01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon Corporation (BK) reported 2015 results that were solid on a GAAP basis but mixed in underlying trends.
Net income applicable to common shareholders was $3.05 billiona, or $2.71 per diluted share, compared with $2.49 billion, or $2.15, in 2014. Excluding a $170 million pre-tax impairment tied to the Sentinel court decision and litigation and restructuring charges, non-GAAP EPS was $2.85. Total revenue fell about 3% to $15.2 billion, as 2014's one-time gains on the sales of Wing Hang and One Wall Street were not repeated.
Noninterest expense dropped 11% to $10.8 billionb, driven by lower litigation charges, so the pre-tax margin rebounded to 28% from 23%. Assets under custody and/or administration rose to a record $28.9 trillion, while assets under management declined 4% to $1.63 trillion on net outflows and a stronger dollar. Balance sheet and capital remained strong.
Total assets were $394 billionc, deposits grew 5% to $280 billion, and the Common Equity Tier 1 ratio under the Advanced Approach was 10.8% on a transitional basis, with a fully phased-in estimate of 9.5%. The company returned significant capital, repurchasing $2.4 billion of common stock and paying $762 million in dividends, while issuing $1 billion of preferred stock.
Fee revenue represents roughly 79% of total revenue, which supports earnings quality and reduces sensitivity to interest rates, though net interest margin remained thin at 0.98%. Key risks flagged in the filing include a pending Basel-based Total Loss-Absorbing Capacity proposal that could force a material refinancing of senior debt, a one-notch downgrade by S&P following its removal of government support assumptions for U.S. G-SIBs, ongoing legal and regulatory exposures (including the Tax Court foreign tax credit matter with a $593 milliond 2013 impact and the Stanford and Postalis matters), and the operational risk capital charge that is pushing up risk-weighted assets under the Advanced Approach.
02—Key points
Key Highlights
- Net income applicable to common shareholders rose 22% to $3.05 billion ($2.71 diluted EPS) versus $2.49 billion ($2.15) in 2014; non-GAAP EPS of $2.85 excludes the $170 million Sentinel impairment and litigation/restructuring costs.
- Total revenue declined about 3% to $15.2 billion, reflecting the absence of 2014's gains on the Wing Hang stake and One Wall Street building sale, while fee revenue held near $12.0 billion (about 79% of revenue ex-securities gains).
- Noninterest expense fell 11% to $10.8 billion on lower litigation charges (2014 included about $953 million), lifting the pre-tax operating margin to 28% from 23%.
- Assets under custody and/or administration reached a record $28.9 trillion (up 1%), while assets under management fell 4% to $1.63 trillion on $35 billion of net outflows and currency headwinds.
- Capital returns were substantial: $2.4 billion of share repurchases (55.6 million shares), $762 million in common dividends, and a $1 billion preferred stock issuance; CET1 ratio was 10.8% (transitional) and an estimated 9.5% fully phased-in under the Advanced Approach.
- Net interest margin remained thin at 0.98% (FTE), up from 0.97%, as the bank shifted cash into securities and loans; net interest revenue rose 5% to $3.0 billion.
- Regulatory headwinds include the proposed TLAC rule (effective 2019) that could require material long-term debt issuance, and S&P's Dec. 2015 removal of government support assumptions, which cut the parent's senior debt rating by one notch.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $15.13B$15.61B | −3.1% |
| Interest Expense | $300.00M$354.00M | −15.3% |
| Net Income | $3.16B$2.57B | +23.0% |
| EPS (Basic) | $2.73$2.17 | +25.8% |
| EPS (Diluted) | $2.71$2.15 | +26.0% |
| Shares Outstanding (Basic) | 1.10B1.13B | −2.2% |
| Shares Outstanding (Diluted) | 1.11B1.14B | −2.2% |
05—Questions
Frequently Asked Questions
Why did BNY Mellon's reported net income rise in 2015 when total revenue fell?
The 2014 results included large one-time gains from selling the Wing Hang equity stake ($490 million pre-tax) and the One Wall Street building ($346 million pre-tax), plus a tax carryback benefit. The 2015 comparison benefited mainly from a sharp drop in litigation and restructuring expense, which fell from roughly $1.1 billion to $85 million, so reported profit rose even though revenue declined.
How significant is the operational risk capital charge for BNY Mellon?
It is material. Operational risk risk-weighted assets rose to $61.3 billion from $45.1 billion, driven by industry-wide external losses that feed into the bank's model. This increase, along with the removal of the simple VaR methodology, pushed the fully phased-in Advanced Approach CET1 ratio down to 9.5% from 9.8%, which is a key metric for investors to monitor.
What is the impact of the proposed TLAC rule on BNY Mellon's funding?
The Federal Reserve's proposed TLAC rule would disqualify senior debt that permits acceleration for reasons other than insolvency or payment default, which covers most of BNY Mellon's outstanding senior long-term debt. The company may need to refinance or issue a substantial amount of eligible long-term debt before the 2019 effective date, which could raise funding costs and reduce net interest revenue. The filing notes the rule could have a materially negative impact unless modified.
What drove the decline in assets under management and what does it mean for fee revenue?
AUM fell 4% to $1.63 trillion, reflecting roughly $17 billion of net long-term outflows (mainly active equity and index), $18 billion of net short-term cash outflows, and a stronger U.S. dollar, partly offset by the Cutwater acquisition. Because investment management fees are based on AUM levels and asset mix, continued outflows or weak markets would reduce fee income, which accounts for a large share of revenue.
Is BNY Mellon's credit rating at risk, and what would a downgrade mean?
In December 2015, S&P removed government support assumptions for the eight U.S. G-SIBs, resulting in a one-notch downgrade of the parent's long-term senior and subordinated debt and the bank's subordinated debt; the outlooks remain stable. A further downgrade could raise borrowing costs and trigger collateral calls or contract terminations. The filing quantifies potential close-out exposure of $1.1 billion if the bank's rating fell to Baa2/BBB and $2.1 billion at Ba1/BB+.
06—Continue