With interest rates expected to rise this year, the outlook for Bank of New York Mellon and other custody banks is looking a bit rosier than it did a few quarters ago.
Though money market fee waivers put a dent in BNY Mellon’s fourth-quarter fee revenue, executives said they expect pressure on fee revenues to ease as the Federal Reserve lifts interest rates. In guidance provided Tuesday during the company’s quarterly earnings call, executives said they expect 2022 fee revenue growth in the neighborhood of 7% over last year.
Managers use fee waivers to keep their pricing competitive when interest rates are low and cash that is parked in safe, low-yielding government debt is earning a meager return. One analysis in mid-2021
“With the first 25-basis-point hike, we would expect to recoup about 50% of the waivers,” Chief Financial Officer Emily Portney said Tuesday. “When you put it all together, we would expect money market fund waivers to be a little less than half of what they actually were in 2021.”
That forecast bodes well for other trust banks like State Street in Boston and Northern Trust in Chicago, both of which will report their results later this week.
BNY Mellon recorded $243 million in fee waivers for the fourth quarter, an increase of 4% from the prior quarter and up 81% from the year-earlier quarter. For the full year, the company recorded fee waivers of $916 million, compared with $337 million in 2020.
Fourth-quarter fee revenue rose 4% from the year-ago period to $3.2 billion, but it would have been up 9% had those fee waivers been excluded. Higher market values and client volumes largely drove the increase in fee revenue.
As soon as 2023, crypto assets could provide BNY Mellon a meaningful source of revenue, Portney said Tuesday in an interview with Bloomberg. The New York company has been partnering with the fintech firm Fireblocks and is awaiting further guidance from regulators on crypto-backed exchange-traded funds, she said.
During the fourth quarter, assets under custody or administration at BNY Mellon rose 14% to $46.7 trillion, and assets under management rose 10% to $2.4 trillion.
Net income rose 15% to $869 million in the fourth quarter, driven by higher fee revenues. Earnings per share of $1.01 landed at the mean estimate of analysts surveyed by FactSet Research Systems.
At $677 million, net interest revenue was essentially flat compared with the same quarter in 2020, the result of lower interest rates on interest-earning assets.
Noninterest expenses rose 1% to $2.9 billion, largely because of staff expenses and investments in infrastructure and efficiency initiatives. Expenses would have increased 6% if not for certain one-time items, including lower litigation reserves, severance expenses and real estate charges, the company said.
BNY Mellon benefited from strong credit quality in the fourth quarter. The company released $17 million from its provision for credit losses, compared with $15 million it set aside for losses during the same quarter in 2020.
