BNY Mellon Looks Set For A Good Year Despite Asset Management Headwinds

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BK: Bank of New York Mellon logo
BK
Bank of New York Mellon

Bank of New York Mellon Corporation (NYSE: BK) is the largest custody bank in the world, and is a major player in the global asset management industry. Per Trefis estimates, the bank’s stock is worth $53 – a figure that is 5% higher than the current market price. We arrive at our price estimate for BNY Mellon based on a P/E multiple of 12.7x and an earnings estimate of $4.17 for FY 2019.  Details about our full-year expectations for BNY Mellon can be found in our interactive dashboard How Did BNY Mellon Fare In Q1 2019, And What Can We Expect In 2019? You can modify any of our key drivers to gauge the impact changes would have on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

In Q1 2019, BNY Mellon reported an EPS figure of $0.94 and total revenues of $3.89 billion, which were both below consensus estimates. The first quarter was an overall forgettable period for the custody banking giant due to a combination of net outflows for its Investment Management business, a decline in its net interest margin (NIM) figure for the second consecutive quarter, and the negative impact of a strong U.S. dollar on its asset base.

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Key trends reported by BNY Mellon in Q1 2019, and our expectations for full-year 2019

  • In Q1 2019, BNY Mellon’s total revenue shrank by $279 million mainly due to a 12% Y-O-Y decline in Investment Management and Performance Fees. For FY 2019, we expect total revenues to grow by 1% on the back of strong asset inflows. However, a decline in the valuation of assets from macroeconomic uncertainty and continued dollar appreciation could potentially hurt the top line.
  • BNY Mellon is a market leader in custody banking and derives a majority of its revenues (76% in Q1) from Investment Services (including FX trading operations). This trend is likely to continue in subsequent quarters and will push total Assets under Custody/Administration (AUC/A) to $35 trillion by the end of 2019.
  • Industry-wide headwinds in Investment Management coupled with BNY Mellon’s selective strategy (only institutional clients and no ETF offerings) are likely to reduce its growth potential in this segment. Investment Management revenues are expected to see a modest 1% growth in 2019 amid decline in performance and investment management fees.

  • Net Interest Income decreased by 8% in Q1 due to high deposit rates, lower loan balances and a drop in non-interest deposits. We expect the trend to continue over subsequent quarters, and this is likely to reduce Net Interest Income down 4% in 2019 compared to 2018.
  • BNY Mellon’s Operating Expenditure fell slightly in Q1 2019 compared to Q1 2018 because of a reduction in nearly each of the bank’s expense streams. However, we expect a moderate increase in Compensation Costs for the rest of the year to drive Total Expenses for full-year 2019 to slightly above the figure for 2018.
  • For FY 2019, we expect BNY Mellon to achieve earnings of $4.17, which coupled with our forward P/E multiple of 12.7x works out to a price estimate of $53.

In conclusion, BNY Mellon looks positive for the ongoing year, and according to current Trefis estimates, the stock is roughly 5% undervalued.

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