Pandemic fallout starts catching up to custodian banks as BNY Mellon Q3 profits dip

Last modified October 18, 2020. Published October 16, 2020.
BNY Mellon Center in Pittsburgh (Daveynin/Creative Commons)

BNY Mellon Center in Pittsburgh (Daveynin/Creative Commons)

Lower interest rates and money market fee waivers dampened ’s profits in the third quarter, but executives said Friday that the bank remains strong and that its strengths will become more clear as it heads into 2021.

Net income was $944 million, down from $1.041 billion in the third quarter of 2019, a 9% drop. However, total revenue stood at $3.8 billion, representing a less than a 1% drop from 2019.

“Revenues were negatively impacted by lower interest rates and associated money market fee waivers,” Emily Portney, who joined the bank as chief financial officer in July, said in an earnings call Friday morning. “Excluding these market-driven factors, underlying fees would extend up, reflecting good momentum across many of our businesses.”

Custodian banks such as BNY Mellon performed well during the early months of the COVID-19 pandemic, with BNY Mellon showing a 12% increase in per-share earnings year to year in the first quarter. Because these banks generate most of their income through fees, they were largely insulated from the credit losses that other banks must have significant reserves to combat.

But the low interest rates and other COVID-related restrictions, such as the U.S. Federal Reserve extending a suspension on share buybacks and dividend increases through the fourth quarter, have had an effect since that strong beginning to 2020.

“Notwithstanding the challenging current environment, our business model continues to generate significant excess capital,” CEO Todd Gibbons said during the call. “We look forward to recommencing share buybacks as soon as regulators and market conditions allow.”

The bank said its assets under management grew to $2.041 trillion, a 9% increase from $1.881 trillion a year ago, reflecting higher market values, the favorable effects of a weaker U.S. dollar versus the British pound, and net inflows. 

BNY Mellon also noted that the lower rates and fee waivers were offset by other factors, including an increase in client activity and balances in its Pershing and asset-servicing divisions. 

“In asset servicing, we are winning and retaining more deals, and our pipeline is stronger than it was at this time last year,” Gibbons said. “Deals are becoming more complex, and cross-product and solutions-based.”

Gibbons cited as an example Canadian wealth management and insurance company iA Financial’s recent decision to use BNY Mellon-founded CIBC Mellon to provide asset services for its operations. “The mandate encompasses fund accounting and administration, custody, foreign exchange and a full data and analytics suite of solutions incorporating the Data Vault and Data Studio, performance measurement and reporting, and middle-office services,” Gibbons said.

Gibbons said that Pershing is absorbing the bulk of money market fee waivers, masking its underlying good performance. 

He further noted that the bank is continuing to increase its cloud-based data and analytics offerings, and that it has seen an increase in wealth management clients as the bank has resumed socially distant in-person meetings.  

BNY Mellon has also been working to control expenses by looking for opportunities to improve automation and is considering reducing its real-estate footprint and rethinking its location strategy, taking cues from the pandemic-related work environment.  

“While uncertainty certainly lies in terms of how the pandemic evolves and its impact on the global economy, we also have significant uncertainty about the size and form of future stimulus programs as well as political developments,” Gibbons said. “But given that, I am certain that the team we have in place will continue to navigate these challenges by executing on our strategic priorities.”

--Additional reporting by Carrie Wood and Rachel Uda