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BNY Mellon To Face Tax Liability Charges, Shares Fall

Zacks Equity Research

Share price of The Bank of New York Mellon Corporation (BK) fell nearly by 1% after it disclosed that it will record a one-time after tax charge of $100 million in second-quarter 2014 on Tuesday. The charge results from an administrative error, due to which a particular fund managed by the company was incorrectly given a residential status.

The error in status of the fund led to unwanted tax exemption on BNY Mellon’s front. Notably, the company declined naming the fund.

Nevertheless, the news does not come as a surprise for investors as BNY Mellon was already in talks with the U.S. tax authorities for sometime. Additionally, the bank had previously updated the shareholders about the tentative error-related charge in its earlier regulatory filings.

Notably, BNY Mellon recorded a year over year increase of 9.8% in other expenses in 2013. This was primarily due to a provision for the potential charges associated with the administrative error. Though the company maintained reserve for potential expenses, the amount was not sufficient to cover the same as reflected by the additional charges the company has to incur in the current quarter.

Separately, BNY Mellon will garner an after tax proceed of $200 million in third quarter 2014 related to the sale of its Manhattan based headquarter tower. The deal worth $585 million was announced last week.

Going forward, keeping aside the one-time items, we project a growth trajectory driven by various restructuring initiatives and a strong capital position, for this New York-based banking major. Moreover, BNY Mellon has delivered positive earnings beat in the trailing four quarters, maintaining an average beat of 5.83%.

However, despite the positives, we remain concerned about a still low interest rate condition, sluggish economic recovery and a stringent regulatory environment.

BNY Mellon currently carries a Zacks Rank #3 (Hold). Some better-ranked banking stocks worth considering include BofI Holding, Inc. (BOFI), Central Pacific Financial Corp. (CPF) and Western Alliance Bancorporation (WAL). All these stocks sport a Zacks Rank #1 (Strong Buy).

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