We are downgrading our recommendation on Bank of New York-Mellon (BK) to Underperform as a low interest rate environment and various lawsuits filed against the company are expected to dent its profitability and lead to higher expenses over the medium term.
Although 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.
Our six-month target price of $17.00 per share equates to about 7.7x our earnings estimate for 2011. Combined with a quarterly dividend of $0.13 per share, this target price implies an expected negative total return of 8.4% over that period, which is consistent with our Underperform recommendation on the shares.
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