Trust Banks Fees Hurt By Slow Markets, Low Volumes In 4Q

Cautious clients and quiet stock markets in the fourth quarter impacted the fees the nation's three big trust banks make from client activities, dragging revenues below expectations.

There was a particularly sharp drop-off in foreign-exchange volumes and an increase in the amount of fees money-managers had to return to clients for slim results for the banks, which handle the funds for trusts and for Wall Street banks.

Bank of New York Mellon Corp. (BK), the largest custody bank, said volumes slumped as clients looked at global turbulence and headed for the bunkers. The steep drop in volumes in foreign-exchange also comes amid scrutiny over the treatment of clients that have the bank conducting foreign-exchange trades. Tuesday, BNY Mellon reached a partial settlement with the Department of Justice that would change how it describes forex offers to clients.

State Street Corp. (STT) and Northern Trust Corp. (NTRS) also missed revenue forecasts, sending shares falling.

BNY Mellon dropped 4.2% to $20.38 in recent trading while State Street lost 7.1% to $39.71 and Northern Trust fell 2.2% to $41.

"As the year end approached we saw a complete risk-off," 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 cost 6 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 prior quarter, when BNY Mellon had said it gained new business as clients increased outsourcing.

Foreign exchange revenues dropped 11% from the prior year while investment management and performance fees fell 9%.

Chief Financial Officer Todd Gibbons said in an interview the dramatic decline in activity could be seen in the drop-off in stock trading, and hasn't turned around in the new year. But he said the bank is winning new clients.

"We are pretty darn optimistic about that," Gibbons said.

BNY Mellon's assets under management and under custody grew, and deposits were again soaring. The bank's 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 Department of Justice 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. Tuesday it did agree 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 the profitability of forex, which has surged as a revenue center for custody banks, would be hurt by lawsuits.

Gibbons said more clients are negotiating their rates, partly because of the attention, but he called the shift inevitable and added it didn't hurt margins this quarter. The bank hopes to make up for the shift with more volume.

At State Street, profits surged as the prior-year was slammed with charges. The Boston bank reported earnings of $381 million, or 76 cents a share, compared to 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 Northern Trust, profit dropped 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.

-By David Benoit, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

--Erin McCarthy contributed to this report.

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