01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon (BK) closed 2008 with a difficult earnings year marked by heavy non-operating charges, but a much larger balance sheet and a stronger liquidity and capital position.
Net income applicable to common stock was $1.386 billiona, or $1.20 diluted EPS (continuing operations $1.22), versus $2.04 billion ($2.18) in 2007. Results absorbed $1.6 billion of pre-tax securities write-downs (mainly Alt-A and other housing-related RMBS), an $894 million charge for voluntary support agreements tied to Lehman-exposed money market and cash funds, $489 million of SILO/LILO charges, $483 million of merger and integration expenses, and a $181 million restructuring charge tied to a roughly 4% workforce reduction. Fee and other revenue rose 18% to $10.7 billion, driven by the July 2007 Mellon Financial merger, record foreign exchange trading revenue of $1.5 billion, and money market inflows.
Net interest revenue grew 28% to $3.0 billionb. The balance sheet expanded sharply, with total assets reaching $237.5 billion (from $197.7 billion) and deposits rising 35% to $159.7 billion as clients sought safe havens during the market turmoil. Available liquidity was roughly $105 billion, or 44% of total assets.
Capital strengthened: the Tier I capital ratio rose to 13.3% from 9.3%, helped by a $3 billionc U.S. Treasury TARP preferred investment and warrant, though tangible common equity fell to 3.8% of assets and book value per common share declined to $22.00 from $25.66. Assets under management fell 17% to $928 billion and assets under custody and administration fell 13% to $20.2 trillion, reflecting market declines and a stronger dollar, partly offset by net money market inflows of $92 billion. Looking ahead, management said nonperforming assets are expected to rise in 2009, noting weakness in South Florida commercial real estate.
The filing flags Basel II implementation, potential further securities impairments, FDIC assessment increases, and TARP-related dividend restrictions, including a limit on common dividends to $0.24d per quarter while the Treasury holds the Series B preferred. A pending Russian federal claim seeking $22.5 billion in damages and a Sentinel Management bankruptcy adversary proceeding are the most significant legal matters, though management does not expect them to have a material effect on the consolidated financial position.
02—Key points
Key Highlights
- Diluted EPS of $1.20 (net income applicable to common stock of $1.386 billion) versus $2.18 in 2007, reflecting roughly $1.6 billion of pre-tax securities write-downs, an $894 million support-agreement charge, $489 million of SILO/LILO charges, and a $181 million restructuring charge.
- Fee and other revenue rose 18% to $10.7 billion, with foreign exchange and other trading a record $1.5 billion, and asset servicing fees up 42% to $3.3 billion, aided by the Mellon Financial merger.
- Total assets grew to $237.5 billion and deposits to $159.7 billion, as client deposits surged in the second half of 2008; roughly $105 billion of available liquidity was held, equal to 44% of total assets.
- Tier I capital ratio improved to 13.3% from 9.3%, supported by the $3 billion U.S. Treasury TARP Series B preferred and warrant, while tangible common equity fell to 3.8% of assets.
- Assets under management declined 17% to $928 billion and assets under custody and administration fell 13% to $20.2 trillion, driven by market depreciation and a stronger dollar, partly offset by $49 billion of net inflows.
- Management expects nonperforming assets to increase in 2009, with South Florida commercial real estate and residential mortgages flagged as areas of credit deterioration.
- Dividend policy is constrained: while the Treasury holds Series B shares, common dividends are capped at the current $0.24 quarterly rate, and the company paid $0.96 per share in 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $13.57B— | — |
| Operating Income | $1.43B$2.21B | −35.2% |
| Interest Expense | $2.67B$3.42B | −22.2% |
| Net Income | $1.43B$2.04B | −29.8% |
| EPS (Basic) | $1.20$2.19 | −45.2% |
| EPS (Diluted) | $1.20$2.17 | −44.7% |
| Shares Outstanding (Basic) | 1.14B923.20M | +23.7% |
| Shares Outstanding (Diluted) | 1.15B930.68M | +23.4% |
05—Questions
Frequently Asked Questions
Why did BNY Mellon's earnings fall sharply in 2008 despite the larger post-merger franchise?
Earnings were pressured by several non-operating or one-time items: $1.6 billion in pre-tax securities write-downs on Alt-A, home equity and CDO holdings; an $894 million charge to support clients exposed to Lehman Brothers and SIV-related funds; $489 million in SILO/LILO tax-lease charges; $483 million in merger and integration costs; and a $181 million restructuring charge. Excluding some of these items, underlying fee growth was solid, though market declines reduced asset-based fees.
How strong is the company's capital and liquidity position?
Capital ratios improved, with the Tier I capital ratio at 13.3% (versus a 10% internal target) and total capital at 17.1%, both boosted by the $3 billion Treasury preferred investment. Liquidity was strong, with roughly $105 billion of available funds at year-end. However, tangible common equity to assets fell to 3.8% from 5.2%, largely due to unrealized securities losses of $4.1 billion net of tax in accumulated other comprehensive loss.
What are the main legal and regulatory risks flagged in the filing?
The most significant matters include a Russian Federal Customs Service claim seeking $22.5 billion in direct and indirect losses tied to the Russian funds transfer matter, which the company is vigorously defending. A Sentinel Management bankruptcy trustee has sued the company, with $370 million reserved in the bankruptcy plan against the bank's $312 million claim. Other matters include SEC and state investigations into auction rate securities and Pershing trading, and a CompSource lawsuit over securities lending losses. Management does not believe these will materially affect the consolidated financial position, though they could affect net income in a given period.
What does the TARP investment mean for common shareholders?
The company issued $3 billion of 5% Series B preferred stock (rising to 9% after five years) and a warrant for 14.5 million common shares at $31.00 to the U.S. Treasury. The preferred dividends reduced 2008 earnings by $33 million and are expected to cut 2009 EPS by about $0.16. Common dividends are limited to $0.24 per quarter, and buybacks are restricted, until the third anniversary or until the Treasury exits its position.
06—Continue