Custody Banks Acquire Glamour -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 25, 2018).

Wall Street's less glamorous players are suddenly among the hottest stocks in the financial world.

Shares of custody banks State Street Corp. and Northern Trust Corp. hit all-time closing highs this week, and a recent climb by rival Bank of New York Mellon Corp. shares put its record within striking distance.

The three companies have outperformed the S&P 500's 25% rise over the past year. Two of them also beat the KBW Nasdaq Bank Index's 29% rise; the third nearly matched it.

The custody banks are benefiting from a market rally that is lifting assets they manage and fees they charge to provide back-office services to corporate and investment-management clients. They also say they are attracting new business. BNY Mellon and State Street both pulled in net new client money during the fourth quarter.

Many investors passed over these banks in early 2017 in favor of financial stocks viewed as more direct beneficiaries of any U.S. tax overhaul, said UBS analyst Brennan Hawken.

A market rally helped turn that around, he said, but investors are also reacting to years of cost cuts, the promise of bigger payouts to shareholders and a bet that U.S. regulators would lighten the capital rules imposed on the largest banks.

"Markets are robust," Mr. Hawken said. "And as interest rates rise, it benefits them. You also have an improved focus on expense discipline."

The most recent evidence of a turnaround came Wednesday as Northern Trust reported fourth-quarter net income, excluding certain charges, of $1.32 a share, according to Credit Suisse Group AG analysts. On that basis, the firm earned $1.11 a share a year earlier.

Revenue climbed 15% to $1.43 billion. The Chicago bank also beat Wall Street's expectations. Assets under custody totaled $8.05 trillion at year-end, up 20% from a year earlier, while assets under management rose 23% to $1.2 trillion. The company's fourth-quarter results also benefited from an acquisition of a UBS servicing business.

Northern Trust's shares are up 28% in the past 12 months to $106.17.

Earlier this week, State Street reported a fourth-quarter profit of $1.83 a share, excluding charges associated with the U.S. tax overhaul, up 24% from a year earlier. Revenue rose 8.5% to $2.98 billion. Both profit and revenue figures exceeded the estimates of analysts polled by S&P Global Market Intelligence.

State Street closed 2017 with a record $33.1 trillion in assets under custody and administration; assets at its money-management arm rose to $2.8 trillion.

Its shares are up 43% in the past year to $112.71.

BNY Mellon last week reported a profit of 91 cents a share, excluding gains from the tax measure and certain charges, matching analysts' average estimates. Revenue totaled about $4 billion, excluding the impact of the new tax rules, up from $3.8 billion a year earlier.

Assets under custody jumped to a record $33.3 trillion at the close of 2017, while assets under management also hit a new high, at $1.9 trillion.

BNY Mellon's shares are up 32% in the past year to $57.77, nearing its all-time high of $62.81. The stock hit that mark in November 2000.

Write to Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

January 25, 2018 02:47 ET (07:47 GMT)