JANUARY 19, 2012
Article from Wall Street Journal
By DAVID BENOIT
Revenue at the three big U.S. trust banks came in below expectations as cautious clients and reduced trading volume in the fourth quarter weighed on their fees.
There was a sharp dropoff in foreign-exchange volumes and an increase in the amount of fees money managers had to return to clients because of slim results for the banks, which handle the funds for trusts and for Wall Street banks. Trust-bank money managers' fees are pegged to performance targets.
Bank of New York Mellon Corp., the largest so-called custody bank, said volumes slumped as clients looked at global turbulence and headed for the bunkers. The steep drop in foreign-exchange volumes also comes amid scrutiny over the treatment of trading clients. On Tuesday, BNY Mellon reached a partial settlement with the Justice Department that would change how it describes forex offers to clients.
State Street Corp. and Northern Trust Corp. also missed revenue forecasts, sending shares falling. BNY Mellon was down 4.8% to $20.24 in mid-afternoon trading, while State Street sank 6.4% to $39.99 and Northern Trust fell 1.9% to $41.13.
"As the year end approached, we saw a complete" risk-averse environment, BNY Mellon Chief Executive Gerald Hassell said on a conference call. "We do think that that is short-lived. Investors do have to invest, they do have to get a return, but I think we just saw a very soft fourth quarter."
BNY Mellon's profit dropped 26% to $505 million, or 42 cents a share. Restructuring charges tied to the bank's efforts to cut costs reduced earnings by six cents a share. Analysts polled by Thomson Reuters expected earnings of 53 cents a share.
Revenue fell 5.6% to $3.54 billion, below the $3.75 billion analysts expected. Fee revenue was down 6.8%. Fees were also down 4% from the previous quarter, when BNY Mellon had said it gained business as clients increased outsourcing.
Foreign-exchange revenue dropped 11% from a year earlier, while investment-management and performance fees fell 9%.
Chief Financial Officer Todd Gibbons said in an interview that the dramatic decline in activity could be seen in the dropoff in stock trading, and hasn't turned around in the new year. But he said the bank is adding clients.
"We are pretty darn optimistic about that," Mr. Gibbons said.
BNY Mellon's assets under management and under custody grew, and deposits were again soaring. Total deposits, at $219.1 billion, are now up more than 50% from a year earlier.
BNY Mellon faces lawsuits from pension funds, the state of New York and the Justice Department over how it handles forex trades for clients. The suits have focused on an offering known as "standing instruction," whereby the bank conducts foreign exchange trades for clients. The crux of the suits allege that offering leaves clients with the worst exchange rate of the day, no matter what rate the trade was made at. State Street has faced similar claims.
BNY Mellon has adamantly denied the allegations. On Tuesday it agreed to a partial settlement with the U.S. attorney in Manhattan to not call the program "free" or "best execution" and to increase disclosures.
Some analysts have been concerned that the profitability of forex, which has surged as a revenue center for custody banks, would be hurt by lawsuits.
Mr. Gibbons said more clients are negotiating their rates, partly because of the attention, but he called the shift inevitable and said it didn't hurt margins this quarter. The bank hopes to make up for the shift with more volume.
At State Street, profit surged as the prior year was slammed with charges. The Boston bank reported earnings of $381 million, or 76 cents a share, compared with 16 cents a share a year earlier. Excluding restructuring charges and other moves, earnings would have climbed to 93 cents from 87 cents, just shy of the 94 cents analysts expected.
Revenue, on an operating basis, was flat at $2.29 billion, below the $2.4 billion Wall Street expected, as fee revenue dropped 4%.
Foreign-exchange revenue declined 12%. State Street Chief Financial Officer Edward Resch also said indirect forex products have declined.
For Chicago-based Northern Trust, profit fell 17% to $130.2 million, or 53 cents a share, which includes several restructuring and other one-time items that reduced the figure by a net 14 cents. Analysts had expected 68 cents a share in earnings.
Revenue rose 6.6% to $955.6 million, but fell short of the $970 million analysts expected.
—Erin McCarthy contributed to this article.
Write to David Benoit at david.benoit@dowjones.com