BNY Mellon Q1 2015 Form 10-Q Summary
Business context and reporting period
The Bank of New York Mellon Corporation reported for the three months ended March 31, 2015. The global financial services company operates primarily through Investment Services and Investment Management. At quarter-end, assets under custody and/or administration (AUC/A) were $28.5 trillion and assets under management (AUM) were $1.741 trillion.
Financial results and key metrics
- Earnings: Net income applicable to common shareholders was $766 million, or $0.67 per diluted share, versus $661 million and $0.57 a year earlier. Income before taxes was $1.149 billion; the income tax provision was $280 million (24.4% effective rate).
- Revenue: Total revenue was $3.851 billion, up 6% year over year. Fee and other revenue was $3.002 billion, up 4%; net interest revenue was $728 million, unchanged. Income from consolidated investment management funds was $121 million, including $90 million attributable to noncontrolling interests.
- Fees and business volumes: Investment Services fees increased 3% to $1.751 billion. Investment management and performance fees rose 1% to $854 million (6% higher on a constant-currency basis). Foreign exchange and other trading revenue increased to $229 million from $136 million. AUM rose 7% year over year; AUC/A rose 2%.
- Margins and returns: Net interest margin (FTE) was 0.97%, down from 1.05% a year earlier and up from 0.91% in Q4 2014. Return on common equity was 8.8%, return on average assets 0.83%, and pre-tax operating margin 30%.
- Expenses and credit: Noninterest expense was $2.700 billion, down 1% year over year. The credit-loss provision was $2 million, compared with an $18 million credit in Q1 2014. Nonperforming assets were $128 million; the allowance for credit losses was $283 million.
- Cash flow: Operating activities used $64 million; investing activities used $10.303 billion; financing activities provided $10.587 billion. The investing outflow largely reflected securities purchases and changes in federal funds sold and resale agreements.
- Balance sheet and liquidity: Total assets were $399.1 billion, up from $385.3 billion at year-end 2014. Deposits were $281.3 billion, up from $265.9 billion. Available funds were $144.1 billion; consolidated HQLA was $194 billion before haircuts and $178 billion after haircuts. The reported LCR was 109%.
- Debt and capital: Long-term debt was $20.4 billion. The phased-in Basel III CET1 ratio under the Advanced Approach was 10.0%, versus 11.2% at year-end; fully phased-in estimated CET1 ratios were 9.2% Advanced and 9.6% Standardized, versus 9.8% and 10.6%. The estimated fully phased-in supplementary leverage ratio was 4.5%. These fully phased-in figures are non-GAAP estimates based on the company’s interpretation of rules and assumptions about regulatory model approvals.
- Shareholder returns: The quarterly common dividend was $0.17 per share. The company repurchased $400 million of common stock in Q1. Following Federal Reserve non-objection to its capital plan, the board authorized up to $3.1 billion in repurchases through Q2 2016; $700 million of that authorization was contingent on preferred-stock issuance.
Changes versus comparable periods
- Common net income increased 16% year over year, while diluted EPS rose from $0.57 to $0.67. Q4 2014 reported earnings were unusually low: net income was $209 million, including $800 million of merger, litigation and restructuring charges and a tax benefit primarily related to a carryback claim. Q4 adjusted net income was $667 million; therefore, the reported sequential improvement is not a like-for-like operating comparison.
- Revenue growth was led by foreign exchange and other trading, asset servicing and clearing fees. Investment and other income fell to $63 million from $102 million a year earlier, primarily on lower lease residual gains.
- Net interest revenue was flat year over year despite higher deposits and a larger securities portfolio; lower asset yields weighed on the margin.
- Fully phased-in CET1 estimates declined from year-end, primarily due to higher risk-weighted assets, including operational risk. Shareholders’ equity edged down to $37.3 billion, with currency translation and repurchases partly offset by retained earnings and stock-related additions.
Outlook, commentary, risks and unusual items
- Management expected a Q2 2015 effective tax rate of approximately 25%–26%. It said compliance, risk and control spending remained elevated, but expected the rate of related expense growth to slow as new rules were implemented; additional regulatory demands could increase costs beyond current estimates.
- The Federal Reserve did not object to the 2015 capital plan. On April 28, 2015, after quarter-end, BNY Mellon issued $1 billion of Series E preferred stock, supporting the conditional portion of the buyback authorization.
- On March 19, 2015, the company announced settlements totaling $714 million for substantially all outstanding foreign-exchange standing-instruction matters, subject to required approvals. The amount was covered by pre-existing legal reserves. The SEC settlement remained subject to Commission approval, and certain individual and securities-law matters remained pending.
- On April 15, 2015, the UK FCA announced a £126 million (approximately $190 million) fine for client-asset rule failures. The fine was covered by existing reserves; the company stated clients suffered no loss from the identified noncompliance and described remediation measures.
- Other notable developments included the January acquisition of Cutwater Asset Management (approximately $23 billion AUM) and an April agreement to sell Meriten Investment Management (approximately $23 billion AUM), subject to regulatory approval.
- Risks highlighted include low or volatile interest rates, market and currency movements, reliance on fee-based revenues and client activity, competition in foreign exchange, regulatory and litigation exposure, operational and technology risks, credit and counterparty risk, and geopolitical developments in Russia and Ukraine. Management noted that a shift away from standing-instruction FX services could pressure FX revenue; those services generated about 31% of Q1 FX revenue.
- For certain legal matters, the company could not estimate a reasonably possible loss range; for matters where it could estimate, the aggregate range was up to $280 million beyond related accruals, if any. A tax appeal could require approximately $100 million of additional tax expense if an interest deduction is disallowed.
Important facts for investors to verify
- Reconcile Q1 reported earnings and revenue with non-GAAP measures, particularly the Q4 2014 litigation, restructuring and tax items.
- Track whether the $714 million FX settlements and FCA fine are fully resolved as described, and monitor remaining legal proceedings, reserves and potential losses.
- Monitor capital ratios and the assumptions behind fully phased-in estimates, including operational-risk RWA and regulatory approval of models; verify execution and funding of the authorized buybacks and preferred issuance.
- Assess the sustainability of fee growth, AUM/AUC trends and FX revenue, including client migration from standing-instruction transactions and currency effects.
- Review liquidity and interest-rate sensitivity as deposits, market rates and required LCR levels change; the filing’s sensitivity estimates depend on assumptions about depositor behavior.
- Monitor credit quality and concentrations, including financial-institution, commercial real-estate and legacy mortgage exposures, as well as the large securities-lending indemnification commitments.