OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDR) of The Bank of New York Mellon Corporation (BK) at 'AA-'/'F1+', with a Stable Outlook. The LT and ST IDRs for The Bank of New York Mellon (BNYM), the main bank subsidiary, have also been affirmed at 'AA'/'F1+'. These rating actions were taken in conjunction with Fitch's U. S. trust and processing bank peer review. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

IDRS, VIABILITY RATINGS, NATIONAL RATINGS AND SENIOR DEBT

The affirmation and Stable Outlook reflect BK's strong franchise in global trust and custody, conservatively managed balance sheet, and good risk-adjusted capital ratios and liquidity position. Fitch believes BK will maintain its risk appetite discipline even as management takes steps to address earnings pressure, specifically return on equity (ROE), which has remained lower than direct peers.

BK has a sustained dominant franchise in the global trust and custody business, with over $29.1 trillion in assets under custody and administration (AUC/A) and a competitive position in investment management with $1.6 trillion in assets under management as of the end of first quarter 2016 (1Q16). This scale and breadth of product offerings, in a business that has high barriers to entry, results in strong and sticky client relationships.

Fitch also views BK's highly-liquid and low-risk balance sheet as a key rating strength, with about 30% of assets in cash and high-quality liquid securities. BK's strong liquidity is a function of its business model which generates significant deposit relationships combined with the fact that BK has historically been viewed as a safe haven/flight to quality during periods of market stress.

BK's risk-adjusted capital levels have remained consistently strong and further support the ratings. Its fully phased-in common equity Tier 1 ratio improved to 11% at 1Q16 from 10.2% at 4Q15 under the standardized approach and to 9.8% at 1Q16 from 9.5% at 4Q15 under the advanced approach. These ratios have exceeded the required minimum 8.5%, though are weaker than BK's direct peer median of 11.6% under the advanced approach.

BK's profitability has been below that of its direct peers and below Fitch's estimated cost of equity of approximately 10% to 12%. BK's average ROE from year-end 2013 to 1Q16 was 7.4%, compared to 9.1% for its direct peer median. Its lower profitability is the result of the sustained low interest rate environment, coupled with BK's large cash position and its relatively short-duration securities portfolio.

The weaker profitability has given rise to shareholder pressures, although BK has been able to maintain its growth and risk appetite discipline while taking steps to seek to improve performance. This is evidenced by the fact that balance sheet growth has been supported by deposit inflows, with the proceeds invested mainly in short-duration securities or held as cash, mostly in central banks. Thus, while balance sheet growth appears high over the past few years, Fitch views this as transitory and not reflective of looser underwriting standards or controls.

Fitch notes BK has continued to focus more on improving operating leverage and accelerating expense reduction initiatives as means to increase shareholders' returns. In 1Q16, expenses were down 2% sequentially and 3% year-over-year, as BK remained focused on driving incremental improvements across the company, leading to reductions in nearly all reported expense categories. BK continues to approach expense management as an ongoing process. Fitch believes that in a higher interest rate and stronger economic environment, much of the work BK has done on the expense front will become more evident through further increases in operating leverage.

Fitch expects the earnings impact on BK from the UK's decision to leave the European Union (EU) to be manageable, as BK will be able to operate through its other EU legal entities, specifically through its European operations. The earnings impact will also be mitigated by increased foreign exchange and market volatility which will support trading revenues.

BK's need to comply with the enhanced supplementary leverage ratio (ESLR) could further pressure profitability. Fitch believes that BK has adequate flexibility and time to bring itself into compliance with ESLR at the operating company level, as demonstrated in 1Q16 by the achievement of ESLR compliance at the holding company level. BK's ESLR increased from 4.9% at 4Q15 to 5.1% at 1Q16 and BNYM's ESLR increased from 4.8% to 5.2%. U. S. rules will require BK to have at least 5% at the holding company and 6% at the bank level by Jan. 1, 2018. The 1Q16 improvements in the ESLR were driven by capital generation and a reduction in average deposits during the quarter.

Fitch believes that BK has thus far held off from implementing a more aggressive deposit pricing strategy to push client deposits off its balance sheet.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BK becomes non-viable. In Fitch's view, implementation of Dodd-Frank Orderly Liquidation Authority legislation has sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid securities are notched from BK's VR of 'aa-' in accordance with Fitch's criteria for such instruments. Subordinated debt is one notch below the VR for loss severity. Hybrid securities are rated five notches below the VR, reflecting three notches for non-performance and two notches for loss severity.

HOLDING COMPANY

The VR of BK is equalized with the VRs of its U. S. depositories, including its main bank subsidiary, BNYM. This reflects BK's role as a bank holding company, which is mandated in the U. S. to act as a source of strength for its bank subsidiary.

SUBSIDIARY AND AFFILIATED COMPANY

BNYM's LT IDR of 'AA', a notch above the parent company's LT IDR, reflects the expected implementation of total loss absorbing capital (TLAC) requirements for U. S. Global Systemically Important Banks (G-SIBs). The VRs remain equalized between BK and its material operating subsidiaries, namely BNYM. The common VR of BK and its operating companies reflects the correlated performance, or failure rate, between BK and these subsidiaries.

LONG - AND SHORT-TERM DEPOSIT RATINGS

BK's domestic (uninsured) deposit ratings are one notch higher than its senior debt ratings reflecting uninsured depositors' superior recovery prospects in case of default given depositor preference in the U. S. These ratings are sensitive to any changes in BK's VR.

RATING SENSITIVITIES

IDRS, VRs, AND SENIOR DEBT

Given that BK's ratings are already near the top of Fitch's global rated bank universe, Fitch sees limited potential for upward ratings momentum.

Sustained decline in operating leverage, most likely from restructuring costs within its global operations, could lead to negative rating pressures.

Fitch believes that the main threat to BK's business model and ratings would result from a large idiosyncratic technological or operational loss resulting in reputational damage that causes clients to flee the firm. BK has been making significant investments in its technology systems over the past several years, which we believe helps to reduce potential idiosyncratic events that are prone to cause large losses.

Fitch believes these operational risks have been well monitored and controlled, but also acknowledges that they are inherently difficult to predict and quantify. As such, a large occurrence that causes a revenue loss of 5% or greater would likely prompt Fitch to review the ratings to determine if a negative rating action was appropriate.

Additionally, negative ratings pressure could emerge should BK materially alter its strategy, for example by entry into or divestiture of a key business line which in Fitch's opinion alters the agency's view of BK's risk appetite.

Currently, Fitch does not expect the affirmative BREXIT vote to overly impact BK's business; however, it may change the way that BK conducts business with some of its foreign clients.

Finally, we also note that BK and its peer trust and processing banks are beginning to face the risk of technological disruption to their business, though this is likely to occur over a very long-term time horizon.

Blockchain, or distributed ledger, is an electronic means of settling, reconciling, and reporting on transactions, which is the core of BK and its peer banks' businesses. While Fitch believes it is highly probable that BK and its peer trust and processing banks jointly work to harness this technology to drive efficiencies across their respective platforms, it is also possible that over a long period of time a technology company could offer a blockchain solution that causes clients to go elsewhere for their core custody business. At present, Fitch views this risk as well outside of the Outlook horizon.

MATERIAL INTERNATIONAL SUBSIDIARIES

The Bank of New York Mellon S. A./N. V., Bank of New York Mellon (International) Ltd. (The), The Bank of New York (Luxembourg) S. A., and The Bank of New York (Luxembourg) - Italian Branch are indirect wholly owned subsidiaries of BK whose IDRs are aligned with BK's because of their core strategic role in and integration into the bank holding company group.

Fitch's Positive Outlook for BK's material international operating subsidiaries reflects the likelihood of internal TLAC as required by the Financial Stability Board (FSB). It also reflects the agency's belief that the internal TLAC of material international operating companies will likely be large enough to meet and exceed Pillar 1 capital requirements and will then be sufficient to recapitalize them.

A one-notch upgrade is likely once Fitch has sufficient clarity as to additional disclosure as to the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. Sufficient clarity may, however, take longer to emerge than the typical Outlook horizon of one to two years.

Specific factors that Fitch seeks additional clarity on before resolving the Rating Outlook and possibly upgrading the subsidiary ratings will include host country clarification on internal TLAC, the quantum of internal TLAC, and whether it will be pre-positioned. The quantum is relevant because per Fitch's criteria the agency will look to the sufficiency of the amount of capital available to that subsidiary to recapitalize it.

If the amount of TLAC is sufficient for recapitalization and is pre-positioned, Fitch will likely upgrade the subsidiary ratings. Conversely, if home and host country regulators reach agreements where pre-positioning is not required, the ratings will not be upgraded and the Outlook will be revised to Stable.

If clarity on host country internal TLAC proposals is further delayed beyond the next six months, Fitch will likely revise the subsidiary Outlooks to Stable until it has clarity on these proposals.

SUPPORT RATING AND SUPPORT RATING FLOOR

SRs are sensitive to any change in Fitch's view of support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

BK's subordinated debt ratings are broadly sensitive to the same considerations that might affect the company's VR.

HOLDING COMPANY

Fitch could notch the holding company's IDR further from the operating company's IDR if holding company liquidity were to deteriorate, raising concerns as to the parent's ability to meet its obligations.

SUBSIDIARY AND AFFILIATED COMPANIES

Given that the VRs of BK and its U. S. depositories, including BNYM, remain equalized, the U. S. depositories' ratings are broadly sensitive to the same considerations that might affect BK's VR.

LONG - AND SHORT-TERM DEPOSIT RATINGS

The ratings of long - and short-term deposits issued by BK and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings would be similarly impacted.

Fitch has affirmed the following ratings with a Stable Outlook:

Bank of New York Mellon Corporation (The)

--Long-Term Issuer Default Rating (IDR) at 'AA-'; Outlook Stable;

--Long-Term senior at 'AA-';

--Long-term subordinated at 'A+';

--Short-Term IDR at 'F1+';

--Viability Rating at 'aa-';

--Preferred Stock at 'BBB';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

The Bank of New York Mellon

--Long-term deposits at 'AA+';

--Long-term IDR at 'AA'; Outlook Stable;

--Long-term senior at 'AA';

--Short-term deposits at 'F1+';

--Short-term IDR at 'F1+';

--Commercial Paper at `F1+';

--Viability Rating at 'aa-';

--Support Rating at `5';

--Support Rating Floor at `NF'.

BNY Mellon National Association

--Long-Term IDR at 'AA'; Outlook Stable;

--Long-term deposits at 'AA+';

--Short-Term IDR at 'F1+';

--Short-term deposits at 'F1+';

--Viability Rating at 'aa-';

--Support Rating at `5';

--Support Rating Floor at `NF'.

BNY Mellon Trust Delaware

--Long-term deposits at 'AA+';

--Long-Term IDR at 'AA'; Outlook Stable;

--Short-term deposits at 'F1+';

--Short-Term IDR at 'F1+';

--Viability Rating at 'aa-';

--Support Rating at `5';

--Support Rating Floor at `NF'.

The Bank of New York Mellon Trust Company, National Association

--Long-term deposits at 'AA+';

--Long-Term IDR at 'AA'; Outlook Stable;

--Short-term deposits at 'F1+';

--Short-Term IDR at 'F1+';

--Viability Rating at 'aa-';

--Support Rating at `5';

--Support Rating Floor at `NF'.

Mellon Funding Corporation

--Long-Term IDR at 'AA-'; Outlook Stable;

--Long-term subordinated debt at 'A+';

--Short-Term IDR at 'F1+';

--Short-term debt at 'F1+';

--Support Rating at '5';

--Support Rating Floor at 'NF.

BNY Institutional Capital Trust A

Mellon Capital III

--Trust Preferred Securities at `BBB+'.

Fitch has affirmed the following ratings with a Positive Outlook:

The Bank of New York Mellon (International) Ltd

--Long-Term IDR at 'AA-'; Outlook Positive;

--Short-Term IDR at 'F1+';

--Support at '1'.

The Bank of New York (Luxembourg) S. A.

The Bank of New York (Luxembourg) S. A. - Italian Branch

--Long-Term IDR at 'AA-'; Outlook Positive;

--Short-Term IDR at 'F1+';

--Support at '1'.

The Bank of New York Mellon S. A./N. V.

--Long-term IDR at 'AA-'; Outlook Positive;

--Short-term IDR at 'F1+';

--Long-term Deposits 'AA-';

--Short-term Deposits 'F1+';

--Support at '1'.