BNY Mellon 10-Q Summary: Third Quarter 2018
Reporting period: Quarter ended September 30, 2018; comparisons are primarily with the quarter ended September 30, 2017. BNY Mellon provides investment servicing and investment management services through its Investment Services and Investment Management businesses, alongside an Other segment.
Financial performance and position
| Metric | Q3 2018 | Comparable period / change |
|---|---|---|
| Total revenue | $4.069 billion | Up 1% from Q3 2017 |
| Net income applicable to common shareholders | $1.075 billion | Up from $983 million |
| Diluted EPS | $1.06 | Up from $0.94 |
| Noninterest expense | $2.738 billion | Up 3% |
| Pre-tax operating margin | 33% | 34% in Q3 2017 |
| Net interest revenue / margin | $891 million / 1.27% | Revenue up 6%; margin up 12 basis points |
| Return on common equity / average assets | 11.2% / 1.28% | 10.6% / 1.13% in Q3 2017 |
- Revenue mix: Fee and other revenue was $3.168 billion, roughly flat year over year. Higher equity market values, collateral-management and clearance volumes, and performance fees were partly offset by lower foreign-exchange revenue. Net interest revenue benefited mainly from higher rates, partly offset by lower deposits and other borrowings.
- Business results: Investment Services revenue rose 3%, while pre-tax income fell 6%, primarily reflecting litigation expense. Investment Management revenue rose 2% and pre-tax income rose 5%.
- Assets serviced and managed: AUC/A was $34.5 trillion, up 7% year over year, reflecting net new business and market values, partly offset by currency translation. AUM was $1.828 trillion, slightly above the prior-year level; Q3 net long-term inflows were $15 billion.
- Balance sheet and debt: Total assets were $349.8 billion, down from $371.8 billion at December 31, 2017. Deposits were $231.6 billion, down from $244.3 billion. Loans were $54.0 billion, versus $61.5 billion. Long-term debt was $28.1 billion, broadly unchanged from year-end.
- Liquidity and capital: Available funds were $123.0 billion, down from $137.0 billion at year-end; the average Q3 liquidity coverage ratio was 121%, above the 100% minimum. CET1 was 11.2% under the Advanced Approach and 12.4% under the Standardized Approach; the supplementary leverage ratio was 6.4%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Cash flow, nine months ended September 30: Operating activities provided $2.8 billion, compared with $3.4 billion in 2017. Investing activities provided $18.0 billion, versus $13.5 billion used in 2017; financing activities used $21.6 billion, versus $11.2 billion provided in 2017. These movements were substantially affected by changes in central-bank deposits, loans, deposits, borrowings, debt and share repurchases.
Changes, outlook, risks, and unusual items
- For the first nine months, revenue increased 5% to $12.385 billion, common net income rose to $3.265 billion from $2.789 billion, and diluted EPS was $3.20 versus $2.64. Net interest revenue rose 11%, while noninterest expense increased 3%.
- The Q3 effective tax rate was 16.5%, compared with 25.4% in Q3 2017. Adjustments to provisional estimates under U.S. tax legislation and other changes included an additional $93 million tax benefit; management expected to complete its analysis in Q4 2018. The filing attributes approximately 4.5 percentage points of the Q3 effective rate to these adjustments and other changes.
- Management expected continued technology-infrastructure and platform investment. Headquarters relocation costs were estimated at $75 million in total; $12 million had been recorded in Q2, with the remaining costs expected in Q4 2018. The filing provides no specific consolidated earnings or revenue guidance.
- Q3 capital returns included repurchases of 12 million shares for $602 million and common dividends of $283 million. The quarterly dividend was $0.28 per share. The company had $1.798 billion remaining under its authorized repurchase plan at September 30, 2018.
- Interest-rate changes, market values and activity, foreign-exchange movements, deposit balances, fee pressure from lower-cost investment products, technology and operational disruption, and litigation or regulatory matters are key risks discussed. Management estimated a 5% global equity-market change, spread evenly through the year, would affect fee revenue by less than 1% and diluted EPS by $0.03–$0.05.
- Legal proceedings include mortgage-securitization, Stanford-related, Brazilian Postalis and other matters. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $900 million in excess of any related accrual; for certain matters, the company could not estimate a range. Management stated that recorded accruals were appropriate, while noting future legal accruals could materially affect a period’s net income. An SEC inquiry concerning ADR pre-releases had an agreement in principle to resolve, subject to Commission approval.
- The securities portfolio’s net unrealized loss, including related hedges, was $1.5 billion at September 30, versus $85 million at year-end, primarily due to higher interest rates. Year-to-date net securities losses were $48 million, mainly reflecting first-quarter debt-security sale losses.
Investor verification priorities
- Confirm the drivers and sustainability of earnings growth, particularly rate-sensitive net interest revenue, deposit levels and fee trends.
- Review litigation accruals and the potential exposure of up to $900 million above related accruals, plus the status of the ADR inquiry and other proceedings.
- Assess the effect of higher rates on securities marks, accumulated other comprehensive income, funding costs and reported capital.
- Track technology and headquarters relocation costs, and whether expense growth moderates as management’s investments continue.
- Verify liquidity and capital resilience against regulatory buffers, deposit outflows and market stress; distinguish reported available funds from funds after regulatory adjustments.