DBRS Morningstar Confirms The Bank of New York Mellon Corporation at AA; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of The Bank of New York Mellon Corporation (BNY Mellon or the Company), including the Company’s Long-Term Issuer Rating of AA. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, The Bank of New York Mellon (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is 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
BNY Mellon’s ratings reflect the Company’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet. BNY Mellon typically performs well in times of stress, as evidenced by its 1H20 results, and even benefits from a deposit flight to quality, augmenting an already very liquid balance sheet. We view BNY Mellon’s franchise as having the broadest, deepest product set of the trust banks.

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, lower interest rates, as well as recent senior management changes are also taken into consideration. Furthermore, the unprecedented economic disruption caused by the Coronavirus Disease (COVID-19) pandemic and related extraordinary support measures implemented to mitigate the fallout have been factored into our ratings assessment. We will continue to monitor this developing situation and its impact on BNY Mellon’s overall credit profile.

RATING DRIVERS
Given BNY Mellon’s very high rating level, a ratings upgrade 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 would result in a ratings downgrade.

RATING RATIONALE
BNY Mellon’s powerful franchise includes dominant or top-tier global positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues. 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. We view 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 the challenging operating environment, BNY Mellon still generated a solid 9.7% return on equity in 1H20, down from 10.2% in the prior year period. Total revenues increased 6% versus 1H19 driven by higher asset servicing fees and higher foreign exchange trading revenue, partially offset by lower net interest revenue. Noninterest expenses were essentially flat, reflecting continued investments in technology, partially offset by lower travel and marketing expenses. Assets under custody and/or administration (AUC/A) grew 5% from a year ago to $37.3 trillion led by net new business and higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. Similarly, assets under management (AUM) increased 6% to $1.96 trillion, benefiting from higher market values and net inflows.

We view BNY Mellon’s risk profile as very strong, considering that its balance sheet is generally less risky than most financial institutions, but recognize 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 2Q20, loan balances represented less than 15% of total assets, with about 20% of the portfolio comprising fully collateralized margin loans.

We consider 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. In 2Q20, total average deposits were up 10% sequentially and 28% versus 2Q19, which we view as a flight to quality given the current environment. On the asset side, BNY Mellon had $290 billion of cash and securities, representing approximately two-thirds of total assets, with 94% of the securities portfolio rated at least AA (low) at June 30, 2020. Consistent since inception, the Company remained a top performer in the Federal Reserve’s 2020 stress testing exercise, including the strongest results among the U.S. G-SIBs, reflecting its lower risk balance sheet. At the end of 2Q20, BNY Mellon’s CET1 ratio was a solid 12.6%, up 150 basis points from a year ago, primarily due to earnings retention.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $442 billion in assets at June 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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; Capitalization – Very Strong/Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 (DBRS Morningstar) 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 1, 2019 when most of the ratings were upgraded.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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.dbrsmorningstar.com.

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