BNY Mellon — Second Quarter 2016 Form 10-Q
Reporting period: Quarter ended June 30, 2016. BNY Mellon is a global custody, investment services and investment management company. Unless otherwise noted, financial amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 / June 30, 2016 | Comparable period |
|---|---|---|
| Total revenue | $3.776 billion | $3.886 billion in Q2 2015, down 3% |
| Net income attributable to common shareholders | $825 million; diluted EPS $0.75 | $830 million and $0.73 in Q2 2015 |
| Noninterest expense | $2.620 billion | $2.727 billion in Q2 2015, down 4% |
| Net interest revenue / FTE margin | $767 million / 0.98% | $779 million / 1.00% in Q2 2015 |
| Credit provision | $9 million credit | $6 million credit in Q2 2015 |
| Effective tax rate | 24.9% | 23.7% in Q2 2015 |
| AUC/A and AUM | $29.5 trillion / $1.664 trillion | AUC/A up 3%; AUM down 2% year over year |
| Regulatory capital | CET1: 10.2% Advanced, 11.8% Standardized; SLR: 5.3% | Advanced CET1 was 10.6% in Q1 2016; Standardized CET1 was unchanged |
For the first six months of 2016, revenue was $7.506 billion versus $7.678 billion in 2015; common net income was $1.629 billion versus $1.596 billion, and diluted EPS was $1.48 versus $1.40. Operating cash flow was $1.462 billion, down from $2.634 billion. Investing activities provided $25.696 billion and financing activities used $27.706 billion; management cautions that cash-flow movements may be less informative for its business than its liquidity disclosures.
At June 30, total assets were $372.351 billion, down from $393.780 billion at year-end 2015. Deposits were $259.678 billion, versus $279.610 billion; long-term debt was $23.573 billion, versus $21.547 billion. Available funds were $135.252 billion, or 36% of total assets, compared with $159.259 billion and 40% at year-end. Consolidated HQLA totaled $191 billion before haircuts and $170 billion after haircuts; the reported LCR was 106%.
Shareholders’ equity was $38.559 billion. The quarter-end common dividend was $0.17 per share. BNY Mellon repurchased 12.5 million shares for $509 million during Q2.
Material changes and business drivers
- Year-over-year revenue fell primarily because investment management and performance fees and investment and other income declined. Investment management and performance fees were $830 million, down 5%; investment services fees were $1.792 billion, approximately flat.
- Lower expenses—including lower litigation, staff and legal costs, favorable currency effects and business-improvement savings—partly offset weaker revenue. Management said spending on risk management, regulatory compliance and controls is expected to increase the expense run rate.
- Net interest revenue was pressured by interest-rate hedging and higher premium amortization as rates declined. The FTE net interest margin fell to 0.98% from 1.00% year over year.
- AUC/A increased on net new business and higher market values, partly offset by the stronger U.S. dollar. AUM declined, reflecting prior outflows and currency effects, partly offset by market gains. Q2 long-term AUM outflows were $5 billion; short-term inflows were $4 billion.
Outlook, risks and unusual items
- Management expected a 2016 effective tax rate of approximately 25%–26%. It estimated that a 5% change in global equity markets, spread evenly through the year, would affect diluted EPS by $0.02–$0.04.
- The Federal Reserve did not object to the 2016 capital plan. Subsequent to quarter-end, the board authorized up to $2.14 billion of common-share repurchases over four quarters, plus up to $560 million conditional on preferred issuance. In August, the company issued $1 billion of perpetual preferred stock, satisfying that condition. The quarterly common dividend was raised 12%, from $0.17 to $0.19, for payment August 12, 2016.
- Regulators found the 2015 resolution plan not credible or insufficient to facilitate an orderly resolution. Deficiencies were due by October 1, 2016, and shortcomings were to be addressed in the 2017 plan. BNY Mellon adopted a single-point-of-entry strategy; management said it could require additional long-term debt and HQLA funding, potentially weighing on net interest revenue. Failure to satisfy regulators could lead to stricter capital, leverage or liquidity requirements, business restrictions or asset divestitures.
- The UK’s June 2016 vote to leave the EU created uncertainty around markets, regulation, operations and the future access of UK operations to EU markets; currency volatility may also affect revenue. The company was still assessing the impact.
- Legal contingencies include an aggregate reasonably possible loss of up to $750 million in excess of accrued liabilities for matters where the company could estimate a range; it could not estimate a range for certain other matters. The Sentinel bankruptcy settlement was approved after quarter-end; the company expected a later distribution on its unsecured claim.
- Other notable exposures include $48.8 billion of financial-institution lending exposure, $20.5 billion of commercial exposure and $302.0 billion of securities-lending indemnifications. Management reported 92% of financial-institution and 94% of commercial portfolio exposures as investment grade. A new expected-credit-loss accounting standard was issued, with adoption required after 2019.
Important facts for investors to verify
- Whether fee trends, especially investment management, foreign exchange and performance fees, improve or remain pressured by outflows, competition, market levels and currency movements.
- How deposit balances, interest-rate hedges, premium amortization and the proposed resolution strategy affect net interest revenue and liquidity.
- Progress in remedying the resolution-plan deficiencies, and any resulting funding costs, regulatory restrictions or operational changes.
- Actual capital returned under the repurchase authorization and the effect of the August preferred issuance and higher common dividend on capital ratios.
- Developments in the Sentinel settlement and other legal matters, including whether losses could exceed recorded accruals.
- Changes in capital measures: the Advanced Approach CET1 ratio declined sequentially, while fully phased-in Advanced CET1 was estimated at 9.5%; these fully phased-in figures are management estimates and non-GAAP measures.