Fitch: BNY Mellon's 4Q13 Earnings Marred by Equity Write-down

The Bank of New York Mellon (BK) reported 4Q13 net income of $513 million inclusive of a $115 million after-tax charge on its investment in ConvergeX, according to Fitch Ratings. Excluding this charge, reported net income would have been $628 million. BK's reported earnings have been affected by various one-time items related to investments and taxes over the past few quarters. Adjusting for impairment charge, net income for the quarter would have been flat to 4Q12. Fitch considers BK's 4Q13 core performance to be consistent with expectations.

Although BK logged some fee revenue growth in certain business lines, overall fee revenue drifted down sequentially and year-on-year to $2.7 billion. The revenue decline includes the aforementioned write-down of $115 million. Excluding this impairment, Fitch estimates that fee revenues would have been roughly flat to 3Q13. Within Investment Services, Asset Servicing and Clearing Services experienced decent growth, which was largely offset by a decline in Issuer Services income owing to seasonally lower Depositary Receipts revenue. Investment management also produced solid revenue growth against weaker comparable periods.

Assets under Custody and Administration (AUC/A) showed solid growth of 5% to $27.6 trillion on a primarily combination of net new business and higher market values. BK reported assets under management (AUM) of $1.5 trillion which represented solid growth on both a linked quarter and year-on-year basis. Growth in AUM was buoyed by solid markets.

NII was slightly up during the quarter, while NIM compressed 7bps sequentially to 1.09%. The NIM compression reflects growth of cash and interbank investments which represented 46% of interest earnings assets. Fitch expects that BK's NII and NIM would benefit from rising interest rates.

BK's risk-adjusted capital ratios remain solid as the company reported a Basel III Tier 1 Common (T1C) ratio of 10.6% under the standardized approach and 11.3% under the advanced approach. These ratios are comfortably above regulatory minimums, including the systemically important surcharge of 1%. With that said, Fitch considers BK's capitalization relatively more challenged under U.S. regulators proposed supplementary leverage ratio. The proposal would require a minimum 5% at the holding company and 6% at the bank level. BK disclosed that its holding company would be at 4.2% based on the proposed rules. Although this is below the proposed standard, Fitch considers that BK has adequate levers to comply, particularly given its strong capital generation.

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