BNY Mellon Stock Is Still Undervalued

[Updated 03/04/2021] BNY Mellon Valuation Update

BNY Mellon stock (NYSE: BK) has rallied 59% since the March 23 lows of the last year and at its current price of $44 per share, it is 10% below its fair value of $48 – Trefis’ estimate for BNY Mellon’s valuation. The mortgage banking giant surpassed the consensus estimates for revenues and earnings in the recently released fourth-quarter results. It reported an EPS figure of $0.96 and total revenues of $3.8 billion. Its revenues were 20% lower than the year-ago period, mainly driven by a 17% decline in net interest income and a 22% decrease in total fees due to money market fee waivers.

The bank reported $15.8 billion in revenues for the full-year 2020 – around 4% lower than the 2019 figure. It was primarily driven by a 7% drop in net interest income due to the lower interest rate environment and a 4% decline in total fees & other income. BNY Mellon derives a big chunk of its revenues from asset servicing fees (29% in 2020) and investment management fees (22% in 2020) – the asset management fees and the investment management fees are charged as a percentage of Assets under Custody & Administration (AUC/A) and Assets under Management (AuM) respectively. While both the AuC/A & AuM have increased by 7% y-o-y by the end of December 2020, fees as a percentage of AuC/A and AuM have suffered in the year. We expect the same trend to continue in the current year. Further, lower interest rates are unlikely to see a swift revival. Overall, the above factors will likely restrict BNY Mellon’s revenues to $15.5 billion in FY2021. That said, the net income margin is likely to see some improvement, leading to an EPS of $3.92 for FY2021. This coupled with a P/E multiple of just above 12x, will lead to the valuation of $48.

[Updated 11/23/2020] BNY Mellon Stock Offers Limited Growth Opportunity In The Short Term

Despite a 38% gain since the March bottom, BNY Mellon stock (NYSE: BK) is still down 24% YTD. Trefis estimates BNY Mellon’s valuation to be around $43 per share – around 15% above the current market price of $38. The custody banking giant recently declared its third-quarter results, which surpassed the consensus estimates for both earnings and revenues. The company reported an EPS figure of $0.98 and total revenues of $3.8 billion. Its total revenues were marginally lower than the year-ago period, mainly driven by a slight decrease in total fees revenue and a 4% decline in net interest income.

We expect BNY Mellon’s revenues trajectory to improve in the coming months, mainly driven by the recent rally in the securities market, leading to higher asset valuations. It is likely to report $16 billion in revenue for FY 2020 – 3% lower than the previous year. Further, its net income margin is likely to suffer due to higher non-interest expenses, reducing the EPS figure to $4.02 for FY 2020. Thereafter, revenues are expected to marginally decline to $15.9 billion in FY2021, mainly driven by a slight drop in the investment management business. The EPS figure is likely to remain around $3.85, which coupled with the P/E multiple of just above 11x, will lead to a valuation of about $43.

[Updated 08/25/2020] BNY Mellon Stock Has A 25% Upside

BNY Mellon stock (NYSE: BK) lost more than 45% – dropping from $50 at the end of 2019 to around $27 in late March – then jumped 31% to around $36 now. Despite this, the stock has lost 27% of its value so far this year.

There were 2 reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the asset valuations in the securities markets dropped. This could negatively affect BNY Mellon’s top line as a major share of its revenues comes from Asset Servicing and Investment Management fees, which are charged as a percentage of Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.

But we believe there is more upside to come over the coming months

Trefis estimates BNY Mellon’s valuation to be around $44 per share – about 25% above the current market price – based on an upcoming trigger explained below and one risk factor.

The trigger is an improved trajectory for BNY Mellon’s revenues over the second half of the year. We expect the company to report $15.8 billion in revenues for 2020 – around 4% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. Further, the rally in the securities market, after a multi-billion dollar fed stimulus in late March, has improved the asset valuations. This is likely to help BNY Mellon’s top line as it charges its asset servicing and investment management fees as a percentage of Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively – it constituted around 50% of the bank’s revenues in FY2019. Similarly, the overall economy will benefit from improvement in consumer spending due to relaxed lockdown restrictions. The same is evident from 8.5% m-o-m improvement in consumer spending in May followed by 5.6% in June. Overall, we see the company reporting an EPS of around $3.96 for FY2020 – 12% below the year-ago figure.

Thereafter, BNY Mellon’s revenues are expected to marginally decline to $15.6 billion in FY2021, mainly driven by a slight drop in the investment management business. This coupled with a lower expected share count due to stock repurchases is likely to result in an EPS figure of $4.17 for FY2021 – up by 5%.

Finally, how much should the market pay per dollar of BNY Mellon’s earnings? Well, to earn close to $4.17 per year from a bank, you’d have to deposit around $460 in a savings account today, so about 110x the desired earnings. At BNY Mellon’s current share price of roughly $36, we are talking about a P/E multiple of just below 9x. We think a figure closer to 11x will be appropriate.

That said, custody banking and asset management is a risky proposition right now. While growth is likely, change in current market sentiment can harm the near-term outlook. What’s behind that?

BNY Mellon is a custody banking giant with Assets under Custody & Administration (AuC/A) of around $35.7 trillion and AuM of just below $1.9 trillion in 2019. The Bank’s
MTB
business model is very sensitive toward movement in asset prices. While the broader markets are on a growth trajectory (up 50%) since the March bottom, any further weakening in the economic scenario or a sudden jump in the Covid-19 case count can reverse the momentum. This could harm BNY Mellon’s top line due to a reversal in asset valuations driven by net market losses.

The same trend is visible across BNY Mellon’s peer – BlackRock. While its revenues are likely to improve in FY2020 due to improved asset valuations and higher net asset inflows, it is facing the same risk of a drop in asset prices due to a sudden uptick in Covid-19 cases or further drop in economic condition. This would explain why BlackRock stock currently has a stock price of over $585 but looks slated for an EPS of around $32.05 in FY2021.

While BNY Mellon stock is undervalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Microsoft vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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