Zacks_Analysts' Blog : BNY Mellon Lowered to Underperform - Analyst Blog

We have downgraded our recommendation on The Bank of New York Mellon Corporation (BK) to “Underperform” as the low interest rate environment and various lawsuits filed against the company will likely dent its profitability and lead to higher expenses over the medium term.

With the low interest rate environment not expected to reverse any time soon, BNY Mellon will likely face substantial margin pressure in the near term. Moreover, the company’s interest-bearing deposit costs are expected to rise at a faster rate than asset yields due to the competitive pressure, leading to further strain on net interest margin.

Though BNY Mellon announced to curtail about 3% of its total workforce in August, it is not expected to fully control cost as the company continues to expand globally and faces numerous regulatory and legal expenses. Over the last few months, BNY Mellon has been sued by various law enforcing agencies for failing to provide the best possible prices while making foreign currency trades on behalf of its clients. These lawsuits would add to the company’s legal expenses.

Furthermore, BNY Mellon’s profitability will be affected by the financial reform law due to increased costs and fee restrictions. Also, along with other large U.S. banks (with assets of $50 billion or more), the company will be subject to an additional surcharge to meet the Basel III requirements. These will likely lower the company’s flexibility with respect to business investments in the mid-term.

However, offsetting these negatives, BNY Mellon’s capital deployment activities through dividend payment and share repurchase reflect its strong capital position. We expect the company to continue building capital over the next couple of years, resulting in a better financial position that will help meet the higher Basel III requirements.

Additionally, BNY Mellon has many organic growth prospects and stands to benefit from a secular growth in global capital markets. The company is also concentrating on building its international business. The long-term growth prospects for the industry are encouraging, given the huge growth potential of overseas securities markets and the rise in complex new securities. We believe that the company will be able to enhance its footprints by continuously investing to enhance its long-term growth prospects.

Currently, BNY Mellon shares retain a Zacks #4 Rank, which implies a short-term ‘Sell’ rating. However, one of the competitors of the company, SunTrust Banks Inc. (STI) retains a Zacks #3 Rank (short-term ‘Hold’ rating).