BNY Mellon Q3 2022 Form 10-Q Summary
Business context and reporting period
The Bank of New York Mellon Corporation is a global financial services company focused on custody, asset servicing, market and wealth services, and investment and wealth management. This unaudited filing covers the quarter and nine months ended September 30, 2022.
Key financial metrics
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Total revenue | $4.279 billion | Up 6% from Q3 2021 |
| Fee and other revenue | $3.353 billion | Down 1% year over year |
| Net interest revenue | $926 million | Up 44% year over year |
| Net income applicable to common shareholders | $319 million; diluted EPS $0.39 | Down from $881 million and $1.04 in Q3 2021 |
| Adjusted net income and diluted EPS (Non-GAAP) | $983 million; $1.21 | Compared with $926 million and $1.09 in Q3 2021 |
| Noninterest expense | $3.679 billion | Up 26% year over year; up 4% excluding notable items (Non-GAAP) |
| Net interest margin | 1.05% | Up 38 basis points year over year |
| Pre-tax operating margin | 15% | Down from 29% in Q3 2021 |
Reported return on common equity was 3.5%; adjusted ROE was 10.9% (Non-GAAP). Reported return on tangible common equity was 7.5%; adjusted ROTCE was 22.4% (Non-GAAP). The effective tax rate was 38.4%, or 19.5% excluding notable items.
Balance sheet, liquidity and capital
- At September 30, total assets were $428.0 billion, deposits were $302.0 billion, loans were $69.8 billion and long-term debt was $27.8 billion. Since December 31, 2021, assets declined from $444.4 billion and deposits from $319.7 billion; debt increased from $25.9 billion.
- Available funds were $149.5 billion, 35% of total assets. Average Q3 liquidity coverage ratio was 116%; the company reported compliance with the 100% minimum requirement.
- Standardized CET1 ratio was 10.0%, Tier 1 leverage ratio 5.4% and supplementary leverage ratio 6.3%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Shareholders’ equity was $39.7 billion, down from $43.0 billion at year-end 2021. Tangible book value per common share was $21.55 (Non-GAAP), versus $24.31 at year-end.
- For the first nine months, operating cash flow was $12.1 billion, investing cash flow was negative $5.3 billion and financing cash flow was negative $7.5 billion. Operating cash flow in the prior-year period was negative $291 million.
Material changes and segment results
- The $680 million non-cash goodwill impairment in Investment Management was the principal reason reported Q3 expenses rose and common earnings fell. It did not affect liquidity, tangible common equity or regulatory capital ratios.
- Higher interest rates lifted net interest revenue, partly offset by higher funding costs and lower interest-earning assets. Average interest-earning assets declined 8% year over year.
- Securities Services revenue rose 13% year over year to $2.1 billion; pre-tax income rose 67% to $523 million, including notable items. Market and Wealth Services revenue rose 17% to $1.4 billion and pre-tax income rose 21% to $631 million.
- Investment and Wealth Management revenue fell 16% to $862 million. The segment reported a $497 million pre-tax loss, primarily due to the impairment; excluding notable items, pre-tax income was $182 million (Non-GAAP), down 48% year over year.
- Assets under custody and/or administration were $42.2 trillion, down 7% year over year; assets under management were $1.776 trillion, down 23%. Lower market values and the stronger U.S. dollar were major factors.
- In Q3, the company raised its quarterly common dividend 9%, from $0.34 to $0.37 per share. It repurchased 36,000 shares for $1 million, all in employee-related transactions; no open-market repurchases occurred during the quarter.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management’s interest-rate model estimated that an instantaneous 100-basis-point increase would add $267 million to 12-month net interest revenue versus baseline; a 100-basis-point decrease would reduce it by $394 million. These are scenario estimates, assume static deposits and no management actions, and are not forecasts.
- Management noted that deposit runoff, particularly of noninterest-bearing deposits, could reduce the benefit of rising rates. A hypothetical $5 billion reduction in U.S.-dollar noninterest-bearing deposits would lower the modeled benefit in the up-100-basis-point scenario by approximately $270 million.
- The securities portfolio had a $10.5 billion net unrealized loss, including hedges, at quarter-end, versus a $384 million net unrealized gain at year-end 2021. After-tax unrealized losses on available-for-sale securities, net of hedges, included in accumulated other comprehensive income were $2.8 billion.
- The allowance for credit losses was $280 million; Q3 provision was a $30 million benefit, mainly from reserve releases on cash balances exposed to Russia and a modest commercial real estate benefit. Management’s downside-scenario sensitivity indicated the allowance would be about $96 million higher if that scenario alone were used.
- BNY Mellon said it had ceased new banking business in Russia and suspended investment-management purchases of Russian securities. Russia exposure was $0.2 billion, primarily cash balances; Russian securities were less than 0.1% of AUC/A and less than 0.01% of AUM.
- Potential reasonably possible legal losses were estimated at up to $520 million above accrued liabilities for matters where an estimate was possible. The filing also describes ongoing Brazilian Postalis litigation and German tax matters; German authorities issued notices totaling approximately $150 million, which the company appealed and intends to pursue seller indemnification for.
- BNY Alcentra, with $32 billion of AUM at quarter-end, was sold on November 1, 2022. The company also disclosed a CFO succession effective February 1, 2023.
- Other risks include market-value and currency impacts on fee revenue and AUM, litigation and regulatory matters, operational and cybersecurity risks, funding and counterparty exposures, and the transition from LIBOR and other reference rates.
Most important facts for investors to verify
- Reconcile reported earnings with the company’s Non-GAAP adjustments, especially the $680 million goodwill impairment and other notable items.
- Track subsequent impairment-test assumptions and Investment and Wealth Management AUM, flows, fee trends and performance after the Alcentra sale.
- Monitor deposit levels and mix, funding costs, realized net interest revenue, and whether rate sensitivity assumptions remain valid as rates change.
- Assess the duration and potential capital or earnings effects of securities unrealized losses, including the distinction between available-for-sale and held-to-maturity holdings.
- Review capital and liquidity ratios, legal and regulatory contingencies, and developments in Russia-related exposures and the LIBOR transition.