BNY Mellon bullish on earnings and spread costs, but cautious on deposits

“We expect this [deposit] moderate growth in the second half of the year, and we expect our balances to decline following the issuance of Treasury bills,” BNY Mellon Chief Financial Officer Dermot McDonogh told analysts.

Mark Kauzlarich/Bloomberg

Bank of New York Mellon says it is living up to the forecast it made earlier in the year for strong net interest income growth in 2023 and assures it can continue to control spending.

At the same time, the $430.4 billion asset trust bank warned of an impending decline in deposit balances and reported lower fee income in the second quarter.

BNY Mellon beat analysts’ expectations with profits of $1 billion for the three months ending June 30, on the back of record quarterly operating revenue of $4.5 billion.

Its second quarter results validated Chief Financial Officer Dermot McDonogh’s forecast following the company’s first quarter earnings report, when he called for robust growth in net interest income “with some upward bias.”

Revenue rose 5% year-over-year, while BNY Mellon held expenses, which totaled $3.1 billion, flat on a quarterly and year-over-year basis. Chairman and CEO Robin Vince credited BNY Mellon with “good financial performance in a very dynamic operating environment” on Tuesday.

Expenses proved to be a particular bright spot. In January, the company pledged to halve the 2022 rate of increase, which stood at 8%. Now, halfway through 2023, BNYMellon thinks it might be able to limit the rate of increase – excluding notable items and the impact of exchange rates – to 3% this year.

“We have an increasingly firm grip on our spend base,” Vince said on a conference call with investor analysts.

In a research note last week, Jefferies analyst Ken Usdin wrote that spending controls will play an increasingly important role for all trusted banks as deposit runoff and funding costs higher threaten to reduce net interest income in the future.

Morningstar analyst Rajiv Bhatia called BNY Mellon’s second-quarter cost figures a “good result given the current inflationary environment,” in a research note Tuesday.

BNY Mellon reported a higher-than-expected level of deposits, totaling $277 billion on June 30, but both Vince and McDonogh predicted the trend would reverse in the second half of 2023 as banks, corporate clients and state and local governments were moving money into higher-yielding Treasury securities.

“We expect this growth to moderate in the second half of the year, and we expect our balances to decline following the Treasury issuance,” McDonough said. A shift to Treasuries could put pressure on deposits “across the industry in the months ahead,” McDonogh added.

The other big driver of BNY Mellon’s earnings advance was net interest income, which jumped 33% year-over-year to $1.1 billion. McDonogh left unchanged its earlier projection of 20% net interest income growth in 2023. “We are very pleased with where we ended the first half of the year and we believe we are on very good bases for the second half,” McDonogh said on the call.

Commission revenue, BNY Mellon’s main source of revenue, fell 2% year-over-year to $3.3 billion.

Reinforcing its status as the world’s largest depository bank, BNY Mellon announced a 9% increase in assets under custody or under administration to $46.9 trillion. The company’s flagship securities services business segment grew revenue 12% year-over-year to $2.24 billion, representing a pretax profit margin of 29%.

The Market and Heritage Services business unit saw revenue increase 10% year-over-year to $1.45 billion. Given the segment’s 46% pre-tax profit margin, it’s no surprise that BNY Mellon is investing in it. “We’re putting big budgets into it,” McDonogh said, citing the Wove open-architecture wealth management platform for investment advisers that BNY Mellon unveiled in June. Wove’s trials have gone well, with “the customer pipeline growing well,” according to Vince.

BNY Mellon experienced headwinds during the quarter. Last month, the company discovered that its ability to expand into the cryptocurrency custody space could be limited by a Securities and Exchange Commission Accounting Bulletin that forces custodians of digital assets to put them on the balance sheet, which creates capital issues.

According to Bhatia, BNY Mellon reported a “decent” second quarter. Investors seemed to agree, pushing the company’s stock price up more than 4% to $45.33 on Tuesday.