DBRS Morningstar Upgrades The Bank of New York Mellon Corp. to AA; Trend Revised to Stable

DBRS, Inc. (DBRS Morningstar) upgraded most of the ratings of The Bank of New York Mellon Corporation (BNY Mellon or the Company), including the Company’s Long-Term Issuer Rating to AA from AA (low). At the same time, DBRS Morningstar upgraded the ratings of its primary banking subsidiary, The Bank of New York Mellon (the Bank) to AA (high) from AA. The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank was raised to AA (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The upgrade reflects BNY Mellon’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet, which DBRS Morningstar expects to be sustained going forward. As a result, BNY Mellon performs well in times of stress and even benefits from a deposit flight to quality, which augments an already very liquid balance sheet. DBRS Morningstar also views BNY Mellon’s franchise as having the broadest, deepest product set of the trust banks, enhancing its diversification.

The ratings and Stable trend are supported by its powerful franchise, with dominant or top-tier global positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues, as well as its very strong balance sheet.

Consistent with 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. Fee pressures within the Company’s businesses, expectations of a slower growing economy and lower interest rate environment, as well as BNY Mellon’s ongoing transition, including its senior management changes are also taken into consideration. Nonetheless, DBRS Morningstar considers the strength of BNY Mellon’s franchise, business model and balance sheet as assuaging such concerns.

RATING DRIVERS
Given the recent ratings action and BNY Mellon’s very high rating level, upward ratings momentum is unlikely. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impacts franchise strength, or the inability to consistently win new business could have negative ratings implications.

RATING RATIONALE
DBRS Morningstar views BNY Mellon’s franchise as the deepest and most diverse of the trust banks. The Company is the largest custodian in the world, the seventh largest asset manager globally and the 11th largest wealth manager in the U.S. DBRS Morningstar views these businesses as defensible and sustainable, considering their significant barriers to entry and that many of the related activities are critical to the functioning of financial markets, regardless of the business cycle stage.

Despite a more challenging operating environment, BNY Mellon still generated a strong pre-tax operating margin of 32% during 9M19, down from 34% in the prior year period. Revenues declined 6% from 9M18, reflecting lower asset management, foreign exchange and net interest revenue, but this was largely offset by lower expenses. Additionally, assets under custody and/or administration (AUC/A) increased 4% from the prior year (to $35.8 trillion), while assets under management (AUM) were up 3% (to $1.88 trillion), benefiting from higher market values. Overall, DBRS Morningstar views the performance favorably, especially in the context of BNY Mellon’s ongoing transition, including the considerable amount of strategic investments being made throughout the Company, particularly in technology and infrastructure.

DBRS Morningstar views BNY Mellon’s risk profile as very 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. Credit risk remains minimal, as the Company primarily targets investment grade companies or high net worth individuals. At the end of 3Q19, loan balances represented just 15% of total assets, with about 20% of the portfolio comprising fully collateralized margin loans.

DBRS Morningstar considers the Company’s funding profile to be very strong, as deposits generated by the asset servicing and corporate trust operations provide a substantial and stable source of funds. The Company’s deposits at the end of 3Q19 were up 8% versus the prior year, reflecting a continued mix shift from noninterest-bearing to interest-bearing balances. On the asset side, BNY Mellon had $218 billion of cash and securities, representing nearly 60% of total assets, with 95% of the securities portfolio rated at least AA (low) at September 30, 2019. DBRS Morningstar notes that BNY Mellon’s balance sheet is highly liquid and has typically attracted significant client funds during times of stress, indicative of a “flight to quality”.

Even with a relatively low tangible common equity ratio, DBRS Morningstar views the Company’s capitalization, including a common equity tier 1 ratio of 11.1% at the end of 3Q19 as strong, particularly given BNY Mellon’s risk profile. Consistent since inception, the Company remained a top performer in the Federal Reserve’s DFAST / CCAR exercise, including the strongest results among the U.S. G-SIBs, evidencing support to the ratings.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $373 billion in assets at September 30, 2019.

The Grid Summary Grades for BNY Mellon are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong/Strong; Risk Profile – Very Strong; Funding & Liquidity – Very Strong; Capitalisation – Very Strong/Strong.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on November 14, 2018, when the ratings were confirmed and the trend on all ratings, except the Company’s and Bank’s short-term ratings, were revised to Positive from Stable.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 2 July 2007

For more information on this credit or on this industry, visit www.dbrs.com.

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