Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this Form 10-Q for the quarter ended March 31, 2012. It is a global financial services company focused on investment management and investment services. At quarter-end, it reported $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management.
Key financial results
| Metric | Q1 2012 | Comparison |
|---|---|---|
| Net income attributable to common shareholders | $619 million | $625 million in Q1 2011; $505 million in Q4 2011 |
| Diluted EPS | $0.52 | $0.50 in Q1 2011; $0.42 in Q4 2011 |
| Total revenue | $3.646 billion | Unchanged year over year; up from $3.540 billion in Q4 2011 |
| Net interest revenue | $765 million | Up 10% year over year; down 2% sequentially |
| Net interest margin, FTE | 1.32% | Down 17 basis points year over year; up 5 basis points sequentially |
| Noninterest expense | $2.756 billion | Up 2% year over year; down 3% sequentially |
| Income before taxes | $885 million | $949 million in Q1 2011; $689 million in Q4 2011 |
| Effective tax rate | 28.7% | 29.3% in Q1 2011; 30.6% in Q4 2011 |
| Operating cash flow | $114 million | $426 million in Q1 2011 |
| Total assets, quarter-end | $300.2 billion | $325.3 billion at Dec. 31, 2011 |
| Total deposits, quarter-end | $192.5 billion | $219.1 billion at Dec. 31, 2011 |
| Long-term debt, quarter-end | $20.3 billion | $19.9 billion at Dec. 31, 2011 |
| Available funds | $106.7 billion | $135.2 billion at Dec. 31, 2011 |
| Estimated Basel III Tier 1 common equity ratio | 7.6% | 7.1% at Dec. 31, 2011; company estimate using its interpretation of the rules |
Material changes versus comparable periods
- Common-shareholder net income declined about 1% year over year, while diluted EPS rose from $0.50 to $0.52, reflecting fewer average shares outstanding.
- Revenue was flat year over year. Higher net interest revenue and investment income were offset by lower investment management fees and foreign-exchange revenue. The reported revenue includes income from consolidated investment management funds.
- Net interest revenue grew year over year, but net interest margin contracted as substantial client deposits were placed in liquid, lower-yielding assets.
- Noninterest expense increased year over year, principally due to litigation and legal costs, incentive compensation associated with vesting stock awards, and pension expense. Excluding specified items, management reported expense growth of 5% year over year.
- Assets under custody and administration increased 4% year over year to a record $26.6 trillion; assets under management increased 6% to a record $1.31 trillion.
- Deposits and total assets fell sequentially as unusually high year-end client deposits declined. Available funds fell by $28.6 billion from year-end.
- The investment securities portfolio’s fair value rose to $88.2 billion from $82.0 billion at year-end; its unrealized pre-tax gain increased to $1.2 billion from $793 million.
Outlook, risks and unusual items
- Management expectations: The company expected a second-quarter 2012 effective tax rate of approximately 27%–29% and quarterly credit-loss provision of approximately $0–$15 million. It said it was on track for $240–$260 million of annualized pre-tax savings in 2012 from operational excellence initiatives. No broader revenue or earnings guidance is provided in the supplied filing text.
- Capital returns: The Federal Reserve did not object to the 2012 capital plan, which permits up to $1.16 billion of common-stock repurchases and continuation of the $0.13 quarterly dividend. The company repurchased 17.3 million shares for $371 million during the quarter.
- Credit and securities risk: The credit-loss provision was $5 million, versus none in Q1 2011. Nonperforming assets were $331 million, down from $341 million at year-end. The filing identifies mortgage-related exposures, European floating-rate notes and credit assumptions as areas requiring monitoring.
- Liquidity and funding: Available funds were $106.7 billion, or 36% of total assets, versus $135.2 billion, or 42%, at year-end. Management said monitored liquidity ratios exceeded minimum guidelines and the Parent complied with its liquidity policy. The decline primarily reflected lower client deposits.
- Legal and regulatory matters: Management expects elevated legal and litigation costs. The filing says reasonably possible losses on certain legal matters could total up to $900 million above accrued liabilities, excluding the tax matter. A foreign-tax-credit dispute involving approximately $900 million, including interest, went to trial in April 2012; a reserve increase of up to $850 million within 12 months was described as reasonably possible under certain developments. Foreign-exchange standing-instruction practices are subject to government inquiries and litigation. A separate Federal Reserve order resulted in a $6 million penalty, paid April 10, 2012.
- Ratings and regulation: Moody’s downgraded long-term debt and deposit ratings in March 2012; Standard & Poor’s, Fitch and DBRS reaffirmed ratings in April. Moody’s and S&P outlooks were negative. The filing discusses uncertainty around Dodd-Frank and Basel III implementation and associated capital, liquidity and compliance requirements.
- Unusual items and comparability: Q1 included $40 million of net securities gains and a $9 million restructuring recovery; merger and integration expense was $18 million. The Shareowner Services business was sold on Dec. 31, 2011, affecting comparisons with prior periods. Management’s adjusted and other Non-GAAP measures exclude selected items and should be read alongside GAAP results.
Important facts for investors to verify
- Reconcile reported revenue and margins, including the treatment of consolidated investment management funds and the company’s Non-GAAP adjustments.
- Track deposit levels, funding mix and liquidity after the decline in available funds, including the company’s sensitivity to client deposit outflows.
- Assess whether net interest revenue can be sustained despite the lower year-over-year net interest margin and low-rate environment.
- Review developments in the foreign-tax-credit dispute, foreign-exchange matters and other litigation, including changes in accruals, expenses or potential losses.
- Confirm the execution and regulatory treatment of the approved repurchase plan, dividend and estimated Basel III capital ratio.
- Monitor securities valuation assumptions, European exposures and mortgage-related credit quality, including delinquency trends and allowance adequacy.