The Bank of New York Mellon Corporation (NYSE:BK) delivered no surprises this quarter – positive or negative – with reported results falling in line with expectations set two months ago when the U.S. Tax Court’s verdict against the global custodian bank sealed the fate of its Q1 2013 income statement (see BNY Mellon Loses $850 Million Tax Lawsuit Pushing Quarter Into The Red). A largely unchanged top-line coupled with the $854 million tax-related charge incurred resulted in net loss of $237 million – compared to profit of $631 million and $646 million in Q1 2012 and Q4 2012 respectively [Q1 2013 Earnings Release, BNY Mellon Press Releases, Apr. 17, 2013].
Adjusting for the one-time tax charge, the bank’s operating income for the quarter was $617 million. Notably, revenues and non-interest expenses remained the same as in the previous quarter with the difference in adjusted net income stemming from a lower release in provisions this quarter ($24 million) compared to Q4 2012 ($61 million). Even the assets under custody & administration (AUC/A) remained flat at $26.3 trillion. However, assets under management (AUM) received a boost, jumping to a record $1.43 trillion at the end of the period.
We marginally increased our price estimate for BNY Mellon’s stock from $27 to $28 to factor in the impact of the bank’s recently proposed capital return plan (see The Fed’s Stress Test & BNY Mellon: 15% Dividend Hike & $1.35 Billion Share Buyback Approved). The bank’s performance over the quarter did not influence our decision to update the price in any way.
Asset & Wealth Management Division Gathers More Clout
BNY Mellon’s asset and wealth management operations from its second most valuable business division (as can be seen from the chart above) and contribute to almost a quarter of its total value. This is why the steady growth in the size of its assets under management is an important factor. You can understand the impact of an increase in AUM on the bank’s share value by making changes to the chart below.
BNY Mellon reported record AUM figures of $1.43 trillion at the end of the quarter – 3% sequential growth and 9% growth over the same period last year. Growth in these assets was fueled by record inflows of $40 billion for its long-term funds. Outflows of $13 billion from short-term money market funds over the quarter resulted in a net inflow of $27 billion for the period.
The increase in assets also translated into an increase in revenues as investment management fees rose to $812 million for Q1 2013 compared to $739 million for Q1 2012.
Foreign Exchange Revenues Also Posted Strong Growth
BNY Mellon’s foreign exchange business came under fire towards the end of 2011 when the states of New York, Virginia and Florida filed a series of lawsuits against the custody bank – alleging that the bank cheated its clients since 2001 by claiming that it was providing them with the best available exchange rate, while actually providing them with some of the worst rates and pocketing the price difference. The high-profile nature of the lawsuits resulted in the bank losing quite a few customers and was also forced to renegotiate forex rates with some customers (see BNY Mellon Under Pressure From Fidelity Over Forex Rates).
But with the bank largely coming clean in the lawsuits (see BNY Mellon Catches A Break In Forex Lawsuits), the impact on the foreign exchange business has been reversed to a good extent. The forex business roped in $149 million in revenues this quarter – 10% higher than the $136 million for Q1 2012 and a good 41% more than the $106 million in Q4 2012.
Disclosure: No positions