BNY Mellon Falls Just Short - Analyst Blog

The Bank of New York Mellon Corporation's (BK) fourth-quarter earnings from continuing operationsof 55 cents per share came in 2 cents below the Zacks Consensus Estimate of 57 cents.

BNY Mellon experienced sequential and year-over-year increases in assets under custody and administration during the reported quarter, reflecting the impact of higher equity markets and new business. Increased fee revenue, improved provision for credit losses and continued strong asset inflows were also among the positives. However, higher non-interest expenses were the downside.

For full year 2010, earnings from continuing operations were $2.11 per share, compared with a loss of 93 cents in 2009. However, the results missed the Zacks Consensus Estimate of $2.25.

Income from continuing operations was $690 million, compared with $625 million in the prior quarter and $712 million in the prior-year quarter. GAAP net income for the reported quarter was $679 million, compared with $622 million in the prior quarter and $593 million in the year-ago quarter.

Quarter in Detail

Total revenues for the quarter were $3.7 billion, up 9% sequentially and 12% year-over-year. Both the sequential and year-over-year increases in revenue were due primarily to an increase in total securities servicing fees as a result of improved market values, new business and recent acquisitions. Revenues for the reported quarter were also better than the Zacks Consensus Estimate of $3.6 billion.

For the full year, revenue nearly doubled to $13.6 billion from $7.7 billion in 2009. Revenue for the full year was in line with the Zacks Consensus Estimate.

Fully tax equivalent net interest revenues increased to $720 million from $718 million in the prior-year. The sequential increase reflects higher average interest-earning assets which resulted from a temporary increase in short-term client deposits during the quarter. Net interest margin deteriorated 13 basis points (bps) sequentially to 1.54%. The decrease was due primarily to a spike in short-term client deposits.

Investment and Other income for the reported quarter came in at $80 million, down 18% sequentially. The decrease primarily reflects lower foreign currency translation and seed capital revenue.

Excluding restructuring charges, M&I expenses and amortization of intangible assets,non-interest expense increased 8% sequentially and 16% year over year to $2.6 billion. Both increases primarily reflect the higher volume driven costs and new business. Also, the year-over-year increase reflects the impact of acquisitions and the sequential increase reflects the impact of seasonality.

The provision for credit losses was a credit of $22 million, compared with the same amount of credit in the prior quarter and a charge of $65 million in the prior-year quarter.The improvement primarily reflects the repayment of a loan to an asset manager that had previously filed for bankruptcy.

Assets Under Management

Assets under management (excluding securities lending assets) totaled $1.17 trillion as of December 31, 2010, up 3% sequentially and 5% year-over-year. Both increases primarily reflect higher equity markets and new business.

Assets Under Custody and Administration

Assets under custody and administration totaled $25.0 trillion as of December 31, 2010, up 2% sequentially and 12% year-over-year. The year-over-year increase primarily reflects the recent acquisitions.

Asset and wealth management fees were $800 million for the reported quarter, up 15% sequentially and 7% year-over-year.

Dividend Update

Concurrent with the earnings release, BNY Mellon declared a quarterly dividend of 9 cents per share. The dividend will be paid on February 9, 2011 to shareholders of record as of January 31, 2011.  

Though the company is well positioned to benefit from favorable long-term wealth management trends and a secular growth in global capital markets, we expect interest-bearing deposit costs to rise faster than asset yields and the low rate environment to persist, thereby negatively impacting net interest margin as well as net interest income.

BNY Mellon's close competitor SunTrust Banks Inc. (STI) is scheduled to release its fourth quarter 2010 earnings on January 21.

BNY Mellon currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold' rating. Also, in the absence of any significant positive or negative catalysts, we maintain a long-term “Neutral” recommendation on the stock.

 
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