01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon Corporation (BK) reported 2019 net income applicable to common shareholders of $4.3 billiona, or $4.51 per diluted share, versus $4.1 billion ($4.04) in 2018.
Results were flattered by roughly $467 millionb (about $0.49 per share) of net one-time benefits, chiefly a $622 million after-tax gain on the sale of its interest in Promontory Interfinancial Network and a reduction of tax-related reserves for certain investment management funds, partially offset by severance, a lease-related impairment, securities losses and litigation expense. Total revenue was essentially flat at $16.5 billion, as fee and other revenue rose 3% to $13.2 billion while net interest revenue fell 12% to $3.2 billion amid higher deposit costs and a net interest margin that compressed to 1.10% from 1.25%. Noninterest expense declined 3% to $10.9 billion.
Scale metrics were strong: assets under custody and/or administration reached $37.1 trillionc (up 12%) and assets under management $1.9 trillion (up 11%), driven largely by market appreciation and client inflows, though Investment Management fees fell 7% on AUM outflows and lower performance fees. Capital strengthened, with the CET1 ratio under the Advanced Approaches rising to 11.5% from 10.7%, and the company repurchased 69.3 million shares for $3.3 billion while paying $1.2 billion in common dividends. Return on common equity improved to 11.4%.
Management flagged several forward-looking items: higher technology spending and pension expense expected in 2020, the adoption of CECL (ASU 2016-13) in 2020 with an expected roughly $50 milliond after-tax increase to retained earnings, the UK's withdrawal from the EU on January 31, 2020, and the transition away from LIBOR. Leadership also changed, with Todd Gibbons named interim CEO in September 2019 and Joseph Echevarria becoming non-executive Chairman.
02—Key points
Key Highlights
- Net income applicable to common shareholders rose to $4.3 billion ($4.51 diluted EPS) from $4.1 billion ($4.04) in 2018, but included a net one-time benefit of about $467 million ($0.49 per share), mainly from the $622 million after-tax gain on the Promontory Interfinancial Network sale.
- Assets under custody and/or administration grew 12% to $37.1 trillion and assets under management grew 11% to $1.9 trillion, though Investment Management fees fell 7% due to net AUM outflows of $36 billion and lower performance fees.
- Net interest revenue fell 12% to $3.2 billion and net interest margin compressed to 1.10% from 1.25%, reflecting higher deposit and funding costs and a $70 million lease-related impairment.
- Fee revenue was 80% of total revenue, supporting a more stable earnings base than a typical bank; total noninterest expense declined 3% to $10.9 billion.
- CET1 ratio (Advanced Approaches) improved to 11.5% from 10.7%, and the company returned capital through $3.3 billion of share repurchases and $1.2 billion of common dividends, with a 26% dividend payout ratio.
- Return on common equity improved to 11.4% from 10.8%, and return on tangible common equity rose to 23.2% from 22.5%.
- Leadership transition: Todd Gibbons became interim CEO in September 2019, and the board named Joseph Echevarria Non-Executive Chairman; the company also expects higher technology and pension expenses in 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $16.46B$16.39B | +0.4% |
| Interest Expense | $4.36B$2.82B | +54.6% |
| Net Income | $4.44B$4.27B | +4.1% |
| EPS (Basic) | $4.53$4.06 | +11.6% |
| EPS (Diluted) | $4.51$4.04 | +11.6% |
| Shares Outstanding (Basic) | 939.62M1.00B | −6.3% |
| Shares Outstanding (Diluted) | 943.11M1.01B | −6.4% |
05—Questions
Frequently Asked Questions
How did BNY Mellon's 2019 earnings compare with 2018, and how much was driven by one-time items?
Net income applicable to common shareholders was $4.3 billion, or $4.51 per diluted share, up from $4.1 billion or $4.04 in 2018. Roughly $467 million ($0.49 per share) came from net one-time benefits, primarily the $622 million after-tax gain on the sale of the Promontory Interfinancial Network interest and a reserve reduction for tax-related exposure in certain investment management funds. These were partly offset by severance, a lease-related impairment, securities losses and litigation expense. Excluding these items, underlying earnings growth was considerably more modest.
Why did net interest revenue decline, and is this likely to continue?
Net interest revenue fell 12% to $3.2 billion because of higher deposit and funding costs, lower noninterest-bearing deposit balances, lower loan balances and the lease impairment, partly offset by higher asset yields. The company notes that future net interest revenue depends on the level and mix of client deposits, deposit rates and the shape of the yield curve, so pressure could persist if deposit costs stay elevated or rates decline.
What are the main growth drivers and risks for the custody and investment management franchise?
AUC/A growth of 12% reflected higher market values and client inflows, and AUM grew 11% largely due to market gains and a weaker dollar. However, Investment Management fees fell 7% because of cumulative AUM outflows, particularly in index and equity funds, and industry trends toward lower-fee products and reduced performance fees. Fee revenue is sensitive to market levels; management estimates a 5% change in global equity markets would move fee revenue by less than 1%.
How strong is BNY Mellon's capital position and how is it returning capital?
The CET1 ratio under the Advanced Approaches rose to 11.5% from 10.7%, and the Tier 1 leverage ratio was 6.6%. The company repurchased 69.3 million shares for $3.3 billion and paid $1.2 billion in common and preferred dividends. Its share repurchase authorization of $3.94 billion runs through the second quarter of 2020 under its Federal Reserve-reviewed capital plan, and future distributions remain subject to regulatory non-objection under CCAR.
What accounting and regulatory changes could affect results in 2020?
BNY Mellon adopts ASU 2016-13 (CECL) on January 1, 2020, which is expected to increase retained earnings by about $50 million after tax, mainly from a reduction in the allowance for commercial lending. The company also expects higher technology spending and pension expense in 2020, and it faces uncertainty from the UK's exit from the EU (transition period through December 31, 2020), the LIBOR transition and evolving Basel III, SA-CCR and Volcker Rule requirements.
06—Continue