Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this unaudited Form 10-Q for the quarter ended March 31, 2011. It operates globally in investment management and investment services, including custody, asset servicing, wealth management, clearing and payments. Results are presented on a continuing-operations basis unless noted.
In Q1 2011, the company reorganized reporting into Investment Management, Investment Services and Other; prior periods were reclassified without changing consolidated results. Year-over-year comparisons also reflect the 2010 acquisitions of Global Investment Servicing and BHF Asset Servicing.
Key financial metrics
| Metric | Q1 2011 | Comparison |
|---|---|---|
| Total revenue | $3.646 billion | Up 9% year over year; down 3% sequentially |
| Net income applicable to common shareholders | $625 million; diluted EPS $0.50 | Compared with $601 million and $0.49 in Q1 2010 continuing operations; $690 million and $0.55 in Q4 2010 continuing operations |
| Income from continuing operations before taxes | $949 million | Compared with $884 million in Q1 2010 and $970 million in Q4 2010 |
| Net interest revenue; FTE net interest margin | $698 million; 1.49% | Revenue was down 9% year over year; margin was 1.89% in Q1 2010 |
| Noninterest expense | $2.697 billion | Up 11% year over year; down 4% sequentially |
| Cash from operating activities | $426 million | Compared with $1.191 billion in Q1 2010 |
| Cash used for investing activities | $16.480 billion | Compared with $512 million provided in Q1 2010 |
| Cash from financing activities | $16.430 billion | Compared with $2.126 billion used in Q1 2010 |
At March 31, total assets were $266.4 billion, deposits $162.5 billion, loans $40.0 billion and long-term debt $17.2 billion. Available funds were approximately $92.2 billion, including $28.7 billion cash; liquid assets were 35% of total assets. Tier 1 and total capital ratios were 14.0% and 16.8%, respectively; Tier 1 common equity to risk-weighted assets was 12.4% (non-GAAP). Book value per common share was $26.78 and tangible book value was $9.67 (non-GAAP).
Assets under custody and administration reached $25.5 trillion, up 14% year over year; assets under management were $1.229 trillion, up 11%. The company reported no provision for credit losses in Q1, versus a $35 million provision in Q1 2010. Net charge-offs were $17 million, and the allowance for credit losses was $554 million.
Material changes versus prior periods
- Fee and other revenue rose 12% year over year, primarily from acquisitions, higher market values and new business. Investment services fees increased 27%; investment management and performance fees increased 11%.
- Revenue gains were partly offset by lower foreign exchange and other trading revenue ($198 million, down 24% year over year), lower investment income ($67 million versus $108 million), and lower net interest revenue. Management cited reduced market volatility and the low-rate environment.
- Noninterest expense increased $257 million year over year. Drivers included acquisitions, business growth, litigation, and higher pension and healthcare costs. The quarter included $47 million of litigation expense, $17 million of merger and integration costs, and a $6 million restructuring recovery.
- Tier 1 capital ratio rose from 13.4% at year-end 2010, primarily reflecting retained earnings. Available funds increased from $77.6 billion at year-end, largely due to higher foreign deposits.
- Operating cash flow was lower while investing cash use rose sharply, principally due to increases in bank and central-bank deposits and securities purchases. Deposit growth and debt issuance largely funded the investing outflows.
Outlook, management commentary, risks and unusual items
- Management expected a full-year 2011 effective tax rate of approximately 30%. Its longer-term goals include first-quartile EPS growth relative to peers, competitive margins and a Tier 1 capital target of 10%; management said it would revisit capital targets after Basel III rules were finalized.
- In March, the Federal Reserve did not object to the company’s capital plan. The board authorized a 44% dividend increase to $0.13 per share, payable in May, and expanded repurchase authorization. The 2011 plan anticipated up to $1.3 billion in repurchases; 1.1 million shares were repurchased in Q1 and another 0.9 million in April.
- After quarter-end, BNY Mellon agreed to sell Shareowner Services for $550 million, subject to regulatory approval, with closing anticipated in Q3 2011. The company expected a pretax gain but a modest after-tax loss, primarily from writing off nondeductible goodwill. It also agreed to acquire Talon Asset Management’s wealth management operations, expected to close in Q2 2011.
- Management cited persistently low interest rates and narrow spreads, money-market fee waivers, seasonality, and continued weakness in structured debt markets as pressures. It anticipated litigation costs would remain above historical levels.
- Legal proceedings are inherently uncertain. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $800 million above related accrued liabilities; the company could not estimate a range for certain other matters. A separate tax dispute concerned approximately $900 million of tax benefits, including interest. The filing states that outcomes could materially affect income in a period.
- Credit exposures totaled $76.9 billion, including unfunded commitments. Financial institutions and commercial portfolios were the largest concentrations, together comprising 62% of lending exposure. The company highlighted mortgage and commercial real estate risks; about 31% of a specified $706 million prime and Alt-A mortgage pool was at least 60 days delinquent.
- Basel III, the Dodd-Frank Act and other regulatory changes could affect capital, liquidity, costs and business practices. Management estimated its Basel III Tier 1 common ratio would exceed 7% by December 31, 2011, but noted rules and implementation remained subject to change.
Most important facts for investors to verify
- Whether fee growth and record AUC/AUM continue, and how much growth reflects acquisitions versus organic flows and market appreciation.
- Whether net interest margin stabilizes as rates and spreads change, and the persistence of money-market fee waivers.
- Whether expense growth, especially litigation, benefits and acquisition-related costs, is controlled relative to revenue.
- Liquidity and capital resilience, including deposit concentration, Basel III impacts, debt maturities and planned dividends and repurchases.
- Developments in material litigation and the tax dispute, along with credit quality in residential mortgages, commercial real estate and other concentrated exposures.
- Completion and financial effects of the Shareowner Services sale and Talon acquisition; the filing’s expected outcomes are forward-looking and subject to conditions.