Bank of New York Mellon Results Test Investors' Patience

By Justin Baer

When Charles Scharf laid out his plans earlier this year for jump-starting Bank of New York Mellon Corp.'s tepid revenue growth, the chief executive warned there was "no silver bullet here." The question is whether investors will be patient.

BNY Mellon's shares had their worst day in more than two years Thursday after the company reported revenue that fell short of some analysts' expectations. The stock fell as much as 6% before closing down 5.2% at $52.73.

"Revenues were weaker than we hoped," said Jeff Harte, an analyst with Sandler O'Neill + Partners. "Missing on revenues is not something the Street is going to like for a group that's already revenue constrained."

The results highlight the main challenge facing BNY Mellon and other custody banks: how to extract more fees from the money managers, brokers and other clients they serve. BNY Mellon has succeeded in slashing expenses since the last financial crisis, helping to lift profits. But revenue growth remains below what investors would like, according to analysts.

BNY Mellon last year tapped Mr. Scharf as CEO to help modernize the custody bank and pull it out of its low-growth doldrums. He has revamped his management team, built out sales coverage in certain businesses and increased the firm's technology budget by $300 million this year.

Those changes, along with a slew of new investment funds and back-office services, will help BNY Mellon pick up new business, Mr. Scharf has said. On Thursday, he reminded investors those investments would take time to bear fruit.

"We are focused on increasing the rate of revenue growth," Mr. Scharf said during a conference call with analysts. "Given the nature of our business, it takes time and therefore, it is very hard to draw any conclusions in individual quarters good or bad."

Total revenue during the second quarter was $4.14 billion. The average estimate among analysts was for $4.13 billion, according to S&P Global Market Intelligence, though some analysts, including Mr. Harte, had been expecting more.

Net income rose 14% to $1.06 billion, or $1.03 a share, from $926 million, or 88 cents a share, in the same period a year earlier. Analysts polled by S&P Global had predicted a per-share profit of $1.02.

Total revenue rose 5%, led by gains in net interest income, while fee revenue climbed 3% to $3.21 billion. Revenue at the bank's investment-services business rose 8% to $3.1 billion, aided by higher interest rates, a pickup in currency trading and more securities-lending activity.

Results from BNY Mellon's Pershing business, which clears trades and lends to brokerage clients, were hurt by the loss of two clients.

The New York company's asset-management division reported revenue of $1.02 billion, up 3% from a year ago. The business, which mostly manages money for pensions and other institutional clients, had net outflows of $26 billion.

When pressed in March by an analyst for a revenue growth target BNY Mellon aspired to produce over time, Mr. Scharf declined to provide a specific one.

Write to Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

July 19, 2018 18:20 ET (22:20 GMT)

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