BNY stock pops on strong earnings — showing exactly why we like this bank in this market

Bank of New York on Thursday delivered top- and bottom-line beats, with better-than-expected fee-based revenue and net interest income, as well as healthy pre-tax margin expansion. The strength of the quarter set the stage for management to boost full-year guidance. Revenue in the third quarter rose 12% year over year to $5.7 billion, ahead of the $5.5 billion consensus, according to the analyst estimates compiled by data provider LSEG. This marks BNY's 15th consecutive quarter of year-over-year revenue growth. Adjusted earnings per share (EPS) in the three months ended Sept. 30 jumped 24% to $2.37, which excludes a 3-cent-per-share severance expense, versus the $2.27 expected, according to LSEG data. Bottom Line Wall Street clearly liked what it heard on the post-earnings conference call because BNY stock went from flat to up more than 3% on the day. While it could always get swept lower given this week's brutal sell-off on AI funding and midterm fears, we think the results point to any weakness as a buying opportunity for those able to stomach increased volatility between now and the next month's elections, which is why we opted to step in and pick up a few more shares Thursday morning. We are reiterating our buy-equivalent 1 rating and $180 price target. BNY YTD mountain Bank of New York YTD BNY may not be the largest bank in the world by revenue, but it is the largest custodian bank in the world. While it may manage only about $2 trillion in assets, it is in charge of safeguarding more than $60 trillion worth of assets. Managed assets are those for which BNY has decision-making power, such as portfolio structure, asset allocation, and so on. For assets under custody, BNY acts as a protector with administrative responsibilities. In both cases, BNY generates fees. However, fees generated from managed assets are tied to market fluctuations, making them more volatile, while those tied to the much larger custodian business tend to be far more stable. When initiating BNY on Sept. 2, we highlighted the bank's heavily fee-based business model as an attractive diversifier versus the deposits and loans focus of Wells Fargo and the investment banking and wealth management focus at Goldman Sachs. Assets under custody/administration increased 10% thanks to an increase in market values, net client inflows, and net new business. As a result, BNY delivered the fee-based revenue results we were looking for, even as a 2% year-over-year increase in assets under management was a tad less than the Street was looking for. Fee-based revenues outpaced expectations, growing 12% year over year on strength pretty much across the board. The team attributed the growth to "net new business, higher client activity and higher market values," partially offset by the mix of assets under management (AUM) flows. Quarterly commentary Net-interest income (NII) was also better than expected, increasing 15% versus the year-ago period as investment securities were reinvested at higher yields and the balance sheet grew. While BNY's Tangible Book Value Per Share (TBVPS) did come up a bit short of expectations, a better-than-expected Return on Tangible Common Equity (ROTCE) served as an offset. These two metrics are key factors in determining the appropriate multiple on which to value financial firms. BNY's Common Equity Tier 1 (CET1) Ratio came in at 10.9%, a bit below expectations. However, it was well above the Federal Reserve's 8.5% enforced minimum, providing plenty of capacity for growth-oriented investments and shareholder returns. During the quarter, BNY returned a total of $1.4 billion to shareholders, with about two-thirds coming from buybacks and the remainder from dividend payments, resulting in a year-to-date payout ratio (dividends divided by net income) of 86%. BNY has three key operating segments: (1) Securities services, which cater to asset owners, managers, and corporate clients; (2) Market and Wealth services, which address the needs of financial institutions, corporations, foundations and endowments, public funds, and government agencies; and (3) Investment and Wealth Management — unlike the first two, which generate custodial fees — is the segment that houses the assets that BNY is actually responsible for managing. Securities services delivered 15% year-on-year revenue growth, as 12% growth in asset servicing was compounded by a 27% increase in issuer services. Market and Wealth services revenue was up nearly 12% versus the year-ago period, with revenue generated from wealth solutions increasing 10%, payments and trade revenue increasing 14%, and revenue from clearance and collateral management increasing 12% year over year. Investment and Wealth Management realized 4% revenue growth year over year, with investment management revenue increasing 1% and wealth management revenue increasing 11% year over year. Guidance Looking ahead, here are the details on management's outlook raise. Total revenue growth is now expected to increase about 12% to 13% (market dependent), better than the 11% growth expected coming into the print. Helping to drive that top-line growth, the team expects NII to be up 15% year-over-year, ahead of the 14% growth expected, according to FactSet. Given the increased revenue outlook, revenue-related expenses are also expected to increase a bit more than expected. That's of course acceptable given the raised expense outlook is tied into the increased revenue outlook. Importantly, the team also adjusted guidance for operating leverage (calculated as the rate of increase in revenue less the rate of increase in noninterest expense), increasing it by about 500 basis points, up from the roughly 400 basis points increase forecast last quarter and well above the 100 basis point guide at the start of the year. (Jim Cramer's Charitable Trust is long BNY, WFC, GS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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