We have reaffirmed our long-term “Neutral” recommendation on Bank of New York Mellon Corporation (BK). The company is well positioned to benefit from favorable long-term wealth management trends and a secular growth in global capital markets. Additionally, BNY Mellon’s decision to hike dividend and authorize a new share repurchase program will enhance investors’ confidence on the stock.
However, we expect the company’s net interest margin (NIM) and net interest income to be adversely affected as a result of faster rise in interest-bearing deposit costs as compared with asset yields.
Last month, BNY Mellon had announced quarterly dividend hike and a share repurchase program, following the Federal Reserve’s approval. The company declared a quarterly cash dividend of $ 0.13 per share, up from $ 0.09 paid in the prior quarter. Furthermore, the company also received approval to buy back $ 1.3 billion worth of common stock through the end of 2011. These capital deployment activities are expected to boost the confidence of the investors.
BNY Mellon is focused on the growth of its international business. The company’s strategy is to provide global and local product set, offer a wide range of traditional and alternative structures, access local markets through strategic partnerships and joint ventures and look at opportunistic acquisitions.
A continuous improvement in credit quality remains the major driving force for BNY Mellon. Net charge-offs and nonperforming assets are showing a declining trend for the last several quarters and improvement in provision for credit losses is also impressive. Besides, BNY Mellon's balance sheet continues to improve along with the expansion of capital ratios.
On the flip side, increased dependence on fee based revenue (comprising 78% of total revenue in 2010) could affect BNY Mellon’s financials in the near term, if there is change in the individual investment preferences or slow down in the capital market activities.
Moreover, as the low interest rate environment is not expected to reverse sooner, we expect BNY Mellon to experience significant pressures on the margin over the near term. The company’s NIM has been declining over the last few years – 1.70% in 2010, 1.82% in 2009 and 1.89% in 2008. Though the improvement in average interest-earning assets is expected to support NIM to some extent, lower spreads will remain a headwind.
Currently, BNY Mellon retains its Zacks #3 rank, which translates into a short-term ‘Hold’ rating. The company’s peer – BB & T Corp. (BBT) also retains a Zacks #3 Rank (a short-term ‘Hold’ rating).
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