BNY Mellon — First-Quarter 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. BNY Mellon is a global investment services and investment management company. Results reflect the early effects of the coronavirus pandemic and unusually volatile markets.
Financial results and key metrics
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Total revenue | $4.108 billion | Up 5% year over year; $4.778 billion in Q4 2019 |
| Net income attributable to common shareholders | $944 million; $1.05 diluted EPS | $910 million; $0.94 diluted EPS in Q1 2019 |
| Net interest revenue | $814 million; 1.01% net interest margin | Down 3% and 19 basis points, respectively, year over year |
| Fee and other revenue | $3.332 billion | Up 10% year over year |
| Provision for credit losses | $169 million | Compared with $7 million in Q1 2019 |
| Noninterest expense | $2.712 billion | Essentially flat year over year |
| Effective tax rate | 21.6% | 19.9% in Q1 2019 |
| Operating cash flow | $(1.685) billion | $(949) million in Q1 2019 |
Total revenue includes a $38 million loss from consolidated investment management funds. Revenue growth was driven chiefly by foreign exchange and trading activity and higher Investment Services volumes; lower interest rates and seed-capital losses were offsets. The credit-loss provision reflected the economic outlook and adoption of the current expected credit losses standard (CECL).
Balance sheet, liquidity, debt and capital
- Total assets were $468.2 billion at quarter-end, up from $381.5 billion at December 31, 2019, primarily as client deposit inflows were placed in central-bank deposits and securities.
- Deposits rose 30% to $336.7 billion. Available funds increased to $201.7 billion from $144.9 billion; these funds were 43% of total assets.
- Long-term debt was $27.5 billion, broadly unchanged from year-end. The Parent had $2.2 billion of long-term debt maturing during the remainder of 2020.
- Average first-quarter liquidity coverage ratio was 115%; the company reported compliance with the 100% minimum throughout the quarter.
- Regulatory CET1 was 11.3% under the Standardized Approach at March 31, versus 12.5% at year-end; the filing attributes the decline primarily to increased risk-weighted assets from balance-sheet growth. The Advanced Approaches CET1 ratio was 11.4%.
- Supplementary leverage ratio was 5.6%, versus 6.1% at year-end. The company reported that April regulatory relief could increase consolidated SLR by approximately 200 basis points in total, based on then-current exposures.
- Common equity was $37.6 billion; book value per share was $42.47 and tangible book value per share was $21.53. The company paid $0.31 per common share in dividends.
Business performance and changes versus prior periods
- Investment Services: Revenue of $3.242 billion rose 9% year over year and pretax income was $1.106 billion, up 13%. AUC/A was $35.2 trillion, up 2% year over year but down 5% from year-end. Higher clearing, custody and foreign-exchange activity supported results.
- Investment Management: Revenue of $898 million fell 4% year over year and pretax income of $194 million fell 27%. AUM was $1.796 trillion, down 2% year over year and 6% from year-end. Market losses and currency effects reduced AUM; first-quarter net long-term outflows were $5 billion, partly offset by $43 billion of cash strategy inflows.
- Foreign exchange and other trading revenue increased to $319 million from $170 million in Q1 2019, largely reflecting higher volatility and client volumes.
- Net interest margin fell amid lower asset yields, although higher deposits and lower funding rates partly offset the pressure.
- Common stock repurchases totaled $985 million for 21.7 million shares, completed before the company announced a temporary buyback suspension through the end of Q2 2020.
Outlook, risks and unusual items
- Management said technology investment and pension expense were expected to be higher in 2020 than in 2019, with planned reductions in other expenses to help offset the increases. The filing gives no numerical earnings or revenue guidance.
- The pandemic increased transaction volumes and deposits, but management said both had declined from late-March levels. It warned that prolonged low rates could pressure net interest revenue and margin, and trigger money-market fee waivers that reduce revenue.
- About 95% of employees were working from home by March-end. The company reported continued operations with minimal client-service disruption, while noting heightened operational, cybersecurity and information-security risks.
- CECL adoption on January 1 increased retained earnings by $45 million after tax. The quarter-end allowance for credit losses was $329 million, compared with $216 million at year-end; management’s estimate depends on uncertain forecasts and scenario weighting.
- An interim goodwill test of the Asset Management reporting unit found no impairment, but its estimated fair value exceeded carrying value by only about 2%. Management cautioned that a prolonged downturn or changes in assumptions could lead to a material non-cash impairment.
- BNY Mellon purchased $2.2 billion of commercial paper and CDs from affiliated money-market funds and about $650 million from third-party funds, with the latter purchase funded through the Federal Reserve’s MMLF.
- For certain legal matters, the company estimated reasonably possible losses of up to $750 million above accrued liabilities; it could not estimate a loss range for some matters. It did not believe the matters would materially affect consolidated financial position or liquidity, though results in a given period could be affected.
Important facts for investors to verify
- Whether deposit balances remain elevated and how their mix affects liquidity, leverage ratios and net interest revenue.
- Subsequent credit-loss provisions, charge-offs and CECL allowance assumptions as pandemic-related economic forecasts evolve.
- Whether low rates result in material money-market fee waivers or further net interest margin compression.
- Progress on expense offsets against higher technology and pension costs, and the narrow impairment cushion for Asset Management goodwill.
- Duration of the buyback suspension, future dividends and the effect of regulatory capital and leverage relief on reported ratios.
- Developments in legal and regulatory matters, including the potential losses disclosed above accrued reserves.