BNY Mellon's Earnings Miss, Revs Beat

Zacks

The Bank of New York Mellon Corporation’s (BK) first-quarter 2013 adjusted earnings of 50 cents per share lagged the Zacks Consensus Estimate by 2 cents. Also, this also compared unfavorably with prior quarter earnings of 53 cents.

After taking in to consideration a charge of $854 million or 73 cents per share related to the U.S. Tax Court’s disallowance of certain foreign tax credits, BNY Mellon reported a net loss, applicable to common shareholders, of $266 million or 23 cents per share.

Lower-than-expected results were mainly due to a rise in operating expenses and lower net interest income, partially offset by almost stable fee income. However, asset quality continued to show improvement while capital ratios remained healthy. Further, BNY Mellon’s asset position continued to improve.

Performance in Detail

BNY Mellon’s total revenue came in at $3.60 billion, almost in line with the previous quarter. However, total revenue was ahead of the Zacks Consensus Estimate of $3.58 billion.

Fully tax equivalent net-interest revenues of $719 million inched down approximately 1% from $725 million in the previous quarter. The fall primarily reflects lower number of days in the reported quarter. However, net interest margin increased 2 basis points (bps) sequentially to 1.11%.

Total fee revenue stood at $2.84 billion, flat on a sequential basis. Almost stable fee revenue reflects increases in investment services fees and foreign exchange and other trading revenues. These positives were offset by declines in investment management and performance fees, distribution and servicing income along with lower financing-related fees and investment and other income.

Excluding restructuring charges, M&I expenses and amortization of intangible assets as well as direct expense related to Shareowner Services, non-interest expense was $2.70 billion, up 1% sequentially. The rise primarily reflects higher staff expenses and net occupancy costs. However, these were partly mitigated by lower professional, legal and other purchased services costs, software equipment costs as well as business development expenses.

Asset Quality

BNY Mellon’s credit quality continued to improve in the reported quarter. Nonperforming assets declined 6% sequentially to $234 million.

Likewise, allowance for loan losses fell 7% from the prior quarter to $358 million in the reported quarter. Further, provision for credit losses was a benefit of $24 million in the quarter compared with a benefit of $61 million in the prior quarter.

Asset Position

Assets under management totaled $1.4 trillion as of Mar 31, 2013, up 9% sequentially driven by higher market values and net new business. Assets under custody and administration totaled $26.3 trillion as of Mar 31, 2013, almost unchanged sequentially. Improved market values were offset by the impact of foreign currency changes, while net new business was flat.

Capital Position

Though BNY Mellon’s capital ratios deteriorated during the quarter, they remained strong. As of Mar 31, 2013, Tier 1 capital ratio was 13.6%, down from 15.0% as of Dec 31, 2012. Similarly, Tier 1 total capital ratio was 14.7%, down from 16.3% as of Dec 31, 2012. The primary reason behind the decline was the implementation of Basel 2.5, which led to nearly 35-40 bps declines in capital ratios.

The estimated Basel III Tier 1 common equity ratio increased to 9.4% compared with 9.8% in the prior quarter.

Capital Deployment Activities

In its latest capital plan, BNY Mellon has received the Federal Reserve’s approval for $1.35 billion worth of share repurchases through the first quarter of 2014. Also, the company hiked its quarterly dividend by 15% to 15 cents per share. This dividend will be paid on May 7 to stockholders of record as of Apr 29.

During the reported quarter, BNY Mellon repurchased shares worth $211 million.

Our Viewpoint

We believe that BNY Mellon’s capital deployment activity will enhance investor confidence in the stock. Further, the top line is expected to benefit from various restructuring initiatives.

However, a low interest rate environment and changing regulatory landscape are expected to slightly dent its revenue growth in the upcoming quarters. Also, higher operating expenses are a major cause of concern.

Among other major regional banks, BB&T Corporation (BBT) and KeyCorp (KEY) are scheduled to announce results on Apr 18 and State Street Corporation (STT) will report on Apr 19.

BNY Mellon retains a Zacks Rank #3 (Hold).

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