Bank of New York Mellon: Financial Winner

NEW YORK ( TheStreet) -- Bank of New York Mellon ( BK) was the winner among the largest U.S. financial names on Tuesday, with shares rising 3% to close at $22.30.

The broad indexes rose for a third straight day, after Federal Reserve Bank of Boston President Eric Rosengren called on the central bank to take "more substantive action than we have taken to date," to stimulate the economy. In an interview with the Wall Street Journal, Rosengren said that the Fed should increase its purchases of securities and state that it will continue to do so "until we start seeing some pretty significant improvements in growth and income."

The KBW Bank Index ( I:BKX) on Monday rose slightly to close at 46.12, with all but seven of the 24 index components showing declines.

Following the accusation on Tuesday by the New York State Department of Financial Services (DFS) that the New York branch of Standard Chartered Bank PLC "schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, reaping SCB hundreds of millions of dollars in fees," while "evading Federal sanctions," and operating "as a rogue institution," the parent company's stock dropped 16% in London trading.

Standard Chartered Bank came out swinging, saying in a press release that it "strongly rejects the position and portrayal of facts" made by the New York regulators, and that the bank "had previously reported that it is conducting a review of its historical compliance and is discussing that review with US agencies, including the DFS, the Department of Justice, the Office of Foreign Assets Control, the Federal Reserve Group of New York and the District Attorney of New York."

The bank went on to say that its analysis was shared with all the agencies, and "demonstrates that throughout the period the Group acted to comply, and overwhelmingly did comply, with US sanctions and the regulations relating to U-turn payments." According to Standard Chartered Bank, "well over 99.9% of the transactions relating to Iran complied with the U-turn regulations," and "the total value of transactions which did not follow the U-turn was under $14m."

Standard Chartered said that it "ceased all new business with Iranian customers in any currency over five years ago," and that because "resolution of such matters normally proceeds through a co-ordinated approach" by the regulatory agencies, it was "therefore surprised to receive the order from the DFS."

The bank was ordered to appear on August 15 before New York Superintendent of Financial Services Benjamin Lawsky to "demonstrate why SCB's license to operate in the State of New York should not be revoked," and Standard Chartered said it would "discuss these matters with the DFS and to contest their position."

Trading for shares of Knight Capital Group ( KCG) settled down after several days of extreme volatility, with the shares pulling back by a penny to close at $3.06, after the Jersey City, N.J., market maker and facilitator of electronic transactions announced on Monday that a group of investors -- including Jefferies Group ( JEF), Blackstone ( BX), Getco, Stephens, Stifel Financial ( SF) and TD Ameritrade ( AMTD) -- had agreed to recapitalize the company by purchasing $400 million in preferred shares, "convertible into approximately 267 million shares of common stock of the Company," at a strike price of $1.50.

The recapitalization is likely to result in the investor group taking control of 70% of Knight Capital Group's shares.

KBW analyst Niamh Alexander late on Monday downgraded Knight Capital to an "Underperform" rating from a "Market Perform" rating, while lowering her price target for the shares to $2.50 from $4.00, while estimating a revised tangible book value of $3.44 per share.

Alexander said the lower price target was based on "75% of the revised estimated tangible book value," with a "wider discount to TBV than historical multiples to reflect the higher risk profile of the earnings now after two consecutive months of outsized trading losses, as well as the liquidity, dilution and risk of shareholder lawsuits." The analyst now estimates that Knight Capital Group will earn 29 cents a share in 2013, "down from $1.35, primarily on higher share count and assuming some minor loss of business and higher expenses resulting from the higher risk profile of the company."

KBW estimates that Knight Capital will show a net loss of $3.14 for the third quarter, "assuming two months of additional interest expense and estimating market-making revenue of negative $300 million, taking into consideration the 62 days of trading outside of the $440 million loss in the quarter."

Bank of New York Mellon's shares have now returned 14% year-to-date, following a 33% decline during 2011.

BK Chart BK data by YCharts

The shares are trading for 1.9 times their reported June 30 tangible book value of $11.47, and for nine times the consensus 2013 earnings estimate of $2.41, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.06.

Jefferies analyst Ken Usdin rates Bank of New York Mellon a "Hold," with a $26 price target, and said in an Aug. 2 report discussing trust banks' efficiency initiatives that the company's "efficiency plan was slightly incremental ($1mm benefit to pre-tax income) in 2Q," which "was a positive surprise, as management had previously indicated that the program would be a net drag on profitability for the balance of the year as program costs overcome gross saves.

Bank of New York Mellon expects between $160 million and $170 million in cost reductions during 2013. Usdin said that through the second quarter, the company had incurred $28 million in expenses tied to the efficiency plan, leaving "over $90mm of program costs to book in the second half."

Usdin estimates that Bank of New York Mellon will earn $2.00 a share for all of 2012, followed by EPS of $2.40 in 2013.

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.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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