Bank of New York Soars on Fee Revenue Growth

  • Second-quarter earnings of $833 million, or 71 cents a share
  • Earnings include equity investment gain of $109 million, or 9 cents a share
  • Adjusted revenue of $3.786 billion
  • Consensus estimates were for EPS of 57 cents on revenue of $3.705 billion
  • Fee revenue rises 13% sequentially, 14% year-over-year

Updated from 7:23 a.m. ET with market reaction and detail on Bank of New York Mellon's capital ratios.

NEW YORK ( TheStreet) -- Bank of New York Mellon ( BK) on Wednesday reported strong second-quarter results, with record revenue and a very significant increase in fee income.

Bank of New York Mellon's shares were up over 4% in early trading to $31.69.

The custody bank reported second-quarter net income applicable to common stockholders of $833 million, or 71 cents a share, compared to a net loss of $266 million, or 23 cents a share, in the first quarter, and earnings of $567 million, or 39 cents a share, during the second quarter of 2012.

The first-quarter results included a charge of $854 million related to a U.S. court's disallowance of foreign tax credits. Excluding the charge, Bank of New York Mellon's first-quarter earnings to common shareholders would have come in at 50 cents a share.

The second-quarter results included an equity investment gain of $109 million, or 9 cents a share.

Bank of New York Mellon reported adjusted second-quarter total revenue of $3.786 billion, up 6% from the first quarter and up 5% from the second quarter of 2012.

Analysts polled by Thomson Reuters had estimated the firm would post second-quarter EPS of 57 cents, on revenue of $3.705 billion.

Bank of New York Mellon CEO Gerald Hassell said in the company's earnings release that "all of our businesses delivered year-over-year increases," adding "Investment Management recorded its 15th consecutive quarter of net positive long-term flows."

Total fee revenue was up 14% sequentially and 14% year over year to $3.155 billion in the second quarter. Second-quarter investment management and performance fees totaled $848 million, up 3% from the first quarter and up 6% from the second quarter of 2012.

Assets under custody or administration declined slightly from the first quarter but rose 4% year-over-year to $26.2 trillion as of June 30. Assets under management were up slightly from the previous quarter and up 10% year-over-year to $1.43 trillion as of June 30.

Bank of New York Mellon reported a very strong second-quarter return on tangible common equity of 25.2% on an adjusted basis, improving from 22.4% a year earlier.

The company estimated that under rules finalized by the Federal Reserve on July 2, its Basel III Tier 1 common equity ratio was 9.3% under the "standard approach," with the ratio rising to 9.8% under the "advanced approach." Either approach puts the bank well above its full requirement for a minimum Basel III tier 1 common equity ratio of 8.5% by January 2019.

The largest holding companies have a minimum Basel III Tier 1 common ratio requirement of 7.0%, plus additional capital buffers for "global systemically important financial institutions," or GSIFIs. The Basel Committee late in 2011 determined Bank of New York Mellon's additional buffer would be 1.5%, bringing the total Tier 1 common requirement to 8.5%.

Bank of New York Mellon also said its Tier 1 leverage ratio under Basel 1 was 5.3% as of June 30. Under new rules proposed by federal regulators last week, banks with total assets of over $700 million will be required to maintain supplementary Basel III Tier 1 leverage ratios of at least 5% by January 2018, with 6% required for the nation's largest holding companies.

The company didn't disclose estimated Basel III Tier 1 leverage ratio, but executives indicated during Bank of New York Mellon's earnings call that the new leverage capital rules were not expected to affect their plans to return capital to investors through dividends and share buybacks.

The bank's shares closed at $30.35 Tuesday, returning 19% this year, following a 32% return during 2012.

The shares trade for 11.9 times the consensus 2014 EPS estimate of $2.55. The consensus 2013 EPS estimate is $2.26.

Based on a quarterly payout of 15 cents, Bank of New York Mellon's shares have a dividend yield of 1.98%. The company in March was approved by the Federal Reserve to repurchase up to $1.35 billion in common shares through the first quarter of 2014. During the second quarter, the firm bought back 11.9 million shares for $330 million.

BK Chart BK data by YCharts

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

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-- 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 TheStreet.com 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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