Why this bank stock is quietly crushing the market

Key points

• BNY Mellon has outperformed all large bank stocks with its 45% YTD return.
• As the largest custody bank, it tends to perform well in various market cycles.
• Even with the big gains, it's still a good value.

BNY Mellon has traditionally been a fairly stable, mostly boring stock. But not this year.

BNY Mellon (NYSE:BK) is not the type of stock that comes to mind when looking to add growth to your portfolio. But that’s what it has delivered over the past year, as it has not only been the best performing bank stock over the past year; it has outgained most of the Magnificent Seven stocks.

It may also represent one of the rare mistakes by Warren Buffett, who owned the stock for 13 years in his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) portfolio until he completely dumped out of it in 2023.

That move came in the first half of last year, when the banking industry was going through a deposit crisis. But BNY Mellon, which stands for Bank of New York Mellon, is not like traditional banks, so it managed the crisis fairly well.

Since then, it has outperformed all of its large bank rivals, returning 82% over the past 12 months and 45% year-to-date. Here’s why this bank stock is quietly crushing the market.

In the room where it happened

BNY Mellon is as old, staid, and blue-chip as it gets on the stock market, as its roots trace back to 1784 when Bank of New York was founded by Alexander Hamilton.

But it is not your traditional bank because it is a custody bank, which means it does not hold deposits and provide loans like other banks. As a custody bank, it holds assets for large corporations, institutions, and asset managers, including ETF and mutual fund assets, for protection and safekeeping.

It also services those assets, providing various functions like accounting, securities lending, clearing, and handling flows. While it does offer wealth management and asset management for investors, most of its revenue, about 75%, comes from its custody business.

So, unlike traditional consumer banks, BNY Mellon makes most of its money on noninterest fee income, because the company charges fees to hold and service the assets. So, that means 75% of its revenue is fee-based. Typically, consumer banks make most of their money on interest from loans.

This is an advantage for BNY Mellon because fee revenue is typically much sturdier, and less prone to macroeconomic swings. Plus, as the largest custodian, with some $52 trillion in assets under custody, the assets are sticky, meaning they are not likely to change hands.

So, in many ways, BNY Mellon is less risky, and more stable, than most of its competitors, and less susceptible to market volatility.

In this particular market, BNY Mellon has outpaced other banks because it is not weighed down as much as its competitors by high deposit costs and provisions for credit losses. Additionally, it has benefitted from the strong stock market, as it makes more money in revenue when asset levels rise.

In the third quarter, BNY Mellon saw its revenue rise 5% to $4.65 billion, buoyed by a 5% increase in fee revenue. Net income rose 16% to $1.1 billion, while earnings per share climbed 22% to $1.50 per share. Both revenue and earnings topped estimates.

Still cheap, still a buy

BNY Mellon is one of those stocks that has produced steady, consistent results over the years, because of its business model and its dominance in this space. There are very few large custody banks, and BNY Mellon is the biggest of the bunch, so it’s just not likely to see much asset flight.

It is just the type of stock Warren Buffett loves, and why he owned it for so long, which is why it is a bit surprising that he sold out of it.

Of course, its long-term returns pale in comparison to the Magnificent Seven and other high flying growth stocks. But this year, many of the overpriced tech stocks have not performed as well, as investors grew concerned about their high multiples.

BNY Mellon is not typically a high-flier, but it does produce reliable results through various market cycles. It also has a solid dividend that has increased for 14 straight years.

BNY Mellon stock remains a solid buy, even with its great YTD returns, as its valuation is relatively low. Its forward P/E is just 11 and its five-year P/E-to-growth (PEG) ratio is just 0.75, which puts it in value stock territory. 

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