Recently, legendary investor Warren Buffett and his company Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) disclosed their latest 13F filing, in which the conglomerate reported what stocks it bought and sold during the fourth quarter of 2021. As expected, Berkshire maintained its more than 72 million shares in the large custodian Bank of New York Mellon (BK 0.89%), a position it first started in 2018.
Buffett's and Berkshire's decision to maintain their position is a testament to Bank of New York Mellon, because they disposed of several bank stocks during the pandemic. It may also be a good reason for investors to give Bank of New York Mellon a look, because it's a stock that may hold up well against some of the volatility and inflation markets are currently experiencing.
A safer kind of bank
Heading into the pandemic, Buffett and Berkshire held a basket of banks including several large money-center banks, investment banks, large regional banks, and credit card companies. But when the pandemic hit the economy in March of 2020, Berkshire would, over the next few months, get much more selective, dumping many of its bank holdings.
Buffett would eventually tell investors that he had plenty of faith in the banks during the pandemic, but that he just didn't like Berkshire's overall exposure, considering that long periods of lockdowns and slow economic activity could leave banks vulnerable to massive amounts of loan losses.
Image source: The Motley Fool.
However, Bank of New York Mellon runs a different business than banks like JPMorgan Chase and Bank of America that are heavily in the business of lending and investment banking. Bank of New York Mellon is a custodian, meaning it is mainly in the business of holding clients' assets for safekeeping. BNY Mellon also runs a large investment and wealth management business. The company is one of the largest custodians in the world, with $46.7 trillion in assets under custody and $2.4 trillion in assets under management at the end of 2021.
BNY Mellon makes most of its money by charging fees, and about 97% of the bank's total revenue in the fourth quarter of 2021 came from fee revenue. A large bank like JPMorgan or Bank of America will typically make at least half of its revenue from net interest income, which is the interest banks make on loans and securities after covering the cost of funding those assets.
Net interest income can be a highly profitable business, but it can be tough to operate in a down economy and can be vulnerable to lots of loan losses. BNY Mellon is typically a safer business because it simply doesn't have as many risky assets.
If you want to see how BNY Mellon can be a safer kind of bank, take a look at the Federal Reserve's latest stress testing results. In this exercise, the Fed puts the largest banks with a presence in the U.S. through a series of extreme hypothetical economic scenarios to ensure banks can absorb losses during a severe economic downturn and still be able to lend to individuals, families, and businesses.
Under the Fed's severely adverse scenario, BNY Mellon would generate the highest profit before taxes of any of the 23 large banks put through the test. Additionally, the bank would incur a very minimal $1.8 billion of loan losses during that scenario as well.
Still a bank
Despite a different business model that involves less risk, BNY Mellon is still a bank, meaning it is in a sector known for hedging at least some amount of inflation and paying out decent dividends. The custodial bank should see higher revenue when the Federal Reserve raises its benchmark overnight lending rate, an event expected to happen multiple times this year.
If the Fed were to instantly raise the federal funds rate by 1% (unlikely to happen because the Fed normally raises in 25-basis-point (0.25%) increments), BNY Mellon would realize $840 million of additional net interest income over the next year.
Investment managers have also been waiving investor fees on money market funds due to the ultra-low-interest rate environment that has been in place since the pandemic started, which has significantly lowered returns in these funds. When the Fed raises rates, Bank of New York Mellon will be able to charge fees again, which will also boost revenue.
Add in BNY Mellon's 2%-plus dividend yield, and you have a stock that is relatively safe, can perform well against inflation, and provides some nice passive income. That sounds like a good place to park money during a time of intense market volatility and uncertainty.
