BNY beats third-quarter forecasts as fees and net interest income climb, but profit eases from the second quarter

BNY's third-quarter earnings and revenue beat Wall Street forecasts as fee income and net interest income rose from a year earlier, the custody bank said Thursday, though revenue was flat from the second quarter while expenses kept rising and its profit margin narrowed.

Ahead of forecasts on both lines

BNY earned $1.61 billion for common shareholders in the quarter ended Sept. 30, or $2.34 a diluted share, up from $1.34 billion, or $1.88 a share, a year earlier. Excluding severance of 3 cents a share, the only item BNY classes as notable that changed diluted earnings this quarter, adjusted earnings were $2.37 a share. Analysts had expected $2.26, according to Zacks Investment Research and Investing.com.

Revenue rose 12% to $5.68 billion, against estimates of $5.55 billion to $5.56 billion. Fee revenue, about 72% of the total, climbed 12% to $4.08 billion, which BNY attributed to net new business, more client activity and higher market values, partly offset by the mix of flows in the assets it manages. Net interest income, the gap between what the bank earns on its securities and loans and what it pays on deposits and other funding, rose 15% to $1.42 billion as BNY reinvested securities at higher yields and grew its balance sheet, partly offset by compression in deposit margins.

The beat was not uniform. Total fee and other revenue of $4.25 billion, net interest income and investment services fees of $2.97 billion all topped the Zacks consensus figures of $4.16 billion, $1.39 billion and $2.85 billion. Foreign exchange revenue of $198 million fell short of the roughly $204 million analysts had forecast, and investment management and performance fees of $803 million trailed an $819 million estimate.

A strong year, a flatter quarter

Measured against a year ago, the quarter looks strong. Revenue grew 12% while noninterest expense rose 8% to $3.49 billion, a gap of 389 basis points that BNY calls operating leverage. The pretax operating margin widened to 38.5% from 36.4%, and return on tangible common equity, a non-GAAP measure, rose to 29% from 25.6%.

Measured against the second quarter, the picture is flatter. Revenue was essentially unchanged from $5.70 billion while expenses rose 1%, so the pretax margin narrowed from 39.8% and earnings per share fell 4% from $2.45. Net interest income slipped 2%, which BNY tied to lower deposit balances, partly offset by reinvesting securities at higher yields. Average deposits fell 1% to $311 billion, and the net interest margin eased to 1.43% from 1.45%. Foreign exchange revenue dropped 14%.

Most of the squeeze showed up in Securities Services, the custody and corporate trust segment that produces about half of revenue. Its revenue held at $2.82 billion while expenses rose 5%, cutting its pretax margin to 35.8% from 39.3% three months earlier. BNY said the increase reflected higher revenue-related expenses and investments. Issuer Services fees were up 43% from a year earlier on higher corporate trust fees, but the line's revenue dipped from the second quarter on lower revenue from its depositary programs, partly offset by higher corporate trust revenue.

Market and Wealth Services, which includes the Pershing brokerage platform, payments and trade, and clearance and collateral management, grew revenue 12% from a year earlier to $1.98 billion, with a 51.4% pretax margin. Net new assets on Pershing's U.S. platform were $48 billion, up from $25 billion in the second quarter.

Custody assets climb as managed money slips

Assets under custody or administration reached $63.4 trillion at Sept. 30, a preliminary figure BNY says can change when it files its quarterly 10-Q report, up 1% from June and 10% from a year earlier. BNY attributed the annual gain to higher market values, net client inflows and net new business, partly offset by a stronger dollar. Assets under management, also preliminary, were $2.19 trillion, down 2% from $2.23 trillion at the end of June. Clients pulled a net $12 billion in the quarter: $22 billion left short-term strategies, while long-term active strategies took in $6 billion and index strategies $4 billion.

Capital returned

BNY returned $1.37 billion to common shareholders, $436 million in dividends and $937 million in share buybacks, compared with $1.10 billion of buybacks in the second quarter. It paid 63 cents a share in quarterly dividends, up from 53 cents. The common equity tier 1 ratio, a core measure of capital strength, was 10.9%, compared with 11% at the end of June and 11.7% a year earlier, and the tier 1 leverage ratio fell to 5.7%, a notch below the 5.8% analysts had expected, according to Zacks. BNY said buybacks, dividends and a decline in accumulated other comprehensive income reduced common equity capital, partly offset by earnings, and that lower risk-weighted assets cushioned the ratio. The leverage ratio also reflected a preferred-stock redemption, net of a new issue.

"BNY delivered strong results in the third quarter," Chief Executive Robin Vince said in the release, describing "an overall constructive but uneven operating environment."

How the stock is trading

Early trading was thin and pointed in both directions. BNY posted its results at about 6:30 a.m. ET, and Investing.com, in a report published at 6:57 a.m., said the shares were down 1.58% in premarket trading. CNBC market data showed them at $140.00 at 7:06 a.m. ET, up 1.7% from Wednesday's close of $137.64, on about 1,500 shares. The stock fell 2.4% on Wednesday, and Zacks said on Oct. 12 that it had lost 12.3% over the prior month.

Vince and Chief Financial Officer Dermot McDonogh are scheduled to discuss the results on a conference call at 11 a.m. ET.