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BNY Mellon (BK) Rides on Higher Rates Amid Rising Expenses
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The Bank Of New York Mellon’s (BK - Free Report) revenues are likely to be supported by a global footprint, higher interest rates and a strong balance sheet position. Its capital deployment activities also seem impressive. However, mounting non-interest expenses and higher dependence on fee-based revenues are concerns.
BNY Mellon has been witnessing decent improvement in net interest revenues (NIR) and net interest margin (NIM) ever since both rebounded solidly in 2022. The company’s NIR recorded a four-year (ended 2022) compound annual growth rate (CAGR) of 3.2%. Likewise, NIM improved to 0.97% last year from 0.68% in 2021.
With the Federal Reserve expected to keep rates high this year, BNY Mellon’s NIR and NIM are anticipated to keep improving, though a rise in funding costs is likely to weigh on it. Our estimates for NIR suggest a CAGR of 6.9% over the next three years. Further, NIM is expected to be 1.19% in 2023.
BNY Mellon has a solid balance sheet. As of Mar 31, 2023, the company had total debt of $59.6 billion, significantly lower than its cash and cash equivalents, and due from banks of $122.6 billion. Its investment-grade credit ratings maintain its favorable access to the debt market. Thus, the company will likely be able to continue meeting debt obligations in the near term, even if the economic situation worsens.
BNY Mellon’s capital deployment activities seem impressive. Following the clearance of the 2023 stress test, the company intends to hike its quarterly cash dividend by 14% to 42 cents per share. It also has a share repurchase program, worth $5 billion, in place. As of Mar 31, 2023, nearly $3.7 billion worth of buyback authorization remained. Driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital deployments.
However, mounting non-interest expenses will likely hurt BNY Mellon’s bottom line. The company’s non-interest expenses have seen a four-year CAGR of 6.1% (ended 2022). Given the inflationary pressure and the company’s efforts to upgrade operations with updated technology, overall costs are expected to remain elevated. Excluding notable items, management anticipates 2023 expenses to increase approximately 4%. While we project non-interest expenses to decline this year, the metric is expected to increase 1.6% in 2024.
BNY Mellon’s largest source of revenue is fee income, which constituted more than 74% of total revenues at the end of the first quarter of 2023. Concentration risk, emanating from higher dependence on fee-based revenues, could significantly alter the company’s financial position if there is any change in individual investment preferences, regulatory amendments, or a slowdown in capital market activities.
In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 6.4% compared with the industry’s rise of 0.2%.
The Zacks Consensus Estimate for Credicorp’s current-year earnings has been revised marginally upward over the last 30 days. In the past three months, BAP shares have rallied 17.4%.
Earnings estimates for BOC Hong Kong for 2023 have been revised 2.8% over the last 60 days. In the past six months, BHKLY shares have lost 18.8%.
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BNY Mellon (BK) Rides on Higher Rates Amid Rising Expenses
The Bank Of New York Mellon’s (BK - Free Report) revenues are likely to be supported by a global footprint, higher interest rates and a strong balance sheet position. Its capital deployment activities also seem impressive. However, mounting non-interest expenses and higher dependence on fee-based revenues are concerns.
BNY Mellon has been witnessing decent improvement in net interest revenues (NIR) and net interest margin (NIM) ever since both rebounded solidly in 2022. The company’s NIR recorded a four-year (ended 2022) compound annual growth rate (CAGR) of 3.2%. Likewise, NIM improved to 0.97% last year from 0.68% in 2021.
With the Federal Reserve expected to keep rates high this year, BNY Mellon’s NIR and NIM are anticipated to keep improving, though a rise in funding costs is likely to weigh on it. Our estimates for NIR suggest a CAGR of 6.9% over the next three years. Further, NIM is expected to be 1.19% in 2023.
BNY Mellon has a solid balance sheet. As of Mar 31, 2023, the company had total debt of $59.6 billion, significantly lower than its cash and cash equivalents, and due from banks of $122.6 billion. Its investment-grade credit ratings maintain its favorable access to the debt market. Thus, the company will likely be able to continue meeting debt obligations in the near term, even if the economic situation worsens.
BNY Mellon’s capital deployment activities seem impressive. Following the clearance of the 2023 stress test, the company intends to hike its quarterly cash dividend by 14% to 42 cents per share. It also has a share repurchase program, worth $5 billion, in place. As of Mar 31, 2023, nearly $3.7 billion worth of buyback authorization remained. Driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital deployments.
However, mounting non-interest expenses will likely hurt BNY Mellon’s bottom line. The company’s non-interest expenses have seen a four-year CAGR of 6.1% (ended 2022). Given the inflationary pressure and the company’s efforts to upgrade operations with updated technology, overall costs are expected to remain elevated. Excluding notable items, management anticipates 2023 expenses to increase approximately 4%. While we project non-interest expenses to decline this year, the metric is expected to increase 1.6% in 2024.
BNY Mellon’s largest source of revenue is fee income, which constituted more than 74% of total revenues at the end of the first quarter of 2023. Concentration risk, emanating from higher dependence on fee-based revenues, could significantly alter the company’s financial position if there is any change in individual investment preferences, regulatory amendments, or a slowdown in capital market activities.
In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 6.4% compared with the industry’s rise of 0.2%.
Image Source: Zacks Investment Research
Stocks Worth Considering
A couple of better-ranked bank stocks worth considering are Credicorp (BAP - Free Report) and BOC Hong Kong (BHKLY - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Credicorp’s current-year earnings has been revised marginally upward over the last 30 days. In the past three months, BAP shares have rallied 17.4%.
Earnings estimates for BOC Hong Kong for 2023 have been revised 2.8% over the last 60 days. In the past six months, BHKLY shares have lost 18.8%.