Northern Trust, State Street Stumble; BNY Mellon Fares Better

By MARSHALL ECKBLAD And JODI XU

Banks that serve wealthy individuals and large institutions don't usually face troubles with bad loans, but Northern Trust Corp.'s first quarter was a glaring exception.

The Chicago bank-and-trust, whose stock fell less during the financial crisis than almost any other U.S. lender, said its levels of troubled loans and assets rose sharply during the first quarter, to $365.2 million. The disclosure was a reversal from last quarter, when the bank's number of souring loans appeared to be tapering. A year ago, Northern Trust had troubled loans, called nonperforming assets, of $172.1 million.

Northern Trust's Boston-based competitor, State Street Corp., marked another custody bank to post lackluster earnings on Tuesday. A third large custody bank, Bank of New York Mellon Corp., turned in better results than its two competitors.

State Street earned $495 million in quarterly profits, up 11% over a year ago. Its revenues of $2.3 billion were up 14.7% over a year ago. But the company said some clients had moved assets out of State Street's management.

State Street also turned in trading revenues of $242 million, down 10% over last quarter, even though some big Wall Street banks, like Bank of America Corp. and J.P. Morgan Chase & Co., have recently reported frothy first-quarter revenues from trading stocks and bonds.

The 120-year-old Northern Trust nonetheless turned in profits of $157.2 million for the quarter as fees from trust and investment services, Northern Trust's core business, remained strong, as compared to year ago. Net income fell 3% over a year ago amid higher expenses and slower profits tied to enduringly low interest rates.

But investors were rattled by the state of the Northern Trust's loan books, which suggest higher losses could be coming in future quarters.

William Morrison, Northern Trust's chief financial officer, said during the company's conference call that "half of the increase" in nonperforming loans "is related to residential real estate." He said the bank's holdings of real estate collateral from failed loans grew sharply, "principally related to two commercial real estate properties."

Earnings at Bank of New York Mellon rose 74% on improved fee revenue and investment gains.

Enduringly low interest rates have weighed on earnings at custody banks, which typically make more money when rates rise and the yield curve steepens.

Despite the low-rate market environment, BNY Mellon continued to grow its revenues, this time modestly, up 1% over last quarter, to $3.3 billion. The bank also set aside $164 million, or ten cents a share, for future litigation costs.