BNY Mellon — Third-Quarter 2017 Form 10-Q
Business context and reporting period. BNY Mellon is a global investments company providing investment services and investment management. This filing covers the quarter and nine months ended September 30, 2017; comparisons below are year over year unless noted. At quarter-end, assets under custody and/or administration (AUC/A) were $32.2 trillion and assets under management (AUM) were $1.824 trillion.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Total revenue | $4.016 billion | $3.941 billion | $11.815 billion | $11.447 billion |
| Net income applicable to common shareholders | $983 million | $974 million | $2.789 billion | $2.603 billion |
| Diluted earnings per share | $0.94 | $0.90 | $2.64 | $2.38 |
| Net interest revenue | $839 million | $774 million | $2.457 billion | $2.307 billion |
| Noninterest expense | $2.654 billion | $2.643 billion | $7.951 billion | $7.892 billion |
| Net interest margin | 1.15% | 1.05% | 1.14% | 1.00% |
| GAAP pre-tax operating margin | 34% | 33% | 33% | 31% |
- Quarterly fee and other revenue was $3.167 billion, up 1%; investment management and performance fees rose 5%, while foreign exchange and other trading revenue declined 5%. The provision for credit losses was a $6 million credit. The effective tax rate was 25.4%, versus 24.6%.
- For the first nine months, operating cash flow was $3.350 billion, compared with $1.557 billion. Investing activities used $14.003 billion, versus providing $21.058 billion; financing activities provided $11.231 billion, versus using $24.178 billion.
- At September 30, total assets were $354.4 billion, deposits $231.0 billion, loans $59.1 billion, long-term debt $28.4 billion, and shareholders’ equity $40.5 billion. Total assets were $333.5 billion and long-term debt $24.5 billion at December 31, 2016.
- Available funds were $124.5 billion, or 35% of total assets, compared with $103.8 billion and 31% at year-end 2016. Average third-quarter liquidity coverage ratio (LCR) was 119%, above the 100% regulatory minimum.
- Regulatory CET1 ratios were 12.3% under the Standardized Approach and 11.1% under the Advanced Approach. Estimated fully phased-in CET1 ratios were 11.9% and 10.7%, respectively. BNY Mellon and its U.S. bank subsidiaries were reported as well capitalized.
Material changes and management commentary
- Quarterly revenue increased 2% from Q2 2017; common net income rose from $926 million and diluted EPS from $0.88. Year over year, revenue grew 2% and net income applicable to common shareholders grew 1%.
- Higher interest rates were the primary driver of increased net interest revenue, partly offset by lower average deposits and loans. The year-to-date increase also reflected lower premium amortization.
- AUC/A and AUM each increased 6% year over year, reflecting higher market values, currency effects and business flows. AUC/A also benefited from net new business. AUM had $10 billion of net short-term inflows in Q3; long-term flows were mixed, with inflows in fixed income and multi-asset/alternative strategies offset by outflows in index, equity and liability-driven investments.
- Expenses were broadly stable year over year. Higher software and professional-services costs were partly offset by lower litigation expense and bank assessment charges. Management said it continued to invest in technology, risk management, regulatory compliance and control functions.
- Net income from common shareholders for the first nine months increased 7% year over year. Investment Management pre-tax income rose 22%; Investment Services pre-tax income rose 6%. The Other segment recorded a $26 million pre-tax loss in Q3.
Outlook, events and risks
- Management expected a 2017 effective tax rate of approximately 25%–26% and indicated the rate could rise by about 100 basis points in 2018, depending on revenue growth and earnings mix. The filing does not provide a clear revenue or earnings forecast.
- The quarterly common dividend increased 26% to $0.24 per share, with the first increased payment made in August. The company repurchased 12.3 million shares for $650 million in Q3; its 2017 capital plan authorized average quarterly repurchases of $650 million through Q2 2018, subject to conditions and capital needs.
- In September, BNY Mellon agreed to sell CenterSquare Investment Management, which had approximately $9 billion in AUM. Closing was expected in Q4 2017 or Q1 2018, subject to approvals. Charles W. Scharf became CEO in July and was expected to become chairman on January 1, 2018.
- The Parent transferred most of its cash and intercompany loans to its intermediate holding company under a resolution-support agreement. Parent cash fell to $416 million from $8.7 billion at year-end; the company reported compliance with its liquidity policy and described stress-test results as sufficient.
- Key exposures include dependence on fee revenue and market levels, low market volatility affecting foreign exchange revenue, interest-rate and deposit behavior, operational/technology and regulatory risks, and credit and counterparty exposure. Financial institutions and commercial clients represented 57% of total loan and unfunded commitment exposure; most of the financial-institution portfolio was investment grade and short-term.
- Legal proceedings include mortgage-securitization trustee claims, Stanford-related litigation, Brazilian fund-administration cases and depositary-receipt foreign-exchange litigation. For certain matters, the company estimated reasonably possible losses of up to $940 million in excess of any accrued liability; it could not estimate a range for some other matters. The SEC’s inquiry into ADR pre-release activity remained under discussion.
- Other notable items: Q3 included $6 million of merger, integration, litigation and restructuring charges. Renewable-energy investment losses reduced other income but were offset by tax benefits and credits. The company reported a $257 million net unrealized pre-tax gain on its investment securities portfolio at quarter-end.
Important facts for investors to verify
- Whether fee growth and AUM/AUC/A levels are sustained by client flows and underlying market performance, rather than primarily market appreciation or currency movements.
- Progress on expense control and the scale of continuing technology, compliance and regulatory investments.
- Capital and liquidity after share repurchases, dividends, debt issuance and the transfer of Parent liquidity to the intermediate holding company.
- Developments in significant legal and regulatory matters, particularly the possible losses beyond recorded accruals and the ADR pre-release inquiry.
- Completion and financial effects of the CenterSquare sale, and the effect of future interest-rate and deposit behavior on net interest revenue.