Bank of NY Settlement Brings Out Bulls
NEW YORK (
) -- Sentiment has become more bullish on
Bank of New York Mellon
(BK) - Get Report
in recent days due to expectations that the resolution of a longstanding legal headache is in the offing.
While the widely expected settlement may already priced into the stock, there are signs the New York-based trust bank and its competitors -- which haven't enjoy the same sharp rise as more consumer- and investment-oriented banks during the market's recent run-up -- may soon gain ground.
Bank of New York has been entangled in a money laundering scandal with Russia since the 1990s, when a company vice president was accused of using bank accounts as a conduit to siphon away more than $7 billion. Two years ago, the country's customs service resurrected the case, asserting that Bank of New York owed the Russian government $22.5 billion in taxes.
On Wednesday, Russian Finance Minister Alexei Kudrin said his government was close to reaching a settlement with the bank. Similar reports circulated in the media in preceding days, though Bank of New York has yet to make an official statement.
The bank may still pay at least $14 million for Russia's legal costs, according to Kudrin. That figure would be in line with a settlement reached with the United States government years ago.
The $14 million penalty is nominal when compared with what Russia had been seeking, and lower than estimates that had circulated in recent months. (One analyst was expecting a settlement of $25 million.)
Bank of New York would also reportedly agree to open a discounted $4 billion credit line for the Russian government, though Kudrin told the
Associated Press
the line wouldn't be directly related to the case but would rather be "an act of goodwill" on the bank's part. Perhaps most importantly for investors, however, is that the settlement would remove the overhang of a lingering dispute with an unpredictable government. Also, a less cordial resolution with Russia could have not only been more costly, but also damaged valuable business relationships.
"In sum, Bank of New York has created a profitable piece of business and is paying very little in costs to do so" excluding its own legal fees, Rochdale Securities analyst Richard Bove said in a note Wednesday, "This stock is very attractive and should be bought."
While Bove is a longtime supporter of Bank of New York, and has held a buy rating on its shares since May, less enthusiastic observers also became more bullish on the firm because of its capital strength and muted share performance.
"Litigation risk appears less onerous than we originally anticipated," Sandler O'Neill analyst Jeff Harte says in a note Thursday. Harte is lifting his rating on Bank of New York's stock to hold from sell and raising his earnings forecast for next year.
Bank of New York shares have underperformed those of other regional banks in recent months, posting a 5% gain so far this quarter, compared with
Northern Trust's
(NTRS) - Get Report
12% rise and
State Street's
(STT) - Get Report
16% appreciation. Compared with the recent surge in shares of other traditional banks, the gains for this group are not remarkable and would indicate there still may be room for these stocks to run.
A report from analysts at Bank of America-Merrill Lynch earlier this week lifted earnings estimates and price targets on all three firms, saying there were "attractive opportunities" in the stocks. The banks are primed to "play some catch-up" and are "positioned well for recovery," the report said, despite ongoing concerns about credit costs.
Bank of New York, Northern Trust and State Street all repaid bailout funds as soon as the opportunity was offered and raised capital to give added girth to their balance sheets. As lenders to other banks in the capital markets, like
Bank of America
(BAC) - Get Report
,
Wells Fargo
(WFC) - Get Report
,
Citigroup
(C) - Get Report
,
JPMorgan Chase
(JPM) - Get Report
,
Goldman Sachs
(GS) - Get Report
and
Morgan Stanley
(MS) - Get Report
, their exposure to consumer issues is limited. They have also benefited from recent improvements in the securities markets.
Still, some investors remain wary about credit risks, especially for Bank of New York. Its less-than-stellar second-quarter results were the result of securities losses, weak margins and impairment charges. The firm offered a muted revenue outlook even for the third quarter, a seasonally slow period for trust banks.
The caution was reflected by the middle-of-the-road rating from Sandler O'Neil's Harte and his price target of $32, a level that Bank of New York shares were fast approaching on Thursday. The stock climbed 7% in the first three session of this week, and it added another 6 cents today to close at $30.78. Its high for the session was $31.57.
-- Written by Lauren Tara LaCapra in New York
.
