Large custody bank faces pressure as depositors chase higher
interest rates
By Justin Baer
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 18, 2019).
Bank of New York Mellon Corp. delivered a grim reminder that
shifting Federal Reserve policies and softening long-term interest
rates are taking their toll on part of the finance industry.
Shares of BNY Mellon fell by nearly 10% Wednesday after the
custody bank reported quarterly earnings and revenue that fell
short of Wall Street's expectations.
BNY Mellon's disappointing results underline how sensitive
financial firms can be to the ebb and flow of interest rates,
particularly when increases in short-term rates aren't matched with
rising longer-term rates. Federal Reserve officials hiked rates
four times in 2018. Then, in January, they signaled they would
leave rates unchanged for some time, citing increasing risks to
economic growth. In March, the central bank indicated it was
unlikely to raise rates at all in 2019.
The policy reversal caused the yield on the benchmark 10-year
Treasury to drop to its lowest level in more than a year. Treasury
yields decline when bond prices rise and investors' outlook for the
economy darkens.
Last month, the 10-year yield fell below that of three-month
Treasurys for the first time since 2007 -- a so-called inverted
yield curve that may indicate a recession is lurking in the
economy's future.
"We're not getting help from interest rates now, which we had
for the last few years," said Jeffrey Harte, a bank analyst with
Sandler O'Neill + Partners. "That puts banks in a position where
interest income is now a function of volume. Can you grow
loans?"
For banks and other financial firms that fund themselves with
deposits and other short-term loans and put that money to work
through loans and longer-term investments, a flattening yield curve
can squeeze their interest margins and leave a mark on earnings. At
BNY Mellon, net interest revenue fell 8% to $841 million from a
year earlier.
"Rates across the entire yield curve declined versus our
assumptions, deposit balances declined, and we saw changes to the
mix between interest and noninterest-bearing deposits," Charles
Scharf, BNY Mellon's chairman and chief executive, said Wednesday
during a conference call with analysts. "We see significant
competitive pressure for deposits."
While Goldman Sachs Group Inc., Bank of America Corp. and other
big banks were able to sidestep the brunt of these effects,
custodians like BNY Mellon tend to lose clients' deposits faster as
rates go up. That is because commercial banks draw more of their
short-term funding from retail customers who are slower to pull
their money than big companies and institutions.
That is especially true for BNY Mellon, which tends to collect
more deposits that don't pay interest. As rates rose, more of BNY
Mellon's customers moved money out of the bank and into
interest-bearing deposits with a higher yield. That shift left BNY
Mellon with a bigger slice of their deposits drawing interest;
meantime, the average deposit rate rose from a year ago.
BNY Mellon and other custody banks don't have big lending
businesses, so a drop in deposits is usually with a decline in
securities holdings that generate interest income. So their revenue
from that interest was shrinking at the same time that their
interest margins were narrowing.
BNY Mellon "is suffering more than other firms now, and
certainly today is a stark reminder that there's an increasing
demand for yield," said Brennan Hawken, an analyst with UBS Group
AG. "You've got a double whammy on your hands."
BNY Mellon executives predicted in January that the bank's
net-interest revenue would be little-changed or slightly higher in
the first quarter from the last three months of 2018. Instead,
interest revenue fell 5%
On the conference call, BNY Mellon finance chief Michael
Santomassimo said the bank expected deposit rates would "inch up a
little bit" in the second quarter.
BNY Mellon reported net income of $946 million, or 94 cents a
share, in the first quarter, down 19% from a year earlier. Total
revenue slipped 6.7% to $3.9 billion.
Analysts polled by S&P Global Market Intelligence had
expected a profit of 96 cents a share, on revenue of $4
billion.
BNY Mellon said the fees it collects also fell, dropping 9% to
$3.03 billion.
The bank's results were also hurt by changes to currency
exchange rates and the flow of assets from its
investment-management division. The sale of several
asset-management businesses last year also affected the most-recent
quarter.
Assets under management dropped 1% from a year ago, to $1.84
trillion.
On the call, BNY Mellon executives said they were continuing to
look for ways to trim expenses even as they invest heavily in
technology initiatives they expect will boost growth.
Noninterest expenses fell 1% to $2.7 billion in the first
quarter from a year earlier.
Allison Prang contributed to this article.
Write to Justin Baer at justin.baer@wsj.com
(END) Dow Jones Newswires
April 18, 2019 02:47 ET (06:47 GMT)
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