Bank of New York Mellon, Battered By Low Rates and Low Volume, Misses Wall Street Estimates

By Eleazar David Meléndez | January 18 2012 10:02 AM

Bank of New York Mellon (NYSE:BK), a giant of the custody and trust banking sector, reported a 31 percent fall in earnings to $478 million, or 42 cents a share, for the fourth quarter. Analysts had expected earnings of 52 cents, according to Bloomberg.

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A BNY Mellon sign is seen on its headquarters in New York's financial district, January 19, 2011.

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Shares fell 3.8 percent to $20.86 in mid-morning Wednesday trading.

"It was a challenging revenue quarter, as general uncertainty in the financial markets resulted in lower-than-normal levels of client activity fourth quarter," CEO Gerald L. Hassell said in a statement.

Financial institutions that derive a large portion of their revenue from custody and trust banking -- an area of banking that deals with managing corporate treasuries and making sure fixed-income obligations are met - tend to fare poorly in a low interest-rate environment. As the U.S. Federal Reserve has kept its main lending rate close to zero since 2009, margins at BNY Mellon, and competitors like State Street (NYSE:STT) and Northern Trust (NASDAQ:NRTS), have eroded.

Boston-based State Street also missed earnings estimates for the fourth quarter in its results also announced Wednesday. Its shares felll more than 7 percent.

The slowdown in the volume of trading increased last quarter as institutional investors bolted from the market, adding increased downward pressure to BNY's bottom line. While all revenue line-items fell, the biggest hit was to a category known as "Issuer Services," which includes managing assets for depositary receipts. That business was particularly affected by the downturn in market volume.

Return on common equity, a measure of how much the bank earned on all assets under management, plummeted to 5.9 percent, from 8.5 percent in 2010.

While the New York-based bank lowered costs by laying off workers - it had 900 fewer employees than in the third quarter or nearly 2 percent of the total payroll - it experienced increased costs as a result of restructuring, which it described as "related to efficiency initiatives." It also experienced a less favorable tax rate than a year ago.

While Bank of New York Mellon was unable to capitalize on growth, one bright spot from the report was that assets under management rose 8 percent to $1.26 billion from the year-earlier quarter.