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Why is an Earnings Beat Likely for BNY Mellon (BK) in Q1?

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The Bank of New York Mellon Corporation (BK - Free Report) is scheduled to report first-quarter 2018 results on Apr 19, before market open. Its revenues and earnings are expected to grow year over year.

Last quarter, the company’s adjusted earnings were in-line with the Zacks Consensus Estimate. Higher net interest revenues and assets under management (AUM) growth were offset by lower fee income and rise in expenses.

BNY Mellon has a decent earnings surprise history. Its earnings did not lag the Zacks Consensus Estimate in any of the trailing four quarters. The average positive surprise was 3.7%.

However, activities of the company in the first quarter were not adequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate of 97 cents has remained stable over the last 30 days. Nevertheless, the figure reflects year-over-year growth of 21.3%.

Further, the company’s Zacks Consensus Estimate for sales is $4.05 billion for the to-be-reported quarter, reflecting an improvement of 6.4% year over year.

BNY Mellon’s shares have gained 10.8% in the past year, underperforming the 17.8% rally of the industry it belongs to.

Will the price performance improve post Q1 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 Positive Surprise in Store?

According to our quantitative model, chances of BNY Mellon beating the Zacks Consensus Estimate in the first 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 +0.21%.

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 Q1 Results

Improvement in Fee Revenues: Given that the equity markets have performed decently during the first quarter, BNY Mellon’s asset servicing fees, as well as investment management and performance fees, are expected to witness modest improvement. Moreover, with the expansion in the spread between three-month LIBOR and the Fed funds rate, along with an increase in trading volumes, securities lending revenues are also expected to improve during the quarter.

Further, driven by higher foreign exchange trading volumes and increased volatility, foreign exchange trading revenues are also likely to witness improvement. Thus, with the expected rise in the above-mentioned components, overall fee revenues must improve during the quarter.

Notably, the Zacks Consensus Estimate for fee revenues of $3.16 billion reflects 5.1% year-over-year improvement.

Higher Rates to Boost Net Interest Revenues (NIR): The Zacks Consensus Estimate for average interest-earning assets of $296.8 billion reflects an improvement of 4.7% from the year-ago quarter. Moreover, the quarter has witnessed a moderate improvement in the lending scenario, primarily due to rise in consumer confidence and increase in loan demand to some extent, owing to the tax reform. Thus, 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.

Expenses to Decline Slightly: Supported by the cost-saving initiatives, BNY Mellon’s expenses have been declining for the past few years. Moreover, despite the impact of investment-related expenses, overall costs are expected to remain low in the quarter.

Other Stocks That Warrant a Look

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

Associated Banc-Corp (ASB - Free Report) is scheduled to release results on Apr 19. It has an Earnings ESP of +0.41% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation (BBT - Free Report) is also slated to release results on Apr 19. It has an Earnings ESP of +1.63% and carries a Zacks Rank #3.

Regions Financial Corporation (RF - Free Report) has an Earnings ESP of +1.25% and carries a Zacks Rank of 3. The company is slated to release results on Apr 20.

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