Underperforming The S&P by 10%, Where Is BNY Mellon Stock Headed?

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

BNY Mellon stock (NYSE: BK) has gained 12% YTD as compared to the 22% rise in the S&P500 index over the same period. Further, at its current price of $51 per share, it is trading slightly below its fair value of $54 – Trefis’ estimate for BNY Mellon’s valuation

Amid the current financial backdrop, BK stock has shown strong gains of 25% from levels of $40 in early January 2021 to around $50 now, vs. a similar change for the S&P 500 over this roughly 3-year period. However, the increase in BK stock has been far from consistent. Returns for the stock were 37% in 2021, -22% in 2022, and 12% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 22% in 2023 (YTD) – indicating that BK underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BK face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The custody banking giant outperformed the street estimates in the third quarter of 2023, with revenues increasing 2% y-o-y to $4.45 billion. It was driven by a 10% rise in the net interest income (NII), while the total fee & other revenue was at par with the year-ago figure. The NII was up due to an improvement in the net interest margin. Similarly, investment servicing fees increased 3% y-o-y, but the gains were offset by lower investment management and foreign exchange revenue. Notably, the Assets under Custody and Administration (AuC/A) increased 8% y-o-y to $45.7 trillion, followed by a 3% growth in the Assets under Management (AuM). In terms of cost, total expenses as a % of revenues witnessed a favorable decrease in the quarter. It resulted in an adjusted net income of $956 million vs $319 million in Q3 2022. 

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The company’s top line grew 6% y-o-y to $13.2 billion in the first nine months of FY 2023. It was due to a 33% jump in the NII, partially offset by a marginal drop in the total fee and other income. Altogether, the adjusted net income increased 56% y-o-y to $2.9 billion. 

Moving forward, we expect the same trend to continue in Q4. Overall, BNY Mellon’s revenues are estimated to touch $17.52 billion in FY2023. Additionally, the adjusted net income margin is likely to improve in the year, leading to an annual GAAP EPS of $4.80. This coupled with a P/E multiple of just above 11x, will lead to a valuation of $54.

 Returns Dec 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 BK Return 5% 12% 7%
 S&P 500 Return 3% 22% 110%
 Trefis Reinforced Value Portfolio 6% 36% 599%

[1] Month-to-date and year-to-date as of 12/21/2023
[2] Cumulative total returns since the end of 2016

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