DBRS Confirms The Bank of New York Mellon Corp. at AA (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of The Bank of New York Mellon Corporation (BNY Mellon or the Company) and its banking subsidiaries, including BNY Mellon’s Issuer & Senior Debt rating of AA (low). The trend for all ratings remains Stable. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

BNY Mellon’s ratings reflect the Company’s leading asset servicing and investment management franchise that is able to generate consistent and diversified earnings through a primarily fee-based business model globally. Indeed, DBRS views BNY Mellon’s business model as the deepest and most diverse of the trust banks. Moreover, the balance sheet remains strong with robust liquidity, low credit risk, and sufficient capital. Slower to react to the challenging operating environment, BNY Mellon is now generating significant positive operating leverage, albeit with the most progress made on the expense side. Like all trust banks, the ratings also consider the operational and reputational risks associated with the important role BNY Mellon plays in the global financial markets that are growing increasingly complex.

The Stable trend reflects DBRS’s view that BNY Mellon is comfortably placed within its rating category. Given the already high rating level, there is limited upside in the rating. Conversely, sustained negative operating leverage or additional operational issues that negatively impact new business could have negative rating implications.

For 9M15, the Company reported net income applicable to common shareholders of $2.4 billion, a 5.7% increase compared to 9M14. While total revenues of $11.5 billion were down almost 5%, 9M14 revenues included $836 million of gains related to the sale of the Company’s investment in Wing Hang and the sale of an office building. Excluding these two items, adjusted revenues increased almost 3% reflecting relatively broad-based revenue growth, especially within foreign exchange. Moreover, core fees have benefited from net new business. Meanwhile, noninterest expense totaled $8.1 billion in 9M15, a decline of 6% compared to 9M14. Positively, the decline in expenses was broad-based. Adjusting for non-core items, adjusted expenses declined almost 2%, as the Company’s expense initiatives continue to reduce structural costs, resulting in solid positive operating leverage.

At September 30, 2015, BNY Mellon reported $28.5 trillion of assets under custody and/or administration (AUC/A) making the Company the largest custodian in the world. Estimated new business wins have been very strong over the past year, including a contract to service $770 billion in assets for T. Rowe Price that was announced in 2Q15. Meanwhile, assets under management (AUM) remained relatively stable year-over-year (YoY) at $1.6 trillion. Specifically, the investment management business has seen net outflows the past two quarters despite continued strong inflows from BNY Mellon’s liability-driven investments product. DBRS notes that approximately 42% of Investment Management revenues came from non-U.S. sources.

The Company’s funding and liquidity remain robust. Indeed, BNY Mellon had $49 billion of liquid funds, or 13% of total assets, as well as $91 billion of cash, or 24% of total assets. Of the $49 billion in liquid funds, $20 billion was held as interest-bearing deposits with large, highly rated global financial institutions. Overall, BNY Mellon reported $190 billion of high-quality liquid assets equating to a liquidity coverage ratio of 108%, already surpassing the January 1, 2017 regulatory requirement.

Evidencing operational risk, this past August, the Company’s accounting platform (provided by third party vendor SunGard) used to process certain net asset values became corrupted during an operational upgrade that resulted in certain mutual fund, exchange-traded funds, and unregistered collective fund clients being unable to calculate their net asset values in a timely manner. The outage lasted a week and impacted approximately 66 clients and approximately 1,200 funds. Although BNY Mellon was able to produce NAVs using alternative methods allowing the funds to remain active, this episode brought unwanted negative publicity to BNY Mellon. Positively, the Company’s management was very proactive with communication to clients and SunGard is a respected third party provider that has traditionally delivered for the industry in general. Following the incident, which impacted less than 1% of total BNY Mellon revenues, there has been no indication the Company’s franchise strength has been impacted. Indeed, the Company continues to announce solid new servicing wins and the pipeline has been characterized as solid.

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 at 4.8% on a fully phased-in basis on September 30, 2015. The easiest way to comply with the SLR would be to have deposits run off, which is more likely in a rising rate environment. Other levers include reducing unfunded commitments, reducing repos, and issuing more preferred securities.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $377.4 billion in assets at September 30, 2015.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 2 July 2007
Most Recent Rating Update: 9 October 2014

For additional information on this rating, please refer to the linking document under Related Research.