BNY Mellon — First-quarter 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016 unless noted. BNY Mellon is a global custody, investment services and investment management company. It reported $29.1 trillion in assets under custody and/or administration (AUC/A) and $1.64 trillion in assets under management (AUM).
Financial results and position
| Metric | 1Q 2016 | Prior comparable period | Change |
|---|---|---|---|
| Net income applicable to common shareholders | $804 million | $766 million, 1Q 2015 | Up 5% |
| Diluted earnings per share | $0.73 | $0.67, 1Q 2015 | Up 9% |
| Total revenue | $3.730 billion | $3.792 billion, 1Q 2015 | Down 2% |
| Net interest revenue | $766 million | $728 million, 1Q 2015 | Up 5% |
| Net interest margin, FTE | 1.01% | 0.97%, 1Q 2015 | Up 4 basis points |
| Noninterest expense | $2.629 billion | $2.700 billion, 1Q 2015 | Down 3% |
| Pre-tax operating margin | 29% | 29%, 1Q 2015 | Unchanged |
| Income-tax provision / effective rate | $283 million / 25.9% | $280 million / 25.7%, 1Q 2015 | Rate up 0.2 percentage points |
Fee and other revenue was $2.970 billion, down 1% year over year. Higher investment services fees, financing-related fees and investment and other income were outweighed by lower investment management and performance fees and foreign exchange and other trading revenue. FX and other trading revenue fell to $175 million from $229 million; investment management and performance fees declined to $812 million from $867 million.
Cash flow: Operating activities provided $1.794 billion, compared with $71 million used in 1Q 2015. Investing activities provided $20.080 billion, versus $9.945 billion used; financing activities used $24.487 billion, versus $10.236 billion provided. Management attributed the current-quarter flows mainly to changes in trading activity and earnings, central-bank deposits and securities, and lower deposits and debt repayments. These cash-flow movements should be read alongside the bank’s liquidity disclosures.
Balance sheet and liquidity: Total assets were $372.9 billion, down from $393.8 billion at year-end 2015, primarily reflecting lower customer deposits. Deposits declined to $257.3 billion from $279.6 billion. Available funds were $141.9 billion, or 38% of total assets, versus $159.3 billion, or 40%, at year-end. Consolidated HQLA after haircuts was $175 billion and the reported liquidity coverage ratio was 107%; the company said it believed it met applicable requirements on a fully phased-in basis.
Loans were $61.7 billion, down from $63.7 billion at year-end. Long-term debt was $21.7 billion, versus $21.5 billion. Total shareholders’ equity was $38.5 billion. The quarterly common dividend was $0.17 per share; the company repurchased 16.2 million shares for $577 million.
Capital: Transitional consolidated CET1 was 10.6%, Tier 1 capital 12.0%, total capital 12.3% and leverage capital 5.9%. Estimated fully phased-in CET1 was 9.8% under the Advanced Approach and 11.0% under the Standardized Approach; estimated fully phased-in SLR was 5.1%. These fully phased-in measures are non-GAAP estimates based on the company’s interpretation of regulatory rules.
Material changes versus prior periods
- Common net income and diluted EPS increased year over year despite slightly lower revenue, supported in part by lower expenses and higher net interest revenue.
- Investment Services revenue rose 2% year over year to $2.709 billion, while Investment Management revenue fell 10% to $895 million. The Other segment reported a $4 million pre-tax loss, compared with $8 million pre-tax income in 1Q 2015.
- AUC/A increased 2% year over year, primarily from net new business and favorable currency translation, partly offset by lower market values. AUM declined 5%, reflecting prior net outflows and unfavorable currency translation.
- Net unrealized pre-tax gains on the investment securities portfolio increased to $1.2 billion from $357 million at year-end, primarily as market interest rates declined.
- Compared with 4Q 2015, common net income rose from $637 million and diluted EPS from $0.57. The prior quarter included a $106 million after-tax Sentinel-related impairment charge and litigation and restructuring charges; reported 4Q results were $755 million and $0.68 per diluted share excluding those items.
Outlook, management commentary, risks and unusual items
- Management expected a 2016 effective tax rate of approximately 25%–26%. It also said the expense run rate for risk management, regulatory compliance and control functions was expected to increase.
- Management expected to maintain an SLR above 5% when the requirement takes effect in 2018. The estimated fully phased-in consolidated SLR was 5.1% at quarter-end.
- Management estimated that a 5% change in global equity markets, spread evenly through the year, would affect fee revenue by less than 1% and diluted EPS by $0.02–$0.04. Fee-waiver recovery depends on client behavior and interest rates.
- In April 2016, regulators determined that BNY Mellon’s 2015 resolution plan was not credible or would not facilitate an orderly resolution. Deficiencies were to be remedied by October 1, 2016; shortcomings were to be addressed in the 2017 plan. Failure to remedy deficiencies could lead to stricter capital, leverage or liquidity requirements, activity restrictions or divestitures.
- Legal matters included the Sentinel dispute, mortgage-securitization trustee claims, Stanford-related litigation, Brazilian Postalis lawsuits and new depositary-receipt FX class actions. For matters where a reasonably possible loss could be estimated, the aggregate range was up to $710 million in excess of accrued liabilities; the company could not estimate a range for certain other matters. It stated that litigation outcomes could materially affect net income in a given period.
- The Sentinel appellate ruling invalidated BNY Mellon’s lien, leaving the bank with an unsecured claim in Sentinel’s bankruptcy. The 4Q 2015 impairment reflected the related court decision; the 1Q 2016 filing reports no new related impairment charge.
- The Supreme Court declined review of the tax-credit case in March 2016. BNY Mellon reduced tax reserves by $467 million and accrued interest by $178 million, with no 1Q earnings impact.
- Other subsequent events: BNY Mellon completed its acquisition of Atherton Lane Advisers in April 2016, adding approximately $2.45 billion of AUM. In May it issued $1.25 billion of senior notes due 2021 at 2.05% and $750 million due 2026 at 2.8%.
- Key risks identified include regulatory and operational costs, technology and information-security events, market and interest-rate sensitivity, fee dependence, FX revenue pressure, counterparty and credit exposure, liquidity, litigation, and changing capital and liquidity rules. The filing also noted the pending UK EU-membership referendum and potential effects on its UK-based EU operations.
Most important facts for investors to verify
- Whether fee growth, AUM flows and FX revenue stabilize; assess the drivers of the year-over-year decline in management fees and trading revenue.
- Progress against the resolution-plan deficiencies and any resulting supervisory actions or costs.
- Developments in Sentinel, MBS trustee, Postalis and depositary-receipt FX litigation, including potential exposure beyond recorded accruals.
- Capital and liquidity trends, including deposit movements, fully phased-in CET1 and SLR estimates, and the effect of regulatory changes.
- Whether higher compliance and control spending offsets efficiency savings, and whether the stated 2016 tax-rate outlook is achieved.