DBRS Comments on BNY Mellon’s Adverse Tax Ruling; Sr. at AA (low)

DBRS, Inc. (DBRS) has today commented on The Bank of New York Mellon Corporation’s (BNY or the Company) announcement that it would be taking a substantial after-tax charge of approximately $850 million in 1Q13 following an adverse U.S. Tax Court ruling. DBRS rates the Company’s Issuer & Senior Debt at AA (low) with a Stable trend.

While the large after-tax charge is likely to result in a quarterly loss for 1Q13, DBRS believes the loss is absorbable and that the Company remains sufficiently capitalized. Indeed, BNY estimated that the charge would result in a 55 basis point decline in the Company’s Basel III Tier 1 common equity ratio, which ended the year at 9.8%. DBRS notes that the charge basically offsets the 50 basis point sequential improvement seen in this ratio during 4Q12. Moreover, as this was a tax-related charge, not a client-related charge, reputational damage is likely to be minimal.

In 2009, BNY had previously challenged an Internal Revenue Service ruling that disallowed certain foreign tax credits claimed by the Company in 2001 and 2002. The case focused on structured trust advantaged repackaged securities (STARS) transactions that the U.S. Tax Court ruled lacked economic substance. BNY intends to appeal the ruling believing the transactions were consistent with statutory and judicial authority at the time.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]