DBRS Confirms The Bank of New York Mellon Corp.; Senior Debt at AA (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of the Bank of New York Mellon Corporation (BNY Mellon or the Company) and its banking subsidiaries, including BNY Mellon’s Issuer & Senior Debt rating of AA (low). The trend for all ratings remains Stable. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The rating confirmation and Stable trend reflect BNY Mellon’s leading asset servicing and investment management franchise that is able to generate consistent earnings through a primarily fee-based business model. Moreover, the Company’s broad product set serves clients in 35 countries and over 100 markets providing revenue and geographic diversification. The ratings are also supported by ample liquidity and a lower risk balance sheet. However, the low interest rate environment, increased regulatory costs, still soft market-sensitive revenues, and various litigation issues continue to weigh on the Company’s financial performance, which the Company is addressing through its Operational Excellence initiative. While BNY Mellon is a top performer in regulatory stress testing, the Company’s tangible common equity ratio is the weakest of the trust banks.

At the Company’s currently high rating level, DBRS does not currently envision a plausible scenario which would lead to an upgrade. Negative rating implications could arise from diminished new business wins, sustained negative operating leverage, or an unexpected material loss that would invade capital.

Over the past year, the Company has continued to win new business in both its primary business segments and has been successfully executing on its Operational Excellence initiative, which includes simplifying BNY Mellon’s core operating model, retiring legacy systems, and utilizing technology to improve efficiencies while reducing risks. When the initiative was announced in 2011, it targeted achieving between $650 million and $700 million of pre-tax savings by the end of 2015. Through 2Q13, the initiative has achieved approximately $600 million of gross savings already exceeding the upper range YE13 target of $520 million.

At June 30, 2013, the Company reported assets under custody and/or administration of $26.2 trillion, a modest decline from 1Q13. BNY Mellon’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 GAAP basis, BNY Mellon reported net income applicable to common shareholders of $567 million for 1H13 compared to $1.085 billion in 1H12. DBRS notes that 1Q13 results included an $854 million after-tax charge related to the disallowance of certain foreign tax credits. Excluding this charge, amortization of intangible assets, M&I, and litigation and restructuring charges, 1H13 net income applicable to common shareholders would have been $1.568 billion compared to $1.497 billion in 1H12. DBRS expects operating earnings and revenues to improve going forward reflecting an improving operating environment and successful execution of Operational Excellence.

While reputational, operational, and litigation risks remain; DBRS views the Company’s balance sheet as less risky than most financial institutions. Indeed, the loan portfolio only represents 14% of total assets and is comprised almost entirely of investment grade companies or high net worth individuals. BNY Mellon’s $105.5 billion (fair value) investment portfolio remains comprised of high quality securities with 89% of the portfolio rated AA (low) or higher. Besides the adverse ruling in the aforementioned tax case, BNY Mellon continues to defend itself in numerous cases. The Company noted that for matters where it is able to estimate a reasonably possible loss, those losses could be as much as $715 million above what the Company has already accrued. DBRS is most mindful of how the various foreign exchange cases evolve, as these cases could negatively impact BNY Mellon’s reputation and franchise strength.

Capital metrics remained relatively stable during the second 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 Mellon 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 Mellon. 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 Mellon to be able to comply with the rule without significantly impairing its strong earnings power.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $360.5 billion in assets at June 30, 2013.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used.]

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Roger Lister
Initial Rating Date: 2 July 2007
Most Recent Rating Update: 5 April 2012

For additional information on this rating, please refer to the linking document under Related Research.