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The Bank of New York Mellon Corporation’s (BK - Analyst Report) second-quarter 2013 adjusted earnings of 62 cents per share beat the Zacks Consensus Estimate of 58 cents. Moreover, this compared favorably with 57 cents earned in the prior-year quarter.

Better-than-expected results were mainly driven by growth in revenues, partially offset by higher operating expenses. Further, the company’s credit quality and asset position continued to improve and capital ratios remained healthy.

After taking into consideration certain non-recurring items, net income applicable to common shareholders was $833 million or 71 cents per share, compared with $466 million or 39 cents per share in the year-ago quarter.

Performance in Detail

BNY Mellon’s total revenue came in at $3.79 billion, up 6% from the previous-year quarter. Further, total revenue was ahead of the Zacks Consensus Estimate of $3.70 billion.

Fully tax equivalent net interest revenues were $757 million, increasing 3% year over year. The rise mainly reflected a change in the mix of earning assets, lower funding costs, a rise in rates as well as average interest-earning assets.

However, net interest margin decreased 10 basis points (bps) sequentially to 1.15%.  The decrease was largely due to higher average interest-earning assets and lower yields, partially offset by a change in the mix of earning assets.

Total fee revenue was $3.16 billion, surging 14% from the prior-year quarter. All the fee income components, except distribution and servicing fees, rose in the reported quarter.

Excluding restructuring charges, M&I expenses, amortization of intangible assets and restructuring charges, non-interest expense was $2.72 billion, up 6% year over year. The rise was primarily due to an increase in staff expenses, professional, legal and other purchased services costs, software equipment costs, business development expenses and net occupancy costs. However, these were partly mitigated by a fall in other expenses.

Assets under management totaled $1.43 trillion as of Jun 30, 2013, up 10% from the year-ago quarter. Assets under custody and administration totaled $26.2 trillion as of Jun 30, 2013, increasing 4% year over year. Both increases were driven by a rise in market values as well as net new business.

Asset Quality

BNY Mellon’s credit quality continued to improve in the reported quarter. Nonperforming assets declined 31% year over year to $204 million.

Likewise, allowance for loan losses fell 28% from the prior-year quarter to $337 million in the reported quarter. Further, provision for credit losses was a benefit of $19 million in the quarter, in line with the prior-year quarter level.

Capital Position

BNY Mellon’s capital ratios depicted mixed results, yet remained strong. As of Jun 30, 2013, Tier 1 capital ratio was 14.8%, up from 14.7% as of Jun 30, 2012. Similarly, Tier 1 total capital ratio was 15.8%, down from 16.4% as of Jun 30, 2012.

The estimated Basel III Tier 1 common equity ratio increased to 9.3% compared with 8.7% in the prior-year quarter.

Capital Deployment Activities

During the reported quarter, BNY Mellon repurchased 11.9 million shares worth $330 million. This was part of the company’s capital plan approved by the Federal Reserve, which sanctioned share repurchases worth $1.35 billion through the first quarter of 2014.

Concurrently, BNY Mellon declared a quarterly dividend of 15 cents per share. The dividend will be paid on Aug 6 to stockholders of record as of Jul 29.

Our Viewpoint

We believe that BNY Mellon’s capital deployment activity will enhance investors’ confidence in the stock. Further, the top line is expected to benefit from various restructuring initiatives. However, a low interest rate environment and changing regulatory landscape will likely dent the company’s revenue growth in the upcoming quarters. Additionally, higher operating expenses remain a plausible concern.

BNY Mellon currently carries a Zacks Rank #3 (Hold).

Among other major regional banks, BB&T Corporation (BBT - Analyst Report) and KeyCorp (KEY - Analyst Report) are scheduled to announce results on Jul 18, while State Street Corporation (STT - Analyst Report) will report on Jul 19.

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