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Here's Why Bank of New York Mellon Shares Fell 9% on Wednesday

By Lou Whiteman - Apr 17, 2019 at 5:14PM

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Interest expense and low volatility led to issues in the first quarter, and pose a continuing threat to earnings in the months to come.

What happened

Shares of Bank of New York Mellon (BK 2.12%) declined more than 9% Wednesday after the company reported mixed first-quarter results and warned it expects continued pressure in the current quarter due to its need to pay higher interest rates to attract deposits.

So what

Bank of New York Mellon reported Q1 earnings of $0.94 per share on revenue of $3.9 billion, short of the $0.96 per share in earnings on $4 billion in revenue that analysts were expecting. The company, a large custodial bank that is also active in asset management, private banking, and institutional services, blamed weakness in investment management and net interest income for the miss.

Net interest revenue fell 8.5% in the quarter from a year prior to $841 million. The bank was also hurt by relatively calm markets in the first three months of the year, which led to a slowdown in client activity and a drop in fee revenue.

A finger points to a falling stock chart.

Image source: Getty Images.

The Federal Reserve in March unexpectedly backed away from its plans to keep raising the fed funds rate, and said it expects no further hikes this year. That dovish turn took banks and bank investors by surprise, and threw interest rate planning at banks like New York Mellon into disarray.

If the weak results weren't bad enough, the company's outlook for the current quarter added further impetus to investors' scramble  for the exits. CEO Charlie Scharf warned that "current expectations for the yield curve will likely negatively impact our revenue growth for the next several quarters," predicting net interest revenue would fall 3% to 5% sequentially in the second quarter.

Now what

Bank of New York Mellon is regarded as a well-managed bank, one that was strong enough to attract an investment from Warren Buffett last year. But the perception in the market is that current trading and interest rate conditions will make this a sluggish growth year for the company.

Of course, trading activity can change rapidly, and interest rate competition between banks could weaken as the year goes on and the Fed holds the line on rates. After Wednesday's drop, Bank of New York Mellon is trading at about 11 times earnings. That's not cheap enough to prompt me to buy in right now, but the share price is nearing a tempting level, which means it's worth watching closely.

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