Recently, we initiated coverage on BNY Mellon Corp. (BK) with a Neutral recommendation. BNY Mellon’s fourth-quarter earnings of 59 cents per share came in above the Zacks Consensus Estimate of 52 cents. The better-than-expected results were aided mainly by a lower provision for credit losses and higher assets under custody and administration.
 
In terms of credit quality, the company maintains a better profile than most of its banking peers, with the least exposure to consumer or construction loans.
 
BNY Mellon is not directly involved in consumer banking and mortgage lending, both of which have been under tremendous pressure since the start of the financial crisis in 2008. The recession has hit these two segments the hardest. However, the company is not immune to the overall effects of recession and has been experiencing a slowdown in its growth rate. But unlike its peers, the business model of the company clearly works in the absence of exposure to risky segments.
 
Additionally, BNY Mellon’s expense management efforts have been able to put the brakes on the growth of operating expenses in recent quarters. We expect the cost containment measures to significantly contribute to a positive operating leverage in the upcoming quarters. Also, the company’s fee revenue franchise is expected to benefit from favorable long-term wealth management trends.
 
However, BNY Mellon’s interest-bearing deposit costs are expected to rise at a faster rate than asset yields due to competitive pressure. As a result, net interest margin is expected to remain under pressure in the near- to medium-term. Also, the expected interest rate volatility could result in a declining net interest income.
 
Furthermore, a lower risk appetite of investors and institutional clients of BNY Mellon has led to an increase in deposit levels in the last few quarters. However, as the economic recovery gains momentum, the company will stop benefiting from increased volatility, volumes and deposit levels.
 
On Thursday, the shares of BNY Mellon were down by about 4.5%, closing at $27.29 on the New York Stock Exchange.
Read the full analyst report on “BK”
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