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

DBRS has today confirmed its ratings for Bank of New York Mellon Corporation, The (BNY Mellon or the Company) including its AA (low) Issuer & Senior Debt rating and its R-1 (middle) Short-Term Instrument rating. The trend on all ratings remains Stable. Today’s action follows the Company’s release of its Q3 2009 financial results, which included a $4.8 billion pre-tax charge related to a restructuring of the Company’s investment securities portfolio. Overall, BNY Mellon reported a net loss of $2.4 billion for the third quarter.

Given improved market conditions for some of BNY Mellon’s Watch List securities, primarily non-Agency RMBS, the Company opted to de-risk its portfolio subsequent to the end of the third quarter. BNY Mellon sold investment securities with an amortized cost of $3.6 billion, realizing a $1.5 billion pre-tax loss, and is seeking to restructure an additional $8.5 billion of non-Agency RMBS. This decision resulted in the re-classification of these securities and a change in their accounting treatment to LOCOM, leading to a pre-tax loss being recognized in Q3 2009 earnings.

In confirming BNY Mellon’s ratings, DBRS notes that the Company’s core businesses are unaffected by the restructuring of the securities portfolio, and that the restructuring is expected to reduce volatility in reported results via a meaningful reduction in quarterly OTTI charges. Operating results for the third quarter indicate that BNY Mellon’s franchise strengths remain intact. The Company increased its market shares across most businesses and maintained strong credit fundamentals; however, core earnings remain weakened by the recent financial turmoil. BNY Mellon’s strong ratings continue to reflect the Company’s diverse and defensible business mix, relatively low risk profile and its robust global franchise.

That said, DBRS notes that the pre-restructuring composition of BNY Mellon’s security portfolio reflects it seeking additional incremental yield. Given the appropriate business role of its investment portfolio, DBRS has little rating tolerance going forward for any significant OTTI charges or marks on the Company’s re-structured securities portfolio or the rest of its investment securities portfolio. DBRS takes some comfort from the fact that management has publicly stated that BNY Mellon will no longer buy credit-related securities for its investment portfolio and has not bought any credit-related securities since the merger with Mellon Financial Corporation in July 2007. Also important from DBRS’s perspective is that BNY Mellon has sufficient capital to absorb the current losses. The Company’s TCE ratio actually improved 40 basis points (bps) to 5.2% as a result of the transaction and unrealized losses on the securities portfolio have been reduced significantly to $1.4 billion, pro forma for the restructuring. DBRS believes that maintaining the current range of TCE is another important rating component for the Company. BNY Mellon’s Tier 1 and Tier 1 Common Ratios both declined by more than 100 bps, but at 11.3% and 9.8%, respectively, continue to compare favorably to peers.

Excluding the charge related to repositioning the securities portfolio as well as merger related expenses, the Company reported operating net income of $642 million in the third quarter compared to $602 million in Q2 2009. Third quarter operating results reflected 500 bps of positive operating leverage as revenues increased 4% from Q2 2009 and operating expenses declined 1%. Revenue growth allowed BNY Mellon to absorb a Q3 2009 loan loss provision of $147 million, an $86 million increase from the prior quarter. The elevated provision resulted from downgrades in the insurance and media portfolios which drove a 48% increase in non-performing assets from the prior quarter. The provision is expected to decline in the fourth quarter.

Fee revenues were $2.6 billion in the third quarter compared to $2.5 billion in Q2 2009 and $3.1 billion in the year-ago quarter. Leasing gains and a gain on sale of VISA shares in the quarter were the primary driver of the increase from Q2 2009. Asset servicing fees increased for a third consecutive quarter to $600 million, but overall securities servicing fees declined 4% from Q2 2009 to $1.2 billion due to lower fixed income issuance and tighter spreads in securities lending. Assets under Custody and Administration were $22.1 trillion at September 30, 2009, up 7% from June 30, 2009. Asset and Wealth Management fees improved 2% from the second quarter to $650 million and reflected improved market conditions. Assets Under Management grew 4% to $966 billion as market appreciation offset net asset outflows of $16 billion, primarily related to money market products. Long-term flows, though still slightly negative, improved from the second quarter as strong global equity and fixed income flows offset outflows in alternative products.

BNY Mellon’s Q3 2009 net interest revenue (on an FTE basis) increased 2% from the prior quarter to $716 million. The low rate environment and the Company’s reinvestment strategy continue to impact net interest revenue. Still, NIM expanded 5 bps to 1.85%, reflecting hedging gains and the reduction of cash held at central banks. The restructuring of the securities portfolio is expected to add $125 - $175 million of net interest revenue in 2010.

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.