UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2018
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 001-35651
THE BANK OF NEW YORK MELLON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2614959 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
225 Liberty Street
New York, New York 10286
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code -- (212) 495-1784
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Smaller reporting company o |
Accelerated filer o | Emerging growth company o |
Non-accelerated filer o (Do not check if a smaller reporting company) | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of | |||
March 31, 2018 | ||||
Common Stock, $0.01 par value | 1,010,676,179 | |||
THE BANK OF NEW YORK MELLON CORPORATION
First Quarter 2018 Form 10-Q
Table of Contents
Page | |
Part I - Financial Information | |
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk: | |
Highlights of first quarter 2018 results | |
Item 1. Financial Statements: | |
Page | |
Notes to Consolidated Financial Statements: | |
Note 3—Acquisitions and dispositions | |
Part II - Other Information | |
Index to Exhibits | |
Signature | |
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Financial Highlights (unaudited)
Quarter ended | |||||||||
(dollars in millions, except per share amounts and unless otherwise noted) | March 31, 2018 | Dec. 31, 2017 | March 31, 2017 | ||||||
Results applicable to common shareholders of The Bank of New York Mellon Corporation: | |||||||||
Net income | $ | 1,135 | $ | 1,126 | $ | 880 | |||
Basic earnings per share | 1.11 | 1.09 | 0.83 | ||||||
Diluted earnings per share | 1.10 | 1.08 | 0.83 | ||||||
Fee and other revenue | $ | 3,270 | $ | 2,860 | $ | 3,018 | |||
(Loss) income from consolidated investment management funds | (11 | ) | 17 | 33 | |||||
Net interest revenue | 919 | 851 | 792 | ||||||
Total revenue | $ | 4,178 | $ | 3,728 | $ | 3,843 | |||
Return on common equity (annualized) | 12.2 | % | 12.1 | % | 10.2 | % | |||
Return on tangible common equity (annualized) – Non-GAAP (a) | 25.9 | % | 25.9 | % | 22.2 | % | |||
Return on average assets (annualized) | 1.29 | % | 1.27 | % | 1.06 | % | |||
Fee revenue as a percentage of total revenue | 79 | % | 77 | % | 78 | % | |||
Percentage of non-U.S. total revenue | 37 | % | 39 | % | 34 | % | |||
Pre-tax operating margin | 35 | % | 20 | % | 31 | % | |||
Net interest margin | 1.22 | % | 1.14 | % | 1.13 | % | |||
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b) | 1.23 | % | 1.16 | % | 1.14 | % | |||
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c) | $ | 33.5 | $ | 33.3 | $ | 30.6 | |||
Assets under management (“AUM”) at period end (in billions) (d) | $ | 1,868 | $ | 1,893 | $ | 1,727 | |||
Market value of securities on loan at period end (in billions) (e) | $ | 436 | $ | 408 | $ | 314 | |||
Average common shares and equivalents outstanding (in thousands): | |||||||||
Basic | 1,016,797 | 1,024,828 | 1,041,158 | ||||||
Diluted | 1,021,731 | 1,030,404 | 1,047,746 | ||||||
Selected average balances: | |||||||||
Interest-earning assets | $ | 302,069 | $ | 297,166 | $ | 283,421 | |||
Assets of operations | $ | 357,483 | $ | 350,129 | $ | 335,080 | |||
Total assets | $ | 358,175 | $ | 350,786 | $ | 336,200 | |||
Interest-bearing deposits | $ | 155,704 | $ | 147,763 | $ | 139,820 | |||
Long-term debt | $ | 28,407 | $ | 28,245 | $ | 25,882 | |||
Noninterest-bearing deposits | $ | 71,005 | $ | 69,111 | $ | 73,555 | |||
Preferred stock | $ | 3,542 | $ | 3,542 | $ | 3,542 | |||
Total The Bank of New York Mellon Corporation common shareholders’ equity | $ | 37,593 | $ | 36,952 | $ | 34,965 | |||
Other information at period end: | |||||||||
Cash dividends per common share | $ | 0.24 | $ | 0.24 | $ | 0.19 | |||
Common dividend payout ratio | 22 | % | 22 | % | 23 | % | |||
Common dividend yield (annualized) | 1.9 | % | 1.8 | % | 1.6 | % | |||
Closing stock price per common share | $ | 51.53 | $ | 53.86 | $ | 47.23 | |||
Market capitalization | $ | 52,080 | $ | 54,584 | $ | 49,113 | |||
Book value per common share | $ | 37.78 | $ | 37.21 | $ | 34.23 | |||
Tangible book value per common share – Non-GAAP (a) | $ | 18.78 | $ | 18.24 | $ | 16.65 | |||
Full-time employees | 52,100 | 52,500 | 52,600 | ||||||
Common shares outstanding (in thousands) | 1,010,676 | 1,013,442 | 1,039,877 | ||||||
2 BNY Mellon
Consolidated Financial Highlights (unaudited) (continued)
Regulatory and Capital ratios | March 31, 2018 | Dec. 31, 2017 | March 31, 2017 | |||
Average liquidity coverage ratio (“LCR”) | 116 | % | 118 | % | 117 | % |
Regulatory capital ratios: (f) | ||||||
Advanced: | ||||||
Common equity Tier 1 (“CET1”) ratio | 10.7 | % | 10.3 | % | 10.0 | % |
Tier 1 capital ratio | 12.7 | 12.3 | 12.1 | |||
Total (Tier 1 plus Tier 2) capital ratio | 13.4 | 13.0 | 12.4 | |||
Standardized: | ||||||
CET1 ratio | 11.7 | % | 11.5 | % | 11.5 | % |
Tier 1 capital ratio | 14.0 | 13.7 | 13.9 | |||
Total (Tier 1 plus Tier 2) capital ratio | 14.9 | 14.7 | 14.5 | |||
Tier 1 leverage ratio (f) | 6.5 | % | 6.4 | % | 6.4 | % |
Supplementary leverage ratio (“SLR”) (f) | 5.9 | 5.9 | 5.9 | |||
BNY Mellon shareholders’ equity to total assets ratio | 11.2 | % | 11.1 | % | 11.6 | % |
BNY Mellon common shareholders’ equity to total assets ratio | 10.2 | 10.1 | 10.5 | |||
(a) | Return on tangible common equity and tangible book value, Non-GAAP measures, exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of Non-GAAP measures. |
(b) | See “Average balances and interest rates” on page 9 for a reconciliation of this Non-GAAP measure. |
(c) | Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.3 trillion at March 31, 2018 and Dec. 31, 2017 and $1.2 trillion at March 31, 2017. |
(d) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
(e) | Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $73 billion at March 31, 2018, $71 billion at Dec. 31, 2017 and $65 billion at March 31, 2017. |
(f) | For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The risk-based regulatory capital ratios, Tier 1 leverage ratio and SLR are presented on a fully phased-in basis for Dec. 31, 2017 and March 31, 2017. Beginning Jan. 1, 2018, regulatory ratios are fully phased-in. For additional information on our capital ratios, see “Capital” beginning on page 31. |
BNY Mellon 3
Part I - Financial Information |
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk |
General
In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.
Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2017 (“2017 Annual Report”).
The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the section titled “Forward-looking Statements.”
How we reported results
Throughout this Form 10-Q, certain measures are noted as “Non-GAAP financial measures.” These items include the return on tangible common equity and tangible book value, net interest revenue and net interest margin both presented on an FTE basis, the growth rates for investment management and performance fees on a constant currency basis and the pre-tax operating margin for the Investment Management business. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for a reconciliation of the financial measures presented on a Non-GAAP basis, other than net interest revenue and net interest margin on an FTE basis. See “Net interest revenue,” including “Average balances and interest rates” beginning on page 8 for information on measures presented on an FTE basis.
In addition, certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation.
Overview
Established in 1784 by Alexander Hamilton, we were the first company listed on the New York Stock Exchange (NYSE: BK). With a more than 230-year history, BNY Mellon is a global company that
manages and services assets for financial institutions, corporations and individual investors in 35 countries.
BNY Mellon has two business segments, Investment Services and Investment Management, which offer a comprehensive set of capabilities and deep expertise across the investment lifecycle, enabling the company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.
The diagram below presents our two business segments and lines of business, with the remaining operations in the Other segment.
Highlights of first quarter 2018 results
We reported net income applicable to common shareholders of $1.14 billion, or $1.10 per diluted common share, in the first quarter of 2018. Net income applicable to common shareholders was $880 million, or $0.83 per diluted common share, in the first quarter of 2017. The highlights below are based on the first quarter of 2018 compared with the first quarter of 2017 unless otherwise noted.
• | Total revenue of $4.2 billion increased 9% primarily reflecting: |
4 BNY Mellon
• | Fee revenue increased 10% primarily reflecting higher equity market values, the favorable impact of a weaker U.S. dollar, higher performance fees and foreign exchange revenue, and growth in collateral management. (See “Fee and other revenue” beginning on page 6.) |
• | Net interest revenue increased 16% driven by higher interest rates and higher deposits. (See “Net interest revenue” on page 8.) |
• | Weaker U.S. dollar increased total revenue approximately 2%. |
• | Noninterest expense of $2.7 billion increased 4% reflecting the unfavorable impact of a weaker U.S. dollar, higher staff expense and volume-related sub-custodian and clearing expenses, partially offset by lower consulting expense. (See “Noninterest expense” beginning on page 10.) |
• | Weaker U.S. dollar increased expense approximately 3%. |
• | Effective tax rate of 19.5% reflecting a lower federal statutory tax rate. Effective January 2018, the corporate federal tax rate was reduced to 21% from 35% as a result of the Tax Cuts and Jobs Act of 2017 (“U.S. tax legislation”). (See “Income taxes” on page 10.) |
Capital and liquidity
• | CET1 ratio under the Advanced Approach was 10.7% at March 31, 2018 and 10.3%, on a fully phased-in basis, at Dec. 31, 2017. The increase |
primarily reflects capital generated through earnings and additional paid-in capital resulting from stock awards, partially offset by capital deployed through common stock repurchased and dividends paid. (See “Capital” beginning on page 31.)
• | Repurchased 11 million common shares for $644 million and paid $246 million in dividends to common shareholders. |
Highlights of our principal businesses
Investment Services
• | Total revenue increased 11% |
• | Income before taxes increased 22% |
• | Record AUC/A of $33.5 trillion, up 9%, reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business. |
Investment Management
• | Total revenue increased 13% |
• | Income before taxes increased 38% |
• | AUM of $1.9 trillion increased 8% reflecting the favorable impact of a weaker U.S. dollar (principally versus the British pound), higher market values and net inflows, partially offset by the divestiture of CenterSquare Investment Management (“CenterSquare”) and other changes. |
See “Review of businesses” and Note 19 for additional information on our businesses.
BNY Mellon 5
Fee and other revenue
Fee and other revenue | 1Q18 vs. | ||||||||||||
(dollars in millions, unless otherwise noted) | 1Q18 | 4Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||
Investment services fees: | |||||||||||||
Asset servicing (a) | $ | 1,168 | $ | 1,130 | $ | 1,063 | 3 | % | 10 | % | |||
Clearing services | 414 | 400 | 376 | 4 | 10 | ||||||||
Issuer services | 260 | 197 | 251 | 32 | 4 | ||||||||
Treasury services | 138 | 137 | 139 | 1 | (1 | ) | |||||||
Total investment services fees | 1,980 | 1,864 | 1,829 | 6 | 8 | ||||||||
Investment management and performance fees | 960 | 962 | 842 | — | 14 | ||||||||
Foreign exchange and other trading revenue | 209 | 166 | 164 | 26 | 27 | ||||||||
Financing-related fees | 52 | 54 | 55 | (4 | ) | (5 | ) | ||||||
Distribution and servicing | 36 | 38 | 41 | (5 | ) | (12 | ) | ||||||
Investment and other income (loss) | 82 | (198 | ) | 77 | N/M | N/M | |||||||
Total fee revenue | 3,319 | 2,886 | 3,008 | 15 | 10 | ||||||||
Net securities (losses) gains | (49 | ) | (26 | ) | 10 | N/M | N/M | ||||||
Total fee and other revenue | $ | 3,270 | $ | 2,860 | $ | 3,018 | 14 | % | 8 | % | |||
Fee revenue as a percentage of total revenue | 79 | % | 77 | % | 78 | % | |||||||
AUM at period end (in billions) (b) | $ | 1,868 | $ | 1,893 | $ | 1,727 | (1 | )% | 8 | % | |||
AUC/A at period end (in trillions) (c) | $ | 33.5 | $ | 33.3 | $ | 30.6 | 1 | % | 9 | % | |||
(a) | Asset servicing fees include securities lending revenue of $55 million in the first quarter of 2018, $51 million in the fourth quarter of 2017 and $49 million in the first quarter of 2017. |
(b) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
(c) | Includes the AUC/A of CIBC Mellon of $1.3 trillion at March 31, 2018 and Dec. 31, 2017 and $1.2 trillion at March 31, 2017. |
N/M - Not meaningful.
Fee and other revenue increased 8% compared with the first quarter of 2017 and 14% (unannualized) compared with the fourth quarter of 2017. The increase compared with the first quarter of 2017 primarily reflects higher investment management and performance fees, asset servicing fees, foreign exchange and other trading revenue and clearing services fees. The increase compared with the fourth quarter of 2017 primarily reflects higher investment and other income, issuer services fees, foreign exchange and other trading revenue and asset servicing fees. Both increases were partially offset by net securities losses.
Investment services fees
Investment services fees were impacted by the following compared with the first quarter of 2017 and the fourth quarter of 2017:
• | Asset servicing fees increased 10% compared with the first quarter of 2017 and 3% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher equity market values, the favorable impact of a weaker U.S. dollar and net new business, including growth in collateral management. |
• | Clearing services fees increased 10% compared with the first quarter of 2017 and 4% (unannualized) compared with the fourth quarter of 2017. Both increases were primarily driven by higher fees due to growth in long-term mutual fund balances and clearance volumes. |
• | Issuer services fees increased 4% compared with the first quarter of 2017 and 32% (unannualized) compared with the fourth quarter of 2017. The increase compared with the first quarter of 2017 primarily reflects higher fees in Corporate Trust as well as the favorable impact of a weaker U.S. dollar. The increase compared with the fourth quarter of 2017 primarily reflects seasonally higher Depositary Receipts revenue. |
• | Treasury services fees decreased 1% compared with the first quarter of 2017 and increased 1% (unannualized) compared with the fourth quarter of 2017. Both comparisons were impacted by the offsetting impact of higher compensating balance credits provided to clients, which reduce fee revenue and increase net interest revenue and higher payment volumes. |
See the “Investment Services business” in “Review of businesses” for additional details.
6 BNY Mellon
Investment management and performance fees
Investment management and performance fees increased 14% compared with the first quarter of 2017 and decreased slightly (unannualized) compared with the fourth quarter of 2017. On a constant currency basis (Non-GAAP), investment management and performance fees increased 9% compared with the first quarter of 2017. Performance fees were $48 million in the first quarter of 2018, $12 million in the first quarter of 2017 and $50 million in the fourth quarter of 2017.
AUM was $1.9 trillion, an increase of 8% compared with March 31, 2017 and a decrease of 1% compared with Dec. 31, 2017. See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees, AUM and AUM flows.
Foreign exchange and other trading revenue
Foreign exchange and other trading revenue | |||||||||
(in millions) | 1Q18 | 4Q17 | 1Q17 | ||||||
Foreign exchange | $ | 183 | $ | 175 | $ | 154 | |||
Other trading revenue (loss) | 26 | (9 | ) | 10 | |||||
Total foreign exchange and other trading revenue | $ | 209 | $ | 166 | $ | 164 | |||
Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. Foreign exchange revenue increased 19% compared with the first quarter of 2017 and 5% (unannualized) compared with the fourth quarter of 2017. The increases primarily reflect higher volumes. The increase compared with the fourth quarter of 2017 also reflects higher volatility. The increase in other trading revenue for both comparisons was primarily driven by hedging activities in the Investment Management business. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.
Financing-related fees
Financing-related fees, which are primarily reported in the Investment Services business and the Other
segment, include capital markets fees, loan commitment fees and credit-related fees. Both decreases primarily reflect lower fees from standby letters of credit and lower syndication fees. The decrease compared with the fourth quarter of 2017 was partially offset by higher underwriting fees.
Distribution and servicing fees
The decrease in distribution and servicing fees compared with the first quarter of 2017 primarily reflects lower fees from money market funds.
Investment and other income
The following table provides the components of investment and other income.
Investment and other income | |||||||||
(in millions) | 1Q18 | 4Q17 | 1Q17 | ||||||
Asset-related gains | $ | 46 | $ | — | $ | 3 | |||
Corporate/bank-owned life insurance | 36 | 43 | 30 | ||||||
Expense reimbursements from joint venture | 16 | 15 | 14 | ||||||
Seed capital gains (a) | — | 7 | 9 | ||||||
Lease-related gains | — | 4 | 1 | ||||||
Equity investment income | — | 4 | 26 | ||||||
Other (loss) | (16 | ) | (271 | ) | (6 | ) | |||
Total investment and other income (loss) | $ | 82 | $ | (198 | ) | $ | 77 | ||
(a) | Excludes seed capital gains related to consolidated investment management funds, which are reflected in operations of consolidated investment management funds. |
Investment and other income increased compared with both the first quarter of 2017 and the fourth quarter of 2017. The increase compared with the first quarter of 2017 primarily reflects higher asset related gains, including the gain on the sale of CenterSquare, partially offset by a gain on an equity investment recorded in the first quarter of 2017 and decreases in other income due to our increased investments in renewable energy. Pre-tax losses on our renewable energy investments are offset by corresponding tax benefits and credits. The increase in investment and other income compared with the fourth quarter of 2017 primarily reflects the impact of U.S. tax legislation on our renewable energy investments recorded in the fourth quarter of 2017.
Net securities losses
Net securities losses recorded in the first quarter of 2018 and fourth quarter of 2017 primarily relate to the sale of debt securities.
BNY Mellon 7
Net interest revenue
Net interest revenue | 1Q18 vs. | ||||||||||||
(dollars in millions) | 1Q18 | 4Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||
Net interest revenue | $ | 919 | $ | 851 | $ | 792 | 8 | % | 16 | % | |||
Add: Tax equivalent adjustment | 6 | 11 | 12 | N/M | N/M | ||||||||
Net interest revenue (FTE) – Non-GAAP (a) | $ | 925 | $ | 862 | $ | 804 | 7 | % | 15 | % | |||
Average interest-earning assets | $ | 302,069 | $ | 297,166 | $ | 283,421 | 2 | % | 7 | % | |||
Net interest margin | 1.22 | % | 1.14 | % | 1.13 | % | 8 | bps | 9 | bps | |||
Net interest margin (FTE) – Non-GAAP (a) | 1.23 | % | 1.16 | % | 1.14 | % | 7 | bps | 9 | bps | |||
(a) | Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-exempt income which allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. |
N/M - Not meaningful.
bps - basis points.
Net interest revenue increased 16% compared with the first quarter of 2017 and 8% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher interest rates and deposits. The increase compared with the first quarter of 2017 was partially offset by higher average long-term debt. The increase compared with the fourth quarter of 2017 was also favorably impacted by interest rate hedging activities.
Net interest margin increased 9 basis points compared with the first quarter of 2017 and 8 basis points
compared with the fourth quarter of 2017. Both increases primarily reflect higher interest rates, partially offset by higher average interest-earning assets.
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the first quarter of 2018. Approximately 45% of the average non-U.S. dollar deposits in the first quarter of 2018 were euro-denominated.
8 BNY Mellon
Average balances and interest rates | Quarter ended | |||||||||||||||||||||||||
March 31, 2018 | Dec. 31, 2017 | March 31, 2017 | ||||||||||||||||||||||||
(dollars in millions, presented on an FTE basis) | Average balance | Interest | Average rates | Average balance | Interest | Average rates | Average balance | Interest | Average rates | |||||||||||||||||
Assets | ||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||
Interest-bearing deposits with banks (primarily foreign banks) | $ | 13,850 | $ | 42 | 1.25 | % | $ | 14,068 | $ | 37 | 1.03 | % | $ | 14,714 | $ | 22 | 0.60 | % | ||||||||
Interest-bearing deposits held at the Federal Reserve and other central banks | 79,068 | 126 | 0.64 | 74,961 | 102 | 0.54 | 66,043 | 57 | 0.35 | |||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 27,903 | 170 | 2.47 | 28,417 | 151 | 2.11 | 25,312 | 67 | 1.07 | |||||||||||||||||
Margin loans | 15,674 | 115 | 2.98 | 14,018 | 94 | 2.67 | 15,753 | 75 | 1.94 | |||||||||||||||||
Non-margin loans: | ||||||||||||||||||||||||||
Domestic offices | 30,415 | 228 | 3.02 | 30,462 | 208 | 2.73 | 30,963 | 188 | 2.44 | |||||||||||||||||
Foreign offices | 12,517 | 77 | 2.51 | 12,292 | 69 | 2.21 | 13,596 | 57 | 1.71 | |||||||||||||||||
Total non-margin loans | 42,932 | 305 | 2.87 | 42,754 | 277 | 2.58 | 44,559 | 245 | 2.22 | |||||||||||||||||
Securities: | ||||||||||||||||||||||||||
U.S. Government obligations | 23,460 | 109 | 1.88 | 25,195 | 109 | 1.71 | 26,239 | 104 | 1.60 | |||||||||||||||||
U.S. Government agency obligations | 62,975 | 350 | 2.23 | 62,889 | 325 | 2.07 | 56,857 | 271 | 1.90 | |||||||||||||||||
State and political subdivisions – tax-exempt (a) | 2,875 | 19 | 2.62 | 3,010 | 23 | 3.10 | 3,373 | 26 | 3.11 | |||||||||||||||||
Other securities | 29,149 | 123 | 1.69 | 29,131 | 98 | 1.34 | 28,317 | 88 | 1.25 | |||||||||||||||||
Trading securities (a) | 4,183 | 28 | 2.62 | 2,723 | 14 | 2.02 | 2,254 | 17 | 3.12 | |||||||||||||||||
Total securities | 122,642 | 629 | 2.05 | 122,948 | 569 | 1.85 | 117,040 | 506 | 1.74 | |||||||||||||||||
Total interest-earning assets (a) | $ | 302,069 | $ | 1,387 | 1.85 | % | $ | 297,166 | $ | 1,230 | 1.65 | % | $ | 283,421 | $ | 972 | 1.38 | % | ||||||||
Noninterest-earnings assets | 56,106 | 53,620 | 52,779 | |||||||||||||||||||||||
Total assets | $ | 358,175 | $ | 350,786 | $ | 336,200 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||
Money market rate accounts | $ | 8,359 | $ | 3 | 0.14 | % | $ | 7,642 | $ | 1 | 0.08 | % | $ | 7,510 | $ | 1 | 0.05 | % | ||||||||
Savings | 773 | 4 | 1.95 | 787 | 2 | 1.09 | 1,094 | 2 | 0.61 | |||||||||||||||||
Demand deposits | 8,379 | 11 | 0.52 | 6,592 | 6 | 0.38 | 5,371 | 1 | 0.12 | |||||||||||||||||
Time deposits | 34,101 | 53 | 0.63 | 30,259 | 32 | 0.41 | 35,429 | 11 | 0.12 | |||||||||||||||||
Foreign offices | 104,092 | 46 | 0.18 | 102,483 | 23 | 0.09 | 90,416 | (6 | ) | (0.03 | ) | |||||||||||||||
Total interest-bearing deposits | 155,704 | 117 | 0.30 | 147,763 | 64 | 0.17 | 139,820 | 9 | 0.03 | |||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements | 18,963 | 107 | 2.29 | 20,211 | 93 | 1.83 | 18,995 | 24 | 0.51 | |||||||||||||||||
Trading liabilities | 1,569 | 9 | 2.26 | 1,406 | 1 | 0.38 | 908 | 2 | 0.89 | |||||||||||||||||
Other borrowed funds | 2,119 | 9 | 1.67 | 3,421 | 13 | 1.46 | 822 | 2 | 0.98 | |||||||||||||||||
Commercial paper | 3,131 | 12 | 1.59 | 3,391 | 11 | 1.23 | 2,164 | 5 | 0.88 | |||||||||||||||||
Payables to customers and broker-dealers | 17,101 | 31 | 0.75 | 17,868 | 22 | 0.49 | 18,961 | 7 | 0.16 | |||||||||||||||||
Long-term debt | 28,407 | 177 | 2.49 | 28,245 | 164 | 2.29 | 25,882 | 119 | 1.85 | |||||||||||||||||
Total interest-bearing liabilities | $ | 226,994 | $ | 462 | 0.82 | % | $ | 222,305 | $ | 368 | 0.65 | % | $ | 207,552 | $ | 168 | 0.33 | % | ||||||||
Total noninterest-bearing deposits | 71,005 | 69,111 | 73,555 | |||||||||||||||||||||||
Other noninterest-bearing liabilities | 18,571 | 18,422 | 15,844 | |||||||||||||||||||||||
Total liabilities | 316,570 | 309,838 | 296,951 | |||||||||||||||||||||||
Temporary equity | ||||||||||||||||||||||||||
Redeemable noncontrolling interests | 193 | 197 | 161 | |||||||||||||||||||||||
Permanent equity | ||||||||||||||||||||||||||
Total The Bank of New York Mellon Corporation shareholders’ equity | 41,135 | 40,494 | 38,507 | |||||||||||||||||||||||
Noncontrolling interests | 277 | 257 | 581 | |||||||||||||||||||||||
Total permanent equity | 41,412 | 40,751 | 39,088 | |||||||||||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 358,175 | $ | 350,786 | $ | 336,200 | ||||||||||||||||||||
Net interest revenue (FTE) – Non-GAAP | $ | 925 | $ | 862 | $ | 804 | ||||||||||||||||||||
Net interest margin (FTE) – Non-GAAP | 1.23 | % | 1.16 | % | 1.14 | % | ||||||||||||||||||||
Less: Tax equivalent adjustment (b) | 6 | 11 | 12 | |||||||||||||||||||||||
Net interest revenue – GAAP | $ | 919 | $ | 851 | $ | 792 | ||||||||||||||||||||
Net interest margin – GAAP | 1.22 | % | 1.14 | % | 1.13 | % | ||||||||||||||||||||
(a) | Interest income and average yields are presented on an FTE basis (Non-GAAP). |
(b) | The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the federal statutory tax rate of 21% for the quarter ended March 31, 2018 and 35% for the quarters ended Dec. 31, 2017 and March 31, 2017, adjusted for applicable state income taxes, net of the related federal tax benefit. |
BNY Mellon 9
Noninterest expense
Noninterest expense | 1Q18 vs. | ||||||||||||
(dollars in millions) | 1Q18 | 4Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||
Staff (a) | $ | 1,576 | $ | 1,628 | $ | 1,488 | (3 | )% | 6 | % | |||
Professional, legal and other purchased services | 291 | 339 | 313 | (14 | ) | (7 | ) | ||||||
Software | 173 | 230 | 166 | (25 | ) | 4 | |||||||
Net occupancy | 139 | 153 | 136 | (9 | ) | 2 | |||||||
Sub-custodian and clearing (b) | 119 | 102 | 103 | 17 | 16 | ||||||||
Distribution and servicing | 106 | 106 | 100 | — | 6 | ||||||||
Furniture and equipment | 61 | 67 | 57 | (9 | ) | 7 | |||||||
Bank assessment charges | 52 | 53 | 57 | (2 | ) | (9 | ) | ||||||
Business development | 51 | 66 | 51 | (23 | ) | — | |||||||
Amortization of intangible assets | 49 | 52 | 52 | (6 | ) | (6 | ) | ||||||
Other (a)(b)(c) | 122 | 210 | 119 | (42 | ) | 3 | |||||||
Total noninterest expense | $ | 2,739 | $ | 3,006 | $ | 2,642 | (9 | )% | 4 | % | |||
Full-time employees at period end | 52,100 | 52,500 | 52,600 | (1 | )% | (1 | )% | ||||||
(a) | In the first quarter of 2018, we adopted new accounting guidance included in Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of pension and other post-retirement costs, other than the service cost component. As a result, staff expense increased and other expense decreased. Prior periods have been reclassified. For additional information, see Note 2 of the Notes to Consolidated Financial Statements. |
(b) | Beginning in the first quarter of 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior periods were reclassified. |
(c) | Beginning in the first quarter of 2018, merger and integration ("M&I"), litigation and restructuring charges are no longer separately disclosed. Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense. |
Total noninterest expense increased 4% compared with the first quarter of 2017 and decreased 9% (unannualized) compared with the fourth quarter of 2017. The increase primarily reflects the unfavorable impact of a weaker U.S. dollar, higher staff expense driven by the annual merit increase that was effective in July 2017 and higher performance-based incentives. The increase also reflects higher volume-related sub-custodian and clearing expenses, partially offset by lower consulting expense. The decrease in total noninterest expense compared with the fourth quarter of 2017 primarily reflects severance, litigation and an asset impairment recorded in the fourth quarter of 2017, as well as lower expenses in nearly all categories. The decrease was partially offset by higher incentives due to the impact of vesting of long-term stock awards for retirement eligible employees and the unfavorable impact of a weaker U.S. dollar.
Our technology-related expenses, including staff expense, increased as a result of our continued investment in technology infrastructure and platforms. We expect to incur expenses in 2018 related to the continued execution of our real estate strategy.
Income taxes
BNY Mellon recorded an income tax provision of $282 million (19.5% effective tax rate) in the first quarter of 2018 and $269 million (22.3% effective tax rate) in the first quarter of 2017. The income tax benefit of $453 million in the fourth quarter of 2017 included the estimated tax benefit of $710 million related to U.S. tax legislation. For additional information, see Note 11 of the Notes to Consolidated Financial Statements.
We expect the effective tax rate to be approximately 21% in 2018 based on current income tax rates.
10 BNY Mellon
Review of businesses
We have an internal information system that produces performance data along product and service lines for our two principal businesses, Investment Services and Investment Management, and the Other segment.
Business accounting principles
Our business data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the businesses will track their economic performance.
For information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 19 of the Notes to Consolidated Financial Statements.
Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the first quarter of 2018. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the third quarter, staff expense typically increases reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth
quarter represents the end of the measurement period for many of the performance fee-eligible relationships.
The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency-denominated expenses than revenues. However, our Investment Management business typically has more foreign currency-denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.
Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At March 31, 2018, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.03 to $0.05.
In the first quarter of 2018, we began presenting total revenue for each of the primary lines of business in our two principal businesses. Note 19 of the Notes to Consolidated Financial Statements summarizes the products and services in each line of business and the primary types of revenue generated. We believe that the updated presentation provides investors a clearer picture of our business results and permits investors to view revenue on a basis consistent with management.
See Note 19 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.
BNY Mellon 11
Investment Services business
1Q18 vs. | |||||||||||||||||||
(dollars in millions unless otherwise noted) | 1Q18 | 4Q17 | 3Q17 | 2Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||||||
Revenue: | |||||||||||||||||||
Investment services fees: | |||||||||||||||||||
Asset servicing | $ | 1,143 | $ | 1,106 | $ | 1,081 | $ | 1,061 | $ | 1,038 | 3 | % | 10 | % | |||||
Clearing services | 414 | 400 | 381 | 393 | 375 | 4 | 10 | ||||||||||||
Issuer services | 260 | 196 | 288 | 241 | 250 | 33 | 4 | ||||||||||||
Treasury services | 138 | 136 | 141 | 139 | 139 | 1 | (1 | ) | |||||||||||
Total investment services fees | 1,955 | 1,838 | 1,891 | 1,834 | 1,802 | 6 | 8 | ||||||||||||
Foreign exchange and other trading revenue | 169 | 168 | 154 | 145 | 153 | 1 | 10 | ||||||||||||
Other (a) | 126 | 135 | 142 | 136 | 129 | (7 | ) | (2 | ) | ||||||||||
Total fee and other revenue | 2,250 | 2,141 | 2,187 | 2,115 | 2,084 | 5 | 8 | ||||||||||||
Net interest revenue | 844 | 813 | 777 | 761 | 707 | 4 | 19 | ||||||||||||
Total revenue | 3,094 | 2,954 | 2,964 | 2,876 | 2,791 | 5 | 11 | ||||||||||||
Provision for credit losses | (7 | ) | (2 | ) | (2 | ) | (3 | ) | — | N/M | N/M | ||||||||
Noninterest expense (excluding amortization of intangible assets) | 1,913 | 2,060 | 1,837 | 1,889 | 1,812 | (7 | ) | 6 | |||||||||||
Amortization of intangible assets | 36 | 37 | 37 | 38 | 37 | (3 | ) | (3 | ) | ||||||||||
Total noninterest expense | 1,949 | 2,097 | 1,874 | 1,927 | 1,849 | (7 | ) | 5 | |||||||||||
Income before taxes | $ | 1,152 | $ | 859 | $ | 1,092 | $ | 952 | $ | 942 | 34 | % | 22 | % | |||||
Pre-tax operating margin | 37 | % | 29 | % | 37 | % | 33 | % | 34 | % | |||||||||
Securities lending revenue | $ | 48 | $ | 45 | $ | 41 | $ | 42 | $ | 40 | 7 | % | 20 | % | |||||
Total revenue by line of business: | |||||||||||||||||||
Asset Servicing | $ | 1,519 | $ | 1,459 | $ | 1,420 | $ | 1,378 | $ | 1,346 | 4 | % | 13 | % | |||||
Pershing | 581 | 569 | 542 | 547 | 522 | 2 | 11 | ||||||||||||
Issuer Services | 418 | 352 | 442 | 398 | 396 | 19 | 6 | ||||||||||||
Treasury Services | 321 | 322 | 316 | 311 | 302 | — | 6 | ||||||||||||
Clearance and Collateral Management | 255 | 252 | 244 | 242 | 225 | 1 | 13 | ||||||||||||
Total revenue by line of business | $ | 3,094 | $ | 2,954 | $ | 2,964 | $ | 2,876 | $ | 2,791 | 5 | % | 11 | % | |||||
Metrics: | |||||||||||||||||||
Average loans | $ | 39,200 | $ | 38,845 | $ | 38,038 | $ | 40,931 | $ | 42,818 | 1 | % | (8 | )% | |||||
Average deposits | $ | 214,130 | $ | 204,680 | $ | 198,299 | $ | 200,417 | $ | 197,690 | 5 | % | 8 | % | |||||
AUC/A at period end (in trillions) (b) | $ | 33.5 | $ | 33.3 | $ | 32.2 | $ | 31.1 | $ | 30.6 | 1 | % | 9 | % | |||||
Market value of securities on loan at period end (in billions) (c) | $ | 436 | $ | 408 | $ | 382 | $ | 336 | $ | 314 | 7 | % | 39 | % | |||||
Pershing: | |||||||||||||||||||
Average active clearing accounts (U.S. platform) (in thousands) | 6,075 | 6,126 | 6,203 | 6,159 | 6,058 | (1 | )% | — | % | ||||||||||
Average long-term mutual fund assets (U.S. platform) | $ | 514,542 | $ | 508,873 | $ | 500,998 | $ | 480,532 | $ | 460,977 | 1 | % | 12 | % | |||||
Average investor margin loans (U.S. platform) | $ | 10,930 | $ | 9,822 | $ | 8,886 | $ | 9,812 | $ | 10,740 | 11 | % | 2 | % | |||||
Clearance and Collateral Management: | |||||||||||||||||||
Average tri-party collateral management balances (in billions) | $ | 2,698 | $ | 2,606 | $ | 2,534 | $ | 2,498 | $ | 2,373 | 4 | % | 14 | % | |||||
(a) | Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income. |
(b) | Includes the AUC/A of CIBC Mellon of $1.3 trillion at March 31, 2018, Dec. 31, 2017 and Sept. 30, 2017 and $1.2 trillion at June 30, 2017 and March 31, 2017. |
(c) | Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $73 billion at March 31, 2018, $71 billion at Dec. 31, 2017, $68 billion at Sept. 30, 2017, $66 billion at June 30, 2017 and $65 billion at March 31, 2017. |
N/M - Not meaningful.
12 BNY Mellon
Business description
BNY Mellon Investment Services provides business services and technology solutions to entities including financial institutions, corporations, foundations and endowments, public funds and government agencies. Our lines of business include: Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management.
We are one of the leading global investment services providers with $33.5 trillion of AUC/A at March 31, 2018.
• | We are the primary provider of U.S. government securities clearance and a provider of non-U.S. government securities clearance. |
• | We are a leading provider of tri-party collateral management services with approximately $2.7 trillion serviced globally including approximately $1.6 trillion of the U.S. tri-party repo market. |
• | Our agency securities lending program is one of the largest lenders of U.S. and non-U.S. securities, servicing a lendable asset pool of approximately $3.4 trillion in 34 separate markets. |
The Asset Servicing business provides a comprehensive suite of solutions. As one of the largest global custody and fund accounting providers and a trusted partner, we offer services for the safekeeping of assets in capital markets globally as well as alternative investment and structured product strategies. We provide custody and foreign exchange services, support exchange-traded funds and unit investment trusts and provide our clients outsourcing capabilities. We deliver securities lending and financing solutions on both an agency and principal basis. Our market leading liquidity services portal enables cash investments for institutional clients and includes fund research and analytics.
Pershing provides clearing, custody, business and technology solutions, delivering dependable operational and practice management support to financial organizations globally.
The Issuer Services business includes Corporate Trust and Depositary Receipts. Our Corporate Trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial
services. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our Depositary Receipts business drives global investing by providing servicing and value-added solutions that enable, facilitate and enhance cross-border trading, clearing, settlement and ownership. We are one of the largest providers of depositary receipts services in the world, partnering with leading companies from more than 50 countries.
Our Treasury Services business includes customizable solutions and innovative technology that deliver high-quality cash management, payment and trade support for corporate and institutional global treasury needs.
Our Clearance and Collateral Management business clears and settles equity and fixed-income transactions globally and serves as custodian for tri-party repo collateral worldwide. Our collateral services include collateral management, administration and segregation.
We offer innovative solutions and industry expertise which help financial institutions and institutional investors to mine opportunities from liquidity, financing, risk and balance sheet challenges.
Review of financial results
AUC/A increased 9% compared with March 31, 2017 to a record $33.5 trillion, reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business. AUC/A consisted of 37% equity securities and 63% fixed-income securities at both March 31, 2018 and March 31, 2017.
Total revenue of $3.1 billion increased compared with both the first quarter of 2017 and the fourth quarter of 2017. Net interest revenue increased in most businesses primarily driven by higher interest rates. The other drivers of net interest revenue and fee revenue by line of business are indicated below.
Asset Servicing revenue of $1.5 billion increased 13% compared with the first quarter of 2017 and 4% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher net interest revenue due in part to an increase in deposit balances, higher fees driven by an increase in
BNY Mellon 13
volumes, market values and foreign exchange volumes, as well as the favorable impact of a weaker U.S. dollar.
Pershing revenue of $581 million increased 11% compared with the first quarter of 2017 and 2% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher net interest revenue and higher fees due to growth in long-term mutual fund balances and clearance volumes.
Issuer Services revenue of $418 million increased 6% compared with the first quarter of 2017 and 19% (unannualized) compared with the fourth quarter of 2017. The increase compared with the first quarter of 2017 primarily reflects higher net interest revenue in Corporate Trust as well as the favorable impact of a weaker U.S. dollar. The increase compared with the fourth quarter of 2017 primarily reflects seasonally higher Depositary Receipts revenue.
Treasury Services revenue of $321 million increased 6% compared with the first quarter of 2017 primarily reflecting higher net interest revenue and payment volumes.
Clearance and Collateral Management revenue of $255 million increased 13% compared with the first quarter of 2017 and 1% (unannualized) compared with the fourth quarter of 2017. The increase compared with the first quarter of 2017 primarily reflects growth in collateral management, higher clearance volumes and net interest revenue.
Market and regulatory trends are driving investable assets toward lower fee asset management products at reduced margins for our clients. These dynamics are also negatively impacting our investment services fees. However, at the same time, these trends are providing additional outsourcing opportunities as clients and other market participants seek to comply with new regulations and reduce their operating costs.
Noninterest expense of $1.9 billion increased 5% compared with the first quarter of 2017 and decreased 7% (unannualized) compared with the fourth quarter of 2017. Both comparisons reflect higher technology costs, the unfavorable impact of the weaker U.S. dollar and higher volume-related sub-custodian and clearing expense. The increase compared with the first quarter of 2017 was partially offset by lower consulting expenses. The decrease compared with the fourth quarter of 2017 was primarily due to lower severance, litigation and an asset impairment recorded in the fourth quarter of 2017.
14 BNY Mellon
Investment Management business
1Q18 vs. | |||||||||||||||||||
(dollars in millions) | 1Q18 | 4Q17 | 3Q17 | 2Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||||||
Revenue: | |||||||||||||||||||
Investment management fees (a) | $ | 898 | $ | 898 | $ | 871 | $ | 845 | $ | 814 | — | % | 10 | % | |||||
Performance fees | 48 | 50 | 15 | 17 | 12 | N/M | 300 | ||||||||||||
Investment management and performance fees (b) | 946 | 948 | 886 | 862 | 826 | — | 15 | ||||||||||||
Distribution and servicing | 50 | 51 | 51 | 53 | 52 | (2 | ) | (4 | ) | ||||||||||
Other (a) | 16 | (25 | ) | (19 | ) | (16 | ) | (1 | ) | N/M | N/M | ||||||||
Total fee and other revenue (a) | 1,012 | 974 | 918 | 899 | 877 | 4 | 15 | ||||||||||||
Net interest revenue | 76 | 74 | 82 | 87 | 86 | 3 | (12 | ) | |||||||||||
Total revenue | 1,088 | 1,048 | 1,000 | 986 | 963 | 4 | 13 | ||||||||||||
Provision for credit losses | 2 | 1 | (2 | ) | — | 3 | N/M | N/M | |||||||||||
Noninterest expense (excluding amortization of intangible assets) | 692 | 756 | 687 | 683 | 668 | (8 | ) | 4 | |||||||||||
Amortization of intangible assets | 13 | 15 | 15 | 15 | 15 | (13 | ) | (13 | ) | ||||||||||
Total noninterest expense | 705 | 771 | 702 | 698 | 683 | (9 | ) | 3 | |||||||||||
Income before taxes | $ | 381 | $ | 276 | $ | 300 | $ | 288 | $ | 277 | 38 | % | 38 | % | |||||
Pre-tax operating margin | 35 | % | 26 | % | 30 | % | 29 | % | 29 | % | |||||||||
Adjusted pre-tax operating margin – Non-GAAP (c) | 39 | % | 29 | % | 34 | % | 33 | % | 32 | % | |||||||||
Total revenue by line of business: | |||||||||||||||||||
Asset Management | $ | 770 | $ | 738 | $ | 693 | $ | 683 | $ | 661 | 4 | % | 16 | % | |||||
Wealth Management | 318 | 310 | 307 | 303 | 302 | 3 | 5 | ||||||||||||
Total revenue by line of business | $ | 1,088 | $ | 1,048 | $ | 1,000 | $ | 986 | $ | 963 | 4 | % | 13 | % | |||||
Average balances: | |||||||||||||||||||
Average loans | $ | 16,876 | $ | 16,813 | $ | 16,724 | $ | 16,560 | $ | 16,153 | — | % | 4 | % | |||||
Average deposits | $ | 13,363 | $ | 11,633 | $ | 12,374 | $ | 14,866 | $ | 15,781 | 15 | % | (15 | )% | |||||
(a) | Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income. |
(b) | On a constant currency basis, investment management and performance fees increased 10% (Non-GAAP) compared with the first quarter of 2017. |
(c) | Net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of this Non-GAAP measure. In the first quarter of 2018, the adjusted pre-tax margin – Non-GAAP for prior periods was restated to include amortization of intangible assets and the provision for credit losses. |
N/M - Not meaningful.
BNY Mellon 15
AUM trends (a) | 1Q18 vs. | ||||||||||||||||||
(dollars in billions) | 1Q18 | 4Q17 | 3Q17 | 2Q17 | 1Q17 | 4Q17 | 1Q17 | ||||||||||||
AUM at period end, by product type: | |||||||||||||||||||
Equity | $ | 161 | $ | 161 | $ | 158 | $ | 163 | $ | 158 | — | % | 2 | % | |||||
Fixed income | 206 | 206 | 206 | 198 | 191 | — | 8 | ||||||||||||
Index | 333 | 350 | 333 | 324 | 330 | (5 | ) | 1 | |||||||||||
Liability-driven investments (b) | 700 | 667 | 622 | 607 | 584 | 5 | 20 | ||||||||||||
Multi-asset and alternative investments | 185 | 214 | 207 | 192 | 188 | (14 | ) | (2 | ) | ||||||||||
Cash | 283 | 295 | 298 | 287 | 276 | (4 | ) | 3 | |||||||||||
Total AUM | $ | 1,868 | $ | 1,893 | $ | 1,824 | $ | 1,771 | $ | 1,727 | (1 | )% | 8 | % | |||||
Changes in AUM: | |||||||||||||||||||
Beginning balance of AUM | $ | 1,893 | $ | 1,824 | $ | 1,771 | $ | 1,727 | $ | 1,648 | |||||||||
Net inflows: | |||||||||||||||||||
Long-term strategies: | |||||||||||||||||||
Equity | — | (6 | ) | (2 | ) | (2 | ) | (4 | ) | ||||||||||
Fixed income | 7 | (2 | ) | 4 | 2 | 2 | |||||||||||||
Liability-driven investments (b) | 13 | 23 | (2 | ) | 15 | 14 | |||||||||||||
Multi-asset and alternative investments | (3 | ) | 2 | 3 | 1 | 2 | |||||||||||||
Total long-term active strategies inflows | 17 | 17 | 3 | 16 | 14 | ||||||||||||||
Index | (13 | ) | (1 | ) | (3 | ) | (13 | ) | — | ||||||||||
Total long-term strategies inflows | 4 | 16 | — | 3 | 14 | ||||||||||||||
Short-term strategies: | |||||||||||||||||||
Cash | (14 | ) | (4 | ) | 10 | 11 | 13 | ||||||||||||
Total net (outflows) inflows | (10 | ) | 12 | 10 | 14 | 27 | |||||||||||||
Net market impact | (14 | ) | 47 | 17 | 1 | 41 | |||||||||||||
Net currency impact | 29 | 10 | 26 | 29 | 11 | ||||||||||||||
Divestitures/Other (c) | (30 | ) | — | — | — | — | |||||||||||||
Ending balance of AUM | $ | 1,868 | $ | 1,893 | $ | 1,824 | $ | 1,771 | $ | 1,727 | (1 | )% | 8 | % | |||||
Wealth Management client assets (d) | $ | 246 | $ | 251 | $ | 245 | $ | 239 | $ | 236 | (2 | )% | 4 | % | |||||
(a) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
(b) | Includes currency overlay AUM. |
(c) | Primarily reflects a change in methodology beginning in the first quarter of 2018 to exclude AUM related to equity method investments as well as the CenterSquare divestiture. |
(d) | Includes AUM and AUC/A in the Wealth Management business. |
Business description
Our Investment Management business consists of two lines of business, Asset Management and Wealth Management. The Asset Management business offers diversified investment management strategies and distribution of investment products. The Wealth Management business provides investment management, custody, wealth and estate planning and private banking services. See pages 19 and 20 of our 2017 Annual Report for additional information on our Investment Management business.
Review of financial results
AUM increased 8% compared with March 31, 2017 primarily reflecting the favorable impact of a weaker U.S. dollar (principally versus the British pound), higher market values and net inflows, partially offset by the divestiture of CenterSquare and other changes.
Net long-term inflows of $4 billion in the first quarter of 2018 were a result of $17 billion of inflows into actively managed strategies, primarily liability-driven and fixed income investments, and $13 billion of outflows from index strategies. Net short-term outflows were $14 billion in the first quarter of 2018. Market and regulatory trends have resulted in increased demand for lower fee asset management products, and for performance-based fees.
Total revenue of $1.1 billion increased 13% compared with the first quarter of 2017 and 4% (unannualized) compared with the fourth quarter of 2017.
Asset Management revenue of $770 million increased 16% compared with the first quarter of 2017 and 4% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher equity market values, the favorable impact of a weaker U.S. dollar (principally versus the British pound) and the
16 BNY Mellon
impact of the sale of CenterSquare. The increase compared with the first quarter of 2017 also reflects higher performance fees due primarily to strong liability-driven investment and alternative investment performance.
Wealth Management revenue of $318 million increased 5% compared with the first quarter of 2017 and 3% (unannualized) compared with the fourth quarter of 2017. Both increases primarily reflect higher equity market values. The increase compared with the first quarter of 2017 also reflects net new business, partially offset by lower net interest revenue due to lower deposit balances.
Revenue generated in the Investment Management business included 42% from non-U.S. sources in the first quarter of 2018, compared with 40% in the first quarter of 2017 and 42% in the fourth quarter of 2017.
Noninterest expense increased 3% compared with the first quarter of 2017, primarily reflecting the unfavorable impact of a weaker U.S. dollar. The 9% (unannualized) decrease compared with the fourth quarter of 2017 primarily reflects lower severance and incentive expense.
Other segment
(in millions) | 1Q18 | 4Q17 | 3Q17 | 2Q17 | 1Q17 | ||||||||||
Fee revenue (loss) | $ | 57 | $ | (221 | ) | $ | 50 | $ | 113 | $ | 62 | ||||
Net securities (losses) gains | (49 | ) | (26 | ) | 19 | — | 10 | ||||||||
Total fee and other revenue (loss) | 8 | (247 | ) | 69 | 113 | 72 | |||||||||
Net interest (expense) | (1 | ) | (36 | ) | (20 | ) | (22 | ) | (1 | ) | |||||
Total revenue (loss) | 7 | (283 | ) | 49 | 91 | 71 | |||||||||
Provision for credit losses | — | (5 | ) | (2 | ) | (4 | ) | (8 | ) | ||||||
Noninterest expense | 87 | 135 | 77 | 28 | 107 | ||||||||||
(Loss) income before taxes | $ | (80 | ) | $ | (413 | ) | $ | (26 | ) | $ | 67 | $ | (28 | ) | |
Average loans and leases | $ | 2,530 | $ | 1,114 | $ | 1,182 | $ | 1,302 | $ | 1,341 | |||||
See pages 25 and 26 of our 2017 Annual Report for additional information on the Other segment.
Review of financial results
Fee revenue increased $278 million compared with the fourth quarter of 2017 primarily reflecting the impact of U.S. tax legislation on our investments in renewable energy, which resulted in a reduction of $279 million recorded in the fourth quarter of 2017.
Net securities losses recorded in the first quarter of 2018 primarily relate to the sale of approximately $1 billion of debt securities.
Net interest expense decreased $35 million compared with the fourth quarter of 2017, primarily reflecting the impact of interest rate hedging activities.
Noninterest expense decreased $20 million compared with the first quarter of 2017 and $48 million compared with the fourth quarter of 2017. Both decreases primarily reflect lower professional, legal and other purchased services expense, partially offset by higher incentive expense. The decrease compared with the fourth quarter of 2017 also reflects lower severance, software and occupancy expenses.
BNY Mellon 17
Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2017 Annual Report. Our critical accounting estimates are those related to the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment (“OTTI”), goodwill and other intangibles, and pension accounting, as referenced below.
Critical policy | Reference |
Allowance for loan losses and allowance for lending-related commitments | 2017 Annual Report, pages 29-30. |
Fair value of financial instruments and derivatives | 2017 Annual Report, pages 30-32. |
OTTI | 2017 Annual Report, pages 32-33. |
Goodwill and other intangibles | 2017 Annual Report, pages 33-34. |
Pension accounting | 2017 Annual Report, pages 34-35. |
Consolidated balance sheet review
One of our key risk management objectives is to maintain a balance sheet that remains strong throughout market cycles to meet the expectations of our major stakeholders, including our shareholders, clients, creditors and regulators.
We also seek to verify that the overall liquidity risk, including intraday liquidity risk, that we undertake stays within our risk appetite. The objective of our balance sheet management strategy is to maintain a balance sheet that is characterized by strong liquidity and asset quality, ready access to external funding sources at competitive rates and a strong capital structure that supports our risk-taking activities and is adequate to absorb potential losses. In managing the balance sheet, appropriate consideration is given to balancing the competing needs of maintaining sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability.
At March 31, 2018, total assets were $374 billion compared with $372 billion at Dec. 31, 2017. The increase in total assets was primarily driven by higher inter