DBRS Ratings Unaffected by Q4 ’09 Earnings of Bank of New York Mellon Corp.; Senior Debt at AA (low), Trend Stable

DBRS has today commented that its ratings for The Bank of New York Mellon Corporation (BNY Mellon or the Company) including its AA (low) Issuer & Senior Debt rating and its R-1 (middle) Short-Term Instruments rating, are unchanged following the release of the Company’s Q4 2009 financial results. The trend on all ratings remains Stable.

BNY Mellon reported net income from continuing operations of $712 million for the fourth quarter compared to a net loss of $2.4 billion for Q3 2009, which included a $4.8 billion pre-tax charge related to the restructuring of the Company’s investment securities portfolio. (Comparisons to Q4 2008 results, net income of $50 million, are less meaningful as results were distorted by the financial market turmoil in Q4 2008.) One time items in the fourth quarter included $139 million of pre-tax restructuring costs relating to the Company’s ongoing efficiency initiatives, which was offset by $133 million of discrete tax benefits and $31 million of net securities gains. Excluding these items and merger-related expenses, BNY Mellon reported Q4 earnings of $667 million.

In DBRS’s view, operating results for the fourth quarter indicate that BNY Mellon’s franchise strengths remain intact and include indications of improvement. The Company increased its market shares across most businesses, saw solid long-term asset inflows in Asset Management and maintained strong credit fundamentals. 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. Core revenue trends were similar to the third quarter. Excluding securities gains/losses from both quarters and excluding leasing gains and a gain on sale of VISA shares from the third quarter, total revenues in the fourth quarter were up about 2% to $3.3 billion.

Fee revenues, excluding gains on asset sales, of $2.6 billion were up 2% from the prior quarter, driven by a 13% increase in Asset and Wealth Management fees to $736 million. Results benefited from the closing of the Insight acquisition in the quarter and generally higher markets. Assets Under Management (AUM) were $1.1 trillion at year end, up $149 billion from the end of the third quarter with Insight contributing $138 billion of assets in the quarter. Securities servicing fees were up slightly from Q3 2009 to $1.2 billion, despite a 33% decline in securities lending revenue, which continues to be impacted by historically narrow spreads and low volumes.

BNY Mellon’s Q4 2009 net interest revenue (on an FTE basis) increased 1% from the prior quarter to $729 million. The low rate environment and the Company’s conservative reinvestment strategy continue to impact net interest revenue. NIM contracted 8 bps to 1.77%, reflecting a higher level of interest earning assets. The restructuring of the securities portfolio is expected to add $200 million of net interest revenue in 2010.

Excluding the noted restructuring charge, core expenses trends were impacted by normal seasonality as well as the acquisition completed in the quarter. Core operating expenses increased 6% from Q3 2009 to $2.3 billion. As expected, the Company’s Q4 2009 loan loss provision of $65 million declined from the elevated Q3 2009 provision of $147 million, reflecting fewer downgrades in the loan portfolio.

The restructuring of the Company’s $56 billion (at fair value) investment securities portfolio, announced in Q3 2009, was completed in the quarter resulting in a $39 million loss which was offset by other securities gains. DBRS reiterated prior comments that it 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 in statements from management which indicate a lower risk appetite for this portfolio and notes positively that the Company continues to make progress in re-positioning this portfolio in a way that better reflects BNY Mellon’s current risk tolerance. In Q4 2009, the Company sold $2.6 billion of watch-list securities, realizing a modest gain of $59 million, and it will continue to look for opportunities to reduce its riskier holdings. Overall, unrealized losses on the securities portfolio improved to $1.2 billion at year end.

The Company’s TCE ratio was unchanged from Q3 2009 at 5.2%, due to higher levels of tangible assets and the Insight acquisition. DBRS believes that maintaining the current range of TCE remains an important rating component for the AA (low)-rated Company. BNY Mellon’s Tier 1 and Tier 1 Common Ratios both increased about 60 bps from the end of the third quarter, and at 12.0% and 10.5%, respectively, continue to compare favorably to peers.

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.