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Why Is BNY Mellon(BK) Up 1.6% Since Its Last Earnings Report?

More than a month has gone by since the last earnings report for The Bank Of New York Mellon Corporation BK. Shares have added about 1.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is BK due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

BNY Mellon’s Q4 Earnings In Line, Expenses Increase

BNY Mellon’s fourth-quarter adjusted earnings per share of 91 cents came in line with the Zacks Consensus Estimate. The figure reflects improvement of 18.2% from the prior-year quarter tally.

The quarter witnessed improvement in net interest revenues along with provision benefits. Also, assets under management reflected growth. However, rise in expenses and lower fee income acted as headwinds.

After taking into consideration net benefit of 41 cents per share related to the Tax Act and severance, litigation and other charges of 24 cents per share, net income applicable to common shareholders for the quarter came in at $1.13 billion or $1.08 per share.

For 2017, the company reported net income applicable to common shareholders of $3.92 billion or $3.72 per share, up from $3.43 billion or $3.15 per share registered in 2016.
 
Revenues Decrease, Costs Rise

Total revenues (GAAP basis) for the quarter decreased 2% year over year to $3.73 billion. The figure includes certain non-recurring items. The Zacks Consensus Estimate for revenues was $3.98 billion.

Total revenues for 2017 were $15.54 billion, up from $15.24 billion registered in 2016. The Zacks Consensus Estimate for revenues was $15.79 billion.

Net interest revenues, on a fully taxable-equivalent basis, were $862 million for the quarter, up 2% year over year. The rise was driven by higher interest rates, partly offset by a fall in average deposits and loans.

However, net interest margin decreased 1 basis points year over year to 1.16%.

Total fee and other revenues decreased nearly 3% from the prior-year quarter to $2.86 billion. The fall was primarily due to lower distribution and servicing fees. Also, the company witnessed investment and other losses of $198 million in the quarter.

Total non-interest expenses (non-GAAP) came in at $2.87 billion, increasing 12% year over year. This reflects an increase in all expense components, except net occupancy costs, business development expenses, bank assessment charges and amortization of intangible assets.

Strong Asset Position

As of Dec 31, 2017, AUM was $1.9 trillion, up 15% year over year. This reflected higher market values, net inflows and the favorable impact of a weaker U.S. dollar (principally versus the British pound).

Moreover, assets under custody and administration of $33.3 trillion were up 11% year over year. Higher market values, favorable impact of a weaker U.S. dollar and net new business largely drove the increase.

Credit Quality Improves

As of Dec 31, 2017, non-performing assets came in at $90 million, down from $107 million registered in the prior-year quarter end. Also, allowance for loan losses decreased 5.9% year over year to $159 million. Provision for credit losses was a benefit of $6 million compared with provision of $7 million in the year-ago quarter.

Capital Position

As of Dec 31, 2017, common equity Tier-1 ratio (Standardized Basel 3 fully phased-in) came in at 11.5% compared with 11.3% as of Dec 31, 2016. Leverage capital ratio was 6.6%, in line with the Dec 31, 2016 figure.

Share Repurchase

During the reported quarter, BNY Mellon bought back 12 million shares for $651 million.

Outlook

Management is of the opinion that a rising rate scenario along with the repositioning of the small securities portfolio will positively impact margins as well as NIR. As a result, higher NIM and NIR will more than offset the reduced size of balance sheet (if non-interest bearing deposits contract as expected).

The company expects to continue to deliver positive operating leverage in 2018.

The company expects investment and other income to be in the range of $40-$60 million in the quarters ahead in 2018. In the first-quarter, however, it is expected to tend towards the higher end of this range as a result of the gain on the sale of CenterSquare.

Similar to the fourth-quarter of 2017, the company expects to incur some additional severance, real estate and other charges in 2018.

Considering the company’s revenue growth model along with its expectation that all other non-technology expenses would grow at a very low rate, EPS is expected to grow in the low to mid-double digits range in 2018.

The company expects to spend $250 million as investment-related expense in 2018. This is over and above the $2 billion base amount.

Moreover, the effective tax rate is anticipated to be around 21% for 2018.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.

VGM Scores

At this time, BK has a subpar Growth Score of D, though it is lagging a bit on the momentum front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

BK has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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