BNY surges past Wall Street’s expectations

• Key insight: BNY’s streak of strong quarterly earnings continued Tuesday, as it reported another quarter of record revenue and record net income.
• Supporting data: Earnings per share for the fourth quarter beat analysts’ expectations by 12 cents.
• Forward look: The bank is now aiming to achieve a return on tangible common equity of 28% in the next three to five years.

The Bank of New York Mellon has again exceeded Wall Street expectations, reporting another quarter of record revenue and record earnings, with strong net interest income driving the beat.

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On Tuesday, the $472.3 billion-asset custody bank said its fourth-quarter revenue totaled $5.18 billion, topping the $5.15 billion consensus estimate of analysts who were polled by S&P Capital IQ. That’s up 7% year over year and continues BNY’s recent streak of revenue improvements.

Net income totaled $1.47 billion, up 27% compared with the year-ago quarter. Earnings per share came in at $2.02, exceeding analysts’ average estimate of $1.90. BNY’s adjusted earnings per share, which excluded noninterest expenses related to severance pay, were about $2.08.

BNY’s favorable results are the outcome of a multiyear transformation of the bank’s operating model, Chairman and CEO Robin Vince said in a statement. The momentum is strong enough that the bank laid out new, ambitious financial targets on Tuesday, just two years after it last set goals.

“With the foundations in place, we expect to realize greater scale and growth opportunities across our platforms,” Vince said. “Our new medium-term financial targets represent the next milestones on our path to unlocking BNY’s full potential over the long-term.”

BNY is now expecting to achieve a return on tangible common equity of 28% over the next three to five years. That’s not far off from what the bank achieved during the fourth quarter — 26.6%.

Some analysts suggested that the new target may be conservative. In a research note following the release of BNY’s results, Steven Alexopolous, an analyst at TD Cowen, said the “new medium-term targets are impressive, but likely a waypoint as the platform operating model ramps.”

The results come as BNY continues to implement business strategies that are intended to streamline and unify departments. 

For the quarter ending Dec. 31, net interest income rose 13% year over year to $1.35 billion,  primarily as a result of the ongoing reinvestment of maturing securities at higher yields and balance sheet growth. The increase was partially offset by deposit margin compression.

The results included the release of $26 million in provisions for credit losses and higher fee income, which rose 5% year over year to $3.7 billion. The increase in fee income reflected higher market values, net new business, higher client activity and a favorable impact from a weaker U.S. dollar, partially offset by the mix of asset under management flows, the bank said.

Expenses of $3.36 billion were flat year over year. 

During the fourth quarter, BNY launched the BNY Dreyfus Stablecoin Reserves Fund, a money market fund designed to hold the reserves for stablecoins to be issued under the Guiding and Establishing National Innovation for U.S. Stablecoins Act, or GENIUS Act, which was signed into law in July. The fund does not invest in stablecoins.

In October, BNY executives told analysts that the bank has been using artificial intelligence at a growing pace. As of Sept. 30, it had 117 different AI solutions in production, an increase of 75% from the second quarter of last year.

As of October, BNY had deployed more than 100 “digital employees” who were working with BNY employees in areas such as code repairs and payment validations.