BNY Mellon Completes Acquisitions

Yesterday, the Bank of New York Mellon Corporation (BK - Snapshot Report) completed two acquisitions - Insight Investment Management Limited and Pinnacle Arbitrage Compliance.

It acquired Insight Investment Management Limited from Lloyds Banking Group plc (LYG - Analyst Report) Insight Investment specializes in Liability Driven Investment (LDI) solutions, active Fixed Income and Absolute Return and is based in London. Its clients include some of the UK's largest pension schemes, corporations, insurance companies and local authorities, along with a growing number of non-UK clients and some of the best known financial services and intermediary companies.

BNY Mellon also completed its previously announced acquisition of Pinnacle Arbitrage Compliance, one of the largest independent U.S. firms devoted exclusively to compliance services for tax-exempt bond issuers and conduit borrowers. Terms of the agreement were not disclosed.

With these acquisitions, BNY Mellon will have more than $1 trillion in assets under management. By choosing to grow its demand in UK and internationally through these acquisitions, BNY Mellon Asset Management will become one of the largest managers of UK pension funds and UK mutual funds.

BNY Mellon reported third quarter earnings of 54 cents per share well ahead of the Zacks Consensus Estimate of 47 cents. This excludes hefty charges on investment securities portfolio restructuring and M&I expenses.

On a GAAP basis, the third quarter loss from continuing operations came in at $2.04 per share, compared to income of 26 cents in the prior-year quarter. The results for the quarter were primarily impacted by an investment securities portfolio restructuring charge of $2.54 per share.

As long as equity markets continue to improve, we believe BNY Mellon should experience increase in its asset management and servicing fees. Also fee generation will get momentum when the Federal Reserve starts increasing interest rates from their current level of near zero.

We think that BNY Mellon is well positioned to benefit from the growth of global financial assets, supported by the increasing savings levels, the modernization of public-pension schemes, and growth in cross-border investing. Also, in terms of credit quality, the company maintains a better profile than most of its banking peers, with minimum exposure to consumer or construction loans.

However, we expect interest-bearing deposit costs to rise at a faster rate than asset yields due to competitive pressure, thereby negatively impacting net interest margin as well as net interest income.

As such, we maintain our Neutral recommendation on the shares of BNY Mellon.