DBRS Comments on BNY Mellon’s 1Q11 Earnings; Sr. Debt at AA (low) Unchanged; Trend Stable

DBRS Inc. (DBRS) has today commented that its ratings for The Bank of New York Mellon Corporation (BNY Mellon or the Company) including its AA (low) Issuer & Senior Debt rating and its R-1 (middle) Short-Term Instruments rating, are unchanged following the release of the Company’s 1Q11 financial results. The trend on all ratings remains Stable.

For the quarter, BNY Mellon reported net income from continuing operations of $625 million, down 8% from the seasonally strong fourth quarter, but up 12% from 1Q10. DBRS sees the quarter’s results as reflective of mostly positive underlying trends, including strong net inflows in Investment Management and $496 billion of new business wins in Asset Servicing. Acquisitions completed in 2010 contributed to y-o-y growth and are providing the Company with further growth opportunities given the increased product capabilities and better access to key European markets. Nevertheless, the challenging low-rate environment and higher expense levels remain headwinds, in DBRS’s view.

Total 1Q11 revenues excluding securities gains were $3.6 billion, compared to $3.7 billion in 4Q10 and $3.3 billion in 1Q10. In 1Q11, 37% of total revenues were sourced from outside the U.S. and total fee revenues were $2.8 billion, or 78% of total revenues excluding securities gains. Higher market values and new business contributed to solid first quarter results for asset servicing (revenues of $923 million) and at March 31, assets under custody and administration (AUC/A) were a record $25.5 trillion. Increased volume and higher markets also benefited clearing services in the first quarter as revenues were up sequentially and y-o-y. Issuer services revenues of $351 million were down 14% from the seasonally strong fourth quarter, but were up 5% from 1Q10. Investment management and performance fees were $764 million in 1Q11, benefitting from the sixth consecutive quarter of long-term inflows and higher market values. Excluding performance fees, which display fourth quarter seasonality, investment fees were $747 million in 1Q11, up 11% y-o-y and up 3% sequentially. DBRS notes that long-term net inflows of $31 billion in 1Q11 were the highest since the Bank of New York, Mellon merger and at quarter-end, assets under management (excluding securities lending assets) were a record $1.2 trillion.

BNY Mellon’s net interest revenue (FTE) totaled $702 million in 1Q11, down 3% from 4Q10 as higher levels of average earning assets were offset by tighter spreads. As a result, the NIM contracted another 5 bps from 4Q10 to 1.49%. The Company has taken steps to improve net interest revenue, including purchasing some high quality asset-backed securities, and it should benefit from the recent ECB rate increase. As a result, management anticipates net interest revenues should be closer to 4Q10 levels in coming quarters.

Core operating expenses of $2.6 billion declined 2% from 4Q10 as seasonal declines were offset by higher litigation, pension and healthcare expenses. Relative to 1Q10 expenses were up 20%, though adjusting for acquisitions and litigation, expenses grew 8% y-o-y, roughly in-line with core revenues. On this basis, the increase from 1Q10 was driven by changes to the revenue mix and higher benefits expense. DBRS notes that core expenses in 1Q11 included $47 million of litigation expenses. After releasing $22 million from reserves in each of the prior two quarters, the 1Q11 provision for loan losses was zero.

BNY Mellon’s $66.4 billion (fair value) investment securities portfolio remained in a solidly positive position with an unrealized pre-tax gain of $569 million, an improvement from the unrealized gain of $353 million at the end of 4Q10. DBRS notes that the approximately $4.5 billion of non-agency RMBS, 94% of which are sub-investment grade, that were previously included in the former Grantor Trust had an unrealized pre-tax gain of $823 million at the end of 1Q11.

The Company continues to generate substantial levels of capital organically, while keeping risk-weighted asset (RWA) growth muted. Tier 1 common equity increased $798 million (or 6.7%) from year-end to $12.7 billion, while RWAs were up just 1.5%. At March 31, the estimated Tier 1 common ratio was a strong 12.4%, up 60 bps from year-end 2010 and BNY Mellon anticipates its Basel III Tier 1 common equity ratio will exceed 7% by year-end. The Company’s estimated Tier 1 capital ratio also increased 60 bps from year end to 14.0%, and the TCE ratio improved to 5.9% from 5.8%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Alan G. Reid
Initial Rating Date: 2 July 2007
Most Recent Rating Update: 10 December 2010

For additional information on this rating, please refer to the linking document below.