When a CEO resigns abruptly – and the company makes it clear he was shown the door – investors can easily treat the situation as a giant red flag.
Or, conversely, as a buying opportunity. Bank of New York Mellon Corp., which ushered out CEO Robert Kelly last week, seems more likely to be the latter.
To be clear, there are good reasons – some of the company’s own making – for the bank testing its 52-week lows. The entire U.S. financial sector has been shedding value as the country teeters on the brink of recession. Like any other player in the industry, BNY Mellon, as it’s informally called, has litigation problems. Most importantly, the low-interest-rate environment puts a significant dent in the company’s earnings.
What this has added up to, however, is a bargain valuation of less than nine times forward earnings, and 0.7 times its book value. A bargain, particularly since BNY Mellon is not the typical U.S. bank, taking consumer deposits and making (bad, in recent years) loans.
Indeed, BNY Mellon dispensed with the last of its retail branches five years ago and now makes its money as a custodian of assets, wealth manager and provider of services to other companies. It has $26.3-trillion (U.S.) in assets under custody and administration and actively manages another $1.3-trillion. It services $11.8-trillion in other companies’ outstanding debt and processes global payments averaging $1.7-trillion per day.
All told, that means that fees make up 80 per cent of its revenue. And that fee revenue grew 18 per cent in the second quarter, year-over-year, to more than $3-billion.
John Maloney, the chief executive officer of BNY Mellon shareholder M&R Capital Management, told Barron’s earlier this year, “I sometimes think if they could just take the word ‘bank’ out of their name, they could pick up a few [dollars per share]”
Morningstar analyst Michael Kon says BNY Mellon’s size and reputation “garners it a wide economic moat.” With the demand for its services rising with investment managers’ desires to outsource, “the tailwind in this industry grows, and Bank of New York is well-positioned to grab a share of new business.”
Raymond James analyst David Long puts some numbers to it: He believes BNY Mellon, which has doubled its proportion of non-U.S. revenue over the last decade, can capture 25 per cent to 30 per cent of what will be $4.7-billion in new global custody and service revenue five years from now.
Recently for BNY Mellon, however, the problem has been the 20 per cent of revenue that doesn’t come from fees. The company holds deposits from its custodial clients and makes money on the spread – which, in this low-interest environment, has been minimal.
BNY Mellon’s second-quarter results, “although largely in line from an earnings perspective,” says Barclays Capital analyst Jason Goldberg, “highlighted the continued adverse impact [from]the low rate environment.”
Meanwhile – significantly – BNY Mellon “has demonstrated a persistent lack of operating leverage owing to rising expenses associated with higher regulatory, integration and legal costs,” Mr. Goldberg notes.
It is unclear what any or all of this had to do with the departure of Mr. Kelly, a native of Halifax who spent considerable time with TD before heading south some years ago. Neither Mr. Kelly nor the bank has commented beyond the Aug. 31 parting statement that said the change was “due to differences in approach to managing the company.”
His successor, Gerald Hassell, a 30-year veteran of the company, will presumably be tasked with managing the company’s costs and assessing whether BNY Mellon can more aggressively invest its deposits to beef up its spread.
He will also deal with the company’s legal hassles. Among other issues, it faces civil suits over its foreign-exchange practices. While they will be vexing in the short term, they will likely not amount to much. Foreign exchange brings in about 1 per cent of the company’s revenue.
In the meantime, the stock has been fighting to get above $20 – an entry point that suggests a roughly 75 per cent gain to the $35 target prices of Mr. Goldberg and Mr. Kon and the $37 of Mr. Long. While pessimists worry about BNY Mellon’s negative headlines and short-term issues, investors with a medium- to long-term view can get a global financial-services giant for the price of a beaten-down U.S. bank.
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BK-N 37.61 -0.292 % 4,403,721