The Bank of New York Mellon Corp. (BK) second-quarter earnings from continuing operations of 55 cents per share was in line with the Zacks Consensus Estimate. This also compares favorably with earnings of 23 cents in the year-ago quarter.
BNY Mellon experienced a year-over-year increase in assets under custody and administration during the reported quarter. Increased securities servicing fees, improved credit quality and continued long-term asset inflows in its asset and wealth management businesses were also among the positives. However, higher non-interest expenses were the downside.
Income from continuing operations was $668 million, compared with $601 million in the prior quarter and $267 million in the prior-year quarter. GAAP net income for the reported quarter was $658 million, compared with $559 million in the prior quarter and $176 million in the year-ago quarter.
Behind the Headlines
Total revenues for the quarter were $3.3 billion, down 1% sequentially but up 3% year over year. The year-over-year increase in revenues was due primarily to a 6% increase in total securities servicing fees.
Fully tax equivalent net interest revenues decreased 6% sequentially to $727 million. The sequential increase reflects the company’s credit strategy to reduce targeted loan exposure, as well as reducing the duration of placements. Net interest margin deteriorated 15 bps sequentially to 1.74%.
Investment income for the reported quarter came in at $72 million, down from $108 million in the prior-quarter but up from $44 million in the year-ago quarter. The year-over-year increase reflects higher lease residual gains and positive foreign currency translations.
Non-interest expense increased 3% sequentially and 4% year over year to $2.2 billion. The year-over-year increase primarily reflects the impact of the Insight acquisition and higher incentive expenses.
Evaluation of Credit Quality
Credit quality significantly improved during the quarter. The provision for credit losses decreased substantially to $20 million from $35 million in the prior quarter and $61 million in the year-ago quarter. Net charge-offs decreased 48% sequentially to $13 million. Non-performing assets declined 12% sequentially to $406 million. The sequential decrease in non-performing assets resulted from repayments.
Assets under Management
Assets under management (excluding securities lending assets) totaled $1.0 trillion as of June 30, 2010, down 5% sequentially but up 13% year over year. The sequential decrease was due primarily to lower market values. However, the year-over-year increase was primarily a result of the acquisition of Insight Investment Management in the fourth quarter of 2009.
Assets under Custody and Administration
Assets under custody and administration totaled $21.8 trillion as of June 30, 2010, down 2% sequentially but up 6% year-over-year. The year-over-year increase reflects higher market values and new business.
Asset and wealth management fees were $676 million for the reported quarter, almost flat sequentially but up 6% year over year.
Concurrent with the earnings release, BNY Mellon declared a quarterly dividend of 9 cents per share. The dividend will be paid on August 10, 2010 to shareholders of record as of July 30, 2010.
Though BNY Mellon is well positioned to benefit from the growth of global financial assets, supported by expense management, modernization of public pension schemes and growth in cross-border investing, we expect costs of raising interest-bearing deposits to rise faster than asset yields due to competitive pressure, thereby negatively impacting net interest margin as well as net interest income.
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 catalysts, we maintain a long-term “Neutral” recommendation on the stock.