Three of the four largest U.S. trust banks -- which manage money, hold securities and process trades for clients -- reported strong fourth quarter profits, as demand rose for their asset management and servicing products.
State Street, based in Boston, Mellon Financial, of Pittsburgh, and the Chicago-based Northern Trust all reported double-digit gains in profit and beat or met Wall Street analysts' forecasts, according to Reuters Estimates.
But only State Street's stock price rose, while shares of Mellon and Northern Trust fell, as analysts picked through the numbers and executives gave future forecasts.
"Many people were expecting strong numbers from these companies," said Gerard Cassidy, analyst at RBC Capital, adding: "but because these were good solid quarters with no
gimmicks but not blowout quarters, people may be happy to sell off the stock a little bit because the news was already built in."
State Street, the world's biggest institutional asset manager with $1.7 trillion in assets, said fresh growth at its State Street Global Advisors money management arm helped
profits jump 17% to $291 million or 86 cents a share. Analysts had forecast 84 cents a share for the company.
State Street Global, which create the now hugely popular exchange-traded funds and is adding more hedge fund products for clients, delivered $253 million in management fees, marking a 19% percent rise. Asset servicing fees earned from clients like Bank of America, Merrill Lynch, and Charles Schwab rose 10%.
Mellon, which will soon merge with former rival Bank of New York, said stronger asset management fees helped net income jump 14% to $237 million or 57 cents a share. Bank of New York, which will post earnings on Jan. 18, agreed last month to acquire Mellon in a $16.5 billion deal, which will create the world's biggest securities servicing company and one of the largest asset managers.
Merrill Lynch analyst Brian Bedell wrote: "The strong quarter should bring modest upside to consensus and supports our above-consensus outlook" of $2.54 a share for the year.
Other analysts are looking for $2.47. For all of 2006, Mellon earned $2.25 a share from continuing operations and had net income of $2.17.
Mellon said investment management fee revenue jumped 52% during the quarter. A good chunk of that came from hedge fund products which collect fees only once a year, executives explained, cautioning analysts to expect a more moderate rate of growth in the first quarter.
The company, criticized by a large shareholder early last year for trying to do too many things, has recently streamlined operations by selling off its venture capital unit, among others, and is now trying hard to earn more revenue abroad. Last year it purchased Scottish asset management firm Walter Scott & Partners, and executives said more small purchases may be on the horizon.
But to date, Mellon is still lagging State Street on foreign earnings, analysts noted. To stay ahead and possibly expand its lead, State Street's sales force will now try to lure clients away from Mellon and Bank of New York as the two work on their integration.
"We share a lot of customers now, and our hope is to get a bigger piece," State Street chairman and CEO Ron Logue told Reuters.
Meanwhile, Northern Trust said strong growth in client assets pushed net income up 15.7% to $170.8 million, or 77 cents a share, as assets under management grew 13% to $697 billion over the same period.
But the numbers disappointed some analysts because the gain was fueled, in part, by a lower tax rate.
Analysts also worried that Northern faced higher than expected operating expenses, something that was addressed by company executives on a conference call. Northern's chief financial
officer, Steven Fradkin, said the matter would be given "additional attention" in the future.