The Bank of New York Mellon Corp.’s (BK) fourth-quarter 2013 adjusted earnings per share of 54 cents were in line with the Zacks Consensus Estimate. Further, this was 1.9% above the prior-year quarter figure of 53 cents.
Despite positive market sentiment, shares of BNY Mellon fell more than 1% in the pre-trading session, indicating that the company’s results have failed to gain investors’ confidence. The movement of the stock price, when the trading session opens, will give a better idea about whether BNY Mellon has been able to meet expectations.
Rise in net interest income, strong capital ratios and an improvement in asset position were positives for the quarter. However, decline in fee income and rise in both provision for credit losses and operating expenses hurt the results.
Including an after-tax loss of $115 million related to an equity investment, net income applicable to common shareholders was $513 million, down 18% from $622 million in the year-ago quarter.
For full-year 2013, earnings of $2.24 per share increased 10% year over year. However, earnings missed the Zacks Consensus Estimate of $2.28.
Quarterly Performance
BNY Mellon’s total revenue came in at $3.75 billion, up 4% from the previous-year quarter. Moreover, it was ahead of the Zacks Consensus Estimate of $3.71 billion.
Fully taxable equivalent net interest revenue was $781 million, increasing 6% year over year. The rise mainly reflected higher average interest-earning assets. Moreover, net interest margin remained stable at 1.09%.
However, total fee and other revenues fell 2% year over year to $2.80 billion due to decrease in distribution and servicing income as well as financing-related fees. These were partially offset by rise in investment services fees, investment management and performance fees as well as foreign exchange and other trading revenues.
Excluding M&I expenses, amortization of intangible assets, litigation costs and restructuring charges, non-interest expense was $2.79 billion, up 4% year over year. The rise was primarily due to increase in staff, legal, consulting and marketing expenses.
Additionally, during 2013, BNY Mellon achieved the targeted program savings of $650–700 million, a year ahead of schedule by achieving savings of $716 million on a run-rate basis in the fourth quarter.
Assets under management totaled $1.58 trillion as of Dec 31, 2013, up 14% from the year-ago quarter. Assets under custody and administration totaled $27.6 trillion as of Dec 31, 2013, increasing 5% year over year. Both the increases were attributable to rise in market values as well as net new business.
Asset Quality
BNY Mellon’s credit quality depicted a mixed bag. Nonperforming assets fell 37% year over year to $156 million. Likewise, allowance for loan losses declined 11% from the prior-year quarter to $344 million in the reported quarter.
However, provision for credit losses was $6 million in the quarter, compared with a benefit of $61 million in the prior-year quarter level.
Capital Position
BNY Mellon’s capital ratios remained strong. As of Dec 31, 2013, Tier 1 capital ratio was 16.2%, up from 15.0% as of Dec 31, 2012. Similarly, Tier 1 total capital ratio was 17.0%, up from 16.3% as of Dec 31, 2012.
The estimated Basel III Tier 1 common equity ratio increased to 11.3% compared with 9.8% in the prior quarter.
Share Repurchase
During the reported quarter, BNY Mellon bought back 10 million shares for $318 million. This was part of the company’s capital plan approved by the Federal Reserve, which sanctioned share repurchases worth $1.35 billion through the first quarter of 2014.
Performance of Other Major Banks
BB&T Corp.’s (BBT) fourth-quarter 2013 earnings per share of 75 cents beat the Zacks Consensus Estimate of 72 cents on the back lower of provision for credit losses. Better-than-expected results were driven by disciplined expense management and a significant decline in provision for credit losses, partially offset by a decline in the top line. Improvement in credit quality, capital ratios and profitability ratios were the other tailwinds for the quarter.
Among other major regional banks, Fifth Third Bancorp (FITB) is scheduled to announce results on Jan 23, while State Street Corp. (STT) will report on Jan 24.
Our Viewpoint
We believe that BNY Mellon’s 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 will likely dent the company’s revenue growth in the coming quarters. Additionally, a rise in operating expenses remains a concern.
Currently, BNY Mellon carries a Zacks Rank #3 (Hold).
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