Bank of NY Mellon profit up

Robert Kelly, chief executive of Bank of New York Mellon Corp., speaks at the Reuters Finance Summit in New York November 6, 2007. (REUTERS/Brendan McDermid)

NEW YORK (Reuters) - Bank of New York Mellon Corp <BK.N> said on Thursday first-quarter profit rose 9 percent, as market volatility helped boost fees from providing custodial and other back-office services to institutional investors.

Profit fell just short of some analysts' estimates. The bank also said market disruptions caused unrealized losses in its securities portfolio to more than quintuple since year-end to $1.79 billion from $342 million.

But the bank said it did not expect to suffer material losses in the $45.5 billion portfolio. It wrote down $74 million tied to these securities in the quarter.

"Results were strong but mixed," said Tom McCrohan, an analyst at Janney Montgomery Scott LLC in Philadelphia. "Market volatility is benefiting all the custody banks, and net interest income was also strong. On the flip side, asset management had headwinds because fees depend on equity markets, which have fallen." McCrohan rates the bank "neutral."

In the third quarter since the merger of Bank of New York Co with Mellon Financial Corp created the world's largest trust bank, profit totaled $746 million, or 65 cents per share. A year earlier, profit was $686 million for the combined banks, and $434 million for Bank of New York alone.

Operating profit was $749 million, or 65 cents per share, and was 72 cents per share excluding merger costs. Results also included a $25 million write-down for investments tied to a former hedge fund affiliate, and a $42 million gain associated with credit card network Visa Inc's <V.N> initial public offering last month. Revenue rose 14 percent to $3.75 billion.

Analysts on average expected a profit of 73 cents per share on revenue of $3.84 billion, according to Reuters Estimates.

Chief Executive Robert Kelly reassured investors that the bank had sufficient capital to withstand any potential securities losses.

"We fundamentally feel the value of the securities we are holding is much higher than what a very illiquid market is putting on them right now," Kelly said in an interview. "We have the ability and the intent to hold these, and we feel comfortable we'll get the principal back upon maturity."

Shares of State Street Corp <STT.N>, another custody bank, sank 9.9 percent Tuesday after it said it had $3.2 billion of unrealized securities losses, and might face $1.5 billion of further losses to bail out mortgage-backed debt funds.

In morning trading, Bank of New York Mellon shares fell 96 cents to $43.04 on the New York Stock Exchange.

DISTRESSED FINANCIAL MARKET

Bank of New York's $18.3 billion purchase of Mellon created a custodial power now handling $23.1 trillion of assets, and a large asset manager now overseeing $1.1 trillion.

Total fee revenue increased 9 percent to $2.98 billion, while net interest income jumped 39 percent to $767 million.

Fees from securities servicing totaled $1.54 billion, up 20 percent, while asset and wealth management fees rose just 5 percent to $842 million.

"We're clearly in a troubled economy and an extraordinarily distressed financial market," Kelly said in the interview. "But we have one-third of our company internationally, and global capital flows remain very strong. It was inevitable that asset management would have issues (when stocks are falling)."

Among other custody banks, profit rose 69 percent at State Street, while operating profit excluding a large one-time gain rose 24 percent at Northern Trust Corp <NTRS.O>. At JPMorgan Chase & Co <JPM.N>, a large custodian better known for retail and investment banking, profit fell 50 percent.

Founded in 1784 by Alexander Hamilton, Bank of New York is the oldest U.S. banking company. Mellon was founded in 1869, and grew to prominence under financier Andrew Mellon. Both companies quit branch banking this decade.

(Editing by Maureen Bavdek and Dave Zimmerman)

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