We are maintaining our Neutral recommendation on
The Bank of New York Mellon Corporation
(
BK
). The decision is based on enhanced fee revenue, better asset
quality along with robust capital ratios. However, the persistent
low-interest rate environment and stricter regulatory requirements
will tend to adversely affect the profitability in the long
run.
BNY Mellon reported its first-quarter earnings of 52 cents, in
line with the Zacks Consensus Estimate. The results were benefited
from increased fee revenue. However, the dwindling net interest
revenue and consistently rising operating expenses were the
dampeners.
BNY Mellon's extensive capital deployment activities make it a
lucrative pick for yield-seeking investors. The company maintains a
healthy dividend policy along with sound capital repurchase
programs. Last year, the company bought back around 34.8 million
shares at a total cost of $835 million. In the first quarter of
2012, BNY Mellon bought back approximately 18.5 million shares
worth $398 million.
Rising operating expenses have been a major cause of concern at
BNY Mellon. Therefore, to contain the rising costs the company
launched an expense saving initiative that will serve the dual
purpose of cost cutting and top-line escalation. The initiative
includes reduction in real estate costs, outsourcing couple of
technology-related functions and benefiting from the use of cloud
computing.
The company is hopeful of saving, on a pre-tax basis, $240-$260
million in 2012, $400-$430 million in 2013, $535-$575 million in
2014 and about $650-$700 million in 2015 through this initiative.
The ongoing initiatives will most definitely help in achieving
efficiency and consolidate revenue in the near future.
With the development of significant growth opportunities in the
Asia Pacific region, management at BNY Mellon is hopeful of
expanding its global footprint. The company aims at providing
localized products as well as entering local markets through
strategic partnerships and look for meaningful acquisitions that
can lead to encouraging revenue growth.
We believe that such efforts will help the company to gain
substantial market share and enhance its profitability in the long
run. Yet, BNY Mellon's heavy dependence on fee revenue may pose
serious threat to its growth prospects given changes in investors'
preferences, modifications in regulatory requirements and
deterioration in capital market activities.
Dodging macro-economic issues like the consistent low interest
rate environment are likely to thwart the net interest margin
growth. NIM has been declining steadily over the last few quarters.
Although, there has been an improvement in average earning assets,
lower spreads have been the headwinds. NIM is likely to remain
under pressure in the near term, following a faster rise in
interest-bearing deposit costs compared with the assets yields.
Litigation costs have been on the rise at BNY Mellon. Lately,
the company has been charged of giving misleading information to
state and public pension funds, private companies, universities and
banks in a scheme of overcharging for foreign exchange (FX). As a
result, it has been entangled in various lawsuits. The expenses
stemming from settlement of these lawsuits will add to the already
rising expenses, thereby negatively impacting the company's
reputation.
Shares of BNY Mellon currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. One of its peers
Fifth Third Bancorp
(
FITB
) also retains a Zacks #3 Rank.
BANK OF NY MELL (BK): Free Stock Analysis
Report
FIFTH THIRD BK (FITB): Free Stock Analysis
Report
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