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BNY Mellon (BK) Beats Q2 Earnings on Strong AUM

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The Bank of New York Mellon Corp.’s (BK - Free Report) second-quarter 2014 adjusted earnings per share of 62 cents beat the Zacks Consensus Estimate of 56 cents reflecting strong growth in assets under management (AUM). This marks the company’s earnings beat for the sixth consecutive quarter. Notably, results included 14 cents per share for the previously disclosed charges. This was in line with the year-ago  adjusted figure.

Better-than-expected results were mainly driven by strong AUM growth, partly offset by a fall in net interest revenue, fee income and a rise in non-interest expenses. Strong capital ratios were among the positives, but asset quality was a mixed bag.

Net income applicable to common shareholders was $554 million compared with $831 million in the prior-year quarter. Excluding the after-tax impact of the previously disclosed charges related to investment management funds and severance, net income in the second quarter totaled $715 million.

Quarterly Performance

BNY Mellon’s total revenue came in at $3.75 billion, down 7% year over year. However, revenues marginally beat the Zacks Consensus Estimate of $3.74 billion.

Fully taxable equivalent net interest revenues were $736 million, down 5% year over year. The fall was mainly due to lower yields on investment securities, which was however, partially offset by higher average deposits. Moreover, net interest margin declined 17 basis points to 0.98%.

Total fee and other revenues decreased 7% year over year to $2.98 billion on the back of lower investment services fees, foreign exchange & other trading revenues and investment, and other income. These were, nevertheless, partially offset by rise in investment management & performance fees.

Total non-interest expenses came in at $2.95 billion, up 4% year over year. The rise in expenses was primarily due to a rise in other expenses, partially offset by fall in incentives and employee benefits, business development, and amortization of tangible assets.

AUM totaled $1.64 trillion as of Jun 30, 2014, up 15% from the year-ago quarter. Assets under custody and administration totaled $28.5 trillion as of Jun 30, 2014, increasing 9% year over year. Both the increases were attributable to rise in market values as well as net new business.

Asset Quality

BNY Mellon’s credit quality depicted a mixed bag. Non-performing assets fell 30.4% year over year to $142 million. However, allowance for loan losses increased 28.4% to $135.5 million in the reported quarter.

Provision for credit losses witnessed a benefit of $12 million, compared with a benefit of $19 million in the prior-year quarter.

Capital Ratios

BNY Mellon’s capital ratios remained strong. At the end of the reported quarter, the company’s common equity tier 1 capital ratio (Standardized Basel 3 Transition) was 10.4% compared with 9.3% at the end of the prior-year quarter. Tangible common equity ratio was 6.4% compared with 5.8% at the end of the prior-year quarter.

Capital Deployment Activities

During the reported quarter, BNY Mellon bought back 12.6 million shares for $431 million. On Jul 8, 2014, the bank declared a quarterly common dividend of $0.17 per share.

Our Viewpoint

We believe BNY Mellon’s enhanced capital deployment activities will boost investors’ confidence in the stock. Further, the top line is expected to benefit from restructuring initiatives. However, a low interest rate environment and stringent regulatory landscape will likely hamper revenue growth in the coming quarters.

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

Other Major Banks

Among other major regional banks, Comerica Inc. (CMA - Free Report) posted second-quarter earnings per share of 80 cents, beat the Zacks Consensus Estimate by 5.3%.

Citigroup Inc. (C - Free Report) reported second-quarter adjusted earnings per share of $1.24, outpacing the Zacks Consensus Estimate of $1.08.

BankUnited, Inc. (BKU - Free Report) is scheduled to report on Jul 24.

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