Bank of New York Mellon Beats as Fee Revenue Grows (Update 1)

  • Third-quarter EPS of 61 cents, beating consensus estimate of 54 cents.
  • Total revenue of $3.675 billion also beats.
  • Investment management fees rise 7% year-over-year

Updated with comments from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Bank of New York Mellon ( BK) on Wednesday reported a 7% year-over-year increase in management fees.

The trust and custody bank announced third-quarter net income applicable to common shareholders of $720 million, or 61 cents a share, soundly beating the consensus estimate of a 54-cent profit, among analysts polled by Thomson Reuters.

Earnings increased from $466 million, or 39 cents a share, during the second quarter (which included a litigation charge of $212 after tax, or 18 cents a share), and $651 million, or 53 cents a share, during the third quarter of 2011.

Total revenue for the third quarter was $3.675 billion, beating the consensus estimate of $3.596 billion, and increasing from $3.579 billion the previous quarter, and $3.683 billion, a year earlier.

Investment services fees totaled $1.7 billion in the third quarter, down 1% from the second quarter, and down 6% from the third quarter of 2011. The company said "the year-over-year decrease was primarily driven by lower Depositary Receipts revenue, the impact of the sale of the Shareowner Services business in the fourth quarter of 2011 and lower Corporate Trust fees, partially offset by higher asset servicing and securities lending revenue."

A third-quarter highlight for Bank of New York Mellon was $779 million in investment management and performance fee income, increasing 2% sequentially and 7% year-over-year, "driven by higher market values and net new business."

Net interest income totaled $749 million during the third quarter, increasing from $734 million the previous quarter, but declining from $775 a year earlier. The net interest margin - the difference between the average yield on loans and investments and the average cost for deposits and borrowings - continued to narrow, to 1.20% in the third quarter, from 1.25% in the second quarter, and 1.30% in the third quarter of 2011. The margin squeeze is in line with most of the industry, with the Federal Reserve keeping its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly increased its purchases of long-term mortgage-backed securities, in an effort to keep long-term rates at historically low levels.

A key element for Bank of New York -- and for most large banks in the current economic environment - is expense management. Total noninterest expenses were $2.705 billion during the third quarter, declining 11% from the previous quarter (mainly because of lower merger and integration expenses), and 2% from a year earlier.

Bank of New York Mellon said that its assets under management grew to $1.4 trillion at the end of the third quarter, an increase of 5% from June, and 14% from September of last year.

Assets under custody/administration grew 3% quarter-over-quarter and 8% year-over-year, to $27.9 trillion, as of Sept. 30.

The company's third-quarter return on tangible common equity was a strong 22%. The company repurchased over 13 million shares, for $288 million, during the third quarter.

Bank of New York Mellon CEO Gerald Hassell said he was "pleased to report solid earnings growth this quarter, led by the strength of Investment Management, which recorded its twelfth consecutive quarter of long-term inflows. New business trends for Asset Servicing were also strong, as we recorded the best quarter in new AUC wins since 2008, a testament to the breadth and quality of our capabilities."

Jefferies analyst Ken Usdin rates BNY Mellon a "Hold," with a $25 price target, and said after the earnings release that although "some may view the run-rate as unsustainable given overearning in fixed income/seed capital gains, we peg the EPS run-rate as no worse than the mid-$0.50's, which is supportive of 2013 consensus."

Usdin added that the company was continuing to make progress on its efficiency plan, as "core expenses held relatively flat (up $10mm) despite the annual merit increase driving a $21mm increase in the comp. line. Offsetting the higher compensation was incremental progress on the cost plan ($10mm of incremental saves) and leverage within a handful of line items (professional, legal & other down $17mm, business development down $11mm)."

Bank of New York Mellon's shares returned 21% year-to-date, through Tuesday's close at $23.56.

The shares trade for 10 times the consensus 2013 EPS estimate of $2.38.

Based on a quarterly payout of 13 cents, the shares have a dividend yield of 2.21%.

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.

>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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