Bank of New York Mellon (NYSE:BK) reported second quarter earnings on Tuesday that came in ahead of analyst projections. The investment climate continues to be quite hostile for financial institutions, but BNY Mellon has a number of appealing investment characteristics that could lead to above-average shareholder returns going forward.
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Second Quarter Recap
Total reported revenues rose 15% to $3.9 billion. Backing out acquisitions, organic growth was more subdued at 7% but was still respectable as both fee revenue and net interest income moved forward. Reported fee revenue advanced 18% to make up the vast majority of the total top line at 77% while net interest revenue from the bank's loan portfolio increased 1.2% to make up the remainder of revenue.

Assets under custody jumped 21% to $26.3 trillion, allowing BNY Mellon to increase its lead on rivals. State Street (NYSE:STT) is the next largest competitor, with custody assets of nearly $23 trillion as of the end of the first quarter. More diversified money center rivals include JPMorgan Chase (NYSE:JPM), the third largest peer at nearly $17 trillion, followed by Citigroup (NYSE:C) at $13 trillion in assets under custody. Northern Trust (Nasdaq:NTRS) is the next largest pure play rival but much smaller overall with just over $4 trillion in custody assets.

Net income growth was also strong, increasing 11.7% to $727 million, or 59 cents per diluted share. This worked out to a return on equity (ROE) of 8.8%, with quarter-end book value at $27.46 per share.

Outlook
For the full year, analysts project revenue growth of 8% and total revenue of almost $15 billion. They expect earnings of $2.30 per share for year-over-year growth of approximately 12.2%. Based on the current profit projection, ROE will end the year at about 8.4%. This is still below BNY Mellon's long-term average and should eventually improve to closer to 10%. At this level and factoring in future acquisitions and organic growth, profits could rise closer to $3 per share within a couple of years.

Bottom Line
The bank's forward earnings multiple is currently less than 10 and also below its historical average. So is its price to book value, which is currently 0.91. Prior to the financial crisis, BNY Mellon traded at more than two times book value. These are very reasonable valuation metrics for the largest custody bank in the world. Throw in a current dividend yield of 2.1%, and there are a number of compelling reasons to consider investing in the stock. (For additional reading, check out Book Value: How Reliable Is It For Investors?)

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