Is BNY Mellon Stock Stock Fairly Priced?

BNY Mellon stock (NYSE: BK) has lost 30% YTD as compared to the 21% drop in the S&P500 index over the same period. Further, at its current price of $41 per share, it is trading approximately 20% below its fair value of $51 – Trefis’ estimate for BNY Mellon’s valuation. 

The custody banking giant posted better than expected results in the second quarter of 2022, with revenues increasing 7% y-o-y to $4.25 billion. It was driven by a 28% y-o-y growth in the net interest income (NII), followed by a 4% rise in the fee income. The NII benefited from an increase in interest rates, partially offset by lower interest-earning assets. Similarly, the fee income primarily grew due to higher investment services and foreign exchange revenues. On the flip side, the Assets under Management (AuM) and the Assets under Custody & Administration (AuC/A) decreased by 17% and 4% y-o-y respectively. Further, the provisions for credit losses and noninterest expenses as a % of revenues increased in the quarter, resulting in a 16% y-o-y decrease in the adjusted net income to $835 million. 

The company’s top line grew 4% y-o-y to $8.2 billion in the first half of 2022. It was primarily driven by a 17% jump in the NII due to an improvement in interest rates. Notably, the Fed has raised the benchmark interest rates five times in the year, including a 0.75% increase this week. That said, the two key metrics – Assets under Management (AuM) and the Assets under Custody & Administration (AuC/A) have seen negative growth in the year, hurting the fee income. 

Moving forward, we expect the growth in NII to drive the top line over the subsequent quarters. Overall, BNY Mellon’s revenues are estimated to touch $16.4 billion in FY2022. Additionally, the adjusted net income margin is likely to see a slight decrease due to higher expenses, leading to a net income of around $3.5 billion. It will likely result in an EPS of around $4.31, which coupled with a P/E multiple of just below 12x, will lead to the valuation of $51.