DBRS: BNY Mellon; Solid YoY Revenue Growth, but Equity Investment Loss Hurts 4Q13 Results

Summary:

• Solid growth in core investment service and investment management fees bolstered by both organic growth, as well as higher market values.
• A $115 million after-tax loss ($175 million pre-tax) on an equity investment in ConvergEx hurt earnings.
• DBRS rates the Bank of New York Mellon Corp. Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) considers the Bank of New York Mellon Corporation’s (BNY Mellon or the Company) 4Q13 results as acceptable for the rating level (excluding the $115 million after-tax loss on an equity investment). Positively, the Company delivered solid YoY revenue growth in most of its primary businesses with particular strength in clearing services, issuer services, and investment management. Earnings would have been $628 million (excluding the equity investment loss rather than the reported $513 million), or a modest 1% increase from 4Q12. BNY Mellon’s leading asset servicing and investment management franchise that is able to generate consistent earnings through a primarily fee-based business model continues to support the rating.

The Investment Management business continues to perform very well reporting positive net inflows, higher revenues, and stronger performance fees. For the year, Investment Management attracted $95 billion of net long-term flows. Combined with market appreciation, total assets under management reached a record $1.58 trillion. The Company noted that it is significantly expanding its Wealth Management sales force to better target retail investors rather than focusing on just institutional investors. Meanwhile, BNY Mellon continues to win new business on the custody side as well, and had an industry leading $27.6 trillion of assets under custody/administration at year-end.

DBRS notes that despite excellent results from Operational Excellence; which has achieved over $650 million in annual savings one year ahead of schedule, the Company was not able to deliver positive operating leverage on an adjusted core basis for FY13. While not generating positive operating leverage is a ratings concern, higher interest rates would help dramatically through net interest margin expansion, larger spreads, and the reduction/elimination of money market fee waivers. Moreover, making investments in the business is imperative for future growth and to maintain the Company’s considerable franchise strength.

Strong asset quality, robust funding and strong risk-adjusted capital continue to support the rating. Benefitting primarily from a change in risk-weighted assets, the Company’s estimated Basel III Tier 1 common equity ratio expanded 50 bps during the quarter to 10.6%.

DBRS rates the Bank of New York Mellon Corp. Issuer & Senior Debt at AA (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]