After announcing earnings this morning, Bank of New York Mellon's (BK 0.89%) stock dropped around 3%. Investors looking for a reason behind that move don't have to look any further than the decline in net interest revenue and net interest margin.
As I predicted yesterday, BNY Mellon joined Wells Fargo in being hampered by a decline in net interest margin. BNY Mellon saw this important metric decline to 1.09% during the fourth quarter, which is down from 1.27% in the same quarter of 2011 and 1.20% in the third quarter of 2012. Lowering margins resulted in lower net interest income as well, which saw a decline to $725 million for the quarter.
However, we should note that Mellon is essentially a bank to other banks, and it gets most of its revenue from fee income. As a result, net interest income only makes up a fifth of its top line.
A temporary blip
It's not all bad news for investors of the nation's largest trust bank. Assets under management saw a 10% increase from the previous year (resulting in a 17% rise in investment management fees), and its assets under custody saw a 9% increase (leading to a slight 1% increase in investment service fees). These figures indicate that the bank's clients still value the services it performs. In addition to its modest quarterly dividend, BNY Mellon also spent over $1 billion in 2012 repurchasing shares, helping to increase shareholder value slightly over the past 12 months.
In the short term, the market may react negatively to the declining net interest income, but this will probably end up being a universal theme across the majority of the bank earnings over the next few weeks.
