BK - Bank of New York Mellon

[Packer16]

I thought BAC was cheap but BK is selling at a little more than 5x FCF for a large fee generating business.  I must be missing something for this stock to be selling so cheap.  It is the largest trust bank and generated about 80% of its revenue from recurring fees.  Southeastern and Davis own shares purchased at higher prices.  I met a few folks from trust banks at the FFH meeting so anybody's comments about the business would be appreciate (esp. if I am missing something).  TIA.

 

Packer

[PlanMaestro]

I thought BAC was cheap but BK is selling at a little more than 5x FCF for a large fee generating business.  I must be missing something for this stock to be selling so cheap.  It is the largest trust bank and generated about 80% of its revenue from recurring fees.  Southeastern and Davis own shares purchased at higher prices.  I met a few folks from trust banks at the FFH meeting so anybody's comments about the business would be appreciate (esp. if I am missing something).  TIA.

 

Packer

 

There is an investigation regarding exchange rates used in transactions for clients. Not sure how big is this.

[vinod1]

I thought BAC was cheap but BK is selling at a little more than 5x FCF for a large fee generating business.  I must be missing something for this stock to be selling so cheap.  It is the largest trust bank and generated about 80% of its revenue from recurring fees.  Southeastern and Davis own shares purchased at higher prices.  I met a few folks from trust banks at the FFH meeting so anybody's comments about the business would be appreciate (esp. if I am missing something).  TIA.

 

Packer

 

Not sure if it is really 5x FCF. Fundamentally no issues other than what I think are manageable litigation expenses. Main catalysts I that can spark a rally in the stock are (1) reengineering cost savings (2) increase in short term interest rates (3) Acquisitions and organic growth in emerging markets. We know #2 is not much of a possibility in the next 1-2 years.

 

From my notes based on YE 2010 data:

 

Normalized fee income of about $11 billion that should be relatively stable. Net interest income of about $3 billion which is at a cylical low due to low interest rates on the short maturity securities resulting in an net interest margin of 1.7% on about $180 billion in interest bearing assets. Thus BK has a normalized revenue of about $14 billion against expenses of $9.5 billion (excluding restructing and amortization charges) and with near negligible credit losses. This gives a pre-tax earnings of about $4.5 billion or about $3 billion in net income ($2.4 in EPS).

 

Vinod

[Packer16]

Your right a good portion of the FCF is non-recurring NOL so it is closer to $2.40 with NIM of 1.7%.  If NIM increases to 2.2%, then EPS goes up to $2.83.  These imply P/FCF of 8.3 and 7.0, respectively.  A little higher than BAC but a business with much more growth (a 7% grower versus a GDP grower).  Based upon the Graham Formula (2*G + 8.5), the P/FCF should be 22.5.

 

Packer

[vinod1]

BK is already earning much closer to its normalized earning power, whereas BAC is vastly below its normal earning power. So I do not think it is a good comparable. BAC does not have to do anything other than to survive and not dilute  :) for a couple of years to get to a PE of 3 or 4.

 

BK is attractive but less likely to be a 2x or 3x (or a 0x). I am keeping an eye on it but there are so many opportunities in the finance sector with similar risk/return profiles - USB, WFC (both of which have the additional advantage of Buffett certification).

 

Vinod

[txlaw]

Maybe it's a combination of the following:

 

-Financials, in general, have tanked over the last few months

-Other financial cos are more attractively priced despite higher risk in business model (e.g., WFC or more controversial financials)

-AUM and AUC have decreased with the market downturn

-NIM and fees are guaranteed to stay compressed for a while because of the stated interest rate policy

-Investors who may have held BK as an interest rate hedge may have exited for other opportunities

-BK faces some litigation that could cause customers to go to competitors

-Recent decision to charge for excessive customer cash holdings could also drive customers to competitors (e.g., State Street)

 

On the flipside, BK still generates a lot profit, is divesting non-core businesses, and the stock currently has a yield higher than the 10-year.  I gotta think that Longleaf and maybe BRK are adding.

[Rabbitisrich]

Robert Kelly is stepping down as CEO and Chairman over "differences in approach to managing the company." The bluntness of the news release is unusual.

 

http://www.bloomberg.com/news/2011-08-31/big-moves-at-bank-of-new-york-the-ticker.html

[PlanMaestro]

State case against BNY Mellon dismissed

http://www.ft.com/cms/s/0/ec8c8d2e-93db-11e1-baf0-00144feab49a.html#ixzz1tg1uucL5

 

Bank of New York Mellon has won a legal victory with a Virginia court dismissing a lawsuit bought by Ken Cuccinelli, the state’s attorney-general, which claimed that the custody bank defrauded state pension funds through foreign-currency transactions.

....

 

The decision follows a March ruling in a California court to partially dismiss similar claims bought as part of a whistleblower lawsuit by FX Analytics on behalf of several pension funds.

.....

 

The bank has been sued in multiple states over practices in the foreign exchange trading services provided to clients such as pension funds. It has defended its business practices and is fighting the claims, which it describes as “without merit”. Civil suits continue in states including New York, Ohio, Massachusetts and Florida, while breach of contract claims remain in process in California.

 

 

[Phaceliacapital]

http://dealbook.nytimes.com/2014/06/30/activist-investor-peltz-builds-stake-in-bank-of-new-york-mellon/?_php=true&_type=blogs&_r=0

 

1 bn stake.

[muscleman]

I thought BAC was cheap but BK is selling at a little more than 5x FCF for a large fee generating business.  I must be missing something for this stock to be selling so cheap.  It is the largest trust bank and generated about 80% of its revenue from recurring fees.  Southeastern and Davis own shares purchased at higher prices.  I met a few folks from trust banks at the FFH meeting so anybody's comments about the business would be appreciate (esp. if I am missing something).  TIA.

 

Packer

 

I looked at the balance sheet but couldn't figure out how you get the FCF number. Would you mind giving some insights?

[sleepydragon]

Anyone looking at this stock?

I have bought some during the last couple of weeks.

Their ROE has been steadily increasing in recent years, perhaps due to that they have a pretty big goodwill on their balance due to the previous merger, which masked their true roe (ROTE is more than 20%) and pe. These goodwill will eventually depreciate but earning power may get better as the new ceo invests in technology to improve productivity. Stock is not that cheap though, used to be trading at 10 pe a few years ago, now around 13/14ish.

 

[vinod1]

Anyone looking at this stock?

I have bought some during the last couple of weeks.

Their ROE has been steadily increasing in recent years, perhaps due to that they have a pretty big goodwill on their balance due to the previous merger, which masked their true roe (ROTE is more than 20%) and pe. These goodwill will eventually depreciate but earning power may get better as the new ceo invests in technology to improve productivity. Stock is not that cheap though, used to be trading at 10 pe a few years ago, now around 13/14ish.

 

The business finally got able management. He laid out his ideas for the company very well in the annual letter.

 

Vinod

[sleepydragon]

In the annual meeting, Web talked about PCP’s goodwill expenses and also the electronic parts supplier’s “very complicated business”.

I feel those characteristics apply to BK too.

[alpha]

 

I noticed BRK has increased it's position. Anyone else been buying recently?

[boilermaker75]

 

I noticed BRK has increased it's position. Anyone else been buying recently?

 

Yes

[sleepydragon]

I have some. It’s a very sticky business, being the “back office” of Wall Street. Difficult  and low margin work, but essential and very sticky. I also think a bank like GS shall buy them eventually. Very high ROTE. The negative is they seem are struggling growing revenues. But they buying back stocks to return unused capitals.

[Guest Schwab711]

Yes I have been. I think BK today looks a lot better than historical numbers/growth would indicate. A big reason for the stalled revenue growth is how they classify one-time gains related to sales of assets/securities.

 

It looks like they are trading at roughly 10x normalized EBT and growing EBT at mid-single digits (when prior years' are normalized). I'll post more if I ever finish reviewing them. I think this is an easy place to park $4b-$5b for BRK. Long-run expected returns (ex-multiple expansion/contraction) are safely above 10% imo.

 

I should add, BK longs also get Charles Scharf, who's one of the best bank execs in the industry.

 

https://en.wikipedia.org/wiki/Charles_Scharf

[CorpRaider]

Thanks for the posts/thoughts gents.

[Spekulatius]

Results in the last quarter were anemic and growth (except interest income) has all but stalled. It feels like a lot of headwinds in this business and no growth. It’s probably an Ok value here and they passed the stress test in a decent shape, unlike STT, but I don’t see large upside.

[NewValueinvestor]

Hi anyone taking a look at BK?

 

I didn't want to start a new thread. I took a look at the business and it's down about 40-50%, it's a stable fee paying business and it's about 0.70 Book value and about 1.8 Tangible book. I found out the High Tangible book number is from the preferred shares they issued around the time of the financial crisis. At about 30$ it looks pretty good as 83% of their income is from fees and not interest income and they are less affected by the recent action of taking interest rates to 0.25%. Their NIM is 1.1% so that remaining 17% of the business will be hurt, but relatively to the other big american banks BNY mellon should come out of the situation better.

 

Any Thoughts?

[BRK7]

Hi anyone taking a look at BK?

 

I didn't want to start a new thread. I took a look at the business and it's down about 40-50%, it's a stable fee paying business and it's about 0.70 Book value and about 1.8 Tangible book. I found out the High Tangible book number is from the preferred shares they issued around the time of the financial crisis. At about 30$ it looks pretty good as 83% of their income is from fees and not interest income and they are less affected by the recent action of taking interest rates to 0.25%. Their NIM is 1.1% so that remaining 17% of the business will be hurt, but relatively to the other big american banks BNY mellon should come out of the situation better.

 

Any Thoughts?

 

Looks interesting. 

 

My understanding is that $37T in assets held within the fee-paying Investment Services business (the 80% piece) are approximately 2/3 fixed income and 1/3 equity.  To the extent that fixed income asset values have declined less than equities, this seems a mitigating factor for BK. 

 

The remaining 20%-ish piece is Investment Management, also primarily fee-based, I believe.  Compared with Investment Services, this business segment is more impacted by the value of market indices, according to the 2019 10-K.

 

Net Interest Revenue is earned by BOTH the I-Services & I-Mgmt segments, though primarily on the I-Services side, from securities lending and spreads on F/X.  Low rates are generally not helpful, but I agree that this is probably less of an issue for BK, compared to more traditional banks for which lending is the primary business.

[rb]

It's not bad.

 

The asset management bit is just gonna suck and NII is gonna evaporate almost completely if not completely.

 

The investor services business is their crown jewel. But that's gonna hurt as well. It's not just custody fees it's also transactions. What I think is gonna happen is that they're gonna have a pretty good quarter. Lot's of transactions (FX also helps a lot - huge margins). But what happens after the crazy dies down is that you're gonna have AUM from equity down in line with the market, fixed income AUM, probably ok. But transactions down substantially. So you're looking at a 20-30% decline in non-interest revenue as well. But that's probably the trough.

[vinod1]

I would be shocked if NII is going to be evaporate. It is going to be hit. They have like $125 billions in Agency securities (FNMA), margin loans, etc that are going to get 2% returns. Their funding costs are going down to 10 to 20 bps.  Treasury/Cash is where it is going to be zilch. So NIM might end up at 0.7% rather than 1%.

 

Investor services, I think will take a 10% hit to revenue at most in any 12 month period. Wild guess is transactions account for say 30% and they fall 40%, that would still only be a 12% hit to revenue.

 

Vinod

[BRK7]

I would be shocked if NII is going to be evaporate. It is going to be hit. They have like $125 billions in Agency securities (FNMA), margin loans, etc that are going to get 2% returns. Their funding costs are going down to 10 to 20 bps.  Treasury/Cash is where it is going to be zilch. So NIM might end up at 0.7% rather than 1%.

 

Investor services, I think will take a 10% hit to revenue at most in any 12 month period. Wild guess is transactions account for say 30% and they fall 40%, that would still only be a 12% hit to revenue.

 

Vinod

 

Thanks for the insights, Vinod.  Overall, how would you characterize the risk/reward here @ $36 or so?

[vinod1]

I would be shocked if NII is going to be evaporate. It is going to be hit. They have like $125 billions in Agency securities (FNMA), margin loans, etc that are going to get 2% returns. Their funding costs are going down to 10 to 20 bps.  Treasury/Cash is where it is going to be zilch. So NIM might end up at 0.7% rather than 1%.

 

Investor services, I think will take a 10% hit to revenue at most in any 12 month period. Wild guess is transactions account for say 30% and they fall 40%, that would still only be a 12% hit to revenue.

 

Vinod

 

Thanks for the insights, Vinod.  Overall, how would you characterize the risk/reward here @ $36 or so?

 

Most of its lines of businesses would be under pressure going forward. Assumptions are low interest rates, continuing pressure on fee reductions from its clients as they themselves need to cut costs, its asset management also faces fee pressure. Cannot take advantage of stock price as buybacks are stopped even though it has no need to do that.

 

Good news is that unlike other financials there is no tail risk to really worry about.

 

Even with all that it is likely to generate low double digit returns. Not too exciting at this time given what else is available.

 

Vinod