Fitch: BNY Mellon's 2Q'14 Core Results Consistent with Expectations

Mon Jul 21, 2014 4:32pm EDT

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(The following statement was released by the rating agency) NEW YORK, July 21 (Fitch) In Fitch Ratings' view, the Bank of New York Mellon (BK) second quarter 2014 (2Q'14) was yet again affected by one-time charges related to investment funds and severance. For the quarter, BK reported net income of $554 million on slightly higher sequential revenues. Adjusting for the aforementioned charges, BK would have reported core net income of approximately $700 million (excluding the $12 million reserve release). Although revenues were essentially flat, BK demonstrated good expense control, as non-interest expenses declined both sequentially and vs 1Q'13. The company also announced that it finished its strategic review of its corporate trust business and intends to keep the business. Core operating results reflected modest improvements due to decent growth in fee revenue. For the quarter, noninterest expenses were up due to a one-time severance charge. BK remains focused on controlling expenses and rationalizing its staff. Going forward, the bottom line should benefit in 2H'14 given streamlining actions and continued reductions in operating costs. The company estimates a $100 million annual run-rate savings. BK reported fee income growth of 4% compared to 1Q'14, offsetting the continued decline in net interest revenue. Investment services fees were slightly higher by 1.2% compared to 1Q'14 largely reflecting seasonally higher securities lending revenue, higher cash management fees, and asset servicing fees due to increased market value. Investment management and performance fees were also up by 4.7% from 1Q'14 despite $72 million in money market fee waivers. Conversely, foreign exchange fees continue to decline due to low currency volatility. Assets under Custody and Administration (AUC/A) and Assets under Management (AUM) continue to grow at record levels, reaching $28.5 trillion (or up 9% compared to 2Q'13) and $1.64 trillion (or 15% compared to 2Q'13), respectively. Much of the increase is due to robust markets leading to higher market-values. The increase in AUM also helps to boost investment management revenues. Given the low rate environment, not surprisingly, net interest income (NII) declined to $719 million and the net interest margin (NIM) compressed further to 0.98%. Despite balance sheet repositioning, Fitch expects that BK's NII and NIM will remain pressured until short-term rates begin to rise. Of note, the net unrealized pre-tax gain on the investment securities portfolio increased by 77% to $1.2 billion during the quarter compared with $676 million in the sequential period due to the reduction in market interest rates. BK's capital position is considered strong, particularly on a risk-adjusted basis and under Basel III. For 2Q'14, Common Equity Tier 1 ratio (CET1) on a fully phased-in basis under the standardized approach is 10.4%, and 10.0% under the advanced approaches. Both measures declined during the quarter mainly attributed to the consolidation of certain investment management funds during the quarter. However, Fitch believes the U.S. enhanced supplemental leverage ratio will be more of a constraint for BK over the near term. The company reported a 4.7% ratio at the holding company for the quarter. Contact: Christopher D. Wolfe Managing Director +1 212 908-0771 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Doriana Gamboa Director +1 212 908-0865 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com' ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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