Is this Bank a Hidden Gem? KBW Thinks So!

Aline Medeiros | June 28, 2024

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Bank of New York Mellon Corp. (BK) has garnered a fresh wave of optimism from market analysts, driven by its strong financial outcomes and strategic market positioning. Recently, Keefe, Bruyette & Woods (KBW) analyst David Konrad upgraded BK’s stock to an “Outperform” rating, citing the bank’s impressive financial performance and robust expense management. This endorsement is underpinned by a raised price target of $70, suggesting a significant 19% upside from its recent trading figure.

Konrad’s optimism extends to the bank’s earnings forecasts, enhancing the 2024 earnings per share (EPS) estimate to $5.48 and the 2025 projection to $6.15. Such adjustments reflect not only past achievements but also a future ripe with profitability. Bank of New York Mellon’s performance in the current year has indeed been robust, with a 14.4% return, narrowly trailing the S&P 500 but outpacing its industry peers within the banking sector.

The bank’s valuation metrics are particularly noteworthy in the context of the broader market. While the S&P 500 commands a forward price-to-earnings (P/E) ratio of 21.2, large-cap banks like BK remain significantly undervalued, with a P/E ratio of 11.2. This discrepancy highlights a potentially undervalued sector where BK is a standout, especially when considering its comparative return on tangible common equity (ROTCE). FactSet data positions BK second among the top twenty U.S. banks with an expected ROTCE near 22% by 2025.

In comparative terms, BK’s metrics reveal a solid competitive edge. Its ROTCE and forward P/E ratios outshine many peers, including major players like JPMorgan Chase & Co. (JPM) and Fifth Third Bancorp (FITB). Notably, only American Express Co. (AXP) surpasses BK in ROTCE, benefiting from its fee-based earnings and high credit card interest rates. However, its higher P/E ratio of 16.6 juxtaposes sharply with BK’s more modest 10.2.

Strategically, BK’s closest competitor in the business model—State Street Corp. (STT)—also deals in securities custody and asset management but trails slightly in terms of P/E ratio. Konrad’s neutral stance on STT underscores BK’s preferable position in the market. Additionally, the analyst foresees BK leading in capital deployment strategies such as share repurchases and dividends, bolstered by its commendable performance in regulatory stress tests and solid capital ratios.

The broader analyst community mirrors Konrad’s positive outlook, with a majority rating BK as a “buy.” This sentiment is anchored in a strong belief in the bank’s strategic direction and fiscal health.

In summary, Bank of New York Mellon not only demonstrates robust financial metrics but also stands as a leading entity with significant upside potential. Through strategic capital management and strong regulatory performance, BK is poised for ongoing success in a competitive financial landscape. The bank’s capacity to outperform amidst challenging market conditions and its favorable valuation metrics make it a compelling choice for investors seeking stability and growth.