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Why an Earnings Beat Is Likely for BNY Mellon (BK) in Q4

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The Bank of New York Mellon Corporation (BK - Free Report) is scheduled to report fourth-quarter and full-year 2017 results on Jan 18, before market open. Its revenues and earnings are expected to grow year over year.

Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Higher revenues and assets under management (AUM) growth were offset by an increase in expenses.

BNY Mellon has a decent earnings surprise history. It surpassed the Zacks Consensus Estimate twice and matched once in the trailing four quarters, the average beat being 3.4%.

However, activities of the company in the fourth quarter were not adequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate of 91 cents has remained stable over the last 30 days. Nevertheless, the figure reflects year-over-year growth of 18.2%.

Further, the company’s Zacks Consensus Estimate for sales is $3.98 billion for the to-be-reported quarter, reflecting an improvement of 5.1% year over year.

BNY Mellon’s shares have gained 13.7% in 2017, underperforming the 18.9% growth of the industry it belongs to.

Will the share price performance improve post Q4 earnings? To a great extent it depends on whether the company will be able to beat earnings estimates this time around. Let’s take a look at what our quantitative model predicts.

A Likely Positive Surprise?

According to our quantitative model, chances of BNY Mellon beating the Zacks Consensus Estimate in the fourth quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which is required to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for BNY Mellon is +0.16%.

Zacks Rank: BNY Mellon carries a Zacks Rank of 3. This when combined with a positive ESP makes us reasonably confident of an earnings beat.

Factors to Influence Q4 Results

Modest Improvement in Fee Revenues: The equity markets have performed decently in the fourth quarter. As a result, performance fee is expected to improve. Moreover, seasonally higher securities lending revenues during the quarter are likely to boost fee income growth.

However, management projects Depositary Receipts revenues to decline nearly $80 million sequentially due to seasonality. While, lower DR revenues and expectation of a fall in foreign exchange trading revenues due to lower volumes might be offsetting factors, overall fee income is expected to improve during the quarter.

Notably, the Zacks Consensus Estimate for fee revenues of $3.10 billion reflects 5.4% year-over-year improvement.

Higher Rates to Boost Net Interest Revenues (NIR): The Zacks Consensus Estimate for average interest-earning assets of $290.3 billion reflects a marginal improvement from the year-ago quarter. Moreover, overall loan balances witnessed modest improvement in the quarter. Given the improvement in loan balances along with the effect of rising interest rates, BNY Mellon should register an increase in NIR.

Moreover, management believes any rate hike will lead to an improvement in margin. Hence, improving margins due to the increase in rates is likely to more than offset the reduced size of balance sheet and hence lead to a modest increase in NIR in the quarter. Notably, management expects NIR to be at the higher end of the 4-6% range in 2017.

Expenses to Decline Slightly: Management expects legal and professional expenses to decline by nearly $10 million in fourth-quarter 2017. Despite the impact of investment-related expenses, overall costs are expected to decline.

Other Stocks That Warrant a Look

Here are a few other finance stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this time around.

BB&T Corp. (BBT - Free Report) is slated to release fourth-quarter results on Jan 18. It has an Earnings ESP of +0.33% and a Zacks Rank #2 (Buy).

Associated Banc-Corp. (ASB - Free Report) is slated to report results on Jan 25. It has an Earnings ESP of +0.64% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

T. Rowe Price Group, Inc. (TROW - Free Report) has an Earnings ESP of +1.31% and a Zacks Rank of 1. It is scheduled to report results on Jan 30.

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