With interest rates expected to rise this year, the outlook for Bank of New York Mellon and other custodian banks looks a bit more optimistic than it did a few quarters ago.
Although money market fee waivers weighed on BNY Mellon’s fee revenue in the fourth quarter, executives said they expect pressure on fee revenue to ease as the Federal Reserve raises interest rates. In guidance on the company’s quarterly earnings call on Tuesday, executives said they expect 2022 fee revenue growth of about 7% from a year ago.
Managers use fee waivers to keep their prices competitive when interest rates are low and cash that is parked in safe, low-yielding public debt earns a meager return. An analysis in mid-2021 believed that trusted banks reduced their money market fees by nearly two-thirds during the COVID-19 pandemic. That should change when the Federal Reserve raises rates, which it should do as early as March.
“With the first 25 basis point hike, we expect to recover 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 just under half of what they actually were in 2021.”
The forecast bodes well for other trust banks like State Street in Boston and Northern Trust in Chicago, both of which will report 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 81% from the prior year quarter. For the full year, the company recorded fee waivers of $916 million, compared to $337 million in 2020.
Fourth-quarter fee revenue increased 4% from the prior year period to $3.2 billion, but would have increased 9% had these fee waivers been excluded. Higher market values and client volumes largely contributed to the increase in commission income.
As early as 2023, crypto assets could provide BNY Mellon with a significant revenue stream, Portney said Tuesday in an interview with Bloomberg. The New York-based company has partnered with fintech firm Fireblocks and is awaiting further guidance from regulators on crypto exchange-traded funds, she said.
During the fourth quarter, assets under custody or under administration at BNY Mellon increased 14% to $46.7 trillion, and assets under management increased 10% to $2.4 trillion.
Net income rose 15% to $869 million in the fourth quarter, driven by higher commission income. Earnings of $1.01 per share landed at the middle estimate of analysts polled by FactSet Research Systems.
At $677 million, net interest income was essentially flat compared to the same quarter in 2020, due to lower interest rates on interest-earning assets.
Non-interest expense increased 1% to $2.9 billion, primarily due to personnel expenses and investments in infrastructure and efficiency initiatives. Expenses would have risen 6% had it not been for certain one-time items, including lower litigation provisions, severance pay and property charges, the company said.
BNY Mellon enjoyed excellent credit quality in the fourth quarter. The company released $17 million from its provision for credit losses, compared to $15 million it had set aside for losses in the same quarter of 2020.