Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon), a global custody, asset servicing, investment management and wealth management company, filed this unaudited Form 10-Q for the quarter ended September 30, 2020. Its two principal segments are Investment Services and Investment and Wealth Management.
Financial performance and position
| Metric | Q3 2020 | Comparison |
|---|---|---|
| Total revenue | $3.847 billion | Down less than 1% from Q3 2019; down 4% from Q2 2020 |
| Net income applicable to common shareholders | $876 million; diluted EPS $0.98 | Down from $1.002 billion and $1.07 per diluted share in Q3 2019 |
| Net interest revenue / margin | $703 million / 0.79% | Revenue down 4% year over year; margin down 20 basis points |
| Fee and other revenue | $3.117 billion | Down less than 1% year over year; money market fee waivers reduced revenue by $101 million net of related expense |
| Noninterest expense | $2.681 billion | Up 4% year over year; essentially flat from Q2 |
| Provision for credit losses | $9 million | Compared with a $16 million release in Q3 2019 and $143 million provision in Q2 2020 |
- For the first nine months of 2020, revenue was $11.965 billion, common net income was $2.721 billion and diluted EPS was $3.04, versus $11.684 billion, $2.881 billion and $3.01, respectively, in the comparable 2019 period.
- At September 30, total assets were $428.4 billion, deposits $296.3 billion, loans $55.5 billion and long-term debt $26.1 billion. At December 31, 2019, these were $381.5 billion, $259.5 billion, $55.0 billion and $27.5 billion, respectively.
- Available funds were $159.0 billion, or 37% of total assets. Average third-quarter LCR was 111%; the company reported compliance with the 100% minimum throughout the quarter.
- Regulatory capital ratios at quarter end included a 13.0% advanced CET1 ratio and 13.5% standardized CET1 ratio, up from 11.5% and 12.5%, respectively, at year-end 2019. Consolidated SLR was 8.5%, including temporary regulatory relief.
- Nine-month cash flow: $5.9 billion provided by operations, $44.3 billion used in investing and $38.1 billion provided by financing, chiefly reflecting securities and deposit movements.
- AUC/A reached $38.6 trillion, up 8% year over year; AUM was $2.041 trillion, up 9%.
Material changes versus comparable periods
- Lower interest rates drove weaker net interest revenue and margin, partly offset by lower deposit and funding costs, higher deposits and a larger securities portfolio. The year-over-year net interest revenue comparison was helped by a $70 million lease-related impairment recorded in Q3 2019.
- Fee revenue was broadly flat year over year: higher asset servicing, treasury services and investment management activity partly offset lower issuer and clearing services fees and money market fee waivers.
- Expense growth reflected technology investment, purchased professional and legal services, foreign currency translation and the absence of a Q3 2019 reduction in reserves for a tax-related exposure. The filing attributes 3 percentage points of consolidated expense growth to that prior-year reserve item.
- Credit-loss allowances rose substantially from year-end following adoption of CECL and pandemic-related estimates. The allowance for credit losses was $486 million at September 30, versus $216 million at December 31, 2019; prior periods were not restated.
- Balance sheet growth reflected client deposit inflows and higher holdings of securities and central-bank deposits. Shareholders’ equity increased to $44.9 billion from $41.5 billion at year-end, including earnings, securities-related unrealized gains and preferred stock issuance.
Outlook, commentary, risks and contingencies
- Management expects net money market fee-waiver impact, net of distribution and servicing expense, of $135 million to $150 million in Q4 2020; it expects the 2021 quarterly run rate to be at the higher end of that range, subject partly to money market balances.
- Technology investment is expected to continue, with technology-related expenses and pension expense higher in 2020 than in 2019; management expects to offset increases through reductions elsewhere. The filing does not provide specific full-year earnings guidance.
- Management warned that low interest rates are expected to continue pressuring net interest revenue and margin. Results also depend on deposit levels and mix, the yield curve, markets, client activity, currency movements and pandemic developments.
- COVID-19 risks include credit deterioration and higher provisions, asset impairments, operational and cybersecurity exposure from remote work, and disruption to client services. The allowance is sensitive to economic forecasts; a 100% downside-scenario weighting would have increased it by about $245 million.
- Open-market common stock repurchases and dividend increases were restricted through Q4 2020 under Federal Reserve capital-distribution limits. The company maintained its $0.31 quarterly common dividend and said it intended to resume repurchases as early as possible, subject to regulatory and market conditions.
- Legal proceedings were not considered likely to materially affect consolidated financial position or liquidity based on current knowledge, but could materially affect results in a period. For matters where a range could be estimated, reasonably possible losses were up to $750 million above related accruals. A Brazilian tribunal found a subsidiary jointly liable for approximately $41.7 million and imposed a fine of approximately $1.8 million; the subsidiary appealed.
- Subsequent events included a November preferred-stock issuance intended to fund redemption of all Series C preferred shares in December 2020, and redemption of $800 million of senior notes in October.
Important facts for investors to verify
- Track the impact of fee waivers, particularly against the disclosed Q4 2020 and 2021 estimates, and monitor whether client balances offset those costs.
- Assess sensitivity of net interest revenue to rates, deposit runoff and balance-sheet mix; review the filing’s modeled interest-rate scenarios and their assumptions.
- Monitor CECL allowance assumptions, credit quality and pandemic-related borrower modifications, especially commercial real estate and energy exposures.
- Confirm the duration of Federal Reserve restrictions on capital distributions and the timing of any resumed open-market repurchases.
- Review developments in the identified legal proceedings, including the Brazilian appeal and the disclosed potential losses above accruals.