BNY Mellon's (BK) Low Cost, Solid AUM Aid, Margin Pressure Ails

The Bank of New York Mellon Corporation’s BK global diversification efforts and prudent cost-control initiatives are expected to keep supporting profitability. The company’s robust assets under management or AUM balance will likely drive revenues in the quarters ahead.

However, due to relatively lower interest rates, its margins will likely remain under pressure, thus hurting the top line to an extent.

Analysts have also been maintaining a neutral stance toward the stock. Over the past seven days, the Zacks Consensus Estimate for BNY Mellon’s current-year earnings has remained unchanged. The company currently carries a Zacks Rank #3 (Hold).

Over the past year, shares of BNY Mellon have gained 43.8% compared with 25.5% growth recorded by the industry.

Image Source: Zacks Investment Research

BNY Mellon’s non-interest expenses have declined, witnessing a compound annual growth rate ("CAGR") of 0.8% over the past eight years ended 2021, driven by the cost-saving efforts. Despite continued investments in technology, operating expenses are expected to remain manageable in the upcoming quarters as the company eliminates unnecessary management layers and automates processes.

The company has been trying to gain a foothold in foreign markets and is also undertaking several growth initiatives. In December 2021, the company, through its subsidiary, acquired Optimal Asset Management. Its international revenues are expected to improve as the demand for personalized services rises across the globe.

Moreover, following the clearance of the 2021 stress test, BNY Mellon authorized the buyback of up to $6.0-billion worth of shares through the fourth quarter of 2022 and announced a dividend hike of 9.7%. Given its earnings strength, and strong capital and liquidity positions, the company is expected to continue enhancing shareholder value through efficient capital deployments.

However, over the past several quarters, BNY Mellon’s net interest margin (“NIM”) has been witnessing a volatile trend. Net interest revenues (“NIR”) have also been witnessing a decline of 10.2% CAGR over the past four years ended 2021. Despite expectations of a few rate hikes this year by the Federal Reserve, the company’s NIR and NIM are expected to continue to remain under pressure due to relatively lower rates.

Further, fee income constituted more than 83% of BNY Mellon’s total revenues in 2021. Concentration risk emanating from higher dependence on fee-based revenues could significantly alter the company’s financial position if there is any change in individual investment preferences, regulatory amendments or a slowdown in capital market activities.

Stocks to Consider

Some better-ranked stocks in the banking space are First Business Financial Services FBIZ, UBS Group AG  UBS and PCB Bancorp PCB. At present, FBIZ and UBS both sport a Zacks Rank #1 (Strong Buy), while PCB carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Over the past year, shares of First Business have jumped 54.1%, whereas those of UBS and PCB have rallied 29.8% and 71.4%, respectively.

Over the past 60 days, the Zacks Consensus Estimate for First Business’ current-year earnings has been revised 9.4% upward, while that for UBS has moved 11.9% north. Moreover, current-year earnings estimates for PCB Bancorp have moved 14.4% up over the past two months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.