Business context and reporting period
The Bank of New York Mellon Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2014. BNY Mellon operates Investment Management and Investment Services businesses, alongside an Other segment. At quarter-end, it reported $28.3 trillion of assets under custody and/or administration (AUC/A) and $1.646 trillion of assets under management (AUM).
Financial and operating highlights
| Metric | Q3 2014 | Comparable period / change |
|---|---|---|
| Revenue | $4.611 billion | Up 22% from Q3 2013; includes significant asset-sale gains |
| Net income applicable to common shareholders | $1.070 billion; diluted EPS $0.93 | Q3 2013: $962 million; diluted EPS $0.82 |
| Adjusted net income / diluted EPS (non-GAAP) | $734 million / $0.64 | Q3 2013: $713 million / $0.61 |
| Net interest revenue | $721 million | Down 7% year over year; FTE net interest margin was 0.94%, versus 1.16% |
| Noninterest expense | $2.968 billion | Up 7% year over year; adjusted non-GAAP expense was $2.673 billion, slightly lower year over year |
| Credit provision | $19 million benefit | Compared with a $2 million provision in Q3 2013 |
| Effective tax rate | 33.5% | Gains, litigation and restructuring charges increased the rate by 7.1 percentage points |
| Pre-tax operating margin | 36% GAAP; 29% adjusted non-GAAP | Q3 2013: 26% GAAP; 29% adjusted non-GAAP |
| AUC/A and AUM | $28.3 trillion / $1.646 trillion | Up 3% and 7%, respectively, year over year |
For the first nine months of 2014, revenue was $12.003 billion, common net income was $2.285 billion, and diluted EPS was $1.97. Net interest revenue was $2.168 billion, down 4%; FTE net interest margin was 0.99%, versus 1.14%. Operating cash flow was $3.298 billion, investing cash flow was a use of $10.659 billion, and financing cash flow provided $7.411 billion.
Balance sheet, liquidity and capital
- Total assets were $386.3 billion at September 30, 2014, versus $374.5 billion at December 31, 2013. Deposits were $264.9 billion, up from $261.1 billion.
- Available funds were $146.4 billion, or 38% of total assets, compared with $155.3 billion, or 41%, at year-end 2013. Management said the reduction reflected lower interbank placements and a shift toward high-quality liquid securities. The filing states internal liquidity ratios exceeded minimum guidelines.
- Long-term debt was $21.6 billion, up from $19.9 billion at year-end; $1.45 billion was due to mature in Q4 2014. Shareholders’ equity was $38.5 billion.
- Transitional Basel III CET1 was 11.4%. Estimated fully phased-in CET1 was 10.2% under the Advanced Approach and 10.8% under the Standardized Approach. Estimated fully phased-in supplementary leverage ratio (SLR) was 4.6%; management expected to meet future requirements as phased in, while noting the enhanced G-SIB standard calls for an SLR above 5%.
- In Q3, the company repurchased 11.0 million shares for $431 million and paid a $0.17 quarterly common dividend. Nine-month repurchases totaled $1.2 billion.
Material changes, outlook, risks and unusual items
- Reported Q3 revenue and earnings benefited from the July sale of the Wing Hang investment, generating a $490 million pre-tax gain ($315 million after tax), and the September sale of One Wall Street for $585 million, generating a $346 million pre-tax gain ($204 million after tax). Excluding these gains and specified charges, adjusted common net income was $734 million.
- Net interest revenue and margin declined year over year, primarily due to lower asset yields and lower accretion. Management planned to reduce interbank placements and increase high-quality liquid assets, aiming to mitigate pressure from low reinvestment rates and negative euro deposit rates.
- Q3 noninterest expense rose, largely reflecting litigation and restructuring charges. The company recorded $220 million of merger, litigation and restructuring charges; management expected litigation costs to remain elevated, while anticipating that growth in compliance and control expenses would begin to slow.
- Management expected a Q4 2014 effective tax rate of approximately 27%. Following IRS approval of a tax carryback claim, it estimated a Q4 after-tax benefit of $160 million to $190 million; the financial-statement impact was still being determined.
- BNY Mellon agreed to acquire Cutwater Asset Management, with approximately $23 billion in AUM; closing was expected by the beginning of Q1 2015, subject to customary conditions and regulatory approvals. The company also announced it would exit derivatives sales and trading over several years.
- New U.S. liquidity coverage ratio requirements begin phasing in January 2015, reaching 100% in 2017. Management expected compliance without material business impact. Capital and liquidity estimates depend on regulatory rules, model approvals and implementation.
- Legal and regulatory exposures include foreign-exchange standing-instruction litigation and inquiries, securities-lending litigation, mortgage-securitization trustee claims, Sentinel-related proceedings, Stanford-related claims, an FCA review and Postalis litigation in Brazil. The company said reasonably possible losses could total up to $940 million in excess of related accruals, where estimable; it could not estimate a range for certain matters. An adverse tax-litigation outcome could require approximately $100 million of additional tax expense.
- Other risks include low interest rates, market and currency movements, litigation and regulatory costs, credit and counterparty risk, and geopolitical developments in Russia and Ukraine. The company disclosed $370 million of net on- and off-balance-sheet Russia exposure and less than $1 million of Ukraine exposure; it said further sanctions could adversely affect Russian-related businesses.
Important facts for investors to verify
- How much of reported earnings growth was attributable to the Wing Hang and One Wall Street gains, and whether adjusted results are a better indicator of recurring performance.
- Whether net interest margin and revenue respond as expected to low rates, euro-area policy, deposit levels and planned changes to liquid assets.
- Progress on litigation, especially foreign-exchange matters, Sentinel, securities lending and mortgage-securitization claims, and any changes to accruals or the disclosed potential-loss range.
- The amount and timing of the IRS carryback benefit, and the outcome of the appeal concerning foreign tax credits and the related interest deduction.
- Regulatory model approvals and the company’s ability to meet the enhanced SLR and phased-in liquidity requirements.
- Whether AUM inflows, AUC/A growth and fee trends persist, including the effects of market movements, structured-debt maturities and money-market reforms.