BNY Mellon Stock Has A Limited Growth Potential

[Updated 11/16/2021] BNY Mellon Valuation Update

BNY Mellon stock (NYSE: BK) has gained 41% YTD, and at its current price of $60 per share, it is trading approximately 5% below its fair value of $63 – Trefis’ estimate for BNY Mellon’s valuation.  The custody banking giant topped the street expectations in the recently released third-quarter results, same as in the previous quarter. It posted a 5% y-o-y growth in total revenues to $4 billion, primarily led by a similar increase in the total fee income, partially offset by a 9% decline in the net interest income (NII). The fee income benefited from higher investment services fees, foreign exchange revenues, and investment management & performance fees. Further, the low funding cost and higher outstanding loan balance supported the NII, however, the impact was more than offset by interest rate headwinds. The company’s Assets under Management (AuM) touched $2.3 billion in the quarter – 4% more than the December end, followed by a 10% growth in Assets under Custody & Administration (AuC/A) to $45.3 trillion over the same period. That said, the growth translated into a marginal increase in the adjusted net income due to higher expenses as a % of revenues.

The bank posted a 4% y-o-y drop in the top-line in 2020, mainly due to a 7% decline in the NII and a 4% drop in the total fees and other income. While the NII was down due to the lower interest rate environment, the fees income suffered due to lower investment and other income. Further, the NII followed the same trend in the first three quarters of 2021 – cumulative nine months NII was down 15% y-o-y to $1.9 billion. However, the total fees and other income improved 3% y-o-y to $9.98 billion over the same period, thanks to the growth in investment services fees and investment management & performance fees. That said, interest rates are unlikely to recover to the pre-Covid-19 levels immediately and will continue to hurt the NII. However, growth in the investment management division will offset the negative impact and enable BNY Mellon’s revenues to touch $15.9 billion in FY2021. Additionally, the adjusted net income margin is likely to remain stagnant in the year, leading to a net income of around $3.4 billion. Further, the bank has restarted the share repurchase program and increased quarterly dividends. It will result in an EPS of around $4.12 for FY2021, which coupled with a P/E multiple of just above 15x, will lead to the valuation of $63.

[Updated 08/27/2021] Is BNY Mellon Stock Undervalued?

BNY Mellon stock (NYSE: BK) has gained 31% YTD, and at its current price of $55 per share, it is trading marginally below its fair value of $57 – Trefis’ estimate for BNY Mellon’s valuation.  The bank recently released its second-quarter 2021 results, beating the consensus estimates of revenues and earnings. It reported total revenues of $3.96 billion – marginally lower than the year-ago period. While the total fee and other income did increase by 2% y-o-y in the quarter, it was more than offset by a 17% drop in the net interest income due to interest rate headwinds. However, the firm still managed to post an adjusted net income of $990 million – up 10% y-o-y, mainly due to a favorable reduction in provisions for credit losses, partially offset by higher non-interest expenses as a % of revenues. 

The company reported $15.8 billion in revenues for 2020 – down 4% y-o-y. This was due to a 7% drop in net interest income (NII) and a 4% decline in total fees and other income. Further, the same trend continued in the first quarter of 2021, also. However, the second-quarter results were slightly different, as the total fee & other income posted positive growth. This was primarily driven by growth in assets – Assets under Management (AuM) grew 18% y-o-y to $2.3 trillion and Assets under Custody & Administration (AuC/A) increased 21% y-o-y to $45 trillion. That said, we expect the NII to continue to suffer in the subsequent quarters, as interest rates are unlikely to recover to the pre-Covid-19 levels anytime soon. However, the negative impact is likely to be offset by growth in fee income. Overall, BNY Mellon’s revenues are likely to remain around $15.9 billion in FY2021. Additionally, the company has increased its quarterly cash dividend by 10% from $0.31 to $0.34 per share (applicable from the third quarter), in addition to a $6 billion share repurchase plan valid till December 2022. This will likely increase the shareholder payout, resulting in an EPS of $4.09 for FY2021. This coupled with a P/E multiple of just below 14x, will lead to the valuation of $57.

[Updated 04/30/2021] BNY Mellon Stock Has Limited Upside

BNY Mellon stock (NYSE: BK) has rallied 92% since the March 23 lows of last year and 24% YTD. Further, at its current price of $50 per share, it is 5% below its fair value of $53 – Trefis’ estimate for BNY Mellon’s valuation.  The custody banking giant outperformed the consensus estimates of revenues and earnings in its recently released first-quarter FY2021 results. However, both the figures decreased on a year-on-year basis. The bank reported revenues of $3.9 billion (down 5%), primarily driven by a 20% drop in net interest income due to the lower interest rate environment. Similarly, its EPS declined from $1.05 to $0.97 in the quarter. The drop in EPS was partially due to lower revenues and partially driven by higher non-interest expenses as a percentage of revenues.

The bank is heavily dependent on asset servicing fees (29% in 2020) and investment management fees (22% in 2020), which are charged as a percentage of Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively. In Q1, the AuC/A grew 1.5% on a sequential basis to $41.7 trillion, while the AuM saw a marginal increase to $2.2 trillion. The growth in assets base is a positive indicator for the company, which will likely benefit its revenue prospects. However, both the investment management fee as a % of AUM and Asset Servicing Fee as a % AuC/A have registered a decline in 2020 and are expected to see a further decrease in FY2021. This is likely to reduce the positive impact of asset growth to some extent. Further, the net interest income benefited from growth in interest-earning assets, however, it was more than offset by a drop in net interest margin. We expect the same trend to continue in the current year. Overall, the above factors will likely restrict BNY Mellon’s revenues to $15.7 billion in FY2021 – slightly lower than the 2020 figure. That said, the net income margin is likely to see some improvement due to lower non-interest expenses and a favorable decrease in provisions for loan losses, leading to an EPS of $4.11 for FY2021. This coupled with a P/E multiple of just below 13x, will lead to the valuation of $53.

[Updated 03/03/2021] BNY Mellon Stock Is Still Undervalued

BNY Mellon stock (NYSE: BK) has rallied 59% since the March 23 lows of the last year and at its current price of $44 per share, it is 10% below its fair value of $48 – Trefis’ estimate for  BNY Mellon’s valuation.  The mortgage banking giant surpassed the consensus estimates for revenues and earnings in the recently released fourth-quarter results. It reported an EPS figure of $0.96 and total revenues of $3.8 billion. Its revenues were 20% lower than the year-ago period, mainly driven by a 17% decline in net interest income and a 22% decrease in total fees due to money market fee waivers. 

The bank reported $15.8 billion in revenues for the full-year 2020 – around 4% lower than the 2019 figure. It was primarily driven by a 7% drop in net interest income due to the lower interest rate environment and a 4% decline in total fees & other income. BNY Mellon derives a big chunk of its revenues from asset servicing fees (29% in 2020) and investment management fees (22% in 2020) – the asset management fees and the investment management fees are charged as a percentage of Assets under Custody & Administration (AUC/A) and Assets under Management (AuM) respectively. While both the AuC/A & AuM have increased by 7% y-o-y by the end of December 2020, fees as a percentage of AuC/A and AuM have suffered in the year. We expect the same trend to continue in the current year. Further, lower interest rates are unlikely to see a swift revival. Overall, the above factors will likely restrict  BNY Mellon’s revenues to $15.5 billion in FY2021. That said, the net income margin is likely to see some improvement, leading to an EPS of $3.92 for FY2021. This coupled with a P/E multiple of just above 12x, will lead to the valuation of $48.

[Updated 11/23/2020] BNY Mellon Stock Offers Limited Growth Opportunity In The Short Term

Despite a 38% gain since the March bottom, BNY Mellon stock (NYSE: BK) is still down 24% YTD. Trefis estimates BNY Mellon’s valuation to be around $43 per share – around 15% above the current market price of $38. The custody banking giant recently declared its third-quarter results, which surpassed the consensus estimates for both earnings and revenues. The company reported an EPS figure of $0.98 and total revenues of $3.8 billion. Its total revenues were marginally lower than the year-ago period, mainly driven by a slight decrease in total fees revenue and a 4% decline in net interest income. 

We expect BNY Mellon’s revenues trajectory to improve in the coming months, mainly driven by the recent rally in the securities market, leading to higher asset valuations. It is likely to report $16 billion in revenue for FY 2020 – 3% lower than the previous year. Further, its net income margin is likely to suffer due to higher non-interest expenses, reducing the EPS figure to $4.02 for FY 2020. Thereafter, revenues are expected to marginally decline to $15.9 billion in FY2021, mainly driven by a slight drop in the investment management business. The EPS figure is likely to remain around $3.85, which coupled with the P/E multiple of just above 11x, will lead to a valuation of about $43.

[Updated 08/25/2020] BNY Mellon Stock Has A 25% Upside

BNY Mellon stock (NYSE: BK) lost more than 45% – dropping from $50 at the end of 2019 to around $27 in late March – then jumped 31% to around $36 now. Despite this, the stock has lost 27% of its value so far this year.

There were 2 reasons for this:  The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the asset valuations in the securities markets dropped. This could negatively affect BNY Mellon’s top line as a major share of its revenues comes from Asset Servicing and Investment Management fees, which are charged as a percentage of Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.

But we believe there is more upside to come over the coming months

Trefis estimates BNY Mellon’s valuation to be around $44 per share – about 25% above the current market price – based on an upcoming trigger explained below and one risk factor.

The trigger is an improved trajectory for BNY Mellon’s revenues over the second half of the year. We expect the company to report $15.8 billion in revenues for 2020 – around 4% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. Further, the rally in the securities market, after a multi-billion dollar fed stimulus in late March, has improved the asset valuations. This is likely to help BNY Mellon’s top line as it charges its asset servicing and investment management fees as a percentage of Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively – it constituted around 50% of the bank’s revenues in FY2019. Similarly, the overall economy will benefit from improvement in consumer spending due to relaxed lockdown restrictions. The same is evident from 8.5% m-o-m improvement in consumer spending in May followed by 5.6% in June. Overall, we see the company reporting an EPS of around $3.96 for FY2020 – 12% below the year-ago figure.

Thereafter, BNY Mellon’s revenues are expected to marginally decline to $15.6 billion in FY2021, mainly driven by a slight drop in the investment management business. This coupled with a lower expected share count due to stock repurchases is likely to result in an EPS figure of $4.17 for FY2021 – up by 5%.

Finally, how much should the market pay per dollar of BNY Mellon’s earnings? Well, to earn close to $4.17 per year from a bank, you’d have to deposit around $460 in a savings account today, so about 110x the desired earnings. At BNY Mellon’s current share price of roughly $36, we are talking about a P/E multiple of just below 9x. We think a figure closer to 11x will be appropriate.

That said, custody banking and asset management is a risky proposition right now. While growth is likely, change in current market sentiment can harm the near-term outlook. What’s behind that?

BNY Mellon is a custody banking giant with Assets under Custody & Administration (AuC/A) of around $35.7 trillion and AuM of just below $1.9 trillion in 2019. The Bank’s business model is very sensitive toward movement in asset prices. While the broader markets are on a growth trajectory (up 50%) since the March bottom, any further weakening in the economic scenario or a sudden jump in the Covid-19 case count can reverse the momentum. This could harm BNY Mellon’s top line due to a reversal in asset valuations driven by net market losses.

The same trend is visible across BNY Mellon’s peer – BlackRock. While its revenues are likely to improve in FY2020 due to improved asset valuations and higher net asset inflows, it is facing the same risk of a drop in asset prices due to a sudden uptick in Covid-19 cases or further drop in economic condition. This would explain why BlackRock stock currently has a stock price of over $585 but looks slated for an EPS of around $32.05 in FY2021.

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