BNY Mellon — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. BNY Mellon provides investment services and investment management through its two principal business segments, alongside an Other segment.
Financial results and key metrics
| Metric | Q1 2018 | Comparison |
|---|---|---|
| Total revenue | $4.178 billion | Up 9% year over year |
| Net income attributable to common shareholders | $1.135 billion; diluted EPS $1.10 | Versus $880 million and $0.83 in Q1 2017 |
| Net interest revenue | $919 million | Up 16% year over year; net interest margin 1.22%, up 9 basis points |
| Fee and other revenue | $3.270 billion | Up 8% year over year |
| Noninterest expense | $2.739 billion | Up 4% year over year |
| Effective tax rate | 19.5% | Versus 22.3% in Q1 2017 |
| Return on common equity | 12.2% | Versus 10.2% in Q1 2017 |
Assets under custody and/or administration reached a record $33.5 trillion, up 9% year over year. Assets under management were $1.868 trillion, up 8% year over year but down 1% from year-end. Investment Services revenue rose 11% and pretax income 22%; Investment Management revenue rose 13% and pretax income 38%.
At March 31, total assets were $373.6 billion, deposits $241.8 billion, loans $60.8 billion and long-term debt $27.9 billion. Shareholders’ equity was $41.7 billion. Available funds were $140.0 billion, or 37% of assets; average liquidity coverage ratio was 116%. The Advanced Approach CET1 ratio was 10.7%, and the supplementary leverage ratio was 5.9%. The company reported that it and its U.S. bank subsidiaries were well capitalized.
Operating cash flow was negative $852 million, investing cash flow negative $1.430 billion and financing cash flow positive $971 million. These figures reflect balance-sheet and trading activity and should be considered alongside the company’s liquidity measures.
Changes versus comparable periods
- Revenue growth reflected higher equity-market values, favorable currency translation, higher performance and foreign-exchange fees, collateral-management growth, and higher interest rates and deposits.
- Expenses increased year over year, principally from currency translation, staff costs and higher volume-related sub-custodian and clearing expenses; lower consulting costs partly offset increases.
- Net income applicable to common shareholders rose 29% year over year. The reported Q4 2017 comparison is affected by a $453 million income-tax benefit, including an estimated $710 million benefit from U.S. tax legislation.
- Net securities losses were $49 million, compared with a $10 million gain in Q1 2017. The portfolio’s net unrealized loss, including related hedges, increased to $853 million from $85 million at year-end, primarily due to higher interest rates.
- The company repurchased 11.46 million common shares for $644 million and paid $246 million in common dividends. The quarterly dividend was $0.24 per share.
Outlook, risks and unusual items
- Management expected an effective tax rate of approximately 21% for 2018, based on then-current tax rates. No specific revenue or earnings forecast was provided in the supplied filing text.
- Management expects continued technology investment and 2018 expenses related to its real-estate strategy. It also described competitive pressure toward lower-fee asset-management products, while noting opportunities from client outsourcing and regulatory needs.
- Interest rates, market values, client activity, foreign exchange, deposit levels and fund flows can affect revenue. A 5% change in global equity markets, spread evenly through the year, was estimated to affect fee revenue by less than 1% and diluted EPS by $0.03–$0.05.
- Key disclosed risks include operational and cybersecurity failures, regulatory and capital requirements, market and liquidity stress, counterparty and credit exposure, litigation, and dependence on fee-based revenue. Management noted that deposit outflows could materially affect balance-sheet size and net interest revenue.
- Legal proceedings include mortgage-securitization trustee claims, Stanford-related litigation, Brazilian Postalis matters and depositary-receipt matters. For matters where a range could be estimated, reasonably possible losses were up to $860 million in excess of related accruals; the company could not estimate a range for certain other matters. Management did not expect the matters, after reserves and insurance, to materially affect consolidated financial position or liquidity, but they could materially affect net income in a period.
- Off-balance-sheet exposures included $51.3 billion of lending commitments and $462.9 billion of securities-lending indemnifications, the latter supported by collateral and subject to risks if collateral proves insufficient.
- Accounting changes adopted in Q1 included revenue recognition, hedge accounting and equity-investment guidance. Revenue-standard adoption reduced opening retained earnings by $55 million after tax. In April 2018, the company issued $1.25 billion of senior notes; proposed regulatory capital rule changes were also disclosed.
Important facts for investors to verify
- Whether ongoing fee growth, AUC/A and AUM flows support revenue growth, particularly given index and short-term strategy outflows and lower-fee product trends.
- How rising interest rates affect net interest revenue, funding costs, deposit balances and unrealized securities values; sensitivity estimates assume static deposits.
- Capital and liquidity headroom, including the 10.7% Advanced Approach CET1 ratio, 5.9% SLR and 116% average LCR, against applicable regulatory requirements.
- Developments in the disclosed legal matters and whether potential losses exceed accruals, including the stated $860 million estimated upper range for certain matters.
- Execution and cost of technology and real-estate initiatives, and the impact of the 2018 tax-rate outlook and April debt issuance.