Bank of New York (BK) and State Street (STT) Should Provide Slow, Steady Growth to Investors - Barron's
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Alluding to Aesop's venerable tale, "The Tortoise and the Hare," Barron's notes that both Bank of New York Mellon (NYSE: BK) and State Street Bank (NYSE: STT) are two of the industries best banks.
The article starts by noting that both banks look reasonably-priced, BK trading at 14x FY10 EPS estimates and STT also at 14x of FY10 EPS estimates. Both also trade for about 12x FY11 EPS projections, below historic P/E ratios in the mid- to high-teens.
Generally, financial institutions face challenges when rates rise, but it would appear that BK and STT could benefit from a jump in rates. BK estimates a $500 million boost in pre-tax profits if rates rise about 1 point. That would add about $0.30 to the EPS annually.
Barron's thinks that due to the improvement in the economy, rates could rise sooner rather than later this year. As Barron's puts it, "Near-zero short rates, for instance, have depressed profits in such areas as asset management and securities lending. BNY Mellon has been giving fee rebates to investors in short-term money-market funds that now yield next to nothing. Those rebates would decline as short rates rise."
An analyst at Basswood partners thinks that there aren't many companies that you can buy at these valuations. He thinks that, because of their growth potential, it is almost unfair to compare them to banks. The analyst notes that his price targets are $52 for Bank of New York, and $80 for State Street.
Bank of New York is the top global custodian, with $22 trillion [not a typo] of assets under management. State Street is number two by comparison, and a leading investment manager with $1.9 trillion in assets. Though not the most exciting lines of business, they run sort of an oligopoly with some pretty stiff barriers to entry.
They both lack large loan portfolios, however. Bank of New York has a portfolio of $32 billion, which is equal to about 15% of total assets. State Street has $10 billion ,or about 7% of assets.
A Davis New York Venture Fund co-manager states that Bank of New York did an excellent job of integration in 2007, and CEO Robert Kelly is one of the best in the business.
State Street CEO Jay Hooley is targeting 10 - 15% of annual growth, and Bank of New York has no forward guidance for right now. Both took good-sized losses related to mortgages and other bond holdings, but the banks expect to make up a chunk of those losses this year.
Concerns to growth include fee pressures in custody and administration, depressed conditions in securities lending, and declining FX profits. Some believe that a paltry earnings report is already baked-in to the price of the shares.
The article starts by noting that both banks look reasonably-priced, BK trading at 14x FY10 EPS estimates and STT also at 14x of FY10 EPS estimates. Both also trade for about 12x FY11 EPS projections, below historic P/E ratios in the mid- to high-teens.
Generally, financial institutions face challenges when rates rise, but it would appear that BK and STT could benefit from a jump in rates. BK estimates a $500 million boost in pre-tax profits if rates rise about 1 point. That would add about $0.30 to the EPS annually.
Barron's thinks that due to the improvement in the economy, rates could rise sooner rather than later this year. As Barron's puts it, "Near-zero short rates, for instance, have depressed profits in such areas as asset management and securities lending. BNY Mellon has been giving fee rebates to investors in short-term money-market funds that now yield next to nothing. Those rebates would decline as short rates rise."
An analyst at Basswood partners thinks that there aren't many companies that you can buy at these valuations. He thinks that, because of their growth potential, it is almost unfair to compare them to banks. The analyst notes that his price targets are $52 for Bank of New York, and $80 for State Street.
Bank of New York is the top global custodian, with $22 trillion [not a typo] of assets under management. State Street is number two by comparison, and a leading investment manager with $1.9 trillion in assets. Though not the most exciting lines of business, they run sort of an oligopoly with some pretty stiff barriers to entry.
They both lack large loan portfolios, however. Bank of New York has a portfolio of $32 billion, which is equal to about 15% of total assets. State Street has $10 billion ,or about 7% of assets.
A Davis New York Venture Fund co-manager states that Bank of New York did an excellent job of integration in 2007, and CEO Robert Kelly is one of the best in the business.
State Street CEO Jay Hooley is targeting 10 - 15% of annual growth, and Bank of New York has no forward guidance for right now. Both took good-sized losses related to mortgages and other bond holdings, but the banks expect to make up a chunk of those losses this year.
Concerns to growth include fee pressures in custody and administration, depressed conditions in securities lending, and declining FX profits. Some believe that a paltry earnings report is already baked-in to the price of the shares.
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