After the stock market's fourth-quarter bang, investors expected a bigger boom than they got from leading custody banks State Street and Bank of New York Mellon .

The rally did lead to more custody and management fees for the quarter, but not enough to impress investors. And continued low interest rates held back profits from short-term investments and lending.

Shares of BNY Mellon dipped 0.5 percent, while State Street fell 4.1 percent. The two banks' stocks had gained more than 20 percent in the past three months.

Bank of New York Mellon, the world's biggest custody bank, said fourth-quarter profit from operations increased 10 percent as two acquisitions from last year bolstered fee income. Excluding items, earnings per share of 59 cents were slightly ahead of analysts' estimates of 57 cents.

The fourth quarter was the best for fee income since the start of the financial crisis in 2008, Chief Executive Officer Robert Kelly said in a telephone interview.

It's been breathtaking how quickly the financial system has repaired itself, he said. All the major banks are essentially profitable in this country, and their balance sheets continue to get healthier.

But Nomura analyst Glenn Schorr said that despite the pretty good quarter at Bank of New York Mellon, the stock has had a big run and could soften given slight disappointments on expenses and assets.

Assets under custody, the bulk of which are in fixed income, grew only 2 percent during the quarter to $25 trillion.

At slightly smaller rival State Street, earnings per share before special items rose, beating Wall Street's expectations by a penny as fee revenue increased 10 percent to $1.7 billion.

In the custody business, the company ranks behind BNY Mellon and JPMorgan Chase & Co .


Low interest rates have constrained revenue growth at State Street, BNY Mellon and much smaller rival Northern Trust Corp . With the Federal Reserve's main lending rate near zero since 2008, custody banks are forced to waive fees they collect on money-market funds.

The banks will recover lost revenue and profits when rates inevitably move higher, said Jason Tyler, senior vice president at Ariel Investments in Chicago. The firm owns 1.4 million shares of Northern Trust and 168,000 shares of BNY Mellon.

Our view here is these are very good long-term companies facing significant interest rate pressure in the short run, Tyler said. Rates won't be low forever, so the earnings power of these companies will accelerate beyond what the market is expecting in the near term.

Chicago-based Northern Trust said fourth-quarter profit fell 22 percent, hurt by low interest rates. Earnings per share of 64 cents missed analysts' estimates of 71 cents.

The company's assets under management fell 2 percent from the September quarter, but assets under custody rose 4 percent.

Shares of Northern Trust were down 3.7 percent in morning trading.

(Additional reporting by Ross Kerber; Editing by Lisa Von Ahn)