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 CREDIT RATING CONSIDERATIONS
BNY Mellon’s ratings and Stable trend reflect the Company’s consistent delivery of predictable and favorable results, as well as its low-risk business model and well managed balance sheet. BNY Mellon’s business model diversification and scale, its track record of successful technology investment and risk management help support balanced and strong financial results. We view BNY Mellon’s franchise as having the broadest, deepest global product reach of the custody banks. BNY Mellon typically performs well in times of stress, as evidenced by its results in 2020 and 2021 during the pandemic, while recent performance in 1H23 benefited from actions taken in late 2022 to reposition the securities portfolio and add liquidity considering the rapid pace of interest rate increases.

In line with our assessment of all trust banks, the ratings also consider the operational, technological, and reputational risks associated with the integral role BNY Mellon plays in the global financial markets. Cost and pricing pressures within the Company’s businesses, the shifting interest rate outlook, which is now driven by inflation, lower deposit levels in the most recent quarters and significantly higher funding costs are also factored into the ratings, as are recent senior management changes.

CREDIT RATING DRIVERS
Given BNY Mellon’s very high rating level, a ratings upgrade is unlikely. Conversely, sustained negative operating leverage or missteps in managing operational or reputational risk that negatively impact franchise strength would result in a downgrade of ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong

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 globally, and has the lead position globally in U.S. government securities clearance, is the world’s twelfth largest asset manager, and the tenth largest private bank in the U.S. We view these businesses as highly sustainable as the largest custodial banks operate in an oligopolistic industry structure 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. BNY Mellon’s high ratings reflect its scale and financial strength which afford the Company room to innovate and lead the development of next generation products and services.

Earnings Combined Building Block (BB) Assessment: Strong / Good

BNY Mellon navigated the volatile markets of 2022 and early 2023 with continued resilience in underlying earnings, while 2H2022 reported earnings were reduced by two large one-time items arising mainly due to the sharp increase in rates. The Company’s reported ROE for full year 2022 was 6.5%, which included significant charges to reposition the securities portfolio for higher rates, and to mark down goodwill on its Investment Management segment, reflecting permanent reductions in expected returns. Assets under Custody/Administration (AUC/A) fell by 5.1% to $44.3 trillion as of year-end 2022, but recovered 5.9% to $46.9 trillion as of June 30, 2023, on improved valuations and client inflows. Wealth and Investment Management Assets Under Management (AUM) of $1.9 trillion as of June 30, 2023, remained below year-end 2021 levels of $2.4 trillion, but were stable from mid-year 2022 levels. Fee income is the dominant source of revenues (73% in 2022), providing a diversified and recurring revenue stream. While fee income has been pressured due to lower asset valuations and lower transaction volumes, this has been more than offset by higher net interest income. This combined with tighter control on expense growth has resulted in positive operating leverage.

Under the new management team, BNY Mellon is now focused on improving margins in its scale Asset Servicing business as well as in Investment & Wealth Management. The Company is also growing its higher margin market services and collateral management businesses with a recently introduced integrated platform for registered investment advisers who service retail clients in Pershing. BNY Mellon is seeking ways to better use its global resources in securities data.

Risk Combined Building Block (BB) Assessment: Very Strong

We view BNY Mellon’s risk profile as very strong, considering that its balance sheet is generally less risky than most financial institutions with its highly liquid and well capitalized structure, and lower exposure to credit risk. We recognize the significant operational and reputational risks the Company faces given its central role in financial markets. These risks increase with the growth of scale and business complexity, and include cybercrime, data security and integrity, AML, and compliance with sanctions terms throughout its global network. BNY Mellon’s pursuit of open architecture platforms and end to end integrated solutions raises the stakes in terms of global integrated market exposure and complexity in defining liability limits with regard to servicing customers. Credit risk remains minimal. At the end of 2Q23, loan balances represented just 15% of total assets and are largely secured by real estate or securities, with strong collateralization levels.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong

The Company’s funding and liquidity remain very sound, although like all banks, sharp interest rate increases have caused higher deposit costs and outflows from deposits to higher-yielding alternatives. BNY Mellon’s broader product set retains much of this business, as customers migrate to BNY Mellon’s money market and UST instruments. BNY Mellon managed its balance sheet and securities portfolio conservatively in the past 18 months, and there was some recovery in deposit balances in the 2Q23, potentially indicating more stable funding trends for the remainder of 2023. Average non-interest bearing deposit balances fell by 32% from 2Q22 to 2Q23, replaced by increases in securities repo positions, other borrowed funds, and long-term debt, as average assets declined by 4% from 2Q22 levels. Over the course of 2022 and into 1H23, BNY Mellon boosted liquidity as it increased its average deposits with the Federal Reserve by 11%. BNY Mellon’s LCR was a solid 120% with the NSFR of 136% also very sound given the repricing pressure on the balance sheet over the 2022-1H23 period.

Capitalization Combined Building Block (BB) Assessment: Strong

BNY Mellon manages capital conservatively and generates resilient earnings. The Company has been able to build CET1 levels back above 11%, at 11.1% as of 2Q23, with a Tier 1 leverage ratio of 5.7% which places them in a strong position to meet upcoming higher capital levels proposed in the Basel 3 finalization. BNY Mellon has consistently performed in line with its low-risk business model in the CCAR process. The Company was assigned a SCB of 2.5% through the 2023/24 CCAR cycle, the lowest possible level. Meanwhile, BNY Mellon has also been assigned a relatively low GSIB buffer of 1.5%, which reflects the Company’s leading global position in the trust and custody services industry. Management resumed modest share buyback levels in the 2Q23, with its dividend payout ratio of about 30-40% of earnings.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/421393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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 22, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023): https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar did have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on October 5, 2022 when all the ratings were confirmed.

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 credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Rebecca Clarke, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global 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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