BNY Mellon — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. BNY Mellon is a global investment services and investment management company. It reported $30.6 trillion in assets under custody and/or administration (AUC/A) and $1.73 trillion in assets under management (AUM) at quarter-end.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $3.843 billion | $3.730 billion | Up 3% |
| Net income attributable to common shareholders | $880 million | $804 million | Up 9% |
| Diluted EPS | $0.83 | $0.73 | Up 14% |
| Net interest revenue | $792 million | $766 million | Up 3% |
| Noninterest expense | $2.642 billion | $2.629 billion | Essentially flat |
| Effective tax rate | 22.3% | 25.9% | Down 3.6 percentage points |
Fee and other revenue was $3.018 billion, up 2% year over year; fee revenue represented 78% of total revenue. Pre-tax operating margin was 31% GAAP and 33% adjusted (non-GAAP). Return on common equity was 10.2%; adjusted return on tangible common equity was 22.4% (non-GAAP). Net interest margin was 1.13%, up from 0.99% a year earlier but down from 1.16% in Q4 2016.
Investment services fees rose 4% year over year to $1.829 billion, and investment management and performance fees rose 4% to $842 million. Foreign exchange and other trading revenue fell 6% to $164 million, including foreign exchange revenue down 10% to $154 million. A $5 million credit for provision for credit losses compared with a $10 million provision in Q1 2016.
Balance sheet, cash flow, liquidity and capital
- Total assets were $337.5 billion at March 31, up from $333.5 billion at year-end. Loans were $60.9 billion, down from $64.5 billion; deposits were $221.3 billion, nearly unchanged.
- Long-term debt was $26.3 billion, compared with $24.5 billion at year-end. The increase primarily reflected $2.25 billion of debt issuance, partly offset by redemption of trust preferred securities.
- Available funds were $110.8 billion, or 33% of assets, versus $103.8 billion, or 31%, at year-end. Average Q1 liquidity coverage ratio (LCR) was 117%, above the 100% regulatory minimum.
- Consolidated CET1 ratios were 12.0% under the Standardized Approach and 10.4% under the Advanced Approach. Estimated fully phased-in ratios were 11.5% and 10.0%, respectively (non-GAAP). The fully phased-in estimated supplementary leverage ratio was 5.9%.
- Cash used for operating activities was $1.2 billion, versus $1.8 billion provided in Q1 2016. Investing activities used $2.3 billion, versus $20.1 billion provided; financing activities provided $4.0 billion, versus $24.5 billion used. Management cautions that cash flow analysis may be less informative for the company than liquidity and balance-sheet measures.
- Quarterly common dividend was $0.19 per share; payout ratio was 23%. The company repurchased 19 million shares for $879 million during the quarter.
Changes, outlook and notable items
- Year-over-year revenue and earnings improved, supported by higher interest rates and stronger investment services and management fees. AUC/A and AUM each increased 5% year over year, primarily reflecting higher market values, partly offset by currency effects.
- Higher interest rates and hedging effects lifted net interest revenue versus Q1 2016, but lower average interest-earning assets and higher long-term debt partly offset the increase. Q1 net interest revenue declined from Q4, in part because of hedging effects and a Q4 premium-amortization adjustment.
- Management expects a 2017 effective tax rate of approximately 25%–26% based on current tax rates. Q1’s 22.3% rate included an approximately 3% benefit from adopting stock-compensation accounting guidance, including a $32 million tax benefit; the new guidance may increase tax-rate volatility.
- Management expects a modest decrease in the run rate of risk management, regulatory compliance and control-function expenses beginning in the second half of 2017, after submission of the 2017 resolution plan. It also described continuing technology and efficiency investments.
- On April 20, 2017, the company declared a $0.19 common dividend, payable May 12. It submitted its 2017 capital plan on April 5; the Federal Reserve was expected to announce its decision in June.
- The company established a wholly owned intermediate holding company (IHC) for its single-point-of-entry resolution strategy and entered into a binding support agreement in Q2 2017. Under severe financial stress, the arrangement may affect the timing of Parent-level resolution and the recovery prospects of Parent security holders.
- Legal proceedings include mortgage-securitization trustee claims, Stanford-related claims, and litigation involving Brazilian funds and depositary receipt foreign-exchange pricing. The company said it could not estimate losses for certain matters; for matters where it could estimate a range, reasonably possible losses were up to $920 million in excess of related accruals, if any.
Key risks and items to verify
- Review the drivers and sustainability of fee growth, including market-value sensitivity, net client flows, lower-fee product trends, foreign-exchange volatility and currency translation.
- Check whether deposits, funding costs, net interest margin and interest-rate sensitivity develop as management expects; the reported rate-sensitivity estimates rely on uncertain assumptions about depositor behavior.
- Monitor regulatory capital requirements, CCAR approval and share-repurchase capacity, including the phased-in capital buffers and potential changes to the G-SIB surcharge.
- Assess liquidity and funding developments, including commercial paper issuance, the IHC support agreement and the effect of the resolution strategy on Parent creditors and shareholders.
- Track litigation and regulatory matters, especially the estimated possible loss exposure of up to $920 million above accruals, and any changes in reserves or case developments.
- Verify credit quality and concentrations, including financial-institution and commercial exposures, real estate lending, and the $208 million purchased residential mortgage portfolio, of which 14% of serviced balances were at least 60 days delinquent.
- Confirm the impact of the Q1 stock-compensation tax benefit and the company’s progress toward its stated 2017 tax-rate and expense expectations.