BNY Mellon — Second-quarter 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. BNY Mellon is a global financial services company focused on investment servicing and investment and wealth management.
Financial results
| Metric | Q2 2020 | Comparison |
|---|---|---|
| Total revenue | $4.01 billion | Up 2% year over year; down 2% sequentially |
| Net income applicable to common shareholders | $901 million | Down from $969 million a year earlier and $944 million in Q1 2020 |
| Diluted EPS | $1.01 | Unchanged year over year; down from $1.05 in Q1 |
| Net interest revenue | $780 million | Down 3% year over year and 4% sequentially |
| Net interest margin | 0.88% | Down 24 basis points year over year and 13 basis points sequentially |
| Noninterest expense | $2.69 billion | Up 1% year over year; down 1% sequentially |
| Provision for credit losses | $143 million | Compared with an $8 million release in Q2 2019 |
| Effective tax rate | 18.3% | Compared with 20.5% in Q2 2019 |
Pre-tax operating margin was 29%, versus 33% in Q2 2019. Return on common equity was 9.4%; return on tangible common equity, a non-GAAP measure, was 18.5%.
For the first six months, revenue was $8.12 billion, up 4%; net income applicable to common shareholders was $1.85 billion, down 2%; diluted EPS was $2.06, up from $1.95; and net interest revenue was $1.59 billion, down 3% year over year.
Business performance and changes
- Investment Services: Q2 revenue rose 3% year over year to $3.11 billion, while income before taxes fell 8% to $973 million. Assets under custody and/or administration were $37.3 trillion, up 5% year over year.
- Investment and Wealth Management: Revenue declined 3% to $886 million and pre-tax income fell 15% to $221 million. AUM was $1.96 trillion, up 6%, mainly from market recovery and net inflows. The second-quarter market rebound benefited seed-capital results after first-quarter losses.
- Fee and other revenue rose 2% year over year, supported by investment and other income, asset servicing and clearing fees; investment management fees were lower. Foreign exchange and other trading revenue was flat year over year but fell 48% sequentially as volatility and volumes eased from Q1.
- Low short-term rates drove money market fee waivers. Their net revenue impact was $79 million in Q2, versus $23 million in Q1. BNY Mellon estimated a further $30 million–$45 million increase in Q3 and an additional $25 million in Q4, subject to money market balances.
Balance sheet, cash flow, capital and liquidity
- At June 30, total assets were $442.3 billion, up from $381.5 billion at year-end 2019, primarily due to client deposit inflows. Deposits rose 18% to $305.5 billion.
- Available funds were $172.2 billion, or 39% of total assets, versus $144.9 billion and 38% at year-end. Average Q2 liquidity coverage ratio was 112%; the company and affected domestic bank subsidiaries remained above the 100% regulatory minimum.
- Long-term debt was $27.6 billion, broadly unchanged from year-end. Shareholders’ equity increased to $43.7 billion from $41.5 billion. The company issued $1 billion of Series G preferred stock in May.
- Advanced-approaches CET1 ratio was 12.6% at quarter-end, compared with 11.5% at year-end; standardized CET1 was 12.7%. The reported 8.2% consolidated supplementary leverage ratio included temporary regulatory exclusions that added 40 basis points.
- For the first six months, operating cash flow was positive $5.1 billion, investing cash flow was negative $58.7 billion, and financing cash flow was positive $53.4 billion. Investing outflows principally reflected increased securities and central-bank placements; financing inflows mainly reflected deposit growth.
- The company paid a $0.31 common dividend per share in Q2. Open-market repurchases were suspended; Q2 repurchases were limited to employee tax-related share withholding. The Federal Reserve’s Q3 restrictions also barred open-market repurchases and constrained dividends.
Outlook, risks and unusual items
- Management said the low-rate environment is expected to continue weighing on net interest revenue and margin. Future results depend on deposit levels and mix, deposit pricing and the yield curve.
- Technology investment and pension costs were expected to be higher in 2020 than in 2019, with management expecting offsets from reductions in other expenses.
- The pandemic’s duration and economic effects were uncertain. About 95% of employees were working remotely at quarter-end; management cited heightened operational and cybersecurity risks, as well as potential service disruption.
- Credit-loss provisioning reflected borrower downgrades and a challenging outlook. The allowance for credit losses was $475 million, up from $216 million at year-end; commercial real estate was the largest allocation. A hypothetical one-grade deterioration in all credit ratings would increase the allowance by $202 million, according to the filing’s sensitivity analysis.
- BNY Mellon modified $282 million of loans in Q2, primarily residential mortgage and commercial real estate loans. These pandemic-related modifications were not classified as troubled debt restructurings and were not reported as past due or nonperforming during the modification period.
- Annual goodwill testing found no impairment, but the Investment Management reporting unit’s estimated fair value exceeded carrying value by only about 5%; management warned that small changes in AUM or operating margin could result in a non-cash impairment.
- For certain legal matters, the company could not estimate a reasonably possible loss range; for matters where it could estimate, possible loss was up to $730 million above accrued liabilities. Management said current matters were not expected to materially affect consolidated financial position or liquidity, though they could affect results in a period.
- Subsequent events included the July appointment of Emily Portney as CFO and the July redemption at par of $1.1 billion in senior notes due in August.
Investor verification priorities
- Track net interest revenue and margin against deposit growth, pricing and interest-rate conditions.
- Verify the realized progression of money market fee waivers against the disclosed Q3/Q4 estimates.
- Monitor credit provisions, commercial real estate exposures, loan modifications and allowance assumptions as economic forecasts evolve.
- Confirm capital ratios and the duration of Federal Reserve restrictions on repurchases and dividends; note temporary SLR calculation relief.
- Assess Investment Management goodwill headroom and the potential sensitivity to AUM and margins.
- Review subsequent legal disclosures, including the stated potential losses, and the effects of pandemic-related operational and cybersecurity risks.