BNY Mellon Earnings: Steady Net Interest Income Outlook and Better Expense Management

On the heels of a tough quarter and outlook for peer State Street, wide-moat-rated BNY Mellon BK 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.

Securities services revenue was up 12% as growth in net interest income offset a decline in fee revenue. Market and Wealth services revenue grew 10%, with 5% growth in fee revenue with broad-based growth. Investment and Wealth management revenue was down 10%, and excluding the impact of Alcentra, we estimate that revenue was down by a low-single-digit percentage. The wealth business continues to be affected by product shifts and lower net interest revenue. On the positive side, the firm’s pre-tax-adjusted segment operating margin was 18%, an improvement from the 13% seen in the first quarter but still lagging many asset manager peers.

Expenses were flat or, excluding notable items, were up 1% in the quarter. Excluding the divestiture of Alcentra, we estimate core expense growth of 3%. Overall, we believe this is a good result given the current inflationary environment.