Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?

BNY Mellon stock (NYSE: BK) has gained 9% YTD which is at par with the S&P500 index over the same period. Further, at its current price of $57 per share, it is trading 10% below its fair value of $63 – Trefis’ estimate for BNY Mellon’s valuation. 

Amid the current financial backdrop, BK stock has shown strong gains of 40% from levels of $40 in early January 2021 to around $55 now, vs. a similar change for the S&P 500 over this roughly 3-year period. However, the increase in BK stock has been far from consistent. Returns for the stock were 37% in 2021, -22% in 2022, and 14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BK underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BK face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The custody banking giant posted better-than-expected results in the fourth quarter of 2023, with revenues increasing 10% y-o-y to $4.3 billion. It was driven by a 4% rise in the net interest income (NII), followed by a 12% gain in the total fee and other revenue. The NII benefited from improvement in the net interest margin, partially offset by lower interest-earning assets. On a similar note, investment servicing fees increased 3% y-o-y, but investment management revenues posted a 5% drop. Notably, the Assets under Custody and Administration (AuC/A) rose by 8% y-o-y to $47.8 trillion, followed by a similar growth in the Assets under Management (AuM) to $1.97 trillion. 

In terms of cost, total expenses as a % of revenues witnessed an unfavorable increase in the quarter. It resulted in an adjusted net income of $256 million – down 50% y-o-y. 

The company’s top line grew 7% y-o-y to $17.5 billion in FY 2023. It was due to a 24% jump in the NII, followed by a 2% gain in the total fee and other income. Further, total expenses as a % of revenues decreased in the year, leading to a 33% improvement in the adjusted net income to $3.15 billion. 

Moving forward, we expect the same trend to continue in Q1. Overall, BNY Mellon’s revenues are estimated to touch $17.7 billion in FY2024. Additionally, the adjusted net income margin is likely to be around 22% in the year, resulting in an annual GAAP EPS of $5.31. This coupled with a P/E multiple of just below 12x, will lead to a valuation of $63.

[1] Returns as of 3/26/2024
[2] Cumulative total returns since the end of 2016

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