STT State Street Corporation

The Bank of New York Mellon Corporation’s (BK) first-quarter 2012 earnings per share of 52 cents came significantly in line with the Zacks Consensus Estimate. This compares favorably with earnings of 42 cents in the prior quarter.

Although BNY Mellon’s results benefited from higher fee income and a rise in net interest margin, these positive were offset by a reduction in net interest revenue and higher operating expenses. Moreover, the company’s asset quality continued to show improvements and the capital ratios remained strong.

BNY Mellon’s net income applicable to common shareholders in the reported quarter was $619 million as against $505 million in the prior quarter and $625 million in the prior-year quarter.

During the quarter, BNY Mellon, after getting the approval for its capital plan from the Federal Reserve, announced a new share repurchase program, authorizing the purchase of up to $1.16 billion of stock through the first quarter of 2013.

Performance in Details

In the first-quarter, BNY Mellon reported total revenue of $3.64 billion, up 2% sequentially, reflecting higher fee revenue, partially offset by lower net interest income. Moreover, revenue for the reported quarter also surpassed the Zacks Consensus Estimate of $3.56 billion.

Fully tax equivalent net-interest income fell to $765 million in the first-quarter from $780 million in the previous quarter. The drop was primarily driven by lower average client deposits and lower accretion, partially mitigated by increased investments in high quality investment securities.

Net interest margin grew 5 basis points (bps) sequentially to 1.32%. The rise reflects increased investments in high quality investment securities and a decrease in lower yielding interest-bearing deposits with banks.

Fee revenue in the reported quarter stood at $2.84 million compared with $2.77 million recorded in the prior quarter. The rise was attributable to higher investment services fees, investment management and performance fees as well as financing-related fees.

Excluding restructuring charges, M&I expenses and amortization of intangible assets as well as direct expense related to Shareowner, non-interest expense surged 4% sequentially to $2.65 billion. The rise primarily reflects higher litigation and legal expenses along with higher incentive expense and higher pension expense. However, these were partly mitigated by lower business development expenses, compensation, net occupancy and software and equipment expenses.

Credit Quality

BNY Mellon’s credit quality continued to improve in the reported quarter with provision for credit losses of $5 million compared with $23 million in the prior quarter.

Total nonperforming assets declined from $341 million in the previous quarter to $331 million in the quarter under review. Likewise, allowance for loan losses fell from $497 million in the prior quarter to $494 million in the reported quarter.

Capital Position

BNY Mellon’s capital ratios remained strong during the quarter. As of March 31, 2012, Tier 1 capital ratio improved to 15.6% compared with 15.0% as of December 31, 2011.

Similarly, the estimated Basel III Tier 1 common equity ratio grew to 7.6% compared with 7.1% recorded in the prior quarter. The improvement was attributable to an increase in the value of investment securities portfolio, earnings retention and lower risk-weighted assets, which were partly offset by share repurchases.

Assets under Management

Assets under management (excluding securities lending assets) totaled $1.3 trillion as of March 31, 2012, up 4% sequentially. The rise resulted from higher equity markets.

Assets under Custody and Administration

Assets under custody and administration totaled $26.6 trillion as of March 31, 2012, up 3% sequentially. The increase primarily reflects higher market values and 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 May 8 to shareholders of record at the close of business on April 30.

Peer Performance

State Street Corporation (STT), one of the peers of BNY Mellon, marginally missed the Zacks Consensus Estimate. The results were negatively impacted by lower fee income and a rise in expenses. However, these were partly offset by higher net interest revenue. Moreover, capital ratios were stable during the quarter.

Among other BNY Mellon’s close peers, BB&T Corporation (BBT) is expected to announce its first quarter 2012 results on April 19.

Our Viewpoint 

We believe BNY Mellon’s recent capital deployment activity will increase investors’ confidence in the stock. Further, the top line will benefit from various restructuring initiatives and acquisitions. However, a low interest rate environment is expected to slightly dent its revenue growth in the upcoming quarters. Also, higher operating expenses are a major cause of concern.

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.

 
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