Bank of New York Mellon

The Bank of New York Mellon reported strong second-quarter results with 13% revenue growth and 7% adjusted expense growth. This led to 22% adjusted net income growth, with returns on tangible common equity rising to 31% versus 29% in the first quarter. Shares rose 3% in July 15 intraday trading.

Why it matters: While BNY handily beat consensus expectations, we believe some investors had anticipated a strong quarter given market movements and Citi’s strong results in its securities services segment. The current environment is undoubtedly favorable, especially with equity market appreciation boosting asset-based fees. In addition, volatility is boosting trading activity and foreign exchange revenue. Net interest income was up 6% sequentially and 20% from the year-ago period with impressive growth in the firm’s net interest margin at 1.45%. This was a multiyear high and up from 1.38% in the first quarter. The sequential NIM expansion was broad-based and driven by higher reinvestment yields, lower rates on interest-bearing deposits, and noninterest-bearing deposits holding up.

The bottom line: As we digest these results, we are raising our fair value estimate on wide-moat-rated BNY to $135 per share from $120 with about half of the increase driven by higher fee income and the other half coming from higher net interest income. We’d wait for a better entry point before recommending shares. With the caveat that NIMs can be difficult to forecast, we now expect 2026 and 2027 net interest margins of 1.41% and 1.40%, respectively, versus our previous expectations of 1.37% and 1.35%.

Bears say: Historically, the custody banks have seen pricing pressure creep up, and it’s possible that the efficiency gains get competed away. On the other hand, BNY noted that more clients are increasingly using the firm across multiple lines of business, which increases the costs of switching.

On the efficiency front, BNY continues to keep a lid on headcount. We note that full-time employees ended the quarter at 46,500 down from 47,200 at the beginning of the quarter and 49,900 at the end of the year-ago quarter.

Diving deeper into other quarterly results, issuer services revenue was up 17% (with fee revenue up 23%) and was unusually strong due to market share gains in its corporate trust business. If there was an area of softness from our vantage point, it was performance fees in its investment management unit.

With regards to the firm’s outlook, BNY raised its full-year 2026 total revenue growth outlook to 10%-11% (from previous expectations of about 6% growth) with net interest income expected to expand 12%-13% (versus expectations for 10% growth previously). As a result of higher variable expenses, adjusted expenses are now expected to grow 6%-7% this year (compared with 4% growth previously). This revised outlook shows strong operating leverage, in our view.

After updating our model following the firm’s release of second-quarter financial results, we are increasing our fair value estimate to $135 per share from $120, reflecting strong near-term fee income and net interest income. Fee income is benefiting from high asset-based fees from market appreciation as well as higher activity from volatility such as foreign exchange trading revenue. We model noninterest income for 2026 and 2027 at $16.5 billion and $16.8 billion, respectively, and net interest income for 2026 and 2027 at $5.7 billion and $5.9 billion, respectively. Our fair value estimate equates to approximately 2.3 times book value, 4.1 times tangible book value, and approximately 15 times our 2026 GAAP EPS estimate.

Following a strong 2026 with 11% revenue growth, we expect total revenue growth of about 4% per year from 2027 to 2030. We expect fee revenue to grow about 3% to 4%, as market appreciation and growth in certain subsegments, such as Pershing's RIA custody unit, are partially offset by pricing pressure. We expect net interest income to grow about 15% in 2026 and then average around 3%-5% per year as deposit growth moderates and interest rates eventually decline. We use a cost of equity of 8.5% and expect returns on tangible equity to be approximately 25%-26% in our base case for the forecast period (Note: this number may differ from management’s adjusted metric).

Bank of New York Mellon’s Securities Services consists of two sub-segments: asset servicing and issuer services with asset servicing about 80% of segment revenue. Asset servicing is the firm’s traditional custody offering for asset managers and asset owners (such as pension funds). We believe the custody business tends to have a wide moat built on cost advantages and switching costs. BNY is roughly tied with State Street as the number-one custodian based on assets under custody and administration. Given the low basis points paid for custody services, we believe this is a business where scale matters. BNY and State Street each spent over $1.5 billion on technology annually in recent years, a level that smaller firms cannot match.

We believe cost advantages for large trust banks are derived primarily from scale. There are large upfront costs to develop software systems and processes to service such a large amount of assets. BNY spent $2.1 billion on software and equipment in 2025, for example.

Clients of the custody banks do face switching costs due to process disruption, the interconnectedness of a client’s workflows and the custodian’s infrastructure, and onboarding costs. Custody is central to the operations of asset managers and asset owners (such as pension funds), and as a result, the decision to switch is not one taken lightly. Switching custodians takes time; it involves integrating new systems and retraining staff. Large asset owners and asset managers may have a formal policy to conduct custody reviews after a certain number of years. In general, we point out that the decision to switch custodian often takes six-18 months.

A very public switch among asset managers was BlackRock’s decision to transition the majority of its iShares ETF custodian from BNY competitor State Street to other players. In May 2020, Barron’s reported that BlackRock was looking to diversify custodians. In February 2021, State Street announced it would lose a large chunk of the iShares business, which represented around 1.5% of State Street’s fee revenue. The transition mainly occurred in late 2023, with the final transition expected to occur in 2025. We make two points. First, the transition took several years. Second, we do believe there is some truth to the idea that BlackRock wanted to diversify providers rather than only generate cost savings. BlackRock’s custody vendors went from the vast majority, State Street, to roughly 40% Citi, 30% JPMorgan,15% BNY, and 15% State Street. We note that State Street’s SPDR business is a meaningful competitor to the iShares ETF business, something that is not the case for the other providers.

The asset management industry continues to consolidate, and both asset managers and asset owners are sophisticated about pricing. As a result, the custody business continues to see pricing pressure. Despite this pricing pressure, the firm’s returns on tangible equity have remained strong as scale and slow expense growth have been able to offset headwinds. Moreover, market shares have been stable.

BNY’s Market and Wealth Services consists of Pershing (around 40% of segment revenues) as well as Treasury Services (around 30% of segment revenues) and Clearance and Collateral Management (around 30% of segment revenue). Pershing provides broker/dealers with clearing services and RIAs with custody services. Essentially, Pershing is BNY’s asset servicing custody business, but geared toward wealth managers, and we believe the same moat sources of cost advantage and switching costs hold. We believe this is a business where scale matters and view the case of then E-Trade acquiring Trust Company of America as illustrative of this. In 2018, to compete with Schwab and then TD Ameritrade, which had RIA custody businesses, E-Trade acquired Trust Company of America with $18 billion in assets under custody for $275 million. However, E-Trade failed to gain scale and, shortly after its acquisition by Morgan Stanley, Trust Company of America was divested in 2021 with roughly $23 billion in assets for just $55 million. We point out that, similar to the asset servicing custody business, market shares tend not to change. Clearance and Collateral Management clears and settles equity and fixed-income transactions. With $7.1 trillion in average tri-party collateral management balances, BNY is the largest clearer of US Treasury securities. The treasury services business averages $249 billion in payments per day, which contributes to its scale-based moat source in our view. We note that this segment has pre-tax operating margins of around 45%-50% and is by far BNY’s highest-margin segment.

BNY’s Investment and Wealth Management segment, which we view as having a narrow moat, is composed of two lines of business, asset management and wealth management, with about two-thirds of revenue coming from asset management. BNY’s asset management consists of seven boutiques focused on certain submarkets. Consistent with other asset managers, we view switching costs and intangible assets as the primary moat sources for asset managers. Switching costs stem from inertia, the uncertainty of achieving better results at another asset manager, and potential tax consequences from selling appreciated assets. With the wealth management business contributing less than 10% to firmwide revenue, we believe it is less relevant to BNY’s moat rating.

BNY may not be done with expense control, and expenses may last longer than expected.

In addition to custody, BNY has a strong market position in a variety of businesses that may be underappreciated, such as ADR servicing and mutual fund subaccounting, the clearing of tri-party repos, and Pershing (which benefits from the rise of RIAs).

In comparison with a traditional bank, only about 25% of BNY's revenue is from net interest income and credit risk is modest, which could make it more attractive to own in a period when interest rates declining and credit defaults are increasing.

Fee compression and lower margins in asset management will result in asset managers being more conscious of their costs and lead to pricing pressure, which has eased up in recent years.

BNY is exposed to many factors outside of its control, such as equity market movements, interest-rate movements, and foreign-exchange volatility.

A large scale acquisition, if it were to occur, could distract the company.