01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon Corporation (BK) reported 2013 results that were solid on fee revenue and capital strength but weighed down by a one-time tax charge.
Net income applicable to common shareholders was $2.0 billiona, or $1.74 per diluted share, versus $2.4 billion ($2.03) in 2012. Excluding a $593 million net after-tax charge tied to U.S. Tax Court rulings on disallowed foreign tax credits, earnings would have been $2.64 billion, or $2.24 per diluted share (non-GAAP). Total fee and other revenue rose 3% to $11.8 billion, led by investment management fees (up 7%) and investment services fees (up 4%), while net interest revenue was roughly flat at $3.0 billion as net interest margin compressed to 1.13% from 1.21% amid low rates.
The company remains a fee-driven global custodian and asset manager, with $27.6 trillionb in assets under custody and/or administration and a record $1.6 trillion in assets under management at year-end 2013. Noninterest expense was essentially flat at $11.3 billion, with lower litigation costs offsetting higher staff, software and branding spending. Credit quality remained strong, with a $35 million credit to the provision for credit losses and nonperforming assets falling to $156 million.
Capital and shareholder returns were central themes. The Basel III Tier 1 common equity ratio was an estimated 10.6%c under the Standardized Approach on a fully phased-in basis, and the company was approved to move to the Advanced Approaches framework from Q2 2014.
Management repurchased $1.03 billiond of common stock in 2013 and raised the quarterly dividend 15% to $0.15. Key risks flagged include Moody's one-notch ratings downgrade in November 2013, the ongoing run-off of high-margin structured debt securitizations, the foreign exchange standing instruction litigation, and the Sentinel loan dispute.
02—Key points
Key Highlights
- Net income applicable to common shareholders of $2.0 billion ($1.74 diluted EPS), down from $2.4 billion ($2.03) in 2012; non-GAAP ex-tax-charge EPS was $2.24
- $593 million after-tax charge from U.S. Tax Court rulings on foreign tax credits, which drove the effective tax rate to 40.9% (25.0% excluding the charge)
- Total fee and other revenue up 3% to $11.8 billion; investment management and performance fees up 7% to $3.4 billion and investment services fees up 4% to $6.8 billion
- Net interest margin (FTE) fell to 1.13% from 1.21%, though net interest revenue rose 1% to $3.0 billion on higher average interest-earning assets
- Record AUM of $1.6 trillion and AUC/A of $27.6 trillion at Dec. 31, 2013, driven by net new business and higher market values
- Estimated Basel III Tier 1 common equity ratio of 10.6% (Standardized Approach); repurchased $1.03 billion of common stock and raised quarterly dividend 15% to $0.15
- Moody's downgraded the parent and bank ratings by one notch in November 2013; S&P and Fitch ratings remained in the A/AA range
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $14.97B$14.53B | +3.0% |
| Operating Income | $2.10B$2.44B | −13.7% |
| Interest Expense | $343.00M$534.00M | −35.8% |
| Net Income | $2.10B$2.42B | −13.0% |
| EPS (Basic) | $1.74$2.03 | −14.3% |
| EPS (Diluted) | $1.73$2.03 | −14.8% |
| Shares Outstanding (Basic) | 1.15B1.18B | −2.2% |
| Shares Outstanding (Diluted) | 1.15B1.18B | −2.0% |
05—Questions
Frequently Asked Questions
Why did BNY Mellon's 2013 earnings fall compared with 2012?
Reported EPS fell to $1.74 from $2.03 mainly because of a $593 million after-tax charge from U.S. Tax Court decisions disallowing certain foreign tax credits. Underlying operating performance improved: excluding that charge, EPS was $2.24, and fee revenue grew 4%. Litigation expense was much lower in 2013 ($24 million versus $488 million in 2012).
How strong is BNY Mellon's capital position?
At Dec. 31, 2013, the estimated Basel III Tier 1 common equity ratio was 10.6% under the Standardized Approach on a fully phased-in basis, and the Basel I Tier 1 capital ratio was 16.2%. The company said it will move to the Advanced Approaches framework starting in Q2 2014, where its estimated ratio was 11.3%. Its G-SIB status implies an expected 1.0% capital surcharge.
What is the outlook for net interest revenue given low interest rates?
Net interest margin compressed in 2013 because lower market rates reduced yields on interest-earning assets, and management expects continued pressure while rates stay low. Net interest revenue sensitivity disclosures show rising rates would increase pre-tax net interest revenue (for example, about $677 million for a 200 basis point parallel increase at year-end 2013), but the company cautioned that a rate rise could also trigger deposit outflows.
What are the main risks to BNY Mellon's business?
Key risks include ongoing regulatory change (Basel III, the Volcker Rule compliance deadline of July 2015, and enhanced prudential standards), litigation including the foreign exchange standing instruction matters and the Sentinel secured-loan case, a credit rating downgrade by Moody's in 2013 that could raise funding costs, the continuing run-off of high-margin structured debt securitizations in Corporate Trust, and exposure to European sovereign and financial-sector stress.
How is the company returning capital to shareholders?
In 2013 BNY Mellon repurchased 35.1 million common shares for $1.03 billion and paid $681 million in common dividends. The board approved a 15% dividend increase to $0.15 per quarter, and the 2014 capital plan was submitted to the Federal Reserve in January 2014, with a non-objection decision expected March 26, 2014. The company noted that payout ratios above 30% of after-tax earnings draw close regulatory scrutiny, and its 2013 payout ratio was 33% (26% excluding the tax charge).
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