Is BNY Mellon Stock Fairly Priced?

+6.11%
Upside
59.09
Market
62.70
Trefis
BK: Bank of New York Mellon logo
BK
Bank of New York Mellon

BNY Mellon stock (NYSE: BK) has lost 5% YTD as compared to the 15% rise in the S&P500 index over the same period. Further, at its current price of $44 per share, it is trading approximately 19% below its fair value of $54 – Trefis’ estimate for BNY Mellon’s valuation

Interestingly, BNY Mellon stock had a Sharpe Ratio of almost zero since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The custody banking giant surpassed the consensus estimates in the second quarter of 2023, with revenues increasing 5% y-o-y to $4.45 billion. It was mainly driven by a 33% jump in the net interest income (NII), partially offset by a 2% drop in the total fee and other income. Notably, total fees and other income contribute around 75% of the top line. The NII was up due to an improvement in the net interest margin from 0.89% to 1.2%. On the flip side, the fee income suffered due to lower investment management & performance fees and a decrease in foreign exchange revenues. In terms of cost, total expenses as a % of revenues slightly declined in the quarter. This led to a 23% rise in the adjusted net income to $1.03 billion. 

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The company’s top line grew 8% y-o-y to $8.82 billion in the first half of FY 2023. It was due to a 46% increase in the NII, partially offset by a marginal drop in the total fee and other income. Markedly, total Assets under Custody and administration (AuC/A) gained 9% y-o-y to $46.9 trillion over the same period, while Assets under Management (AuM) decreased 2% y-o-y to $1.91 trillion. Altogether, the adjusted net income increased 26% y-o-y to $1.94 billion. 

Moving forward, we expect the same trend to continue in Q3. Overall, BNY Mellon’s revenues are forecast to touch $17.52 billion in FY2023. Additionally, the adjusted net income margin is likely to improve in the year, leading to an adjusted net income of $3.7 billion. It will likely result in an EPS of $4.80, which coupled with a P/E multiple of just above 11x, will lead to a valuation of $54.

 Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 BK Return -4% -5% -8%
 S&P 500 Return -3% 15% 98%
 Trefis Reinforced Value Portfolio -5% 29% 564%

[1] Month-to-date and year-to-date as of 8/28/2023
[2] Cumulative total returns since the end of 2016

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