J.P. Morgan Discusses Trust Banks

J.P. Morgan Chase & Co. is out with a research report on trust banks, including The Bank of New York Mellon Corporation BK. It has an Overweight rating and a $38 price target. In a note to clients, J.P. Morgan Chase & Co. writes, "We expect 2Q results at the trust banks to be moderate due to pressures offsetting seasonal strength in securities lending, new business wins, and ECB rate hike. Several pressures are impacting results: mixed performance in equities markets, lower trading volumes, pressure on F/X volatility and volumes, continued low interest rates, and increase in FDIC insurance premiums. And the trust banks are headed into the seasonally weaker 3Q compounded by increased macroeconomic concerns which are pushing back the prospects for interest rate hikes. Lower trading volumes would hurt servicing fee revenues – highest share of revenues from servicing is at STT. In addition, F/X volatility has weakened recently which could worsen the seasonal decline in 3Q. As a result, markets remain choppy and earnings estimates for the trust banks will have continued uncertainty which will keep the stocks under pressure despite attractive valuations. In addition, longer term impact on F/X revenues from litigation remains a concern. State Street should have some offset from some cost savings in its reported earnings and along with Bank of New York, some offset from share buybacks. There have been concerns among some investors about Basel 3 for Bank of New York, but the bank will have a long timeframe to achieve it and has been approved for share buybacks by regulators post the second stress test." Shares of BK lost 73 cents yesterday to close at $25.07, a loss of 2.87%.