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

DBRS, Inc. (DBRS) confirmed the ratings of The Bank of New York Mellon Corporation (BNY Mellon or the Company), including the Company’s Long-Term Issuer Rating of AA (low) and Short-Term Issuer Rating of R-1 (middle). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, The Bank of New York Mellon (the Bank). The trend for all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

BNY Mellon’s ratings reflect the Company’s leading asset servicing and investment management franchise, which generates consistent and diversified earnings through a primarily fee-based business model. Additionally, the Company continues to generate significant positive operating leverage, albeit driven principally by disciplined expense management, with balance sheet fundamentals remaining strong. Similar to its trust bank peers, the ratings also consider the operational and reputational risks associated with the important role BNY Mellon plays in the global financial markets that are growing increasingly complex. The Stable trend reflects DBRS’s view that BNY Mellon is comfortably placed within its rating category.

Underpinning its very strong franchise, the Company provides a comprehensive set of products and services for all stages of the investment lifecycle to clients in 35 countries and over 100 markets globally, which produces significant revenue and geographic diversification. Overall, BNY Mellon is the largest custodian in the world, the sixth largest asset manager globally and the eighth largest wealth manager in the U.S. Indeed, DBRS views BNY Mellon’s business model as the deepest and most diverse of the trust banks.

The Company reported $1.8 billion of net income applicable to common shareholders, representing an ROE of 10.3%, during the first six months of 2017 (1H17), which was up 11% compared to the same period a year ago, delivering positive operating leverage. Specifically, total revenues increased 4% from 1H16, benefiting from favorable financial market conditions, including higher equity market values and the rise in short-term interest rates, as well as higher money market fees and net new business. In addition, operating expenses were essentially flat, reflecting further execution of its business improvement process. DBRS notes that savings from the business improvement process is enabling BNY Mellon to fund regulatory changes, invest in opportunities and return capital to shareholders, while still being able to generate positive operating leverage.

Assets under management increased 6% from 2Q16, reaching a record $1.8 trillion, driven by higher market values and net inflows of liability-driven investments and short-term cash strategies, partially offset by the unfavorable impact of the stronger U.S. dollar primarily versus the British pound. Meanwhile, assets under custody and/or administration grew 5% compared to a year ago to a record $31.1 trillion, with estimated new wins of $261 billion during the first half of 2017, including the noteworthy $33 billion PGIM Real Estate win that was announced in April (the real estate business of Prudential Global Investment Management).

DBRS views BNY Mellon’s risk profile as strong, considering that its balance sheet is generally less risky than most financial institutions, but recognizes the significant operational and reputational risks the Company faces given its important role in global financial markets. Meanwhile, credit risk remains minimal, as the Company primarily targets investment grade companies or high net worth individuals. Moreover, loan balances represent only 17% of total assets, with nearly a quarter of the portfolio comprised of fully collateralized margin loans. Further, BNY Mellon’s investment securities represent 34% of total assets, with 93% of the portfolio rated at least AA (low). DBRS notes that in December 2016, the Federal Reserve and FDIC determined that BNY Mellon adequately remedied the identified deficiencies regarding the Company’s 2015 resolution plan in its October 2016 resubmission.

The Company’s funding and liquidity remain robust. Indeed, BNY Mellon had $41 billion of liquid funds, or 12% of total assets, as well as $79 billion of cash, or 22% of total assets. Of the $41 billion in liquid funds, $14 billion was held as interest-bearing deposits with large, highly rated global financial institutions. In aggregate, BNY Mellon reported $174 billion of high-quality liquid assets and is compliant with the fully phased-in liquidity coverage ratio requirement.

DBRS views the Company’s capitalization as solid even with a relatively low tangible common equity ratio. Similar to previous years, the Company remained a top performer in the Federal Reserve’s DFAST / CCAR exercise, including the strongest results among the U.S. G-SIBs, benefiting from its lower risk balance sheet. BNY Mellon’s 2017 capital plan included share repurchases of up to $2.6 billion and up to an additional $500 million contingent on the issuance of $500 million of preferred stock, as well as a 26% increase in the quarterly dividend. For 2Q17, the Company’s capital metrics remained robust, including its SLR ratio, its likely binding constraint, which improved to 6.0% on a fully phased-in basis, firmly above fully phased-in regulatory requirements.

The Bank of New York Mellon Corporation, a financial holding company headquartered in New York City, reported $355 billion in assets at June 30, 2017.

The Grid Summary Grades for BNY Mellon are as follows: Franchise Strength – Very Strong; Earnings Power – Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong; Capitalisation – Very Strong/Strong.

RATING DRIVERS
Given the already relatively high rating level, there is limited upside in the rating. Conversely, sustained negative operating leverage or additional operational issues that negatively impact new business could have negative rating implications.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Global Credit Policy
Initial Rating Date: 2 July 2007
Most Recent Rating Update: 2 August 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.