BNY Mellon’s Net Income Up 12% YoY

During an earnings call, Chairman and Chief Executive Officer Gerald Hassell said he expects to see evidence of the bank’s commitment to aggressive expense management through various actions this year. These actions include the sale of BNY Mellon’s New York headquarters, the consolidation of custody platforms, from three to two, and getting more out of the technology spend.
By Janet Du Chenne(59204)
BNY Mellon reported first quarter net income of $661 million, a 12% increase year-over-year.

Total revenues were $3.6 billion, unchanged year-over-year. Expenses were down 1% over the same period.

During an earnings call, Chairman and Chief Executive Officer Gerald Hassell said he expects to see evidence of the bank’s commitment to aggressive expense management through various actions this year. These actions include the sale of BNY Mellon’s New York headquarters, the consolidation of custody platforms, from three to two, and getting more out of the technology spend.

“Operating leverage will be driven both by expenses control and the revenue mix,” he said. “We are controlling nominal expenses…slowing growth rates and getting more out of tech spend. All being constant, and revenue constant, we’ll see positive leverage ratios even at slower growth rates.”

For the first quarter of 2013, BNY Mellon reported a loss of $266 million. This includes the charge related to the U.S. Tax Court’s disallowance of certain foreign tax credits of $854 million. Excluding this charge, net income for the first quarter of 2013 would have been $588 million. Net income for the fourth quarter of 2013 was $513 million. Excluding the after-tax loss of $115 million related to an equity investment, net income totaled $628 million in the fourth quarter of 2013.

Assets under custody and/or administration (AUC/A) amounted to $27.9 trillion at March 31, 2014, an increase of 6% compared with the prior year and 1% sequentially. Both increases were primarily driven by higher market values, says BNY Mellon. The sequential increase also reflects net new business. In asset servicing estimated new business wins (AUC/A) were $161 billion in the first quarter of 2014, compared to $123 billion in the fourth quarter of 2013 and $205 billion in the first quarter of 2013.

Investment services fees totaled $1.7 billion, an increase of 3% year-over-year and 1% sequentially. The year-over-year increase primarily reflects higher asset servicing fees driven by higher market values, net new business and organic growth, as well as higher clearing services and depositary receipts revenue, says BNY Mellon.
The sequential increase reflects higher asset servicing fees primarily driven by organic growth, higher securities lending revenue and net new business. Both increases were partially offset by the impact of the continued net run-off of high margin securitizations in Corporate Trust and higher money market fee waivers, says BNY Mellon.

Asset servicing fees were $1 billion, an increase of 4% year-over-year and 3% sequentially. The year-over-year increase primarily reflects higher market values, net new business and organic growth, says BNY Mellon. The sequential increase primarily reflects organic growth, higher securities lending revenue and net new business, it says.

During the earnings call, Tim Keaney, chief executive officer of the investment services business noted consistent revenues over the last six quarters in the business he oversees and a “real shift” to non-AuC/A business, namely transfer agency, sub-transfer agency and increasing middle office outsourcing by insurers and asset managers. Keaney said he expects a sales pipeline of $2 trillion in asset servicing and clearing.

Answering an analyst’s question on the intensity of pricing competition, Keaney said the custodian bank has pricing power in the small to middle market client segments where it has been re-pricing “with pretty high retention rates”. “There’s a very tough price competition at the high end of the market,” he said. The bank is providing more services, Keaney added, noting investments in collateral capabilities and technology.

He also noted a focus on “bundled players” that are impacted by consolidation and need more investment services delivered through leading franchises such as Pershing and maintaining price discipline.

Securities lending revenue at BNY Mellon was $30 million in the first quarter of 2014, down from $31 million in the first quarter of 2013 but up from $21 million in the forth quarter of 2013.

Clearing services fees were $325 million, an increase of 7% year-over-year and unchanged sequentially. The year-over-year increase was driven by higher mutual fund fees, higher asset-based fees and an increase in daily average revenue trades (DARTS), partially offset by higher money market fee waivers, says BNY Mellon. Sequentially, higher clearance revenue was primarily offset by fewer trading days in the first quarter of 2014.

“Our performance benefited from strength in Clearing Services, the eighteenth consecutive quarter of positive long-term inflows in Investment Management and the growing contribution from our Global Collateral Services and electronic foreign exchange initiatives,” says Hassell.

Issuer services fees were $229 million, a decrease of 3% both year-over-year and sequentially. Both decreases reflect the impact of the continued net run-off of high margin securitizations in Corporate Trust. The year-over-year decrease was partially offset by higher Depositary Receipts revenue driven by corporate actions, says BNY Mellon.

Foreign exchange and other trading revenue totaled $136 million compared with $161 million in the first quarter of 2013 and $146 million in the fourth quarter of 2013. In the first quarter of 2014, foreign exchange revenue totaled $130 million, a decrease of 13% year-over-year and an increase of 3% sequentially. Comparisons with both prior periods were impacted by lower volatility, and higher volumes driven by enhancements to our electronic foreign exchange platform, says BNY Mellon.

Net interest revenue and the net interest margin (FTE) were $728 million and 1.05% in the first quarter of 2014 compared with $719 million and 1.11% in the first quarter of 2013 and $761 million and 1.09% in the fourth quarter of 2013.

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