Company Reports

BNY Mellon reported a decent start to 2024, in our view. Revenue and EPS edged out the FactSet consensus estimates by 3% and 5%, respectively. Fee revenue is benefiting from market appreciation, while net interest income decreased. BNY Mellon reiterated its expectation of net interest income declining by about 10% for full-year 2024 (our model: down 6%). Overall, we will maintain our wide moat rating and $60 fair value estimate on BNY Mellon.

With over $47 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

Wide-moat-rated BNY Mellon reported solid core results excluding some notable items. Excluding notable items, revenue of $4.46 billion beat the FactSet consensus estimate of $4.30 billion. As we tweak our model, we are maintaining our fair value estimate of $56 per share and regard shares as roughly fairly valued.

With over $46 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

With over $46 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

Wide-moat-rated BNY Mellon reported a decent third quarter, in our view. Revenue of $4.37 billion was a touch above the FactSet consensus expectation of $4.32 billion. Adjusted EPS of $1.27 beat the consensus estimate of $1.15, which we attribute to higher revenue, expense control, and a slightly lower tax rate. Overall, there was little in the firm’s earnings release that would change our long-term view of the firm, and we will maintain our fair value estimate of $56 on BNY Mellon’s shares. We believe BNY Mellon’s diversified businesses will serve it well relative to peers, and we continue to prefer BNY Mellon over its close peer State Street.

The custody banks have gotten visibly cheaper in recent years, but we think investors need to be discerning. At the onset of COVID-19, lower interest rates weighed heavily on the banks' net interest income, or NII, and resulted in hefty money market fee waivers. However, higher interest rates were not the panacea many investors hoped for. The custody banks' asset-manager and asset-owner clients tend to be sophisticated, a fact that State Street mentioned multiple times on its most recent earnings call. While money market fee waivers have been eliminated, deposit betas over 100% for State Street and BNY Mellon have meant that these firms have had to rapidly increase the interest they pay on the deposits of these sophisticated clients. In addition, the inflationary environment has had a negative impact on expense growth, particularly at Northern Trust.

With over $46 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

With over $44 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

On the heels of a tough quarter and outlook for peer State Street, wide-moat-rated BNY Mellon reported a decent second quarter, which we believe reflects the diversification embedded in BNY Mellon's seven lines of business. Revenues of $4.45 billion and adjusted EPS of $1.38 exceeded the FactSet consensus estimate of $4.38 billion and $1.22, respectively. Net interest income was down 2% sequentially, as a decline in the firm's net interest margin to 1.20% from 1.29% was partially offset by asset and deposit growth. Importantly, BNY Mellon maintained its expectation of 20% growth in net interest income for the full year and still expects non-interest-bearing deposits to be 20%-25% of its total deposits. Overall, we will maintain our fair value estimate of $55.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Wide-moat-rated Bank of New York Mellon reported a decent start to the year. Revenue of $4.36 billion and adjusted EPS of $1.13 in the first quarter were roughly in line with the FactSet consensus estimates of $4.40 billion and $1.12 billion. Net interest income of $1.13 billion was up 7% sequentially, a stark contrast to the 3% sequential decline at peer State Street. We attribute the difference to non-interest-bearing deposits declining less than State Street, BNY Mellon’s diversified deposit base, including asset servicing, Pershing, and wealth management, and securities repositioning. Average deposits declined 3% with non-interest-bearing deposits declining 8% and interest-bearing deposits declining 2%. We will maintain our fair value estimate of $55 on BNY Mellon’s shares.

With over $44 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

Wide-moat-rated Bank of New York Mellon finished 2022 on a high note. Adjusted revenue of $4.38 billion and adjusted earnings per share of $1.30 for the fourth quarter topped the FactSet consensus estimates of $4.20 billion and $1.01, respectively. The bank is benefiting from higher interest rates as net interest margin expanded from 1.05% in the prior quarter to 1.19%, resulting in net interest income increasing 14% sequentially and 56% from the year-ago period. Monetary tightening is affecting average deposits, which were down 2% sequentially and 12% from the year-ago period. As we update our model, we anticipate raising our $55 fair value estimate by a single-digit percentage.

With over $42 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.

Wide-moat-rated Bank of New York Mellon reported a solid third quarter. Revenue of $4.28 billion and adjusted EPS of $1.21 edged out the FactSet consensus of $4.19 billion and $1.10, respectively. BNY Mellon is benefiting from rising interest rates and market volatility, though this is being partially offset by lower market values impacting asset-based revenue. We will maintain our fair value estimate of $56 on BNY Mellon’s shares.

Many investment service firms (wealth managers, retail brokerages, custody banks, and asset managers) have material exposure to interest rates. Clients at wealth management firms and retail brokerages typically have 5%-20% of their account balance in cash that the financial institution sweeps into a bank subsidiary. The deposits are then used to make loans or invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.

Wide-moat-rated Bank of New York Mellon reported decent second-quarter financial results. Second-quarter revenue of $4.25 billion and adjusted EPS of $1.15 came in a touch higher than the FactSet consensus of $4.17 billion and $1.12, respectively. BNY Mellon is benefiting from rising interest rates as the firm’s net interest margin expanded to 0.89% from 0.76% in the prior quarter. For the full year, BNY Mellon now expects net interest income to rise in the low-20s percentage range, which is up meaningfully from its previous expectation of 13% growth. Encouragingly, this outlook also reflects lower sensitivity of client deposits to interest rates. Money market fee waivers were down 69% sequentially, and we expect them to be de minimis at current interest rates. That said, declining equity markets and fixed income markets will weigh on fee revenue, which is now expected to be flat versus a previous expectation of a 4%-5% increase. We will maintain our fair value estimate of $56 on BNY Mellon’s shares.

We went into this year’s Federal Reserve bank stress tests expecting a bit more pressure on stress capital buffers as multiple banks had warned in the preceding quarter that their SCB was likely to increase. This is indeed what played out, as we estimate that roughly seven of the 20 U.S. banks we cover that participated this year are likely to see a higher SCB once the assigned SCBs become official. It appears that JPMorgan, Bank of America, and Citigroup are all likely to see increases to their SCBs of close to 1% each. The biggest increase seems likely to come from M&T Bank, which we expect to increase close to 2.2%, going from 2.5% to roughly 4.7%. Meanwhile, we expect the SCB for 11 of the 20 U.S. banks we cover to remain stable, including for Wells Fargo, which had previously warned that their SCB could go up, so this is a slight positive surprise for the bank in our view. Finally, we think Goldman Sachs could see a slight decrease to its current SCB of 6.2%, potentially declining to 6%, while Discover could see a more material decline, going from 3.6% to 2.5%.

With over $46 trillion in assets under custody or administration, Bank of New York Mellon is the largest custodian in the world. While core custody can be an undifferentiated offering, scale and the stickiness of clients have helped the firm generate double-digit returns on tangible equity.