BNY Mellon Finally Clears Its Forex-Related Legal Backlog With $180 Million Settlement

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Bank of New York Mellon

Bank of New York Mellon (NYSE:BK) settled the last major lawsuit related to its foreign exchange misgivings late last week for a total figure of $180 million – finally putting a lid on an issue that has been nagging the global custody bank for several years. [1] BNY Mellon’s settlement of the class-action suit means that only a few small lawsuits brought against the bank by individual clients remain to be dealt with. As the bank had set aside most of the cash needed for the deal, it will only incur a pre-tax charge of $50 million in the second quarter as a result of this settlement.

We maintain a $44 price estimate for BNY Mellon’s stock, which is slightly ahead of its current market price.

See our full analysis for BNY Mellon here

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BNY Mellon came under considerable fire in late 2011 when a series of lawsuits alleged that its foreign exchange unit misled clients into believing they were being given the best possible exchange rate while actually providing them with some of the worst rates (see BNY Mellon’s Forex Lawsuits Drag On). Subsequently, the lawsuits established the fact that all transactions conducted by BNY Mellon as part of standing instruction agreements with its clients did not use the “best” exchange rate available as the bank advertised. [2] This translated to millions of dollars in losses for clients ranging from government pension funds to institutional investors who used BNY Mellon’s services to exchange currency worth billions over years – all of which boosted the bank’s foreign exchange fee revenues all the way back from 2001.

The most notable of these lawsuits were those filed by the states of New York, Ohio, Virginia, Massachusetts and Florida against BNY Mellon. Over the years, the bank worked its way through these lawsuits (see BNY Mellon Catches A Break In Forex Lawsuits), with the biggest deal including the U.S. Justice Department, the New York attorney general, the Department of Labor, the SEC as well as private clients being inked this March for $714 million. ((BNY Mellon Settles Outstanding FX-Related Actions, BNY Mellon Press Releases, Mar 19 2015)) With the recently announced settlement, BNY Mellon has shelled out around $1.5 billion in total to get rid of its forex woes. The remaining minor lawsuits are not expected to change the total figure materially.

While BNY Mellon maintained that there was no wrongdoing on its part, the bank’s reputation in the foreign exchange industry suffered considerably over the 2011-2013 period. The bank lost some of its major clients, and had to accept sharp cuts in fees from many large clients to ensure that it retains their business (see BNY Mellon Under Pressure From Fidelity Over Forex Rates). The impact of this can be seen quite clearly in BNY Mellon’s foreign exchange trading revenues for the period, as detailed in the chart above.

But the figure improved to a great extent in Q1 2015, with forex and other trading revenues of $229 million being the highest since Q4 2010. Having put its forex-related misgivings behind it for good, BNY Mellon should see a steady improvement in these revenues over coming years. You can see how changes in forex trading fees impacts BNY Mellon’s total value by making changes to the chart below.

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Notes:
  1. Bank of New York to Pay $180 Million to Settle Forex Suit, The Wall Street Journal, May 21 2015 []
  2. BNY Mellon Settlement, BNY Mellon Website []