Business context and reporting period
The Bank of New York Mellon Corporation (BNY Mellon) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. It is a global asset servicing, investment management and wealth management company, reporting Investment Services, Investment and Wealth Management, and Other activities.
Financial performance and position
- Second-quarter earnings: Net income applicable to common shareholders was $991 million, or $1.13 diluted EPS, versus $901 million and $1.01 a year earlier. Total net income was $1.027 billion.
- Revenue: Total revenue was $3.960 billion, down 1% year over year. Fee and other revenue rose 3% to $3.315 billion, while net interest revenue fell 17% to $645 million. Net interest margin was 0.67%, down 21 basis points year over year.
- Expenses and credit: Noninterest expense increased 3% to $2.778 billion. The provision for credit losses was an $86 million benefit, compared with a $143 million provision in Q2 2020. The effective tax rate was 19.0%; pre-tax operating margin was 32%, versus 29%.
- Six-month results: Total revenue declined 3% to $7.881 billion; net interest revenue declined 18% to $1.300 billion. Common net income was nearly flat at $1.849 billion versus $1.845 billion; diluted EPS increased to $2.10 from $2.06. Noninterest expense rose 4% to $5.629 billion, and the credit-loss provision was a $169 million benefit versus a $312 million provision.
- Business drivers: Investment Services revenue fell 4% year over year, while Investment and Wealth Management revenue rose 13%. Assets under custody and/or administration were $45.0 trillion, up 21%; assets under management were $2.320 trillion, up 18%. AUM benefited from higher markets, favorable currency effects and net inflows.
- Balance sheet and liquidity: At quarter-end, assets were $466.963 billion, deposits $338.670 billion, loans $63.547 billion and long-term debt $25.629 billion. Available funds were $182.5 billion, or 39% of assets, down from $196.2 billion and 42% at year-end 2020. Average Q2 liquidity coverage ratio was 110%; the company reported compliance with the 100% minimum.
- Capital and shareholder returns: Standardized CET1 was 12.6%, unchanged from March 31; Tier 1 leverage was 6.0%. The company repurchased 12.8 million shares for $618 million in Q2. Its common dividend was $0.31 per share during the quarter.
- Cash flows: For the six months, operating activities used $345 million, investing activities provided $3.899 billion and financing activities used $3.461 billion. Management cautions that bank cash-flow movements may be less informative than its liquidity and balance-sheet disclosures.
Material changes versus comparable periods
Year-over-year fee growth, higher asset values and the Q2 credit-loss benefit supported earnings, but lower interest rates materially reduced net interest revenue and margin. Q2 fee revenue increased 4%; the net impact of money-market fee waivers rose to $252 million from $79 million in Q2 2020 and $188 million in Q1 2021. Compared with year-end 2020, total assets and deposits edged lower, loans increased from $56.5 billion to $63.5 billion, and available funds declined. The securities portfolio’s net unrealized gain, including related hedges, fell to $1.7 billion from $3.2 billion, primarily due to higher market rates.
Outlook, commentary, risks and unusual items
- Management expects 2021 net interest revenue to decline versus 2020 because of lower interest rates. It expects full-year reported noninterest expense to rise approximately 3% versus 2020, reflecting currency, investment and volume-related factors, partly offset by 2020 notable items.
- Based on quarter-end implied forward rates and money-market balances, management expected Q3 2021 net money-market fee-waiver impact of approximately $225 million; actual waivers depend on rates and balances. Management estimated recovery of more than half of pre-tax waiver impact with a 25-basis-point Fed Funds increase and nearly all with a 100-basis-point increase, assuming unchanged balances.
- In June, the board authorized up to $6.0 billion of common-stock repurchases from Q3 2021 through Q4 2022. In July, it approved a 10% dividend increase to $0.34 per share. The Federal Reserve’s indicative stress capital buffer was 2.5%, subject to final confirmation.
- COVID-19 effects remained uncertain. Low rates continued to weigh on net interest revenue and drive fee waivers; improving markets supported asset-based fees, while an improving macroeconomic outlook reduced credit-loss allowances. Market levels, deposit behavior, interest rates, foreign exchange, client activity, operational and cybersecurity risks, regulation, and the LIBOR transition remain relevant risks.
- Unusual items include a $39 million renewable-energy investment impairment recorded in Q1 2021 and a Q2 transfer of approximately $5.95 billion of securities from available-for-sale to held-to-maturity to reduce AOCI sensitivity to rate movements. Annual goodwill testing recorded no impairment, though management noted sensitivity at the Investment Management reporting unit.
- Legal matters include German tax-authority notices of approximately $150 million related to pre-acquisition activity, which the company appealed and intends to pursue seller indemnification for. For certain legal matters, reasonably possible losses were estimated at up to $735 million above accrued liabilities; other matters could not be estimated. Management stated it did not expect these matters to materially affect consolidated financial position or liquidity, though they could affect results in a period.
Important facts for investors to verify
- Whether net interest revenue and margin stabilize, and how rate changes and deposit mix affect the earnings outlook.
- Actual money-market waiver levels versus the Q3 estimate, and the sensitivity of fee revenue to short-term rates and market values.
- Progress on expense guidance, efficiency and growth investments, and whether revenue growth offsets cost increases.
- Capital ratios and regulatory constraints as the new buyback authorization and increased dividend take effect.
- Credit quality, allowance assumptions and commercial real estate exposure, including the impact of changing economic forecasts.
- Developments in German tax and other disclosed litigation matters, including the potential loss range and any recoveries.