NEW YORK - The Bank of New York Mellon Corp.'s fourth-quarter profit tumbled 68 percent due to its exposure to assets backed by mortgages and a tough comparison to last year, when the bank gained $1.4 billion after unloading its retail operations.
Its core businesses — managing assets and providing middleman services between investors and other financial institutions — performed well, though. The bank's stock fell around 1 percent in midday trading.
The trust bank, because it runs funds for companies and wealthy individuals rather than retail banks for the mass market, has avoided exposure to the consumer problems other banks have.
Still, it was vulnerable to mortgage defaults through products called collateralized debt obligations, or CDOs. The bank's exposure to those pools of mortgage-backed debt resulted in a $118 million write-down in the latest quarter, or $200 million pretax.
Also during the fourth quarter, the bank brought a debt vehicle it had managed onto its balance sheet, as many banks have done. That decision resulted in a $180 million charge.
Goldman Sachs analyst Lori Appelbaum noted the bank's credit markdowns were "clearly more pronounced than peers." Bank of New York Mellon invested significantly fewer dollar in CDOs than other banks did, but percentage-wise, it marked them down by more — 53 percent.
Appelbaum wrote there is some risk of further markdowns in the first quarter, but "underneath all the credit noise core trends were mostly favorable — the merger integration is on track."
Net income totaled $520 million, or 45 cents a share, in the period from October to December, down sharply from $1.63 billion, or $2.27 a share, in the same period a year earlier. In 2006, Bank of New York Mellon got a big boost in profit after JPMorgan acquired its retail banking business in exchange for JPMorgan's corporate trust business.
Income from continuing operations was 67 cents per share, excluding a one-time merger-and-integration expense and a charge for restructuring and consolidating the assets of Three Rivers Funding Corp. In the same period a year earlier earnings from continuing operations were 61 cents a share.
Writing down the value of its CDOs and restructuring the Three Rivers conduit were done to reduce risk and exit businesses outside its core operations, said CEO Robert P. Kelly.
"I still see a role for credit, but over time, less so than we have traditionally," Kelly told analysts in a conference call.
The valuation of its securities — which comprise about $50 billion of its $200 billion balance sheet — "assumes housing will fall another 12 to 15 percent before things bottom out" over the next couple years, Kelly said in an interview with the Associated Press.
Revenue in the latest quarter totaled $3.81 billion, more than double the prior year's $1.89 billion.
Shares fell about 50 cents, or 1.11 percent, to $45.59 in morning trading.
Analysts polled by Thomson Financial, on average, predicted higher fourth-quarter earnings of 69 cents per share, and lower revenue of $3.75 billion. Analysts' estimates typically exclude one-time charges.
Bank of New York Mellon's assets under management rose 11 percent to $1.1 trillion; asset and wealth management fees climbed 14 percent to $887 million; and asset servicing fees increased 36 percent to $809 million.
For 2007, Bank of New York Mellon's net income totaled $2.04 billion, or $2.18 a share, down from $2.85 billion, or $3.94 a share, in 2006.
By the year's end, Bank of New York Mellon held investment securities totaling $48.7 billion, $41.6 of which were highly rated mortgage and asset-backed securities. The CDOs in that portfolio had previously amounted to $379 million; the $200 million pretax write-down means the bank held $179 million in its CDOs as of Dec. 31.
The bank said exposure in its money market funds to the troubled funds known as "structured investment vehicles" is around 2 percent, and will be closer to 1 percent in six months.
Kelly said a U.S. recession could slow down revenue growth a bit, but that he believes the company is better positioned than its peers, particularly due to its operations overseas.
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