Bank of New York Mellon Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. BNY Mellon is a global investment management and investment services company. At quarter-end, it reported $26.3 trillion in assets under custody and/or administration (AUC/A) and $1.43 trillion in assets under management (AUM).
Financial results and key metrics
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Total revenue | $3.613 billion | $3.646 billion in Q1 2012; down about 1% |
| Net income applicable to common shareholders | Loss of $266 million; diluted EPS loss of $0.23 | $619 million income and $0.52 diluted EPS in Q1 2012 |
| Tax-adjusted net income and diluted EPS (non-GAAP) | $588 million; $0.50 | Excludes the $854 million after-tax tax-credit charge |
| Net interest revenue | $719 million | $765 million in Q1 2012; down 6% |
| Net interest margin (FTE) | 1.11% | 1.32% in Q1 2012 |
| Noninterest expense | $2.828 billion | $2.756 billion in Q1 2012; up 3% |
| Provision for credit losses | $24 million credit | $5 million provision in Q1 2012 |
| Assets / deposits at period-end | $355.9 billion / $239.7 billion | Assets were $359.0 billion and deposits $246.1 billion at Dec. 31, 2012 |
| Available funds | $130.5 billion, or 37% of assets | $145.3 billion, or 40%, at Dec. 31, 2012 |
| Long-term debt | $19.9 billion | $18.5 billion at Dec. 31, 2012 |
| Estimated Basel III Tier 1 common equity ratio | 9.4% | 9.8% at Dec. 31, 2012 |
Fee and other revenue was $2.844 billion, essentially flat year over year. Investment services fees rose 1%, and investment management and performance fees rose 10%, supported by Meriten, higher market values, net new business and lower money-market fee waivers. Investment and other income fell to $72 million from $139 million; foreign exchange and other trading revenue decreased to $161 million from $191 million. GAAP pre-tax operating margin was 22%, versus 24% in Q1 2012; the company reported a 26% adjusted non-GAAP margin.
Cash used in operating activities was $2.744 billion, compared with $114 million provided in Q1 2012. Investing activities provided $7.261 billion, and financing activities used $4.755 billion. Operating cash flow was affected substantially by trading activity changes and the quarterly net loss; these cash-flow movements should be considered alongside the balance-sheet and client-deposit fluctuations.
Material changes and business trends
- The $854 million after-tax charge arose from an adverse U.S. Tax Court ruling on foreign tax credits claimed for 2001 and 2002. Excluding the charge, reported common income was $588 million. BNY Mellon said it would appeal.
- Net interest revenue declined year over year, mainly due to lower reinvestment yields and accretion and the elimination of interest on European Central Bank deposits. Management noted that the low-rate environment continued to pressure net interest revenue.
- AUC/A increased 2% year over year, primarily from net new business and improved market values. AUM increased 9% year over year and 3% sequentially; long-term net inflows were a record $40 billion.
- Available funds fell from year-end as client deposits declined and funds were redeployed into securities and loans. Total deposits decreased about 3% sequentially. Loans increased to $49.2 billion from $46.6 billion at year-end.
- The investment securities portfolio’s fair value was $106.6 billion. Its net unrealized pre-tax gain decreased to $2.2 billion from $2.4 billion at year-end, primarily reflecting higher market interest rates and realized gains.
- Shareholders’ equity decreased to $35.7 billion from $36.4 billion at year-end, reflecting the quarterly loss, repurchases and a modest decline in securities valuations. The Basel I Tier 1 capital ratio was 13.6%, down from 15.0%; the company attributed the decrease to the loss, higher risk-weighted assets and Basel II.5 market-risk rule implementation.
Outlook, risks and unusual items
- Management expected a second-quarter 2013 effective tax rate of approximately 25%–26% and a provision for credit losses of approximately zero.
- The Federal Reserve did not object to the 2013 capital plan. The board authorized up to $1.35 billion of share repurchases and approved a 15% quarterly common-dividend increase, from $0.13 to $0.15 per share, beginning in Q2. The increased dividend was paid May 7, 2013.
- From April 1 through May 8, the company repurchased 11.0 million shares for $304 million. Q1 repurchases totaled $211 million in open-market purchases; additional employee-related repurchases were also reported.
- Management targeted $500–$520 million in annualized gross savings from operational-excellence initiatives by the end of 2013, with $70–$90 million of incremental program expenses to achieve those goals. Actual operating expense may vary for other reasons.
- BNY Mellon anticipated an approximately $100 million after-tax gain in Q2 from its ConvergEx investment following a divestiture. It agreed to sell SourceNet Solutions, expecting an immaterial gain; Newton agreed to sell its private-client business, also expected to have an immaterial impact.
- Management cited intense competition, low interest rates, potential deposit volatility and money-market-fund reform, foreign-exchange pricing pressure, market and counterparty risks, and elevated legal costs. It expected structured-debt securitization run-off could reduce annual company revenue by approximately 0.5%–0.75% if those markets did not recover.
- Potential additional exposure of up to $175 million was disclosed for administrative errors involving offshore tax-exempt funds. Separately, the filing reported up to $470 million of aggregate reasonably possible legal loss in excess of accruals, excluding tax matters; the company could not estimate a range for some proceedings.
- Notable legal matters included the pending appeal of the tax ruling, securities-lending and foreign-exchange proceedings, a proposed $210 million Madoff-related settlement awaiting final court approval, and a $114 million Medical Capital settlement that had received preliminary approval.
- BNY Mellon said it had sufficient liquidity under its stress scenarios and that its liquidity measures exceeded minimum guidelines. It also described ongoing tri-party repo reforms, with a goal of practically eliminating intraday credit in that activity by the end of 2014.
Important facts for investors to verify
- Track the tax-credit appeal, the related $1.05 billion uncertain-tax-position reserve, and accrued tax interest of $323 million; Q1 tax expense included $289 million of additional interest expense.
- Monitor whether net interest revenue and margin stabilize as rates, reinvestment yields, deposit mix and client balances change.
- Check capital-ratio trends, including the impact of the tax charge, share repurchases, the Basel II.5 market-risk rules and applicable Basel III requirements.
- Assess liquidity and deposit trends against the decline in available funds, client-deposit concentration, and potential money-market-fund reform effects.
- Follow resolution and amounts for the offshore-fund administrative-error exposure, litigation matters and pending settlements, as well as progress toward expense-savings targets.
- Interpret the filing’s adjusted non-GAAP results alongside GAAP results; the reported net loss primarily reflects the exceptional tax charge.