Investments In AI And Digital Platforms Will Improve Future Client Experiences

Key Takeaways

• The One BNY model leverages cross-selling to drive revenue growth through enhanced client relationships and experiences.
  
• Investments in digitization, AI, and new platforms focus on improving efficiency and supporting top-line revenue growth.
  
• Market volatility and shifts in deposit mix, along with digitization risks, could challenge Bank of New York Mellon's revenue and earnings targets.

Catalysts

Provides a range of financial products and services in the United States and internationally.

• BNY's commercial coverage model, One BNY, aims to drive revenue growth through cross-selling and leveraging its diverse business platforms to deepen client relationships and improve client experiences. This model is expected to enhance revenue.
  
• Acquisition of Archer and development of new client solutions such as CollateralOne and next-gen ETF servicing platforms are part of BNY's strategy to become an end-to-end solutions provider. These efforts should contribute to top-line growth.
  
• Significant investments in digitization and AI are intended to increase efficiency and scalability while supporting revenue growth through enhanced capabilities and new product offerings.
  
• Transition to BNY's Platforms Operating Model is designed to drive efficiency and enable top-line growth by simplifying operations and fostering better collaboration, which should improve net margins.
  
• Positive operating leverage remains a key focus, with BNY planning to manage expenses while increasing revenue through strategic initiatives, thereby supporting earnings growth and achieving long-term financial targets.

Bank of New York Mellon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of New York Mellon's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.4% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $5.5 billion (and earnings per share of $8.45) by about January 2028, up from $4.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 3.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Bank of New York Mellon Future Earnings Per Share Growth

Risks

• Increased geopolitical tensions and conflicts, as well as persistent trade and fiscal policy uncertainties, could create market volatility and negatively impact revenue and earnings.
  
• Shifts in deposit mix, such as a decrease in noninterest-bearing deposits, could reduce net interest income, affecting overall earnings.
  
• The execution of the Platforms Operating Model transition, which involves a significant change in employee work processes, carries risks that could disrupt efficiency gains and potentially impact net margins.
  
• Market volatility in interest rates could impact net interest income, particularly if the expected growth in client activity and deposit balances does not materialize, affecting overall earnings.
  
• Risks associated with large-scale investments in digitization and AI may not yield expected top-line growth or cost efficiencies, impacting the firm's ability to meet its revenue and net margin targets.

Valuation

• The analysts have a consensus price target of $91.03 for Bank of New York Mellon based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $104.0, and the most bearish reporting a price target of just $76.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.7 billion, earnings will come to $5.5 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $86.34, the analyst's price target of $91.03 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.