BNY Mellon — Third Quarter 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. BNY Mellon is a global asset servicing, investment management and wealth management company, with Investment Services and Investment and Wealth Management segments.
Financial performance and position
- Q3 earnings: Net income applicable to common shareholders was $881 million, or $1.04 per diluted share, versus $876 million and $0.98 a year earlier. GAAP total revenue was $4.035 billion, up 5% year over year; pre-tax income was $1.162 billion.
- Revenue mix: Fee and other revenue rose 8% to $3.394 billion, led by higher asset-based fees, client activity, foreign exchange revenue and strategic equity investment gains. Fee revenue excluding money-market fee waivers increased 11% (non-GAAP). Net interest revenue declined 9% to $641 million; net interest margin fell to 0.67% from 0.79% a year earlier.
- Expenses and credit: Noninterest expense increased 9% to $2.918 billion, including higher litigation reserves, revenue-related costs and investments. The provision for credit losses was a $45 million benefit, versus a $9 million provision in Q3 2020. The effective tax rate was 18.8%.
- Business trends: Investment Services revenue increased 3%, while pre-tax income decreased 9%. Investment and Wealth Management revenue increased 12% and pre-tax income rose 42%. Period-end assets under custody/administration were $45.3 trillion, up 17%; assets under management were $2.31 trillion, up 13% year over year.
- Balance sheet and funding: Assets totaled $470.5 billion; deposits were $343.1 billion, including $100.5 billion of noninterest-bearing deposits. Loans were $64.3 billion and long-term debt was $25.0 billion. Available funds were $182.3 billion, down from $196.2 billion at year-end 2020. Average Q3 liquidity coverage ratio was 111%; the company reported compliance with the 100% minimum.
- Capital and returns: Standardized CET1 was 11.7%, down from 12.6% at June 30, 2021 and 13.4% at December 31, 2020. The decline reflected repurchases, dividends, securities-related unrealized losses and higher risk-weighted assets, partly offset by earnings. The company repurchased 38.1 million shares for $2.0 billion in Q3 and paid a $0.34 quarterly dividend, raised 10% from $0.31.
- Cash flow, first nine months: Operating activities used $291 million, investing activities used $259 million and financing activities provided $2.2 billion. Operating cash flow was $5.9 billion positive in the comparable 2020 period; management notes that cash flow movements can be affected by trading-related balance-sheet changes.
Changes and outlook
- For the first nine months, common-shareholder net income was $2.730 billion versus $2.721 billion in 2020, while total revenue was $11.916 billion versus $11.965 billion. Net interest revenue fell 15%, partly offset by 4% growth in fee revenue.
- Management expected net interest revenue to decrease in full-year 2021 compared with 2020. It expected full-year reported noninterest expense to increase approximately 4% year over year, reflecting investment, foreign-exchange effects and higher volume- and revenue-related costs.
- Management expected Q4 2021 money-market fee waivers, net of distribution expense, to approximate Q3’s $233 million, subject to short-term rates and money-market balances. It estimated that a 25-basis-point Fed Funds rate increase could restore over half of pre-tax income associated with waivers, assuming unchanged balances.
- The board authorized up to $6.0 billion of common-stock repurchases from Q3 2021 through Q4 2022. In October 2021, after quarter-end, the Parent issued $1.5 billion of senior notes in three tranches due 2024 and 2029.
Risks, contingencies and unusual items
- Low short-term rates weighed on net interest revenue and continued to drive money-market fee waivers. Results remain sensitive to interest rates, deposit levels and mix, market values, client activity, currency movements and the uncertain course of the coronavirus pandemic.
- The securities portfolio’s net unrealized gain, including hedges, was $1.4 billion, down from $3.2 billion at year-end 2020, primarily due to higher market rates. The company transferred $4.81 billion of securities from available-for-sale to held-to-maturity in Q3, following a similar transfer in Q2, to reduce AOCI sensitivity to rate changes.
- Legal and regulatory matters could affect results in individual periods. For matters with estimable reasonably possible losses, the aggregate range was up to $615 million in excess of related accruals. Brazilian Postalis-related proceedings include an appealed judgment of about $3 million and an appealed administrative finding involving approximately $45 million plus a roughly $2 million fine. German tax authorities issued approximately $150 million in secondary-liability notices concerning pre-acquisition activity; the company appealed and intends to pursue seller indemnification.
- Other stated risks include operational and cybersecurity failures, regulatory constraints on capital distributions, counterparty and credit exposures, LIBOR transition, and potential impacts from market or economic weakness. Management said disclosure controls were effective and reported no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether fee growth can offset continued pressure on net interest revenue and money-market fee waivers.
- Progress against the approximately 4% full-year expense-growth outlook, including litigation reserves and planned investments.
- Capital-ratio effects of the $6.0 billion repurchase authorization, dividends and market-driven AOCI movements.
- Credit quality and reserve sensitivity, including the $45 million quarterly provision benefit, rising nonperforming assets and lending exposures.
- Developments in the Brazilian and German matters, and any changes to the estimated potential legal-loss range or related reserves.