The Bank of New York Mellon Corporation’s (BK) fourth-quarter 2011 earnings per share of 42 cents significantly missed the Zacks Consensus Estimate of 54 cents. This also compares unfavorably with earnings of 53 cents in the prior quarter and 54 cents recorded in the prior-year quarter.
Similarly, for fiscal 2011 BNY Mellon’s earnings per share of $2.03 missed the Zacks Consensus Estimate of $2.19 and the prior year earnings of $2.05.
Although BNY Mellon’s results benefited from higher interest income and lower operating expenses, these positives were more than offset by reduction in fee revenue and decline in net interest margin. However, the company’s asset quality showed improvement and capital ratios remained strong.
Behind the Headlines
BNY Mellon’s net income applicable to common shareholders in the reported quarter was $505 million as against $651 million in the prior quarter and $679 million in the prior-year quarter. For fiscal 2011, net income stood at $2.52 billion relatively flat compared with the prior year results.
In the fourth quarter, BNY Mellon reported total revenue of $3.57 billion, down 3% sequentially and 4% year over year. The decline was primarily attributable to decline in fee revenue, partially mitigated by higher interest income. Revenue for the reported quarter also missed the Zacks Consensus Estimate of $3.73 billion.
For full year 2011, total revenue stood at $14.48 billion, up nearly 6% from $13.66 billion in the prior year. However, total revenue was below the Zacks Consensus Estimate of $14.83 billion.
Fully tax equivalent net interest income (NII) increased to $780 million in the fourth quarter from $775 million in the previous quarter and $720 million a year ago. The increase was driven by growth in client deposits.
Net interest margin (NIM) deteriorated 3 basis points (bps) sequentially and 27 bps year over year to 1.27%, reflecting rise in client deposits, which were invested in short-term, low-yielding assets.
Excluding restructuring charges, M&I expenses and amortization of intangible assets, non-interest expense declined 3% sequentially and 2% year over year to $2.59 billion. The sequential decrease primarily resulted from lower compensation expenses and litigation costs. However, these were partly mitigated by higher business development expenses as well as surge in professional, legal and other purchased services expenses.
Credit Quality
Though BNY Mellon’s credit quality continued to improve in the reported quarter, provision for credit losses was $23 million compared with a credit of $22 million in both the prior quarter and prior year quarter.
However, total nonperforming assets improved and declined from $344 million in the previous quarter and $399 million in the prior year quarter to $341 million. Similarly, allowance for loan losses fell from $498 million in the prior quarter and $571 million in the year ago quarter to $497 million.
Capital Position
BNY Mellon’s capital ratios remained strong during the quarter. As of December 31, 2011, Tier 1 capital ratio improved to 15.0% compared with 14.0% as of September 30, 2011. The estimated Basel III Tier 1 common equity ratio was 7.1% compared with 6.5% recorded in the prior quarter.
Assets under Management
Assets under management (excluding securities lending assets) totaled $1.26 trillion as of December 31, 2011, up 5% sequentially and 8% year over year. The sequential rise resulted from higher equity markets and net new business. The year-over-year surge reflects net new business.
Assets under Custody and Administration
Assets under custody and administration totaled $25.8 trillion as of December 31, 2011, flat sequentially but up 3% year over year. The year-over-year increase primarily reflects net new business.
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 February 7 to shareholders of record at the close of business on January 30.
Our Viewpoint
We believe BNY Mellon is well positioned to benefit from favorable long-term wealth management trends and secular growth in global capital markets. Moreover, the company’s strong liquidity position and capital deployment activities are expected to significantly boost investors’ confidence in the stock.
However, we anticipate interest-bearing deposit costs to rise faster than asset yields, thereby adversely affecting NIM. Furthermore, various lawsuits filed against BNY Mellon are expected to lead to higher legal expenses.
Among BNY Mellon’s close peers, BB&T Corporation (BBT) is expected to announce its fourth quarter and full year 2011 results on January 19 while SunTrust Banks Inc. (STI) is scheduled to release its fourth quarter and full year 2011 results on January 20.
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.
BB&T CORP (BBT): Free Stock Analysis Report
BANK OF NY MELL (BK): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
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