Persistently low interest rates have been a headache for banks in more ways than shrinking profits on the loans they make.
Since the COVID-19 pandemic contracted already-low rates, firms like Bank of New York Mellon and State Street have taken increasing hits to fee revenue. But executives at the two trust banks are hopeful the pressures will soon ease, since Federal Reserve officials indicated last month that they will start hiking interest rates to keep inflation under control.
For trust banks that park trillions of client dollars in safe, low-yielding government debt through money market mutual funds, the interest earned has been so low that the fees managers charge can make the difference between earning a return and taking a loss. The dynamic has been a side effect of the Fed’s move last year to cut rates close to zero in an attempt to buoy the economy.
As a result, trust banks have been making cuts to their charges by as much as two-thirds, according to Crane Data. The so-called fee waivers are even steeper than when rates were last at such depths — during the financial crisis and subsequent recovery from 2009 to 2015, according to Peter Crane, the firm’s president.
“The reason firms have been patient and willing to do it is because they don’t expect it to last,” Crane said. “Of course, the last time they didn’t expect it to last, and it lasted seven years.”
BNY Mellon last week reported $252 million in fee waivers during the second quarter, up 34% from the previous three months and more than three times the amount during the same period last year.
As a result, its $3.2 billion in fee revenue dipped 1% from the first quarter. Though BNY’s fee income was still 4% higher than one year ago, the growth would have been 10% if it were not for the waivers, according to the bank’s earnings report.
State Street in 2020 provided close to $10 million in fee waivers for the full year, according to its year-end SEC filing. But then the discounts started to increase, totaling $15 million in the first quarter of 2021, followed by another $25 million in waivers for the second quarter.
But in recent calls with analysts, both banks said these waivers may now start to shrink.
BNY Mellon expects fee waivers to fall to $225 million in the third quarter, Chief Financial Officer Emily Portney said during a July 15 call. The better forecast is due in part to
State Street had expected to book $35 million in fee waivers per quarter for 2021 but is now estimating discounts to total between $20 million and $25 million, CEO Thomas Gibbons said during the company’s July 16 call.
“We may well have seen the bottom,” Crane said. “If the delta virus doesn’t pull the rug out from everything, one could expect it’s a good bet that next quarter will be a little less painful than the last quarter.”
Trust banks have benefited from the arrival of new business over the past year as cash-rich companies and institutional investors have been seeking more places to store their money.
BNY Mellon reported $991 million in net income for the quarter, up 10% year over year. State Street’s $763 million in net income was also 10% higher than one year ago.
Still, the fee waivers may take time to fully disappear. The Fed panel that sets interest rates indicated in June that two hikes to the central bank’s main borrowing rate could come before the end of 2023.
“Although these challenges will likely not abate near term,” Michael Brown, an analyst with Keefe, Bruyette & Woods, said in a recent note to clients about trust banks, “we believe the downside is well understood and the ‘bad news’ is largely in the rear-view mirror.”
