very clear all the way along that we won’t be able to repay TARP until our regulators are comfortable,” he said in the interview. “It is just too early to say what the eventual outcome will be.”

Through Monday, Bank of New York Mellon shares had fallen 1 percent this year, compared with a 29 percent drop in the KBW Bank Index .BKX. (Reporting by Jonathan Stempel; editing by Gerald E. McCormick and John Wallace)