Investors are wondering about BNY Mellon’s stability after the near collapse of another specialized financial institution, First Republic Bank (FRC).
Fears that First Republic (FRC) could collapse led BNY Mellon (BK) and 10 other banking giants to organize a $30 billion bailout. First Republic will use the money to cover uninsured deposits. The hope is to prevent further bank collapses.
To explain, First Republic could collapse because it has many wealthy depositors with over $250,000 in their accounts. The Federal Deposit Insurance Corporation (FDIC) normally only insures the first $250,000 in accounts. However, the FDIC is insuring any amount in accounts at two other troubled institutions, Silicon Valley Bank and Signature Bank.
How Safe is BNY Mellon?
Bank Bears will wonder if BNY Mellon (NYSE: BK), which also has many high-value customers, could be vulnerable. To explain, BNY Mellon makes money by providing investment services and wealth management.
That business model resembles Silicon Valley Bank, Signature Bank, and First Republic Bank. Hence, BNY Mellon could face the banking death spiral if wealthy customers withdraw their money. The banking death spiral occurs when a bank lacks the funds to cover all withdrawals. Bank runs often cause the banking death spiral.
The federal government guaranteed all accounts at Signature Bank and Silicon Valley Bank to prevent hysteria that could lead to bank runs and death spirals. Similarly, big banks are giving First Republic money to prevent a collapse that could trigger bank runs.
Could BNY Mellon Collapse?
Skeptics will wonder if the bank bailout could hurt BNY Mellon (NYSE: BK). Notably, BNY Mellon admits it is making a $1 billion uninsured deposit to help save First Republic Bank.
The Bank of New York Mellon (BK) can easily afford the bailout because it had $405.783 billion in Total Assets and $148.06 billion cash and short-term investments on 31 December 2022. However, bank bears will note that BNY Mellon’s cash and assets shrank in 2022.
For example, BNY Mellon’s Total Assets fell from $444.438 billion on 31 December 2021 to $405.783 billion on 31 December 2022. Hence, BNY Mellon’s total assets shrank by $38.655 billion in 2022.
Similarly, BNY Mellon’s cash and short-term investments fell from $171.342 billion on 31 December 2021 to $148.060 billion on 31 December 2022. Hence, BNY Mellon’s cash and short-term investments shrank by $23.282 billion in 2022.
Moreover, BNY Mellon’s total debts grew in 2022. The total debt from $66.591 billion on 31 December 2021 to $72.524 billion on 31 December 2022. Thus, BNY Mellon lost cash and value in 2022 while taking on more debt.
How Much Cash is BNY Mellon (BK) Generating?
Another reason to fear a BNY Mellon collapse is the cash flow. For example, BNY Mellon’s quarterly operating cash flew fell from $3.129 billion on 31 December 2021 to $2.924 billion on 31 December 2022.
Thus, the quarterly operating cash flow fell in 2022. However, the quarterly operating cash flow rose to $4.990 billion on 30 June 2022. In contrast, the quarterly investing cash flow rose from $19.931 billion on 31 December 2021 to $25.124 billion on 31 December 2022.
Similarly, the quarterly financing cash flow fell from -$24.127 billion on 31 December 2021 to -$26.150 billion on 31 December 2022. I think BK Mellon borrowed a lot of money in 2022 because it reported a $30.095 billion quarterly financing flow on 31 March 2022.
Yet, BNY Mellon’s quarterly ending cash flow grew from -$1.07 billion on 31 December 2021 to $1.929 billion on 31 December 2022. The quarterly ending cash flow rose to $9.544 billion on 31 March 2022.
Is BNY Mellon (BK) Making Money?
BNY Mellon (BK) is making money, but it is making less money. For example, it reported a $685 million quarterly operating income on 31 December 2022. However, the quarterly operating income fell from $1.065 billion on 31 December 2021.
Similarly, the quarterly gross profit fell from $4.015 billion on 31 December 2021 to $3.918 billion on 31 December 2022. Conversely, BNY Mellon’s quarterly revenues rose from $4.067 billion on 31 December 2021 to $6.059 billion on 31 December 2022.
Interestingly, BNY is a growing company. Its revenues grew by 48.98% in the quarter ending 31 December 2022. Comparatively, the revenues grew by 3.26% in the quarter ending on 31 December 2021. So BNY Mellon is growing as it makes less money.
Could the Banking Crisis Boost BNY Mellon (BK)?
I think the banking crisis could boost the Bank of New York Mellon (BK) in two ways.
First, wealthy people and companies that take their money out of shaky institutions such as First Republic will have to put their funds somewhere. Unlike ordinary people, the wealthy cannot hide their money under the mattress.
I think of those people will turn to older banks people view as safe, such as BNY Mellon (BK). Notably, Circle the company behind the USD Coin (USDC) stablecoin deposited $5.4 billion in Bank of New York Mellon after the news about Silicon Valley Bank’s troubles broke.
Second, I think the federal government is now insuring all bank accounts regardless of size. For example, the FDIC organized a “bridge bank” to enable all Silicon Valley Bank depositors to get their money. I believe the federal government will have to organize a similar bailout for any large bank that gets in trouble, including Bank of New York Mellon (BK).
Is the Ukraine War hurting BNY Mellon (BK)?
One reason BNY Mellon has less money could be the Ukraine War. To explain, the Biden Administration used sanctions to cut Russia off from the international financial system to punish the Kremlin for invading Ukraine.
In particular, US, Canadian, British, and European authorities removed Russian banks from SWIFT. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) operates the system that most banks use to make cross-border payments. This means people cannot send money to Russia or receive money from Russia.
Consequently, wealthy Russians can no longer deposit money at BNY Mellon (BK). Instead, those Russians will send their money to Chinese banks in Shanghai.
Notably, VTB Bank, Russia’s second largest financial institution, is participating in the China National Advanced Payments System (CNAPS), the Carnegie Endowment for International Peace reports. CNAPS is the money transfer network that connects Chinese banks. Sanctions block VTB from sending money to BNY Mellon through SWIFT, but it can send money to Chinese banks through CNAPS.
Thus, the Biden Administration could facilitate the movement of the world’s financial center from New York to Shanghai with its sanctions regime. Worse, one of the world’s largest oil exporters, Russia, is becoming dependent on Chinese banks for survival. This will hurt institutions such as BNYMellon.
Is BNY Mellon (BK) a Value Investment?
Contrarians will wonder if the Silicon Valley Bank’s collapse makes BNY Mellon (BK) a value investment?
BNY Mellon is cheap. Mr. Market priced it at $43.27 on 20 March 2023. Yet the bank had $405.783 billion in Total Assets and $148.06 billion cash and short-term investments on 31 December 2022. Thus, BNY Mellon offers enormous value at a cheap price.
Moreover, Bank of New York Mellon (BK) offers an attractive dividend. For example, BNY Mellon scheduled eight 37₵ quarterly dividends between 11 May 2023 and 11 February 2025. BK shares were offering a $1.48 forward dividend and a 3.42% dividend yield on 20 March 2023.
I consider BNY Mellon (BK) a value investment. However, BK is not a value investment for the faint of heart because it operates in an unstable and drastically changing banking industry. If you think it will not collapse, BNY Mellon is a bank stock to investigate.