DBRS Comments on BNY Mellon’s 2Q13 Earnings - Sr. at AA (low)

DBRS, Inc. (DBRS) has today commented on the 2Q13 earnings of The Bank of New York Mellon Corporation (BNY or the Company). DBRS rates the Company’s Issuer & Senior Debt at AA (low) with a Stable trend. The Company reported net income applicable to common shareholders of $833 million in the second quarter, up from a net loss applicable to common shareholders of $266 million in the first quarter and from $466 million a year ago. Excluding the $109 million equity investment gain associated with the sale of ConvergEx in 2Q13 and the adverse tax ruling taken in 1Q13, net income applicable to common shareholders would have been $724 million compared to $588 million in 1Q13.

Highlights of the quarter include positive operating leverage achieved by record revenues and stable expenses, continued solid net positive long-term Investment Management flows, and continued improvement in credit quality. Sequential results did benefit from seasonality, but YoY, all of BNY’s businesses reported higher revenues. Positively, BNY continues to make investments in its franchise. Notably, management announced its intent to grow the Wealth Management business by increasing the sales force by 50%, as well as adding other important staff including private bankers, wealth strategists, portfolio managers, and support staff. The new hires will be added to both current and new locations.

The Company reported assets under custody and/or administration of $26.2 trillion, a modest decline from 1Q13. BNY’s estimated 2Q13 new business wins totaled $201 billion, which were also down slightly from 1Q13. Meanwhile, Investment Management had its 15th consecutive quarter of positive long-term flows adding $21 billion primarily from growth within liability-driven strategies. Overall, assets under management reached a record $1.43 trillion.

On a FTE basis, net interest revenue increased $38 million sequentially to $771 million. The increase reflected net interest margin expansion of four basis points (bps) to 1.15%, as well as higher levels of average interest-earning assets. The margin benefited from lower yielding cash/interbank investments being replaced with higher yielding securities and loans.

Noninterest expense was relatively stable in the quarter at $2.7 billion (excluding amortization of intangibles, M&I, litigation and restructuring charges). Higher staff expense, business development, software and equipment expenses were almost entirely offset by a decrease in the reserve for administrative errors in certain offshore tax-exempt funds established in1Q13.

During the quarter, the Company added an incremental $13 million in gross savings at a program cost of $11 million under its Operational Excellence initiative. Although smaller than prior amounts seen, Operational Excellence continues to track well and is well ahead of original guidance given at the inception of the program.

The $105.5 billion (fair value) investment portfolio remains comprised of high quality securities with 89% of the portfolio rated AA (low) or higher. The increase in interest rates seen in the latter half of the quarter caused the net unrealized pre-tax gain to shrink to $656 million from $2.2 billion in 1Q13. Overall, the change in accumulated other comprehensive income negatively impacted the Company’s Basel III Tier 1 common equity ratio by 50 bps. To help mitigate some of the impact of rising rates, BNY has increased its held-to-maturity portfolio to $13.8 billion including an increase of $2.1 billion during the quarter.

Nonperforming assets declined $30 million during the quarter to $204 million. As a result of continued improvements, the Company’s provision for credit losses was a credit of $19 million.

Capital metrics remained relatively stable during the quarter. Specifically, the Company’s estimated Basel III Tier 1 common equity ratio was 9.3% at June 30, 2013 compared to 9.4% at March 31, 2013. With the new proposed leverage rules announced in early July, BNY estimated that its supplementary leverage ratio would be above 4%. The Company noted that there are a number of levers it can implement, as well as benefit from time, before needing to interrupt its planned capital actions. Moreover, the final rules may change, which could benefit BNY. For example, excluding cash held at central banks and government guaranteed securities the Company would easily be in compliance with the rule at 2Q13. Regardless, DBRS expects BNY to be able to comply with the rule without significantly impairing its strong earnings power.

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

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