01—Abstract
Summary
Summary of the 10-K filed February 27, 2015. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon (BK) closed 2014 with net income applicable to common shareholders of $2.5 billiona, or $2.15 per diluted share, versus $2.0 billion ($1.73) in 2013.
Management's adjusted non-GAAP figure was $2.8 billionb ($2.39), excluding a $315 million gain on the sale of Wing Hang, a $204 million after-tax gain on the One Wall Street building sale, a $150 million tax carryback benefit, and $860 million of litigation and restructuring charges. The headline GAAP result was weighed down by a $598 million after-tax litigation accrual added in February 2015, largely for the foreign exchange standing-instruction matters, and by noninterest expense rising 8% to $12.2 billion. Underlying fee businesses held up.
Fee and other revenue rose 7% to $12.6 billionc, led by investment management and performance fees (up 3% to $3.5 billion) and asset servicing (up 4%). Assets under custody and/or administration reached a record $28.5 trillion and assets under management reached $1.71 trillion, supported by market gains and net new business. Net interest revenue fell 4% to $2.9 billion as net interest margin compressed to 0.97% from 1.13%, reflecting lower yields and a deliberate reduction in interbank placements in favor of high-quality liquid assets.
Capital and balance sheet items warrant attention. The estimated fully phased-in Basel III CET1 ratio under the Advanced Approach fell to 9.8%d from 11.3%, driven by higher risk-weighted assets, including the consolidation of certain investment management funds. Under the Standardized Approach it was 10.6%, unchanged.
The company repurchased $1.7 billion of stock and paid $0.66 per share in dividends, a 13% increase in the quarterly rate to $0.17 announced in April 2014. Management also flagged regulatory pressure, including the FDIC's view that the 2013 resolution plans were not credible, and the Federal Reserve's scrutiny of dividend payout ratios above 30%. The company's 2014 payout ratio was 31%, or 25% excluding litigation.
02—Key points
Key Highlights
- GAAP EPS of $2.15 rose 24% from $1.73; adjusted non-GAAP EPS was $2.39 excluding asset sale gains, tax benefits, litigation and restructuring charges.
- Fee and other revenue increased 7% to $12.6 billion, driven by asset servicing, investment management fees, and $1.2 billion of investment and other income (largely from the Wing Hang and One Wall Street gains).
- AUC/A reached a record $28.5 trillion and AUM reached a record $1.71 trillion at Dec. 31, 2014, up 3% and 8% respectively.
- Noninterest expense rose 8% to $12.2 billion, including $1.1 billion of M&I, litigation and restructuring charges; excluding these items, expense fell 2%.
- Net interest margin declined to 0.97% from 1.13% on lower yields and interest-rate hedging; net interest revenue fell 4% to $2.9 billion.
- Advanced Approach CET1 ratio fell to 9.8% from 11.3%, while the Standardized Approach ratio held at 10.6%; the company repurchased $1.7 billion of common stock in 2014.
- A further $598 million after-tax litigation accrual was recorded in February 2015, primarily for substantially all foreign exchange-related actions, weighing on near-term earnings visibility.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 27, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $15.61B$14.97B | +4.3% |
| Operating Income | $2.57B$2.10B | +22.0% |
| Interest Expense | $354.00M$343.00M | +3.2% |
| Net Income | $2.57B$2.10B | +22.0% |
| EPS (Basic) | $2.17$1.74 | +24.7% |
| EPS (Diluted) | $2.15$1.73 | +24.3% |
| Shares Outstanding (Basic) | 1.13B1.15B | −1.8% |
| Shares Outstanding (Diluted) | 1.14B1.15B | −1.5% |
05—Questions
Frequently Asked Questions
Why did reported GAAP earnings differ so much from management's adjusted earnings?
GAAP net income applicable to common shareholders was $2.5 billion ($2.15 per diluted share), while management's non-GAAP figure was $2.8 billion ($2.39). The difference reflects one-time gains on the Wing Hang equity stake ($315 million after tax) and the One Wall Street building ($204 million after tax), plus a $150 million tax carryback benefit, partially offset by $860 million of after-tax litigation and restructuring charges and $81 million related to investment management funds.
How serious is the foreign exchange litigation exposure?
Management added a $598 million after-tax litigation expense in February 2015 in anticipation of resolving several matters, including substantially all foreign exchange-related actions. The filing also discloses ongoing inquiries by government authorities, class actions, and a New York Attorney General lawsuit. The aggregate reasonably possible loss above accrued amounts is disclosed as up to $200 million, but the filing states that outcomes remain difficult to predict.
Is the dividend and buyback capital return sustainable given regulatory scrutiny?
In 2014 the company paid $0.66 per share in dividends and repurchased $1.7 billion of stock, with a 31% payout ratio (25% excluding litigation). The Federal Reserve gives particularly close scrutiny to payout ratios above 30%, and the 2015 capital plan was submitted in January 2015 with a response expected in March. The Advanced Approach CET1 decline to 9.8% and the pending G-SIB surcharge rule add uncertainty to future capital distributions.
What is driving the pressure on net interest revenue?
Net interest revenue fell 4% to $2.9 billion because of lower yields, lower purchase accretion, and interest-rate hedging, which compressed net interest margin to 0.97% from 1.13%. Management also reduced interbank placements to build high-quality liquid assets for the Liquidity Coverage Ratio, which lowers returns on excess deposits. Management warned that negative European deposit rates may further weigh on net interest revenue.
What are the main strategic initiatives and cost-reduction efforts?
Management is pursuing streamlining actions that include staff rationalization and process automation across Investment Services and technology, with 2014 restructuring charges of $177 million. It is also reinvesting in strategic platforms, a new Technology Solutions Group, and the BNY Mellon Markets Group, while exiting the derivatives sales and trading business over several years. Management targets improved operating margin through 2017, though 2014 pre-tax operating margin fell to 23% from 25% on a GAAP basis.
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