Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The global financial services company operates through Investment Services and Investment Management, with remaining activities reported in Other.
Financial performance and position
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Total revenue | $3.899 billion | Down 7% from Q1 2018; down 3% from Q4 2018 |
| Net income applicable to common shareholders | $910 million; $0.94 diluted EPS | Compared with $1.135 billion and $1.10 diluted EPS in Q1 2018 |
| Pre-tax income / operating margin | $1.193 billion / 31% | Compared with $1.444 billion / 35% in Q1 2018 |
| Fee and other revenue | $3.032 billion | Down 7% year over year |
| Net interest revenue / margin | $841 million / 1.20% | Revenue down 8%; margin down 2 basis points year over year |
| Noninterest expense | $2.699 billion | Down 1% year over year |
| Effective tax rate | 19.9% | 19.5% in Q1 2018 |
| Assets / deposits / long-term debt | $346.1 billion / $222.4 billion / $27.9 billion | Assets and deposits declined from Dec. 31, 2018; debt was down from $29.2 billion |
| Available funds / average LCR | $120.5 billion / 118% | Available funds were $134.8 billion at year-end; LCR was unchanged |
| Regulatory capital | Advanced CET1 11.1%; standardized CET1 12.0%; SLR 6.3% | Advanced CET1 was 10.7% and SLR 6.0% at year-end |
Cash flows were $949 million used in operating activities, $20.8 billion provided by investing activities and $19.8 billion used in financing activities. Management notes that cash-flow movements can be less informative for assessing earnings and net assets at a financial institution. The common dividend was $0.28 per share; BNY Mellon repurchased 10.5 million shares for $555 million.
Assets under custody and/or administration were $34.5 trillion, up 3% year over year. Assets under management were $1.841 trillion, down 1% year over year.
Material changes versus the prior comparable period
- Revenue and earnings fell year over year. Fee revenue was pressured by currency translation, 2018 divestitures and asset-related gains, cumulative AUM outflows, lower foreign-exchange revenue, client activity and performance fees. Prior-year net securities losses partially offset the decline.
- Net interest revenue fell amid lower noninterest-bearing deposit and loan balances, higher deposit rates and hedging activity; higher asset yields provided a partial offset.
- Investment Services revenue declined 5% and pre-tax income declined 16%. Investment Management revenue declined 14% and pre-tax income declined 29%.
- At quarter-end, total assets were down from $362.9 billion at year-end, deposits were down 7% to $222.4 billion, and available funds were down to $120.5 billion. Management attributed balance-sheet contraction mainly to lower central-bank deposits, federal funds sold and client deposits.
- Common equity and tangible book value per share increased to $39.36 and $19.74, respectively, from $38.63 and $19.04 at year-end. Tangible book value is a non-GAAP measure.
Outlook, risks, contingencies and unusual items
- Management expected technology investment to continue at recent levels and technology-related expenses to be higher in 2019 than in 2018, largely offset by reductions in other expenses. No specific full-year earnings or revenue guidance is provided in the filing text.
- Future net interest revenue depends on the level and mix of client deposits, deposit rates and the yield curve; management cautioned that reinvestment yields could decline. A modeled 100-basis-point parallel rate increase implies approximately $208 million of additional 12-month net interest revenue, while a 100-basis-point decrease implies approximately $91 million less; these estimates assume static deposits and no management response.
- Credit quality indicators worsened in part because of a California utility bankruptcy: the provision for credit losses was $7 million, and nonperforming assets rose to $174 million from $79 million at year-end. The filing identifies approximately $100 million of unsecured funded exposure to the utility.
- For legal proceedings where a reasonably possible loss could be estimated, the aggregate potential loss was up to $860 million in excess of accrued liabilities, if any. The company said it could not estimate a loss range for certain other matters and did not expect the matters, after reserves and insurance, to materially affect consolidated financial position or liquidity, though results in a given period could be affected.
- Other disclosed matters include mortgage-securitization trustee litigation, Stanford-related claims, Brazilian Postalis and Silverado proceedings, and German tax investigations concerning third-party funds. The filing describes a new putative class action against BNY Mellon in March 2019 related to Stanford allegations; several Deposit Receipt suits were subject to settlement agreements requiring court approval.
- Brexit remained uncertain, with the UK then scheduled to leave the EU on October 31, 2019; BNY Mellon said it was adjusting its UK and EU operations. The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2020; its financial impact was still under assessment.
- BNY Mellon adopted lease accounting in Q1 2019, recognizing $1.3 billion of right-of-use assets and $1.5 billion of lease liabilities. The Federal Reserve’s 2019 CCAR change removed the qualitative objection for most firms, including BNY Mellon, but quantitative review and other supervisory oversight remained. A proposed custody-bank SLR change was not yet final.
Important facts for investors to verify
- Whether fee pressure, AUM flows, foreign-exchange activity and client volumes stabilize, and how much Q1 comparisons were affected by divestitures and prior-year gains.
- Deposit trends, deposit pricing and the sensitivity of net interest revenue to rates and deposit runoff.
- The credit and reserve implications of the California utility bankruptcy and the increase in nonperforming assets.
- Developments in material litigation and regulatory matters, including the potential loss range disclosed and matters for which no range could be estimated.
- Progress on 2019 expense management, CECL implementation, Brexit operating adjustments and capital distributions, including the remaining share-repurchase authorization.