DBRS: BNY Mellon’s 3Q14 Earnings Bolstered by Asset Sales; Adjusted Earnings Higher Both QoQ and YoY

Summary:
• Reported net income applicable to common shareholders of $1.07 billion, or $734 million excluding non-core items, up from $715 million in 2Q14.
• Solid YoY revenue growth in Investment Management and Investment Services, while core expenses declined modestly.
• 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) 3Q14 results as sound reflecting solid revenue growth in both Investment Management and Investment Services and continued expense discipline. Results were bolstered by the previously announced asset sales including BNY Mellon’s equity investment in Wing Hang and the sale of its corporate headquarters, which more than offset additional restructuring charges that in aggregate added $336 million of net income.

Investment management and performance fees increased 7% over the past year benefitting from net inflows, higher markets, a weaker dollar, and higher performance fees. During the quarter, the Company had $13 billion of net long-term inflows once again attributable to liability-driven investments. Meanwhile, short term net inflows totaled $19 billion. Overall, assets under management reached a record $1.65 trillion. Earlier this month, BNY Mellon announced that it had reached an agreement to acquire Cutwater Asset Management, a U.S.-based fixed income and solutions specialist with approximately $23 billion in assets under management. The acquisition is expected to close by the beginning of 1Q15.

Investment Services revenue increased 5% over the past year driven by growth in asset servicing, clearing services, and treasury services, which more than offset lower Corporate Trust fees. BNY Mellon estimated 3Q14 new custody wins at $115 billion. Overall, asset under custody/and or administration declined modestly in the quarter to $28.3 trillion reflecting lower market valuations.

Positively, the Company reported modestly higher net interest revenue despite continued net interest margin pressure. With the European Central Bank lowering the rates to negative 20 basis points, BNY Mellon started charging for deposits on October 1. Moreover, the Company is reducing interbank placement assets and increasing high quality liquid assets. BNY Mellon noted that the Company’s liquidity coverage ratio was already in excess of the 80% January 1, 2015 requirement.

The balance sheet remains strong and supportive of the rating, including robust liquidity, sound asset quality, and strong risk-based capital. The Company’s fully phased in Basel III tier 1 common equity ratio under the advanced approach remained stable at 10.0%, while the supplementary leverage ratio declined modestly to approximately 4.6% as a result of balance sheet growth.

DBRS rates the Company’s Issuer & Senior Debt at AA (low) with a Stable trend.

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