BNY Mellon Earnings: Decent Quarter and Steady Net Interest Income Outlook

Wide-moat-rated BNY Mellon BK 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.

Net interest income of $1.02 billion was down 8% sequentially. The firm’s net interest margin of 1.18% came in a bit below our 1.19% expectation. Importantly, BNY Mellon still expects a 20% increase in net interest income in 2023, which implies about a 4% sequential decline of net interest income in the fourth quarter. Amid choppy markets and lower trading activity, fee revenue was flat sequentially.

Expenses, excluding notable items, were up 3% in the quarter. Excluding the divestiture of Alcentra, we estimate core expense growth of 4%-5%. Overall, we believe this is a respectable result as inflation and investment spending continue.

BNY Mellon’s growth initiatives include outsourced trading and Pershing’s wealth management platform known as Wove. We generally believe that BNY Mellon has lagged its peers in its outsourced trading offering but are encouraged by the signing of an external client in Europe. We view Wove as BNY Mellon’s attempt to capture advisor wallet share beyond custody by providing financial technology solutions similar to Envestnet, Orion, and other providers. Thus far, these initiatives are not needle movers, but we’re encouraged that management has committed to share operating metrics on Wove next year.