Company Overview 

Bank of New York Mellon Corporation (NYSE: BK) is a global investment firm dedicated to assisting customers with the management and servicing of their financial assets throughout the investment lifecycle. It offers financial services to individuals, companies, and organizations. Securities Services, Market and Wealth Services, and Investment and Wealth Management are the company's segments. Asset servicing, global custody, fund accounting, integrated middle-office solutions, transfer agency, and data and analytics solutions are all part of the Securities Services category. Pershing, clearing, and collateral management, and its scaled treasury services division are all part of the Market and Wealth Services sector. Its investment management and wealth management businesses are included in the Investment and Wealth Management sector. It has USD 46.7 trillion in assets under management and USD 2.4 trillion in assets under management.

BK Details

Key takeaways from Q1 FY22

• Revenues for the quarter ending March 31, 2022, were USD 3.9 billion, essentially unchanged from the previous quarter.
• The corporation's fee revenue fell 3% to USD 3.1 billion in the quarter, with a USD 88 million loss due to increased amortization of deferred costs for depositary receipts services in Russia.
• Net interest revenue increased 7% to USD 698 million from USD 655 million in the prior quarter, owing to higher interest rates on interest-earning assets, a shift in asset mix, and lower funding costs. Lower interest-earning assets somewhat offset the benefits.
• Securities Services' overall revenue of USD 1.78 billion was almost flat year over year, while Market and Wealth Services generated USD 1.20 billion in total revenue, which was unchanged year over year.
• The corporation reported an adjusted pre-tax operating margin of 41 percent in Q1 2022, compared to 46 percent the year before, while noninterest expenses increased to USD 3.01 billion from USD 2.85 billion.  As a result, the Corporation of New York Mellon reported a net income applicable to common shareholders of USD 699 million in Q1 2022, down 18 percent from USD 858 million a year ago.
• The provision for credit losses was USD 2 million, compared to a USD 83 million profit, and the effective tax rate of 16.7% includes a benefit from yearly stock-based award vesting.

Recent Developments 

• BNY Mellon Funds declared a "Change in Control" of Alcentra NY, LLC, the Funds' Sub-Adviser, on May 31, 2022. BNY Mellon has stated that it will sell its entire indirect ownership stake in Alcentra to Franklin Resources, Inc. known as Franklin Templeton. With USD 38 billion in assets under management and global competence in senior secured loans, high yield bonds, private credit, structured credit, unusual circumstances, and multi-strategy credit strategies, Alcentra is one of the major European credit and private debt managers.
• The transaction is scheduled to close in the fourth quarter of 2022, pending usual closing conditions such as regulatory clearances. The Fund's portfolio managers will become solely Alcentra employees because of the transaction and will no longer be eligible to manage the Fund in their role as employees of BNYM Investment Adviser.
• On June 02, 2022, BNY Mellon Municipal Bond Infrastructure Fund, Inc. declared a dividend of USD 0.0530 per share of common stock, payable on July 1, 2022, to shareholders of record as of June 17, 2022. The stock will go ex-dividend on June 16, 2022. The last pay-out was USD 0.0530 per share of common stock, which was declared in May.

Other Key events of Q1 FY22 

• Client inflows, net new business, and greater market values accounted for 9 percent of the USD 45.5 trillion in assets under custody, somewhat offset by the adverse impact of a stronger US currency.
• AUM climbed by 2% to USD 2.3 trillion, owing to net inflows and higher market valuations, somewhat offset by the negative impact of a stronger US currency.
  • The company paid USD 118 million for 1.9 million common shares that were repurchased at a break-even price of USD 62.10 and paid USD 278 million in dividends to common stockholders (including dividend-equivalents on share-based awards).

Balance Sheet & Liquidity Position 

Source: Company filing

Top 10 shareholders 

The top 10 shareholders together form around 42.63% of the total shareholding, while the top 4 constitute the maximum holding. Berkshire Hathaway Inc. and The Vanguard Group, Inc. hold the maximum stake in the company at 8.96% and 8.07%, respectively, as also highlighted in the chart below: 

Source: REFINITIV, Analysis by Kalkine Group

Risk Analysis 

• Macroeconomic risk: Revenue of USD 3.9 billion was unchanged year over year, or up 2%, excluding an approximately USD 90 million decline due to government sanctions and the company's operational measures in Russia. As the Russia-Ukraine war had an impact of USD 90 million in revenues for the corporation, therefore the macroeconomic factor has become a primary risk for the corporation.
• Operational risk: Given the corporation's high volume of daily transactions, it is susceptible to the operational risk caused by a breakdown in the system or in information.
• FX risk: With 50% of revenue for the company is earned from the foreign currency therefore current dollar appreciation has affected the corporation’s profitability.

Outlook for Q2 FY 2022 

With the current macroeconomic scenarios and rapidly evolving monetary policies, the company expects the current year NIR to up by roughly 13% compared to 2021, assuming the correlation between the rates and deposit runs-offs to remain consistent which has been seen in the past. The company expects revenue to be up 4%-5%, including a tailwind of about 5% from the reduction in key waivers and a 1%-2% headwind from the Russian-Ukraine war, currency, and other factors. For expenses, the corporation expects an increase of approximately 5%, slightly lower than the previous estimates. Further hedges have been taken for the portfolio to mitigate the impact of higher rates and credit spreads.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation 

(Analysis by Kalkine Group) 

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:  

With the crisis in Ukraine, unpredictable markets, and continuously rising inflation, we are in a more unstable climate that will necessitate more significant monetary policy adjustments. In times like these, BK's robust, lower-risk balance sheet, as well as the durability of its business model, set it apart from its competitors.

BK share has corrected over the past six months, down 19.55%. The stock is currently leaning towards the lower end of its 52-week range of USD 41.77 to USD 64.63. As can be seen in the price chart below, the price is currently taking resistance from the short-term (50-day) SMA. The price has broken the bottom consolidation and has moved upwards, and it is predicted that after the retest the price will continue its upward movement towards our target levels. We have valued the stock using the Price/ Book Value Per Share multiple-based relative valuation method and arrived at a target price of USD 55.53. 

Considering the strong fundamentals, robust AUM and AUC, positive outlook, associated risks, and current valuation,we give a "Buy" recommendation on the stock at the closing price ofUSD 45.34, as of June 08, 2022.  

1-Year Technical Price Chart (as of June 08, 2022) Source: REFINITIV, Analysis by Kalkine Group  

Technical Levels Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.  

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices. 

Note 1:The reference data in this report has been partly sourced from REFINITIV. 

Note2:Investmentdecision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: The report publishing date is as per the Pacific Time Zone.