DBRS: BNY Mellon; Improving Expense Control More Than Offsets Lower Revenue in 1Q14

Summary:
• Improving expense control and strong asset quality more than offset weaker core revenues resulting in a 5% QoQ increase in net income applicable to common shareholders to $661 million.
• Highlights include higher revenue in securities lending and foreign exchange trading, and improvements in key regulatory ratios.
• DBRS rates the Bank of New York Mellon Corp. Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) views the Bank of New York Mellon Corporation’s (BNY Mellon or the Company) 1Q14 results as supportive of the rating level. Indeed, the balance sheet strengthened, expenses were lower and most business lines have shown solid growth over the past year. Importantly, the Company’s considerable franchise strength was highlighted by winning numerous industry awards that were announced during the quarter. Overall, BNY Mellon reported net income applicable to common shareholders of $661 million, a 5% increase from 4Q13, which excludes a $115 million after-tax loss on an equity investment.

Core expenses were down 4% quarter-over-quarter (QoQ), even with the acceleration of the vesting of long-term stock awards for retirement eligible employees that takes place in the first quarter, aided by lower pension and compensation expense. Management indicated that they are committed to aggressive expense management in 2014, which should enable the Company to generate positive operating leverage in 2014 even if the revenue environment remains challenging.

Both assets under custody/administration and assets under management grew modestly during the quarter to $27.9 trillion and a record $1.62 trillion, respectively. Both have benefited from new business wins and higher market valuations. Positively, both securities lending and foreign exchange (FX) trading revenues increased sequentially. FX volatility was quite low in the quarter, but volumes have increased reflecting BNY Mellon’s investments in electronic trading capabilities. Meanwhile, demand for securities lending has increased, but spreads remain low.

Despite a larger balance sheet, net interest revenue declined 4% sequentially, primarily reflecting a four basis point decline in the net interest margin (FTE) and fewer days in the quarter. Other revenue headwinds remain, including money market fee waivers and declining Corporate Trust revenues.

Key regulatory ratios improved during the quarter including BNY Mellon’s estimated Basel III tier 1 common ratio and supplementary leverage ratio. Specifically, on a fully phased in basis, the Company’s Basel III tier 1 common ratio was 11.0% under both the standardized and advanced approaches, while the supplementary leverage ratio was approximately 4.7%. The Company’s 2014 Capital Plan includes a 13% increase in the dividend and nearly 30% increase in potential share repurchases of up to $1.74 billion of common shares over the next four quarters.

DBRS rates the Company’s 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.]