October 19, 2017 / 7:19 PM / a year ago

Fitch: Flat Expenses Support BNY Mellon's 3Q17 Results

(The following statement was released by the rating agency) NEW YORK, October 19 (Fitch) The Bank of New York Mellon Corporation (BK) reported net income of $983 million on revenue of $4.0 billion in the third quarter of 2017 (3Q17), according to Fitch Ratings. Earnings grew 1% while revenue grew 2% and expenses remained flat compared to the year ago quarter. BK's results this quarter generated a return on common equity (ROE) of 10.6% compared to 10.4% last quarter and 10.8% in the year ago quarter. Results compared to both periods benefitted from flat expenses, which continues to be a key area of management focus. Relative to the year ago quarter, BK's earnings improved due to higher core asset servicing fees, higher clearing volumes, higher asset management fees, and stronger net interest income. These favorable trends were somewhat offset by weaker results in depositary receipts and foreign exchange revenue. Relative to the linked quarter, results benefitted from incremental growth across most businesses, particularly in depositary receipts which benefitted from seasonal trends, offset primarily by lower leasing gains. Total fee revenue increased 2% sequentially and 1% from a year ago. The increase in both periods was driven by higher growth in the core asset servicing and asset management businesses, which have benefitted from higher equity market levels. BK's treasury services business has grown modestly in both periods due to higher volumes. Issuer services fees continue to be somewhat volatile due to seasonality in depositary receipts, which drove higher revenue sequentially, though results were down from a year ago due to lower corporate actions. Clearing services showed solid growth from a year ago due to higher money market fees though lower volumes impacted sequential results. Net interest revenue (NIR) grew 2% sequentially and 8% compared to a year ago. BK's NIR continues to benefit from interest rate increases by the Federal Reserve due to its asset sensitive balance sheet. The net interest margin (NIM) expanded by 1 basis point (bp) sequentially and 10 bps year over year. This expansion came despite several headwinds from balance sheet actions, including a reduction in average loan balances and higher long-term debt levels. Management reiterated that it expects NIR for full-year 2017 to increase at the higher end of the 4%-6% guidance range. Fitch continues to believe BK's NIR is sensitive to further increases in short-term interest rates due to the low duration of its assets. BK's fee income also benefits from higher interest rates, as demonstrated this quarter in several business lines by increased money market fees and inflows into cash management products. Management continues to show good execution on its cost control strategies, which resulted in flat expenses both sequentially and year over year. Management also reiterated its guidance that total expenses for 2017 should be roughly 1% higher than the prior year. This modest level of expense growth comes despite ongoing significant technology and other investments BK is making in its businesses. Over time, Fitch believes these investments will allow BK to realize further earnings improvement through the economies of scale embedded in its business model. New CEO Charlie Scharf also commented that he sees further opportunities for investment in automation and robotics to replace manual processes, along with more technology platform consolidations, which should benefit expenses over the longer term. BK's assets under management (AUM) were $1.82 trillion at the end of 3Q17, an increase of 3% sequentially and 6% from a year ago. The company continues to benefit from inflows into its cash products due to solid performance and from higher equity markets. Asset under custody and administration (AUCA) were up 4% sequentially and 6% from a year ago to $32.2 trillion. AUCA growth was also supported by higher equity markets, along with some net new business. BK's risk-adjusted capital position remains solid in the context of its low risk balance sheet. BK's estimated fully phased-in Basel III Common Equity Tier 1 Ratio (CET1) under the advanced approach was 10.7% at the end of 3Q17, a 30 bps sequential increase driven by retained earnings and higher unrealized gains in the securities portfolio. The estimated fully phased-in enhanced supplementary leverage ratio (eSLR), BK's binding capital constraint, also increased by 10 bps to 6.1% at the consolidated level. BK's eSLR at the consolidated and main bank levels remain in excess of the final requirements which come into effect on Jan. 1, 2018. BK's average liquidity coverage ratio of 119% during 3Q17 continues to comfortably exceed the 100% requirement. While there has been some discussion of regulatory relief under the eSLR for holdings of central bank deposits and U.S. Treasuries, Fitch does not believe BK's approach to capital management would materially change should the eSLR calculation change. Management noted that all of BK's capital ratios are at or above its internal targets and given the prospect for eSLR relief, it no longer expects to issue the $500 million of preferred stock contemplated in its 2017 capital plan. This would have been offset by a corresponding repurchase of common shares. Management also noted that due to capital reaching targeted levels, stock repurchases could increase in future years, though this remains subject to the Federal Reserve approving of the company's annual capital plan. Fitch would view a decline in capital levels to materially below peer levels negatively, though this is not expected at this time. 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