Raymond James on Wednesday gave a shout-out to Bank of New York Mellon Corp., the custodial bank that has largely missed out on the sector’s post-election rally. The brokerage upgraded the stock to strong buy from outperform.
Bank of New York BK, -0.17% shares have gained just 8% since the November election, while the KBW Nasdaq Bank exchange-traded fund BKX, -1.12% has gained 24%, “creating what we believe is an attractive entry point, as the market is overstating potential headwinds,” analysts led by David Long wrote in a note.
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Bank stocks have been on a tear since the Nov. 8 election on the presumption that President-elect Donald Trump and a Republican Congress will reverse some or all of the regulations put in place after the 2008 financial crisis.
Investors are also expecting the sector to benefit from lower corporate tax rates and any measures to stimulate U.S. growth, moves that could lift interest rates and boost bank returns.
Bank of New York should benefit from a steeper yield curve, the recent 25 basis-points hike in the federal-funds rate, higher volume and volatility in financial markets such as foreign exchange trading and securities lending, higher stock valuations and solid long-term trends in the global custody and servicing business, Long wrote.
These strong fourth-quarter trends and an improved outlook for 2017 has spurred Raymond James to raise its earnings estimates for the custody banks — Bank of New York, State Street STT, -0.76% and Northern Trust NTRS, -0.70%
Stronger equity markets should boost growth in custody/servicing and management fees for Bank of New York and State Street, Long said. Net interest margins are expected to benefit from the steeper yield curve and higher short-term rates.
The banks are expected to see revenue from securities lending gain from wider spreads and higher volumes.
Raymond James also predicts securities lending revenue will rise 12% to 13% in the fourth quarter from the third quarter.
Another positive: The custody banks have little exposure to the scandal at Wells Fargo & Co. WFC, -1.13% over unauthorized account openings that may weigh on other big banks. Custody banks do not offer the kind of retail banking services that are expected to be subject to new regulations, according to the Raymond James note.
Custody banks do not offer credit cards, for example, a major source of concern of the Senate Banking Committee when it grilled former Wells Fargo CEO John Stumpf over the bank’s practices. Stumpf stepped down from his post Oct. 12.
“As a result, we believe the custody banks are better positioned to weather any new regulatory costs or revenue headwinds relative to the megabanks and regional banks,” said the Raymond James note.
Bank of New York shares closed down 0.2%, after gaining 1% in early trading. The stock has gained 16% in the year to date, while the S&P 500 SPX, -0.84% is up about 10%.