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Why is Earnings Beat Less 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 2018 results on Jan 16, before the market opens. Its revenues and earnings for the to-be-reported quarter are expected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Higher revenues and assets under management (AUM) growth were partly offset by rise in expenses.

BNY Mellon has an impressive earnings surprise history. Its earnings did not lag the Zacks Consensus Estimate in any of the trailing four quarters. The average positive surprise was 3.8%.

However, activities of the company in the fourth quarter were not adequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for earnings of 94 cents decreased 2.1% over the past 30 days. Nevertheless, the figure reflects year-over-year growth of 3.3%.

Further, the company’s Zacks Consensus Estimate for sales for the to-be-reported quarter is $4.04 billion, reflecting an improvement of 8.8% year over year.

Despite robust fundamentals, the company’s price performance does not look impressive. Its shares have lost 18.8% in the past year compared with 19% decline recorded by the industry it belongs to.

Will the price performance improve post fourth-quarter earnings? To a great extent, it depends on whether the company will be able to beat earnings estimates this time around.

Before we take a look at what our quantitative model predicts, let’s check the factors that are likely to impact Q4 results.

Factors to Influence Q4 Results

The Zacks Consensus Estimate for AUM for the fourth quarter is pegged at $1.8 trillion, which reflects marginal growth sequentially. Further, the Zacks Consensus Estimate for total assets under custody and administration of $34.6 trillion reflects slight growth sequentially. Thus, investment management and performance fees are likely to be slightly positively impacted during the fourth quarter, driven by expected growth in assets.

Management anticipates performance fee in the fourth quarter to be stable year over year.

Nevertheless, the Zacks Consensus Estimate for total fee revenues shows that this component will likely decline. Its estimate for the fourth quarter is $3.15 billion, reflecting nearly 1% decline sequentially.

Notably, while loan growth during the fourth quarter was not very impressive, a slight improvement in the lending scenario will likely lead to an increase in net interest revenues (NIR). Moreover, despite the flattening of the yield curve, rise in interest rates will offer further support.

In fact, management believes that any rate hike is likely to lead to an improvement in net interest margin (NIM) as well as NIR. Hence, improving margins due to the increase in rates are likely to more than offset the reduced size of balance sheet and lead to a modest increase in NIR.

Supported by the company’s cost-saving initiatives, expenses have been declining for the past few years. However, because of the impact of investment-related costs, overall expenses are expected to increase slightly in the fourth quarter.

Now, let’s take a look at what our quantitative model predicts.

According to our quantitative model, it is less likely that BNY Mellon will be able to beat the Zacks Consensus Estimate in the fourth quarter. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and 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.

Earnings ESP: The Earnings ESP for BNY Mellon is -1.15%.

Zacks Rank: BNY Mellon currently carries a Zacks Rank of 3.

Stocks That Warrant a Look

Here are a few 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.

U.S. Bancorp (USB - Free Report) is slated to release results on Jan 16. It has an Earnings ESP of +0.15% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SunTrust Banks, Inc. (STI - Free Report) is scheduled to release results on Jan 18. It has an Earnings ESP of +0.07% and a Zacks Rank #3.

Zions Bancorporation, National Association (ZION - Free Report) has an Earnings ESP of +1.09% and it currently carries a Zacks Rank of 3. The company is slated to release results on Jan 22.

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