Fitch: Bank of New York Demonstrates Positive Operating Leverage Momentum in 3Q15 Earnings
OREANDA-NEWS. The Bank of New York Mellon Corporation (BK) demonstrated positive operating leverage in third quarter 2015 (3Q15) and reported net income of $820 million on revenue of $3.7 billion. Revenues were essentially flat versus the linked quarter, although up versus the year ago period, adjusting for one-time gains related to the sale of BK's investment in Wing Hang and sale of the One Wall Street building. BK continues to hold down expenses, which is a key objective in improving operating leverage, according to Fitch Ratings.
Overall fee revenues were a mainly flat on a linked-quarter and year-over-year basis adjusting for the aforementioned one-time gains. Along with typical seasonality, there were a number of moving parts during the quarter affecting fee revenues, namely market volatility and the strength of the U.S. dollar. Market volatility particularly affected Investment management, which was down 6% on both a linked basis as well as versus the year ago period. Nonetheless, Fitch regards the overall performance to be fairly stable and reflective of the business model.
Net interest revenue (NIR) and net interest margin (NIM) remained stagnant, exhibiting slight deterioration on a sequential basis and improvement from 3Q14. BK has attempted to stabilize NIR and NIM through shifts toward more securities and loans and less cash. Despite this, BK continues to be negatively affected by the low rate environment.
BK's assets under management (AUM) through 3Q15 was $1.63 trillion, which marked a 4% decline from 2Q15. BK accredits the sequential decline in AUM primarily to lower equity market values. Relative to 3Q14, AUM remained flat as a result of stronger relative market values, the Cutwater acquisition and net new business that offset an unfavorable stronger U.S. dollar. Similarly, assets under custody and administration (AUC/A) also remained flat despite new business and higher market values due to a stronger U.S. dollar. AUC/A totaled $28.5 trillion at the end of 3Q15. BK also disclosed during the quarter that it changed the timing of when it includes new business.
BK's fully phased-in Basel III CET1 of 9.3% (advanced approach) reported at the end of 3Q15 declined a relatively substantial 60bps on a linked-quarter basis. The decline in CET1 was primarily attributed to a change in methodology of how the company calculates risk-weighted assets under the fully phased-in advanced approach. This partly reflects a change in how BK determines the risk-weight for repo-style transactions, eligible margin loans, and similar transactions. BK had previously used a simple value-at-risk methodology, but this methodology is subject to regulatory approval and BK determined that it should no longer assume the use of this methodology.
While BK's risk-adjusted remains solid despite the decline, the company continues to make progress toward achieving compliance with the U.S. supplementary leverage ratio. BK reported a consolidated 4.8%, which is up 20bps from the prior quarter, and also reported that its main bank subsidiary, The Bank of New York Mellon, had an estimated 4.6% leverage ratio. U.S. rules will require to BK to have at least 5% at the holding company and 6% at the bank level. Fitch continues to be of the view that BK has adequate levers and time to bring itself into compliance well ahead of required implementation.