Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is BNY Mellon Making Money?

The Bank of New York Mellon (NYSE: BK); the bank that is also known as BNY Mellon, has long been one of my favorite banking stocks. I like BNY Mellon because it generates a lot of cash but generates very little attention, which is good for a bank.

Bank of New York Mellon is in a growing business, one of its primary jobs is handling transactions between entities in the United States and banks around the world. That field is lucrative and likely to grow as funds flow back into the USA because of the new federal taxes rate enacted last year.

Congress lowered the U.S. corporate tax income rate to 21% which is likely to attract a lot more foreign money to American shores. Large amounts of money held by American firms overseas and foreign companies wanting to invest in the USA is likely to flow in because of that. This is likely to generate more business for BNY Mellon, which specializes in moving money between countries.

BNY Mellon is on the cutting edge of Fintech

To add icing to the cake, BNY Mellon is on the cutting edge of financial technology. It is heavily involved in efforts to commercialize the blockchain and cryptocurrency for example.

The most intriguing of BNY Mellon’s Fintech efforts is the somewhat mysterious Utility Settlement Coin (USC). The USC is a token that is designed to facilitate the movement of cash assets between banks and central banks. Uses of USC might include as collateral for loans, speeding foreign exchange, and guaranteeing the liquidity of assets.

A lot is unknown about USC including the technology behind it. At the present moment, it is not clear whether USC is a blockchain or a sidechain. Although USC uses the distributed ledger technology, the distributed ledger is basically a euphemism for the blockchain.

What is known is that USC is being developed by a consortium that includes a Who’s Who of the world’s best-known banks. Known members include Barclay’s PLC (NYSE: BCS), Credit Suisse (NYSE: CS), UBS, the Canadian Imperial Bank of Commerce (NYSE: CM), The State Street Corporation (NYSE: STT),HSBC (NYSE: HSBC), Bank of Tokyo-Mitsubishi UFJ or MUFG (NYSE: MTU), Deutsche Bank (NYSE: DB), Banco Santander (NYSE: SAN), and Nex (formerly Icap) (LON: NEX). The technology itself is being developed by a company called Clearmatics.

What is the Utility Settlement Coin?

The best guess is that USC is an effort to provide fast liquidity for banks. It sounds a great deal like John Maynard Keynes’ Bancor proposal which inspired the cryptocurrency of the same name.

Keynes wanted to create an international clearing union for currency transactions based on a currency dubbed Bancor to facilitate economic activity globally. The idea, promulgated during World War II was to always have funds available to keep the economy liquid or functioning.

The Bancor (BNT) smart token is an effort to guarantee liquidity for cryptocurrencies. Note: there is no known connection between the Bancor token and the USC. The USC is an effort to ensure liquidity for banks. Liquidity means that there will be cash available to conduct transactions when needed.

When a bank loses liquidity, it literally runs out of cash and can no longer do business. That is what happened to several major financial institutions including Lehman Brothers and Bank of America during the great financial meltdown of 2008.

Obviously, a lot of people will be scared by the USC, because it sounds as if the bankers know something about the world’s financial system we do not. One cynical view might be that bankers fear the current system might collapse so they are quietly building an alternative.

Moving Fiat Currency on the Blockchain

Testing of the USC apparently began in summer 2017 on a very limited scale, Coindesk reported.

The USC reportedly began testing a collateralized token that functions a deal like an Ethereum smart contract. BK Mellon is also involved with the Hyperledger Project; which is developing Ethereum-based digital ledger technology, and the Ethereum Enterprise Alliance (EEA).

The EEA is trying to develop commercial decentralized applications (DApps) for Ethereum. If the descriptions of USC are correct; it would function a great deal like an Ethereum DApp. A DApp is an application designed to operate in the Ethereum blockchain.

The purpose of the USC is apparently to move large amounts of fiat currency through the blockchain. That might speed transactions, and generate revenue by bypassing middlemen and make the currency transfer process more efficient. It can make money for BNY Mellon, by reducing the costs of doing business and increasing the volume of business.

There are many potential lucrative uses for a faster way of transferring fiat currency including remittances, investment, loan repayment, the collection of international repayments, collection of taxes, and decentralization of the financial system. One obvious use of USC would be to build an alternative system that would function if the regular financial system went down because of hacking, cyberwarfare, power outages, terrorism, economic crises, or natural disasters.

The hope is to create a backup or alternative to current international money transfer mechanisms such as SWIFT. Other uses would be to make the existing money transfer more scalable; that is easier to expand in order to accommodate more volume which is likely to be needed as the world economy grows.

Is Bank of New York Mellon Making Money?

All this makes BNY Mellon (NYSE: BK) an interesting financial technology play, but is it making money right now. The answer to that question is yet, which also makes BNY a value investment.

Mellon reported a gross profit of $3.728 billion and an operating income of $722 million for 4th Quarter 2017, Stockrow data indicates. That gave the bank a net income of $1.175 billion which was up from $870 million in 4th Quarter 2016.

There’s also a lot of cash at Bank of New York Mellon, the company reported an operating cash flow of $1.291 billion and a free cash flow of $1.027 billion on December 31, 2017. To add icing to the cake there was also a financing cash flow of $15.549 billion. All those figures prove that BNY Mellon’s business is very lucrative.

How Healthy is BNY Mellon?

Equally important was BNY Mellon’s cash and equivalents of $103.489 billion and total assets of $371.758 billion on December 31, 2017. Those were matched by $330.012 billion in liabilities.

One figure I liked at BNY Mellon was the debt which was $49.245 billion on December 31, 2017. That means Mellon is in a position to pay off its debts with its cash, the bank is liquid.

A figure I did not like was the revenues which fell by 1.64% during 4th Quarter 2017. Revenues dropped from $4.016 billion in September 2017 to $3.728 billion in December. Hopefully, that trend will not continue.

All this proves that BNY Mellon has classic value characteristics. In particular, it was really cheap at $50.79 a share on April 9, 2018. If you are looking for a value stock with the potential to profit from cutting-edge financial technology BNY Mellon is it.