Higher Fee Revenues Help BNY Mellon Post Strong Q2 Results

Investors received a nice surprise when The Bank of New York Mellon Corporation (NYSE:BK) reported its performance figures for the second quarter of the year last Wednesday, as the world’s largest custody bank posted a much-better-than-expected $833 million in net income for the period. ^[1] Now, this figure includes a one-time boost of $109 million from an equity investment. And the results look much better in comparison to the profit of $466 million in Q2 2012 and the loss of $266 million in Q1 2013 as the earnings for each of these quarters were marred by multi-million dollar charges (see No Surprises From BNY Mellon Results As Assets Swell). But once the playing field is leveled by doing away with all these non-recurring items, the numbers show that BNY Mellon’s operations actually did quite well this time around. Total fee revenues and the net interest income have climbed while expenses (as adjusted) remain nearly flat across the quarters, resulting in a very real improvement in operating income.

Although there was a slight decline in both the size of assets under custody & administration (AUC/A) as well as the assets under management (AUM) quarter-on-quarter, this was largely expected as the debt market turmoil would have wiped out a chunk of these assets’ value.

We have increased our price estimate for BNY Mellon’s stock from $28 to $32 to factor in the improvements in the bank’s fee revenues across the board – especially in the foreign exchange business.

See our full analysis for BNY Mellon here

Asset Servicing Business Continues To Deliver Value

BNY Mellon draws nearly a third of its value from its asset servicing business. After all, the bank is the industry leader in custodian services with $26.2 trillion in assets under custody. And while recent quarters have seen lower fee incomes due to the prolonged low interest-rate environment, the bank bucked this trend in Q2 2013 with asset servicing fees edging 2% higher compared to Q1 2013 to reach $988 million. There was also notably higher securities lending fees generated this quarter ($50 million) compared to the last ($39 million).

This is reflected below as a higher fee revenue as a percentage of AUC/A for the bank.

Foreign Exchange Revenues On The Comeback Trail

BNY Mellon’s foreign exchange business suffered a considerable loss of face towards the end of 2011 when the states of New York, Virginia and Florida filed a series of lawsuits alleging that the bank cheated its clients since 2001 by claiming that it was providing them with the best available exchange rate while actually providing them with some of the worst rates and pocketing the price difference. The high-profile nature of the lawsuits resulted in the bank losing quite a few customers and was also forced to renegotiate forex rates with some customers (see BNY Mellon Under Pressure From Fidelity Over Forex Rates). The result was clearly seen in the bank’s declining forex revenues over past quarters.

But when BNY Mellon came (almost) clean in the lawsuits (see BNY Mellon Catches A Break In Forex Lawsuits), the impact on the foreign exchange business started getting reversed in Q1 2013, and it continued to remain uptick in Q2 2013 too. Revenues for the forex business jumped from $149 million in the previous quarter to $179 million in Q2 2013 – a 20% jump.

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1. BNY Mellon Reports Second Quarter Earnings of $833 Million or $0.71 Per Common Share, BNY Mellon Press Releases, Jul 17 2013 [↩]