By Dow Jones Business News, October 16, 2013, 07:45:00 AM EDT
Bank of New York Mellon Corp.'s ( BK ) third-quarter income rose 35% amid a rising stock market and a boost from a
recent tax-court decision. But expenses rose, cutting into earnings growth as revenue growth remained sluggish.
BNY Mellon reported a profit of $980 million, up from $725 million a year earlier. Per-share earnings, which reflect
preferred dividends and the tax-court decision, rose to 82 cents from 61 cents in the year-earlier period. Excluding the
tax benefit, net income slipped by a penny to 60 cents a share in the latest period.
Revenue meanwhile improved 2.5% to $3.77 billion, although it fell 6% from the prior quarter. Analysts polled by
Thomson Reuters had most recently forecast per-share earnings of 58 cents on revenue of $3.75 billion.
Growth in revenues is "still pretty anemic," said Ken Usdin, an analyst with Jefferies. He noted that while BNY Mellon
has been keeping a lid on expense growth, revenue growth still isn't outpacing cost growth.
In its earnings release, the bank noted that revenues were helped by higher clearing-services fees and rising stock-
market values since the third quarter of 2012. But revenues were hurt by a "seasonal decrease in securities lending
revenue," and "higher money-market fee waivers" driven by continued low short-term interest rates.
On a conference call with analysts, BNY Mellon Chief Financial Officer Thomas P. Gibbons noted that the money market
fee waivers hit per-share earnings by about six cents, which is "as high as we've seen it." Excluding the impact of fee
waivers, Mr. Gibbons said BNY Mellon's fee growth would have been about 4.5% from the year earlier.
Analysts at Credit Suisse had recently warned that low interest rate environment continues to depress net interest
margins for trust banks given the shorter-term nature of their balance sheets, as well as increasing money market fee
waivers and tight securities lending spreads.
BNY Mellon's results included a $2 million benefit from income taxes, compared with an expense of $225 million a year
earlier. The company noted the recent tax benefit was driven by a specific benefit of $261 million "related to the U.S.
Tax Court's partial reconsideration" of a February decision in which it disallowed "certain foreign tax credits."
Meanwhile, the bank's net interest margin, which measures what a bank earns on money it lends out, was 1.16%, narrower
than the year-ago's 1.20% but slightly wider than the second quarter's 1.15%.
Investment services fees rose 3.6% from the year earlier to $1.74 billion, reflecting higher fees from clearing
services, asset services and issuer services. Foreign exchange revenue rose 27% from the year earlier to $154 million,
due to higher volumes and volatility, but fell 14% from the second quarter.
Assets under management rose 13% from a year earlier to $1.53 trillion, while assets under custody and administration
grew 4% to $27.4 trillion as the bank was helped by net new business and higher market values.
Investment management and performance fees were $821 million, an increase of about 5% year-over-year and a decrease of
about 3% sequentially.
Bank of New York Mellon reported a provision for credit losses of $2 million during the quarter, compared with a
credit of $5 million a year ago and a credit of $19 million in the second quarter.
On the expense side, noninterest expense rose 2.7% from the year earlier to $2.78 billion, although this figure was
1.5% lower than the second quarter's.
When asked about how BNY Mellon is preparing for a possible government default, Chief Executive Gerald L. Hassell said
the bank has a "variety of contingency plans in place with a variety of different scenarios." He said the bank's balance
sheet has ballooned by about $10 billion since the end of the third quarter as money market funds and other clients exit
certain positions and park more cash with the bank. "As every day goes by, more people are getting more defensive," said
Shares fell Wednesday by 0.3% to $30.76. The stock has risen 20% so far this year.
Write to Saabira Chaudhuri at Saabira.Chaudhuri@wsj.com
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