DBRS: BNY Mellon’s 4Q Benefits from Lower Expenses, but Revenue Growth Remains Elusive

Summary:
• Reported net income applicable to common shareholders of $807 million, or $667 million excluding non-core items, down from $734 million in 3Q14.
• Expenses declined both QoQ and YoY, but revenue growth remains the primary challenge.
• 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) 4Q14 as evidencing solid progress in managing expenses. Nonetheless, revenue growth remains the primary challenge for the Company with 4Q14 adjusted revenues declining both QoQ and YoY. Overall, BNY Mellon did generate positive operating leverage for the year, with lower expenses more than offsetting weaker revenues. DBRS notes that with modest growth in assets under custody and administration, the Company is once again the largest custody player by this measure at $28.5 trillion after falling to number two last quarter.

Revenue growth remains a challenge with most line items declining from 3Q14 levels, including net interest revenue, issuer services and asset servicing. Management noted that its Corporate Trust business (part of issuer services) is near an inflection point for improved revenue growth in the near-term. Positively, clearing services, treasury services and foreign exchange all showed improvements. The Company noted that they are capturing more foreign exchange volume through enhanced electronic trading capabilities. Meanwhile, investment management and performance fees were relatively stable. During the quarter, BNY Mellon reported net inflows of $32 billion and overall assets under management were a record $1.7 trillion. Liability-driven investments, which have attractive margins, continue to be the primary contributor to long-term inflows.

The Company’s expense initiatives continue to bear fruit with adjusted expenses declining both QoQ and YoY. Some of these initiatives include staff reductions, insourcing application development, reducing its real estate portfolio and exiting certain businesses. For the year, adjusted expenses declined by 2%.

The balance sheet remains strong and supportive of the rating including robust liquidity, sound asset quality and strong risk-based capital. Capital metrics were relatively stable sequentially, but the supplementary leverage ratio did decline modestly.

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.