DBRS: BNY Mellon’s 2Q Improved Operating Performance; Very Strong Custody New Business

Summary:
• Reported improved net income applicable to common shareholders of $830 million, or $868 million excluding litigation and restructuring charges.
• BK generated positive operating leverage for the second consecutive quarter, as the Company continues to execute on its key strategic priorities.
• 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) strong 2Q15 results as evidencing continued execution on strategic priorities that are contributing to improved operating performance. For the second consecutive quarter, BNY Mellon reported positive operating leverage primarily reflecting strong asset servicing fees and net interest revenue growth and lower adjusted core expenses.

Importantly, the Company announced a significant middle office contract to service $770 billion in assets for T. Rowe Price, in addition to other servicing new business wins, which totaled an aggregate $1.02 trillion in the quarter. Although BNY Mellon experienced net outflows from active institutional clients within Investment Management, the Company attracted inflows from both liability-driven investments, as well as alternative investments. Positively, the Company noted that it continues to make progress in attracting U.S. retail investors with gross sales up over 50%.

Revenue growth was once again relatively broad-based. The Company continued to grow average earning assets and had modest net interest margin expansion sequentially resulting in a 7% increase in net interest revenue. Meanwhile, organic growth and seasonally higher securities lending revenue resulted in solid asset servicing fee growth. Following a particularly strong 1Q, foreign exchange trading declined during the quarter reflecting reduced volatility, but was still up 40% year-over-year. Core expenses declined modestly during the quarter, as the Company continues to become more efficient. Overall, the Company reported positive operating leverage for the second consecutive quarter and a pre-tax profit margin of 33%.

As a global systemically important bank holding company (GSIB), BNY Mellon must hold extra capital. Specifically, the Federal Reserve indicated that using the most recently available data that the Company would be required to have a surcharge of 1.0%, the lowest of all the U.S. GSIBs, when the rule becomes fully effective on January 1, 2019. Regardless, the Company’s Supplementary Leverage Ratio remains the binding constraint and was relatively stable at 4.6% on a fully phased-in basis. Lastly, the Company noted that it is already compliant with the fully phased-in Liquidity Coverage Ratio.

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.