BNY Mellon (NYSE:BK) is currently trading at less than $20 per share, about 40% below its 52-week high of $32.50 from January of this year. No doubt the global economic slowdown, aggravated by the escalating debt situation in Europe, has considerably impaired the financial institution’s outlook for this year and next. But the current share prices hardly do justice to the value of the bank, which holds the distinction of being the largest custodian bank in the world. BNY Mellon has much less exposure to the Eurozone compared to most other major banks – particularly investment banks such as Morgan Stanley (NYSE:MS). However its shares have taken the same punishment that has been meted out to other Wall Street banks in recent months, reiterating the level of pessimism in the market.
We have updated our price estimate for BNY Mellon’s stock from $34 to just under $27 and detail below the reasons for this reduction in our estimate.
Assets under Management to Grow at Slower Rate
BNY Mellon is a major player in the global asset management field, with the bank consistently ranking among the top 10 asset managers in the U.S. since the merger of Bank of New York and Mellon Financial. In fact, according to the bank’s annual report, its nearly $1.2 billion assets under management saw it ranked 11th among global asset managers.
But BNY Mellon is unlikely to be able to sustain the strong 5% growth in its asset base from last year – at least over the next 2 years. The bank’s assets under management have grown by just above 2% year-to-date. And as economies around the globe come out of the effects of this slowdown, we expect BNY Mellon to see a pickup in growth figures, starting with a 2.5% rate for 2012. This is significantly lower than our initial estimates of sustained 5% growth through the end of our forecast period.
Decline in Asset Servicing Fees
Asset Servicing activities, which include global custody, global fund services and securities lending, are expected to be driven largely by emerging economies over the medium and long term with stability issues raising doubts about the “strong” European economies.
While this would help BNY Mellon’s assets under custody (AuC) grow over the forecast period, it also signifies a need to reduce servicing fees in order to ensure competitiveness in these markets. We expect to see a reversal in the current trend of increasing asset servicing fees (as a percentage of AuC), with the figure trending towards 0.01% by the end of our forecast period.