Bank of New York Mellon Corp - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2019
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 incorporation or organization) | (I.R.S. Employer Identification No.) |
240 Greenwich Street
New York, New York 10286
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code – (212) 495-1784
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | BK | New York Stock Exchange |
Depositary Shares, each representing 1/4,000th of a share of Series C Noncumulative Preferred Stock | BK PrC | New York Stock Exchange |
6.244% Fixed-to-Floating Rate Normal Preferred Capital Securities of Mellon Capital IV | BK/P | New York Stock Exchange |
(fully and unconditionally guaranteed by The Bank of New York Mellon Corporation) |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019, 942,662,027 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
THE BANK OF NEW YORK MELLON CORPORATION
Second Quarter 2019 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: | |
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 | Year-to-date | |||||||||||||||
(dollars in millions, except per share amounts and unless otherwise noted) | June 30, 2019 | March 31, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||
Results applicable to common shareholders of The Bank of New York Mellon Corporation: | ||||||||||||||||
Net income | $ | 969 | $ | 910 | $ | 1,055 | $ | 1,879 | $ | 2,190 | ||||||
Basic earnings per share | $ | 1.01 | $ | 0.94 | $ | 1.04 | $ | 1.95 | $ | 2.15 | ||||||
Diluted earnings per share | $ | 1.01 | $ | 0.94 | $ | 1.03 | $ | 1.95 | $ | 2.14 | ||||||
Fee and other revenue | $ | 3,112 | $ | 3,032 | $ | 3,210 | $ | 6,144 | $ | 6,480 | ||||||
Income from consolidated investment management funds | 10 | 26 | 12 | 36 | 1 | |||||||||||
Net interest revenue | 802 | 841 | 916 | 1,643 | 1,835 | |||||||||||
Total revenue | $ | 3,924 | $ | 3,899 | $ | 4,138 | $ | 7,823 | $ | 8,316 | ||||||
Return on common equity (annualized) | 10.4 | % | 10.0 | % | 11.2 | % | 10.2 | % | 11.7 | % | ||||||
Return on tangible common equity (annualized) – Non-GAAP (a) | 21.2 | % | 20.7 | % | 23.5 | % | 20.9 | % | 24.6 | % | ||||||
Return on average assets (annualized) | 1.13 | % | 1.10 | % | 1.22 | % | 1.12 | % | 1.25 | % | ||||||
Fee revenue as a percentage of total revenue | 79 | % | 78 | % | 78 | % | 78 | % | 78 | % | ||||||
Percentage of non-U.S. total revenue | 36 | % | 36 | % | 37 | % | 36 | % | 37 | % | ||||||
Pre-tax operating margin | 33 | % | 31 | % | 34 | % | 32 | % | 34 | % | ||||||
Net interest margin | 1.12 | % | 1.20 | % | 1.26 | % | 1.16 | % | 1.24 | % | ||||||
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b) | 1.12 | % | 1.20 | % | 1.26 | % | 1.16 | % | 1.25 | % | ||||||
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c) | $ | 35.5 | $ | 34.5 | $ | 33.6 | $ | 35.5 | $ | 33.6 | ||||||
Assets under management (“AUM”) at period end (in billions) (d) | $ | 1,843 | $ | 1,841 | $ | 1,805 | $ | 1,843 | $ | 1,805 | ||||||
Market value of securities on loan at period end (in billions) (e) | $ | 369 | $ | 377 | $ | 432 | $ | 369 | $ | 432 | ||||||
Average common shares and equivalents outstanding (in thousands): | ||||||||||||||||
Basic | 951,281 | 962,397 | 1,010,179 | 956,887 | 1,013,507 | |||||||||||
Diluted | 953,928 | 965,960 | 1,014,357 | 959,957 | 1,018,020 | |||||||||||
Selected average balances: | ||||||||||||||||
Interest-earning assets | $ | 287,417 | $ | 282,185 | $ | 292,086 | $ | 284,816 | $ | 297,050 | ||||||
Total assets | $ | 342,384 | $ | 336,165 | $ | 346,328 | $ | 339,292 | $ | 352,219 | ||||||
Interest-bearing deposits | $ | 167,545 | $ | 159,879 | $ | 152,799 | $ | 163,734 | $ | 154,244 | ||||||
Noninterest-bearing deposits | $ | 52,956 | $ | 54,583 | $ | 64,768 | $ | 53,765 | $ | 67,869 | ||||||
Long-term debt | $ | 27,681 | $ | 28,254 | $ | 28,349 | $ | 27,966 | $ | 28,378 | ||||||
Preferred stock | $ | 3,542 | $ | 3,542 | $ | 3,542 | $ | 3,542 | $ | 3,542 | ||||||
Total The Bank of New York Mellon Corporation common shareholders’ equity | $ | 37,487 | $ | 37,086 | $ | 37,750 | $ | 37,287 | $ | 37,672 | ||||||
Other information at period end: | ||||||||||||||||
Cash dividends per common share | $ | 0.28 | $ | 0.28 | $ | 0.24 | $ | 0.56 | $ | 0.48 | ||||||
Common dividend payout ratio | 28 | % | 30 | % | 23 | % | 29 | % | 22 | % | ||||||
Common dividend yield (annualized) | 2.5 | % | 2.3 | % | 1.8 | % | 2.6 | % | 1.8 | % | ||||||
Closing stock price per common share | $ | 44.15 | $ | 50.43 | $ | 53.93 | $ | 44.15 | $ | 53.93 | ||||||
Market capitalization | $ | 41,619 | $ | 48,288 | $ | 53,927 | $ | 41,619 | $ | 53,927 | ||||||
Book value per common share | $ | 40.30 | $ | 39.36 | $ | 37.97 | $ | 40.30 | $ | 37.97 | ||||||
Tangible book value per common share – Non-GAAP (a) | $ | 20.45 | $ | 19.74 | $ | 19.00 | $ | 20.45 | $ | 19.00 | ||||||
Full-time employees | 49,100 | 49,800 | 52,000 | 49,100 | 52,000 | |||||||||||
Common shares outstanding (in thousands) | 942,662 | 957,517 | 999,945 | 942,662 | 999,945 |
2 BNY Mellon
Consolidated Financial Highlights (unaudited) (continued)
Regulatory capital and other ratios | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | |||
Average liquidity coverage ratio (“LCR”) | 117 | % | 118 | % | 118 | % |
Regulatory capital ratios: (f) | ||||||
Advanced: | ||||||
Common Equity Tier 1 (“CET1”) ratio | 11.1 | % | 11.1 | % | 10.7 | % |
Tier 1 capital ratio | 13.2 | 13.2 | 12.8 | |||
Total capital ratio | 14.0 | 14.0 | 13.6 | |||
Standardized: | ||||||
CET1 ratio | 12.4 | % | 12.0 | % | 11.7 | % |
Tier 1 capital ratio | 14.8 | 14.3 | 14.1 | |||
Total capital ratio | 15.7 | 15.3 | 15.1 | |||
Tier 1 leverage ratio | 6.8 | % | 6.8 | % | 6.6 | % |
Supplementary leverage ratio (“SLR”) | 6.3 | 6.3 | 6.0 | |||
BNY Mellon shareholders’ equity to total assets ratio | 10.9 | % | 11.9 | % | 11.2 | % |
BNY Mellon common shareholders’ equity to total assets ratio | 10.0 | 10.9 | 10.2 |
(a) | Return on tangible common equity and tangible book value per common share, 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” beginning 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 $1.4 trillion at June 30, 2019, $1.3 trillion at March 31, 2019 and $1.4 trillion at June 30, 2018. |
(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 $64 billion at June 30, 2019, $62 billion at March 31, 2019 and $70 billion at June 30, 2018. |
(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. For additional information on our capital ratios, see “Capital” beginning on page 33. |
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, 2018 (“2018 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.”
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.

Key second quarter 2019 and subsequent events
Share repurchase program and increase in cash dividend on common stock
In June 2019, our Board of Directors approved the repurchase of up to $3.94 billion of common stock starting in the third quarter of 2019 and continuing through the second quarter of 2020.
Additionally, in July 2019, our Board of Directors approved an 11% increase in the quarterly cash dividend on common stock, from $0.28 to $0.31 per share. This increased quarterly cash dividend will be paid on Aug. 9, 2019.
4 BNY Mellon
Highlights of second quarter 2019 results
Net income applicable to common shareholders was $969 million, or $1.01 per diluted common share, in the second quarter of 2019. Net income applicable to common shareholders was $1.06 billion, or $1.03 per diluted common share, in the second quarter of 2018. The highlights below are based on the second quarter of 2019 compared with the second quarter of 2018, unless otherwise noted.
• | Total revenue of $3.9 billion decreased 5% primarily reflecting: |
• | Fee revenue decreased 3% primarily reflecting cumulative AUM outflows since the second quarter of 2018, the unfavorable impact of a stronger U.S. dollar and lower foreign exchange and securities lending revenue, partially offset by higher fees in Issuer Services, growth in clearance volumes and collateral management, as well as higher client assets and volumes in Pershing. (See “Fee and other revenue” beginning on page 6.) |
• | Net interest revenue decreased 12% as the higher yield on interest-earning assets was more than offset by higher deposit and funding costs, lower noninterest-bearing deposits and loan balances and the impact of hedging activities. The impact of hedging activities is offset in foreign exchange and other trading revenue. (See “Net interest revenue” on page 8.) |
• | Noninterest expense of $2.6 billion decreased 4%. Over 1% of the decrease was driven by the favorable impact of a stronger U.S. dollar. The remaining decrease primarily reflects lower staff expense and decreases in most other expense categories, partially offset by continued investments in technology. (See “Noninterest expense” on page 11.) |
• | Effective tax rate of 20.5%. (See “Income taxes” on page 11.) |
Capital and liquidity
• | CET1 ratio under the Advanced Approach was 11.1% at June 30, 2019, unchanged compared with March 31, 2019, reflecting capital generated through earnings and the unrealized gain in our investment securities portfolio, offset by capital deployed through common stock repurchases, dividends payments and higher risk-weighted assets (“RWA”). (See “Capital” beginning on page 33.) |
• | Repurchased 15.3 million common shares for $750 million and paid $270 million in dividends to common shareholders in the second quarter of 2019. |
Highlights of our principal businesses
Investment Services
• | Total revenue decreased 3%. |
• | Income before taxes decreased 8%. |
• | AUC/A of $35.5 trillion, increased 6%, primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. |
Investment Management
• | Total revenue decreased 10%. |
• | Income before taxes decreased 17%. |
• | AUM of $1.8 trillion increased 2%, primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows. |
See “Review of businesses” and Note 20 of the Notes to Consolidated Financial Statements for additional information on our businesses.
BNY Mellon 5
Fee and other revenue
Fee and other revenue | YTD19 | |||||||||||||||||||||
2Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions, unless otherwise noted) | 2Q19 | 1Q19 | 2Q18 | 1Q19 | 2Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Investment services fees: | ||||||||||||||||||||||
Asset servicing fees (a) | $ | 1,141 | $ | 1,122 | $ | 1,157 | 2 | % | (1 | )% | $ | 2,263 | $ | 2,325 | (3 | )% | ||||||
Clearing services fees (b) | 410 | 398 | 401 | 3 | 2 | 808 | 825 | (2 | ) | |||||||||||||
Issuer services fees | 291 | 251 | 266 | 16 | 9 | 542 | 526 | 3 | ||||||||||||||
Treasury services fees | 140 | 132 | 140 | 6 | — | 272 | 278 | (2 | ) | |||||||||||||
Total investment services fees (b) | 1,982 | 1,903 | 1,964 | 4 | 1 | 3,885 | 3,954 | (2 | ) | |||||||||||||
Investment management and performance fees (b) | 833 | 841 | 901 | (1 | ) | (8 | ) | 1,674 | 1,851 | (10 | ) | |||||||||||
Foreign exchange and other trading revenue | 166 | 170 | 187 | (2 | ) | (11 | ) | 336 | 396 | (15 | ) | |||||||||||
Financing-related fees | 50 | 51 | 53 | (2 | ) | (6 | ) | 101 | 105 | (4 | ) | |||||||||||
Distribution and servicing | 31 | 31 | 34 | — | (9 | ) | 62 | 70 | (11 | ) | ||||||||||||
Investment and other income | 43 | 35 | 70 | N/M | N/M | 78 | 152 | N/M | ||||||||||||||
Total fee revenue | 3,105 | 3,031 | 3,209 | 2 | (3 | ) | 6,136 | 6,528 | (6) | |||||||||||||
Net securities gains (losses) | 7 | 1 | 1 | N/M | N/M | 8 | (48 | ) | N/M | |||||||||||||
Total fee and other revenue | $ | 3,112 | $ | 3,032 | $ | 3,210 | 3 | % | (3 | )% | $ | 6,144 | $ | 6,480 | (5 | )% | ||||||
Fee revenue as a percentage of total revenue | 79 | % | 78 | % | 78 | % | 78 | % | 78 | % | ||||||||||||
AUC/A at period end (in trillions) (c) | $ | 35.5 | $ | 34.5 | $ | 33.6 | 3 | % | 6 | % | $ | 35.5 | $ | 33.6 | 6 | % | ||||||
AUM at period end (in billions) (d) | $ | 1,843 | $ | 1,841 | $ | 1,805 | — | % | 2 | % | $ | 1,843 | $ | 1,805 | 2 | % |
(a) | Asset servicing fees include securities lending revenue of $44 million in the second quarter of 2019, $48 million in the first quarter of 2019, $60 million in the second quarter of 2018, $92 million in the first six months of 2019 and $115 million in the first six months of 2018. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Includes the AUC/A of CIBC Mellon of $1.4 trillion at June 30, 2019, $1.3 trillion at March 31, 2019 and $1.4 trillion at June 30, 2018. |
(d) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
N/M - Not meaningful.
Fee and other revenue decreased 3% compared with the second quarter of 2018 and increased 3% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower investment management and performance fees, investment and other income, foreign exchange and other trading revenue and asset servicing fees, partially offset by an increase in issuer services and clearing services fees. The increase compared with the first quarter of 2019 primarily reflects higher issuer services, asset servicing and clearing services fees.
Investment services fees
Investment services fees were impacted by the following compared with the second quarter of 2018 and the first quarter of 2019:
• | Asset servicing fees decreased 1% compared with the second quarter of 2018 and increased 2% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower securities lending revenue, lower client activity and the unfavorable |
impact of a stronger U.S. dollar, partially offset by growth in clearance volumes and collateral management. The increase compared with the first quarter of 2019 primarily reflects growth in clearance volumes and collateral management.
• | Clearing services fees increased 2% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. Both increases primarily reflect higher client assets and volumes. |
• | Issuer services fees increased 9% compared with the second quarter of 2018 and 16% compared with the first quarter of 2019. Both increases primarily reflect higher fees in Depositary Receipts and Corporate Trust. |
• | Treasury services fees was unchanged compared with the second quarter of 2018 and increased 6% compared with the first quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects 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 decreased 8% compared with the second quarter of 2018 and 1% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects the impact of cumulative AUM outflows since the second quarter of 2018 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), partially offset by higher market values. On a constant currency basis (Non-GAAP), investment management and performance fees decreased 6% compared with the second quarter of 2018. The decrease compared with the first quarter of 2019 primarily reflects the timing of performance fees, partially offset by higher market values. Performance fees were $2 million in the second quarter of 2019, $12 million in the second quarter of 2018 and $31 million in the first quarter of 2019.
AUM was $1.8 trillion at June 30, 2019, an increase of 2% compared with June 30, 2018, primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows.
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) | 2Q19 | 1Q19 | 2Q18 | YTD19 | YTD18 | ||||||||||
Foreign exchange | $ | 150 | $ | 160 | $ | 171 | $ | 310 | $ | 354 | |||||
Other trading revenue | 16 | 10 | 16 | 26 | 42 | ||||||||||
Total foreign exchange and other trading revenue | $ | 166 | $ | 170 | $ | 187 | $ | 336 | $ | 396 |
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. In the second quarter of 2019, foreign exchange revenue totaled $150 million, a decrease of 12% compared with the second quarter of 2018 and 6% compared with the first quarter of 2019. Both decreases primarily reflect lower volumes and volatility. Foreign exchange revenue is primarily reported in the Investment Services business and, to a
lesser extent, the Investment Management business and the Other segment.
Distribution and servicing fees
Distribution and servicing fees decreased compared with the second quarter of 2018 and was unchanged compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower fees from mutual funds.
Investment and other income
The following table provides the components of investment and other income.
Investment and other income | |||||||||||||||
(in millions) | 2Q19 | 1Q19 | 2Q18 | YTD19 | YTD18 | ||||||||||
Corporate/bank-owned life insurance | $ | 32 | $ | 30 | $ | 31 | $ | 62 | $ | 67 | |||||
Expense reimbursements from joint venture | 19 | 19 | 19 | 38 | 35 | ||||||||||
Seed capital gains (a)(b) | 8 | 2 | 3 | 10 | 3 | ||||||||||
Asset-related gains | 1 | 1 | 15 | 2 | 61 | ||||||||||
Other (loss) income (b) | (17 | ) | (17 | ) | 2 | (34 | ) | (14 | ) | ||||||
Total investment and other income | $ | 43 | $ | 35 | $ | 70 | $ | 78 | $ | 152 |
(a) | Excludes seed capital gains related to consolidated investment management funds, which are reflected in operations of consolidated investment management funds. |
(b) | The first quarter 2019 amounts were adjusted to correct the classification of certain revenue between seed capital and other income. |
Investment and other income decreased compared with the second quarter of 2018 and increased compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower asset-related gains, foreign currency translation and increased pre-tax losses on investments in renewable energy, partially offset by higher seed capital gains. The increase compared with the first quarter of 2019 primarily reflects higher seed capital gains.
Year-to-date 2019 compared with year-to-date 2018
Fee and other revenue decreased 5% compared with the first six months of 2018, primarily reflecting lower investment management and performance fees, investment and other income, asset servicing fees and foreign exchange and other trading revenue, partially offset by net securities losses recorded in the first six months of 2018. The 10% decrease in investment management and performance fees primarily reflects the impact of cumulative AUM outflows since the
BNY Mellon 7
second quarter of 2018, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of divestitures. The decrease in investment and other income primarily reflects lower asset-related gains, which included the gain on the sale of CenterSquare and gains on equity investments both recorded in the first quarter of 2018. The 3% decrease in asset servicing fees primarily reflects lower client activity, the unfavorable impact
of a stronger U.S. dollar and lower securities lending revenue, partially offset by growth in clearance volumes and collateral management. The 15% decrease in foreign exchange and other trading revenue primarily reflects lower foreign exchange volumes and volatility. Net securities losses in the first six months of 2018 were driven by sales of debt securities.
Net interest revenue
Net interest revenue | YTD19 | |||||||||||||||||||||
2Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 2Q18 | 1Q19 | 2Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Net interest revenue | $ | 802 | $ | 841 | $ | 916 | (5 | )% | (12 | )% | $ | 1,643 | $ | 1,835 | (10 | )% | ||||||
Add: Tax equivalent adjustment | 4 | 4 | 5 | N/M | N/M | 8 | 11 | N/M | ||||||||||||||
Net interest revenue on a fully taxable equivalent basis (“FTE”) – Non-GAAP (a) | $ | 806 | $ | 845 | $ | 921 | (5 | )% | (12 | )% | $ | 1,651 | $ | 1,846 | (11 | )% | ||||||
Average interest-earning assets | $ | 287,417 | $ | 282,185 | $ | 292,086 | 2 | % | (2 | )% | $ | 284,816 | $ | 297,050 | (4 | )% | ||||||
Net interest margin | 1.12 | % | 1.20 | % | 1.26 | % | (8 | ) bps | (14 | ) bps | 1.16 | % | 1.24 | % | (8 | ) bps | ||||||
Net interest margin (FTE) – Non-GAAP (a) | 1.12 | % | 1.20 | % | 1.26 | % | (8 | ) bps | (14 | ) bps | 1.16 | % | 1.25 | % | (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 decreased 12% compared with the second quarter of 2018 and 5% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects higher yields on interest-earning assets, which were more than offset by the higher deposit and funding costs, lower noninterest-bearing deposits and loan balances and the impact of hedging activities. The decrease compared with the first quarter of 2019 was primarily driven by higher interest-bearing deposit costs, lower noninterest-bearing deposit balances, lower yields on interest-earning assets and the impact of hedging activities, partially offset by the benefit of higher interest-bearing deposit balances. The impact of hedging activities is offset in foreign exchange and other trading revenue.
Net interest margin decreased 14 basis points compared with the second quarter of 2018 and 8 basis points compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects higher deposit rates, partially offset by higher asset yields. The decrease compared with the first quarter of 2019 primarily reflects higher deposit rates and lower asset yields.
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the second quarter of 2019. Approximately 45% of the average non-U.S. dollar deposits in the second quarter of 2019 were euro-denominated.
Net interest revenue in future quarters will depend on the level and mix of client deposits, deposit rates, as well as the level and shape of the yield curve which may result in lower yields on interest-earning assets.
Year-to-date 2019 compared with year-to-date 2018
Net interest revenue decreased 10% compared with the first six months of 2018, primarily driven by higher yields on interest-earning assets which were more than offset by the higher deposit and funding costs, lower noninterest-bearing deposits and loan balances and the impact of hedging activities. The impact of hedging activities is offset in foreign exchange and other trading revenue. The decrease in the net interest margin primarily reflects higher deposit rates, partially offset by higher asset yields.
8 BNY Mellon
Average balances and interest rates | Quarter ended | |||||||||||||||||||||||||
June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||||||||||||||||||||
(dollars in millions) | Average balance | Interest | Average rates | Average balance | Interest | Average rates | Average balance | Interest | Average rates | |||||||||||||||||
Assets | ||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve and other central banks | $ | 61,756 | $ | 113 | 0.72 | % | $ | 63,583 | $ | 139 | 0.87 | % | $ | 69,676 | $ | 136 | 0.77 | % | ||||||||
Interest-bearing deposits with banks (primarily foreign banks) | 13,666 | 64 | 1.87 | 13,857 | 63 | 1.85 | 15,748 | 56 | 1.41 | |||||||||||||||||
Federal funds sold and securities purchased under resale agreements (a) | 38,038 | 568 | 5.99 | 28,968 | 474 | 6.63 | 28,051 | 230 | 3.29 | |||||||||||||||||
Margin loans | 10,920 | 119 | 4.36 | 12,670 | 135 | 4.34 | 14,838 | 128 | 3.46 | |||||||||||||||||
Non-margin loans: | ||||||||||||||||||||||||||
Domestic offices | 29,492 | 284 | 3.86 | 28,177 | 269 | 3.85 | 29,970 | 257 | 3.44 | |||||||||||||||||
Foreign offices | 9,961 | 81 | 3.29 | 10,511 | 86 | 3.32 | 12,258 | 88 | 2.87 | |||||||||||||||||
Total non-margin loans | 39,453 | 365 | 3.71 | 38,688 | 355 | 3.70 | 42,228 | 345 | 3.27 | |||||||||||||||||
Securities: | ||||||||||||||||||||||||||
U.S. government obligations | 18,870 | 103 | 2.19 | 23,597 | 129 | 2.22 | 23,199 | 116 | 2.02 | |||||||||||||||||
U.S. government agency obligations | 66,445 | 428 | 2.58 | 64,867 | 427 | 2.63 | 63,022 | 374 | 2.37 | |||||||||||||||||
State and political subdivisions (b) | 1,735 | 13 | 2.89 | 2,206 | 15 | 2.71 | 2,677 | 18 | 2.75 | |||||||||||||||||
Other securities (b) | 30,770 | 157 | 2.04 | 28,647 | 151 | 2.13 | 28,863 | 126 | 1.75 | |||||||||||||||||
Trading securities (b) | 5,764 | 39 | 2.72 | 5,102 | 36 | 2.91 | 3,784 | 29 | 3.10 | |||||||||||||||||
Total securities | 123,584 | 740 | 2.40 | 124,419 | 758 | 2.45 | 121,545 | 663 | 2.19 | |||||||||||||||||
Total interest-earning assets | $ | 287,417 | $ | 1,969 | 2.74 | % | $ | 282,185 | $ | 1,924 | 2.75 | % | $ | 292,086 | $ | 1,558 | 2.14 | % | ||||||||
Noninterest-earnings assets | 54,967 | 53,980 | 54,242 | |||||||||||||||||||||||
Total assets | $ | 342,384 | $ | 336,165 | $ | 346,328 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||
Domestic offices | $ | 74,180 | $ | 251 | 1.36 | % | $ | 70,562 | $ | 224 | 1.29 | % | $ | 54,200 | $ | 105 | 0.78 | % | ||||||||
Foreign offices | 93,365 | 181 | 0.78 | 89,317 | 167 | 0.76 | 98,599 | 68 | 0.28 | |||||||||||||||||
Total interest-bearing deposits | 167,545 | 432 | 1.04 | 159,879 | 391 | 0.99 | 152,799 | 173 | 0.45 | |||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements (a) | 11,809 | 372 | 12.64 | 11,922 | 331 | 11.26 | 18,146 | 158 | 3.48 | |||||||||||||||||
Trading liabilities | 1,735 | 11 | 2.47 | 1,305 | 7 | 2.25 | 1,198 | 7 | 2.43 | |||||||||||||||||
Other borrowed funds | 2,455 | 20 | 3.36 | 3,305 | 24 | 2.87 | 2,399 | 14 | 2.40 | |||||||||||||||||
Commercial paper | 2,957 | 18 | 2.43 | 1,377 | 8 | 2.44 | 3,869 | 21 | 2.13 | |||||||||||||||||
Payables to customers and broker-dealers | 15,666 | 69 | 1.76 | 16,108 | 70 | 1.76 | 16,349 | 45 | 1.10 | |||||||||||||||||
Long-term debt | 27,681 | 241 | 3.45 | 28,254 | 248 | 3.52 | 28,349 | 219 | 3.06 | |||||||||||||||||
Total interest-bearing liabilities | $ | 229,848 | $ | 1,163 | 2.03 | % | $ | 222,150 | $ | 1,079 | 1.96 | % | $ | 223,109 | $ | 637 | 1.14 | % | ||||||||
Total noninterest-bearing deposits | 52,956 | 54,583 | 64,768 | |||||||||||||||||||||||
Other noninterest-bearing liabilities | 18,362 | 18,628 | 16,857 | |||||||||||||||||||||||
Total liabilities | 301,166 | 295,361 | 304,734 | |||||||||||||||||||||||
Temporary equity | ||||||||||||||||||||||||||
Redeemable noncontrolling interests | 53 | 70 | 184 | |||||||||||||||||||||||
Permanent equity | ||||||||||||||||||||||||||
Total The Bank of New York Mellon Corporation shareholders’ equity | 41,029 | 40,628 | 41,292 | |||||||||||||||||||||||
Noncontrolling interests | 136 | 106 | 118 | |||||||||||||||||||||||
Total permanent equity | 41,165 | 40,734 | 41,410 | |||||||||||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 342,384 | $ | 336,165 | $ | 346,328 | ||||||||||||||||||||
Net interest revenue (FTE) – Non-GAAP | $ | 806 | $ | 845 | $ | 921 | ||||||||||||||||||||
Net interest margin (FTE) – Non-GAAP | 1.12 | % | 1.20 | % | 1.26 | % | ||||||||||||||||||||
Less: Tax equivalent adjustment (b) | 4 | 4 | 5 | |||||||||||||||||||||||
Net interest revenue – GAAP | $ | 802 | $ | 841 | $ | 916 | ||||||||||||||||||||
Net interest margin – GAAP | 1.12 | % | 1.20 | % | 1.26 | % |
(a) | Includes the average impact of offsetting under enforceable netting agreements of approximately $51 billion for the second quarter of 2019, $44 billion for the first quarter of 2019 and $18 billion for the second quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the yield on federal funds sold and securities purchased under resale agreements would have been 2.57% for the second quarter of 2019, 2.63% for the first quarter of 2019 and 2.01% for the second quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the rate on federal funds purchased and securities sold under repurchase agreements would have been 2.39% for the second quarter of 2019, 2.40% for the first quarter of 2019 and 1.75% for the second quarter of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates earned and paid. |
(b) | Average rates were calculated on an FTE basis, at tax rates of approximately 21%, and annualized. |
BNY Mellon 9
Average balances and interest rates | Year-to-date | ||||||||||||||||
June 30, 2019 | June 30, 2018 | ||||||||||||||||
(dollars in millions) | Average balance | Interest | Average rates | Average balance | Interest | Average rates | |||||||||||
Assets | |||||||||||||||||
Interest-earning assets: | |||||||||||||||||
Interest-bearing deposits with the Federal Reserve and other central banks | $ | 62,665 | $ | 252 | 0.80 | % | $ | 74,346 | $ | 262 | 0.70 | % | |||||
Interest-bearing deposits with banks (primarily foreign banks) | 13,761 | 127 | 1.86 | 14,804 | 98 | 1.33 | |||||||||||
Federal funds sold and securities purchased under resale agreements (a) | 33,528 | 1,042 | 6.26 | 27,978 | 400 | 2.88 | |||||||||||
Margin loans | 11,790 | 254 | 4.35 | 15,254 | 243 | 3.21 | |||||||||||
Non-margin loans: | |||||||||||||||||
Domestic offices | 28,838 | 553 | 3.85 | 30,191 | 485 | 3.23 | |||||||||||
Foreign offices | 10,235 | 167 | 3.30 | 12,387 | 165 | 2.68 | |||||||||||
Total non-margin loans | 39,073 | 720 | 3.71 | 42,578 | 650 | 3.07 | |||||||||||
Securities: | |||||||||||||||||
U.S. government obligations | 21,220 | 232 | 2.21 | 23,329 | 225 | 1.95 | |||||||||||
U.S. government agency obligations | 65,660 | 855 | 2.60 | 62,998 | 724 | 2.30 | |||||||||||
State and political subdivisions (b) | 1,969 | 28 | 2.80 | 2,776 | 37 | 2.68 | |||||||||||
Other securities (b) | 29,715 | 308 | 2.08 | 29,005 | 249 | 1.72 | |||||||||||
Trading securities (b) | 5,435 | 75 | 2.81 | 3,982 | 57 | 2.85 | |||||||||||
Total securities | 123,999 | 1,498 | 2.42 | 122,090 | 1,292 | 2.12 | |||||||||||
Total interest-earning assets | $ | 284,816 | $ | 3,893 | 2.75 | % | $ | 297,050 | $ | 2,945 | 1.99 | % | |||||
Noninterest-earnings assets | 54,476 | 55,169 | |||||||||||||||
Total assets | $ | 339,292 | $ | 352,219 | |||||||||||||
Liabilities | |||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||
Domestic offices | $ | 72,381 | $ | 475 | 1.32 | % | $ | 52,914 | $ | 176 | 0.67 | % | |||||
Foreign offices | 91,353 | 348 | 0.77 | 101,330 | 114 | 0.23 | |||||||||||
Total interest-bearing deposits | 163,734 | 823 | 1.01 | 154,244 | 290 | 0.38 | |||||||||||
Federal funds purchased and securities sold under repurchase agreements (a) | 11,865 | 703 | 11.95 | 18,552 | 265 | 2.88 | |||||||||||
Trading liabilities | 1,521 | 18 | 2.37 | 1,382 | 16 | 2.33 | |||||||||||
Other borrowed funds | 2,878 | 44 | 3.08 | 2,260 | 23 | 2.06 | |||||||||||
Commercial paper | 2,171 | 26 | 2.43 | 3,502 | 33 | 1.89 | |||||||||||
Payables to customers and broker-dealers | 15,887 | 139 | 1.76 | 16,723 | 76 | 0.92 | |||||||||||
Long-term debt | 27,966 | 489 | 3.48 | 28,378 | 396 | 2.78 | |||||||||||
Total interest-bearing liabilities | $ | 226,022 | $ | 2,242 | 2.00 | % | $ | 225,041 | $ | 1,099 | 0.98 | % | |||||
Total noninterest-bearing deposits | 53,765 | 67,869 | |||||||||||||||
Other noninterest-bearing liabilities | 18,494 | 17,710 | |||||||||||||||
Total liabilities | 298,281 | 310,620 | |||||||||||||||
Temporary equity | |||||||||||||||||
Redeemable noncontrolling interests | 65 | 188 | |||||||||||||||
Permanent equity | |||||||||||||||||
Total The Bank of New York Mellon Corporation shareholders’ equity | 40,829 | 41,214 | |||||||||||||||
Noncontrolling interests | 117 | 197 | |||||||||||||||
Total permanent equity | 40,946 | 41,411 | |||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 339,292 | $ | 352,219 | |||||||||||||
Net interest revenue (FTE) – Non-GAAP | $ | 1,651 | $ | 1,846 | |||||||||||||
Net interest margin (FTE) – Non-GAAP | 1.16 | % | 1.25 | % | |||||||||||||
Less: Tax equivalent adjustment (b) | 8 | 11 | |||||||||||||||
Net interest revenue – GAAP | $ | 1,643 | $ | 1,835 | |||||||||||||
Net interest margin – GAAP | 1.16 | % | 1.24 | % |
(a) | Includes the average impact of offsetting under enforceable netting agreements of approximately $47 billion for the first six months of 2019 and $16 billion for the first six months of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the yield on federal funds sold and securities purchased under resale agreements would have been 2.59% for the first six months of 2019 and 1.84% for the first six months of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the rate on federal funds purchased and securities sold under repurchase agreements would have been 2.39% for the first six months of 2019 and 1.55% for the first six months of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates earned and paid. |
(b) | Average rates were calculated on an FTE basis, at tax rates of approximately 21%, and annualized. |
10 BNY Mellon
Noninterest expense
Noninterest expense | YTD19 | |||||||||||||||||||||
2Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 2Q18 | 1Q19 | 2Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Staff | $ | 1,421 | $ | 1,524 | $ | 1,489 | (7 | )% | (5 | )% | $ | 2,945 | $ | 3,065 | (4 | )% | ||||||
Professional, legal and other purchased services | 337 | 325 | 328 | 4 | 3 | 662 | 619 | 7 | ||||||||||||||
Software and equipment | 304 | 283 | 266 | 7 | 14 | 587 | 500 | 17 | ||||||||||||||
Net occupancy | 138 | 137 | 156 | 1 | (12 | ) | 275 | 295 | (7 | ) | ||||||||||||
Sub-custodian and clearing | 115 | 105 | 110 | 10 | 5 | 220 | 229 | (4 | ) | |||||||||||||
Distribution and servicing | 94 | 91 | 106 | 3 | (11 | ) | 185 | 212 | (13 | ) | ||||||||||||
Business development | 56 | 45 | 62 | 24 | (10 | ) | 101 | 113 | (11 | ) | ||||||||||||
Bank assessment charges | 31 | 31 | 47 | — | (34 | ) | 62 | 99 | (37 | ) | ||||||||||||
Amortization of intangible assets | 30 | 29 | 48 | 3 | (38 | ) | 59 | 97 | (39 | ) | ||||||||||||
Other | 121 | 129 | 135 | (6 | ) | (10 | ) | 250 | 257 | (3 | ) | |||||||||||
Total noninterest expense | $ | 2,647 | $ | 2,699 | $ | 2,747 | (2 | )% | (4 | )% | $ | 5,346 | $ | 5,486 | (3 | )% | ||||||
Full-time employees at period end | 49,100 | 49,800 | 52,000 | (1 | )% | (6 | )% |
Total noninterest expense decreased 4% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower staff expense, the favorable impact of a stronger U.S. dollar and decreases in most other expense categories, partially offset by continued investments in technology. The investments in technology are included in staff, professional, legal and other purchased services, and software and equipment expenses. The decrease compared with the first quarter of 2019 primarily reflects lower staff expense, driven by the impact of vesting of long-term stock awards for retirement eligible employees recorded in the first quarter of 2019. The decrease was partially offset by higher software and equipment, volume-related and professional, legal and other purchased services expenses.
Our investments in technology infrastructure and platforms are expected to continue at recent levels. As a result, we expect to incur higher technology-related expenses in 2019 than in 2018. This increase is expected to be mostly offset by decreases in other expenses as we continue to manage overall expenses.
Year-to-date 2019 compared with year-to-date 2018
Noninterest expense decreased 3% compared with the first six months of 2018. The decrease primarily reflects lower staff expense, the favorable impact of a stronger U.S. dollar and decreases in most other expense categories, partially offset by continued investments in technology.
Income taxes
BNY Mellon recorded an income tax provision of $264 million (20.5% effective tax rate) in the second quarter of 2019, $286 million (20.5% effective tax rate) in the second quarter of 2018 and $237 million (19.9% effective tax rate) in the first quarter of 2019. For additional information, see Note 12 of the Notes to Consolidated Financial Statements.
BNY Mellon 11
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, see Note 20 of the Notes to Consolidated Financial Statements. For information on the primary products and services in each line of business, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 23 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the second quarter of 2019. 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, staff expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. 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 and first quarters, as those quarters represent 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 June 30, 2019, 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.
See Note 20 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.
12 BNY Mellon
Investment Services business
YTD19 | ||||||||||||||||||||||||||||
(dollars in millions unless otherwise noted) | 2Q19 vs. | vs. | ||||||||||||||||||||||||||
2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | 1Q19 | 2Q18 | YTD19 | YTD18 | YTD18 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Investment services fees: | ||||||||||||||||||||||||||||
Asset servicing fees (a) | $ | 1,120 | $ | 1,103 | $ | 1,106 | $ | 1,136 | $ | 1,135 | 2 | % | (1 | )% | $ | 2,223 | $ | 2,278 | (2 | )% | ||||||||
Clearing services fees (b) | 411 | 398 | 398 | 393 | 400 | 3 | 3 | 809 | 824 | (2 | ) | |||||||||||||||||
Issuer services fees | 291 | 251 | 286 | 288 | 265 | 16 | 10 | 542 | 525 | 3 | ||||||||||||||||||
Treasury services fees | 140 | 132 | 139 | 136 | 140 | 6 | — | 272 | 278 | (2 | ) | |||||||||||||||||
Total investment services fees (b) | 1,962 | 1,884 | 1,929 | 1,953 | 1,940 | 4 | 1 | 3,846 | 3,905 | (2 | ) | |||||||||||||||||
Foreign exchange and other trading revenue | 153 | 157 | 163 | 161 | 172 | (3 | ) | (11 | ) | 310 | 341 | (9 | ) | |||||||||||||||
Other (b)(c) | 112 | 113 | 121 | 116 | 121 | (1 | ) | (7 | ) | 225 | 237 | (5 | ) | |||||||||||||||
Total fee and other revenue | 2,227 | 2,154 | 2,213 | 2,230 | 2,233 | 3 | — | 4,381 | 4,483 | (2 | ) | |||||||||||||||||
Net interest revenue | 775 | 796 | 827 | 827 | 874 | (3 | ) | (11 | ) | 1,571 | 1,718 | (9 | ) | |||||||||||||||
Total revenue | 3,002 | 2,950 | 3,040 | 3,057 | 3,107 | 2 | (3 | ) | 5,952 | 6,201 | (4 | ) | ||||||||||||||||
Provision for credit losses | (4 | ) | 8 | 6 | 1 | 1 | N/M | N/M | 4 | (6 | ) | N/M | ||||||||||||||||
Noninterest expense (excluding amortization of intangible assets) | 1,934 | 1,949 | 2,090 | 1,995 | 1,931 | (1 | ) | — | 3,883 | 3,844 | 1 | |||||||||||||||||
Amortization of intangible assets | 20 | 20 | 22 | 35 | 36 | — | (44 | ) | 40 | 72 | (44 | ) | ||||||||||||||||
Total noninterest expense | 1,954 | 1,969 | 2,112 | 2,030 | 1,967 | (1 | ) | (1 | ) | 3,923 | 3,916 | — | ||||||||||||||||
Income before taxes | $ | 1,052 | $ | 973 | $ | 922 | $ | 1,026 | $ | 1,139 | 8 | % | (8 | )% | $ | 2,025 | $ | 2,291 | (12 | )% | ||||||||
Pre-tax operating margin | 35 | % | 33 | % | 30 | % | 34 | % | 37 | % | 34 | % | 37 | % | ||||||||||||||
Securities lending revenue | $ | 40 | $ | 44 | $ | 43 | $ | 52 | $ | 55 | (9 | )% | (27 | )% | $ | 84 | $ | 103 | (18 | )% | ||||||||
Total revenue by line of business: | ||||||||||||||||||||||||||||
Asset Servicing | $ | 1,391 | $ | 1,407 | $ | 1,435 | $ | 1,458 | $ | 1,520 | (1 | )% | (8 | )% | $ | 2,798 | $ | 3,039 | (8 | )% | ||||||||
Pershing | 564 | 554 | 558 | 558 | 558 | 2 | 1 | 1,118 | 1,139 | (2 | ) | |||||||||||||||||
Issuer Services | 446 | 396 | 441 | 453 | 431 | 13 | 3 | 842 | 849 | (1 | ) | |||||||||||||||||
Treasury Services | 317 | 317 | 328 | 324 | 329 | — | (4 | ) | 634 | 650 | (2 | ) | ||||||||||||||||
Clearance and Collateral Management | 284 | 276 | 278 | 264 | 269 | 3 | 6 | 560 | 524 | 7 | ||||||||||||||||||
Total revenue by line of business | $ | 3,002 | $ | 2,950 | $ | 3,040 | $ | 3,057 | $ | 3,107 | 2 | % | (3 | )% | $ | 5,952 | $ | 6,201 | (4 | )% | ||||||||
Metrics: | ||||||||||||||||||||||||||||
Average loans | $ | 32,287 | $ | 33,171 | $ | 35,540 | $ | 35,044 | $ | 38,002 | (3 | )% | (15 | )% | $ | 32,726 | $ | 38,598 | (15 | )% | ||||||||
Average deposits | $ | 201,146 | $ | 195,082 | $ | 203,416 | $ | 192,741 | $ | 203,064 | 3 | % | (1 | )% | $ | 198,131 | $ | 208,567 | (5 | )% | ||||||||
AUC/A at period end (in trillions) (d) | $ | 35.5 | $ | 34.5 | $ | 33.1 | $ | 34.5 | $ | 33.6 | 3 | % | 6 | % | $ | 35.5 | $ | 33.6 | 6 | % | ||||||||
Market value of securities on loan at period end (in billions) (e) | $ | 369 | $ | 377 | $ | 373 | $ | 415 | $ | 432 | (2 | )% | (15 | )% | $ | 369 | $ | 432 | (15 | )% | ||||||||
Pershing: | ||||||||||||||||||||||||||||
Average active clearing accounts (U.S. platform) (in thousands) | 6,254 | 6,169 | 6,125 | 6,108 | 6,080 | 1 | % | 3 | % | |||||||||||||||||||
Average long-term mutual fund assets (U.S. platform) | $ | 532,384 | $ | 507,606 | $ | 489,491 | $ | 527,336 | $ | 512,645 | 5 | % | 4 | % | ||||||||||||||
Average investor margin loans (U.S. platform) | $ | 9,440 | $ | 10,093 | $ | 10,921 | $ | 10,696 | $ | 10,772 | (6 | )% | (12 | )% | ||||||||||||||
Clearance and Collateral Management: | ||||||||||||||||||||||||||||
Average tri-party collateral management balances (in billions) | $ | 3,400 | $ | 3,266 | $ | 3,181 | $ | 2,995 | $ | 2,801 | 4 | % | 21 | % |
(a) | Asset servicing fees include the fees from the Clearance and Collateral Management business. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Other revenue includes investment management and performance fees, financing-related fees, distribution and servicing revenue and investment and other income. |
(d) | Includes the AUC/A of CIBC Mellon of $1.4 trillion at June 30, 2019, $1.3 trillion at March 31, 2019, $1.2 trillion at Dec. 31, 2018 and $1.4 trillion at Sept. 30, 2018 and June 30, 2018. |
(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 agent on behalf of CIBC Mellon clients, which totaled $64 billion at June 30, 2019, $62 billion at March 31, 2019, $58 billion at Dec. 31, 2018, $69 billion at Sept. 30, 2018 and $70 billion at June 30, 2018. |
N/M - Not meaningful.
BNY Mellon 13
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 $35.5 trillion of AUC/A at June 30, 2019.
• | 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 an average of $3.4 trillion serviced globally including approximately $2.5 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 $4.1 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 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 global payments, liquidity management, payables/receivables and trade finance services for financial institutions, corporations and the public sector.
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 with their liquidity, financing, risk and balance sheet challenges.
Review of financial results
AUC/A increased 6% compared with June 30, 2018 to $35.5 trillion, primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. AUC/A consisted of 35% equity securities and 65% fixed-income securities at June 30, 2019 and 37% equity securities and 63% fixed-income securities at June 30, 2018.
Total revenue of $3.0 billion decreased 3% compared with the second quarter of 2018 and increased 2% compared with the first quarter of 2019. The drivers of total revenue by line of business are indicated below.
Asset Servicing revenue of $1.4 billion decreased 8% compared with the second quarter of 2018 and 1% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower net interest revenue, lower foreign exchange and securities lending revenue, lower client activity and the unfavorable impact of a stronger U.S. dollar. The decrease compared with the
14 BNY Mellon
first quarter of 2019 primarily reflects lower net interest revenue.
Pershing revenue of $564 million increased 1% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. Both increases primarily reflect higher client assets and volumes, partially offset by lower net interest revenue.
Issuer Services revenue of $446 million increased 3% compared with the second quarter of 2018 and 13% compared with the first quarter of 2019. Both increases primarily reflect higher fees in Depositary Receipts and Corporate Trust. The increase compared with the second quarter of 2018 was partially offset by lower net interest revenue in Corporate Trust.
Treasury Services revenue of $317 million decreased 4% compared with the second quarter of 2018 and was unchanged compared with the first quarter of 2019. The decrease primarily reflects lower net interest revenue.
Clearance and Collateral Management revenue of $284 million increased 6% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. Both increases primarily reflect growth in clearance volumes and collateral management, partially offset by lower 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 $2.0 billion decreased 1% compared with the second quarter of 2018 and first quarter of 2019. The decrease compared with the second quarter of 2018 was primarily driven by lower staff expense and bank assessment charges and the favorable impact of a stronger U.S. dollar, partially offset by higher investments in technology. The decrease compared with the first quarter of 2019 primarily reflects lower staff expense, partially offset by higher volume-related expenses.
Year-to date 2019 compared with year-to-date 2018
Total revenue of $6.0 billion decreased 4% compared with the first six months of 2018. Asset Servicing revenue of $2.8 billion decreased 8% primarily reflecting lower net interest revenue, lower foreign exchange and securities lending revenue, the unfavorable impact of a stronger U.S. dollar and lower client activity. Pershing revenue of $1.1 billion decreased 2% primarily reflecting previously disclosed lost business and lower net interest revenue, partially offset by higher client assets. Issuer Services revenue of $842 million decreased 1% primarily reflecting lower net interest revenue due to lower Corporate Trust deposits and lower fees in Depositary Receipts, partially offset by higher fees in Corporate Trust. Treasury Services revenue of $634 million decreased 2% primarily reflecting lower net interest revenue. Clearance and Collateral Management revenue of $560 million increased 7% primarily reflecting growth in collateral management and clearance volumes, partially offset by lower net interest revenue.
Noninterest expense of $3.9 billion increased less than 1% compared with the first six months of 2018 primarily reflecting higher investments in technology, partially offset by lower staff expense, the favorable impact of a stronger U.S. dollar and lower bank assessment charges.
BNY Mellon 15
Investment Management business
YTD19 | ||||||||||||||||||||||||||||
2Q19 vs. | vs. | |||||||||||||||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | 1Q19 | 2Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Investment management fees (a) | $ | 827 | $ | 806 | $ | 826 | $ | 879 | $ | 885 | 3 | % | (7 | )% | $ | 1,633 | $ | 1,783 | (8 | )% | ||||||||
Performance fees | 2 | 31 | 54 | 30 | 12 | N/M | (83 | ) | 33 | 60 | (45 | ) | ||||||||||||||||
Investment management and performance fees (b) | 829 | 837 | 880 | 909 | 897 | (1 | ) | (8 | ) | 1,666 | 1,843 | (10 | ) | |||||||||||||||
Distribution and servicing | 44 | 45 | 45 | 47 | 48 | (2 | ) | (8 | ) | 89 | 98 | (9 | ) | |||||||||||||||
Other (a) | (23 | ) | (18 | ) | (35 | ) | (18 | ) | (4 | ) | N/M | N/M | (41 | ) | 12 | N/M | ||||||||||||
Total fee and other revenue (a) | 850 | 864 | 890 | 938 | 941 | (2 | ) | (10 | ) | 1,714 | 1,953 | (12 | ) | |||||||||||||||
Net interest revenue | 67 | 75 | 73 | 77 | 77 | (11 | ) | (13 | ) | 142 | 153 | (7 | ) | |||||||||||||||
Total revenue | 917 | 939 | 963 | 1,015 | 1,018 | (2 | ) | (10 | ) | 1,856 | 2,106 | (12 | ) | |||||||||||||||
Provision for credit losses | (2 | ) | 1 | 1 | (2 | ) | 2 | N/M | N/M | (1 | ) | 4 | N/M | |||||||||||||||
Noninterest expense (excluding amortization of intangible assets) | 645 | 660 | 702 | 688 | 685 | (2 | ) | (6 | ) | 1,305 | 1,377 | (5 | ) | |||||||||||||||
Amortization of intangible assets | 9 | 9 | 13 | 13 | 12 | — | (25 | ) | 18 | 25 | (28 | ) | ||||||||||||||||
Total noninterest expense | 654 | 669 | 715 | 701 | 697 | (2 | ) | (6 | ) | 1,323 | 1,402 | (6 | ) | |||||||||||||||
Income before taxes | $ | 265 | $ | 269 | $ | 247 | $ | 316 | $ | 319 | (1 | )% | (17 | )% | $ | 534 | $ | 700 | (24 | )% | ||||||||
Pre-tax operating margin | 29 | % | 29 | % | 26 | % | 31 | % | 31 | % | 29 | % | 33 | % | ||||||||||||||
Adjusted pre-tax operating margin – Non-GAAP (c) | 32 | % | 32 | % | 29 | % | 35 | % | 35 | % | 32 | % | 37 | % | ||||||||||||||
Total revenue by line of business: | ||||||||||||||||||||||||||||
Asset Management | $ | 618 | $ | 637 | $ | 660 | $ | 704 | $ | 702 | (3 | )% | (12 | )% | $ | 1,255 | $ | 1,472 | (15 | )% | ||||||||
Wealth Management | 299 | 302 | 303 | 311 | 316 | (1 | ) | (5 | ) | 601 | 634 | (5 | ) | |||||||||||||||
Total revenue by line of business | $ | 917 | $ | 939 | $ | 963 | $ | 1,015 | $ | 1,018 | (2 | )% | (10 | )% | $ | 1,856 | $ | 2,106 | (12 | )% | ||||||||
Average balances: | ||||||||||||||||||||||||||||
Average loans | $ | 16,322 | $ | 16,403 | $ | 16,485 | $ | 16,763 | $ | 16,974 | — | % | (4 | )% | $ | 16,363 | $ | 16,926 | (3 | )% | ||||||||
Average deposits | $ | 14,615 | $ | 15,815 | $ | 14,893 | $ | 14,634 | $ | 14,252 | (8 | )% | 3 | % | $ | 15,211 | $ | 13,810 | 10 | % |
(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 fees, treasury services fees, foreign exchange and other trading revenue and investment and other income. |
(b) | On a constant currency basis, investment management and performance fees decreased 6% (Non-GAAP) compared with the second quarter of 2018. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of this Non-GAAP measure. |
(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. |
N/M - Not meaningful.
16 BNY Mellon
AUM trends | 2Q19 vs. | ||||||||||||||||||
(dollars in billions) | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | 1Q19 | 2Q18 | ||||||||||||
AUM at period end, by product type: (a) | |||||||||||||||||||
Equity | $ | 152 | $ | 149 | $ | 135 | $ | 167 | $ | 160 | 2 | % | (5 | )% | |||||
Fixed income | 209 | 208 | 200 | 202 | 197 | — | 6 | ||||||||||||
Index | 322 | 333 | 301 | 352 | 334 | (3 | ) | (4 | ) | ||||||||||
Liability-driven investments | 709 | 709 | 659 | 652 | 663 | — | 7 | ||||||||||||
Multi-asset and alternative investments | 184 | 178 | 167 | 184 | 181 | 3 | 2 | ||||||||||||
Cash | 267 | 264 | 260 | 271 | 270 | 1 | (1 | ) | |||||||||||
Total AUM by product type | $ | 1,843 | $ | 1,841 | $ | 1,722 | $ | 1,828 | $ | 1,805 | — | % | 2 | % | |||||
Changes in AUM: (a) | |||||||||||||||||||
Beginning balance of AUM | $ | 1,841 | $ | 1,722 | $ | 1,828 | $ | 1,805 | $ | 1,868 | |||||||||
Net (outflows) inflows: | |||||||||||||||||||
Long-term strategies: | |||||||||||||||||||
Equity | (2 | ) | (4 | ) | (8 | ) | (2 | ) | (3 | ) | |||||||||
Fixed income | (4 | ) | 3 | (1 | ) | 2 | (4 | ) | |||||||||||
Liability-driven investments | 1 | 5 | 14 | 16 | 2 | ||||||||||||||
Multi-asset and alternative investments | 1 | (4 | ) | (2 | ) | 2 | (3 | ) | |||||||||||
Total long-term active strategies (outflows) inflows | (4 | ) | — | 3 | 18 | (8 | ) | ||||||||||||
Index | (22 | ) | (2 | ) | (11 | ) | (3 | ) | (7 | ) | |||||||||
Total long-term strategies (outflows) inflows | (26 | ) | (2 | ) | (8 | ) | 15 | (15 | ) | ||||||||||
Short-term strategies: | |||||||||||||||||||
Cash | 2 | 2 | (10 | ) | — | (11 | ) | ||||||||||||
Total net (outflows) inflows | (24 | ) | — | (18 | ) | 15 | (26 | ) | |||||||||||
Net market impact | 42 | 103 | (69 | ) | 18 | 17 | |||||||||||||
Net currency impact | (16 | ) | 16 | (19 | ) | (10 | ) | (53 | ) | ||||||||||
Divestiture/other | — | — | — | — | (1 | ) | |||||||||||||
Ending balance of AUM | $ | 1,843 | $ | 1,841 | $ | 1,722 | $ | 1,828 | $ | 1,805 | — | % | 2 | % | |||||
Wealth Management client assets (b) | $ | 257 | $ | 253 | $ | 239 | $ | 261 | $ | 254 | 2 | % | 1 | % |
(a) Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b) 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 18 and 19 of our 2018 Annual Report for additional information on our Investment Management business.
Review of financial results
AUM increased 2% compared with June 30, 2018 primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows.
Net long-term strategy outflows were $26 billion in the second quarter of 2019, primarily resulting from
outflows of index and fixed income funds. Market and regulatory trends have resulted in increased demand for lower fee asset management products, and for performance-based fees.
Total revenue of $917 million decreased 10% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019.
Asset Management revenue of $618 million decreased 12% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects the change in AUM, which was impacted by the cumulative outflows since the second quarter of 2018, partially offset by higher market values. The decrease compared with the second quarter of 2018 also reflects the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of divestitures and hedging activities. The decrease compared with the first quarter of 2019 primarily reflects the timing of
BNY Mellon 17
performance fees and the impact of AUM outflows, partially offset by higher market values.
Wealth Management revenue of $299 million decreased 5% compared with the second quarter of 2018 and 1% compared with the first quarter of 2019. Both decreases primarily reflect lower net interest revenue, partially offset by higher market values.
Revenue generated in the Investment Management business included 38% from non-U.S. sources in the second quarter of 2019, compared with 41% in the second quarter of 2018 and 40% in the first quarter of 2019.
Noninterest expense of $654 million decreased 6% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. Both decreases reflect lower staff expense. The decrease compared with the second quarter of 2018 also
reflects the favorable impact of a stronger U.S. dollar and lower distribution and servicing expense.
Year-to date 2019 compared with year-to-date 2018
Total revenue of $1.9 billion decreased 12% compared with the first six months of 2018. Asset Management revenue of $1.3 billion decreased 15%, primarily reflecting net outflows, the impact of divestitures, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of hedging activities, partially offset by higher market values. Wealth management revenue of $601 million decreased 5%, reflecting lower net interest revenue and fees.
Noninterest expense of $1.3 billion decreased 6% compared with the first six months of 2018, primarily reflecting lower staff expense, the favorable impact of a stronger U.S. dollar (principally versus the British pound) and lower distribution and servicing expense.
Other segment
(in millions) | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | YTD19 | YTD18 | ||||||||||||||
Fee revenue | $ | 34 | $ | 29 | $ | 29 | $ | 7 | $ | 40 | $ | 63 | $ | 97 | |||||||
Net securities gains (losses) | 7 | 1 | — | — | 1 | 8 | (48 | ) | |||||||||||||
Total fee and other revenue | 41 | 30 | 29 | 7 | 41 | 71 | 49 | ||||||||||||||
Net interest (expense) | (40 | ) | (30 | ) | (15 | ) | (13 | ) | (35 | ) | (70 | ) | (36 | ) | |||||||
Total revenue (loss) | 1 | — | 14 | (6 | ) | 6 | 1 | 13 | |||||||||||||
Provision for credit losses | (2 | ) | (2 | ) | (7 | ) | (2 | ) | (6 | ) | (4 | ) | (6 | ) | |||||||
Noninterest expense | 39 | 61 | 160 | 6 | 81 | 100 | 168 | ||||||||||||||
(Loss) before taxes | $ | (36 | ) | $ | (59 | ) | $ | (139 | ) | $ | (10 | ) | $ | (69 | ) | $ | (95 | ) | $ | (149 | ) |
Average loans and leases | $ | 1,764 | $ | 1,784 | $ | 1,809 | $ | 2,000 | $ | 2,090 | $ | 1,774 | $ | 2,308 |
See page 20 of our 2018 Annual Report for additional information on the Other segment.
Review of financial results
Fee revenue, net securities gains and net interest expense are primarily related to corporate treasury and other investment activity, including hedging activity which offsets between fee revenue and net interest expense.
Noninterest expense decreased $42 million compared with the second quarter of 2018 and $22 million compared with the first quarter of 2019, primarily reflecting lower staff expense. The decrease compared with the second quarter of 2018 also
reflects the expenses associated with relocating our corporate headquarters, of which $12 million was recorded in the second quarter of 2018.
Year-to date 2019 compared with year-to-date 2018
Losses before taxes decreased $54 million compared with the first six months of 2018. Total revenue decreased $12 million, primarily reflecting corporate treasury activity and lower asset-related gains, partially offset by net securities losses recorded in the first six months of 2018. Noninterest expense decreased $68 million, primarily reflecting expenses associated with relocating our corporate headquarters recorded in 2018 and lower staff expense.
18 BNY Mellon
Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2018 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, goodwill and other intangibles and litigation and regulatory contingencies, as referenced below.
Critical policy | Reference |
Allowance for loan losses and allowance for lending-related commitments | 2018 Annual Report, pages 24-25. |
Fair value of financial instruments and derivatives | 2018 Annual Report, pages 25-27. |
Goodwill and other intangibles | 2018 Annual Report, page 27. Also, see below. |
Litigation and regulatory contingencies | “Legal proceedings” in Note 19 of the Notes to Consolidated Financial Statements. |
Goodwill and other intangible assets
BNY Mellon’s three business segments include seven reporting units for which goodwill impairment testing is performed on an annual basis. The Investment Services segment is comprised of four reporting units; the Investment Management segment is comprised of two reporting units and one reporting unit is included in the Other segment.
In the second quarter of 2019, we performed our annual goodwill impairment test on all seven reporting units using an income approach to estimate fair values of each reporting unit. Estimated cash flows used in the income approach were based on management’s projections as of March 31, 2019. The discount rate applied to these cash flows was 10% and incorporated a 6% market equity risk premium. Estimated cash flows extend far into the future, and, by their nature, are difficult to estimate over such an extended time frame.
As a result of the annual goodwill impairment test of the seven reporting units, no goodwill impairment was recognized. The fair values of six of the Company’s reporting units were substantially in excess of the respective reporting units’ carrying value. The Asset Management reporting unit, with $7.2 billion of allocated goodwill, which is one of the
two reporting units in the Investment Management segment, exceeded its carrying value by approximately 18%. For the Asset Management reporting unit, in the future, small changes in the assumptions, such as changes in the level of AUM and operating margin, could produce a non-cash goodwill impairment. See “Critical accounting estimates” in the 2018 Annual Report for additional information on the annual goodwill impairment test.
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 undertake overall liquidity risk, including intraday liquidity risk, that 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 June 30, 2019, total assets were $381 billion, compared with $363 billion at Dec. 31, 2018. The increase in total assets was primarily driven by higher federal funds sold and securities purchased under resale agreements. Deposits totaled $253 billion at June 30, 2019, compared with $239 billion at Dec. 31, 2018. The increase reflects higher interest-bearing deposits in both U.S. and non-U.S. offices, partially offset by lower noninterest-bearing deposits principally in U.S. offices. Total interest-bearing deposits as a percentage of total interest-earning assets were 60% at June 30, 2019 and 54% at Dec. 31, 2018.
At June 30, 2019, available funds totaled $152 billion which include cash and due from banks, interest-bearing deposits with the Federal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. This compares with available
BNY Mellon 19
funds of $135 billion at Dec. 31, 2018. Total available funds as a percentage of total assets were 40% at June 30, 2019 and 37% at Dec. 31, 2018. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”
Securities were $120.1 billion, or 32% of total assets, at June 30, 2019, compared with $119.8 billion, or 33% of total assets, at Dec. 31, 2018. Lower investments in U.S. Treasury and state and political subdivision securities were more than offset by additional investments in agency residential mortgage-backed securities (“RMBS”), sovereign debt/sovereign guaranteed securities and an increase in the net unrealized pre-tax gain, as well as additional investments in nearly all other types of securities. For additional information on our securities portfolio, see “Securities” and Note 4 of the Notes to Consolidated Financial Statements.
Loans were $52 billion, or 14% of total assets, at June 30, 2019, compared with $57 billion, or 16% of total assets, at Dec. 31, 2018. The decrease was primarily driven by lower margin loans and overdrafts. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.
Long-term debt totaled $28 billion at June 30, 2019 and $29 billion at Dec. 31, 2018. The decrease
reflects maturities of $2.8 billion, partially offset by issuances and an increase in the fair value of hedged long-term debt. For additional information on long-term debt, see “Liquidity and dividends.”
The Bank of New York Mellon Corporation total shareholders’ equity increased to $41.5 billion from $40.6 billion at Dec. 31, 2018. For additional information on our capital, see “Capital.”
Country risk exposure
The following table presents BNY Mellon’s top 10 exposures by country (excluding the U.S.) as of June 30, 2019, as well as certain countries with higher risk profiles, and is presented on an internal risk management basis. We monitor our exposure to these and other countries as part of our internal country risk management process.
The country risk exposure below reflects the Company’s risk to an immediate default of the counterparty or obligor based on the country of residence of the entity which incurs the liability. If there is credit risk mitigation, the country of residence of the entity providing the risk mitigation is the country of risk. The country of risk for investment securities is generally based on the domicile of the issuer of the security.
Country risk exposure | Interest-bearing deposits | Investment securities (b) | Total exposure | ||||||||||||||||||||
(in billions) | Central banks | Banks | Lending (a) | Other (c) | |||||||||||||||||||
Top 10 country exposure: | |||||||||||||||||||||||
UK | $ | 14.1 | $ | 1.0 | $ | 2.4 | $ | 4.2 | $ | 2.0 | $ | 23.7 | |||||||||||
Germany | 18.0 | 0.5 | 0.7 | 3.0 | 0.2 | 22.4 | |||||||||||||||||
Japan | 14.2 | 0.8 | 0.2 | — | 0.1 | 15.3 | |||||||||||||||||
Belgium | 6.0 | 1.0 | 0.1 | 0.2 | — | 7.3 | |||||||||||||||||
Canada | — | 1.6 | 0.2 | 2.6 | 0.8 | 5.2 | |||||||||||||||||
China | — | 2.2 | 0.8 | — | 0.3 | 3.3 | |||||||||||||||||
France | — | 0.2 | — | 2.0 | 0.4 | 2.6 | |||||||||||||||||
Netherlands | — | — | 0.3 | 1.8 | 0.1 | 2.2 | |||||||||||||||||
Australia | — | 1.1 | 0.3 | 0.5 | 0.3 | 2.2 | |||||||||||||||||
Italy | — | 0.7 | — | 1.3 | — | 2.0 | |||||||||||||||||
Total Top 10 country exposure | $ | 52.3 | $ | 9.1 | $ | 5.0 | $ | 15.6 | $ | 4.2 | $ | 86.2 | (d) | ||||||||||
Select country exposure: | |||||||||||||||||||||||
Spain | $ | — | $ | 0.2 | $ | 0.1 | $ | 1.3 | $ | — | $ | 1.6 | |||||||||||
Brazil | — | — | 1.4 | 0.1 | 0.1 | 1.6 | |||||||||||||||||
Total select country exposure | $ | — | $ | 0.2 | $ | 1.5 | $ | 1.4 | $ | 0.1 | $ | 3.2 |
(a) | Lending includes loans, acceptances, issued letters of credit, net of participations, and lending-related commitments. |
(b) | Investment securities include both the available-for-sale and held-to-maturity portfolios. |
(c) | Other exposures include over-the-counter (“OTC”) derivative and securities financing transactions, net of collateral. |
(d) | The top 10 country exposures comprise approximately 80% of our total non-U.S. exposure. |
20 BNY Mellon
Our largest country risk exposure, based on our internal country risk management process at June 30, 2019, was to the UK, which is planning to withdraw from the European Union (“EU”). For additional information, see “Recent accounting and regulatory developments - The United Kingdom’s Withdrawal from the European Union (“Brexit”)” in our first quarter 2019 Quarterly Report on Form 10-Q and in our 2018 Annual Report, “Risk Factors - The United Kingdom’s referendum decision to leave the EU has had and may continue to have negative effects on global economic conditions, global financial markets, and our business and results of operations.”
Events in recent years have resulted in increased focus on Italy, Spain and Brazil. The country risk exposure to Italy and Spain primarily consists of
investment grade sovereign debt. The country risk exposure to Brazil is primarily short-term trade finance loans extended to large financial institutions. We also have operations in Brazil providing investment services and investment management services.
Securities
In the discussion of our securities portfolio, we have included certain credit ratings information because the information can indicate the degree of credit risk to which we are exposed. Significant changes in ratings classifications for our securities portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our securities portfolio.
The following table shows the distribution of our total securities portfolio.
Securities portfolio | March 31, 2019 | 2Q19 change in unrealized gain (loss) | June 30, 2019 | Fair value as a % of amortized cost (a) | Unrealized gain (loss) | Ratings (b) | ||||||||||||||||||||||||
BB+ and lower | ||||||||||||||||||||||||||||||
(dollars in millions) | Fair value | Amortized cost | Fair value | AAA/ AA- | A+/ A- | BBB+/ BBB- | Not rated | |||||||||||||||||||||||
Agency RMBS | $ | 50,872 | $ | 503 | $ | 52,816 | $ | 52,860 | 100 | % | $ | 44 | 100 | % | — | % | — | % | — | % | — | % | ||||||||
U.S. Treasury | 19,545 | 82 | 18,272 | 18,284 | 100 | 12 | 100 | — | — | — | — | |||||||||||||||||||
Sovereign debt/sovereign guaranteed (c) | 12,811 | 32 | 13,007 | 13,146 | 101 | 139 | 76 | 3 | 20 | 1 | — | |||||||||||||||||||
Agency commercial mortgage-backed securities (“MBS”) | 10,800 | 56 | 10,678 | 10,689 | 100 | 11 | 100 | — | — | — | — | |||||||||||||||||||
Supranational | 3,541 | 13 | 3,903 | 3,925 | 101 | 22 | 100 | — | — | — | — | |||||||||||||||||||
U.S. government agencies | 3,556 | 8 | 3,861 | 3,866 | 100 | 5 | 100 | — | — | — | — | |||||||||||||||||||
CLOs | 3,373 | 9 | 3,665 | 3,649 | 100 | (16 | ) | 98 | — | — | 1 | 1 | ||||||||||||||||||
Foreign covered bonds (d) | 3,053 | 12 | 3,465 | 3,479 | 100 | 14 | 100 | — | — | — | — | |||||||||||||||||||
Other asset-backed securities (“ABS”) | 2,037 | 6 | 2,466 | 2,470 | 100 | 4 | 100 | — | — | — | — | |||||||||||||||||||
Non-agency commercial MBS | 1,476 | 30 | 1,968 | 1,993 | 101 | 25 | 98 | 2 | — | — | — | |||||||||||||||||||
Non-agency RMBS (e) | 1,354 | (1 | ) | 1,090 | 1,314 | 121 | 224 | 13 | 12 | 5 | 44 | 26 | ||||||||||||||||||
State and political subdivisions | 2,183 | 10 | 1,270 | 1,297 | 102 | 27 | 72 | 27 | — | — | 1 | |||||||||||||||||||
Corporate bonds | 903 | 13 | 889 | 905 | 102 | 16 | 16 | 69 | 15 | — | — | |||||||||||||||||||
Other | 1,476 | 1 | 1,671 | 1,674 | 100 | 3 | 89 | 7 | — | — | 4 | |||||||||||||||||||
Total securities | $ | 116,980 | (f) | $ | 774 | $ | 119,021 | $ | 119,551 | (f) | 100 | % | $ | 530 | (f)(g) | 95 | % | 2 | % | 2 | % | 1 | % | — | % |
(a) | Amortized cost reflects historical impairments. |
(b) | Represents ratings by Standard & Poor’s (“S&P”) or the equivalent. |
(c) | Primarily consists of exposure to UK, Germany, France, Spain, Italy and the Netherlands. |
(d) | Primarily consists of exposure to Canada, UK, Australia and Sweden. |
(e) | Includes RMBS that were included in the former Grantor Trust of $791 million at March 31, 2019 and $753 million at June 30, 2019. |
(f) | Includes net unrealized losses on derivatives hedging securities available-for-sale of $252 million at March 31, 2019 and $737 million at June 30, 2019. |
(g) | Unrealized gains of $384 million at June 30, 2019 related to available-for-sale securities, net of hedges. |
The fair value of our securities portfolio, including related hedges, was $119.6 billion at June 30, 2019, compared with $119.2 billion at Dec. 31, 2018. Lower investments in U.S. Treasury and state and political subdivision securities were more than offset
by additional investments in agency RMBS, sovereign debt/sovereign guaranteed securities and an increase in the net unrealized pre-tax gain as well as additional investments in nearly all other types of securities.
BNY Mellon 21
At June 30, 2019, the total securities portfolio had a net unrealized gain of $530 million, compared with a net unrealized loss of $907 million at Dec. 31, 2018, including the impact of related hedges. The increase in the net unrealized pre-tax gain was primarily driven by lower market interest rates.
The unrealized gain (after-tax) on our available-for-sale securities portfolio, net of hedges, included in accumulated other comprehensive income (“OCI”) was $287 million at June 30, 2019, compared with an unrealized loss (after-tax) of $167 million at Dec. 31, 2018.
At June 30, 2019, 95% of the securities in our portfolio were rated AAA/AA-, unchanged when compared with Dec. 31, 2018.
See Note 4 of the Notes to Consolidated Financial Statements for the pre-tax net securities gains (losses) by security type. See Note 16 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy.
The following table presents the amortizable purchase premium (net of discount) related to the securities portfolio and accretable discount related to the 2009 restructuring of the securities portfolio.
Net premium amortization and discount accretion of securities (a) | |||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | ||||||||||
Amortizable purchase premium (net of discount) relating to securities: | |||||||||||||||
Balance at period end | $ | 1,315 | $ | 1,388 | $ | 1,429 | $ | 1,536 | $ | 1,642 | |||||
Estimated average life remaining at period end (in years) | 4.5 | 4.8 | 5.0 | 5.2 | 5.3 | ||||||||||
Amortization | $ | 91 | $ | 78 | $ | 92 | $ | 108 | $ | 115 | |||||
Accretable discount related to the prior restructuring of the securities portfolio: | |||||||||||||||
Balance at period end | $ | 181 | $ | 193 | $ | 207 | $ | 224 | $ | 239 | |||||
Estimated average life remaining at period end (in years) | 6.3 | 6.3 | 6.3 | 6.3 | 6.3 | ||||||||||
Accretion | $ | 13 | $ | 16 | $ | 17 | $ | 20 | $ | 24 |
(a) | Amortization of purchase premium decreases net interest revenue while accretion of discount increases net interest revenue. Both were recorded on a level yield basis. |
Loans
Total exposure – consolidated | June 30, 2019 | Dec. 31, 2018 | |||||||||||||||||
(in billions) | Loans | Unfunded commitments | Total exposure | Loans | Unfunded commitments | Total exposure | |||||||||||||
Non-margin loans: | |||||||||||||||||||
Financial institutions | $ | 11.5 | $ | 35.6 | $ | 47.1 | $ | 11.6 | $ | 34.0 | $ | 45.6 | |||||||
Commercial | 1.7 | 13.6 | 15.3 | 2.1 | 15.2 | 17.3 | |||||||||||||
Subtotal institutional | 13.2 | 49.2 | 62.4 | 13.7 | 49.2 | 62.9 | |||||||||||||
Wealth management loans and mortgages | 15.7 | 0.8 | 16.5 | 16.0 | 0.8 | 16.8 | |||||||||||||
Commercial real estate | 5.2 | 3.6 | 8.8 | 4.8 | 3.5 | 8.3 | |||||||||||||
Lease financings | 1.2 | — | 1.2 | 1.3 | — | 1.3 | |||||||||||||
Other residential mortgages | 0.6 | — | 0.6 | 0.6 | — | 0.6 | |||||||||||||
Overdrafts | 4.7 | — | 4.7 | 5.5 | — | 5.5 | |||||||||||||
Other | 1.2 | — | 1.2 | 1.2 | — | 1.2 | |||||||||||||
Subtotal non-margin loans | 41.8 | 53.6 | 95.4 | 43.1 | 53.5 | 96.6 | |||||||||||||
Margin loans | 10.6 | 0.1 | 10.7 | 13.5 | 0.1 | 13.6 | |||||||||||||
Total | $ | 52.4 | $ | 53.7 | $ | 106.1 | $ | 56.6 | $ | 53.6 | $ | 110.2 |
22 BNY Mellon
At June 30, 2019, total exposures of $106.1 billion decreased 4% compared with Dec. 31, 2018, primarily reflecting lower margin loans, commercial exposure and overdrafts, partially offset by higher financial institutions exposure.
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 59% of our total exposure at June 30, 2019 and 57% at Dec. 31, 2018. Additionally, most of our overdrafts relate to financial institutions.
Financial institutions
The financial institutions portfolio is shown below.
Financial institutions portfolio exposure (dollars in billions) | June 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||
Loans | Unfunded commitments | Total exposure | % Inv. grade | % due <1 yr. | Loans | Unfunded commitments | Total exposure | ||||||||||||||||
Securities industry | $ | 2.5 | $ | 24.3 | $ | 26.8 | 99 | % | 92 | % | $ | 3.1 | $ | 22.5 | $ | 25.6 | |||||||
Asset managers | 1.4 | 6.7 | 8.1 | 98 | 81 | 1.3 | 6.1 | 7.4 | |||||||||||||||
Banks | 6.5 | 1.0 | 7.5 | 76 | 98 | 6.3 | 1.6 | 7.9 | |||||||||||||||
Insurance | 0.1 | 2.4 | 2.5 | 100 | 10 | 0.1 | 2.5 | 2.6 | |||||||||||||||
Government | 0.1 | 0.3 | 0.4 | 100 | 16 | 0.1 | 0.5 | 0.6 | |||||||||||||||
Other | 0.9 | 0.9 | 1.8 | 86 | 56 | 0.7 | 0.8 | 1.5 | |||||||||||||||
Total | $ | 11.5 | $ | 35.6 | $ | 47.1 | 95 | % | 85 | % | $ | 11.6 | $ | 34.0 | $ | 45.6 |
The financial institutions portfolio exposure was $47.1 billion at June 30, 2019, an increase of 3% from Dec. 31, 2018, primarily reflecting higher exposure to the securities industry and asset managers portfolios, partially offset by lower exposure to the banks portfolio.
Financial institution exposures are high-quality, with 95% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at June 30, 2019. Each customer is assigned an internal credit rating, which is mapped to an equivalent external rating agency grade based upon a number of dimensions, which are continually evaluated and may change over time. The exposure to financial institutions is generally short-term. Of these exposures, 85% expire within one year and 16% expire within 90 days. In addition, 84% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.
For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent to the sovereign rating of the country where the counterparty resides, regardless of the internal credit
rating assigned to the counterparty or the underlying collateral.
At June 30, 2019, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $20.6 billion and was primarily included in the securities industry portfolio. Dealers secure the outstanding intraday credit with high-quality liquid collateral having a market value in excess of the amount of the outstanding credit.
Our bank exposure primarily relates to our global trade finance. These exposures are short-term in nature, with 98% due in less than one year. The investment grade percentage of our bank exposure was 76% at June 30, 2019, compared with 77% at Dec. 31, 2018. Our non-investment grade exposures are primarily in Brazil. These loans are primarily trade finance loans.
The asset manager portfolio exposure was high-quality, with 98% of the exposures meeting our investment grade equivalent ratings criteria as of June 30, 2019. These exposures are generally short-term liquidity facilities, with the majority to regulated mutual funds.
BNY Mellon 23
Commercial
The commercial portfolio is presented below.
Commercial portfolio exposure | June 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||
(dollars in billions) | Loans | Unfunded commitments | Total exposure | % Inv. grade | % due <1 yr. | Loans | Unfunded commitments | Total exposure | |||||||||||||||
Manufacturing | $ | 0.7 | $ | 4.7 | $ | 5.4 | 94 | % | 7 | % | $ | 0.8 | $ | 5.1 | $ | 5.9 | |||||||
Services and other | 0.7 | 3.9 | 4.6 | 96 | 16 | 0.7 | 4.8 | 5.5 | |||||||||||||||
Energy and utilities | 0.3 | 3.8 | 4.1 | 95 | 7 | 0.5 | 4.1 | 4.6 | |||||||||||||||
Media and telecom | — | 1.2 | 1.2 | 93 | 8 | 0.1 | 1.2 | 1.3 | |||||||||||||||
Total | $ | 1.7 | $ | 13.6 | $ | 15.3 | 95 | % | 10 | % | $ | 2.1 | $ | 15.2 | $ | 17.3 |
The commercial portfolio exposure was $15.3 billion at June 30, 2019, a decrease of 12% from Dec. 31, 2018, primarily driven by lower unfunded commitments.
Utilities-related exposure represents approximately 76% of the energy and utilities portfolio at June 30, 2019. Included in this portfolio is unsecured funded exposure of approximately $100 million to a California utility company that filed for bankruptcy in the first quarter of 2019. In July, we entered into agreements to sell all of this exposure, which are expected to settle in the third quarter of 2019, and will result in an $8 million reduction to the allowance for credit losses.
The remaining exposure in the energy and utilities portfolio, which includes exposure to refining, exploration and production companies, integrated companies and pipelines, was 94% investment grade at June 30, 2019, and 88% at Dec. 31, 2018.
Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The following table summarizes the percentage of the financial institutions and commercial portfolio exposures that are investment grade.
Percentage of the portfolios that are investment grade | ||||||||||
Quarter ended | ||||||||||
June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | ||||||
Financial institutions | 95 | % | 94 | % | 95 | % | 94 | % | 94 | % |
Commercial | 95 | % | 95 | % | 95 | % | 95 | % | 96 | % |
Wealth management loans and mortgages
Our wealth management exposure was $16.5 billion at June 30, 2019, compared with $16.8 billion at Dec. 31, 2018. Wealth management loans and mortgages primarily consist of loans to high-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only, adjustable-rate mortgages with a weighted-average loan-to-value ratio of 62% at origination. Less than 1% of the mortgages were past due at June 30, 2019.
At June 30, 2019, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 23%; New York - 18%; Massachusetts - 10%; Florida - 8%; and other - 41%.
Commercial real estate
Our commercial real estate exposure totaled $8.8 billion at June 30, 2019, compared with $8.3 billion at Dec. 31, 2018. Our income-producing commercial real estate facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities also include construction and renovation facilities. Our client base consists of experienced developers and long-term holders of real estate assets. Loans are approved on the basis of existing or projected cash flows and supported by appraisals and knowledge of local market conditions. Development loans are structured with moderate leverage, and in many instances, involve some level of recourse to the developer.
At June 30, 2019, 63% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 42% secured by residential buildings, 40% secured by office
24 BNY Mellon
buildings, 9% secured by retail properties and 9% secured by other categories. Approximately 96% of the unsecured portfolio consists of real estate investment trusts (“REITs”) and real estate operating companies, which are both predominantly investment grade.
At June 30, 2019, our commercial real estate portfolio consisted of the following concentrations: New York metro - 42%; REITs and real estate operating companies - 36%; and other - 22%.
Lease financings
The leasing portfolio exposure totaled $1.2 billion at June 30, 2019 and $1.3 billion at Dec. 31, 2018 and consisted of exposures backed by well-diversified assets, including large-ticket transportation equipment, the largest consisting of passenger and freight train cars. At June 30, 2019, approximately 97% of the leasing portfolio exposure was investment grade, or investment grade equivalent.
Other residential mortgages
The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled $549 million at June 30, 2019 and $594 million at Dec. 31, 2018. Included in this portfolio at June 30, 2019 were $111 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 10% of the serviced loan balance was at least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities clearance clients and are generally repaid within two business days.
Other loans
Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.
Margin loans
Margin loan exposure of $10.7 billion at June 30, 2019 and $13.6 billion at Dec. 31, 2018 was collateralized with marketable securities. Borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. Margin loans included $1.1 billion at June 30, 2019 and $2.6 billion at Dec. 31, 2018 related to a term loan program that offers fully collateralized loans to broker-dealers. The decrease in margin loans was primarily driven by lower client demand.
Asset quality and allowance for credit losses
Our credit strategy is to focus on investment grade clients who are active users of our non-credit services. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded contractual commitments to lend, standby letters of credit (“SBLC”) and overdrafts associated with our custody and securities clearance businesses.
BNY Mellon 25
The following table details changes in our allowance for credit losses.
Allowance for credit losses activity | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | June 30, 2018 | ||||||||
(dollars in millions) | ||||||||||||
Non-margin loans | $ | 41,794 | $ | 41,176 | $ | 43,080 | $ | 42,719 | ||||
Margin loans | 10,602 | 12,311 | 13,484 | 15,057 | ||||||||
Total loans | $ | 52,396 | $ | 53,487 | $ | 56,564 | $ | 57,776 | ||||
Beginning balance of allowance for credit losses | $ | 248 | $ | 252 | $ | 251 | $ | 256 | ||||
Provision for credit losses | (8 | ) | 7 | — | (3 | ) | ||||||
Net recoveries (charge-offs): | ||||||||||||
Other residential mortgages | 2 | — | — | 1 | ||||||||
Wealth management loans and mortgages | (1 | ) | — | — | — | |||||||
Commercial | — | (11 | ) | — | — | |||||||
Foreign | — | — | 1 | — | ||||||||
Net recoveries (charge-offs) | 1 | (11 | ) | 1 | 1 | |||||||
Ending balance of allowance for credit losses | $ | 241 | $ | 248 | $ | 252 | $ | 254 | ||||
Allowance for loan losses | $ | 146 | $ | 146 | $ | 146 | $ | 145 | ||||
Allowance for lending-related commitments | 95 | 102 | 106 | 109 | ||||||||
Allowance for loan losses as a percentage of total loans | 0.28 | % | 0.27 | % | 0.26 | % | 0.25 | % | ||||
Allowance for loan losses as a percentage of non-margin loans | 0.35 | 0.35 | 0.34 | 0.34 | ||||||||
Total allowance for credit losses as a percentage of total loans | 0.46 | 0.46 | 0.45 | 0.44 | ||||||||
Total allowance for credit losses as a percentage of non-margin loans | 0.58 | 0.60 | 0.58 | 0.59 |
The allowance for credit losses decreased $11 million compared with Dec. 31, 2018, primarily reflecting a decrease in loans and lending-related commitments.
The provision for credit losses was a credit of $8 million in the second quarter 2019 driven by lower credit exposure. The provision of $7 million in the first quarter 2019 was driven by our exposure to a California utility company that filed for bankruptcy.
We had $10.6 billion of secured margin loans on our balance sheet at June 30, 2019 compared with $13.5 billion at Dec. 31, 2018 and $15.1 billion at June 30, 2018. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses as a percentage of non-margin loans is a more appropriate metric to measure the adequacy of the reserve.
The allowance for loan losses and allowance for lending-related commitments represent management’s estimate of losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.
Based on an evaluation of the allowance for credit losses as discussed in “Critical accounting estimates” and Note 1 of the Notes to Consolidated Financial Statements, both in our 2018 Annual Report, we have allocated our allowance for credit losses as follows.
Allocation of allowance | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | June 30, 2018 | |||||
Commercial | 32 | % | 33 | % | 32 | % | 30 | % | |
Commercial real estate | 30 | 30 | 30 | 29 | |||||
Foreign | 13 | 12 | 13 | 13 | |||||
Financial institutions | 9 | 9 | 9 | 10 | |||||
Wealth management (a) | 8 | 8 | 8 | 9 | |||||
Other residential mortgages | 6 | 6 | 6 | 7 | |||||
Lease financing | 2 | 2 | 2 | 2 | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % |
(a) | Includes the allowance for wealth management mortgages. |
The allocation of the allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the losses.
The credit rating assigned to each credit is a significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $56 million, while if each credit were rated one grade worse, the allowance would have increased by $107 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $34 million, while if the loss given default were one rating better,
26 BNY Mellon
the allowance would have decreased by $28 million. For impaired credits, if the net carrying value of the loans was 10% higher or lower, the allowance would have decreased or increased by less than $1 million, respectively.
Nonperforming assets
The table below presents our nonperforming assets.
Nonperforming assets | June 30, 2019 | Dec. 31, 2018 | ||||
(dollars in millions) | ||||||
Nonperforming loans: | ||||||
Commercial | $ | 96 | $ | — | ||
Other residential mortgages | 65 | 67 | ||||
Wealth management loans and mortgages | 23 | 9 | ||||
Total nonperforming loans | 184 | 76 | ||||
Other assets owned | 2 | 3 | ||||
Total nonperforming assets (a) | $ | 186 | $ | 79 | ||
Nonperforming assets ratio | 0.35 | % | 0.14 | % | ||
Nonperforming assets ratio, excluding margin loans | 0.45 | 0.18 | ||||
Allowance for loan losses/nonperforming loans | 79.3 | 192.1 | ||||
Allowance for loan losses/nonperforming assets | 78.5 | 184.8 | ||||
Total allowance for credit losses/nonperforming loans | 131.0 | 331.6 | ||||
Total allowance for credit losses/nonperforming assets | 129.6 | 319.0 |
(a) | In the second quarter 2019, we refined the application of our nonperforming assets policy for first lien residential mortgage loans greater than 90 days delinquent that resulted in a $12 million increase in nonperforming assets. |
Nonperforming assets activity | June 30, 2019 | Dec. 31, 2018 | ||||
(in millions) | ||||||
Balance at beginning of quarter | $ | 174 | $ | 81 | ||
Additions | 17 | 4 | ||||
Return to accrual status | — | (1 | ) | |||
Charge-offs | 1 | (1 | ) | |||
Paydowns/sales | (6 | ) | (4 | ) | ||
Balance at end of quarter | $ | 186 | $ | 79 |
Nonperforming assets increased by $107 million compared with Dec. 31, 2018, primarily reflecting loans to a California utility company that filed for bankruptcy. Our nonperforming assets are expected to decrease in the third quarter of 2019 as a result of sales of the loans related to this utility company.
Deposits
Total deposits were $252.9 billion at June 30, 2019, an increase of 6%, compared with $238.8 billion at Dec. 31, 2018. The increase reflects higher interest-bearing deposits in both U.S. and non-U.S. offices, partially offset by lower noninterest-bearing deposits principally in U.S. offices.
Noninterest-bearing deposits were $58.3 billion at June 30, 2019 compared with $70.8 billion at Dec. 31, 2018. Interest-bearing deposits were $194.6 billion at June 30, 2019 compared with $168.0 billion at Dec. 31, 2018.
Short-term borrowings
We fund ourselves primarily through deposits and, to a lesser extent, other short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements, payables to customers and broker-dealers, commercial paper and other borrowed funds. Certain other borrowings, for example, securities sold under repurchase agreements, require the delivery of securities as collateral.
Information related to federal funds purchased and securities sold under repurchase agreements is presented below.
Federal funds purchased and securities sold under repurchase agreements | |||||||||
Quarter ended | |||||||||
(dollars in millions) | June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 12,127 | $ | 12,113 | $ | 14,138 | |||
Average daily balance (a) | $ | 11,809 | $ | 11,922 | $ | 18,146 | |||
Weighted-average rate during the quarter (a) | 12.64 | % | 11.26 | % | 3.48 | % | |||
Ending balance (b) | $ | 11,757 | $ | 11,761 | $ | 13,200 | |||
Weighted-average rate at period end (b) | 14.43 | % | 9.82 | % | 4.24 | % |
(a) | Includes the average impact of offsetting under enforceable netting agreements of $50,710 million for the second quarter of 2019, $44,091 million for the first quarter of 2019 and $17,975 million for the second quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the weighted-average rates would have been 2.39% for the second quarter of 2019, 2.40% for the first quarter of 2019 and 1.75% for the second quarter of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates paid. |
(b) | Includes the impact of offsetting under enforceable netting agreements of $78,433 million at June 30, 2019, $47,461 million at March 31, 2019 and $36,766 million at June 30, 2018. |
BNY Mellon 27
Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods reflect changes in overnight borrowing opportunities. The increase in the weighted-average rates, compared with both March 31, 2019 and June 30, 2018, primarily reflects the increase in repurchase agreement activity with the Fixed Income Clearing Corporation (“FICC”), where we record interest expense gross, but the average balances reflect the impact of offsetting under enforceable netting agreements. The increased activity primarily relates to government securities collateralized resale and repurchase agreements executed with clients that are novated to and settle with the FICC.
Information related to payables to customers and broker-dealers is presented below.
Payables to customers and broker-dealers | |||||||||
Quarter ended | |||||||||
(dollars in millions) | June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 19,149 | $ | 20,343 | $ | 20,349 | |||
Average daily balance (a) | $ | 18,679 | $ | 19,291 | $ | 19,402 | |||
Weighted-average rate during the quarter (a) | 1.76 | % | 1.76 | % | 1.10 | % | |||
Ending balance | $ | 18,946 | $ | 19,310 | $ | 19,123 | |||
Weighted-average rate at period end | 1.73 | % | 1.75 | % | 1.08 | % |
(a) | The weighted-average rate is calculated based on, and is applied to, the average interest-bearing payables to customers and broker-dealers, which were $15,666 million in the second quarter of 2019, $16,108 million in the first quarter of 2019 and $16,349 million in the second quarter of 2018. |
Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and broker-dealers are driven by customer trading activity levels and market volatility.
Information related to commercial paper is presented below.
Commercial paper | Quarter ended | ||||||||
(dollars in millions) | June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 8,894 | $ | 4,601 | $ | 4,470 | |||
Average daily balance | $ | 2,957 | $ | 1,377 | $ | 3,869 | |||
Weighted-average rate during the quarter | 2.43 | % | 2.44 | % | 2.13 | % | |||
Ending balance | $ | 8,894 | $ | 2,773 | $ | 2,508 | |||
Weighted-average rate at period end | 2.35 | % | 2.40 | % | 2.24 | % |
The Bank of New York Mellon issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The fluctuations in the commercial paper balances, compared with prior periods, primarily reflect funding of investments in short-term assets.
Information related to other borrowed funds is presented below.
Other borrowed funds | Quarter ended | ||||||||
(dollars in millions) | June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 2,732 | $ | 3,969 | $ | 3,053 | |||
Average daily balance | $ | 2,455 | $ | 3,305 | $ | 2,399 | |||
Weighted-average rate during the quarter | 3.36 | % | 2.87 | % | 2.40 | % | |||
Ending balance | $ | 1,921 | $ | 3,932 | $ | 3,053 | |||
Weighted-average rate at period end | 3.84 | % | 3.31 | % | 2.53 | % |
Other borrowed funds primarily include borrowings from the Federal Home Loan Bank (“FHLB”), overdrafts of sub-custodian account balances in our Investment Services businesses, finance lease liabilities and borrowings under lines of credit by our Pershing subsidiaries. Overdrafts typically relate to timing differences for settlements. The decrease in other borrowed funds, compared with prior periods, primarily reflects a decrease in borrowings from the FHLB.
28 BNY Mellon
Liquidity and dividends
BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to roll over or issue new debt, especially during periods of market stress, at a reasonable cost, and in order to meet its short-term (up to one year) obligations. Funding liquidity risk is the risk that BNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flow and collateral needs without adversely affecting daily operations or our financial condition. Funding liquidity risk can arise from funding mismatches, market constraints from the inability to convert assets into cash, the inability to hold or raise cash, low overnight deposits, deposit run-off or contingent liquidity events.
We also manage liquidity risk on an intraday basis. Intraday liquidity risk is the risk that BNY Mellon cannot access funds during the business day to make payments or settle immediate obligations, usually in real time. Intraday liquidity risk can arise from timing mismatches, market constraints from the inability to convert assets into cash, the inability to raise cash intraday, low overnight deposits and/or adverse stress events.
Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also can affect BNY Mellon’s liquidity risk profile and are considered in our liquidity risk framework.
The Parent’s policy is to have access to sufficient unencumbered cash and cash equivalents at each quarter-end to cover forecasted debt redemptions, net interest payments and net tax payments for the following 18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act. As of June 30, 2019, the Parent was in compliance with this policy.
For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2018 Annual Report.
We define available funds for internal liquidity management purposes as cash and due from banks, interest-bearing deposits with the Federal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. The following table presents our total available funds at period end and on an average basis.
Available funds | June 30, 2019 | Dec. 31, 2018 | Average | ||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 2Q18 | ||||||||||||
Cash and due from banks | $ | 5,556 | $ | 5,864 | $ | 5,083 | $ | 4,853 | $ | 4,916 | |||||
Interest-bearing deposits with the Federal Reserve and other central banks | 69,700 | 67,988 | 61,756 | 63,583 | 69,676 | ||||||||||
Interest-bearing deposits with banks | 15,491 | 14,148 | 13,666 | 13,857 | 15,748 | ||||||||||
Federal funds sold and securities purchased under resale agreements | 61,201 | 46,795 | 38,038 | 28,968 | 28,051 | ||||||||||
Total available funds | $ | 151,948 | $ | 134,795 | $ | 118,543 | $ | 111,261 | $ | 118,391 | |||||
Total available funds as a percentage of total assets | 40 | % | 37 | % | 35 | % | 33 | % | 34 | % |
Total available funds were $151.9 billion at June 30, 2019, compared with $134.8 billion at Dec. 31, 2018. The increase was primarily due to higher federal funds sold and securities purchased under resale agreements and interest-bearing deposits with the Federal Reserve and other central banks.
Average non-core sources of funds, such as federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowed funds, were $18.4 billion for the six months ended June 30, 2019 and $25.7 billion for the six months ended June 30, 2018. The decrease primarily reflects a decrease in federal funds
purchased and securities sold under repurchase agreements.
Average foreign deposits, primarily from our European-based Investment Services businesses, were $91.4 billion for the six months ended June 30, 2019, compared with $101.3 billion for the six months ended June 30, 2018. The decrease primarily reflects client activity. Average interest-bearing domestic deposits were $72.4 billion for the six months ended June 30, 2019 and $52.9 billion for the six months ended June 30, 2018. The increase primarily reflects an increase in demand deposits.
BNY Mellon 29
Average payables to customers and broker-dealers were $15.9 billion for the six months ended June 30, 2019 and $16.7 billion for the six months ended June 30, 2018. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.
Average long-term debt was $28.0 billion for the six months ended June 30, 2019 and $28.4 billion for the six months ended June 30, 2018.
Average noninterest-bearing deposits decreased to $53.8 billion for the six months ended June 30, 2019 from $67.9 billion for the six months ended June 30, 2018, primarily reflecting client activity.
A significant reduction in our Investment Services business would reduce our access to deposits. See “Asset/liability management” for additional factors that could impact our deposit balances.
Sources of liquidity
The Parent’s three major sources of liquidity are access to the debt and equity markets, dividends from its subsidiaries, and cash on hand and cash otherwise made available in business-as-usual circumstances to the Parent through a committed credit facility with our intermediate holding company (“IHC”).
Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which are as follows:
Credit ratings at June 30, 2019 | |||||||
Moody’s | S&P | Fitch | DBRS | ||||
Parent: | |||||||
Long-term senior debt | A1 | A | AA- | AA (low) | |||
Subordinated debt | A2 | A- | A+ | A (high) | |||
Preferred stock | Baa1 | BBB | BBB | A (low) | |||
Outlook - Parent | Stable | Stable | Stable | Stable | |||
The Bank of New York Mellon: | |||||||
Long-term senior debt | Aa2 | AA- | AA | AA | |||
Subordinated debt | NR | A | NR | NR | |||
Long-term deposits | Aa1 | AA- | AA+ | AA | |||
Short-term deposits | P1 | A-1+ | F1+ | R-1 (high) | |||
Commercial paper | P1 | A-1+ | F1+ | R-1 (high) | |||
BNY Mellon, N.A.: | |||||||
Long-term senior debt | Aa2 | (a) | AA- | AA | (a) | AA | |
Long-term deposits | Aa1 | AA- | AA+ | AA | |||
Short-term deposits | P1 | A-1+ | F1+ | R-1 (high) | |||
Outlook - Banks | Stable | Stable | Stable | Stable |
(a) | Represents senior debt issuer default rating. |
NR - Not rated.
Long-term debt totaled $28.2 billion at June 30, 2019 and $29.2 billion at Dec. 31, 2018. The decrease reflects maturities of $2.8 billion, partially offset by issuances of $1.25 billion and an increase in the fair value of hedged long-term debt. The Parent has $1.5 billion of long-term debt that will mature in the remainder of 2019.
In June 2019, The Bank of New York Mellon, our largest bank subsidiary, issued $1.25 billion of floating rate senior notes maturing in 2021 at an
annual interest rate of 3-month LIBOR plus 28 basis points.
The Bank of New York Mellon may issue notes and certificates of deposit (“CDs”). At June 30, 2019 and Dec. 31, 2018, $3.1 billion and $2.8 billion, respectively, of CDs were outstanding. At June 30, 2019 and Dec. 31, 2018, $2.3 billion and $1.0 billion, respectively, of notes issued by The Bank of New York Mellon were outstanding.
30 BNY Mellon
The Bank of New York Mellon also issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The average commercial paper outstanding was $2.2 billion for the six months ended June 30, 2019 and $3.5 billion for the six months ended June 30, 2018. Commercial paper outstanding was $8.9 billion at June 30, 2019 and $1.9 billion at Dec. 31, 2018.
Subsequent to June 30, 2019, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $1.2 billion, without the need for a regulatory waiver. In addition, at June 30, 2019, non-bank subsidiaries of the Parent had liquid assets of approximately $1.6 billion. Restrictions on our ability to obtain funds from our subsidiaries are discussed in more detail in “Supervision and Regulation - Capital Planning and Stress Testing - Payment of Dividends, Stock Repurchases and Other Capital Distributions” and in Note 18 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
Pershing LLC has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing LLC has three separate uncommitted lines of credit amounting to $750 million in aggregate. There were no borrowings under these lines in the second quarter of 2019. Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has three separate uncommitted lines of credit amounting to $350 million in aggregate. Average borrowings under these lines were $2 million, in aggregate, in the second quarter of 2019.
The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated parent company equity, which includes our noncumulative perpetual preferred stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by Parent company debt. As the double leverage ratio increases, this can reflect greater demands on a company’s cash flows in order to service interest payments and debt maturities. BNY Mellon’s double leverage ratio is managed in a range considering the high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank
deposit placements and government securities), the Company’s cash generating fee-based business model, with fee revenue representing 79% of total revenue in the second quarter of 2019, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 117.1% at June 30, 2019 and 117.7% at Dec. 31, 2018, and within the range targeted by management.
Uses of funds
The Parent’s major uses of funds are payment of dividends, repurchases of common stock, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries.
In May 2019, a quarterly cash dividend of $0.28 per common share was paid to common shareholders. Our common stock dividend payout ratio was 29% for the first six months of 2019.
In the second quarter of 2019, we repurchased 15.3 million common shares at an average price of $48.97 per common share for a total cost of $750 million.
In June 2019, following the Federal Reserve’s non- objection to our 2019 capital plan, BNY Mellon announced a share repurchase plan providing for the repurchase of up to $3.94 billion of common stock starting in the third quarter of 2019 and continuing through the second quarter of 2020. This new share repurchase plan replaces all previously authorized share repurchase plans.
In July 2019, BNY Mellon increased the quarterly cash dividend on common stock by approximately 11%, from $0.28 to $0.31 per share. This increased quarterly cash dividend will be paid on Aug. 9, 2019.
Liquidity coverage ratio
U.S. regulators have established an LCR that requires certain banking organizations, including BNY Mellon, to maintain a minimum amount of unencumbered high-quality liquid assets (“HQLA”) sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day time horizon.
BNY Mellon 31
The following table presents BNY Mellon’s consolidated HQLA at June 30, 2019, and the average HQLA and average LCR for the second quarter of 2019.
Consolidated HQLA and LCR | June 30, 2019 | ||
(dollars in billions) | |||
Securities (a) | $ | 134 | |
Cash (b) | 63 | ||
Total consolidated HQLA (c) | $ | 197 | |
Total consolidated HQLA - average (c) | $ | 166 | |
Average LCR | 117 | % |
(a) | Primarily includes securities of U.S. government-sponsored enterprises, U.S. Treasury, sovereign securities, U.S. agency and investment-grade corporate debt. |
(b) | Primarily includes cash on deposit with central banks. |
(c) | Consolidated HQLA presented before adjustments. After haircuts and the impact of trapped liquidity, consolidated HQLA totaled $153 billion at June 30, 2019 and averaged $118 billion for the second quarter of 2019. |
BNY Mellon and each of our affected domestic bank subsidiaries were compliant with the U.S. LCR requirements of at least 100% throughout the second quarter of 2019.
Statement of cash flows
The following summarizes the activity reflected on the consolidated statement of cash flows. While this information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as relevant when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity and dividends and asset/liability management herein may provide more useful context in evaluating our liquidity position and related activity.
Net cash used for operating activities was $2.5 billion in the six months ended June 30, 2019, compared with net cash provided by operating activities of
$1.6 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, cash flows used for operations primarily resulted from changes in accruals and trading activities, partially offset by earnings. In the six months ended June 30, 2018, cash flows provided by operations primarily resulted from earnings, partially offset by changes in accruals and trading activities.
Net cash used for investing activities was $11.4 billion in the six months ended June 30, 2019, compared with net cash provided by investing activities of $15.2 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, net cash used for investing activities primarily reflects changes in federal funds sold and securities purchased under resale agreements, partially offset by changes in loans. In the six months ended June 30, 2018, net cash provided by investing activities primarily reflects changes in interest-bearing deposits with the Federal Reserve and other central banks and changes in loans, partially offset by changes in interest-bearing deposits with banks.
Net cash provided by financing activities was $13.2 billion in the six months ended June 30, 2019, compared with net cash used for financing activities of $16.8 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, net cash provided by financing activities primarily reflects changes in deposits and changes in commercial paper, partially offset by repayment of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements and changes in other borrowed funds. In the six months ended June 30, 2018, net cash used for financing activities primarily reflects changes in deposits, repayment of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements and common stock repurchases, partially offset by net proceeds from the issuance of long-term debt.
32 BNY Mellon
Capital
Capital data (dollars in millions, except per share amounts; common shares in thousands) | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | ||||||
Average common equity to average assets | 10.9 | % | 11.0 | % | 11.2 | % | |||
At period end: | |||||||||
BNY Mellon shareholders’ equity to total assets ratio | 10.9 | % | 11.9 | % | 11.2 | % | |||
BNY Mellon common shareholders’ equity to total assets ratio | 10.0 | % | 10.9 | % | 10.2 | % | |||
Total BNY Mellon shareholders’ equity | $ | 41,533 | $ | 41,225 | $ | 40,638 | |||
Total BNY Mellon common shareholders’ equity (a) | $ | 37,991 | $ | 37,683 | $ | 37,096 | |||
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a) | $ | 19,275 | $ | 18,896 | $ | 18,290 | |||
Book value per common share (a) | $ | 40.30 | $ | 39.36 | $ | 38.63 | |||
Tangible book value per common share – Non-GAAP (a) | $ | 20.45 | $ | 19.74 | $ | 19.04 | |||
Closing stock price per common share | $ | 44.15 | $ | 50.43 | $ | 47.07 | |||
Market capitalization | $ | 41,619 | $ | 48,288 | $ | 45,207 | |||
Common shares outstanding | 942,662 | 957,517 | 960,426 | ||||||
Cash dividends per common share | $ | 0.28 | $ | 0.28 | $ | 0.28 | |||
Common dividend payout ratio | 28 | % | 30 | % | 33 | % | |||
Common dividend yield (annualized) | 2.5 | % | 2.3 | % | 2.4 | % |
(a) | See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for a reconciliation of GAAP to Non-GAAP. |
The Bank of New York Mellon Corporation total shareholders’ equity increased to $41.5 billion at June 30, 2019 from $40.6 billion at Dec. 31, 2018. The increase primarily reflects earnings, the unrealized gain in our investment securities portfolio and additional paid-in capital resulting from stock awards, partially offset by common stock repurchases and dividend payments.
In the second quarter of 2019, we repurchased 15.3 million common shares at an average price of $48.97 per common share for a total of $750 million under the current program.
The unrealized gain (after-tax) on our available-for-sale securities portfolio, net of hedges, included in accumulated OCI was $287 million at June 30, 2019, compared with an unrealized loss (after-tax) of $167 million at Dec. 31, 2018. The increase in the unrealized gain, net of tax, was primarily driven by lower market interest rates.
Capital adequacy
Regulators establish certain levels of capital for bank holding companies (“BHCs”) and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our U.S. bank subsidiaries and BNY Mellon must, among other things, qualify as “well
capitalized.” As of June 30, 2019 and Dec. 31, 2018, BNY Mellon and our U.S. bank subsidiaries were “well capitalized.”
Failure to satisfy regulatory standards, including “well capitalized” status or capital adequacy rules more generally, could result in limitations on our activities and adversely affect our financial condition. See the discussion of these matters in “Supervision and Regulation - Regulated Entities of BNY Mellon and Ancillary Regulatory Requirements” and “Risk Factors - Operational Risk - Failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition,” both in our 2018 Annual Report.
The U.S. banking agencies’ capital rules are based on the framework adopted by the Basel Committee on Banking Supervision, as amended from time to time. For additional information on these capital requirements, see “Supervision and Regulation” in our 2018 Annual Report. BNY Mellon is subject to the U.S. capital rules, which were gradually phased-in over a multi-year period through Jan. 1, 2019. The phase-in requirements for consolidated capital were completed on Jan. 1, 2018.
BNY Mellon 33
The table below presents our consolidated and largest bank subsidiary regulatory capital ratios.
Consolidated and largest bank subsidiary regulatory capital ratios | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | |||||||||||
Well capitalized | Minimum required | Capital ratios | Capital ratios | Capital ratios | ||||||||||
(a) | ||||||||||||||
Consolidated regulatory capital ratios: (b) | ||||||||||||||
Advanced Approach: | ||||||||||||||
CET1 ratio | N/A | (c) | 8.5 | % | 11.1 | % | 11.1 | % | 10.7 | % | ||||
Tier 1 capital ratio | 6 | % | 10 | 13.2 | 13.2 | 12.8 | ||||||||
Total capital ratio | 10 | % | 12 | 14.0 | 14.0 | 13.6 | ||||||||
Standardized Approach: | ||||||||||||||
CET1 ratio | N/A | (c) | 8.5 | % | 12.4 | % | 12.0 | % | 11.7 | % | ||||
Tier 1 capital ratio | 6 | % | 10 | 14.8 | 14.3 | 14.1 | ||||||||
Total capital ratio | 10 | % | 12 | 15.7 | 15.3 | 15.1 | ||||||||
Tier 1 leverage ratio | N/A | (c) | 4 | 6.8 | 6.8 | 6.6 | ||||||||
SLR (d) | N/A | (c) | 5 | 6.3 | 6.3 | 6.0 | ||||||||
The Bank of New York Mellon regulatory capital ratios: (b) | ||||||||||||||
Advanced Approach: | ||||||||||||||
CET1 ratio | 6.5 | % | 7 | % | 14.2 | % | 14.2 | % | 14.0 | % | ||||
Tier 1 capital ratio | 8 | 8.5 | 14.2 | 14.4 | 14.3 | |||||||||
Total capital ratio | 10 | 10.5 | 14.2 | 14.9 | 14.7 | |||||||||
Tier 1 leverage ratio | 5 | 4 | 7.3 | 7.6 | 7.6 | |||||||||
SLR (d) | 6 | 3 | 6.7 | 6.9 | 6.8 |
(a) | Minimum requirements for June 30, 2019 include minimum thresholds plus currently applicable buffers. |
(b) | 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 Tier 1 leverage ratio is based on Tier 1 capital and quarterly average total assets. The fully phased-in U.S. G-SIB surcharge of 1.5% is subject to change. The countercyclical capital buffer is currently set to 0%. |
(c) | The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for BHCs. |
(d) | The SLR is based on Tier 1 capital and total leverage exposure, which includes certain off-balance sheet exposures. |
Our CET1 ratio determined under the Advanced Approach was 11.1% at June 30, 2019 and 10.7% at Dec. 31, 2018. The ratio increased compared with Dec. 31, 2018, primarily reflecting capital generated through earnings, the unrealized gain in our investment securities portfolio and additional paid-in capital resulting from stock awards, partially offset by capital deployed through common stock repurchases, dividend payments and higher RWAs.
Our SLR was 6.3% at June 30, 2019 and 6.0% at Dec. 31, 2018.
The Advanced Approach capital ratios are significantly impacted by RWAs for operational risk. Our operational loss risk model is informed by external losses, including fines and penalties levied
against institutions in the financial services industry, particularly those that relate to businesses in which we operate, and as a result external losses have impacted and could in the future impact the amount of capital that we are required to hold.
Our capital ratios are necessarily subject to, among other things, anticipated compliance with all necessary enhancements to model calibration, approval by regulators of certain models used as part of RWA calculations, other refinements, further implementation guidance from regulators, market practices and standards and any changes BNY Mellon may make to its businesses. As a consequence of these factors, our capital ratios may materially change, and may be volatile over time and from period to period.
34 BNY Mellon
The following table presents our capital components and RWAs.
Capital components and risk-weighted assets | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | ||||||
(in millions) | |||||||||
CET1: | |||||||||
Common shareholders’ equity | $ | 37,991 | $ | 37,683 | $ | 37,096 | |||
Adjustments for: | |||||||||
Goodwill and intangible assets (a) | (18,716 | ) | (18,787 | ) | (18,806 | ) | |||
Net pension fund assets | (331 | ) | (334 | ) | (320 | ) | |||
Equity method investments | (358 | ) | (357 | ) | (361 | ) | |||
Deferred tax assets | (45 | ) | (43 | ) | (42 | ) | |||
Other | (7 | ) | (6 | ) | — | ||||
Total CET1 | 18,534 | 18,156 | 17,567 | ||||||
Other Tier 1 capital: | |||||||||
Preferred stock | 3,542 | 3,542 | 3,542 | ||||||
Other | (61 | ) | (59 | ) | (65 | ) | |||
Total Tier 1 capital | $ | 22,015 | $ | 21,639 | $ | 21,044 | |||
Tier 2 capital: | |||||||||
Subordinated debt | $ | 1,250 | $ | 1,250 | $ | 1,250 | |||
Allowance for credit losses | 241 | 248 | 252 | ||||||
Other | (6 | ) | (1 | ) | (10 | ) | |||
Total Tier 2 capital – Standardized Approach | 1,485 | 1,497 | 1,492 | ||||||
Excess of expected credit losses | 41 | 53 | 65 | ||||||
Less: Allowance for credit losses | 241 | 248 | 252 | ||||||
Total Tier 2 capital – Advanced Approach | $ | 1,285 | $ | 1,302 | $ | 1,305 | |||
Total capital: | |||||||||
Standardized Approach | $ | 23,500 | $ | 23,136 | $ | 22,536 | |||
Advanced Approach | $ | 23,300 | $ | 22,941 | $ | 22,349 | |||
Risk-weighted assets: | |||||||||
Standardized Approach | $ | 149,226 | $ | 151,101 | $ | 149,618 | |||
Advanced Approach: | |||||||||
Credit Risk | $ | 94,304 | $ | 92,798 | $ | 92,917 | |||
Market Risk | 3,241 | 3,507 | 3,454 | ||||||
Operational Risk | 69,025 | 67,313 | 68,300 | ||||||
Total Advanced Approach | $ | 166,570 | $ | 163,618 | $ | 164,671 | |||
Average assets for Tier 1 leverage ratio | $ | 322,879 | $ | 316,586 | $ | 319,007 | |||
Total leverage exposure for SLR | $ | 350,747 | $ | 344,829 | $ | 347,943 |
(a) | Reduced by deferred tax liabilities associated with intangible assets and tax deductible goodwill. |
The table below presents the factors that impacted CET1 capital.
CET1 generation | 2Q19 | ||
(in millions) | |||
CET1 – Beginning of period | $ | 18,156 | |
Net income applicable to common shareholders of The Bank of New York Mellon Corporation | 969 | ||
Goodwill and intangible assets, net of related deferred tax liabilities | 71 | ||
Gross CET1 generated | 1,040 | ||
Capital deployed: | |||
Common stock dividend payments | (270 | ) | |
Common stock repurchases | (750 | ) | |
Total capital deployed | (1,020 | ) | |
Other comprehensive income: | |||
Foreign currency translation | 10 | ||
Unrealized gain on assets available-for-sale | 282 | ||
Defined benefit plans | 10 | ||
Total other comprehensive income | 302 | ||
Additional paid-in capital (a) | 57 | ||
Other additions (deductions): | |||
Net pension fund assets | 3 | ||
Deferred tax assets | (2 | ) | |
Embedded goodwill | (1 | ) | |
Other | (1 | ) | |
Total other deductions | (1 | ) | |
Net CET1 generated | 378 | ||
CET1 – End of period | $ | 18,534 |
(a) | Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans. |
The following table shows the impact on the consolidated capital ratios at June 30, 2019 of a $100 million increase or decrease in common equity, or a $1 billion increase or decrease in RWAs, quarterly average assets or total leverage exposure.
Sensitivity of consolidated capital ratios at June 30, 2019 | ||||
Increase or decrease of | ||||
(in basis points) | $100 million in common equity | $1 billion in RWA, quarterly average assets or total leverage exposure | ||
CET1: | ||||
Standardized Approach | 7 | bps | 8 | bps |
Advanced Approach | 6 | 7 | ||
Tier 1 capital: | ||||
Standardized Approach | 7 | 10 | ||
Advanced Approach | 6 | 8 | ||
Total capital: | ||||
Standardized Approach | 7 | 11 | ||
Advanced Approach | 6 | 8 | ||
Tier 1 leverage | 3 | 2 | ||
SLR | 3 | 2 |
BNY Mellon 35
Capital ratios vary depending on the size of the balance sheet at period end and the levels and types of investments in assets. The balance sheet size fluctuates from period to period based on levels of customer and market activity. In general, when servicing clients are more actively trading securities, deposit balances and the balance sheet as a whole are higher. In addition, when markets experience significant volatility or stress, our balance sheet size may increase considerably as client deposit levels increase.
Total Loss-Absorbing Capacity (“TLAC”)
The final TLAC rule establishing external TLAC, external long-term debt (“LTD”) and related requirements for U.S. G-SIBs, including BNY Mellon, at the top-tier holding company level became effective on Jan. 1, 2019.
The following summarizes the minimum requirements for BNY Mellon’s external TLAC and external LTD ratios, plus currently applicable buffers.
As a % of RWAs (a) | As a % of total leverage exposure | |
Eligible external TLAC ratios | Regulatory minimum of 18% plus a buffer (b) equal to the sum of 2.5%, the method 1 G-SIB surcharge (currently 1%), and the countercyclical capital buffer, if any | Regulatory minimum of 7.5% plus a buffer (c) equal to 2% |
Eligible external LTD ratios | Regulatory minimum of 6% plus the greater of the method 1 or method 2 G-SIB surcharge (currently 1.5%) | 4.5% |
(a) RWA is the greater of Standardized and Advanced Approaches.
(b) Buffer to be met using only CET1.
(c) | Buffer to be met using only Tier 1 capital. |
External TLAC consists of the Parent’s Tier 1 capital and eligible unsecured long-term debt issued by it that has a remaining term to maturity of at least one year and satisfies certain other conditions. Eligible long-term debt consists of the unpaid principal balance of eligible unsecured debt securities, subject to haircuts for amounts due to be paid within two years, and satisfy certain other conditions. Debt issued prior to Dec. 31, 2016 has been permanently grandfathered to the extent these instruments otherwise would be ineligible only due to containing
impermissible acceleration rights or being governed by foreign law.
The following table presents our external TLAC and external LTD ratios.
TLAC and LTD ratios | June 30, 2019 | |||||
Minimum required | Minimum ratios with buffers | |||||
Ratios | ||||||
Eligible external TLAC: | ||||||
As a percentage of RWA | 18.0 | % | 21.5 | % | 26.6 | % |
As a percentage of total leverage exposure | 7.5 | % | 9.5 | % | 12.6 | % |
Eligible external LTD: | ||||||
As a percentage of RWA | 7.5 | % | N/A | 11.9 | % | |
As a percentage of total leverage exposure | 4.5 | % | N/A | 5.6 | % |
If BNY Mellon maintains risk-based ratio or leverage TLAC measures above the minimum required level, but with a risk-based ratio or leverage below the minimum level with buffers, we will face constraints on dividends, equity repurchases and discretionary executive compensation based on the amount of the shortfall.
Trading activities and risk management
Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating hedging in compliance with the Volcker Rule. The risk from market-making activities for customers is managed by our traders and limited in total exposure through a system of position limits, value-at-risk (“VaR”) methodology and other market sensitivity measures. VaR is the potential loss in value due to adverse market movements over a defined time horizon with a specified confidence level. The calculation of our VaR used by management and presented below assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. VaR facilitates comparisons across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firm-wide level.
36 BNY Mellon
VaR represents a key risk management measure and it is important to note the inherent limitations to VaR, which include:
• | VaR does not estimate potential losses over longer time horizons where moves may be extreme; |
• | VaR does not take account of potential variability of market liquidity; and |
• | Previous moves in market risk factors may not produce accurate predictions of all future market moves. |
See Note 18 of the Notes to Consolidated Financial Statements for additional information on the VaR methodology.
The following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods using the historical simulation VaR model.
VaR (a) | 2Q19 | June 30, 2019 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 4.2 | $ | 3.3 | $ | 5.2 | $ | 3.8 | ||||
Foreign exchange | 2.7 | 1.9 | 4.2 | 2.3 | ||||||||
Equity | 0.8 | 0.6 | 0.9 | 0.7 | ||||||||
Credit | 0.8 | 0.5 | 1.2 | 0.9 | ||||||||
Diversification | (3.2 | ) | N/M | N/M | (3.2 | ) | ||||||
Overall portfolio | 5.3 | 4.0 | 6.9 | 4.5 |
VaR (a) | 1Q19 | March 31, 2019 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 4.0 | $ | 3.2 | $ | 5.3 | $ | 4.2 | ||||
Foreign exchange | 3.8 | 2.8 | 6.4 | 3.9 | ||||||||
Equity | 0.7 | 0.6 | 1.1 | 0.9 | ||||||||
Credit | 0.6 | 0.4 | 1.0 | 0.7 | ||||||||
Diversification | (2.9 | ) | N/M | N/M | (3.5 | ) | ||||||
Overall portfolio | 6.2 | 4.6 | 9.5 | 6.2 |
VaR (a) | 2Q18 | June 30, 2018 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 4.0 | $ | 3.3 | $ | 5.2 | $ | 3.5 | ||||
Foreign exchange | 3.7 | 2.9 | 5.7 | 3.5 | ||||||||
Equity | 0.7 | 0.5 | 1.0 | 0.5 | ||||||||
Credit | 0.8 | 0.6 | 1.0 | 1.0 | ||||||||
Diversification | (3.9 | ) | N/M | N/M | (3.9 | ) | ||||||
Overall portfolio | 5.3 | 4.3 | 7.0 | 4.6 |
VaR (a) | YTD19 | ||||||||
(in millions) | Average | Minimum | Maximum | ||||||
Interest rate | $ | 4.1 | $ | 3.2 | $ | 5.3 | |||
Foreign exchange | 3.3 | 1.9 | 6.4 | ||||||
Equity | 0.7 | 0.6 | 1.1 | ||||||
Credit | 0.7 | 0.4 | 1.2 | ||||||
Diversification | (3.1 | ) | N/M | N/M | |||||
Overall portfolio | 5.7 | 4.0 | 9.5 |
VaR (a) | YTD18 | ||||||||
(in millions) | Average | Minimum | Maximum | ||||||
Interest rate | $ | 4.2 | $ | 3.3 | $ | 5.5 | |||
Foreign exchange | 4.5 | 2.9 | 8.3 | ||||||
Equity | 0.8 | 0.5 | 1.2 | ||||||
Credit | 1.1 | 0.6 | 2.6 | ||||||
Diversification | (4.7 | ) | N/M | N/M | |||||
Overall portfolio | 5.9 | 4.3 | 10.4 |
(a) | VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments. |
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.
The interest rate component of VaR represents instruments whose values predominantly vary with the level or volatility of interest rates. These instruments include, but are not limited to, sovereign debt, swaps, swaptions, forward rate agreements, exchange-traded futures and options, and other interest rate derivative products.
The foreign exchange component of VaR represents instruments whose values predominantly vary with the level or volatility of currency exchange rates or interest rates. These instruments include, but are not limited to, currency balances, spot and forward transactions, currency options, exchange-traded futures and options, and other currency derivative products.
The equity component of VaR consists of instruments that represent an ownership interest in the form of domestic and foreign common stock or other equity-linked instruments. These instruments include, but are not limited to, common stock, exchange-traded funds, preferred stock, listed equity options (puts and calls), OTC equity options, equity total return swaps, equity index futures and other equity derivative products.
The credit component of VaR represents instruments whose values predominantly vary with the creditworthiness of counterparties. These instruments include, but are not limited to, credit derivatives (credit default swaps and exchange-traded credit index instruments), exposures from corporate credit spreads and mortgage prepayments. Credit derivatives are used to hedge various credit exposures.
BNY Mellon 37
The diversification component of VaR is the risk reduction benefit that occurs when combining portfolios and offsetting positions, and from the correlated behavior of risk factor movements.
During the second quarter of 2019, interest rate risk generated 50% of average gross VaR, foreign exchange risk generated 32% of average gross VaR, equity risk generated 9% of average gross VaR and credit risk generated 9% of average gross VaR. During the second quarter of 2019, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio.
The following table of total daily trading revenue or loss illustrates the number of trading days in which our trading revenue or loss fell within particular ranges during the past five quarters.
Distribution of trading revenue (loss) (a) | |||||||||||
Quarter ended | |||||||||||
(dollars in millions) | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | ||||||
Revenue range: | Number of days | ||||||||||
Less than $(2.5) | — | 1 | 1 | — | 1 | ||||||
$(2.5) – $0 | 4 | 5 | 7 | 6 | 3 | ||||||
$0 – $2.5 | 30 | 22 | 17 | 30 | 21 | ||||||
$2.5 – $5.0 | 23 | 23 | 24 | 20 | 30 | ||||||
More than $5.0 | 7 | 10 | 13 | 7 | 9 |
(a) | Trading revenue (loss) includes realized and unrealized gains and losses primarily related to spot and forward foreign exchange transactions, derivatives and securities trades for our customers and excludes any associated commissions, underwriting fees and net interest revenue. |
Trading assets include debt and equity instruments and derivative assets, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading assets were $8.6 billion at June 30, 2019 and $7.0 billion at Dec. 31, 2018.
Trading liabilities include debt and equity instruments and derivative liabilities, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading liabilities were $3.8 billion at June 30, 2019 and $3.5 billion at Dec. 31, 2018.
Under our fair value methodology for derivative contracts, an initial “risk-neutral” valuation is performed on each position assuming time-discounting based on a AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.
We reflect external credit ratings as well as observable credit default swap spreads for both ourselves and our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties.
At June 30, 2019, our OTC derivative assets, including those in hedging relationships, of $3.0 billion included a credit valuation adjustment (“CVA”) deduction of $26 million. Our OTC derivative liabilities, including those in hedging relationships, of $2.6 billion included a debit valuation adjustment (“DVA”) of $1 million related to our own credit spread. Net of hedges, the CVA decreased by $1 million and the DVA was unchanged in the second quarter of 2019, which increased foreign exchange and other trading revenue by $1 million. The net impact of these adjustments increased foreign exchange and other trading revenue by less than $1 million in the first quarter of 2019 and $2 million in the second quarter of 2018.
The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure during the past five quarters. This information indicates the degree of risk to which we are exposed. Significant changes in ratings classifications for our foreign exchange and other trading activity could result in increased risk for us.
Foreign exchange and other trading counterparty risk rating profile (a) | ||||||||||
Quarter ended | ||||||||||
June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | ||||||
Rating: | ||||||||||
AAA to AA- | 54 | % | 49 | % | 50 | % | 48 | % | 37 | % |
A+ to A- | 26 | 28 | 28 | 30 | 41 | |||||
BBB+ to BBB- | 17 | 20 | 18 | 19 | 18 | |||||
BB+ and lower (b) | 3 | 3 | 4 | 3 | 4 | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
(a) | Represents credit rating agency equivalent of internal credit ratings. |
(b) | Non-investment grade. |
38 BNY Mellon
Asset/liability management
Our diversified business activities include processing securities, accepting deposits, investing in securities, lending, raising money as needed to fund assets and other transactions. The market risks from these activities include interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures.
An earnings simulation model is the primary tool used to assess changes in pre-tax net interest revenue. The model incorporates management’s assumptions regarding interest rates, market spreads, changes in the prepayment behavior of loans and securities and the impact of derivative financial instruments used for interest rate risk management purposes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior and are inherently uncertain. Actual results may differ materially from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and management’s strategies, among other factors.
In the table below, we use the earnings simulation model to run various interest rate ramp scenarios from a baseline scenario. The interest rate ramp scenarios examine the impact of large interest rate movements. In each scenario, all currencies’ interest rates are shifted higher or lower. The baseline scenario is based on our quarter-end balance sheet and the spot yield curve. The 100 basis point ramp scenario assumes rates change 25 basis points above or below the yield curve in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis point per quarter change. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest revenue between the scenarios over a 12-month measurement period. The net interest revenue sensitivity methodology assumes static deposit levels and also assumes that no management actions will be taken to mitigate the effects of interest rate changes.
The following table shows net interest revenue sensitivity for BNY Mellon.
Estimated changes in net interest revenue (in millions) | June 30, 2019 | March 31, 2019 | June 30, 2018 | ||||||
Up 200 bps parallel rate ramp vs. baseline (a) | $ | 380 | $ | 410 | $ | 372 | |||
Up 100 bps parallel rate ramp vs. baseline (a) | 200 | 208 | 183 | ||||||
Down 100 bps parallel rate ramp vs. baseline (a) | (179 | ) | (91 | ) | (70 | ) | |||
Long-term up 50 bps, short-term unchanged (b) | 171 | 149 | 72 | ||||||
Long-term down 50 bps, short-term unchanged (b) | (192 | ) | (178 | ) | (89 | ) |
(a) | In the parallel rate ramp, both short-term and long-term rates move in four equal quarterly increments. |
(b) | Long-term is equal to or greater than one year. |
To illustrate the net interest revenue sensitivity to deposit runoff, we note that a $5 billion instantaneous reduction of U.S. dollar denominated noninterest-bearing deposits would reduce the net interest revenue sensitivity results in the ramp up 100 basis point and 200 basis point scenarios in the table above by approximately $150 million and approximately $180 million, respectively. The impact would be smaller if the runoff was assumed to be a mixture of interest-bearing and noninterest-bearing deposits.
For a discussion of factors impacting the growth or contraction of deposits, see “Risk Factors - Our business, financial condition and results of operations could be adversely affected if we do not effectively manage our liquidity,” in our 2018 Annual Report.
Off-balance sheet arrangements
Off-balance sheet arrangements discussed in this section are limited to guarantees, retained or contingent interests and obligations arising out of unconsolidated variable interest entities (“VIEs”). For BNY Mellon, these items include certain guarantees. Guarantees include SBLCs issued as part of our corporate banking business and securities lending indemnifications issued as part of our Investment Services business. See Note 19 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.
BNY Mellon 39
Supplemental information - Explanation of GAAP and Non-GAAP financial measures
BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures on a tangible basis as a supplement to generally accepted accounting principles (“GAAP”) information, which exclude goodwill and intangible assets, net of deferred tax liabilities. BNY Mellon believes that the return on tangible common equity is additional useful information for investors because it presents a measure of those assets that can generate income, and the tangible book value per common share is additional useful information because it presents the level of tangible assets in relation to shares of common stock outstanding.
The presentation of the growth rates of investment management and performance fees on a constant
currency basis permits investors to assess the significance of changes in foreign currency exchange rates. Growth rates on a constant currency basis were determined by applying the current period foreign currency exchange rates to the prior period revenue. BNY Mellon believes that this presentation, as a supplement to GAAP information, gives investors a clearer picture of the related revenue results without the variability caused by fluctuations in foreign currency exchange rates.
BNY Mellon has also included the operating margin for the Investment Management business net of distribution and servicing expense that was passed to third parties who distribute or service our managed funds. BNY Mellon believes that this measure is useful when evaluating the performance of the Investment Management business relative to industry competitors.
The following table presents the reconciliation of the return on common equity and tangible common equity.
Return on common equity and tangible common equity reconciliation | |||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 2Q18 | YTD19 | YTD18 | ||||||||||
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | 969 | $ | 910 | $ | 1,055 | $ | 1,879 | $ | 2,190 | |||||
Add: Amortization of intangible assets | 30 | 29 | 48 | 59 | 97 | ||||||||||
Less: Tax impact of amortization of intangible assets | 7 | 7 | 11 | 14 | 23 | ||||||||||
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, excluding amortization of intangible assets – Non-GAAP | $ | 992 | $ | 932 | $ | 1,092 | $ | 1,924 | $ | 2,264 | |||||
Average common shareholders’ equity | $ | 37,487 | $ | 37,086 | $ | 37,750 | $ | 37,287 | $ | 37,672 | |||||
Less: Average goodwill | 17,343 | 17,376 | 17,505 | 17,360 | 17,543 | ||||||||||
Average intangible assets | 3,178 | 3,209 | 3,341 | 3,193 | 3,369 | ||||||||||
Add: Deferred tax liability – tax deductible goodwill | 1,094 | 1,083 | 1,054 | 1,094 | 1,054 | ||||||||||
Deferred tax liability – intangible assets | 687 | 690 | 709 | 687 | 709 | ||||||||||
Average tangible common shareholders’ equity – Non-GAAP | $ | 18,747 | $ | 18,274 | $ | 18,667 | $ | 18,515 | $ | 18,523 | |||||
Return on common equity (annualized) – GAAP | 10.4 | % | 10.0 | % | 11.2 | % | 10.2 | % | 11.7 | % | |||||
Return on tangible common equity (annualized) – Non-GAAP | 21.2 | % | 20.7 | % | 23.5 | % | 20.9 | % | 24.6 | % |
40 BNY Mellon
The following table presents the reconciliation of book value and tangible book value per common share.
Book value and tangible book value per common share reconciliation | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | June 30, 2018 | ||||||||
(dollars in millions, except common shares) | ||||||||||||
BNY Mellon shareholders’ equity at period end – GAAP | $ | 41,533 | $ | 41,225 | $ | 40,638 | $ | 41,505 | ||||
Less: Preferred stock | 3,542 | 3,542 | 3,542 | 3,542 | ||||||||
BNY Mellon common shareholders’ equity at period end – GAAP | 37,991 | 37,683 | 37,096 | 37,963 | ||||||||
Less: Goodwill | 17,337 | 17,367 | 17,350 | 17,418 | ||||||||
Intangible assets | 3,160 | 3,193 | 3,220 | 3,308 | ||||||||
Add: Deferred tax liability – tax deductible goodwill | 1,094 | 1,083 | 1,072 | 1,054 | ||||||||
Deferred tax liability – intangible assets | 687 | 690 | 692 | 709 | ||||||||
BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP | $ | 19,275 | $ | 18,896 | $ | 18,290 | $ | 19,000 | ||||
Period-end common shares outstanding (in thousands) | 942,662 | 957,517 | 960,426 | 999,945 | ||||||||
Book value per common share – GAAP | $ | 40.30 | $ | 39.36 | $ | 38.63 | $ | 37.97 | ||||
Tangible book value per common share – Non-GAAP | $ | 20.45 | $ | 19.74 | $ | 19.04 | $ | 19.00 |
The following table presents the impact of changes in foreign currency exchange rates on our consolidated investment management and performance fees.
Constant currency reconciliation – Consolidated | 2Q19 vs. | |||||||
(dollars in millions) | 2Q19 | 2Q18 | 2Q18 | |||||
Investment management and performance fees (a) | $ | 833 | $ | 901 | (8 | )% | ||
Impact of changes in foreign currency exchange rates | — | (16 | ) | |||||
Adjusted investment management and performance fees – Non-GAAP | $ | 833 | $ | 885 | (6 | )% |
(a) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
The following table presents the impact of changes in foreign currency exchange rates on investment management and performance fees reported in the Investment Management business.
Constant currency reconciliation – Investment Management business | 2Q19 vs. | |||||||
(dollars in millions) | 2Q19 | 2Q18 | 2Q18 | |||||
Investment management and performance fees | $ | 829 | $ | 897 | (8 | )% | ||
Impact of changes in foreign currency exchange rates | — | (16 | ) | |||||
Adjusted investment management and performance fees – Non-GAAP | $ | 829 | $ | 881 | (6 | )% |
The following table presents the reconciliation of the pre-tax operating margin for the Investment Management business.
Pre-tax operating margin reconciliation - Investment Management business | |||||||||||||||||||||
(dollars in millions) | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q18 | YTD19 | YTD18 | ||||||||||||||
Income before income taxes – GAAP | $ | 265 | $ | 269 | $ | 247 | $ | 316 | $ | 319 | $ | 534 | $ | 700 | |||||||
Total revenue – GAAP | $ | 917 | $ | 939 | $ | 963 | $ | 1,015 | $ | 1,018 | $ | 1,856 | $ | 2,106 | |||||||
Less: Distribution and servicing expense | 94 | 91 | 95 | 99 | 103 | 185 | 213 | ||||||||||||||
Adjusted total revenue, net of distribution and servicing expense – Non-GAAP | $ | 823 | $ | 848 | $ | 868 | $ | 916 | $ | 915 | $ | 1,671 | $ | 1,893 | |||||||
Pre-tax operating margin – GAAP (a) | 29 | % | 29 | % | 26 | % | 31 | % | 31 | % | 29 | % | 33 | % | |||||||
Adjusted pre-tax operating margin, net of distribution and servicing expense – Non-GAAP (a) | 32 | % | 32 | % | 29 | % | 35 | % | 35 | % | 32 | % | 37 | % |
(a) | Income before taxes divided by total revenue. |
BNY Mellon 41
Recent accounting and regulatory developments
Recently issued accounting standards
The following Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) has not yet been adopted.
ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an ASU, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU introduces a new current expected credit losses model, which will apply to financial assets subject to credit losses and measured at amortized cost, including held-to-maturity securities and certain off-balance sheet credit exposures. The guidance will also change current practice for the impairment model for available-for-sale debt securities. The available-for-sale debt securities model will require the use of an allowance to record estimated credit losses and subsequent recoveries.
The standard requires a cumulative effect of initial application to be recognized in retained earnings at the date of initial application. BNY Mellon has developed expected credit loss models and approaches that include forecasting and other methodologies, and our focus for the remainder of 2019 is on model validation as well as business process refinements and testing to ensure the expected credit losses are calculated in accordance with the standard. We are continuing to assess the impact of the standard on our consolidated financial statements, disclosures and internal controls. The adoption impact will depend on several factors, including the composition and remaining expected lives of financial instruments at the time of adoption, the establishment of an allowance for expected credit losses on held-to-maturity securities, and the macroeconomic conditions and forecasts that exist at that date. We plan to adopt the new standard on Jan. 1, 2020.
Recent regulatory developments
For a summary of additional regulatory matters relevant to our operations, see “Supervision and Regulation” in