Bank of New York and Northern Trust Corp. are proving more resilient than other banks to recent stock market swings, because key lines of their business go full tilt during bull or bear markets.
The companies act as safekeepers for billions of dollars of securities, providing bookkeeping, processing, and other services that are necessary whether people are entering, leaving, or just sitting pat in the market.
The ongoing securities revenues "somewhat insulate these institutions and allow them to perform better than many traditional bank peers," said Bradley Ball, banking analyst with Credit Suisse First Boston.
Indeed, shares of traditional banks that rely primarily on spread income from gathering deposits and making loans have fallen by one-third from their summer highs. But Bank of New York and Chicago's Northern Trust, which offer more than traditional banking services, have dropped less than 15%.
This suggests that at least some banks may be getting what they have long wanted-assessments based on their diverse business lines, not a lumping together with shares of all other financial institutions.
Bank of New York and Northern Trust appear to have broken from the pack. Though their shares fell 10.31% and 13.1% respectively between July 15 and Sept. 15, that was far less than the 23.97% plunge in the same period by the Standard & Poor's bank index, which is made up of a large grouping of bank stocks.
"All banks are not equal," said Susan Roth, financial institutions analyst with Donaldson Lufkin & Jenrette. "Revenue growth prospects, risk profiles, and competitive positioning vary greatly across the universe."
Bank of New York and Northern Trust even outpace Mellon Bank Corp., Pittsburgh, and State Street Corp., Boston, two of the industry's other securities processing giants.
Analysts said that's because the market is now drawing a distinction between institutions such as Mellon, focused largely on adding new investments, and operations like Bank of New York that cull ongoing income from an existing body of business.
Bank of New York "represents the unique combination of a securities processing powerhouse and a more traditional regional bank," Ms. Roth said.
With a roughly fifty-fifty split between the traditional and securities businesses, and a strong emphasis on cost controls, Bank of New York "justifies a premium valuation," Ms. Roth said.
She sees earnings per-share growth of 10% or more annually based on management's goals for the next few years. The company wants a 23% return on equity, a return on assets of 2% or more, and an efficiency ratio of 48%.
Ms. Roth also likes Northern Trust for "pursuing a strategy that balances a focus on trust and securities businesses with traditional lending."
Northern Trust is heavily into asset management, as are Mellon and State Street. But Northern Trust targets a more stable group of investors-wealthy individuals who stay in the market through ups and downs, said Mr. Ball of Credit Suisse.
He said both Bank of New York and Northern Trust will probably outpace peers if the economy goes into an extended downturn.
"Given their mix of businesses, there should be less slowing on their revenue growth," Mr. Ball said.