The Bank of New York Mellon Corporation’s (BK) third quarter earnings of 54 cents per share were well ahead of the Zacks Consensus Estimate of 47 cents. This excludes hefty charges on investment securities portfolio restructuring and M&I expenses.
On a GAAP basis, the third quarter loss from continuing operations came in at $2.04 per share, compared to income of 26 cents in the prior-year quarter. The results for the quarter were primarily impacted by an investment securities portfolio restructuring charge of $2.54 per share.
Management said that the restructuring charges taken during the quarter will not materially impact its capital, and the restructuring is expected to benefit net interest revenue by $125-$175 million in 2010.
On a non-GAAP basis, total revenue for the quarter was $3.3 billion, up 3.7% sequentially but down 14.1% year-over-year.
The provision for credit losses substantially increased to $147 million from $61 million in the prior quarter. The sequential increase in provision was due primarily to downgrades in the insurance and media portfolios.
On a non-GAAP basis, non-interest expense decreased 1.1% sequentially and 9.2% year-over-year to $2.1 billion. Sequential revenue growth combined with expense reduction resulted in 500 basis points (bps) of positive operating leverage (excluding investment securities losses) during the reported quarter.
Assets under management (excluding securities lending assets) totaled $966 billion at Sept. 30, 2009, up 4.0% sequentially but down 9.0% compared with the prior-year quarter. Net asset outflows in the third quarter totaled $16 billion, primarily reflecting $14 billion of money market outflows.
Assets under custody and administration totaled $22.1 trillion at Sept. 30, 2009, up 7.0% sequentially but down 1.0% year-over-year. The year-over-year decrease reflects continued new business wins, which were offset by lower market values. The sequential increase primarily reflects higher market values and new business.
Non-performing assets increased 48.1% sequentially to $560 million, primarily reflecting downgrades in the insurance portfolio. During the reported quarter, total allowance for credit losses increased $70 million and net charge-offs totaled $77 million.
During the third quarter of 2009, BNY Mellon announced plans to buy Lloyds Banking Group PLC’s Insight Investment Management Ltd. unit for about $387 million.
As long as equity markets continue to improve, BNY Mellon should experience increase in its asset management and servicing fees. Also fee generation will get momentum when the Federal Reserve starts increasing interest rates from their current level of near zero.
We think that BNY Mellon is well positioned to benefit from the growth of global financial assets, supported by the increasing savings levels, the modernization of public-pension schemes, and growth in cross-border investing. Also, in terms of credit quality, the company maintains a better profile than most of its banking peers, with minimum exposure to consumer or construction loans.
However, we expect interest-bearing deposit costs to rise at a faster rate than asset yields due to competitive pressure, thereby negatively impacting net interest margin as well as net interest income. As such, we maintain our Neutral recommendation on the shares of BNY Mellon.
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