Bank of New York Mellon Signals Dark Yield Curve Clouds in Trust and Custodial Companies

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It’s unusual to see shares of Bank of New York Mellon Corp. (NYSE: BK) have a huge post-earnings reaction. After all, the 235-year-old bank is the top custodial player with a large interest income play in investment services. The yield curve is creating a problem for the bank, and its shares have suffered handily as a result. This brings a bad omen for other trust and custodial banks, and it may even send a cloud over the already pressured online brokerage giants, which also rely on an interest spread.

Earnings per share down 15% and revenues down 7% doesn’t add up to a great day for BNY Mellon. Fee revenue decreased by 9% and net interest revenue decreased 8%. It reported a 20% decline in profits, and this appears to be the bank’s first earnings miss against consensus estimates in about two years. Lower client activity and a small drop in total assets under management added pressure on top of the yield curve. The bank’s assets under custodial services rose by 3% to $34.5 trillion, while its assets under its own management fell by 1% to $1.8 trillion.

The custodial behemoth now sees its net interest revenue dropping by 3% to 5% in the second quarter, as the bank is being forced to pay out higher interest on deposits. Even though BNY Mellon sees a low chance of future interest rate hikes by the Federal Reserve, there has continued to be steep competition for deposits.

BNY Mellon shares were last seen down over 8% to $48.98 on Wednesday morning. Their 52-week range is $43.67 to $58.22, and the prior consensus target price from Refinitiv was $54.00.

Most of the BNY Mellon analysts who cover the shares will be making calls later on Wednesday and Thursday morning. That said, Merrill Lynch maintained its Neutral rating with a $53 price objective in a post-earnings flash report.

Investment banking firm Jefferies also pointed out that BNY Mellon weakness is likely to affect fellow custody banks such as Northern Trust Corp. (NASDAQ: NTRS) and State Street Corp. (NYSE: STT). State Street’s shares were down 2.7% at $69.75, in a 52-week range of $57.87 to $104.33.  Shares of Northern Trust were down 2.7% at $93.00, and its 52-week range is $75.96 to $115.61.

E*Trade Financial Corp. (NASDAQ: ETFC) were trading down 0.25% at $49.70, and rival TD Ameritrade Holding Corp. (NASDAQ: AMTD) was down the same percentage at $53.87. Both companies have underperformed the broader indexes for the S&P 500 year to date, but E*Trade shares were up 13.5% and TD Ameritrade was up 10% so far this year.

Charles Schwab Corp. (NYSE: SCHW) was bucking the trend with a small three-cent gain after a day earlier it reported that its net interest revenue increased by 3% sequentially and 33% from a year ago. Schwab also beat earnings estimates and said that its net interest margin of 2.46% was up from 2.12% this time a year ago, while its core net new assets rose by 6% ($51.7 billion) and total client assets were up 8% ($3.59 trillion). Charles Schwab was trading at $45.69 a share, in a 52-week range of $37.83 to $60.22.

24/7 Wall St. has taken out some of the quotes from BNY Mellon’s board chair and chief executive officer, Charlie Scharf, to show some exact wording about the pressure that is being felt with such a flat yield curve:

The year-over-year declines in revenue and earnings per share were primarily driven by the changing mix and cost of our deposits and the impact of the prior year asset management outflows… While the current expectations for the yield curve will likely negatively impact our revenue growth for the next several quarters, we will remain disciplined on expenses and continue to build out capabilities, which should eventually enable stronger growth.

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