2023-05-04 13:45:58 ET
Summary
- The bank will continue to benefit from a favorable interest-rate environment.
- It has a solid and healthy capital position, and is a global systemically critical bank.
- It has shown stability and growth in dividends.
- It has a proven ability to achieve profitability in a storm.
- Its downside risk could come from the overall banking sector headwinds and sector confidence rather than its fundamentals.
One undercovered equity I am bullish on this year is also one of the three oldest banks in the US and the largest custodian bank in the world, according to Wikipedia .
That bank's name? Bank of New York Mellon ( BK ).
The reason why I am bullish on Bank of New York Mellon is I believe that this bank will continue to benefit for the rest of 2023 from a favorable interest-rate environment that is in its favor, has a healthy capital position and deemed to be a systemically critical bank, has shown growth YoY in dividends back to shareholders, and has remained profitable throughout the headwinds of the last few years including through the dual market shocks of war and inflation.
The downside risk it could face relates to drops in investor confidence in the banking sector overall, rather than its fundamentals, which could be triggered if we see more regional bank failures this year, causing market dips. This could, however, also lead to a dip buying potential for acquiring this stock at great value.
Here are more details behind my thesis:
A Favorable Interest Rate Environment
As you can see from the bank's official Q1 2023 earnings release , net interest revenue grew 7% QoQ and a healthy 62% YoY.
Q1 2023 earnings release - BNY Mellon (BNY Mellon)
I would argue that this is a direct result of the Fed's rate policy over the last year. This is shown in the following chart of Fed rate hikes from March 2022 to March 2023 :
Chart of Fed Rate Hikes 2022 - 2023 (Forbes)
The key question, however, is will this favorable rate environment continue, looking forward toward the rest of 2023 and early 2024, particularly since rates were raised again at the May 3 Fed meeting. In my opinion, the favorable environment will continue and Bank of New York Mellon will continue to benefit. Here is why:
Based on a Reuters poll of 100 economists, as highlighted in an April 20 article in Reuters , beyond May "59 of 100 economists expected the Fed to keep its policy rate unchanged through at least this year." In that same article, chief US economist at Bank of America Securities, Michael Gapen, stated "we maintain the first rate cut in March 2024."
Systematically Critical Bank with Healthy Capital Position
Bank of New York Mellon is one of the global systematically critical banks according to a list by the Financial Stability Board .
I believe this gives it a competitive edge well above those regional banks that we recently saw being taken over, such as Silicon Valley Bank, Signature Bank, and First Republic Bank.
More importantly, let's look at its capital situation. In my opinion, it has a very healthy capital position:
Q1 2023 BNY Mellon Results - Capital (BNY Mellon official website)
As you can see from the above results from Q1, Bank of New York Mellon has an 11% CET1 Ratio, an increase over its 10.4% CET1 Ratio YoY. It also has a liquidity coverage ratio of 118%. Remember that Liquidity Coverage Ratio is defined by Investopedia as " the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations."
Proven Ability to Pay Out & Grow Dividends for Shareholders
I also look at a bank's ability to pay dividends back to its shareholders, and in the case of Bank of New York Mellon, you see above that it increased its dividend YoY from $0.34 to $0.37. While this may not sound like a lot, it shows a trend in dividend growth rather than the other way around, which is good for shareholders.
Also of interest to me is what kind of dividend yield I will get. If you look at this chart below from MarketWatch, you can see that as recently as April 28 the yield was as high as 3.56%.
Dividend yield for BNY Mellon - 28 April (MarketWatch)
Looking forward towards 2024, I don't see a reason for Bank of New York Mellon to reduce its dividend as its capital position is solid, so I anticipate the dividend will hold steady and potentially go up in 2024.
As someone who traded Bank of New York Mellon as an individual home-based investor right after the April 2020 pandemic-induced market dip, a successful strategy I have tested is buying its stock during a major dip, holding it long enough to earn the dividends, selling covered call options on my position to earn premiums, and then only selling the position once a capital gain can be realized.
This type of strategy earns multiple income streams from dividends, capital gains, and options premiums.
Continuous Profitability Despite Market & Sector Turbulence
Since the beginning of 2022 until now, we have seen a major war erupt in the world, rising inflation, and several regional bank failures. We also saw equity values drop, which also can lead to reduced value of assets under management.
However, based on Bank of New York Mellon's financial results below, they have remained a safe port in the storm, I would say confidently. It is important to note that part of their revenue is fee-driven, and as you can see the YoY drop in fee revenue is not particularly significant to be noteworthy.
Q1 2023 results - BNY Mellon (BNY Mellon website)
My opinion is that Bank of New York Mellon has strong financial performance, and it is echoed in the results above, showing a 62% increase in net interest revenue, 11% increase in total revenue, 29% increase in net income, and 30% increase in earnings per share, in comparison to the same quarter a year ago.
My sentiment was echoed in an April 18 article in Yahoo Finance by Zacks Equity Research , which reiterated that "higher interest rates, Bank of New York Mellon's global footprint and a strong balance sheet position are likely to keep supporting its revenue growth in the near term."
Downside Risk based on Sector Confidence, not Fundamentals
The downside risk on Bank of New York Mellon, I believe, will not come from its own fundamentals but from periods of dips in banking sector stocks, fueled by panic selling by investors being wary of negative banking sector news.
This is not surprising, considering just days ago First Republic Bank was taken over by JPMorgan Chase, in an FDIC brokered deal, while not that long ago we saw Credit Suisse get taken over by rival UBS ( UBS ), after the failure of both Silicon Valley Bank and Signature Bank in the US.
This downside risk can be an opportunity for dip buyers, and I expect more dip buying opportunities this spring, as we do not yet know how many more regional banks are in trouble.
Corporate Finance Institute defines dip buying as "an investment strategy of buying a fundamentally sound asset when its price falls, commonly due to outside factors. Investors then buy the dip in anticipation of prices recovering for that asset."
This strategy was echoed in an April 5 article in Bloomberg stating that "individuals snap up bank stocks even as uncertainty swirls."
Therefore, I reiterate my sentiment that Bank of New York Mellon should be considered in a dip-buying scenario.
Share Price Potential
Since I am bullish on Bank of New York Mellon, what buy-and-hold strategy could an investor take?
1 year price chart for BNY Mellon, with SMA (StreetSmart Edge platform)
If you look at the 1 year price chart above for its stock, overlayed by the 30 day simple moving average, you see that going into early May it is at what I would say an attractive price range having fallen below its 30 day simple moving average, as the chart shows a key price dip in March after the Silicon Valley Bank failure, followed by a rebound, and another dip below the moving average as the market was facing the potential First Republic Bank failure and the approaching May 3 Fed meeting.
Based on this chart, I think this stock can rebound back above $50 sometime in 2023, putting current buyers in a favorable position potentially, while going into 2024 I believe the stock will approach price ranges similar to the start of 2022, prior to the dual market shocks of war and inflation that affected the equity market overall that year.
Old Bank of New York building near Wall Street (Author original photo, 2020)
Conclusion - Bullish Rating
In conclusion, I am reaffirming my bullish rating on Bank of New York Mellon based on its solid fundamentals, too-big-to-fail status in its sector, a continuing favorable environment for large banks in spite of sector turbulence and regional bank failures, and its attractive value as a dividend-income stock, as well as its proven potential for rebounding from market dips, which could prove profitable for dip buyers.
For further details see:
Bullish On Bank of New York Mellon: A Safe Port In The Storm