01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon (NYSE: BK) closed 2009 with a sharply weaker reported result driven by a deliberate balance-sheet repositioning.
The company posted a net loss applicable to common shareholders of $1.37 billiona, or $1.16 per diluted share, versus net income of $1.39 billion ($1.20) in 2008. Loss from continuing operations was $0.93 per share. The decline was dominated by $5.4 billion of pre-tax net investment securities losses, mainly from the sale and restructuring of about $13.5 billion (amortized cost) of watch-list securities, principally Alt-A, prime and subprime RMBS.
Excluding those items and other charges, management's non-GAAP view shows a much healthier fee-based franchise, with fee revenue down 18% to $10.1 billionb on lower equity markets, weaker securities lending spreads and a 21% drop in FX volumes. Expense discipline was a clear positive. Noninterest expense fell 17% to $9.6 billion, reflecting lower incentives, merger synergies and a stronger dollar.
Net interest revenue was flat at $2.9 billionc despite historically low rates, and the company's loan book shrank as management cut targeted credit exposure. Balance-sheet strength improved on a common-equity basis: the Tier 1 capital ratio fell to 12.1% from 13.2% because of the securities charge and the $3.0 billion repurchase of TARP preferred stock, but Tier 1 common equity rose to 10.5% and the tangible common equity ratio improved to 5.2% from 3.8%. Book value per share rose to $23.99 and the company raised $1.4 billion of common equity in 2009.
For investors, the central questions are the durability of fee revenue as markets recover, the timing of the expected return of dividend flexibility (management expects regulatory consent restrictions to lift in Q4 2010), and the cost of pending transactions, including the $2.31 billiond agreement to acquire Global Investment Servicing from PNC, which would add roughly $855 billion in assets under administration. Several regulatory overhangs also remain, including a proposed Financial Crisis Responsibility Fee estimated at about $200 million per year, Basel III capital proposals that could disqualify trust preferred securities from Tier 1, and a pending $900 million IRS tax dispute.
02—Key points
Key Highlights
- Net loss applicable to common shareholders of $1.37 billion ($1.16 per diluted share) in 2009, versus net income of $1.39 billion ($1.20 per share) in 2008, driven by investment securities losses.
- Pre-tax net investment securities losses of $5.4 billion, primarily from the sale and restructuring of roughly $13.5 billion of watch-list securities; the restructuring is expected to add about $200 million to 2010 net interest revenue.
- Fee revenue fell 18% to $10.1 billion on lower equity markets, lower securities lending revenue ($259 million vs. $789 million) and a 21% decline in FX volumes; total fee and other revenue was $4.8 billion after securities losses.
- Noninterest expense declined 17% to $9.6 billion, aided by merger synergies and lower incentive compensation; pre-tax loss from continuing operations was $2.2 billion.
- Capital position: Tier 1 capital ratio 12.1% (13.2% prior year), Tier 1 common equity ratio 10.5%, tangible common equity ratio 5.2%; all bank subsidiaries well-capitalized, and the company repurchased $3.0 billion of TARP preferred stock and the warrant for $136 million.
- Scale: $1.1 trillion in assets under management, $22.3 trillion in assets under custody and administration, and about 42,200 employees; agreed in February 2010 to acquire GIS from PNC for $2.31 billion cash.
- Key forward risks: proposed Financial Crisis Responsibility Fee (~$200 million annually), Basel capital and liquidity proposals, the Volcker Rule, and a potential $900 million exposure in a U.K. tax-credit dispute.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $7.65B$13.57B | −43.6% |
| Operating Income | -$814.00M$1.43B | −156.9% |
| Interest Expense | $593.00M$2.67B | −77.7% |
| Net Income | -$1.08B$1.43B | −175.7% |
| EPS (Basic) | $-1.16$1.20 | −196.7% |
| EPS (Diluted) | $-1.16$1.20 | −196.7% |
| Shares Outstanding (Basic) | 1.18B1.14B | +3.2% |
| Shares Outstanding (Diluted) | 1.18B1.15B | +2.7% |
05—Questions
Frequently Asked Questions
Why did BNY Mellon report a loss in 2009 when its core businesses appear to have been stable?
The loss was driven mainly by a one-time, $5.4 billion pre-tax securities charge tied to a deliberate restructuring of its riskiest investment holdings, not by weak operations. Management reduced balance-sheet risk by selling or restructuring about $13.5 billion of watch-list securities, mostly Alt-A, prime and subprime mortgage-backed bonds. Core fee-based businesses were weaker because of market declines, but expense control and merger synergies helped offset that pressure.
How strong is the company's capital position after the securities charge and TARP repurchase?
Capital remains solid on the measures that matter most for equity holders. The regulatory Tier 1 ratio fell to 12.1% from 13.2%, but Tier 1 common equity improved to 10.5% from 9.4%, and the tangible common equity ratio rose to 5.2% from 3.8%. The company raised $1.4 billion of common equity in 2009, all bank subsidiaries remained well-capitalized, and management said the securities charge had only a minimal effect on tangible capital.
Will BNY Mellon's dividend be at risk?
The quarterly dividend was maintained at $0.09 per share through 2009 and into 2010. However, the company's two principal banks need regulatory consent before paying dividends to the parent because of the securities restructuring charge, and any increase in the dividend requires consultation with the Federal Reserve. Management expects the bank-dividend restriction to lift in the fourth quarter of 2010, and says parent-level liquidity is sufficient to cover the current dividend in the meantime.
What is the significance of the pending Global Investment Servicing acquisition?
The acquisition of GIS from PNC for $2.31 billion in cash would significantly expand BNY Mellon's institutional servicing franchise, adding about $855 billion in assets under administration, including $460 billion in assets under custody, and roughly 4,500 employees. BNY Mellon plans to raise $700 to $800 million in equity to fund the deal, which is expected to close in the third quarter of 2010 subject to regulatory approvals. Investors should weigh the expected synergies against dilution from the equity raise and integration risk.
What regulatory and legal risks could affect future earnings?
The most material near-term item is the proposed Financial Crisis Responsibility Fee, which BNY Mellon estimates would cost about $200 million per year if enacted as proposed. Basel Committee proposals could disqualify U.S.-style trust preferred securities from Tier 1 capital, and the Volcker Rule and other reforms could limit business activities. On the legal side, the company is contesting a Statutory Notice of Deficiency related to a 2001 U.K. tax transaction with total exposure of about $900 million, and it faces several pending investigations and lawsuits, though management does not believe they will materially affect financial position.
06—Continue