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Trust Bank Profits Starved of Fees (Update 3)

Updated with State Street's earnings announcement, Northern Trust's earnings announcement, with comments from Nomura analyst Glenn Schorr and afternoon trading information.

NEW YORK ( TheStreet) -- Following a fourth-quarter trend of lower transaction fees because of investor uncertainty, Bank of New York Mellon (BK - Get Report) and State Street (STT - Get Report) both announced significant declines in fourth-quarter fee revenue.

Bank of New York Mellon reported reported fourth-quarter earnings of $505 million, or 42 cents a share, declining from $54 cents a share in the third quarter and 53 cents a share during the fourth quarter of 2010.

Shares were down 4% in afternoon trading, to $21.42.

The fourth-quarter results missed the analyst consensus estimate of 54 cents, according to Zacks, in part because of $107 million, or 6 cents a share, in restructuring charges "related to efficiency initiatives."

Despite a 3% year-over-year increase in assets under custody and administration to $25.8 trillion as of Dec. 30, the company reported an 8% decline in investment services fees to $1.6 billion, during what Bank of New York Mellon CEO Gerald Hassell called "a challenging revenue quarter, as general uncertainty in the financial markets resulted in lower-than-normal levels of client activity."
Bank of New York CEO Gerald L. Hassell

Hassell's comments about slowing client activity mirrored those of TD Ameritrade (AMTD) CEO Fred Tomczyk, after his firm reported a decline in commissions and transaction fees.

Bank of New York Mellon's fourth-quarter investment management and performance fees declined 9% year-over-year, to $730 million, "driven by higher money market fee waivers," in the prolonged low interest rate environment, as well as "lower performance fees and weaker international equity markets, partially offset by net new business."

Hassell was upbeat on Bank of New York Mellon's continued capital build, with an estimated Basel III Tier 1 common equity ratio of 7.1% as of Dec. 30, increasing from 6.5% the previous quarter.

Total noninterest expenses -- excluding restructuring charges, $32 million in merger-related expenses, and $106 million in amortization of intangible assets -- declined 2% year-over-year, to $2.58 billion, "lower staff expense partially offset by higher litigation expense."

Excluding the restructuring and M&I charges, Bank of New York reported an annualized return on tangible common equity for the fourth quarter of 20.4%, declining from 22.3% the previous quarter and 29.1% a year earlier. The decline in ROE in part reflects the company's strengthened capital position.

Bank of New York Mellon's shares were up 7% year-to-date, through Tuesday's close at $21.27. According to Zacks, nine out of 19 analysts covering the company rate the shares a buy, while nine have neutral ratings and one analyst recommends selling the shares.

The shares traded for nine times the 2012 consensus EPS estimate of $2.40.

Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.

State Street reported fourth-quarter net income available to common shareholders of $371 million, or 76 cents a share.

The company reported fourth-quarter operating earnings of 93 cents a share, missing by a penny the analyst consensus estimate of fourth-quarter earnings of 94 cents a share, according to Zacks.

Operating EPS declined from 96 cents during the third quarter and a dollar during the fourth quarter of 2010.

The shares were down over 6% in afternoon trading, to $40.00.

Fourth-quarter operating revenue was $2.29 billion, declining 5% from the previous quarter but increasing slightly from a year earlier.

Servicing fees totaled $1.06 billion, declining 4% from the previous quarter and 1% from a year earlier, reflecting "volatile markets and risk-averse investor behavior," according to State Street CEO Joseph Hooley.

Investment management fees declined 12% sequentially and 9% year-over-year to $202 million in the fourth quarter, while trading services revenue declined 18% from the third quarter and 12% from a year earlier, to $273 million.

The year-over-year fee revenue declines were offset by a 30% increase in securities finance revenue to $90 million, a 5% increase in net interest revenue, to $577 million, and $42 million in securities gains.

The shares trade for 10 times the 2012 consensus EPS estimate of $4.05 according to Zacks. Analyst sentiment is strong, with 15 out of 21 analysts covering State Street rating the shares a buy, while the remaining six analysts have neutral rarings.

Interested in more on State Street? See TheStreet Ratings' report card for this stock.

Northern Trust (NTRS - Get Report) of Chicago announced fourth-quarter earnings of $130.2 million, or 53 cents a share, which included $61 million ($39.8 million, or 17 cents a share, after tax) in restructuring charges, which CEO Frederick Waddell said "include the planned elimination of approximately 700 positions, and additional positions [which] will be eliminated through attrition."

Analysts had expected Northern Trust to announce fourth-quarter earnings of 68 cents a share.

In comparison, the company earned 70 cents in the third quarter and 64 cents in the fourth quarter of 2010.

Northern Trust's noninterest income totaled $683.8 million in the third quarter, declining from $714.8 million in the third quarter, but increasing from $674.1 million in the fourth quarter of 2010.

Trust, investment and servicing fees grew 7% from a year earlier, to $541.5 million during the fourth quarter, reflecting 4% growth in assets under custody to $4.3 trillion as of Dec. 30, and 3% growth in assets under management, to $662.9 billion.

Waddell said that the company has been "actively analyzing various aspects of our businesses and technology to identify opportunities to deliver more value," and has "begun to implement initiatives that we expect will sustainably improve productivity and profitability." The "profit improvement initiatives are expected to benefit annual pre-tax income by approximately $250 million by the end of 2013.

Nomura analyst Glenn Schorr said the "$250mn cost save program came in above our $160-$180mn estimate and is a larger percentage of total expenses than BK or STT," and that the company's "capital ratios remain robust," with Northern Trust reporting a Tier 1 capital ratio of 12.5% as of Dec. 30.

Schorr maintained his neutral rating on Northern Trust, with a $42 price target, "based on a target multiple of 14x our 2012 EPS estimate of $3.00."

Northern Trust's shares were down over 2% in afternoon trading, to $41.02.

Most analysts covering Northern Trust are on the fence, with three buy ratings, 15 neutral ratings and one analyst recommending investors sell the shares.

Interested in more on Northern Trust? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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