A Trust Bank to Consider for Your Portfolio

Last quarter, low interest rates and restrained capital market activity resulted in uninspiring results at U.S. trust banks. The largest custody bank of them all, Bank of New York Mellon (NYSE: BK  ) , saw its profits fall by 26% in the fourth quarter of 2011.

As banks are recovering, the stock markets have rallied as well, and custody banks seem well positioned to gain from it. This year the Dow Jones Industrials Average (INDEX: ^DJI  ) is up 7%, and the S&P 500 is up 11%. It's about time we took a look at the trust banks.

Here's the good, the bad, and why you should keep an eye on BNY Mellon.

The good
BNY Mellon's asset management business is on the up. The bank's assets under management rose to $1.26 trillion last quarter, rising by almost 8% from the year-ago period. At the same time, its assets under custody and administration increased to $25.8 trillion, up 3% from the previous year. The rise reflects an influx of new businesses.

Peer State Street (NYSE: STT  ) , on the other hand, saw its AUM decline by 7.2%, although AUC increased by 1% to $21.8 trillion from the year-ago period. The rise was credited to an increase in new businesses as well. Northern Trust (Nasdaq: NTRS  ) , too, saw its AUC rise by 4% to $4.26 trillion with its AUM going up 3% to $662.9 billion in the same period. 

In addition, diversified bank JPMorgan Chase saw its AUM rise to $1.3 trillion, up 3% from the earlier year, whereas its AUC rose by 5% to $16.9 trillion. Fellow big bank Citigroup (NYSE: C  ) , which recently failed the Fed stress test, witnessed a 1% decline in AUC to $12.5 trillion. However, the fall was mainly a result of a change in foreign exchange rates.        

Even though asset management fees have been relatively flat for a while now, the rise in AUM and AUC is definitely a green flag, as it'll help these companies improve their performance going forward.

Back to BNY Mellon: Its recent cost-cutting initiatives should help the bank churn profits in the long run. In the last quarter, the bank spent $107 million for restructuring, which should allow it to save $700 million before taxes by 2015. State Street has also resorted to similar measures. In fact, the two banks together are expected to cut a total of 3,750 jobs by 2015, saving up to $575 million in the process.

The bad
One downer for the bank is the number of foreign exchange related lawsuits it faces. The lawsuits are a result of claims that BNY Mellon ripped off state and local pension funds on forex transactions through unfavorable rates (read: overcharging). Rival State Street is in the same boat and has faced similar allegations as well.

The treasurer's office of Ohio was the latest on the list to file a lawsuit against BNY Mellon. Reacting to the suit, Kevin Heine, a BNY Mellon spokesman, said, "We are confident we are right on the facts and the law. ... We provide our clients with a valuable service at competitive prices, and any suggestion otherwise is simply wrong."

Even though the bank has challenged these claims, there is no denying that further scrutiny by customers with regards to pricing will negatively impact the company's margins. Forex deals are one of the most important areas for trust banks, and these lawsuits may end up making things more difficult for them.

In my portfolio?
A bank with a solid balance sheet and which is looking to help improve its profitability is definitely one to watch out for. When I find such a stock, the first thing I do is add it to my Watchlist. You should do the same -- simply click here and add it to Your Watchlist.

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Fool contributor Shubh Datta doesn't own any shares in the companies listed above. The Motley Fool owns shares of Citigroup and JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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