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BNY Mellon Outpaces by a Sliver

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The Bank of New York Mellon Corporation’s (BK - Free Report) third quarter 2012 earnings of 57 cents per share came in 3 cents ahead of the Zacks Consensus Estimate. Moreover, this is at par with the earnings of 57 cents reported in the prior quarter.

Results benefited from growth in net interest revenue and fee income. Yet, slightly higher operating expenses were a dampener. Moreover, asset quality continued to show improvement and capital ratios remained healthy. Further, BNY Mellon’s asset position also improved.

After taking into consideration certain non-recurring items, net income applicable to common shareholders stood at $720 million or 61 cents per share. This compares favorably with net income of $466 million or 39 cents per share in the previous quarter.

Performance in Detail

BNY Mellon’s total revenue of $3.65 billion was up 2% sequentially, reflecting higher net interest income and fee revenue. Moreover, total revenue beat the Zacks Consensus Estimate of $3.59 billion.

Fully tax equivalent net-interest income was $749 million, up 2% from $734 million in the previous quarter. The rise was primarily due to higher average interest-earning assets, partially offset by the removal of interest on European Central Bank (ECB) deposits.  

However, net interest margin fell 5 basis points sequentially to 1.20%. The decrease was mainly attributable to lower reinvestment yields, the elimination of interest on ECB deposits, lower accretion and growth in customer deposits.

Fee revenue stood at $2.88 million, increasing 2% from $2.83 million in the prior quarter. The surge reflects growth in investment services fees, foreign exchange and other trading revenue and financing-related fees. These positives were partly offset by lower investment management and performance fees.

Excluding restructuring charges, M&I expenses and amortization of intangible assets as well as direct expense related to Shareowner Services, non-interest expense increased marginally from $2.57 billion in the last quarter to $2.58 billion. The slight rise primarily reflects higher staff expenses, distribution and servicing expenses and net occupancy costs, partly mitigated by lower business development expenses.

Asset Quality

BNY Mellon’s credit quality continued to improve in the reported quarter. Provision for credit losses was a benefit of $5 million in the quarter compared with a benefit of $19 million in the prior quarter.

Nonperforming assets declined from $294 million in the previous quarter and $344 million in the prior-year quarter to $274 million. Likewise, allowance for loan losses fell from $467 million in the prior quarter and $498 million in the previous-year quarter to $456 million in the reported quarter.

Assets Position

Assets under management totaled $1.4 trillion as of September 30, 2012, up 5% sequentially and 13% year over year. Both rises were driven by higher market values and net inflows.

Assets under custody and administration totaled $27.9 trillion as of September 30, 2012, up 3% sequentially and 8% year over year. Both increases primarily reflect net new business and higher market values.

Capital Position

BNY Mellon’s capital ratios remained stable during the quarter. As of September 30, 2012, Tier 1 capital ratio was 15.3% compared with 14.7% as of June 30, 2012 and 14.0% as September 30, 2011.

The estimated Basel III Tier 1 common equity ratio increased to 9.3% compared with 8.7% in the prior quarter. The rise reflects earnings retention and an augmentation in the value of the investment portfolio, partially mitigated by higher risk-weighted assets.

Share Repurchase

In March, BNY Mellon, after receiving approval for its capital plan from the Federal Reserve, announced a new share repurchase program, authorizing the purchase of up to $1.16 billion of stock through the first quarter of 2013. During the reported quarter, the company repurchased 13.4 million shares for $288 million.

Dividend Update

Concurrent with the earnings release, BNY Mellon announced a quarterly cash dividend of 13 cents per share. The dividend will be paid on November 7 to shareholders of record at the close of business on October 29.

Peer Performance

Similar to BNY Mellon, State Street Corporation’s (STT - Free Report) third quarter earnings marginally outpaced the Zacks Consensus Estimate. Better-than-expected results benefited from improvement in net interest revenue and fall in operating expenses. Moreover, capital ratios and asset position remained robust during the quarter. However, decline in fee revenue was the primary dampener.

Our Viewpoint

We believe BNY Mellon’s recent capital deployment activity will enhance investors’ confidence in the stock. Further, the top line is expected to benefit from various restructuring initiatives. However, a low interest rate environment and changing regulatory landscape are expected to slightly dent its revenue growth in the upcoming quarters. Also, higher operating expenses are a major cause of concern.

BNY Mellon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, in the absence of any significant positive or negative catalyst, we maintain a long-term Neutral recommendation on the stock.

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