We are maintaining our Neutral recommendation on The Bank of New York Mellon Corporation (BK). The decision is based on enhanced fee revenue, better asset quality along with robust capital ratios. However, the persistent low-interest rate environment and stricter regulatory requirements will tend to adversely affect the profitability in the long run.
BNY Mellon reported its first-quarter earnings of 52 cents, in line with the Zacks Consensus Estimate. The results were benefited from increased fee revenue. However, the dwindling net interest revenue and consistently rising operating expenses were the dampeners.
BNY Mellon’s extensive capital deployment activities make it a lucrative pick for yield-seeking investors. The company maintains a healthy dividend policy along with sound capital repurchase programs. Last year, the company bought back around 34.8 million shares at a total cost of $835 million. In the first quarter of 2012, BNY Mellon bought back approximately 18.5 million shares worth $398 million.
Rising operating expenses have been a major cause of concern at BNY Mellon. Therefore, to contain the rising costs the company launched an expense saving initiative that will serve the dual purpose of cost cutting and top-line escalation. The initiative includes reduction in real estate costs, outsourcing couple of technology-related functions and benefiting from the use of cloud computing.
The company is hopeful of saving, on a pre-tax basis, $240-$260 million in 2012, $400-$430 million in 2013, $535-$575 million in 2014 and about $650-$700 million in 2015 through this initiative. The ongoing initiatives will most definitely help in achieving efficiency and consolidate revenue in the near future.
With the development of significant growth opportunities in the Asia Pacific region, management at BNY Mellon is hopeful of expanding its global footprint. The company aims at providing localized products as well as entering local markets through strategic partnerships and look for meaningful acquisitions that can lead to encouraging revenue growth.
We believe that such efforts will help the company to gain substantial market share and enhance its profitability in the long run. Yet, BNY Mellon’s heavy dependence on fee revenue may pose serious threat to its growth prospects given changes in investors’ preferences, modifications in regulatory requirements and deterioration in capital market activities.
Dodging macro-economic issues like the consistent low interest rate environment are likely to thwart the net interest margin growth. NIM has been declining steadily over the last few quarters. Although, there has been an improvement in average earning assets, lower spreads have been the headwinds. NIM is likely to remain under pressure in the near term, following a faster rise in interest-bearing deposit costs compared with the assets yields.
Litigation costs have been on the rise at BNY Mellon. Lately, the company has been charged of giving misleading information to state and public pension funds, private companies, universities and banks in a scheme of overcharging for foreign exchange (FX). As a result, it has been entangled in various lawsuits. The expenses stemming from settlement of these lawsuits will add to the already rising expenses, thereby negatively impacting the company’s reputation.
Shares of BNY Mellon currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. One of its peers Fifth Third Bancorp (FITB) also retains a Zacks #3 Rank.
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