BNY Mellon — Q2 2019 Form 10-Q Summary
Business context and reporting period
Global custody, investment services and investment management company reporting for the quarter and six months ended June 30, 2019. Its principal segments are Investment Services and Investment Management.
Financial and operating performance
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Total revenue | $3.924 billion | Down 5% from Q2 2018 |
| Net income attributable to common shareholders | $969 million; diluted EPS $1.01 | $1.055 billion; diluted EPS $1.03 in Q2 2018 |
| Net interest revenue / margin | $802 million / 1.12% | Down 12% / 14 basis points year over year |
| Fee and other revenue | $3.112 billion | Down 3% year over year |
| Noninterest expense | $2.647 billion | Down 4% year over year |
| Pre-tax operating margin | 33% | 34% in Q2 2018 |
| Effective tax rate | 20.5% | 20.5% in Q2 2018 |
| Assets under custody/administration | $35.5 trillion | Up 6% year over year |
| Assets under management | $1.843 trillion | Up 2% year over year; Q2 long-term net outflows were $26 billion |
Six-month net income applicable to common shareholders was $1.879 billion, down from $2.190 billion. Total revenue was $7.823 billion, down from $8.316 billion; net interest revenue was $1.643 billion, down from $1.835 billion. Return on common equity was 10.4% for Q2 and 10.2% year to date.
Six-month cash flows were $(2.5) billion from operating activities, $(11.4) billion from investing activities and $13.2 billion from financing activities. The filing attributes operating cash use mainly to changes in accruals and trading activities, and investing cash use mainly to federal funds sold and resale agreements.
Balance sheet, liquidity and capital
At June 30, total assets were $381.2 billion, deposits $252.9 billion, loans $52.4 billion and long-term debt $28.2 billion. Available funds were $151.9 billion, or 40% of total assets; average liquidity coverage ratio was 117%, above the 100% regulatory minimum. Commercial paper outstanding rose to $8.9 billion from $1.9 billion at year-end 2018.
The Advanced Approach CET1 ratio was 11.1% (10.7% at year-end 2018); the standardized CET1 ratio was 12.4%. The supplementary leverage ratio was 6.3%. The company repurchased 15.3 million shares for $750 million and paid $270 million in common dividends during Q2.
Material changes, outlook and risks
- Revenue pressure reflected lower investment management fees, foreign exchange and securities-lending revenue, and weaker net interest revenue. Higher deposit and funding costs, reduced noninterest-bearing deposits and hedging effects outweighed higher yields on earning assets.
- Investment Management revenue fell 10% year over year, with cumulative AUM outflows, currency effects and divestitures among the drivers. Investment Services revenue fell 3%, although issuer services and clearing fees grew.
- Management expects technology-related expenses in 2019 to exceed 2018 levels, with increases mostly offset by reductions elsewhere. Technology investment is expected to continue at recent levels.
- After quarter-end, the Board authorized up to $3.94 billion of common-share repurchases through Q2 2020 and approved an approximately 11% quarterly dividend increase, from $0.28 to $0.31 per share.
- Nonperforming assets increased to $186 million from $79 million at year-end, primarily due to a California utility bankruptcy and a change in mortgage classification policy. The company agreed to sell its utility exposure; settlement was expected in Q3 and management expected an $8 million allowance reduction.
- Potentially reasonably possible legal losses were estimated at up to $930 million above accrued liabilities, where estimable. The filing discusses mortgage-securitization, Stanford, Brazilian Postalis and other proceedings; management said outcomes could affect results in a given period.
- No goodwill impairment was recorded. The Asset Management reporting unit’s estimated fair value exceeded carrying value by approximately 18%; management cautioned that modest changes in AUM or operating-margin assumptions could cause a non-cash impairment.
- Other risks include interest-rate and deposit sensitivity, market and currency volatility, Brexit, cybersecurity and operational risks, regulatory requirements, and the transition from LIBOR and other benchmark rates. The company planned to adopt the current expected credit loss standard on January 1, 2020; the impact was still being assessed.
Important facts for investors to verify
- Whether net interest revenue and margin stabilize as deposit costs, deposit mix and yield curves change.
- Whether Investment Management outflows and fee declines persist, and whether higher custody assets translate into fee growth.
- Execution and regulatory capacity for the authorized buybacks and dividend increase, including effects on capital ratios.
- Settlement and final credit impact of the California utility exposure, and developments in significant legal and regulatory matters.
- The effect of the 2020 credit-loss accounting adoption and ongoing technology investment on expenses, reserves and earnings.
- Commercial paper funding levels and maintenance of liquidity and capital buffers under market stress.