Looking Beyond BNY Mellon's Earnings

The situation looks very chaotic at Bank of New York Mellon (NYSE: BK  ) , especially after the controversial departure of CEO Robert Kelly. I decided to put it through the wringer to see whether the stock deserves space in my portfolio.

Performance
Rising fee revenue and growth in its assets under management helped Bank of New York Mellon report an impressive second quarter. The company witnessed a strong growth in fees and net interest revenue. Investment services fees rose 27% year over year, while investment management and performance fees increased by 14%, reflecting new business and higher revenues from securities lending. Increased client deposits and the purchase of high-quality securities drove a 5% rise in net interest revenue. Net new business also helped its assets under management climb to $1.3 trillion, up 22% from the previous year.

Despite low interest rates, trust banks have managed to perform fairly well in general. Rivals State Street (NYSE: STT  ) and SunTrust Banks (NYSE: STI  ) also reported healthy quarters. But as savvy investors, we need to look beyond earnings to decide whether a stock is worth investing in. Let's narrow things down by comparing the company with its closest peers along a few important parameters:

  • Price/earnings (P/E) ratio: This ratio helps us look at a company's earnings relative to its price, and determine how cheap or expensive the stock is.
  • Price-to-book (P/B) ratio: Widely linked with value investing, and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea of a stock's value and indicates value opportunities.
  • Tier 1 capital ratio: This metric, which divides the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times.
  • Dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.

Company

P/E
(TTM)

P/B

Tier 1 Capital Ratio

Dividend Yield

Bank of New York Mellon 9.2 0.71 14.1% 2.6%
State Street 10.5 0.86 18.9% 2.2%
SunTrust Banks 23.5 0.52 11.1% 1%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

BNY Mellon seems to have best figures among its peers. Its price-to-earnings and price-to-book ratios make it look cheaper than State Street. Although both have low P/B multiples, its P/E is considerably lower than SunTrust's. Although its dividend yield and payout ratio are not very high, they're still a bit higher than its competitors'. BNY Mellon’s Tier 1 ratio also increased to 14.1%, up from 13.5% in 2010, well above the required 8% minimum, reflecting its strong capital adequacy and stability.

Part of the reason it's trading at a discount to its peers is no doubt due to the controversies surrounding the bank, from charges its currency traders ripped off pensions to allegations of conflicts of interest in representing investors in the attempted Bank of America (NYSE: BAC  ) settlement, and now to the sudden departure of its CEO.

Banks worldwide are cutting costs aggressively. And trust banks such as State Street and BNY Mellon are following suit. Now, with the change in the top guard, these cost-cutting measures will most likely intensify.

The Foolish bottom line
With impressive earnings, strong fundamentals and an attractive price, BNY Mellon could be an attractive buy. But the CEO change, and perhaps internal soul-searching, could mean some near-term rockiness for the company.

To keep up with all the top Foolish news and analysis about Bank of New York Mellon, click here to add it to your watchlist.

Zeeshan Siddique does not own shares of any of the companies mentioned in the article. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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