BNY Mellon — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023. BNY Mellon provides custody, asset servicing, payments, clearance, investment management and wealth management services through Securities Services, Market and Wealth Services, and Investment and Wealth Management.
Financial results and key metrics
| Metric | Q3 2023 | Comparison |
|---|---|---|
| Total revenue | $4.374 billion | Up 2% year over year; down 2% from Q2 |
| Fee and other revenue | $3.358 billion | Flat year over year |
| Net interest revenue | $1.016 billion | Up 10% year over year; down 8% from Q2 |
| Net income attributable to common shareholders | $956 million | Versus $319 million in Q3 2022 and $1.031 billion in Q2 2023 |
| Diluted EPS | $1.22 | Versus $0.39 in Q3 2022 and $1.30 in Q2 2023 |
| Noninterest expense | $3.089 billion | Down 16% year over year; adjusted expense rose 3% (non-GAAP) |
| Pre-tax operating margin | 29% | Versus 15% in Q3 2022 |
| Net interest margin | 1.18% | Up 13 basis points year over year |
| ROE / ROTCE | 10.5% / 20.5% | ROTCE is non-GAAP |
| AUC/A; AUM | $45.7 trillion; $1.821 trillion | AUC/A up 8% and AUM up 3% year over year |
Q3 adjusted net income was $992 million and adjusted diluted EPS was $1.27, excluding severance and litigation reserves (non-GAAP). The prior-year comparison is significantly affected by a $680 million goodwill impairment in Q3 2022; prior-year adjusted net income was $983 million and adjusted diluted EPS was $1.21.
Fee revenue was supported by higher market values, client inflows and net new business, but offset by lower foreign-exchange revenue and the Alcentra divestiture. Foreign-exchange revenue fell 24% year over year. Higher rates lifted net interest revenue year over year, while balance-sheet size and mix contributed to the sequential decline.
- Securities Services: Revenue increased 1% year over year; pre-tax income fell 7% to $485 million, with a 23% margin.
- Market and Wealth Services: Revenue increased 6%; pre-tax income was $631 million, essentially unchanged, with a 44% margin.
- Investment and Wealth Management: Revenue fell 4%; pre-tax income was $164 million versus a $497 million loss a year earlier, which included the goodwill impairment. Q3 adjusted pre-tax margin was 22% (non-GAAP).
Balance sheet, cash flow, capital and liquidity
- Total assets were $405.2 billion at September 30, broadly unchanged from year-end 2022. Deposits were $277.5 billion, down 1%; noninterest-bearing deposits fell to $60.6 billion from $78.0 billion, while interest-bearing deposits rose to $216.9 billion from $201.0 billion.
- Available funds were $151.6 billion, or 37% of assets, versus $138.2 billion and 34% at year-end 2022. Average Q3 liquidity coverage ratio was 121%; average net stable funding ratio was 136%. The company reported compliance with both minimum requirements.
- Long-term debt was $29.2 billion, down from $30.5 billion at year-end 2022. In October, the Parent issued $900 million of senior notes due 2029 and $1.1 billion due 2034, with initial fixed coupons of 6.317% and 6.474%, respectively, then floating-rate terms.
- Regulatory CET1 ratio was 11.4% under the Advanced Approaches and 11.9% under the Standardized Approach; the Tier 1 leverage ratio was 6.1%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Q3 cash dividends were $0.42 per common share, following a 14% increase approved in July. The company returned $783 million to common shareholders, including $450 million of repurchases. It repurchased $2.2 billion of shares in the first nine months of 2023.
- For the first nine months, operating cash flow was $8.0 billion, investing cash outflow was $4.5 billion and financing cash outflow was $7.3 billion. Operating cash flow was down from $12.1 billion in the comparable 2022 period.
Material changes, outlook, risks and unusual items
- Year-to-date revenue was $13.191 billion, up 6%; common net income was $2.892 billion versus $1.853 billion. Year-to-date net interest revenue rose 33%, while fee and other revenue declined 1%. Adjusted year-to-date expense rose 2% (non-GAAP).
- Management did not provide specific forward earnings or revenue guidance in the supplied filing text. It described efficiency savings as partly offsetting continued investment, inflation and revenue-related costs.
- The securities portfolio had $9.8 billion of net unrealized losses, including hedges, at September 30. Held-to-maturity securities had $6.8 billion of unrealized losses; the company stated it did not intend, and was not more likely than not required, to sell those securities. Higher rates remain relevant to valuation and earnings sensitivity.
- Management’s interim goodwill test for Investment Management found fair value only about 2% above carrying value; no additional impairment was recorded. The filing warns that changed assumptions or discount rates could lead to a material non-cash impairment.
- The FDIC proposed a special assessment related to bank failures. If finalized as proposed, BNY Mellon estimated approximately $470 million of noninterest expense in the quarter the rule is finalized; timing and final amount remain uncertain.
- Moody’s placed Parent and rated subsidiary long-term ratings on review for downgrade during Q3; short-term ratings and certain bank deposit ratings were affirmed. The filing identifies funding costs and collateral terms as potential rating-related sensitivities.
- Legal proceedings include Brazilian Postalis-related matters, Stanford-related claims, German tax investigations and regulatory inquiries concerning off-channel communications. BNY Mellon estimated reasonably possible losses of up to $590 million above accrued liabilities for matters where it could estimate a range; it could not estimate a range for certain other matters.
- Other notable items include the October senior-note issuances and a disclosed October 30 amendment providing the CFO a $2.23 million 2023 cash payment for additional tax obligations tied to previously disclosed equity buyout awards and relocation.
Most important facts for investors to verify
- Whether deposit balances, especially noninterest-bearing deposits, stabilize and how deposit mix affects net interest revenue.
- Progress in fee revenue, AUC/A and AUM, including investment-management flows, foreign-exchange activity and the continuing effects of the Alcentra divestiture.
- Whether the proposed FDIC assessment is finalized and whether the estimated $470 million charge changes.
- Investment Management goodwill headroom and sensitivity to market conditions, discount rates and projected cash flows.
- Developments in the securities portfolio’s unrealized losses, regulatory capital proposals, Moody’s review and material legal or regulatory contingencies.
- Share repurchases, dividend capacity and the effects of the October debt issuance on funding costs and capital planning.