Business context and reporting period
The Bank of New York Mellon Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2014. BNY Mellon is a global investment management and investment services company; at quarter-end it reported $28.5 trillion in assets under custody and/or administration (AUC/A) and $1.636 trillion in assets under management (AUM).
Financial and operating performance
- Earnings: Net income applicable to common shareholders was $554 million, or $0.48 per diluted share, versus $831 million, or $0.71, in second-quarter 2013. Excluding specified charges and gains, non-GAAP net income was $715 million, or $0.62 per diluted share, versus $701 million, or $0.60.
- Revenue: Total revenue was $3.745 billion, down 7% year over year; fee and other revenue was $2.980 billion, also down 7%. Net interest revenue was $719 million, down 5%; FTE net interest margin was 0.98%, versus 1.15% a year earlier.
- Revenue drivers: Investment management and performance fees rose 4% to $883 million. Investment services fees fell 1% to $1.720 billion, including a 21% decline in issuer services fees. Foreign exchange and other trading revenue fell to $130 million from $207 million, and investment and other income declined to $142 million from $285 million, mainly reflecting a prior-year equity investment gain.
- Expenses and credit: Noninterest expense rose 4% to $2.946 billion. The provision for credit losses was a $12 million credit, reflecting improving portfolio credit quality. GAAP pre-tax operating margin was 22%, versus 30% in second-quarter 2013; the company’s adjusted non-GAAP margin was 30%, versus 32%.
- Cash flow: For the first six months, operating activities provided $2.385 billion, investing activities used $26.318 billion, and financing activities provided $23.635 billion. Investing outflows principally reflected securities purchases, changes in deposits with banks and central banks, and loan growth; deposit growth and debt issuance were significant financing sources.
- Balance sheet and liquidity: At June 30, total assets were $400.7 billion, versus $374.5 billion at December 31, 2013. Deposits were $282.4 billion, up from $261.1 billion; loans were $59.2 billion, up from $51.7 billion. Available funds totaled $168.4 billion, or 42% of assets. Long-term debt was $20.3 billion, versus $19.9 billion at year-end.
- Capital and shareholder returns: The estimated fully phased-in Basel III common equity Tier 1 ratio was 10.0% under the Advanced Approach and 10.3% under the Standardized Approach. The reported regulatory CET1 ratio was 11.4%. The company repurchased 12.6 million shares for $431 million in the quarter and increased its quarterly common dividend to $0.17 per share.
- Business volumes: AUC/A increased 9% year over year, primarily from higher market values. AUM increased 15% to a record level, reflecting market values, currency effects and net new business; second-quarter net long-term outflows were $13 billion and short-term outflows were $18 billion.
Material changes, outlook and risks
- Second-quarter results included a $109 million pre-tax charge, net of incentives, related to administrative errors involving offshore tax-exempt funds, and a $120 million pre-tax restructuring charge, primarily for severance and streamlining.
- In July, BNY Mellon sold its Wing Hang Bank investment, expecting an approximately $315 million after-tax gain. The company also agreed to sell its One Wall Street headquarters building for $585 million; completion was expected in the third quarter, with an anticipated approximately $200 million after-tax gain.
- Management expected a third-quarter 2014 effective tax rate of approximately 27%. It planned to reduce interbank placements and increase high-quality liquid securities in the second half of 2014 to help offset pressure from low reinvestment rates. Management expected growth in regulatory, risk and control expenses to begin slowing as new rules are implemented, while legal and litigation costs were expected to remain elevated.
- Key exposures include interest-rate and market movements, dependence on fee revenue and client deposits, regulatory and capital requirements, and litigation and operational risks. The company reported $829 million in tax reserves and stated that reasonably possible legal losses could reach $850 million in aggregate above related accruals for matters where a range could be estimated. Sentinel, foreign-exchange standing-instruction, securities-lending and mortgage-securitization matters remained notable proceedings.
- Capital ratios require careful comparison: the company moved to Advanced Approach regulatory reporting in 2014, and inclusion of certain consolidated investment-fund assets reduced reported June 30 risk-based ratios. Estimated fully phased-in ratios assume regulatory approval of relevant models. The company also disclosed that regulators found its 2013 resolution plan not credible and required improvements for its 2015 submission.
Most important facts for investors to verify
- Reconcile the reported year-over-year earnings decline with the $109 million fund-administration charge, restructuring costs and prior-year equity investment gain; distinguish GAAP from management’s non-GAAP adjustments.
- Track net interest margin, deposit balances and reinvestment yields, including the effect of planned portfolio repositioning.
- Assess whether AUM growth translates into durable net inflows, given second-quarter long-term and short-term outflows.
- Monitor capital ratios under both Basel III approaches, model approvals, and the effect of regulatory changes and capital distributions.
- Follow the resolution-plan remediation, tax-credit appeal, Sentinel litigation, foreign-exchange investigations and other legal contingencies, as well as the closing and gains from announced asset sales.