Cost-Control Efforts to Aid BNY Mellon (BK) Amid Low Rates

The Bank of New York Mellon Corporation BK is well-poised for growth on the back of its solid assets under management balance and prudent expense-management initiatives.

However, the company’s margins are expected to be hurt to some extent in the near term due to near-zero interest rates.

In fact, over the past 30 days, the Zacks Consensus Estimate for BNY Mellon’s current-year earnings has been revised 7.8% downward, reflecting that analysts are not very optimistic regarding its earnings growth potential. Thus, the company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its price performance is also not encouraging. Because of the current global crisis, resulting from the coronavirus outbreak, shares of BNY Mellon have lost 33.2% so far this year compared with a 44.9% decline recorded by the industry.

Looking at its fundamentals, expenses have declined, witnessing a CAGR of 2.2%, over the past six years (2014-2019), owing to the company’s cost-saving initiatives. Moreover, despite continued investments in technology, operating expenses are expected to remain manageable in the upcoming quarters as BNY Mellon eliminates unnecessary management layers and automates processes.

Further, the company’s capital deployment activities look impressive. Its capital deployment plan (including dividend payments and share buybacks) reflects a solid balance sheet position and is expected to enhance shareholder value. Notably, recently, the company announced that in order to provide liquidity to the people affected by the coronavirus outbreak, it is suspending its share buyback program till second-quarter 2020. Of the many companies that have suspended share buybacks currently, some big names are JPMorgan JPM, Citigroup C and Bank of America BAC.

However, because of the Federal Reserve’s accommodative monetary policy, BNY Mellon’s revenues are expected to be hampered to some extent. While the company’s net interest margin (NIM) and net interest revenues (NIR) improved on a sequential basis in the fourth quarter of 2019, the same witnessed a decline in the prior five quarters. With near-zero interest rates, BNY Mellon is expected to record a fall in NIR and NIM in the upcoming quarters as well.

Further, the company’s significant dependence on fee revenues (constituting more than 80% of total revenues in 2019) is a concern. Concentration risk, emanating from higher dependence on fee-based revenues, could significantly alter its financial position if there is any change in individual investment preferences, regulatory amendments or a slowdown in capital market activities.

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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.

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