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From the Survey: Bank of New York Mellon Corporation
The Bank of New York Mellon Corporation (BK) was formed via merger between the Bank of New York and Mellon Corporation on July 1, 2007. It serves as a global financial services company that helps clients both manage and move their financial assets. The company currently operates in 37 countries worldwide and provides asset management, wealth management, and issuer services to institutions, corporations, and high-net-worth individuals.
While Bank of New York Mellon’s loan portfolio is rather diverse, consisting of roughly, 20%, commercial loans; 10%, real estate; 25%, foreign; 10%, leases; 10%, consumer; and the other 25% various debt covenants, it suffered through the same economic turmoil and treacherous loan environment as its chief competitors, namely Barclays PLC (BCS), JP Morgan Chase & Co. (JPM - Free JP Morgan Stock Report), and State Street Corp. (STT). To combat volatile market conditions, the bank has focused on trimming risky toxic loans from its portfolio and worked to enhance fee revenues. Two core drivers of bottom-line performance have been Securities Servicing and Asset & Wealth Management fees. The former surged 29%, year over year, which reflected both improved market conditions and new global business. In addition, higher issuer services revenues have been pouring in of late, due to increased depositary receipts and rising demand for clearing services. Too, recent results have been bolstered by the key acquisitions of Toronto-based wealth management company i3 Advisors Inc., the 253 million-euro ($352 million) takeover of BHF Asset Servicing GmbH to expand in Europe, as well as PNC Financial Services Group Inc.’s global-investment servicing business for $2.31 billion, which added hedge-fund and mutual-fund clients. Asset & Wealth Management has been aided by healthier equity markets, higher trading volumes, elevated volatility, and stronger inflows of long-term assets into customer accounts. These strategic focuses and vital acquisitions ought to augur well for top- and bottom-line results in future quarters.
Bank of New York Mellon’s balance sheet remains rather strong, despite a difficult operating environment the past couple of years. Although Basel III federal regulatory requirements may place pressure on the bank’s performance and squeeze margins a bit, it still appears poised to be among the first group of banks to receive government approval of future capital reserves. Given the bank’s ability to generate solid capital and limit the need for risk-weighted assets in the business model, it should be able to raise the dividend generously and pay down costly long-term borrowings, or perhaps, even complete sizable share buybacks over the next few years.
Long-term, income-seeking investors could be well-rewarded by adding a bank stock like BK to their portfolios. The current dividend yield hovers around 2%, which is reasonable during these low-yield times, and the basic business model should lend to good earnings growth going forward. It benefits from fee-based revenue and a low-risk asset mix, primarily comprised of high-grade securities, central bank deposits, liquid placements, and predominantly investment-grade loans. This means the bank’s appealing Financial Strength (A) is not likely to be threatened, due to investments in risky assets. Furthermore, investors should also note that as the economic landscape brightens, federal regulators should begin to loosen some tight restrictions and capital requirements placed on most banks during the earlier, more troubled times. This means Bank of New York Mellon should be able to take advantage of slowly growing loan demand, increased consumer deposits, and climbing asset levels for its managed money investor accounts. These combined factors make this bank’s shares an attractive selection for investors concerned with drawing some income, while holding on for long-term capital appreciation.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.