BNY Mellon profit up, analysts worry

BNY Mellon Corp reported an 11 percent rise in third-quarter earnings on Wednesday, beating analysts' expectations, as money management and performance fees increased.

While BNY Mellon's stock rose 4.1 percent to $24.52, some analysts expressed concern about the revenue trends at the world's largest custody bank's core investment servicing business, which tracks mutual fund prices and collects and distributes dividend and interest payments for investors.

The bank reported a sharp decline in revenue from trading foreign exchange currencies and a 6 percent drop in overall investment services fees.

CLSA Ltd analyst Mike Mayo described what was happening to BNY Mellon's servicing fees as a bloodbath.

It just keeps getting worse and worse, Mayo told BNY Mellon executives on a conference call. If I look at your services fees, including foreign exchange and securities lending, this is the lowest percentage of those fees to assets under custody in your history.

BNY Mellon CEO Gerald Hassell said foreign exchange revenue, hit hard by changing client behavior and lower volatility in currency markets, might not stage a complete comeback. Foreign exchange is going the route of the equity markets - more electronic, higher-speed and streaming prices to clients on a consistent basis, giving them greater optionality in terms of how they execute with us, Hassell said.

And overall, pricing for the plain-vanilla custodial business remains under pressure, Bernstein Research analyst Brad Hintz said in a research note. Executives at BNY Mellon and rival State Street Corp have acknowledged they have a hard time getting price increases from their largest clients.

Both custody banks have been fighting lawsuits from customers and U.S. authorities accusing them of overcharging on certain forex trades. While the banks deny any wrongdoing, they concede that customers have shifted some of their forex activity to cheaper alternatives such as electronic trading.

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