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Financial Winners & Losers

Bank of New York Mellon: Today's Financial Winner

Philip van Doorn

04/10/13 - 04:51 PM EDT

NEW YORK ( TheStreet) -- Bank of New York Mellon (BK) was the winner on a strong day for the nation's largest banks, with shares rising over 3% to close at $28.62.

The Dow Jones Industrial Average and S&P 500 (SPX.X) both ended with 1% gains, while the NASDAQ Composite was up 2%, after the Federal Reserve released the minutes of the Federal Open Market Committee's meetings from March 19 and 20.

The Federal Reserve has kept the short-term federal funds in an extraordinarily low range of zero to 0.25% since late 2008. Since September, the Fed also has been making monthly purchases of $85 billion in long-term securities, in an effort to hold rates down.

According to the FOMC meeting minutes, "all but one member judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability."

The KBW Bank Index (I:BKX) rose over 1% to close at 56.87, with all 24 index components showing gains for the session, except for Capital One Financial (COF), which was down a nickel to close at $55.76.

First-quarter earnings season for the big banks will kick off Friday, with JPMorgan Chase (JPM) and Wells Fargo (JPM) scheduled to report before the market opens.

The consensus among analysts polled by Thomson Reuters is for JPMorgan Chase to report first-quarter EPS of $1.40 a share, increasing from $1.39 in the fourth quarter and $1.19 in the first quarter of 2012.

In a note to clients discussing areas of focus for JPMorgan's earnings report, KBW analyst Frederick Cannon said in a note to clients late on Tuesday that "while much attention is paid to trading, investment banking, and net interest income, the company's asset management business quietly chugs along as the second-largest component of total revenues (15% in 2012)."

"If the 4Q12 run rate of $3.7 billion in this line item were to hold true, it would represent approximately $14.8 billion in annual revenues versus our estimate of just $14.2 billion for 2013," Cannon wrote. KBW is behind the consensus, estimating that JPMorgan will report first-quarter earnings of $1.33 a share, with full-year estimates of $5.45 for 2013 and $5.70 for 2014.

But Cannon's comment highlights the possibility of an upside earnings surprise from JPMorgan Chase, along with upward EPS estimate revisions from sell-side analysts, which can only be good news for investors.

JPMorgan's shares were up over 1% to close at $49.25.

Analysts expect Wells Fargo to report first-quarter earnings of 88 cents a share, declining from 92 cents in the fourth quarter, but increasing from 75 cents in the first quarter of 2012.

Wells Fargo's mortgage loan origination and sale revenue is expected to suffer a major decline this year, although the decline may be largely offset by increases in loan servicing revenue and accounting adjustments.

Wells Fargo's shares rose slightly to close at $37.57.

Bank of New York Mellon


Shares of Bank of New York Mellon have returned 12% this year, following a 32% return during 2012. The shares trade for 2.5 times tangible book value, according to Thomson Reuters Bank Insight, and for 11.1 times the consensus 2014 EPS estimate of $2.58. The 2013 EPS estimate is $2.25.

The company on Thursday raised its quarterly dividend to 15 cents from 13 cents. Based on an increased quarterly payout, the shares have a dividend yield of 2.10%.

Following the completion of the Federal Reserve's annual stress tests in March, Bank of New York Mellon announced that the regulator had approved its capital plan, which in addition to the dividend increase included common share buybacks of up to $1.35 billion through the first quarter of 2014.

Bank of New York Mellon will announce its first-quarter results on April 17, with analysts expecting operating earnings of 48 cents a share, declining from 53 cents during the fourth quarter, and 52 cents in the first quarter of 2012.

After losing a court ruling related to the disallowance of some foreign tax credits for 2001 and 2002, the company said it would take an after-tax charge of $850 million for the first quarter, which will pretty much wipe out its earnings for the quarter on a GAAP basis.

Jefferies analyst Ken Usdin rates Bank of New York Mellon "hold," with a $29 price target, and said in a note to clients on April 5 that he expects the company's "core to be in line."

Usdin wrote that he expected Bank of New York Mellon's "revenue growth to lag" when compared to custody bank competitors State Street (STT) and Northern Trust (NTRS).

On a brighter note, Usdin added that "as the cheapest way to play asset-sensitivity among the trust banks (11 times on 2014 EPS), BK is compelling for investors with a long-term view, but positive catalysts are lacking near-term."

BK Chart BK data by YCharts

Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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