BNY Mellon: Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. BNY Mellon is a global financial services company focused on securities services, market and wealth services, and investment and wealth management.
Financial performance and key metrics
| Metric | Q2 2023 | Change vs. Q2 2022 |
|---|---|---|
| Total revenue | $4.454 billion | Up 5% |
| Net income applicable to common shareholders | $1.031 billion | Up 23% |
| Diluted EPS | $1.30 | Up from $1.03 |
| Net interest revenue | $1.100 billion | Up 33% |
| Fee and other revenue | $3.354 billion | Down 2% |
| Noninterest expense | $3.111 billion | Essentially flat |
| Provision for credit losses | $5 million | Compared with $47 million |
| Net interest margin | 1.20% | Up 31 basis points |
| Return on common equity | 11.6% | Up from 9.3% |
| Return on tangible common equity | 22.6% (non-GAAP) | Up from 19.2% |
For the first six months of 2023, revenue was $8.817 billion, up 8%; net income applicable to common shareholders was $1.936 billion, up 26%; and diluted EPS was $2.42, up from $1.88. Net interest revenue rose 46% year to date, while fee revenue declined 1%.
Business mix and operating trends
- Securities Services: Q2 revenue increased 12% year over year to $2.240 billion; pre-tax income rose 91% to $642 million. Growth was led by net interest revenue and Issuer Services.
- Market and Wealth Services: Revenue increased 10% to $1.445 billion; pre-tax income rose 8% to $657 million.
- Investment and Wealth Management: Revenue declined 10% to $813 million and pre-tax income fell 38% to $129 million. Drivers included the Alcentra divestiture, fee mix, and lower net interest revenue.
- Assets under custody and/or administration were $46.9 trillion, up 9% year over year, reflecting market values, client inflows, and new business. Assets under management were $1.906 trillion, down 2%, with $18 billion of net outflows in Q2.
- Foreign exchange revenue fell 29% year over year, mainly on lower volumes and volatility. Investment management and performance fees declined 9%.
Balance sheet, cash flow, debt, and capital
- At June 30, total assets were $430.4 billion, up from $405.8 billion at year-end 2022. Deposits were $292.0 billion, including $67.7 billion of noninterest-bearing deposits.
- Available funds were $172.3 billion, or 40% of total assets, compared with $138.2 billion and 34% at year-end. Average Q2 liquidity coverage ratio was 120%; average net stable funding ratio was 136%. Both exceeded the 100% regulatory minimum.
- Long-term debt was $32.5 billion, versus $30.5 billion at year-end; $2.8 billion was scheduled to mature in the remainder of 2023.
- Regulatory CET1 ratios were 11.1% under the Advanced Approaches and 11.8% under the Standardized Approach. The supplementary leverage ratio was 7.0%. The company reported that it and its U.S. bank subsidiaries were well capitalized.
- For the first six months, operating cash flow was $2.9 billion, investing cash flow was a use of $25.1 billion, and financing cash flow provided $20.0 billion. The filing cautions that cash flow analysis may be less informative for this business than its liquidity and balance-sheet disclosures.
- Q2 shareholder returns totaled $745 million, including $448 million of common share repurchases. The company repurchased 35.8 million shares for $1.7 billion in the first half. The board approved a July dividend increase from $0.37 to $0.42 per share quarterly.
Material changes, outlook, risks, and unusual items
- Higher interest rates drove substantial net interest revenue growth, but deposit mix and higher deposit costs contributed to a 9-basis-point sequential decline in net interest margin from Q1.
- Q2 expenses were flat year over year on a reported basis; adjusted expenses, excluding litigation reserves and severance, increased 1%. Management cited investment spending, revenue-related costs, and inflation, partly offset by efficiency savings.
- The securities portfolio had $8.9 billion of net unrealized losses, including related hedges, at June 30. The filing says the losses primarily reflected interest rates and that the company did not intend, and was not more likely than not required, to sell the securities. Held-to-maturity securities had $5.9 billion of net unrealized losses.
- Commercial real estate exposure was $10.2 billion. The allowance for credit losses was $323 million; management weighted its downside economic scenario most heavily. A 100% downside-scenario weighting would have increased the allowance by approximately $78 million.
- The Investment Management reporting unit’s estimated fair value exceeded carrying value by approximately 3%; no additional goodwill impairment was recorded. Management cautioned that changes in assumptions could result in a future non-cash impairment.
- Legal matters include an estimated reasonably possible loss range of up to $620 million in excess of accrued liabilities for matters where a range could be estimated. BNY Mellon said it could not estimate losses for certain other matters. German authorities issued approximately $150 million of tax-related secondary liability notices, which the company appealed.
- The FDIC proposed a special assessment to recover losses associated with bank failures. If finalized as proposed, BNY Mellon expected a significant expense in a single quarter; the filing does not state a final assessment amount.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management identified exposure to deposit outflows, interest-rate changes, market activity and values, litigation and regulatory matters, cybersecurity and operational disruptions, and proposed regulatory capital changes.
Important facts for investors to verify
- Whether net interest revenue can remain resilient as deposit costs rise and balances or mix change.
- Trends in noninterest-bearing deposits, client activity, liquidity ratios, and funding costs.
- Progress in stabilizing Investment and Wealth Management revenue, AUM flows, and margins after the Alcentra divestiture.
- Potential credit deterioration, particularly in commercial real estate, and changes to reserve assumptions.
- The duration and eventual resolution of securities unrealized losses, legal contingencies, German tax matters, and any FDIC special assessment.
- The potential effects of proposed U.S. capital rules and the narrow valuation cushion in the Investment Management goodwill test.