Solid net interest income numbers were a big reason Bank of New York Mellon met analysts' bottom line expectations on Tuesday, reporting a $905 million first-quarter profit. Chief Financial Officer Dermot McDonogh is confident that the $425.1 billion-asset custody giant can extend that run for the remainder of 2023.
On a conference call with analysts, McDonogh reiterated Bank of New York Mellon's guidance from earlier this year, calling for 20% year-over-year growth in the noninterest income line "with some skew to the upside."
Bank of New York Mellon reported first-quarter net interest income of $1.13 billion, up 62% year-over-year. For all of 2022, net interest income totaled $3.5 billion.
"We're off to a good start in the first quarter," McDonogh said.
The company also appeared to make headway toward meeting CEO Robin Vince's goal of cutting annual expense growth in half. Its reported noninterest expense of $3.1 billion was down from the fourth-quarter figure and represented a modest 3% year-over-year increase. Noninterest expenses increased 8% during 2022.
Vince "has been clear about our determination to bend the cost curve," McDonogh said. "We're executing with discipline and urgency."
Bank of New York Mellon experienced a decline in deposits "in line with typical seasonal patterns and in line with our expectations," between January and early March, only to see the trend reverse following the collapse of Silicon Valley Bank and subsequent industry turmoil, McDonogh said. Bank of New York Mellon reported deposits of $281.3 billion on March 31, up about 1% from year-end 2022.
Noninterest deposits amounted to about 26% of Bank of New York Mellon's total deposits — slightly above the historical range of 20% to 25%. McDonogh expects to see some moderation, though not a significant amount.
"It's stayed sticky," McDonogh said of the noninterest portfolio. "Clients left cash with us in March because they just wanted to…use the safety and resilience of our balance sheet and it just stays there."
Bank of New York Mellon's outlook is considerably rosier than that of Boston-based State Street, which
Abundant noninterest deposits are a primary driver of net interest income because banks can invest the no-cost money into interest-earning assets. Pricier funding, by definition, produces less revenue. Indeed, State Street's Aboaf said every $1 billion reduction in noninterest deposits results in a $12 million to $15 million drop in quarterly revenue.
Bank of New York Mellon reported fee income of $3.2 billion, in line with the total from the first quarter of 2022. Analysts projected a bigger number, and CEO Vince labeled the result "lackluster," though the company has a number of fundamentals in place "designed to help us change this trajectory and drive underlying fee growth over time," Vince added.
In a similar vein, State Street is expecting fee income growth to accelerate through the remainder of 2023 as it brings a $3.6 trillion backlog of assets under custody and/or administration onto the balance sheet. State Street's first-quarter results failed to meet analysts' expectations, however, as fee revenue of $2.3 billion declined 9% year-over-year.
Disappointing first-quarter fee revenue results should not obscure what was otherwise a positive earnings performance for Bank of New York Mellon, Robert Wildhack, who covers the company for Autonomous Research, wrote Tuesday in a research note.
"While the fee result will get more scrutiny, the rest of the quarter appears solid, especially given the net interest income picture and balance sheet trends," Wildhack wrote.
Investors appeared to agree with Wildhack's generally positive take on Bank of New York Mellon's earnings. Shares closed higher by more than 1% Tuesday at $44.89.
