BNY Mellon’s Settlements & Diversification Plans Defend $27 Fair Value

The Bank of New York Mellon Corporation (NYSE:BK) has seen a string of positive developments over the last fortnight, with the world’s largest custodian bank winning a commercial banking license in Brazil, launching a new European brokerage unit and also putting two high-profile legal battles behind it. ^[1] The bank settled its differences with the state of Virginia over a forex-related lawsuit and renewed its ties with the state’s pension fund with a new 10-year service contract. ^[2] More recently, BNY Mellon’s subsidiary Ivy Asset Management also agreed to a $210 million settlement for a lawsuit alleging that it misled clients into investing money in the Madoff Ponzi scheme. ^[3]

We maintain a price estimate of $27 for BNY Mellon’s stock, which is less than 15% above the current market price. We largely attribute this premium to the weak short-term outlook for global custody banking compounded by the complicating debt situation in the Eurozone. The bank’s remaining foreign-exchange related lawsuits are still a thorn in the flesh.

See our full analysis for BNY Mellon here

Another Step Towards Closing The Nagging  Forex Issue

BNY Mellon has been under fire for well over a year from various state attorneys for allegedly making billions through unfair foreign exchange practices (see BNY Mellon’s Forex Lawsuits Drag On). But the bank has been putting considerable effort towards resolving the differences with the states of New York, Florida and Virginia – which resulted in partial relief from New York this April followed by the settlement with Virginia earlier this month. In addition to the dismissal of the Virginia lawsuit, the bank also won back the business of the state’s pension funds. ^[2]

BNY Mellon and Virginia state pension funds have reportedly agreed to a 10-year business contract with the bank conceding to demands for a lower fee over the first five years as compensation for the high foreign exchange fees levied over previous years. The settlement will no doubt reflect through an improvement in BNY Mellon’s forex related revenues in the years to come.

An Expanding Global Footprint Is Only Going To Help

Last week, BNY Mellon announced that it was awarded a commercial banking license by the Brazilian Central Bank. ^[1] This will allow the custodian bank to expand its security service offerings in the South American nation to non-resident investors as well as private equity funds while allowing it to provide deposit-taking, collateral and agency services. BNY Mellon already has a sizable business in Brazil with around $11 billion in assets under management and nearly $91 billion in assets under custody – something that should receive a boost in the near future as a result of the expected increase in the scope of operations.

BNY Mellon is also all set to challenge the biggest global investment banks in Europe by offering brokerage services for fixed-income and equity securities through its newly registered BNY Mellon Capital Markets Emea unit. ^[4] Securities trading currently ropes in negligible revenues for the bank which reports them as part of its forex and other trading revenues.

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1. BNY Mellon Awarded Banking License in Brazil, BNY Mellon Newsroom, Nov 9 2012 [↩] [↩]
2. BNY Mellon Currency-Trade Fraud Suit Settled by Virginia, Bloomberg, Nov 9 2012 [↩] [↩]
3. BNY Mellon unit settles Madoff charges, Financial Times, Nov 13 2012 [↩]
4. BNY Mellon to launch European brokerage business, Financial News, Nov 12 2012 [↩]