The Bank of New York Mellon Corporation’s (BK) second-quarter 2011 earnings of 59 cents per share came in 3 cents ahead of the Zacks Consensus Estimate. This also compares favorably with earnings of 54 cents in the year-ago quarter.
BNY Mellon experienced sequential and year-over-year increases in assets under custody and administration during the reported quarter, reflecting acquisitions in the prior year, change in market values and net new business. Increasedfee revenue, wiped out provision for credit losses and improved capital ratios despite dividend increase and stock repurchases were also among the positives. However, higher non-interest expenses were the downside.
Net income applicable to common shareholders was $735 million, compared with $625 million in the prior quarter and $658 million in the prior-year quarter.
Quarter in Detail
Total revenue for the quarter was $3.8 billion, up 5% sequentially and 15% year over year. The growth was primarily attributable to an increase in investment services fees as a result of improved revenues from Depositary Receipts and securities lending, partially offset by higher money market fee waivers. Revenue for the reported quarter was also better than the Zacks Consensus Estimate of $3.7 billion.
Fully tax equivalent net interest revenues increased to $731 million from $698 million in the prior quarter and $722 million a year ago. The sequential increase was driven by a growth in client deposits and the purchase of high quality securities, partially offset by lower spreads resulting from the continued impact of the low rate environment. Net interest margin deteriorated 8 basis points (bps) sequentially to 1.41%.
Investment and Other income for the reported quarter came in at$145 million, up 79% sequentially but flat year over year. The sequential increase primarily reflects gains related to loans held-for-sale retained from a previously divested banking subsidiary.
Excluding restructuring charges, M&I expenses and amortization of intangible assets,non-interest expense increased 4% sequentially and 21% year over year to $2.7 billion. Both year-over-year and sequential increases reflect the impact of higher annual employee merit-related cost as well as volume-related and business development expenses.
There was no provision for credit losses in the quarter, compared with $22 million in the prior-year quarter.
Capital Position
Despite a dividend hike and stock repurchases in the previous quarter, the company’s capital ratios remained strong during the quarter. At June 30, 2011, Tier 1 capital ratio was 14.1% compared with 14.0% at March 31, 2011. Also, the estimated Basel III Tier 1 common equity ratio improved to 6.6% from 6.1% in the prior-year quarter.
Assets Under Management
Assets under management (excluding securities lending assets) totaled $1.27 trillion as of June 30, 2011, up 4% sequentially and 22% year over year. The year-over-year increase reflects net new business and the change in market values. But the sequential increase was driven by net new business alone.
Assets Under Custody and Administration
Assets under custody and administration totaled $26.3 trillion as of June 30, 2011, up 3% sequentially and 21% year over year. The sequential increase was driven by net new business.The year-over-year increase primarily reflects last year’s acquisitions.
Dividend and Share Repurchase Update
Concurrent with the earnings release, BNY Mellon announced a quarterly dividend of 13 cents per share. The dividend will be paid on August 9 to shareholders of record as of the close of business on July 29. During the previous quarter, the company increased its quarterly dividend by 44% to the current level. The company repurchased 9.8 million shares of its common stock during the reported quarter.
Our Viewpoint
Though the company is well positioned to benefit from favorable long-term wealth management trends and secular growth in global capital markets, we expect interest-bearing deposit costs to rise faster than asset yields, thereby adversely affecting net interest margin and net interest income. However, BNY Mellon’s increased dividend payment and share repurchase program will enhance investors’ confidence in the stock.
BNY Mellon’s close competitor SunTrust Banks Inc. (STI) is scheduled to release its second quarter 2011 earnings on July 22.
BNY Mellon currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, in the absence of any significant positive or negative catalyst, we maintain a long-term “Neutral” recommendation on the stock.
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