01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon Corporation (BK) reported a solid 2016 in its 10-K filed February 28, 2017.
Net income applicable to common shareholders rose to $3.4 billiona, or $3.15 per diluted share, up 16% from $2.71 in 2015. Excluding M&I, litigation and restructuring charges and the Sentinel recovery, adjusted diluted EPS was $3.17 (Non-GAAP), up 11%. Total revenue was essentially flat at $15.2 billion, as lower fee revenue from a stronger U.S. dollar, client outflows and lower foreign exchange revenue offset higher net interest revenue.
Noninterest expense fell 3% to $10.5 billionb, which drove the improvement in pre-tax operating margin to 31% from 28%. The company's scale is substantial: assets under custody and/or administration reached $29.9 trillion and assets under management reached $1.6 trillion at year-end 2016. Fee revenue accounted for about 79% of total revenue, which underpins the business model.
Management returned $3.2 billionc to shareholders in 2016 ($778 million in dividends and $2.4 billion in buybacks) and raised the quarterly common dividend 12% to $0.19. Total assets fell sharply to $333 billion from $394 billion, mainly because customer deposits declined and interest-bearing deposits held at central banks were reduced, which lifted the leverage-based capital ratios. Capital and regulatory positioning remain strong.
The CET1 ratio under the Advanced Approach was 10.6%d, and the estimated fully phased-in CET1 ratio was 9.7%. The supplementary leverage ratio improved to 5.6% (fully phased-in).
The filing also discloses that regulators found the 2015 resolution plan not credible in April 2016, and that the company's October 2016 resubmission was accepted in December 2016. Key risks for investors include the continued low-margin shift in client assets, foreign exchange revenue pressure, sensitivity to interest rates and the regulatory agenda, including the Volcker Rule, the TLAC rule and the Department of Labor fiduciary rule.
02—Key points
Key Highlights
- Net income applicable to common shareholders of $3.4 billion, or $3.15 per diluted share, up 16% year over year; adjusted (Non-GAAP) diluted EPS of $3.17, up 11%.
- Total revenue of $15.2 billion was roughly flat, with fee and other revenue of $12.1 billion and net interest revenue up 4% to $3.1 billion.
- Noninterest expense declined 3% to $10.5 billion; pre-tax operating margin improved to 31% from 28%.
- Assets under custody and/or administration reached a record $29.9 trillion, and assets under management were $1.65 trillion, up 1%.
- Shareholder returns totaled $3.2 billion in 2016 ($2.4 billion of buybacks and $778 million of dividends); the quarterly dividend was raised 12% to $0.19 per share.
- CET1 ratio (Advanced Approach) was 10.6%; estimated fully phased-in CET1 was 9.7% and fully phased-in SLR was 5.6%, up from 4.9%.
- Total assets decreased to $333 billion from $394 billion, reflecting lower customer deposits, with deposits down 21% to $221 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Interest Expense | $437.00M$300.00M | +45.7% |
| Net Income | $3.55B$3.16B | +12.3% |
| EPS (Basic) | $3.16$2.73 | +15.8% |
| EPS (Diluted) | $3.15$2.71 | +16.2% |
| Shares Outstanding (Basic) | 1.07B1.10B | −3.5% |
| Shares Outstanding (Diluted) | 1.07B1.11B | −3.6% |
05—Questions
Frequently Asked Questions
What drove the growth in earnings per share in 2016?
Diluted EPS rose to $3.15 from $2.71, mainly because noninterest expense fell and there was a lower provision for credit losses. Share count also declined, as buybacks reduced average diluted shares to about 1.07 billion from 1.11 billion. Excluding one-time items, adjusted EPS grew 11% to $3.17.
Why did total assets and deposits decline so sharply?
Total assets fell to $333 billion from $394 billion, and deposits fell to $221 billion from $280 billion. The decline reflected lower interest-bearing deposits in non-U.S. offices, mainly from lower client deposits in the Investment Services business, and lower overnight deposits with the Federal Reserve and other central banks.
What are the main headwinds to fee revenue?
A stronger U.S. dollar, particularly against the British pound, reduced revenue translated from non-U.S. operations. Net outflows in investment management, clients shifting to lower-fee products and lower foreign exchange revenue (down 8% to $687 million) also weighed on results. Performance fees fell to $60 million from $97 million.
How is the company's capital position and regulatory standing?
BNY Mellon and its U.S. bank subsidiaries were well capitalized at year-end 2016. The CET1 ratio was 10.6% under the Advanced Approach, and the fully phased-in SLR reached 5.6%. Regulators found the 2015 resolution plan not credible in April 2016, but accepted the October 2016 resubmission in December 2016, and the company has moved to a single point of entry resolution strategy.
What risks should investors monitor going forward?
Key risks include continued pressure on fee margins and foreign exchange revenue, interest rate sensitivity (the company guided to an effective tax rate of about 25-26% in 2017), potential goodwill impairment in the Asset Management reporting unit, which had an 11% fair-value cushion, and regulatory changes such as the TLAC rule, the Volcker Rule conformance deadline of July 2017, and the Department of Labor fiduciary rule.
06—Continue