BNY Mellon Q2 2022 Form 10-Q Summary
Business context and reporting period
The Bank of New York Mellon Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. It provides global custody, investment services, market and wealth services, and investment and wealth management in 35 countries. Its principal segments are Securities Services, Market and Wealth Services, and Investment and Wealth Management.
Financial performance and key metrics
- Q2 revenue: $4.254 billion, up 7% year over year. Fee and other revenue was $3.430 billion, up 3%; net interest revenue was $824 million, up 28%.
- Profit: Net income applicable to common shareholders was $835 million, or $1.03 diluted EPS, versus $991 million and $1.13 a year earlier. Pre-tax operating margin was 26%, compared with 32%.
- Expenses and credit: Noninterest expense increased 12% to $3.112 billion. The provision for credit losses was $47 million, versus an $86 million benefit in Q2 2021. The effective tax rate was 21.1%.
- Interest margins: GAAP net interest margin was 0.89%, up 22 basis points year over year. Average interest-earning assets declined 5% year over year.
- Cash flow, six months: Operating activities provided $8.419 billion; investing activities used $24.595 billion; financing activities provided $15.557 billion. These flows were substantially affected by changes in trading balances, central-bank deposits, deposits, and debt issuance.
- Balance sheet at June 30: Total assets were $452.6 billion; deposits were $325.8 billion; loans were $69.3 billion; securities were $150.8 billion; and long-term debt was $27.6 billion. Compared with year-end 2021, assets rose from $444.4 billion, deposits from $319.7 billion, and long-term debt from $25.9 billion.
- Liquidity and capital: Available funds were $170.1 billion, or 38% of assets; average Q2 liquidity coverage ratio was 111%. CET1 ratios were 10.0% under the Advanced Approach and 10.1% under the Standardized Approach; Tier 1 leverage was 5.2%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Assets serviced and managed: AUC/A was $43.0 trillion, down 4% year over year; AUM was $1.937 trillion, down 17%. AUM declined chiefly from lower market values and a stronger U.S. dollar, partly offset by net inflows.
Material changes versus comparable periods
- Q2 revenue improved as higher interest rates lifted net interest revenue and lower money-market fee waivers supported fees. Higher funding expense and lower interest-earning assets partially offset the NIR increase.
- Common-shareholder net income fell 16% year over year despite higher revenue, reflecting higher expenses and the swing from a credit-loss benefit to a provision. Q2 expense included a $92 million increase in litigation reserves; Securities Services reported a 17% pre-tax margin, or 21% excluding that increase.
- Segment results were mixed: Securities Services revenue rose 12% while pre-tax income fell 24%; Market and Wealth Services revenue rose 10% and pre-tax income rose 9%; Investment and Wealth Management revenue fell 10% and pre-tax income fell 36%.
- Accumulated other comprehensive loss widened to $5.307 billion from $2.213 billion at year-end, largely reflecting higher interest rates and unrealized securities losses. The securities portfolio’s net unrealized loss, including hedges, was $7.0 billion, compared with a $384 million gain at year-end.
- Q2 trading VaR averaged $6.9 million, versus $4.9 million in Q1 2022 and $3.0 million in Q2 2021. Management reported that daily trading losses did not exceed overall portfolio VaR during Q2.
Outlook, commentary, risks, and unusual items
- The filing gives no specific earnings or revenue guidance. Management’s rate-sensitivity model estimated that an instantaneous 100-basis-point increase would raise 12-month net interest revenue by $161 million versus baseline; the model assumes static deposits and no management response. A hypothetical $5 billion reduction in U.S. dollar noninterest-bearing deposits would reduce that modeled benefit by about $205 million.
- In July, the board approved a 9% increase in the quarterly common dividend, from $0.34 to $0.37 per share. The company also announced a CFO succession effective February 1, 2023. July debt issuances totaled $1.75 billion in fixed-to-floating-rate senior notes.
- BNY Mellon agreed to sell Alcentra, which had $38 billion of AUM at April 30, 2022; closing was expected early in Q1 2023, subject to customary conditions and regulatory approvals.
- Management cited exposure to market declines, foreign-exchange movements, inflation, deposit sensitivity, client activity, credit conditions, operational and cybersecurity risks, and geopolitical developments. The company ceased new banking business in Russia and suspended investment-management purchases of Russian securities; reported Russia exposure was $100 million of cash balances.
- Legal matters remain uncertain. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $550 million above related accruals, if any; the company could not estimate a range for certain other matters. German tax authorities issued notices totaling approximately $150 million concerning historical cum/ex activity; the company appealed and cited an acquisition-related indemnity.
- No goodwill impairment was recorded in the annual Q2 test. The Investment Management and Issuer Services reporting units had estimated fair-value cushions of approximately 6% and 10%, respectively, leaving potential sensitivity to assumptions.
Important facts for investors to verify
- Track whether higher interest rates continue to lift net interest revenue after funding costs, deposit repricing, and potential deposit runoff.
- Review whether fee revenue, AUC/A, and AUM stabilize as market values, currency movements, client flows, and fee waivers change.
- Monitor litigation reserves and outcomes, including the potential-loss range, Brazilian Postalis proceedings, and German tax notices.
- Assess the effect of securities unrealized losses and accumulated OCI on common equity, regulatory capital, and capital distributions.
- Confirm Alcentra sale timing and proceeds, the increased dividend, and the company’s capital and liquidity levels in subsequent filings.