BOSTON BNY Mellon Corp (BK.N) said on Monday it will take an $850 million hit against first-quarter profit, a move that also will erode some of its capital after losing a high-stakes tax case to the U.S. Internal Revenue Service.
The world's largest custody bank announced the hit against capital and earnings just hours after the U.S. Tax Court rejected BNY Mellon's bid to keep $900 million in tax benefits. The after-tax charge against profit is about $850 million, the bank said.
The bank claimed a benefit that stemmed from a $1.5 billion loan from Barclays Plc (BARC.L), funding so cheap, in fact, that at one point Barclays actually paid BNY Mellon to take Barclays' money, according to court papers.
The IRS challenged the benefit and won after the court ruled that the transactions lacked "economic substance," meaning they were done solely for tax purposes.
Investors won't be completely blindsided by the profit hit because BNY Mellon previously disclosed in U.S. regulatory filings that it might have to book a reserve of up to $850 million in the event of an unfavorable ruling in the case.
BNY Mellon said it would appeal the U.S. Tax Court's decision.
After taking the charge, the bank said it expects it will continue to be well capitalized. But its Basel III Tier 1 common equity ratio will decline by about 55 basis points.
At the end of 2012, the bank's Basel III Tier 1 common equity ratio was 9.8 percent.