DBRS Confirms Bank of New York Mellon Corp.’s Senior Debt at AA (low), Trend Now Stable

DBRS has today confirmed all ratings of The Bank of New York Mellon Corporation (BK or the Company) and its related operating subsidiaries, including its Issuer & Senior Debt rating of AA (low). At the same time, the trend on all long-term ratings has been changed to Stable from Positive, while the trend for all short-term ratings remains Stable. The rating action follows the Company’s announcement of its fourth quarter and full-year 2008 financial results.

The trend change from Positive to Stable on BK’s long-term ratings reflects the strong headwinds facing the Company given the current turmoil in financial markets, which will likely continue to constrain profitability. Moreover, the operating environment for financial institutions has dramatically worsened since the Positive trend was assigned in June 2007. Although BK has navigated the difficult operating environment relatively well, DBRS expects a challenging year for the Company in 2009, for which a Stable trend is better aligned. That being said, BK continues to further strengthen its already robust global franchise with larger market shares and a more diverse business mix while maximizing cost savings and maintaining a relatively low risk profile.

The Company reported net income of $28 million in the fourth quarter of 2008 compared with $303 million in Q3 2008 and $520 million in Q4 2007. BK continues to generate a strong revenue stream from continuing operations, but DBRS believes that the stream is likely to slow from depressed asset valuations and the potential for further securities writedowns. Fourth-quarter 2008 earnings were negatively affected by a host of one-time charges, including $1.24 billion (pre-tax) in securities impairments, a $181 million restructuring charge related to a 4% (approximately 1,800 positions) headcount reduction, $163 million (pre-tax) in capital support agreements and a $26 million non-cash charge relating to the consolidation of the Company’s last remaining conduit. Nonetheless, the Company generated $4.1 billion (excluding securities losses) in revenues for the quarter, which was an increase of 6% from the prior quarter (excluding SILO/LILO (sale in, lease out/lease in, lease out) charges) and grew more than 3% compared with Q4 2007.

Price and currency volatility, strong securities lending revenue, money market flows, new business wins and higher global corporate trust balances and spreads fees all contributed to BK’s strong operating performance in the quarter but were somewhat offset by the various charges, primarily due to unprecedented capital market disruption.

Despite net asset inflows of $6 billion in the quarter, assets under management and custody decreased 17% and 13%, respectively, compared with the prior year due to declining asset values and the stronger U.S. dollar. DBRS notes that pressure is likely to continue in the asset and wealth management businesses due to the impact of asset value declines on revenues. DBRS believes that BK has done a good job with controlling expenses, both with the Mellon Financial Corporation merger and integration and in its overall businesses. This has enabled the Company to generate strong operating leverage, even in periods of considerable stress. The continued growth in BK’s non-U.S. businesses is also favorable, for it provides broader diversification and strengthens the Company’s global competitive position – revenues from non-U.S. sources in the quarter were 31% of total revenues (excluding securities writedowns).

Securities losses of $1.241 billion were recorded for the quarter on the approximately $46.0 billion securities portfolio, based on an assumption that national home prices would decline an additional 20% over the next two years, which significantly affected earnings. Only $208 million of the total $1.241 billion is actual expected loss, with the remaining writedown reflecting market illiquidity for mortgage-backed securities. The unrealized loss on the portfolio moved significantly in the quarter, rising $2.92 billion to $7.58 billion in the quarter. As a result, the adjusted tangible common equity-to-assets ratio declined slightly to 3.8% from 3.9% at the end of the previous quarter and 5.2% at December 31, 2007. DBRS believes that maintaining the current range of tangible common equity is an important rating factor for the Company. In October 2008, BK issued $3 billion of Troubled Assets Relief Program (TARP) Capital Purchase Program senior preferred stock to the U.S. Treasury, which boosted Tier 1 capital to 13.1% and total capital to 16.8%.

DBRS believes that some of the investment portfolio risk is mitigated by the generally high quality of the securities and BK’s capacity to hold them until either prices recover or the securities mature. The portfolio is performing and approximately 81% of the securities are rated AAA and 6% AA.

The Bank of New York Mellon Corporation, with its headquarters in New York City, reported assets under custody and administration of $20.2 trillion and assets under management of $928 billion at December 31, 2008.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.