T+1 Settlement And Decisive Partnerships Propel BNY's Revenue And Trust

Key Takeaways

• Introduction of T+1 settlement and successful collaborations highlight BNY Mellon's commitment to enhancing client trust and expanding fee revenue through service integration.
  
• Investments in technology and strategic expansions in Securities, Market, and Wealth Services segments are poised to drive future growth in investment and wealth management revenues.
  
• Diverse challenges including seasonally lower deposits, market condition risks, and increased investments and regulatory costs, may pressure margins and profitability.

Catalysts

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

• The introduction of T+1 settlement in the U.S., Canadian, and Mexican markets is expected to strengthen client trust and deepen BNY's relationships with them, which could lead to increased transaction volumes impacting fee revenue positively.
  
• The successful execution of major mandates, such as the one from a premier global asset manager and the collaboration with AIA and BlackRock, showcases BNY's ability to offer comprehensive and integrated services across its platform, likely enhancing its fee revenue growth.
  
• BNY's focus on investments in technology and personnel, including the launch of its wealth advisory platform, Wove, indicates a commitment to innovation and client service enhancement, which may drive future growth in both investment services fees and wealth management revenues.
  
• The bank's resilient business model, as demonstrated by its performance in the Federal Reserve's annual bank stress test and the subsequent increase in its dividend payout, signals a strong financial position that could be attractive to investors, potentially impacting share price positively.
  
• Expansion in Securities Services and Market and Wealth Services segments, such as through ETF servicing growth and enhanced Treasury Services, indicates strategic growth areas that could further increase fee revenue and improve net margins.

Assumptions

• Analysts are assuming Bank of New York Mellon's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.2% today to 23.9% in 3 years time.
• Analysts expect earnings to reach $4.7 billion (and earnings per share of $6.82) by about August 2027, up from $3.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2027 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 5.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Risks

• Seasonally lower deposits in the coming quarters, particularly a reduction in noninterest-bearing deposits, could lead to a decrease in net interest income (NII), affecting overall revenue.
  
• The bank's growth and financial performance are partly attributed to market-related activities, such as Clearance and Collateral Management and foreign exchange revenue; adverse market conditions could negatively impact these revenue streams.
  
• Investment in technology and new platforms, while crucial for long-term growth, poses execution risk and upfront costs that could pressure margins and net income in the short to medium term.
  
• Although the bank has shown discipline in managing expenses, the need to continue investing in technology and personnel to support growth initiatives might lead to higher operating expenses, impacting net margins.
  
• Regulatory changes or increased compliance costs can also adversely affect the bank's operating environment, potentially increasing expenses and affecting profitability metrics such as return on tangible common equity (ROTCE) and pre-tax margins.

Valuation

• The analysts have a consensus price target of $70.31 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 $76.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.5 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $61.42, the analyst's price target of $70.31 is 12.6% higher.
  
• 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.