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, 2021. The global financial services company operates through Investment Services and Investment and Wealth Management, with remaining activities in Other.
Financial results and key metrics
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Revenue | $3.921 billion | $4.108 billion in Q1 2020 |
| Net income applicable to common shareholders | $858 million | $944 million in Q1 2020 |
| Diluted EPS | $0.97 | $1.05 in Q1 2020 |
| Net interest revenue / margin | $655 million / 0.66% | $814 million / 1.01% in Q1 2020 |
| Noninterest expense | $2.851 billion | $2.712 billion in Q1 2020 |
| Return on common equity / pre-tax operating margin | 8.5% / 29% | 10.1% / 30% in Q1 2020 |
- Fee and other revenue was $3.266 billion, down 1% year over year; fee revenue alone rose 1% to $3.257 billion. Fee revenue represented 83% of total revenue.
- Provision for credit losses was an $83 million benefit, primarily due to an improved macroeconomic forecast; the comparable Q1 2020 provision was $169 million.
- Effective tax rate was 19.2%, versus 21.6% in Q1 2020.
- Quarter-end total assets were $465.0 billion, deposits $336.8 billion, loans $60.7 billion and long-term debt $25.4 billion. Total assets and deposits declined from December 31, 2020; loans increased from $56.5 billion.
- Available funds were $183.5 billion, down from $196.2 billion at year-end; they equaled 39% of total assets. Average LCR was 110%, and the company reported compliance with the 100% minimum.
- Operating cash flow was negative $3.2 billion; investing cash flow was positive $4.7 billion and financing cash flow was negative $1.5 billion. Management cautions that bank cash-flow movements may be less useful than its liquidity discussion for assessing liquidity.
- Standardized CET1 was 12.6% at quarter-end, compared with 13.4% at December 31, 2020; the filing also reports 13.1% under the Advanced Approaches at year-end. The decline reflected securities-related unrealized losses, repurchases and dividends, and higher risk-weighted assets, partly offset by earnings. The company and its U.S. bank subsidiaries were described as well capitalized.
Material changes versus prior periods
- Year over year, revenue fell 5%, common net income fell 9%, and diluted EPS declined from $1.05 to $0.97. Net interest revenue fell 20%, mainly because of lower yields, while average interest-earning assets grew 23%.
- Higher markets, client volumes and balances, and a weaker U.S. dollar supported fee revenue. Low rates and higher money-market balances increased net fee-waiver impact to $188 million, versus $23 million in Q1 2020 and $134 million in Q4 2020.
- Investment Services revenue declined 8% year over year and pre-tax income declined 12%; AUC/A rose 18% to $41.7 trillion. Investment and Wealth Management revenue increased 10% and pre-tax income increased 43%; AUM rose 23% to $2.214 trillion.
- Noninterest expense increased 5% year over year, mainly from staff, technology-related costs and currency effects. Shareholders’ equity fell to $45.0 billion from $45.8 billion at year-end, principally reflecting available-for-sale securities losses, dividends and repurchases.
Outlook, risks, contingencies and unusual items
- Management expected net interest revenue to decrease in 2021 versus 2020 and full-year reported noninterest expense to increase slightly versus 2020. It estimated Q2 2021 net money-market fee-waiver impact at approximately $220 million, subject to rates and balances.
- Management said the pandemic’s future effects remained uncertain. Low short-term rates continued to pressure net interest revenue and fee waivers; improved markets and economic outlook supported activity and the credit-loss release.
- The $39 million impairment of a renewable-energy investment was a notable item. Total renewable-energy investment losses were $81 million in Q1; the filing says related tax benefits and credits more than offset such losses.
- Common dividends remained $0.31 per share. The company repurchased 16.8 million shares for $699 million in Q1. Federal Reserve restrictions remained in effect for Q2; the company was authorized to repurchase up to approximately $600 million in that quarter, subject to applicable limits. The temporary exclusion of U.S. Treasury securities from SLR calculations ended April 1, 2021.
- Legal proceedings include multiple matters with uncertain outcomes. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $650 million in excess of related accruals, if any; other matters could not be reasonably estimated. German tax authorities issued notices totaling approximately $150 million related to pre-acquisition activity; the company appealed and cited an indemnity from sellers.
- Other risks include sensitivity to interest rates, markets, currency and deposits; credit and counterparty exposure; operational, technology and cybersecurity risks; regulatory restrictions; and the LIBOR transition. The company reported effective disclosure controls and no materially impactful Q1 changes to internal control over financial reporting.
Important facts for investors to verify
- Whether net interest revenue and money-market fee waivers track management’s 2021 outlook as rates and deposit balances change.
- Whether fee growth, client flows, market levels and expense trends sustain the reported segment performance.
- Capital ratios after the SLR temporary Treasury exclusion ended, and the scope of permitted distributions under regulatory restrictions.
- Developments in the German tax notices, Postalis and other litigation, including possible losses beyond recorded accruals.
- How the renewable-energy impairment, credit-loss allowance assumptions and securities valuation changes evolve.