Bank of New York Mellon Q1 Earnings: An Emerging Growth Story (NYSE:BK)

Interest rates have moved sharply higher this year. The yield on the benchmark 10-year Treasury note has jumped from 3.8% last December to near 4.7% over recent trading days. The 2-year note yield is back at 5% amid strong economic growth data and inflation readings that are above what the Federal Reserve wants to see.

Still, the SPDR S&P Bank ETF (KBE) is up more than 20%, dividends included, over the past year. The fund remains significantly under a late 2023 peak, but the group has been surprisingly resilient in the face of the bond market selloff. Fears of mismatches between banks’ assets and liabilities, for now, are muted while asset managers are generally benefitting from higher stock and bond prices.

I am upgrading The Bank of New York Mellon Corporation (NYSE:BK) from a hold to a buy. I was cautious on the stock about a year ago, but the bank has weathered volatility well. Shares are attractively valued considering the firm’s growth trajectory, in my view, while the technical situation has improved.

Bank Stocks Performing Well Amid Treasury Selling

According to Bank of America Global Research, BNY Mellon is a global company dedicated to helping its clients manage and service their financial assets throughout the investment life cycle. The three segments (Securities Services, Market & Wealth Services, and Investment & Wealth Management) offer a comprehensive set of capabilities and expertise across the investment lifecycle, enabling the Company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.

Earlier this month, BK reported a strong set of Q1 numbers. First-quarter non-GAAP EPS of $1.29 beat analysts’ estimates by a dime, while revenue of $4.5 billion, up 3% from a year ago, also topped expectations. Stronger fee revenue and interest income helped the firm, though credit costs were elevated due to its commercial real estate exposure.

Still, the management team reiterated its FY 2024 guidance and sees net interest income declining 10% year-on-year with flat expenses. Who doesn’t love a little AI pixie dust? The company plans to leverage AI for productivity, while it aims to return capital to shareholders. A key risk is the reality that BK has cyclical exposure, so a downturn in GDP at home would likely hit the stock.

On valuation, analysts at BofA see earnings rising a solid 8.5% this year, with accelerating EPS growth in the out years. Operating EPS is seen hitting $6 in 2025, and the Seeking Alpha consensus outlook is about on par with what BofA projects.

Dividends, meanwhile, are forecast to rise at a steady pace over the next several quarters, making for an attractive yield. A concern I see is a somewhat soft revenue forecast – merely in the 2% to 5% range annually through 2026.

BK: Earnings, Valuation, Dividend Yield Forecasts

While BK’s current earnings multiple is nothing to get too excited about, the earnings growth path is what I like about this Asset Management and Custody Banks industry company.

If we assume $6 of 2025 EPS and apply the stock’s 5-year historical non-GAAP forward P/E of 10.7, then shares should trade near $64. The PEG ratio is also to the cheap side. On a book value basis, though, shares are not overly cheap today.

BK: Compelling Valuation Considering the Growth Path

Compared to its peers, BK sports a valuation grade roughly on par with the industry norm. Its growth forecast is quite positive, however, and BK’s profitability metrics are very strong.

With healthy share-price momentum over the past several months and a slew of EPS upgrades over the past three months, there are technical and fundamental tailwinds today.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2024 earnings date of Thursday, July 18 BMO.

The stock trades ex a $0.42 dividend this Thursday and BK’s management team is slated to present at the North American Financial Information Summit 2024 during the middle of next month.

Corporate Event Risk Calendar

The Technical Take

With a robust growth backdrop and some fundamental tailwinds, BK’s chart has improved from several months ago. Notice in the graph below that shares recently broke out above key resistance in the low to mid-$50s range. What was concerning, however, was a bearish RSI divergence with price, as evidenced by a lower high in the RSI momentum oscillator at the top of the chart. It’s possible that it was resolved with the filling of a price gap last week, when shares touched $52.64 on an intraday basis.

Bigger picture, take a look at the long-term 200-day moving average – it is positively sloped, suggesting that the bulls are in charge. Moreover, based on the $17 range from early 2022 through last December, a bullish upside measured move price objective to near $70 is in play. That would be above the double-top high from early 2022 just shy of $65. Support is near $52.

Overall, the technical view on this asset manager/bank stock is positive, though the bearish RSI divergence still bears watching.

BK: Shares Above Key Support, Rising 200dma

The Bottom Line

I am upgrading BK from a hold to a buy. Shares are up sharply from a year ago, when heavy pessimism was priced into anything related to a traditional bank, but broader upside momentum in the asset management space has helped bring shares higher. The growth outlook has also turned more sanguine along with the chart situation.