Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) is a global financial-services company focused on asset servicing, market and wealth services, and investment and wealth management. This unaudited Form 10-Q covers the quarter ended March 31, 2022; comparisons below are primarily with the first quarter of 2021 unless noted.
Financial performance and condition
| Metric | Q1 2022 | Comparison / context |
|---|---|---|
| Total revenue | $3.926 billion | Essentially flat year over year |
| Fee and other revenue | $3.228 billion | Down 1% year over year; fee revenue alone fell 3% |
| Net interest revenue | $698 million | Up 7%; net interest margin was 0.75%, up 9 basis points |
| Noninterest expense | $3.006 billion | Up approximately 5.5% |
| Provision for credit losses | $2 million expense | Compared with an $83 million benefit in Q1 2021 |
| Income before taxes / tax rate | $918 million / 16.7% | Tax provision was $153 million; rate includes a benefit from annual stock-award vesting |
| Net income / common net income | $765 million / $699 million | Common net income was down from $858 million |
| Diluted EPS | $0.86 | Down from $0.97 |
| Pre-tax operating margin | 23% | Down from 29% |
| Return on common equity | 7.6% | Down from 8.5%; return on tangible common equity was 15.4% (non-GAAP) |
Expenses rose mainly from investment in growth, infrastructure and efficiency initiatives, higher revenue-related costs, and staff costs associated with annual vesting of stock awards. Fee revenue was pressured by Russia-related depositary-receipt costs, prior-year lost business, foreign exchange revenue and currency translation. A strategic equity investment gain and the prior-year renewable-energy impairment partly offset those pressures.
At March 31, total assets were $473.8 billion, deposits $345.6 billion, loans $68.1 billion and long-term debt $25.2 billion. Deposits increased 8% from year-end 2021. Available funds were $187.2 billion, or 40% of assets, versus $154.8 billion, or 35%, at year-end. Average liquidity coverage ratio was 109%; the company reported compliance with the 100% minimum throughout the quarter.
Operating cash flow was $3.4 billion, versus cash used of $3.2 billion in Q1 2021. Investing activities used $33.9 billion, principally reflecting changes in central-bank and bank deposits; financing activities provided $30.1 billion, primarily from deposits and other funding flows. These cash-flow amounts reflect balance-sheet activity and should be considered alongside the filing’s liquidity discussion.
Common shareholders’ equity was $37.0 billion and total shareholders’ equity $41.8 billion, both lower than at year-end. The decline primarily reflected available-for-sale securities losses and dividends, partly offset by earnings. The securities portfolio’s net unrealized loss, including hedges, was $4.4 billion; the after-tax available-for-sale loss in accumulated other comprehensive income was $1.1 billion. The standardized CET1 ratio fell to 10.1% from 11.2%; the decline reflected securities losses, higher risk-weighted assets following SA-CCR implementation and capital distributions, partly offset by earnings. The company and its U.S. bank subsidiaries were reported as well capitalized.
Material changes and business trends
- AUC/A was $45.5 trillion, up 9% year over year, reflecting client inflows, net new business and higher market values, partly offset by the stronger U.S. dollar. AUM was $2.266 trillion, up 2% year over year but down from $2.434 trillion at year-end 2021.
- Securities Services revenue was flat year over year, while income before taxes fell 33% to $280 million. Market and Wealth Services revenue was flat and pretax income fell 10% to $496 million. Investment and Wealth Management revenue fell 3% and pretax income fell 24% to $212 million.
- Investment and Wealth Management recorded $1 billion of net long-term strategy outflows and $11 billion of short-term strategy outflows. Its quarter-end AUM nevertheless exceeded the year-earlier level, primarily due to net inflows and market values.
- Net money market fee waivers, after related distribution expense, were $199 million, down from $243 million in Q4 2021, as higher rates reduced waivers.
Outlook, risks and unusual items
- BNY Mellon ceased new banking business in Russia and suspended investment-management purchases of Russian securities. Sanctions and related actions reduced Q1 fee revenue by approximately $90 million; management estimated an ongoing annual revenue impact of $80 million to $100 million. Russian securities were less than 0.1% of AUC/A and less than 0.01% of AUM at quarter-end. The filing does not provide formal earnings or revenue guidance.
- Management highlighted sensitivity to interest rates and deposits. Its modeled 12-month net interest revenue impact for an instantaneous 100-basis-point rate increase was +$268 million, but the filing cautions that the model assumes static deposits and no mitigating management actions. A $5 billion reduction in U.S.-dollar noninterest-bearing deposits would reduce the modeled benefit by approximately $140 million.
- Market, currency, client-activity and fee-waiver changes could affect fee revenue; management also cited demand shifts toward lower-fee asset-management products. A 5% change in global equity markets, spread evenly through the year, was estimated to affect fee revenue by less than 1% and diluted EPS by $0.04 to $0.07.
- Legal and regulatory matters remain uncertain. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $700 million in excess of accrued liabilities, if any. German tax authorities issued approximately $150 million in secondary-liability notices related to pre-acquisition activity; BNY Mellon appealed and intends to pursue an acquisition-related indemnity. Brazilian Postalis proceedings include a judgment of approximately $50 million plus a fine against a subsidiary; the subsidiary is challenging the decision.
- Other items to monitor include the CEO’s announced retirement effective August 31, 2022 and planned succession; April 2022 senior-note issuance totaling $1.7 billion; potential acquisition-related contingent consideration of $15 million to $45 million over three years; and the transition from USD LIBOR, whose remaining settings were scheduled to cease after June 30, 2023.
Most important facts for investors to verify
- Whether Russia-related revenue effects, including the estimated $80 million to $100 million annual impact, evolve as expected.
- Whether higher interest rates translate into sustained net interest revenue gains after deposit repricing, deposit runoff and other balance-sheet effects.
- Whether securities valuation losses, accumulated other comprehensive income and regulatory capital ratios stabilize or continue to weaken.
- Whether fee trends, client flows and market values support growth in AUC/A, AUM and segment profitability, while expenses remain controlled.
- Developments in material litigation and regulatory matters, particularly the Brazilian and German matters, and any changes to estimated exposure or reserves.