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How Safe Is Bank of New York Mellon and Its Dividend?

By Brent Nyitray, CFA – Jul 22, 2020 at 9:48AM

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Fee income helps smooth out earnings for this trust bank.

Second-quarter results for banks are coming in, and we have seen some big drops in earnings as they have built up credit loss reserves. Coronavirus-related issues have created issues for consumers who have credit card debt as well as for businesses that have been forced to temporarily close.

Bank of New York Mellon (BK 0.68%) has a somewhat different business model than the typical bank that makes its money by taking deposits and making loans. While these types of transactions are part of BNY's operations, it has other revenue streams that don't rely on credit risk. 

Picture of a trading floor

Image source: Getty Images.

Trust banks have a different business model

Bank of New York Mellon is a trust bank, which means a big part of its business is handling cash for large institutional investors. For example, its investment services business includes fixed-income clearing firm Pershing, which benefits from increased bond trading (a good thing when the Fed is active in the markets). The bank's treasury services segment handles the day-to-day cash management needs of large corporations, while asset servicing handles the administration for large professional investors.

The investment management business oversees money for institutions and individual investors, while wealth management includes high-net-worth estate planning and private banking.

While BNY is in the business of making loans and investments, the fee income derived from these other businesses makes the company less exposed to macroeconomic and credit cycles. 

BNY reports flat earnings

Bank of New York Mellon reported second-quarter earnings recently, which were flat on a year-over-year basis, while revenue increased by 2%. Compare that to big competitors like JPMorgan Chase (earnings per share down 52%), Citigroup (EPS down 74%), Bank of America (EPS down 50%), and Wells Fargo, which reported a loss. Most of the big banks had to take multi-billion-dollar credit charges. BNY took a charge of only $143 million, which was driven primarily by credit downgrades for some of its commercial real estate book. The company did not have any actual charge-offs in the quarter. 

Stress tests were passed with flying colors

The company reported that its results under the Dodd-Frank stress tests were strong and that it had the lowest peak-to-trough drop in capital of all the U.S. Globally Systemically Important Banks at 20 basis points. This means that among U.S. banks, Bank of New York Mellon is one of the most insulated against further weakness in the economy. Regarding plans for capital, CEO Thomas Gibbons had this to say on the conference call: 

Looking ahead at our capital returns, we expect to maintain our quarterly common stock dividend of $0.31 [per share], and we will not buy back shares during the third quarter. We have a very strong capital position and low-risk model that should allow us to perform well under a wide range of scenarios. We will commence buybacks as soon as possible, depending on the economic and regulatory environment, our outlook for the business, and outcome of the resubmitted capital plans based on new scenarios we expect to receive later this year.

In other words, BNY is focused on when it can start buying back stock. Compare that to Wells Fargo, which just cut its dividend from $0.51 to $0.10 a share on the back of a quarterly loss. At current levels, BNY's dividend works out to a yield of 3.43%. Note that having the prime interest rate hovering around zero for an extended period will negatively affect Bank of New York, as it will be forced to waive fees on many accounts. Still, a drop in interest income is less of a problem than deteriorating credit quality. 

While not all the other banks are in the same position as Wells Fargo, credit quality is an issue for most of them. With commercial real estate struggling, credit quality and writedowns are likely. Bank of New York Mellon's dividend certainly looks secure in the near term, which makes it a suitable investment for income investors who value stability. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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