While the sudden departure of Bank of New York Mellon CEO Robert Kelly late Wednesday might have come as a surprise to some industry observers, it was actually a change Rochdale Securities Bank analyst Dick Bove called for two weeks ago.
“The guy was not running the company to maximize profits. (That) is the bottom line,” Bove said of Kelly in a phone interview with On Wall Street, ASR’s sister publication on Thursday.
Bove’s opinion comes as BNY Mellon has $122 billion in cash, $34 billion in capital and $24 billion in market capitalization.
“Those numbers should be the reverse,” Bove said. “They should have more market cap than book value and more book value than it has cash. But because shareholders distrust the company so much, it’s arranged in the fashion I just mentioned.”
Bank of New York Mellon reported its book value at $27.46 a share at the end of the second quarter. In reaching that calculation, it showed tangible assets from its operations of $211.0 billion.
The Bank of New York Mellon Corp. on July 19 reported second quarter net income applicable to common shareholders of $735 million, or $0.59 per common share, compared with net income applicable to common shareholders of $658 million, or $0.54 per common share, in the second quarter of 2010 and net income applicable to common shareholders of $625 million, or $0.50 per common share, in the first quarter of 2011.
Kelly followed those gains in profit and revenue, with job cuts. On August 10, BNY Mellon said it planned to cut its work force by 3%or 1,500 positions, by year's end. The reason? Operating expenses were growing faster than revenues.
"Over recent quarters, BNY Mellon has succeeded in building positive revenue momentum. However, expenses have been growing unsustainably faster," Kelly said.
In the past year, revenue had grown 19.6%, to $3.1 billion in the second quarter of this year. But staff, professional, legal, software and other “noninterest” expenses have risen 21.2%.
Jobs were not the only target for expense reductions. The company also said it expected to rationalize technology picked up in a series of acquisitions in recent years, most notably the $2.3 billion purchase of the global investment servicing business of PNC Financial Services Group.
Kelly’s resignation ignited industry chatter on Wednesday regarding his management style. BNY Mellon simultaneously named Gerald L. Hassell, currently president, to also serve as chairman and chief executive officer. BNY Mellon officials were not available for comment.
Keefe Bruyette & Woods (KBW) analysts Robert Lee and Jacob Troutman called it a “surprise move” in a follow-up report on Wednesday.
“Our initial thought is that Kelly may have wanted to make more dramatic cuts and/or strategic changes in the business, such as additional business dispositions, than the board,” KBW's report said.
The announcement of the job cuts came less than a month after the report of strong earnings. That time lag could suggest an internal debate about the direction of the company, KBW's report said
“As a 30-year veteran of BK and board member for 13 years, our initial take is that Hassell may have been perceived by the board as more likely to adhere to the current strategy and less likely to seek more dramatic change,” Keefe, Bruyette & Woods’ report said.
The change in leadership should mark a positive change for BNY Mellon, said Rochdale Securities’ Bove, giving the firm the opportunity to improve in key areas.
“I think it’s fair to state that they will be much more aggressive in the management of their balance sheet,” Bove said. BNY Mellon may also change their pricing strategy to emphasize their core products and lobby more effectively so that state governments do not sue them, he said.
Those initiatives, taken with efforts to better inform shareholders about the firm, could help lift BNY Mellon’s stock price to reflect its positions in the market, according to Bove. Shares of BNY Mellon were up 2.9% to $21.27 at about noon on Thursday.
“The stock should be selling at double its price,” Bove said.