BNY Mellon Follows Bad Revenue Trend but Operating Earnings Top Views (Update 1)

  • Excluding 22-cent tax benefit, third-quarter EPS comes in at 60 cents.
  • Operating EPS beats consensus estimate of 58 cents.
  • Revenue down 7% from second quarter but up 3% year over year.

Updated from 7:20 a.m. ET with early market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Bank of New York Mellon ( BK) on Wednesday followed the industry trend by reporting a sequential revenue decline, but the company's earnings rose significantly because of a tax benefit.

The trust and custody bank reported third-quarter net income available to common shareholders of $967 million, or 82 cents a share, compared to $833 million, or 71 cents a share in the second quarter, and $720 million, or 61 cents a share, in the third quarter of 2012.

The third-quarter results soundly beat the consensus estimate of 58 cents a share, among analysts polled by Thomson Reuters.

Total revenue for the third quarter came in at $3.963 billion, down 7% from $4.009 billion the previous quarter, but up 3% from $2.879 billion a year earlier.

Bank of New York's bottom-line earnings were boosted by a "benefit related to the U.S. Tax Court's partial reconsideration of a tax decision," which came to $261 million, or 22 cents a share. Without the tax benefit, third-quarter earnings-per-share would have come in at 60 cents -- still ahead of the consensus EPS estimate.

Investment services fees totaled $1.738 billion in the third quarter, down only slightly from $1.742 billion in the second quarter, as small declines in asset servicing, clearing and treasury services were outweighed by a 10% sequential increase in issuer services fees to $322 million. Investment services fees were up 4% from $1.678 billion in the third quarter of 2012.

Investment management and performance fees totaled $821 million in the third quarter, down 3% from $848 million the previous quarter, but up from $779 million a year earlier. The company's largest revenue decline, on a percentage basis, was in foreign exchange and other trading revenue, which totaled $160 million in the third quarter, down 12% from $207 million in the second quarter, and down 23% from $182 million in the third quarter of 2012.

The sharp decline in trading revenue followed the industry trend reported by JPMorgan Chase ( JPM) and Citigroup ( C).

Bank of America ( BAC) followed suit on Wednesday, reporting that trading account profits declined to $1.266 billion in the third quarter from $1.938 billion the previous quarter and $2.989 billion a year earlier. BAC's noninterest income declined to $11.264 million in the third quarter from $12.178 billion the previous quarter and $12.533 billion a year earlier.

Please see TheStreet's earnings' coverage for plenty of additional detail on Bank of America's $2.5 billion third-quarter profit.

Bank of New York Mellon's assets under management grew 7% sequentially and 13% year over year to $1.53 trillion. Assets under custody or administration grew 5% sequentially but declined 2% from a year earlier to $27.4 trillion.

The company's pretax operating margin for the third quarter was 26%, declining from 30% in the second quarter, and reflecting the revenue decline, as noninterest expenses declined slightly. In the third quarter of 2012, the pretax operating margin was 27%.

The adjusted third-quarter return on tangible common equity was a solid 21.5%, although it was down from 25.2% the previous quarter and 22.5% a year earlier.

BNY Mellon CEO Gerald Hassell said in the company's earnings release that he was "pleased to report strong year-over-year revenue and earnings growth in our Investment Management and Investment Services businesses." The CEO added the bank continues "to remain ahead of our Operational Excellence initiatives goals, the savings from which have provided us the flexibility to make targeted investments in our platforms and service applications to deliver the full breadth of our global capabilities."

"Finally, we continue to strengthen our balance sheet and capital position, as we generated more than $1 billion of estimated Basel III Tier 1 common equity and once again delivered a very healthy return on tangible common equity for our shareholders," he said.

Bank of New York Mellon's shares were up over 1% in early trading to $31.25.

Jefferies analyst Ken Usdin in a note published soon after the earnings release wrote that "On the surface, core EPS looks to be inline with consensus ($0.57) with a stronger-than-expected spread income result and solid cost control offsetting softness in core fee lines." He added that BNY Mellon's "Basel III Tier 1 common ratios jumped meaningfully and are now above 10%, but share buybacks slowed."

The company repurchased $122 million worth of common shares during the third quarter, down from $330 million in the second quarter. Bank of New York Mellon in March received approval from the Federal Reserve for up to $1.35 billion in share repurchases through the first quarter of 2014.

Usdin pointed out that BNY Mellon's expenses declined 2% in the third quarter from the second quarter, and that "Compensation increased only $7mm despite digesting an annual merit increase."

The analyst rates Bank of New York Mellon a "hold," with a price target of $34.00.

BNY Chart BNY data by YCharts

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

RELATED STORIES:







-- 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.

More from Stocks

What You Need to Know About Facebook and Europe's New Privacy Rules

What You Need to Know About Facebook and Europe's New Privacy Rules

8 Bold Moves General Motors Could Make to Rev Up Its Battered Stock Price

8 Bold Moves General Motors Could Make to Rev Up Its Battered Stock Price

Is Your Investment Portfolio Prepared for Trade Wars, Inflation and More Trump?

Is Your Investment Portfolio Prepared for Trade Wars, Inflation and More Trump?

GE Is Too Opaque, Too Diversified and Too Poorly Managed: Doug Kass Insider

GE Is Too Opaque, Too Diversified and Too Poorly Managed: Doug Kass Insider

Dow Falls Over 200 Points as Apple's Slump Offsets Gains in General Electric

Dow Falls Over 200 Points as Apple's Slump Offsets Gains in General Electric