BNY Mellon 10-Q Summary: Third Quarter 2019
Reporting period: Quarter ended September 30, 2019; comparisons are primarily with the third quarter of 2018. BNY Mellon provides investment servicing and investment management services through its Investment Services and Investment Management segments.
Financial and operating results
| Metric | Q3 2019 | Comparison |
|---|---|---|
| Total revenue | $3.861 billion | Down 5% year over year |
| Net income attributable to common shareholders | $1.002 billion | Down from $1.075 billion |
| Diluted EPS | $1.07 | $1.06 in Q3 2018 |
| Net interest revenue | $730 million | Down 18%; net interest margin was 0.99%, down 28 basis points |
| Fee and other revenue | $3.128 billion | Down 1%; fee revenue was 81% of total revenue |
| Noninterest expense | $2.590 billion | Down 5% |
| Provision for credit losses | $16 million credit | Credit partly reflected sale of remaining loans tied to a bankrupt California utility |
| Effective tax rate | 19.1% | 16.5% in Q3 2018 |
Pre-tax operating margin was 33%, versus 33% a year earlier; return on common equity was 10.6%, versus 11.2%, and return on average assets was 1.13%, versus 1.28%. The $70 million lease-related impairment reduced quarterly net interest revenue by about 8% and net interest margin by 10 basis points.
For the first nine months of 2019, revenue was $11.684 billion, down 6%; common net income was $2.881 billion, down 12%; and diluted EPS was $3.01 versus $3.20. Net interest revenue fell 13% to $2.373 billion. Operating cash flow was $2.567 billion, compared with $2.812 billion in the prior-year period; investing cash flow was a $5.230 billion outflow versus an $18.017 billion inflow, while financing cash flow was a $3.454 billion inflow versus a $21.556 billion outflow.
Balance sheet, liquidity and capital
- At September 30, total assets were $373.2 billion, deposits $249.7 billion, loans $54.9 billion and long-term debt $27.9 billion. Available funds were $139.7 billion, or 37% of total assets.
- Average liquidity coverage ratio was 117%. Consolidated high-quality liquid assets were $186 billion before adjustments and $142 billion after haircuts and trapped-liquidity adjustments.
- Advanced Approaches CET1 ratio was 11.1%, unchanged from June and up from 10.7% at year-end 2018. Standardized CET1 was 12.3%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Q3 capital returns included $981 million of common-stock repurchases and $294 million of common dividends. The quarterly common dividend was $0.31 per share.
- Assets under custody and/or administration were $35.8 trillion, up 4% year over year. Assets under management were $1.881 trillion, up 3%, primarily due to market appreciation, partly offset by currency effects and net outflows.
Changes, outlook and notable items
- Lower net interest revenue reflected the lease impairment, higher deposit and funding costs, and lower noninterest-bearing deposits; higher asset yields provided a partial offset. Management said future net interest revenue will depend on deposit levels and mix, deposit pricing, and the yield curve.
- Investment management and performance fees fell 9% year over year, reflecting prior-period AUM outflows, lower performance fees and unfavorable currency translation. Investment Management segment revenue decreased 12%; its pre-tax income fell 5%, with the comparison affected by a net reduction in tax-related reserves.
- Expense reductions included lower litigation costs and a reduction of previously established reserves for tax-related exposure of certain managed funds. Management expects technology spending to remain near recent levels, resulting in higher technology expense in 2019 than 2018, mostly offset by reductions elsewhere.
- Management said potential streamlining actions, including severance and a small securities-portfolio repositioning, could reduce Q4 pre-tax earnings by $100 million to $200 million.
- In September, Todd Gibbons was named interim CEO and Joseph Echevarria non-executive chairman. BNY Mellon and other holders agreed to sell their interests in Promontory Interfinancial Network; closing was expected in Q4 2019, with an estimated after-tax gain of approximately $600 million.
- Credit losses were a net credit in Q3. Total credit exposure was $107.8 billion; 95% of financial institution and commercial portfolio exposures were investment grade. The filing identifies those portfolios as concentrated risk areas.
- Management expected adoption of the current expected credit loss standard on January 1, 2020, and then expected a reduction in the allowance for credit losses; the ultimate impact remained subject to portfolio, economic and model assumptions.
- Risks include interest-rate and deposit sensitivity, market and currency effects on fee revenue, operational and cybersecurity risks, Brexit and country exposures, and litigation or regulatory matters. For matters with an estimable reasonably possible loss, the aggregate range was up to $850 million above related accruals, if any. Management said it could not estimate a range for certain other matters.
Important facts for investors to verify
- Whether the Promontory sale closed as expected and whether the approximately $600 million after-tax gain was realized.
- The actual Q4 impact of any restructuring, severance or securities-portfolio repositioning actions.
- Whether deposit mix, deposit pricing and interest-rate changes further pressure net interest revenue and margin.
- Subsequent AUM flows, investment management fees and expense trends, including the durability of reserve-related expense reductions.
- Developments in the disclosed litigation and regulatory matters, the potential loss range, and the expected CECL adoption impact.