BNY Mellon — Third Quarter 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; filed November 6, 2015. BNY Mellon is a global investment services and investment management company. At quarter-end, it reported $28.5 trillion of assets under custody and/or administration (AUC/A) and $1.625 trillion of assets under management (AUM).
Financial performance and key metrics
| Metric | Q3 2015 | Comparable period |
|---|---|---|
| Net income applicable to common shareholders | $820 million; diluted EPS $0.74 | Q3 2014: $1.070 billion; $0.93 per diluted share. Q2 2015: $830 million; $0.73 per diluted share |
| Total revenue | $3.790 billion | Q3 2014: $4.611 billion; Q2 2015: $3.886 billion |
| Fee and other revenue | $3.053 billion | Q3 2014: $3.851 billion; Q2 2015: $3.067 billion |
| Net interest revenue; FTE net interest margin | $759 million; 0.98% | Q3 2014: $721 million; 0.94%. Q2 2015: $779 million; 1.00% |
| Noninterest expense | $2.680 billion | Q3 2014: $2.968 billion; Q2 2015: $2.727 billion |
| Income before taxes; effective tax rate | $1.109 billion; 25.4% | Q3 2014: $1.662 billion; 33.5% |
| Return on common equity; pre-tax operating margin | 9.1%; 29% | Q3 2014: 11.6%; 36% |
For the first nine months of 2015, common net income was $2.416 billion versus $2.285 billion in 2014; diluted EPS was $2.13 versus $1.97. Total revenue was $11.468 billion versus $12.003 billion, while noninterest expense declined to $8.107 billion from $8.653 billion. Operating cash flow was $3.985 billion, compared with $3.298 billion. Investing activities used $248 million, versus $10.659 billion used in the prior-year period; financing activities used $2.515 billion, versus $7.411 billion provided.
Balance sheet and funding: Total assets were $377.4 billion at September 30, compared with $385.3 billion at December 31, 2014; the decline primarily reflected adoption of consolidation accounting guidance. Deposits were $266.8 billion, loans $63.3 billion, and long-term debt $21.4 billion. Available funds were $139.6 billion, or 37% of total assets. The consolidated liquidity coverage ratio was 108%; the company stated it was compliant with applicable requirements on a fully phased-in basis.
Capital and shareholder returns: Consolidated phased-in CET1, Tier 1, total capital and leverage ratios were 10.5%, 11.9%, 12.2% and 5.9%, respectively. Estimated fully phased-in CET1 was 9.3% under the Advanced Approach and 9.9% under the Standardized Approach; estimated supplementary leverage ratio was 4.8%. The quarterly common dividend was $0.17 per share. The company repurchased 15.8 million shares for $690 million in Q3 and 45.5 million shares for $1.9 billion year to date.
Material changes and business trends
- Q3 revenue and earnings were lower year over year, substantially because Q3 2014 included gains from the Wing Hang investment and One Wall Street building sales. Q3 2014 common net income was $1.070 billion; excluding those gains and specified litigation/restructuring charges, the company reported non-GAAP net income of $734 million and diluted EPS of $0.64. Q3 2015 non-GAAP net income was $828 million and diluted EPS was $0.74. These are non-GAAP measures and should be considered alongside GAAP results.
- Q3 investment services fees increased 2% year over year to $1.852 billion, supported by organic growth and new business. Investment management and performance fees declined 6% to $829 million, reflecting lower performance fees, market values and net outflows, along with currency effects and the Meriten sale.
- Investment and other income was $59 million, versus $890 million in Q3 2014, principally because the prior-year quarter included the Wing Hang and One Wall Street gains. Foreign exchange and other trading revenue rose to $179 million from $153 million, while financing-related fees increased to $71 million from $44 million.
- Expense declined 10% year over year, reflecting currency translation, lower legal and consulting costs and the business improvement process; the company said higher regulatory-related consulting costs partly offset savings. Management expects the expense run rate for risk management, compliance and control functions to increase.
- AUC/A rose 1% year over year to $28.5 trillion, mainly on net new business, partly offset by the stronger U.S. dollar and lower equity markets. AUM was broadly flat year over year at $1.625 trillion, but fell 4% sequentially. Q3 long-term net outflows were $5 billion and short-term outflows were $10 billion.
- Net interest revenue increased 5% year over year, attributed to higher securities and loans, deposit growth and lower deposit expense; it declined 3% sequentially. Management estimated that a 100-point change in the S&P 500, spread evenly through a year, would affect fee revenue by less than 1% and diluted EPS by $0.02–$0.04, subject to market movements differing from the index.
Outlook, risks and unusual items
- Management expected an approximately 25% effective tax rate in Q4 2015. It said it expected to maintain an SLR above 5% when the requirement becomes effective; the current estimated fully phased-in consolidated SLR was 4.8%.
- In August, a SunGard InvestOne platform outage delayed or prevented timely system-generated NAVs and reports for some clients during August 24–28. BNY Mellon generally supplied daily NAVs through alternative procedures; normal daily production resumed August 31. Q3 other expense included client out-of-pocket and incidental expenses related to the outage.
- The company completed the Meriten sale on July 31 for $40 million and recorded a $12 million after-tax loss. It acquired Cutwater in January 2015. It also began providing portfolio and fund accounting services for T. Rowe Price; approximately 220 T. Rowe Price associates joined BNY Mellon in August.
- Legal matters remain significant. The filing states that, for matters where a reasonably possible loss could be estimated, the aggregate exposure was up to $450 million in excess of related accruals, if any; for other matters, the company could not estimate a reasonably possible loss range. It said such matters were not expected to materially affect consolidated financial position or liquidity, but could materially affect net income in a period.
- BNY Mellon reported that it had resolved substantially all pending foreign-exchange standing-instruction matters through settlements totaling $714 million, with several individual-customer and derivative actions remaining. A proposed SEC settlement included a $30 million penalty, subject to Commission approval. The Second Circuit affirmed an adverse tax case ruling; the company intended to seek U.S. Supreme Court review.
- Risks highlighted include market and interest-rate sensitivity, fee dependence on client activity and asset values, currency effects, competition in foreign exchange, operational and technology disruptions, regulatory and legal matters, credit and counterparty risk, and potential effects of rating changes. The company reported $129.4 billion in total loan exposure including unfunded commitments, up 32% from year-end, primarily due to committed secured intraday credit for tri-party repo activity.
- New regulatory matters disclosed after quarter-end included proposed TLAC requirements, uncleared-swap margin rules and a proposed FDIC assessment increase. BNY Mellon estimated the proposed FDIC surcharge could increase annual expense by about $10 million. S&P placed U.S. G-SIBs, including the Parent, on CreditWatch negative on November 2 regarding possible withdrawal of government-support assumptions.
Important facts for investors to verify
- Reconcile GAAP revenue and earnings with non-GAAP comparisons, particularly the large Q3 2014 asset-sale gains and excluded litigation, restructuring and other items.
- Track AUM flows, market-sensitive fee revenue, foreign-exchange revenue and the effect of currency movements and equity markets.
- Assess capital trajectory under both fully phased-in CET1 approaches, the SLR, future buffers and surcharges, and the effect of operational-risk RWA.
- Monitor committed tri-party repo credit and broader unfunded commitments, collateral coverage, and securities-lending indemnification exposure.
- Follow developments in legal and tax matters, including the unresolved FX actions, MBS trustee litigation, the tax appeal and the disclosed potential loss range.
- Evaluate whether the SunGard incident or other operational risks lead to further client costs, remediation, business losses or regulatory action.
- Confirm future regulatory impacts, including TLAC, FDIC assessments, swap-margin implementation and any rating changes.