TEXT-S&P: Bank of New York Mellon ratings unaffected by results
Oct 17 - Standard & Poor's Ratings Services said today that its ratings on Bank of New York Mellon Corp. (BK; A+/Negative/A-1) are not affected by the company's satisfactory third-quarter earnings, which reflect modest fee and net interest revenue growth, coupled with stable expenses during the quarter. Results met our expectations in the context of the difficult market conditions of low reinvestment yields and low market activity. Positively, BK's new business trends in both investment services and asset management continued to be impressive, reinforcing our view of the company's very strong business profile. We anticipate that the company will continue to face net interest margin (NIM) compression from very low rates in coming quarters, but overall fee revenue from its diversified investment servicing and asset management businesses should remain stable and within our expectations for the ratings. The company reported net income available to shareholders of $720 million, versus $678 million in the second quarter (excluding second-quarter's large litigation charge). A decline in BK's tax rate in the quarter to 23% from about 28% exaggerated the rise, adding, according to our estimate, about $47 million to net income. Still, operating earnings were solid, in our view, as the company posted an approximate 29% pretax operating margin. The company achieved some slight operating leverage as total revenue rose 2% sequentially, while operating expenses were about flat sequentially, partly as a result of BK's expense controls, which we expect to continue. Investment-services fees rose only 1% from the second quarter, supported by net new business, higher market values, and a seasonal rise in depositary receipts revenue. However, corporate trust, clearing services, securities lending, and foreign exchange revenue declined during the quarter, partly because of lower market activity. Other fee income rose significantly because of seed capital and other investment gains. Excluding performance fees, investment management fees increased 3% sequentially and that business continued to report strong inflows of asset under management (AUM). Overall, assets under custody and administration of $27.9 trillion rose 3%, while AUM of $1.4 trillion rose 5%--reflecting both higher market valuations and net new business. Although the NIM declined 5 basis points (bps) to 1.20%, net interest revenue rose 2% from the second quarter, reflecting a large 11% increase in its securities portfolio, partly as a result of customer deposit inflows. We expect that the NIM will narrow further in coming quarters because of lower reinvestment rates on the company's securities, although the company may seek to shift its portfolio mix to slightly higher-yielding, albeit high-quality, assets. As we expected, BK's capital ratios rose during the quarter, reflecting some earning retention after $443 million of capital deployed (including $288 million of common share repurchases). This total pay-out represented 62% of net income. We anticipate the company will continue to buy back common shares at a similar pace in the next two quarters under its $1.16 billion program. However, the rating reflects our assumption that BK's total payout will not exceed 60%-65% of net income in 2012. BK estimated that its Basel III Tier I common equity ratio (under the Federal Reserve's new proposed rules) rose 60 bps in the quarter to 9.3% because of earnings retention and higher unrealized securities gains. BK's capital ratio estimates under these new rules continue to be significantly higher than its prior estimates because of the new rule's lower risk-weighting for speculative-grade mortgage-backed securities (MBS). The negative rating outlook on BK reflects our negative outlook on the U.S. sovereign rating. We incorporate one notch of uplift into our ratings on BK, given our expectation of potential extraordinary U.S. government support. Otherwise, we continue to view BK's fundamental trends as stable. We expect that BK's overall financial performance will remain satisfactory, although earnings should remain subdued because of low interest rates. The rating reflects our assumption that BK will increase and maintain its Standard & Poor's risk-adjusted capital ratio above 7.0% over the next few years, through earnings generation, the run-off of its speculative-grade MBS portfolio, and conservative capital management. Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions.(New York Ratings Team)
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