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The Bank of New York Mellon Corp. BK remains well-poised for revenue growth on the back of a strong balance sheet, higher rates and expansion initiatives. However, an elevated expense base and concentrated revenues from fee income are concerns.

High interest rates continue to support BNY Mellon’s net interest revenues (NIR) and net interest margin (NIM), though a rise in funding costs exerts pressure on both.

The company’s NIR witnessed a compound annual growth rate (CAGR) of 3.8% over the five years ended 2023. Likewise, NIM improved to 1.25% in 2023 from 0.97% in 2022, 0.68% in 2021 and 0.84% in 2020. Though NIR and NIM dipped in the first quarter of 2024 because of higher funding costs, both are expected to stabilize gradually in the upcoming quarters and witness an improvement over time. While we anticipate NIR to decline in 2024, the metric is estimated to recover and grow 2.1% and 6.2% in 2025 and 2026, respectively. NIM is estimated to be 1.11%, 1.12% and 1.19% in 2024, 2025 and 2026, respectively.

As of Mar 31, 2024, BK had a total debt of $50.9 billion and cash and due from banks and interest-bearing deposits of $124.5 billion, indicating a strong balance sheet and liquidity position. Further, the company maintains investment-grade long-term senior debt ratings of A1, A and AA- from Moody’s, S&P Ratings and Fitch Ratings, respectively. This enhances the accessibility of the company in the debt market. Thus, decent earnings strength and a strong liquidity position enable the repayment of debt obligations even if economic turmoil occurs.

BNY Mellon keeps undertaking several growth initiatives (including launching new services, digitizing operations and engaging in strategic buyouts) in order to expand its footprint in foreign markets. Given the growth potential of overseas securities markets alongside the emergence of complex new securities, the long-term growth prospects of the industry remain encouraging. In 2023, non-U.S. revenues constituted 36% of total revenues and the same is likely to improve amid rising demand for personalized services across the globe.

Nonetheless, while BK’s cost-mitigating initiatives helped it to reduce expenses over the past years, the same has witnessed an increase lately. Non-interest expenses experienced a 3.3% CAGR over the five-year period ended 2023. The uptrend continued in the first quarter of 2024. Further, BNY Mellon’s multi-year transformation program, inflationary pressure and ongoing technological investments are likely to keep the expense base escalated in the upcoming quarters. While we estimate non-interest expenses to decrease 5.6% in 2024, the metric is likely to increase 2.2% and 1.1% in 2025 and 2026, respectively.

BNY Mellon’s fee income accounted for 73% of total revenues in the first quarter of 2024. This reflected concentration risk in terms of revenues. Notably, the metric witnessed just 0.1% CAGR over a five-year period (2018-2023). While fee income majorly aided the top line during the first quarter of 2024, enhanced volatility in the capital markets remains a concern and keeps us apprehensive regarding sustained growth going forward.

BNY Mellon currently carries a Zacks Rank #3 (Hold). Over the past six months, shares of the company have rallied 27.7%, underperforming the industry’s growth of 37.7%.

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Major Bank Stocks to Consider

Some better-ranked major bank stocks worth a look are Northern Trust Corporation NTRS and Wells Fargo & Company WFC, sporting a Zacks Rank #1 (Strong Buy) each. You can see the complete list of today’s Zacks Rank #1 stocks here.

Estimates for NTRS’ current-year earnings have been revised 6.4% upward in the past month. The company’s shares have jumped 23.4% over the past six months.

Estimates for WFC’s current-year earnings have been revised marginally upward in the past week. The company’s shares have surged 51.6% over the past six months.

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