01—Abstract
Summary
Summary of the 10-K filed February 28, 2018. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon Corporation (BK) closed 2017 with record scale and improving profitability.
Assets under custody and/or administration (AUC/A) reached a record $33.3 trilliona and assets under management (AUM) reached a record $1.9 trillion, both up roughly 11-15% on higher market values, a weaker U.S. dollar and net new business. Net income applicable to common shareholders was $3.9 billion, or $3.72 per diluted share, up about 14% from $3.15 in 2016, and return on common equity rose to 10.8%. Results were flattered by an estimated $427 million net benefit (about $0.41 per share) from the Tax Cuts and Jobs Act, which lowered the effective tax rate to 10.8%.
Fourth-quarter severance, litigation and other charges of $246 millionb (about $0.24 per share) partly offset that benefit. Revenue quality remains a strength. Fee revenue was 78% of total revenue, and total revenue rose modestly to $15.5 billion.
Net interest revenue increased 5% to $3.3 billionc as net interest margin widened to 1.14% from 1.03%, reflecting higher rates. Noninterest expense rose 4% to $11.0 billion, driven by staff, software and professional services costs. Capital and liquidity are solid: the Advanced Approach CET1 ratio was 10.7% (about 10.3% fully phased-in), the estimated fully phased-in supplementary leverage ratio was 5.9%, and the liquidity coverage ratio averaged 118%.
The company returned $3.6 billiond to shareholders in 2017 through $901 million in dividends and $2.7 billion in buybacks, and the quarterly dividend rose 26% to $0.24. Investors should weigh several items.
The U.S. tax legislation reduced regulatory capital by $551 million, and the company faces ongoing litigation, including mortgage-securitization trust suits, Stanford-related claims, Brazilian Postalis and Silverado matters, depositary receipt suits and an SEC pre-release inquiry, with reasonably possible losses of up to $840 million above accruals. Management also flagged a 2018 headquarters relocation, a $2.6 billion buyback authorization running through mid-2018, a holding-company structure (the IHC support agreement) that adds structural considerations for debt holders, and continued sensitivity to interest rates and market levels.
02—Key points
Key Highlights
- Record AUC/A of $33.3 trillion (up 11%) and record AUM of $1.9 trillion (up 15%) at Dec. 31, 2017, driven by higher market values, a weaker U.S. dollar and net new business
- Diluted EPS of $3.72 vs. $3.15 in 2016 (about 18% growth), including a $0.41 per share net benefit from U.S. tax legislation and $0.24 per share of severance, litigation and other charges
- Net interest margin rose to 1.14% from 1.03%, lifting net interest revenue 5% to $3.3 billion on higher interest rates
- Fee revenue was 78% of total revenue; total revenue rose to $15.5 billion, while noninterest expense increased 4% to $11.0 billion
- Capital strong: Advanced Approach CET1 ratio 10.7% (10.3% fully phased-in), estimated fully phased-in SLR 5.9%, LCR averaged 118%
- Shareholder returns of $3.6 billion in 2017 ($901 million dividends, $2.7 billion buybacks); quarterly dividend raised 26% to $0.24
- Ongoing legal and regulatory exposure, including MBS trustee suits, Stanford/Pershing claims, Brazilian litigation and an SEC depositary receipt inquiry, with reasonably possible losses up to $840 million above accruals
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 28, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $15.54B— | — |
| Interest Expense | $1.07B$437.00M | +145.8% |
| Net Income | $4.09B$3.55B | +15.3% |
| EPS (Basic) | $3.74$3.16 | +18.4% |
| EPS (Diluted) | $3.72$3.15 | +18.1% |
| Shares Outstanding (Basic) | 1.03B1.07B | −3.0% |
| Shares Outstanding (Diluted) | 1.04B1.07B | −3.0% |
05—Questions
Frequently Asked Questions
How did BNY Mellon's 2017 earnings compare with 2016, and how much came from the tax law?
Net income applicable to common shareholders was $3.9 billion, or $3.72 per diluted share, versus $3.4 billion, or $3.15, in 2016. The results include an estimated $427 million ($0.41 per share) net benefit from the Tax Cuts and Jobs Act, which lowered the effective tax rate to 10.8% from 24.9%. Without that benefit, earnings growth would have been noticeably lower. The company also absorbed $246 million ($0.24 per share) of Q4 severance, litigation and other charges.
What drove growth in fee revenue and assets?
Investment services fees rose 3% to $7.5 billion, led by clearing services (up 11%) and asset servicing (up 3%), and investment management and performance fees rose 7% to $3.6 billion. Growth came from higher equity and money market values, net new business and the weaker dollar. Issuer services fees fell 5% on lost Depositary Receipts business.
How strong is BNY Mellon's capital position, and what is it returning to shareholders?
The Advanced Approach CET1 ratio was 10.7% at year-end (10.3% fully phased-in) and the fully phased-in SLR was 5.9%, both above regulatory minimums. The company returned $3.6 billion in 2017, including $2.7 billion in buybacks under a $2.6 billion authorization running through Q2 2018, and it expects to keep repurchasing shares in the first half of 2018. The tax law reduced CET1 by $551 million, a partial offset to the capital generated in 2017.
What are the main risks investors should monitor?
Key risks include ongoing litigation and regulatory matters (mortgage-securitization trustee suits, Stanford-related claims against Pershing, Brazilian Postalis and Silverado cases, depositary receipt class actions and an SEC pre-release inquiry), with reasonably possible losses up to $840 million above accruals. Market risk tied to equity and fixed-income valuations, interest-rate sensitivity of net interest revenue, and the Parent's reliance on its intermediate holding company under the single-point-of-entry resolution strategy are also important considerations.
What changes were announced for 2018?
The company completed the sale of CenterSquare Investment Management in January 2018, is combining Mellon Capital, Standish and The Boston Company Asset Management into a multi-asset manager, and is relocating its headquarters to 101 Barclay Street. The effective tax rate is expected to be about 21% in 2018, and the SLR became binding on January 1, 2018. Management expects higher technology-related expenses and additional severance and real estate actions in 2018.
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