Is BNY Mellon Doing Enough To Keep Costs In Check?

by Trefis Team
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The Bank of New York Mellon (NYSE:BK) is the world’s largest custody bank by assets, which provides Investment Servicing (e.g. asset servicing, issuer services and clearing services) and Investment Management services to clients around the world. Notably, the custody banking giant spent around 74% of its total revenues of $16.4 billion in 2018 under different expense categories, with Compensation & Benefits being the single biggest expense category. Trefis has analyzed the various components of BNY Mellon’s Total Expenses in an interactive dashboard, parts of which are highlighted below. And we believe that Total Expenses will continue to expand as a percentage of Revenues to cross 75% in 2020.

Notably, BNY Mellon faced considerable pressure from activist investor Marcato Capital over 2015-2016 to reduce its operating costs. The bank has done well over recent years to maintain compensation costs at roughly 37% of revenues – below the figure of 40% for peer State Street. But given that the pressure on interest rates is likely to weigh on BNY Mellon’s revenues in the near future, it will be critical for the bank to take a tougher look at its costs to maintain profitability.

An Overview Of BNY Mellon’s Total Expenses

  • BNY Mellon’s Total expenses as a % of Revenue dropped from 76.7% in 2016 to 73.5% in 2017, before increasing to 74% in 2018 due to higher tax expense and software , furniture & equipment cost. Further, the metric is expected to record a slight increase in the near term, and would be around 75% by 2020.
  • The expected spike in 2019-2020 can be attributed to a higher decrease in revenues due to challenging market conditions, when compared to the company’s expenses.
  • Although BNY Mellon’s total revenues grew at an average annual rate of 3.7% from $15.2 billion in 2016 to $16.4 billion in 2018, they are expected to drop 5% in 2019 followed by an increase of nearly 1%. This would enable it to cross $15.8 billion by 2020.
  • Additional details about BNY Mellon Revenues can be found in a related interactive dashboard.
  • The company’s expense figure has fluctuated over the last three years from $11.7 billion in 2016 to $11.4 billion in 2017, before increasing to $12.1 billion in 2018. Further, expenses would drop 3.7% in 2019 followed by an increase of 1.2% in the subsequent year, leading it to the figure of $11.8 billion by 2020.

 

Breaking Down BNY Mellon’s Total Expenses

Compensation & Benefits

  • Compensation Expense, which accounted for 51% of the company’s total expense in 2018, includes employee related costs, and service cost component of net pension benefit/cost. Further, the bank also includes a portion of Investment in Technology under this header.
  • Compensation & Benefits as % of revenue has fluctuated over the last few years from 37.6% in 2016 to 38.4% in 2017, before coming down to 37.5% in 2018. Trefis estimates the metric to decrease in subsequent years and be around 37.3% by 2020.

Professional Services

To understand how BNY Mellon’s Professional Services cost has trended and what the outlook is, view our interactive dashboard analysis

Software, Furniture and Equipment

  • Software, Furniture & Equipment cost accounted for 9% of the company’s total expenses in 2018. This header includes the expense incurred in purchasing & licensing software, furniture and equipment, along with a portion of investment in technology.
  • The figure has increased over the last few years from 5.9% in 2016 to 6.5% in 2018, in terms of % of revenue. Further, it is expected to hover around the 6.5% mark in the near term.

Income Taxes

  • Income Tax figure saw a sharp decrease in 2017, due to the impact of the tax reform. The effective tax rate for BNY Mellon stood at 18.1% in 2018; however we estimate it to be around 20% in 2019.
  • Thereafter, the effective Tax rate is expected to hover around 21% in near term.

Other Operating Expenses

  • Other Operating Expense accounted for 15% of the company’s total expenses in 2018, which made it the second highest expense category.
  • This category represents expenses which can’t be classified under other headers, like a components of net pension benefit/cost (except service cost), Distribution & Servicing, Sub-custodian cost, Amortization of intangible assets, Merger and integration, litigation and restructuring charges etc.
  • The figure as a % of revenues of has fluctuated over the last three years from 12.3% in 2016 to 12.4% in 2017, before coming down to 11.1% in 2018. In the near term, Trefis estimates the figure to be around 11.1%.

 

Additional details about trends in BNY Mellon’s Occupancy and Advertising & Marketing expenses over the years are available in our interactive dashboard.

 

Trefis has a price estimate of $51 for BNY Mellon’s stock (shows cash and valuation analysis) which is 5% higher than its current market price. Our price estimate takes into account BNY Mellon’s earnings performance in the third quarter.

 

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