01—Abstract
Summary
Summary of the 10-K filed February 28, 2013. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon (BNY Mellon) reported 2012 net income applicable to common shareholders of $2.4 billiona, or $2.03 per diluted share, roughly flat versus 2011 ($2.5 billion, $2.03).
The company is a fee-driven global custodian and asset manager, with $26.2 trillionb in assets under custody and/or administration (AUC/A) and a record $1.4 trillion in assets under management (AUM) at year-end. Fee revenue of $11.2 billion declined 2% largely due to the 2011 sale of Shareowner Services, while noninterest expense rose 2% to $11.3 billion, driven by higher litigation charges. Net interest revenue was flat at $3.0 billion, though net interest margin compressed to 1.21% from 1.36% amid low rates and the ECB's elimination of deposit interest.
Capital strengthened: the estimated Basel III Tier 1 common equity ratio rose to 9.8% from 7.1%, and the company returned capital through $1.12 billionc of 2012 buybacks and a $0.13 quarterly dividend, with a 2013 capital plan pending Federal Reserve review. Management flagged several near-term items: an expected roughly $850 million after-tax charge in Q1 2013 following an adverse U.S. Tax Court ruling on foreign tax credits (about 55 basis points of Basel III capital impact), and an AUC/A restatement that cut the year-end figure by $0.5 trillion from the preliminary $26.7 trillion, with disclosure controls over that metric judged ineffective (remediated after year-end, and unrelated to internal control over financial reporting).
Investors should weigh the strong capital position and asset growth against pressure on net interest revenue, rising legal costs, and the Q1 2013 tax charge. Foreign exchange revenue fell 18%d on low volatility, and the company's fee-based model remains sensitive to market levels and capital-markets activity.
02—Key points
Key Highlights
- Net income applicable to common shareholders of $2.4 billion ($2.03 diluted EPS), flat year over year; return on common equity of 7.1%.
- Record AUM of $1.4 trillion (up 10%) and AUC/A of $26.2 trillion (up 4%, after restatement from the preliminary $26.7 trillion).
- Fee revenue declined 2% to $11.2 billion, reflecting the Shareowner Services sale; investment management and performance fees rose 6% to $3.2 billion.
- Net interest margin fell to 1.21% from 1.36%, as low reinvestment yields and the ECB deposit rate cut compressed spreads.
- Estimated Basel III Tier 1 common equity ratio rose to 9.8% from 7.1%; the company repurchased $1.12 billion of stock in 2012.
- Expected ~$850 million after-tax charge in Q1 2013 from the U.S. Tax Court ruling on foreign tax credits, appeal pending.
- Noninterest expense rose 2% to $11.3 billion, driven by $559 million in M&I, litigation and restructuring charges, mainly Sigma and Medical Capital settlements.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 28, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $14.53B$14.68B | −1.0% |
| Operating Income | $2.44B$2.52B | −3.1% |
| Interest Expense | $534.00M$604.00M | −11.6% |
| Net Income | $2.42B$2.52B | −3.9% |
| EPS (Basic) | $2.03$2.03 | 0.0% |
| EPS (Diluted) | $2.03$2.03 | 0.0% |
| Shares Outstanding (Basic) | 1.18B1.22B | −3.6% |
| Shares Outstanding (Diluted) | 1.18B1.22B | −3.6% |
05—Questions
Frequently Asked Questions
How did BNY Mellon perform financially in 2012?
Net income applicable to common shareholders was $2.4 billion, or $2.03 per diluted share, essentially flat with 2011. Revenue was stable at roughly $14.6 billion, with fee revenue down 2% (largely from selling Shareowner Services) and net interest revenue flat at $3.0 billion. Higher litigation expense offset operational-excellence savings, leaving pre-tax income at $3.3 billion versus $3.6 billion in 2011.
What is the impact of the U.S. Tax Court ruling?
On Feb. 11, 2013, the Tax Court upheld the IRS's disallowance of certain foreign tax credits for 2001 and 2002. BNY Mellon expects an after-tax charge of about $850 million in Q1 2013 and will appeal. The company expects to remain well capitalized, but the charge reduces the Basel III Tier 1 common equity ratio by roughly 55 basis points and lowers bank dividend capacity to about $1.9 billion from $2.7 billion.
Why did BNY Mellon restate its AUC/A figure?
In January 2013 the company found errors in its AUC/A data extraction, including double-counting of some AUC, under-counting of AUA, and use of original rather than amortized principal for some fixed-income securities. The year-end figure was reduced to $26.2 trillion from the preliminary $26.7 trillion. The errors did not affect client assets, revenues, earnings or capital, but management concluded disclosure controls over this metric were ineffective at year-end.
How is BNY Mellon's capital position and shareholder return?
The estimated Basel III Tier 1 common equity ratio was 9.8% at year-end 2012, up from 7.1%, supported by earnings retention and a reduction in risk-weighted assets. The company repurchased 49.8 million shares for $1.12 billion in 2012, paid $0.52 in annual dividends, and issued $1.07 billion of preferred stock. Its 2013 capital plan is subject to Federal Reserve review, with a response expected by March 14, 2013.
What are the main risks to BNY Mellon's earnings outlook?
Key risks include persistently low interest rates compressing net interest margin, weak foreign exchange volatility (FX revenue fell 18%), ongoing litigation costs, the Tax Court outcome, and heavy reliance on fee revenue tied to market values and capital-markets activity. Regulatory changes under Dodd-Frank and Basel III, potential G-SIB surcharges, and Eurozone stress also present uncertainty.
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