Asset Inflows Drive BNY Mellon's Earnings Beat - Analyst Blog

The Bank of New York Mellon Corp.'s BK first-quarter 2014 earnings per share of 57 cents surpassed the Zacks Consensus Estimate of 54 cents reflecting improvement in asset under management. Also, this was 14% above the prior-year quarter's adjusted figure of 50 cents.

Better-than-expected results were driven by rise in net interest revenue and fee income coupled with a fall in operating expenses. Further, improved asset position and strong capital position were the other tailwinds. However, lower benefit from provision was a dampener.

Net income applicable to common shareholders was $661 million compared with net loss of $266 million in the prior-year quarter. The year-ago quarter included a charge related to the U.S. Tax Court's disallowance of certain foreign tax credits of $854 million.

Quarterly Performance

BNY Mellon's total revenue came in at $3.63 billion, almost in line with the year-ago quarter. However, it lagged the Zacks Consensus Estimate of $3.73 billion.

Fully taxable equivalent net interest revenues were $744 million, up 2% year over year. The rise mainly reflected a change in the mix of assets and higher average deposits, partly offset by lower yields on investment securities. However, net interest margin declined 6 basis points to 1.05%.

Total fee and other revenues rose 2% year over year to $2.86 billion due to higher investment services fees, investment management and performance fees, and investment and other income. These were partially offset by decrease in distribution and servicing income, foreign exchange and other trading revenues as well as financing-related fees.

Excluding merger & integration expenses, amortization of intangible assets, litigation costs and restructuring charges, non-interest expense was $2.68 billion, down 1% year over year. The fall was primarily due to lower other expenses and decline in amortization of intangible assets, partially offset by increase in staff, professional, legal and other purchased services.

Assets under management totaled $1.62 trillion as of Mar 31, 2014, up 14% from the year-ago quarter. Assets under custody and administration totaled $27.9 trillion as of Mar 31, 2014, increasing 6% year over year. Both the increases were attributable to rise in market values as well as net new business.

BNY Mellon's capital ratios remained strong. At the end of the reported quarter, the company's common equity tier 1 capital ratio Standardized Approach (Basel 3 Transition) was 11.0% compared with 9.4% at the end of the prior-year quarter. Tangible common equity ratio was 6.6% compared with 5.9% at the end of the prior-year quarter.

Asset Quality

BNY Mellon's credit quality depicted a mixed bag. Non-performing assets fell 38% year over year to $146 million. Likewise, allowance for loan losses declined 16% from the prior-year quarter to $198 million in the reported quarter.

However, provision for credit losses was a benefit of $18 million in the quarter, compared with a benefit of $24 million in the prior-year quarter level.

Capital Deployment Activities

During the reported quarter, BNY Mellon bought back 11.6 million shares for $375 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.

Further, in March, BNY Mellon received the Federal Reserve's approval for its 2014 capital plan that included share repurchases up to $1.74 billion between the second quarter of 2014 and the first quarter of 2015. Additionally, earlier this month, the company (as part of its 2014 capital plan) raised its quarterly cash dividend by 13% to 17 cents per share.

Our Viewpoint

We believe BNY Mellon's enhanced capital deployment activity will boost investors' confidence in the stock. Further, the top line is expected to benefit from restructuring initiatives. However, a low interest rate environment and stringent regulatory landscape will likely hamper revenue growth in the coming quarters.

Currently, BNY Mellon carries a Zacks Rank #3 (Hold).

Performance of Other Major Banks

KeyCorp. KEY and SunTrust Banks, Inc. STI outpaced the Zacks Consensus Estimate. While SunTrust benefited from prudent expense management and lower provisions, KeyCorp's results were driven by lower expenses, a decline in provision for loan and lease losses and higher fee income.

However, a decline in the top line led BB&T Corp.'s BBT first-quarter earnings to miss the Zacks Consensus Estimate. This was partially offset by prudent expense management.