Over the past two weeks, most of the biggest banks in the U.S. have reported earnings. Every one reported large earnings-per-share declines from increased provisioning for credit losses due to the new current expected credit loss (CECL) framework and the novel coronavirus pandemic. But Bank of New York Mellon (NYSE:BK) has a business model that relies heavily on recurring fee income along with taking credit risk. This creates a bank that is in a strong position to weather storms like the current one.
Fee-based revenue saves the day
In the first quarter of 2020, BNY Mellon earned $1.05 per share compared to $0.94 in the first quarter of 2019. Revenues rose 5% on a year-over-year basis to $4.1 billion, driven by a 10% increase in fee income and a 3% decline in net interest income. On the conference call, CEO Thomas Gibbons had this to say about BNY Mellon's model and the current environment:
We have a lower risk fee-based business model that positions us relatively well in an environment like this. We perform stress tests regularly as do our regulators. ... We have a highly diversified business model with a conservative risk profile and fees in general are skewed toward recurring revenue streams.
Market volatility drove revenue in March
For the fee-based portion of the business, the first quarter was fantastic. Massive volatility in stock and bond markets, along with an international flight to the U.S. dollar, drove increased trading revenue. Elevated Treasury and Fed activity drove a 16% increase in revenue for BNY's Pershing clearinghouse and its treasury services as volumes increased to 2.5 to 3 times normal volumes. Asset management also saw large inflows along with higher performance fees. On the conference call, the company cautioned that investors shouldn't extrapolate the first quarter's performance to the rest of the year. Volatility will almost certainly revert back to normal, which will translate into more typical growth rates.
BNY Mellon doesn't have the same type of credit exposure most banks have
On the credit book, BNY Mellon provisioned $169 million for expected credit losses. The company didn't really get into where the provisions were allocated on the conference call, but it did say that the base economic assumption was for a recession that lasts for most of the year and an economy that doesn't really get back to normal until 2021. BNY Mellon's credit risk is concentrated in financial institutions and margin, and it has about 2% of assets in commercial real estate and corporate loans. BNY does provide loans and mortgages to high-net-worth individuals as well. For the most part, BNY Mellon has none of the retail mortgage, auto loan, and credit card exposure to small borrowers. Mortgage forbearance shouldn't affect it at all.
BNY Mellon has a much different business model than a traditional bank. As one of the plumbers of the financial system, BNY Mellon generates its income from fees and will be less exposed to credit risk than a more traditional bank. While the first quarter (especially March) was exceptional for its fee-based business, BNY should return to its more steady earnings growth. If the COVID-19 crisis lasts longer than anticipated, the bank should weather the crisis a bit better than most.