DBRS Comments on Bank of New York Mellon Corp’s Q1 Earnings; Senior Debt at AA (low) Unchanged

DBRS has commented today on the Q1 2009 financial results of The Bank of New York Mellon Corporation (BK or the Company). The Company reported net income of $322 million in the first quarter of 2009 compared to $28 million in Q4 2008 and $746 million in Q1 2008. First quarter results reflected the impact the challenging market environment is having on the Company’s revenues from continuing operations. Excluding investment writedowns, Q1 2009 revenues of $3.3 billion, were down 14% from the prior year’s quarter and 21% from Q4 2008. The lower earnings notwithstanding, BK’s franchise strengths remain intact and credit fundamentals remain within tolerance in a difficult operating environment and therefore all of its ratings including its AA (low) for Issuer & Senior Debt and Stable trend - remain unchanged.

Although BK has navigated the difficult operating environment relatively well, DBRS expects the rest of 2009 to remain challenging for the Company. Market share gains and strong expense control in the first quarter were not enough to fully offset weaker revenue trends, and there remains material credit risk in the Company’s investment portfolio. Sustained revenue declines, significant security losses and/or a lack of positive operating leverage could pressure the Company’s ratings. For highly rated institutions like BK, DBRS expects both revenues and earnings to be relatively predictable and recurring. That being said, BK’s strong ratings continue to reflect the Company’s diverse business mix, relatively low risk profile and its robust global franchise.

Fee revenues totaled $2.4 billion in Q1 2009, down 20% relative to both Q4 2008 and Q1 2008. Tighter spreads in interbank markets, lower equity and credit markets, a decline in market volumes, reduced volatility in foreign currency markets and reduced spreads in securities lending all contributed to fee revenue declines. BK’s Q1 2009 net interest revenue (on an FTE basis) was down 26% to $796 million compared to Q4 2008 due to narrower spreads and an 8% decline in earning assets. Relative to Q1 2008, net interest revenues were up 3% thanks to higher levels of earning assets and a 66% increase in non-interest bearing deposits.

Mitigating some of the pressure BK saw on its top line in the quarter was strong expense control. Though the company failed to deliver positive operating leverage, Q1 2009 operating expenses did decline 10% relative to Q1 2008. Relative to Q4 2008, operating expenses were down 9% (unannualized). To date, the Company has realized $710 million of cost synergies related to the Mellon transaction, which represents 84% of targeted cumulative cost saves.

Revenue declines masked some positive trends in the quarter as the Company reported market share gains across its businesses as it shrewdly builds competitive advantage during a period of market turbulence. In Asset Servicing, where Assets Under Custody were $19.5 trillion, the Company has had new business wins totaling $1.9 trillion in the last twelve months and continues to gain share in hedge fund administration. In Asset Management, BK saw the first positive inflows into equity products since completing the Mellon merger. Flows in prime money market funds were solid as well (+$13 billion in Q1 2009) as clients moved out of Treasury and Government funds ($27 billion of outflows in Q1 2009). At the end of the first quarter Assets Under Management were $818 billion, a 5% decline from year end.

Though first quarter results were pressured by reduced volatility and a return to more normal conditions in interbank markets, DBRS sees these developments as having some benefits for the Company over the medium-term. Improved market values and less risk aversion should bolster asset servicing and asset management results. Better market conditions are also likely to help issuer services revenues. In addition, BK indicated that improved market conditions will allow the Company to invest term money in high quality earning assets rather than just placing these funds in its account at the Fed. This should help stabilize net interest revenues going forward, though DBRS expects these revenues to remain pressured given the historically low rate environment as well as the Company’s conservative posture and strong liquidity position.

Capital levels, including a Tier 1 ratio of 13.8% (and 11.2% excluding TARP capital) improved from the prior quarter. In addition, the announced reduction in its common dividend is expected to preserve $700 million in capital annually. Early adoption of recent FASB revisions to statements 157 and 115, benefited BK’s capital ratios. The adoption of the new guidance related to FASB 115 added 33 bps to BK’s Tier 1 ratio, as retained earnings increased $681 million. DBRS notes that the corresponding increase in accumulated other comprehensive loss does not affect regulatory capital ratio calculations. Meanwhile, the adoption of the new FASB 157 guidance added 28 bps to the TCE ratio in Q1 2009. The Company’s adjusted tangible common equity (TCE) to assets ratio improved to 4.2% from 3.8% at the end of the previous quarter, but was down from 4.4% at March 31, 2008. DBRS believes that maintaining the current range of TCE is an important rating factor for the Company.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.