DBRS Comments on Bank of New York Mellon Corp’s Q2 Earnings; Senior Debt at AA (low) Unchanged

DBRS has today commented on the Q2 2009 financial results of The Bank of New York Mellon Corporation (BK or the Company). The Company reported net income of $176 million in the second quarter compared to $322 million in the first quarter of 2009 and $309 million in Q2 2008. Adjusted for discontinued operations (a $91 million after-tax loss), charges related to TARP dividends and redemption ($236 million after-tax) and the FDIC special assessment ($36 million after-tax), second quarter income was $539 million. In DBRS’s view, core second quarter performance reflected mixed trends as revenues excluding investment write-downs were up only slightly from the challenging first quarter. While stability in revenues is positive given the declines in prior quarters, DBRS notes that going forward, revenue declines, significant security losses and/or a lack of positive operating leverage could pressure the Company’s ratings. That being said, franchise strengths remain intact as BK increased its market shares across most businesses and credit fundamentals remain strong. Therefore, all of its ratings, including its AA (low) for Issuer & Senior Debt and Stable trend, remain unchanged. BK’s strong ratings continue to reflect the Company’s diverse business mix, relatively low risk profile and its robust global franchise.

Fee revenues (excluding securities losses) were $2.5 billion in the second quarter compared to $2.4 billion in Q1 2009 and $3.1 billion in the year-ago quarter. Asset Servicing fees were up 10% from Q1 2009 and drove the 5% increase in total securities servicing fees to $1.3 billion. Higher asset values, increased volumes and seasonality in securities lending all benefited asset servicing. Assets under Custody and Administration were $20.7 trillion at June 30, 2009, up 6% from March 31, 2009. Despite the strong quarter for capital markets and improved asset values, Asset and Wealth Management fees improved just 3% in the second quarter and reflected a more conservative shift to cash and fixed income investments. Assets Under Management grew 5% from March 31, 2009 to $926 billion as market appreciation offset net asset outflows related to the termination of a large, but low-yielding relationship.

Second quarter losses on the Company’s $48.2 billion (fair value) securities portfolio were $256 million in Q2 2009, down from $295 million in Q1 2009. Losses were driven by RMBS where BK raised loss severity assumptions given house valuation trends. Watch list securities grew $4.9 billion to $19 billion as the Company added its European floating rate securities to the list based on declining European housing markets. All of these securities remain highly rated. Overall, the unrealized net of tax loss on the portfolio declined $100 million from the end of the first quarter to $4.4 billion at June 30, 2009.

BK’s Q2 2009 net interest revenue (on an FTE basis) was down 10% to $704 million following a 26% decline from Q4 2008 to Q1 2009. The low rate environment and an anticipated return of the balance sheet to its historical size drove the decline. Average earning assets declined 11% in the second quarter to $157 billion and net interest margin (NIM) contracted 7 bps from Q1 2009 to 1.80%. The roll off of the safe haven deposit inflows the Company experienced in prior quarters led to a 24% decline in average noninterest bearing deposits in Q2 2009 which contributed, in part, to a 21% reduction in BK’s low-yielding central bank deposits. Also, improved market conditions in the quarter allowed the Company to invest term money in high quality, short duration securities rather than just placing these funds in its account at the Fed. Though this action did not benefit the absolute level of the NIM in the quarter, DBRS notes that it should result in improved margin stability going forward.

Excluding the FDIC special assessment and merger-related charges, BK’s operating expenses grew 2% in the quarter, slightly less than revenues. The ability to generate positive operating leverage remains an important rating consideration. The Company realized $186 million of expense synergies in the quarter and remains on track to deliver the cumulative $710 million of targeted 2009 savings.

After repurchasing TARP preferred shares from the U.S. Treasury for $3 billion (including unpaid dividends) in the quarter, BK’s capital levels remained strong and were bolstered by a $1.4 billion common equity raise. The Company reported a Tier 1 ratio of 12.5% compared to 11.2% (ex-TARP) in Q1 2009. Benefiting from the capital raise, BK’s Tier 1 Common ratio was 11.1% up 110 bps from last quarter and the Company’s adjusted Tangible common equity (TCE) to assets ratio improved to 4.8% from 4.2% at the end of the previous quarter and from 4.6% at June 30, 2008. DBRS believes that maintaining the current range of TCE is another important rating component for the Company.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.