Did BNY Mellon’s Net Interest Margin Figure Reverse Its Declining Trend In Q2?

by Trefis Team
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BNY Mellon
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Bank of New York Mellon Corporation (NYSE: BK) will report its second quarter 2019 earnings on Wednesday, 17th July. Consensus figures points to a 5% decline in revenues year-on-year to $3.93 billion, and an 8% drop in EPS figure to $0.95. Per Trefis, BNY Mellon’s stock has a fair value of $53, which is about 20% higher than the current market price. We have analyzed BNY Mellon’s revenues & expenses over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on BNY Mellon’s valuation. Additionally, you can see more Trefis data for financial services companies here.

A Quick Look At BNY Mellon’s Revenue Sources

BNY Mellon reported $16.4 billion in Total Revenues in FY 2018. This included 2 revenue streams.

  • Investment Management: $4.1 billion in FY 2018 (25% of Total Revenues) – This division offers a broad range of asset management products (like equity, fixed income, cash and alternative) to institutional and retail clients.
  • Investment Servicing: $12.3 billion in FY 2018 (75% of Total Revenues) – It can be sub-divided into 6 segments:
    • Asset Servicing: includes services like global custody, global fund services, securities lending, government securities clearance, collateral management etc.
    • Clearing Services: includes the company’s global clearing and execution businesses through its subsidiary Pershing
    • Forex & Other Trading: refers to the revenue from Trading Services and Securities Financing
    • Issuer Services: includes corporate trust and agency services
    • Treasury Services: deals in cash management solutions, trade finance services, international payment services, global markets, capital markets and liquidity services.
    • Capital Gains & Other: represents fees revenue from structured products business, software licensing and maintenance, equity income from joint venture investments etc.

How Have BNY Mellon’s Revenues Changed Over Recent Quarters?

  • In Q1 2019, BNY Mellon’s reported total revenues of $3.9 billion, 7% down as compared to year-ago period.
  • Notably, the company posted a lower than expected EPS of $0.94 in quarter one.
  • Overall, the first quarter was a 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.

BNY Mellon’s Key Revenue Drivers

Assets under Custody/Administration (AUC/A): 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). In Q1 2019, AUC/A saw an increase of 3% y-o-y to $34.5 trillion which is expected to continue in subsequent quarters. Further, we expect the figure to cross $35 trillion by the end of FY 2019.

Assets under Management (AuM): It is a key driver for Investment Management revenues and has suffered in first quarter due to net AuM outflows. In Q1 2019, the bank reported total AuM figure of $1.8 billion, 1.5% less as compared to year-ago period. However, we expect it to improve in subsequent quarters and cross $1.9 trillion by the end of 2019.

Net Interest Margin (NIM): BNY Mellon reported a Net Interest Margin of 1.2% in Q1 which is slightly less than previous quarter. The main reason behind this decrease is lower non-interest deposits, higher deposit rates and lower client activity. The pressure on its NIM figure has weighed on the custody bank’s revenues and profits over recent quarters. With the Fed’s maintaining interest rates constant since last December, the NIM figure could potentially see a minor uptick for the quarter.

BNY Mellon’s Outlook For Full Year 2019

  • We expect total revenues to grow by 1% y-o-y to $16.5 billion 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.
  • Notably, Investment Services would increase by 1% y-o-y and continue to drive a bulk of the bank revenues in 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.
  • 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.
  • BNY Mellon is expected to have repurchased shares worth around $700 million in second quarter. We expect the trend to continue in subsequent quarters and help the EPS figure reach $4.17 for FY 2019.
  • The EPS of $4.17 coupled with our forward P/E multiple of 12.7x represents a price estimate of $53 for BNY Mellon – representing a potential upside of 20% for the bank’s stock.

Do not agree with our forecast? Create your own forecast for BNY Mellon by changing the base inputs (blue dots) on our interactive dashboard.

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