Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It is a global custody, investment services and investment management company. At quarter-end, assets under custody and/or administration (AUC/A) were $30.5 trillion and assets under management (AUM) were $1.715 trillion.
Financial results and key metrics
| Metric | Q3 2016 | Comparable period / context |
|---|---|---|
| Revenue | $3.941 billion | Up 4% year over year; $11.447 billion for the first nine months, down slightly from $11.468 billion |
| Net income attributable to common shareholders | $974 million; diluted EPS $0.90 | Compared with $820 million and $0.74 in Q3 2015; first nine months $2.603 billion versus $2.416 billion |
| Income before taxes | $1.317 billion | Q3 2015: $1.109 billion |
| Pre-tax operating margin | 33% GAAP; 35% adjusted, non-GAAP | Q3 2015: 29% GAAP; 31% adjusted |
| Net interest revenue / margin | $774 million; 1.06% FTE margin | Q3 2015: $759 million; 0.98% margin |
| Noninterest expense | $2.643 billion | Down 1% year over year; first nine months $7.892 billion, down 3% |
| Provision for credit losses | $19 million credit | Driven by $13 million of net recoveries, including Sentinel-related recovery |
| Effective tax rate | 24.6% | Management expected approximately 25%–26% for 2016 |
Fee and other revenue was $3.150 billion, up 3% year over year. Investment services fees increased 2% to $1.890 billion and investment management and performance fees rose 4% to $860 million. Foreign exchange and other trading revenue was $183 million; financing-related fees declined 18% to $58 million. Higher issuer services, investment management and other income supported quarterly revenue growth.
For the first nine months, operating cash flow was $1.557 billion, versus $3.985 billion in 2015. Investing activities provided $21.058 billion, while financing activities used $24.178 billion. The filing attributes the large investing inflow chiefly to changes in deposits at the Federal Reserve and other central banks; cash-flow movements also reflected deposit outflows, debt activity and share repurchases.
At September 30, total assets were $374.1 billion, down from $393.8 billion at December 31, 2015, primarily reflecting lower customer deposits. Deposits were $261.4 billion, versus $279.6 billion at year-end. Available funds were $134.6 billion, or 36% of assets, compared with $159.3 billion, or 40%, at year-end. Long-term debt was $24.4 billion, up from $21.5 billion. The company reported a 109% consolidated liquidity coverage ratio (LCR), above the then-current 90% requirement.
Capital remained substantial: quarter-end CET1 was 12.2% under the Standardized Approach and 10.5% under the Advanced Approach. Estimated fully phased-in CET1 was 11.4% and 9.8%, respectively. The transitional supplementary leverage ratio was 6.0% (estimated fully phased-in: 5.7%). BNY Mellon reported that it and its U.S. bank subsidiaries were well capitalized.
Material changes versus prior periods
- Quarterly common net income increased to $974 million from $820 million a year earlier; diluted EPS rose to $0.90 from $0.74. The filing cites higher revenue, lower expenses and a credit provision as contributing factors.
- Net interest margin improved to 1.06% from 0.98%, attributed to balance-sheet actions and higher market rates. Average interest-earning assets were down 6% year over year.
- Quarter-end AUC/A increased 7% year over year to $30.5 trillion and AUM increased 6% to $1.715 trillion, primarily reflecting higher market values, partly offset by currency effects.
- First-nine-month total revenue was nearly flat year over year, while common net income increased. Investment Management pre-tax income fell 7% for the period; Investment Services pre-tax income rose 14%.
- Deposits fell 7% from year-end and available funds declined by approximately $24.7 billion. Long-term debt increased by approximately $2.9 billion from year-end.
- Q3 included a $13 million Sentinel recovery and $18 million of merger, litigation and restructuring charges. Adjusted, non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Outlook, commentary, risks and contingencies
- Resolution plan and funding: Regulators found the 2015 resolution plan deficient in April 2016. BNY Mellon submitted a revised plan on October 1 and said it believed it addressed the identified deficiencies. Its revised single-point-of-entry strategy was expected to require $2–$4 billion of additional unsecured long-term debt by July 2017, with a modest negative effect on net interest revenue; the estimate remained subject to refinement.
- Costs and revenue sensitivity: Management expected a higher expense run rate for risk management, regulatory compliance and control functions. It estimated a 5% change in global equity markets, spread through the year, would affect fee revenue by less than 1% and diluted EPS by $0.02–$0.04. Foreign exchange revenue was exposed to lower volatility, competitive pressure and client migration to lower-margin products.
- Market and geographic risks: The Brexit vote created uncertainty around markets, regulation, operating arrangements and the British pound. The company also cited low or volatile interest rates, market activity, deposit behavior and global economic conditions as risks to earnings and liquidity.
- Legal matters: The company stated that pending matters were not expected to materially affect consolidated financial position or liquidity, but could materially affect net income in a period. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $900 million in excess of related accruals, if any. Matters included mortgage-securitization trustee litigation, Stanford-related claims, Brazilian Postalis and Silverado litigation, and depositary receipt foreign-exchange claims.
- Other exposures: Total lending exposure, including unfunded commitments, was $123.5 billion. Securities-lending indemnifications were $309.4 billion, generally collateralized; these notional exposures do not equal expected losses. Country exposures included $1.7 billion net exposure to Brazil and $727 million to Turkey. The company also disclosed operational, cyber, counterparty, credit, regulatory and reputational risks.
- Capital returns: The quarterly common dividend increased 12% to $0.19 per share. BNY Mellon repurchased $464 million of common stock in Q3 and issued $1 billion of preferred stock in August 2016.
Important facts for investors to verify
- Reconcile reported GAAP results with adjusted, non-GAAP results, including the treatment of the Sentinel recovery, amortization and litigation or restructuring charges.
- Track execution and regulatory acceptance of the revised resolution plan, the amount and cost of required additional debt, and any effects on net interest revenue or credit ratings.
- Assess the durability of deposit balances, available funds and LCR, particularly given the decline in deposits and the parent company’s reliance on subsidiary dividends and capital-market access.
- Monitor Advanced Approach capital, fully phased-in CET1 and SLR against future regulatory buffers and requirements.
- Review developments in material litigation and whether any reasonably possible losses become estimable, accrued or payable.
- Evaluate whether market-value-driven AUC/A and AUM growth converts into recurring fee revenue, and monitor outflows, foreign exchange effects, fee waivers and foreign-exchange activity.
- Confirm subsequent-period expenses, credit quality and cash flows; nine-month operating cash flow was materially lower than in the prior-year period.