The fourth-quarter earnings announcement that Mellon Financial
The bank's revenue, which is mainly noninterest income, was $1.5 billion in the quarter, an increase of 27% from the previous year. Mellon's net income rose to $237 million from $208 million, an increase of 14%. The decision to sell the venture capital business caused the bank to recognize a loss of $61 million in the fourth quarter, and that charge for discontinued operations largely accounts for an earnings growth rate that is modest when compared with the sizzling earnings increase attributed to continuing operations. For the full year, revenue rose to $5.3 billion from $4.7 billion, or 14%, and net income increased to $898 million from $782 million, a 15% improvement.
The triumphant tone in the headline obscures a number of other items that might lead investors to a more sober view of the bank's prospects. In particular, Mellon's $0.72 of EPS from continuing operations in the fourth quarter was boosted by a tax benefit of about $0.18 per share. In addition, about one-third of Mellon's revenue growth came from the increase in performance fees earned by its investment management unit. Unlike investment management fees, which are generally steady throughout the year, performance fee income is more seasonal. As the name implies, that income also depends on an adviser's ability to deliver returns in excess of certain benchmarks. Investors should therefore be careful about spotting a trend in Mellon's stunning 154% year-over-year increase in performance fee income.
There were a number of one-time items included in Mellon's results from continuing operations that hurt performance. Had severance payments, impairment charges, and merger-related expenses been omitted, Mellon's net income would have been higher by $41 million, or $0.10 per share. Nevertheless, a quick read of Mellon's earnings announcement was much more likely to leave an impression of the bank's performance that is too exuberant rather than too restrained.
On balance, however, Mellon shareholders should feel very positive about both the recent performance and the outlook for Mellon's pending merger with Bank of New York
The combination of Mellon and Bank of New York's custody businesses will create a giant with more assets under custody than JPMorgan Chase
Investors who are considering buying shares of Mellon might view the recent share price of $44 to be a good value when compared with the stock of industry rival State Street
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