Custody: BNY Mellon’s new CEO tackles expenses
Hassell shuns future acquisitions; Litigation and regulation unavoidable expenses
The unexpected departure of Robert Kelly, BNY Mellon’s chief executive, at the end of August is evidence that the custody and trust banks are coming under increasing pressure as they face rising expenses. BNY Mellon reported an increase in profits in its second-quarter earnings. However, a 22% rise in expenses on the first quarter of 2010 prompted the firm to announce 1,500 job cuts in August.
Although Kelly’s departure was cited as being because of differences in management style, one analyst says his replacement, Gerald Hassell, is regarded as "more of an expense hawk". Jeff Harte, principal analyst at Sander O’Neill in Chicago, says: "In this environment having someone who will keep a closer eye on costs makes sense. Custody and trust is a scale business. Pricing has been under pressure for years and custodians moved into securities lending and FX trading to cushion that. However, those have fallen on harder times. Persistent revenue headwinds have pushed banks to look for bottom-line growth from reducing costs."
At Barclays Capital Global Financial Services Conference in September, Hassell made clear the acquisition trail forged by Kelly had ended with his departure. "[The] priority is organic growth," he said. "We’ve done a number of acquisitions. We’re far along in the integration and assimilation of those. The real power is capitalizing on the footprint we have globally and capitalizing on those acquisitions. So acquisitions are not a priority for us. There might be a few places here or there that could add to the business model in an opportunistic way but we’re not pounding the streets and pounding the globe looking for acquisitions. Our number-one priority is capital generation, and then to the extent we have excess capital, it’s returning it to shareholders."
Kelly made a number of acquisitions in his tenure as chief executive. In 2007, BNY Mellon acquired ARX Capital Management out of Brazil and ABN Amro’s global securities servicing business. In 2009 the firm bought Insight Investment Management, and acquired a 20% stake in private equity company Siguler Gulf & Company. Last year, two more acquisitions were made: PNC’s asset servicing business and Germany-based BHF Asset Servicing.
Hassell will lay out more detailed plans for the business, including where the expense cuts will occur, at an investor day in November. One analyst says Hassell is well known to Wall Street despite having taken something of a backseat since the BNY Mellon merger. "Hassell knows the firm inside out and was the clear choice for Kelly’s replacement but it will be interesting to see if he is the right leader when it comes to motivating the troops now that the environment is getting gloomier," the analyst says.
The problem of rising expenses confronts the entire custody industry. Revenues are already under pressure with interest rates so low. Hassell, however, pointed out that 80% of BNY Mellon’s revenues are fee-based, so the firm "is not as dependent on the fee environment as other firms". He also points to inflows of some $95 billion since the second quarter of 2010, which has boosted fee revenue.
Litigation has been a primary driver of the increase in expenses for BNY Mellon. The bank is facing several lawsuits, including a handful from state pension funds accusing the firm of overcharging on FX trading fees. State Street has faced similar litigation. Hassell says: "Litigation is a real challenge in the US marketplace in particular. We were faced with a couple of suits in our foreign exchange practices. We actually feel very good about how we’ve conducted ourselves. Our clients are not necessarily upset with us as much as the attorneys general in certain states are.
"We have every regulator around the world wanting information from us in a variety of different ways. We view that as a running-rate expense that we have to bear and still deliver positive operating leverage and still deliver positive results to shareholders"
"We’ve always executed within the band of the interbank range of the day, so we don’t think we’ve done anything out of line. And yet we’re being challenged in terms of our practices. We feel very strongly that our practices are sound and, as a result, we are fighting a couple of those lawsuits."
Harte says that while the class-action lawsuits will result in reputational damage, he has not seen evidence to suggest institutional clients are walking away from trading FX with the custody and trust banks.
State Street, for example, was reappointed by Calpers this year even after being sued by the pension fund manager just two years ago for overcharging on FX trading fees.
The regulatory environment is also adding to the expense burden, a crimp on margins that Hassell says is there to stay. "We have every regulator around the world wanting information from us in a variety of different ways. We’ve had to build teams of people to respond to those requirements. And it’s not just to meet the minimum capital levels. It’s to provide them information, start to develop living wills, all sorts of things. But we view that as a running-rate expense that we have to bear and still deliver positive operating leverage and still deliver positive results to shareholders. So it’s just a fact of life we’re going to have to deal with."