01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon (BK) closed 2011 with net income applicable to common shareholders of $2.5 billiona, or $2.03 per diluted share, roughly flat with $2.05 in 2010.
Results reflect a fee-driven model: total fee revenue rose 7% to $11.5 billionb, led by investment services fees (up 13% to $6.8 billion, helped by the full-year impact of the GIS and BAS acquisitions) and investment management fees (up 5% to $3.0 billion). Net interest revenue was essentially flat at $3.0 billion as the net interest margin compressed to 1.36% from 1.70%, reflecting the low-rate environment and a sharp rise in low-yielding central bank deposits. Noninterest expense rose 9% to $11.1 billion, so pre-tax margin fell to 24-25% from 26-27%.
Balance sheet growth was dramatic. Total assets rose to $325 billionc from $247 billion, driven by a $74 billion increase in client deposits to $219 billion, as clients moved cash to safety amid European sovereign stress. Management is treating this as a liquidity and capital-intensity story: the Basel I Tier 1 ratio rose to 15.0%, but the estimated Basel III Tier 1 common equity ratio is 7.1%, and the leverage ratio fell to 5.2%.
Capital return remained active, with a dividend increase to $0.13d per quarter and $835 million of buybacks in 2011, though future payouts face Federal Reserve capital-plan scrutiny. Key risks for investors include credit rating pressure (S&P downgraded the parent by one notch in November 2011 and Moody's placed ratings on review for downgrade in December), a heavy litigation docket (including Sentinel, Madoff-related, foreign exchange, German broker-dealer, and tax matters, with a reasonably possible loss of up to $1.05 billion above accruals), and regulatory changes under Dodd-Frank, the Volcker Rule, and expected G-SIB capital surcharges.
02—Key points
Key Highlights
- Net income applicable to common shareholders of $2.5 billion ($2.03 per diluted share) in 2011, versus $2.5 billion ($2.05) in 2010; 2011 return on common equity was 7.5%.
- Total fee revenue grew 7% to $11.5 billion, with investment services fees up 13% to $6.8 billion, driven by the full-year impact of the 2010 GIS and BAS acquisitions and net new business.
- Net interest margin (FTE) fell sharply to 1.36% from 1.70% as client deposits were placed at low-yielding central banks; net interest revenue was roughly flat at $3.0 billion.
- Assets under custody and administration reached $25.8 trillion and assets under management $1.26 trillion at year-end 2011, both up year over year.
- Client deposits rose 51% to $219 billion, pushing total assets to $325 billion and liquid assets to 42% of total assets.
- Capital: Basel I Tier 1 ratio 15.0%; estimated Basel III Tier 1 common equity ratio 7.1%; leverage ratio 5.2%. The company repurchased $835 million of stock and raised its quarterly dividend 44% to $0.13.
- Credit ratings were pressured: S&P cut debt ratings by one notch in November 2011, and Moody's placed the ratings on review for downgrade in December, with the company's ratings receiving government-support 'lift' under threat from Dodd-Frank.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $14.68B$13.82B | +6.3% |
| Operating Income | $2.52B$2.58B | −2.6% |
| Interest Expense | $604.00M$545.00M | +10.8% |
| Net Income | $2.52B$2.52B | −0.1% |
| EPS (Basic) | $2.03$2.06 | −1.5% |
| EPS (Diluted) | $2.03$2.05 | −1.0% |
| Shares Outstanding (Basic) | 1.22B1.21B | +0.7% |
| Shares Outstanding (Diluted) | 1.22B1.22B | +0.6% |
05—Questions
Frequently Asked Questions
How did BNY Mellon's profitability change in 2011?
Net income applicable to common shareholders was about $2.5 billion in both 2011 and 2010, with diluted EPS of $2.03 versus $2.05. Revenue growth from fees was offset by a lower net interest margin and a 9% rise in noninterest expense, which included full-year acquisition costs, higher staff expense, and restructuring charges of $89 million. The pre-tax operating margin declined to 24% from 26%.
Why did the balance sheet grow so much?
Total assets increased to $325 billion from $247 billion, primarily because client deposits surged $74 billion during 2011. Clients moved cash into BNY Mellon amid European debt concerns, and most of these deposits were placed with central banks or in high-quality securities, which supports liquidity but dilutes margins.
Is BNY Mellon's capital position strong enough for shareholder returns?
Under the current Basel I framework the company is well capitalized, with a 15.0% Tier 1 capital ratio. However, the estimated Basel III Tier 1 common equity ratio of 7.1% is below the 7% minimum target when fully phased in, and the company's ability to raise dividends or buy back stock depends on Federal Reserve approval of its capital plan, with payout ratios above 30% of earnings drawing close scrutiny.
What are the most significant risks disclosed in the filing?
Key risks include credit rating downgrades that would raise funding costs and could trigger collateral calls on derivatives; low interest rates compressing net interest revenue; European sovereign and counterparty exposure; regulatory changes under Dodd-Frank, the Volcker Rule, and proposed G-SIB surcharges; and ongoing litigation, including the Sentinel, Madoff-related, foreign exchange pricing, German broker-dealer, and tax disputes. The company estimates reasonably possible losses above accruals of up to $1.05 billion.
How much of the company's revenue comes from outside the United States?
International operations accounted for roughly 37% of 2011 revenue, with EMEA revenue of $3.8 billion and APAC revenue of $842 million. Income from international operations was $1.5 billion, and the company's assets under management managed from international operations rose to 38% of total AUM.
06—Continue