DBRS Confirms The Bank of New York Mellon Corp. at AA (low); Trend Revised to Positive from 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). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, The Bank of New York Mellon (the Bank). With the exception of the Company’s and the Bank’s short-term ratings, the trend on all other ratings has been revised to Positive from 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.

KEY RATING CONSIDERATIONS
BNY Mellon’s ratings and Positive trend reflect its powerful franchise, which DBRS views as the deepest and most diverse of the trust banks. BNY Mellon is the largest custodian in the world, the seventh largest asset manager globally and the tenth largest wealth manager in the U.S. DBRS views these businesses as defensible and sustainable, considering their significant barriers to entry and that many of the related activities are critical to the functioning of financial markets, regardless of the business cycle stage. In addition, these businesses produce a substantial amount of recurring, fee-based revenues, as well as a low risk and highly liquid balance sheet.

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, as well as fee pressures within its asset management business and the Company’s current restructuring plans and activities.

RATING DRIVERS
Given BNY Mellon’s long history of stable, predictable and favorable results, the ratings would likely be upgraded if the Company continues to generate similar financial results and balance sheet trends. While DBRS sees downward rating action as unlikely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impact franchise strength, or the inability to consistently win new business could have negative rating implications.

RATING RATIONALE
BNY Mellon reported 9M18 net income of $3.3 billion, up 17% from the prior year period, representing a solid 11.6% return on equity (up from 10.4% in 9M17). While the Company’s returns have trailed its trust bank peers, DBRS views BNY Mellon’s financial performance positively, given the significant changes implemented over the past year. Specifically, the Company invested the vast majority of its tax-reform-related benefits into its business, particularly technology, and continues to heavily invest in technology and infrastructure. Management has noted that three-quarters of the Company is a technology-based processing business and that technology will continue to be a more important differentiator for success in the future. Meanwhile, the Company has added a number of new senior leaders across the firm in recent months and has restructured its investment management business. Specifically, the active equity strategies of The Boston Company, the active fixed income strategies of Standish Mellon, and the index, multi-asset and multi-factor strategies of Mellon Capital were combined into one firm, with approximately $560 billion assets under management (AUM), under the brand name “Mellon” (effective on 1/2/19).

Assets under custody and/or administration (AUC/A) at the end of 3Q18 were up 7% from the prior year (to $34.5 trillion), reflecting net new business, higher equity markets, partially offset by the impact of the stronger U.S. dollar. Despite favorable financial markets and continued inflows of liability-driven investments, AUM were essentially flat, owing to the divestiture of CenterSquare, an actively managed real estate and infrastructure global investment manager with approximately $10 billion AUM, as well as the impact of the stronger dollar.

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. In December 2017, BNY Mellon received positive feedback from the FDIC and Federal Reserve regarding its 2017 resolution plan, with the agencies noting that the Company satisfactorily addressed the shortcomings previously identified. Moreover, credit risk remains minimal, as the Company primarily targets investment grade companies or high net worth individuals. At the end of 3Q18, loan balances represented just 15% of total assets, with about a quarter of the portfolio comprising fully collateralized margin loans.

DBRS considers the Company’s funding profile to be very strong, as deposits generated by the asset servicing and corporate trust operations provide a significant and stable source of funds. In 9M18, the Company’s deposits (75% of total liabilities) expectedly declined, reflecting the impact of increasing price competition and the Fed’s unwind. BNY Mellon’s securities portfolio totaled $119 billion, or 34% of total assets, with 94% of the portfolio rated at least AA (low), provides additional liquidity. DBRS notes that BNY Mellon’s balance sheet is highly liquid and has typically attracted significant client funds during times of stress, indicative of a “flight to quality”.

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 2018 capital plan included share repurchases of up to $2.4 billion and a 17% increase in the quarterly dividend. For 3Q18, the Company’s capital metrics remained robust, including its SLR ratio, its likely binding constraint, which improved to 6.4% 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 $350 billion in assets at September 30, 2018.

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.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), 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: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 2 July 2007
Last Rating Date: 5 October 2017

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

For more information on this credit or on this industry, visit www.dbrs.com.