Shares of Bank of New York Mellon (BK) were higher in late morning trading after slipping approximately 5% Thursday following the bank saying on its quarterly conference call that it plans to spend the lion’s share of tax reform gains on increasing the minimum wage of its U.S. employees and technology upgrades. In response, JPMorgan downgraded the stock, saying such moves will result in “sizable” restructuring charges, while Morgan Stanley upgraded BNY Mellon, saying the reaction to such investments is overblown.
WHAT’S NEW: Following BNY Mellon’s fourth quarter earnings report yesterday, the bank’s executives said that nearly all of this year’s benefits from the new U.S. tax law will go to technology upgrades and its workers instead of shareholders. Such moves, according to the Wall Street Journal, include a raise in the minimum wage to $15 an hour starting March 1 mostly for employees in the company’s operations unit. The wage increase will affect roughly 1,000 of the bank’s 52,500 employees, the Journal noted.
JPMORGAN DOWNGRADE: Commenting on the moves in response to the new tax law, JPMorgan analyst Vivek Juneja downgraded BNY Mellon to Underweight from Neutral, saying that while new Chief Executive Officer Charles Scharf is making the right moves for the long term, such actions will result in “sizable” restructuring charges in 2018. The analyst added that he was also downgrading the stock because the tax overhaul will not materially boost the bank’s earnings in the near term, because revenues are pressured in certain businesses, and that valuation is well above long term averages in light of the need to invest in technology. Juneja said he believes that the bank needs to continue to invest in technology to offset pricing pressure and maintain leadership position in the servicing business.
MORGAN STANLEY UPGRADE: On the other side, Morgan Stanley analyst Betsy Graseck upgraded BNY Mellon to Overweight from Equal Weight and raised her price target on shares to $64 from $60. Graseck said that the negative stock reaction to the bank’s planned increase in investment spending is overblown, and that “tech-focused” Scharf understands that major digital investments are required the drive the next leg of operating leverage in the custody space. The analyst said that such moves should drive share gains for the stock and should be positive in the medium term. Graseck previously highlighted, however, that Scharf could slow the pace of operating leverage and lower taxes provide an excellent opportunity to reinvest in the business without sacrificing EPS growth, she said.
