Bank of New York Mellon Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. BNY Mellon provides custody, asset servicing, payments, clearing, investment management and wealth management services through Securities Services, Market and Wealth Services, and Investment and Wealth Management.
Financial results and key metrics
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Total revenue | $4.36 billion | Up 11% year over year |
| Fee and other revenue | $3.24 billion | Approximately flat year over year; fee revenue was $3.16 billion |
| Net interest revenue | $1.13 billion | Up 62% year over year; net interest margin was 1.29%, up 54 basis points |
| Provision for credit losses | $27 million | Versus $2 million in Q1 2022 |
| Noninterest expense | $3.10 billion | Up 3% year over year |
| Income before taxes | $1.24 billion | Versus $918 million in Q1 2022 |
| Net income applicable to common shareholders | $905 million; diluted EPS $1.12 | Versus $699 million and $0.86 per diluted share in Q1 2022 |
| Returns and margin | ROE 10.3%; ROTCE 20.2% (non-GAAP); pre-tax operating margin 28% | Q1 2022 ROE 7.6%; ROTCE 15.4%; margin 23% |
| Operating cash flow | $1.79 billion provided | Versus $3.43 billion in Q1 2022 |
Net interest revenue growth reflected higher rates on interest-earning assets, partly offset by higher funding costs. Fee revenue was broadly unchanged: higher investment services fees, including the abatement of money-market fee waivers, were offset by lower investment management and performance fees and foreign-exchange revenue. Q1 2022 had included an $88 million reduction related to accelerated amortization of deferred depositary-receipt costs associated with Russia.
Segment results: Securities Services revenue was $2.12 billion, up 19% year over year, with pre-tax income of $560 million. Market and Wealth Services revenue was $1.47 billion, up 22%, with pre-tax income of $698 million. Investment and Wealth Management revenue was $827 million, down 14%, with pre-tax income of $93 million, down 56%. Its results reflected lower market values, currency effects and the Alcentra divestiture; adjusted pre-tax margin was 13% (non-GAAP).
Balance sheet, liquidity and capital
- Total assets were $425.1 billion, up from $405.8 billion at year-end 2022. Deposits were $281.3 billion, versus $279.0 billion; noninterest-bearing deposits fell to $70.2 billion from $78.0 billion.
- Available funds were $164.6 billion, or 39% of assets, compared with $138.2 billion, or 34%, at year-end. Average Q1 liquidity coverage ratio was 118%; the company reported compliance with the 100% regulatory minimum.
- Long-term debt was $30.5 billion at quarter-end. The filing reports $3.5 billion of maturities for the remainder of 2023. In April, after quarter-end, the Parent issued $2.5 billion of fixed-to-floating-rate senior notes.
- Loans were $62.3 billion, down from $66.1 billion at year-end. Lending-related exposure, including unfunded commitments, was $113.5 billion. The allowance for credit losses was $320 million; nonperforming assets were $105 million.
- Common Equity Tier 1 ratio was 11.0% under the Advanced Approaches and 11.4% under the Standardized Approach; the Tier 1 leverage ratio was 5.8%. The company and its U.S. bank subsidiaries were reported as well capitalized.
- Common shareholders received $1.3 billion in share repurchases and $304 million in common dividends during the quarter. The quarterly dividend was $0.37 per share. The board’s January 2023 repurchase authorization was up to $5.0 billion.
Material changes, outlook and risks
- Average interest-earning assets declined 7% year over year, while higher rates substantially lifted net interest revenue. Management’s modeled 12-month net interest revenue sensitivity to an immediate 100-basis-point rate increase was positive $441 million; the model assumes static deposits and no management actions. A $5 billion reduction in U.S.-dollar noninterest-bearing deposits would reduce that modeled benefit by about $290 million.
- Assets under custody and/or administration were $46.6 trillion, up 2% year over year, reflecting client inflows and new business partly offset by market values and currency. Assets under management were $1.91 trillion, down 16%, mainly due to lower market values, currency and the Alcentra divestiture.
- The securities portfolio had net unrealized losses of $8.3 billion, including related hedges, at March 31, down from $9.4 billion at year-end. The filing attributes the improvement mainly to lower market interest rates; it reports $5.5 billion of net unrealized losses on held-to-maturity securities. Management stated it did not intend to sell the securities and was not more likely than not to be required to sell them.
- Following the March 2023 bank failures, BNY Mellon experienced increased deposit balances and elevated activity in some businesses. Its $1 billion deposit at First Republic was assumed by JPMorgan Chase after the FDIC took receivership on May 1. The timing, amount and allocation of a potential FDIC special assessment remain uncertain and could materially affect expense and results; future assessments related to bank resolutions are also a stated risk.
- Other risks highlighted include deposit outflows and liquidity stress, interest-rate and securities valuation changes, credit deterioration, commercial real estate exposure, operational and cybersecurity incidents, regulatory changes, and uncertainty around the U.S. debt ceiling. The filing gives no specific consolidated earnings or revenue guidance for future periods.
- Goodwill in the Investment Management reporting unit had only about a 1% fair-value cushion over carrying value in the Q1 interim test; no additional impairment was recorded. Changes in assumptions could result in a material noncash impairment.
- Legal proceedings remain uncertain. For matters with estimable reasonably possible losses, the aggregate amount was up to $520 million in excess of accrued liabilities, if any. German authorities issued approximately $150 million of secondary-liability notices concerning pre-acquisition fund activity; the company appealed and intends to pursue an acquisition-related indemnity.
Important facts for investors to verify
- Whether deposit balances and mix remain stable, especially noninterest-bearing deposits, and how deposit pricing affects net interest revenue.
- Actual net interest revenue versus the filing’s modeled rate sensitivity, including the effect of changing rates, deposit behavior and management actions.
- The amount and timing of FDIC special assessments and any resulting impact on bank assessment expense.
- Developments in securities portfolio unrealized losses, liquidity needs and any pressure to realize losses.
- Credit quality and allowance trends, particularly commercial real estate, financial institutions and off-balance-sheet commitments.
- Progress on share repurchases and dividends alongside regulatory capital requirements and capital ratios.
- Developments in the Investment Management goodwill valuation and the legal and regulatory matters described in the filing.