EFTA00645278.pdf

From: Richard Kahn • To: "jeffrey E." <jeevacation®gmail.com> Subject: Fwd: BNY Mellon: EPS Down on Lower NII, Expense Saves the Wildcard Date: Fri, 22 Jul 2016 12:05:22 +0000 Richard Kahn HBRK Associates Inc. Begin forwarded message: From: "Morgan Stanley" < Subject: BNY Mellon: EPS Down on Lower Nll, Expense Saves the Wildcard Date: Jul 22, 2016 at 12:25:13 AM EDT To: < Reply-To: < Subscription Notification: July 22 BNY Mellon: EPS Down on Lower Nil, Expense Saves the Wildcard Betsy L. Graseck, CFA — Morgan Stanley July 22, 2016 4:01 AM GMT Taking EPS down 1% in 2016 and 1.5% in 2017 as flatter curve pressures NIM. Execution on expense initiatives continued this quarter, and could provide a tailwind to estimates if BK is able to self-fund growth plans amidst higher regulatory costs. With expense saves, the proof is in the pudding. EPS down on lower NII, partially offset by continued expense discipline:We lower estimates 1% in 2016 and 1.5% in 2017 on the back of an in-line quarter marked by top- line pressures, offset by lower expenses and better credit.Mgmt is committed to keeping EFTA00645278 expenses flat y/y in 2016 as upcoming 'Living Will' costs are being offset by savings related to real estate, technology, headcount, and third-party vendors. Our flat expense growth estimate y/y in 2016 yields 110bps of positive operating leverage.Some pushback from investors around the ability for BK to keep expenses flat in the face of higher regulatory costs. Mgmt's efforts to reduce the expense base have shown through since Investor Day, but ultimately the success of the expense initiatives will depend on how deep BK is willing to go in order to drive efficiency gains.Ultimately need higher rates (not in our estimates) to drive material improvement in the expense ratio. We estimate expense ratio staying in the 70% range through 2018, with servicing fees as a % of total expenses at —95%.Pref issuance and deposit strategy continue to attract investor attention:As part of BK's 2016 CCAR plan, $560mn of common stock repurchases are contingent on the issuance of $750mn in preferred stock. BK was the only bank in our coverage to announce a pref-for-common swap, their second year of doing so. We model BK issuing $750mn in pref in 3Q16 at 5%.With rate hikes likely off the table for now, BK is reengaging in its strategy to reduce excess/non-strategic deposits. This, combined with the additional pref issuance, will help boost SLR (MSe 5.4% by YEI6 vs. 5.0% today).CFO's commentary on the call indicated BK had capacity to issue addi Click here to see the full report. This alert is sent from: Andrew Atlas, Andrew.Atlas(throorganstanley.com You received this because you asked to be alerted to: THE BANK OF NEW YORK MELLON CORPORATION Please contact your FA if you want to unsubscribe from the alerts. Disclosures: Please see the full report for risks, disclosures and other important information. Important disclosures regarding the relationship between the companies that are referenced in Morgan Stanley research and Morgan Stanley Wealth Management research are available on the Morgan Stanley Wealth Management disclosure website at littps:/Avww.morganstanley.com/online/researchdisclosures. Morgan Stanley Wealth Management Not Acting as Municipal Advisor Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. Copyright The copyright in materials provided by Morgan Stanley is owned by Morgan Stanley & Co. LLC. Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. 2016 Morgan Stanley Smith Barney LLC. Member SIPC. EFTA00645279 IRI EFTA00645280