Bank of NY Mellon (BK, Financial) acts as a custodian to asset managers and owners, is the trustee for bond issuances and depository receipts and operates a clearing business for brokers, dealers and RIAs. It incurs little credit risk for a “bank” of its size—a trait well-illustrated in Bank of NY Mellon’s supervisory stress test where the Federal Reserve officials modeled that it would earn more than $4 billion in pre-tax profits in the “severely adverse” scenario. The majority of its revenues are fee-based, but it also earns approximately one-fifth of its revenue from interest income on the approximately $250 billion of client deposits that these businesses attract. The decline in interest rates erodes that revenue stream and does so relatively quickly, given the short duration of its assets. It’s valued today at 10x current year earnings, which already reflects most of the impact from lower interest rates. The earnings upside from an eventual rise in interest rates could be 20–30%.
From Chris Davis (Trades, Portfolio)' Davis Financial Fund semi-annual 2020 review.
