Northern Trust Is Maintained at Hold by Deutsche Bank

Shares of The Bank of New York Mellon Corporation BK, popularly known as BNY Mellon, have performed remarkably well this year. Last week, the stock touched a new 52-time high of $80.29 during Wednesday’s trading session, ending just 3% below this level on Friday.

BK stock has soared 48% this year. It has widely outperformed its industry, the S&P 500 Index and close peers —Northern Trust NTRS and State Street STT.

Year-to-Date Price Performance

Last week was an impressive one for the U.S. equity markets. The S&P 500 Index recorded its best week of the year and even briefly touched the 6,000 level. The rally was driven by Donald Trump's win in the U.S. presidential election and the Federal Reserve's 25 basis point cut in interest rates.

The developments spurred a massive rally in financial sector stocks and BK wasn’t untouched. Trump’s re-election raises hopes of a de-regulation in the sector that has been reeling under stringent regulatory requirements. Further, lower interest rates will support the sector’s top-line growth, which is presently hampered by high funding costs.

Lower Interest Rates: A Key Factor Driving BNY Mellon Stock

The Fed lowered interest rates for the second time last week. Earlier in September, the central bank cut rates by 50 basis points for the first time since March 2020. Cooling inflation numbers and a slowdown in the labor market drove it to take this step.

BNY Mellon, together with STT and NTRS, has been facing funding cost pressure since last year. This has hurt their net interest income (NII) and squeezed margins.

BK’s NII has seen a five-year (2018-2023) compound annual growth rate of 3.8%. In the first nine months of 2024, its funding costs stabilized, driving NII higher. Also, net interest margin recorded a slight improvement during the period.

With the Fed expected to keep cutting interest rates, BNY Mellon is expected to gain from it. Management now projects NII to be down 5% this year, a change from prior guidance of a 10% decline. This is based on the market-implied forward interest rates and assumptions of higher investment yields, deposit margin compression and modest deposit run-off.

Other Factors Supporting BNY Mellon’s Performance

BNY Mellon’s growth initiatives are impressive. The company has been launching several new services and products, digitizing operations and making strategic acquisitions.

Earlier this month, BK completed the acquisition of Berwyn, PA-based Archer Holdco, LLC, a leading technology-enabled service provider of managed account solutions to the asset and wealth management industry. This will enable the company to enhance its enterprise platform to support retail-managed accounts. Further, Archer will provide BNY Investments and BNY Pershing’s Wove wealth platform for advisors with expanded distribution of model portfolios and access to its multi-custodial network.

Additionally, in September, BNY Mellon announced plans to launch Alts Bridge, an extensive data, software and services solution, by fall. It will cater to rising demand from wealth intermediaries seeking simplified access to alternative and private market investment products. The platform has been designed to integrate seamlessly into intermediaries' existing desktops, starting with BNY Pershing X’s Wove advisory platform and NetX360+, incorporating cutting-edge artificial intelligence and analytics tools.

BNY Mellon has a solid balance sheet. As of Sept. 30, 2024, the company had a total debt of $52.7 billion, significantly lower than its cash and due from banks, and interest-bearing deposits of $108.5 billion. It maintains investment-grade long-term senior debt ratings of A1, A and AA- from Moody’s, S&P Ratings and Fitch Ratings, respectively, which render it favorable access to the debt markets.

BNY Mellon is expected to keep enhancing shareholder value through efficient capital distributions. After clearing the 2024 stress test, the company hiked its quarterly cash dividend by 12% to 47 cents per share. In the last five years, the company increased its dividend four times. It has an annualized dividend growth rate of 8.92%, with a payout ratio of 34%.

Dividend Yield (TTM)

State Street Corp STT remains well-positioned for growth on the back of higher interest rates, efforts to improve fee income and strategic acquisitions. However, a rising expense base and concentrated fee-based revenues remain concerns. Nonetheless, solid capital distributions are another positive.

State Street’s Growth Drivers

Higher Rates to Aid Net Interest Revenue: State Street’s net interest income (NII) and net interest margin (NIM) are anticipated to witness a modest expansion amid the relatively high-interest rate scenario. Both reflected a solid improvement in 2022 and 2023, driven by higher rates. NII experienced a compound annual growth rate (CAGR) of 7.8% over the three years ended 2023.

Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022. High funding costs and lower non-interest-bearing deposit balances exerted pressure on NII and NIM during the first nine months of 2024.

As the Federal Reserve signaled future rate cuts, funding costs are anticipated to stabilize eventually. Also, the company’s investment portfolio repositioning initiative will aid NII and NIM growth. Our estimate for NII indicates a CAGR of 2.8% over the next three years.

Efforts to Bolster Fee Income: STT remains focused on improving fee income sources. Though the company’s total fee revenues dipped in 2022 and 2023, the metric reflected a four-year (2019-2023) CAGR of 1%. This growth was primarily driven by increased client activity and substantial market volatility. The uptrend continued during the first nine months of 2024. Moreover, servicing assets yet to be installed were $3.5 trillion in 2021, $3.6 trillion in 2022 and $2.3 trillion in 2023 across client segments and regions.

Notably, the company had $2.4 trillion of servicing assets to be installed at the end of the third quarter of 2024. State Street remains well-positioned fundamentally on account of its global exposure and a wide array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, combined with business servicing wins and inorganic growth measures, are anticipated to bolster fee revenues. We project total fee revenues to rise 5.3% this year.

Strategic Buyouts: State Street has been expanding its scale via strategic acquisitions and restructuring efforts. This September, the company collaborated with Apollo to boost investors' accessibility to private markets, while in August, it announced its plan to acquire a 5% stake in Australia-based Raiz Invest Limited and a strategic partnership with Taurus.

Further, in February, the company acquired CF Global Trading to expand its outsourced trading capabilities. Further, as part of the consolidation of its India-based operations, the company has assumed full ownership of its two joint ventures. These are part of STT’s ongoing initiatives to optimize its global operations. Such opportunistic buyouts are expected to lead to revenue and cost synergies alongside expanding the company’s footprint globally.

Encouraging Capital Distributions: STT has hiked its quarterly dividend by 10% to 76 cents per share following the clearance of its 2024 stress test. Moreover, this January, the company authorized the buyback of shares worth up to $5 billion, with no expiration date.

As of Sept. 30, 2024, roughly $4.3 million worth of shares remained available for repurchase under authorization. The company intends to distribute 80-90% of its earnings to shareholders this year. Given a solid capital position and earnings strength, the company will likely keep its capital distributions sustainable going forward.

Nonetheless, rising operating expenses and concentrated fee-based revenues alongside volatile capital markets are near-term concerns.

Zacks Rank & Price Performance for STT

Year to date, shares of STT have gained 25% compared with the industry’s rise of 21.7%. STT currently sports a Zacks Rank #1 (Strong Buy).

Other Banks Worth a Look

A couple of other top-ranked bank stocks are Northern Trust Corporation NTRS and Comerica Incorporated CMA.

The Zacks Consensus Estimate for NTRS has been revised upward marginally for 2024 over the past week. The stock price has increased 24.5% over the past six months. NTRS currently sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Earnings estimates for CMA have been revised marginally upward for the current year over the past week. In the past six months, CMA’s shares have risen 30.5%. Presently, CMA carries a Zacks Rank #2 (Buy).

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