STT State Street Corporation

The Bank of New York Mellon Corporation’s (BK) second quarter 2012 earnings of 57 cents per share were ahead of the Zacks Consensus Estimate of 50 cents. This also compares favorably with earnings of 52 cents in the prior quarter.

Despite a decrease in net interest revenue and fee income, BNY Mellon’s results benefited from lower operating expenses. Moreover, asset quality continued to show improvements and capital ratios remained healthy.

After taking into consideration a one-time litigation charge of $212 million (after-tax), net income applicable to common shareholders stood at $466 million or 39 cents per share.

Performance in Detail

BNY Mellon’s total revenue of $3.59 billion was down 1% sequentially, reflecting lower net interest income. Moreover, total revenue was almost in line with the Zacks Consensus Estimate.

Fully tax equivalent net-interest income fell to $734 million, down 4.1% from $765 million in the previous quarter. The decline was primarily due to lower spreads. Similarly, net interest margin fell 7 basis points sequentially to 1.25%.

Fee revenue stood at $2.83 million, down marginally from $2.84 million in the prior quarter. The drop was primarily attributable to lower investment management and performance fees, foreign exchange and other trading revenue, financing-related fees and investment and other income. However, these were partially offset by growth in investment services fees.

Excluding restructuring charges, M&I expenses and amortization of intangible assets as well as direct expense related to shareowners, non-interest expense fell marginally by 1% sequentially to $2.57 billion. The dip primarily reflects lower staff expenses and net occupancy costs, partly mitigated by higher business development expenses.

Asset Quality

BNY Mellon’s credit quality continued to improve in the reported quarter. Provision for credit losses was a benefit of $19 million in the quarter compared with a provision of $5 million in the prior quarter and no provision in the year-ago quarter.

Total nonperforming assets declined from $331 million in the previous quarter and $351 million in the prior-year quarter to $294 million. Likewise, allowance for loan losses fell from $494 million in the prior quarter and $535 million in the previous-year quarter to $467 million in the reported quarter.

Assets Position

Assets under management (excluding securities lending assets) totaled $1.3 trillion as of June 30, 2012, down almost 1% sequentially but up 2% year over year. The decline resulted from lower equity market values, partially offset by net inflows, while net inflows, partially offset by lower equity market values, led to the year-over-year surge.

Assets under custody and administration totaled $27.1 trillion as of June 30, 2012, up 2% sequentially and 3% year over year. Both increases primarily reflect net new business, partly offset by lower equity market values.

Capital Position

BNY Mellon’s capital ratios remained stable during the quarter. As of June 30, 2012, Tier 1 capital ratio was 14.1% compared with 15.6% as of March 31, 2012 and 14.7% as June 30, 2011.

The estimated Basel III Tier 1 common equity ratio increased to 8.7% compared with 7.6% in the prior quarter and 6.5% in the year-ago quarter. The improvement was mainly due to the reduction in risk-weighted assets.

Share Repurchase

In March 2012, BNY Mellon, after receiving approval for its capital plan from the Federal Reserve, had announced a new share repurchase program, authorizing the purchase of up to $1.16 billion of stock through the first quarter of 2013. During the reported quarter, the company repurchased 12.2 million shares for $286 million.

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 August 7 to shareholders of record at the close of business on July 30.

Peer Performance

Almost similar to BNY Mellon, State Street Corporation’s (STT) second quarter earnings also marginally outpaced the Zacks Consensus Estimate. The improvement came on the back of enhanced net interest revenue and reduced operating expenses. The capital ratios also remained strong in the quarter. However lower fee revenue was the primary headwind.

Our Viewpoint

We believe BNY Mellon’s recent capital deployment activity will enhance investors’ confidence in the stock. Further, the top line is expected to benefit from various restructuring initiatives. 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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