BNY Mellon — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. BNY Mellon is a global asset servicing and investment management company operating through Investment Services, Investment Management and Other.
Financial performance
| Metric | Q2 2018 | Comparison |
|---|---|---|
| Total revenue | $4.14 billion | Up 5% year over year; down 1% sequentially |
| Net income attributable to common shareholders | $1.06 billion | Up 14% year over year; down 7% sequentially |
| Diluted EPS | $1.03 | Versus $0.88 a year earlier and $1.10 in Q1 |
| Noninterest expense | $2.75 billion | Up 3% year over year |
| Effective tax rate | 20.5% | Versus 25.4% in Q2 2017 |
| Net interest revenue / margin | $916 million / 1.26% | Revenue up 11% year over year; margin up 12 basis points |
For the first six months, revenue was $8.32 billion, up 7%; common net income was $2.19 billion, up 21%; and diluted EPS was $2.14 versus $1.70. The Q2 pre-tax operating margin was 34%, compared with 33% a year earlier. Fee revenue represented 78% of Q2 revenue.
Revenue growth reflected higher interest rates, stronger asset servicing and investment management fees, foreign exchange revenue and business growth. Expenses rose mainly due to technology investment, real estate consolidation and currency effects. Q2 provision for credit losses was a benefit of $3 million.
Business and balance sheet
- Investment Services: Q2 revenue increased 8% year over year to $3.11 billion and pre-tax income rose 20% to $1.14 billion. Period-end assets under custody and/or administration reached a record $33.6 trillion, up 8%.
- Investment Management: Q2 revenue increased 3% to $1.02 billion and pre-tax income rose 11% to $319 million. AUM was $1.805 trillion, up 2% year over year but down 3% sequentially; quarterly net outflows were $26 billion.
- Other segment: Q2 pre-tax loss was $69 million, versus income of $67 million in Q2 2017, reflecting lower gains and higher expenses.
- Balance sheet: Total assets were $352.9 billion at June 30, down from $371.8 billion at year-end 2017. Deposits were $230.6 billion, down 6% from year-end; loans were $57.8 billion, down from $61.5 billion.
- Debt and equity: Long-term debt was $28.3 billion, versus $28.0 billion at year-end. Shareholders’ equity was $41.5 billion. Q2 buybacks totaled $651 million and common dividends paid were $244 million.
- Credit quality: Allowance for credit losses was $254 million; nonperforming assets were $82 million, down from $90 million at year-end. Total loan and unfunded-commitment exposure was $110.6 billion, down 5% from year-end.
Cash flow, liquidity and capital
For the six months, operating cash flow was positive $1.6 billion, versus negative $1.8 billion in 2017. Investing activities provided $15.2 billion, while financing activities used $16.8 billion. These cash flow movements were substantially affected by changes in central-bank deposits, deposits, securities and other balance-sheet activity.
Available funds were $123.1 billion at quarter-end, down from $137.0 billion at year-end; this included $75.1 billion in central-bank deposits. Average Q2 liquidity coverage ratio was 118%, above the 100% minimum, and the company reported compliance with applicable LCR requirements. Long-term debt maturities of $1.45 billion were due in the second half of 2018.
The CET1 ratio was 11.0% under the Advanced Approach and 11.9% under the Standardized Approach; the supplementary leverage ratio was 6.1%. The company and its U.S. bank subsidiaries were reported as well capitalized. The Federal Reserve did not object to the 2018 capital plan.
Outlook, material developments and risks
- Management expected an approximately 21% effective tax rate for 2018. The filing did not provide specific company-wide revenue or earnings guidance.
- Management expected continued technology investment. Headquarters relocation costs were estimated at $75 million in total; $12 million was recorded in Q2, with the remainder expected in Q4 2018.
- Following regulatory non-objection to the capital plan, the board authorized up to $2.4 billion of share repurchases from Q3 2018 through Q2 2019. In July, it approved a 17% increase in the quarterly common dividend, from $0.24 to $0.28 per share.
- Market and regulatory demand for lower-fee investment products may pressure asset-management and investment-services fees. Investment Management recorded $26 billion of Q2 net outflows. Fee income is also exposed to market values, client activity and foreign exchange movements.
- Higher interest rates increased net interest revenue but also contributed to a $1.1 billion net unrealized pre-tax loss on the securities portfolio, compared with an $85 million loss at year-end. Management attributed the change primarily to higher rates and said it did not intend, and was not more likely than not, to need, to sell the relevant securities.
- The company disclosed ongoing litigation and regulatory matters, including mortgage-securitization, Stanford-related, Brazilian Postalis and depositary-receipt matters. For matters where a loss range could be estimated, reasonably possible losses were up to $940 million in excess of accrued liabilities, if any; outcomes and timing remain uncertain.
- Other principal risks include operational and cybersecurity disruptions, regulatory and capital requirements, liquidity and deposit outflows, market and interest-rate volatility, counterparty exposures, and potential changes in credit ratings.
Key facts for investors to verify
- Whether fee growth and the record custody-and-administration asset base continue, and whether Investment Management outflows persist.
- How deposit levels, funding costs and interest-rate movements affect net interest revenue and the securities portfolio’s unrealized losses.
- Progress on technology and headquarters spending, including the expected remaining relocation costs and full-year tax rate.
- Execution of the authorized buyback and dividend increase while maintaining capital and liquidity buffers.
- Developments in significant legal and regulatory matters, particularly the disclosed potential loss range of up to $940 million above accruals.