The financial crisis reminded everyone just how fragile the financial system can be during times of stress. Yet while most of the attention during the crisis focused on well-known banking institutions with a substantial retail-banking presence, Bank of New York Mellon (NYSE:BK) actually plays a key role in maintaining the health of the entire global financial system. That makes BNY Mellon stock arguably the purest play on the state of global finance. Let's take a closer look at this little-known financial institution to see what's behind its recent success.
What BNY Mellon does
The reason so few people know about BNY Mellon is that it doesn't act like an ordinary bank. The financial institution doesn't offer retail customers traditional banking services like deposit accounts or mortgage loans. Rather, it serves the banks and other financial institutions that do work directly with individual and corporate banking and investment customers, acting as the world's top custodian of financial assets.
That business model worked quite well for BNY Mellon during the financial crisis, as the bank didn't have to worry about direct exposure to bad assets on its balance sheet or liabilities from mishandling foreclosures and other collection activity. Because the company relies on its big-bank customers for its own revenue, BNY Mellon stock wasn't immune to the big drop in the stock market during 2008 and early 2009, but it didn't suffer nearly the damage that many of the hardest-hit banks did.
How BNY Mellon has fared recently
BNY Mellon has navigated changing conditions in the financial industry fairly well lately. In its most recent quarter, the company suffered a net loss, due entirely to a charge of more than $850 million related to disallowed foreign-tax credits in a Tax Court decision that it hopes to have reversed on appeal. Yet BNY Mellon benefitted from the rise in global stock markets, with management and performance fees up 10%, and servicing fees rising 3%.
The best news BNY Mellon got recently came from the Fed, when it gave the bank a passing grade on its stress tests in March. Again, given the bank's distinct business model, BNY Mellon saw almost no deterioration in its capital ratios even under the stress-scenario the Fed ran, and those ratios already ranked among the highest of the 18 banks that had to take the tests.
It's important to understand that BNY Mellon hasn't been able to stay completely insulated from the aftermath of the financial crisis. Perhaps the highest profile case recently involves a proposed $8.5 billion settlement from Bank of America (NYSE:BAC) to settle investors' claims over mortgage-backed securities issued by mortgage-unit Countrywide Financial. Insurance giant AIG (NYSE:AIG) has objected to the settlement, and with BNY Mellon acting as trustee of the hundreds of trusts that hold Countrywide mortgage-backed securities, AIG argues that Mellon's relationship with B of A played a role in its willingness to accede to the settlement. Nevertheless, the liability belongs to B of A, and it's hard to come up with a situation in which Mellon would be on the hook for damages.
Why BNY Mellon's worth watching
In the end, what BNY Mellon stock offers is a chance to participate in the health of the financial industry. With a whopping $28 trillion in assets under its control across its various business lines, BNY Mellon needs stability and reliability in the global financial system in order to thrive and succeed in the long run.
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Fool contributor Dan Caplinger owns warrants on Bank of America and AIG. The Motley Fool recommends AIG. The Motley Fool owns shares of AIG and Bank of America and has the following options: Long Jan 2014 $25 Calls on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.