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. Furthermore, the balance sheet remains strong with robust liquidity, low credit risk, and sufficient capital. Additionally, BNY Mellon continues to generate significant positive operating leverage, albeit driven primarily by disciplined expense management. Similar to its trust bank peers, 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.

For 9M16, the Company reported net income applicable to common shareholders of $2.6 billion, an 8% increase compared to 9M15. Specifically, total revenues were essentially flat compared to the year-ago period as lower investment management and performance fees, as well as foreign exchange and other trading revenue was offset by increased investment services fees, investment and other income and net interest revenue. Meanwhile, noninterest expense declined 3% versus 9M15, with broad-based improvement in nearly all categories, reflecting, in part, the continued benefit of the business improvement process. DBRS notes that savings from the business improvement process is enabling BNY Mellon to fund regulatory changes, invest in opportunities and return capital to shareholders, while still being able to generate positive operating leverage. Specifically, adjusting for non-core items including securities gains, BNY Mellon has generated 246 basis points of positive operating leverage in 9M16, the best among the trust banks.

BNY Mellon remains the largest custodian in the world with $30.5 trillion of assets under custody and/or administration (AUC/A) at September 30, 2016. In addition, asset servicing estimated new business wins continue to be favorable with $150 billion reported in 3Q16. Meanwhile, assets under management (AUM) increased 6% from the prior year to $1.7 trillion, reflecting higher market values, partially offset by the unfavorable impact of the stronger U.S. dollar. Nonetheless, the investment management business has seen net outflows despite continued strong inflows from BNY Mellon’s liability-driven investments product. DBRS notes that 40% of Investment Management revenues came from non-U.S. sources in 3Q16.

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 $86 billion of cash, or 23% of total assets. Of the $49 billion in liquid funds, $14 billion was held as interest-bearing deposits with large, highly rated global financial institutions. In aggregate, BNY Mellon reported $195 billion of high-quality liquid assets and is compliant with the fully phased-in liquidity coverage ratio requirement.

Overall, DBRS views BNY Mellon’s risk profile as quite strong, considering that its balance sheet is generally less risky than most financial institutions, but recognizes the significant operational and reputational risks the Company faces given its important role in global financial markets. Meanwhile, in April 2016, the Federal Reserve and FDIC issued a joint notice of deficiencies and shortcomings regarding BNY Mellon’s 2015 resolution plan, which the Company believes it addressed in its resubmission to the agencies on October 1, 2016. Also, as a result, BNY Mellon changed its preferred resolution strategy to a single point of entry strategy (SPOE), which would require approximately $2 to $4 billion of incremental unsecured long-term debt issuance above typical funding requirements by July 2017 to satisfy resource needs in times of distress. From DBRS’s perspective, the shift to the SPOE strategy should make the entire Company more resilient by enhancing liquidity and capital at its material entities, albeit at a cost.

DBRS views the Company’s capitalization as solid even with a relatively low tangible common equity ratio. Notably, BNY Mellon remains a top performer under DFAST/CCAR, as its lower risk balance sheet performs very well in times of stress. Meanwhile, the Supplementary Leverage Ratio (SLR) remains the binding constraint for the Company and was 5.7% and 5.9% at the Company and largest bank subsidiary, respectively, on a fully phased-in basis at September 30, 2016. DBRS expects that BNY Mellon’s insured depository institution subsidiaries will meet the required 6% threshold when the SLR becomes effective as a binding ratio in 2018.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $374.1 billion in assets at September 30, 2016.

RATING DRIVERS
Given the already relatively 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.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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: Michael Driscoll
Rating Committee Chair: William Schwartz
Initial Rating Date: 2 July 2007
Most Recent Rating Update: 4 December 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.