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BNY Mellon Beats Q3 Earnings Estimates

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The Bank of New York Mellon Corporation’s (BK - Free Report) third-quarter 2013 adjusted earnings per share of 60 cents beat the Zacks Consensus Estimate of 58 cents. However, this was below 61 cents earned in the prior-year quarter.

Better-than-expected results were mainly driven by top-line growth, partially offset by higher operating expenses. Further, consistent improvement in credit quality and asset position as well as strong capital ratios were the tailwinds.

After taking into consideration benefit of $261 million related to the U.S. Tax Court’s partial reconsideration of a tax decision, net income applicable to common shareholders was $967 million, up 34% from $720 million in the year-ago quarter.

Performance in Detail

BNY Mellon’s total revenue came in at $3.76 billion, up 3% from the previous-year quarter. Moreover, it was ahead of the Zacks Consensus Estimate of $3.72 billion.

Fully taxable equivalent net interest revenues were $772 million, increasing 3% year over year. The rise mainly reflected a change in the mix of earning assets, lower funding costs, lower premium amortization on investment securities and a rise in average interest-earning assets. However, net interest margin fell 4 basis points (bps) sequentially to 1.16%.

Total fee and other revenues rose 3% year over year to $3.0 billion. The growth was primarily driven by increase in investment service fees, investment management and performance fees as well as investment and other income. These were mainly offset by fall in distribution and servicing fees, along with decline in foreign exchange and other trading revenues.

Excluding M&I expenses, amortization of intangible assets, litigation costs and restructuring charges, non-interest expense was $2.68 billion, up 4% year over year. The rise was primarily due to an increase in staff expenses.

Assets under management totaled $1.53 trillion as of Sep 30, 2013, up 13% from the year-ago quarter. Assets under custody and administration totaled $27.4 trillion as of Sep 30, 2013, increasing 4% year over year. Both the 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 fell 37% year over year to $172 million.

Likewise, allowance for loan losses declined 26% from the prior-year quarter to $339 million in the reported quarter. However, provision for credit losses was $2 million in the quarter, compared with a benefit of $5 million in the prior-year quarter level.

Capital Position

BNY Mellon’s capital ratios depicted mixed results, yet remained strong. As of Sep 30, 2013, Tier 1 capital ratio was 15.8%, up from 15.3% as of Sep 30, 2012. Similarly, Tier 1 total capital ratio was 16.8%, down from 16.9% as of Sep 30, 2012.

The estimated Basel III Tier 1 common equity ratio increased to 10.1% compared with 9.3% in the prior quarter.

Capital Deployment Activities

During the reported quarter, BNY Mellon repurchased shares worth $122 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 Nov 5 to stockholders of record as of Oct 28.

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 coming quarters. Additionally, a rise in operating expenses remains a plausible concern.

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

Among other major regional banks, BB&T Corporation (BBT - Free Report) and Fifth Third Bancorp (FITB - Free Report) are scheduled to announce results on Oct 17, while State Street Corporation (STT - Free Report) will report on Oct 22.

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