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On December 27, we reiterated our ‘Neutral’ recommendation on The Bank of New York Mellon Corporation (BK - Analyst Report) based on its improving top line and stable capital position. However, elevated expenses and unsettling macro economic issues remain the major concerns. Moreover, BNY Mellon – a bank holding company and one of the world's leading financial institutions – retains a Zacks #3 Rank (Hold).

Why the Neutral Stance?

BNY Mellon’s third quarter 2012 earnings came in at 57 cents, marginally ahead of the Zacks Consensus Estimate of 54 cents per share. Revenues increased 2.0% from the year-ago period to $3.65 billion, slightly outpacing the Zacks Consensus Estimate of $3.59 billion. Over the past four quarters, BNY Mellon has delivered an average earnings surprise of only 5.4%.

Moreover, over the last 60 days, the Zacks Consensus Estimate for 2012 remained almost unchanged. In addition, the company’s sound capital deployment activities, robust restructuring initiatives and opportunistic acquisitions have helped it sustain the Neutral recommendation. The top line is expected to benefit from various restructuring initiatives and acquisitions. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

However, the low interest rate environment and changing regulatory landscape are expected to undermine its revenue growth in the subsequent quarters. In addition, we remain wary of the continuously rising operating expenses. The company is trying to rein in costs and has undertaken several measures in the third quarter of 2012, including leveraging of Eastern European operations acquired from PNC Financial Services Group Inc’s (PNC - Analyst Report) Global Investment Servicing Business, client conversion upon acquisition of Germany-based BHF Asset Servicing GmbH and consolidation of business operations, to counter it. However, we do not anticipate cost-trimming initiatives to fully control the rising costs as the company continues to expand globally, which entail numerous regulatory and legal expenses.

Other Stocks to Consider

Other banking stocks that are currently performing well include Heartland Financial USA Inc. (HTLF - Snapshot Report), IberiaBank Corp. (IBKC - Snapshot Report) and First Community Bancshares, Inc. (Bluefield) (FCBC - Snapshot Report). All these companies carry a Zacks #1 Rank (Strong Buy).


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