DBRS, Inc. (DBRS Morningstar) confirmed the ratings of The Bank of New York Mellon Corporation (BNY Mellon or the Company), including the Company’s Long-Term Issuer Rating of AA. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, The Bank of New York Mellon (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.
KEY RATING CONSIDERATIONS
BNY Mellon’s ratings reflect the Company’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet. BNY Mellon typically performs well in times of stress, as evidenced by its recent results, and even benefits from a deposit flight to quality, augmenting an already very liquid balance sheet. We view BNY Mellon’s franchise as having the broadest, deepest product set of the trust banks.
Consistent with all trust banks, the ratings also consider the operational and reputational risks associated with the important role BNY Mellon plays in the global financial markets that are growing increasingly complex. Fee pressures within the Company’s businesses, lower interest rates, as well as recent senior management changes are also taken into consideration.
Given BNY Mellon’s very high rating level, a ratings upgrade is unlikely. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impacts franchise strength, or the inability to consistently win new business would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong
BNY Mellon’s powerful franchise includes dominant or top-tier global positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues. The Company is the largest custodian in the world, the seventh largest asset manager globally and the 10th largest wealth manager in the U.S. We view these businesses as defensible and sustainable, considering their significant barriers to entry and that many of the related activities are critical to the functioning of financial markets, regardless of the business cycle stage.
Earnings Combined Building Block (BB) Assessment: Strong/Good
BNY Mellon delivered a 9.2% return on equity in 1H21, down from 9.7% in the prior year period. Total revenue decreased 3% versus 1H20, reflecting significantly lower net interest revenue on lower rates, partially offset by modest growth in fee revenue. Meanwhile, noninterest expenses increased 4% primarily due to investments in efficiency and growth initiatives. Assets under custody and/or administration (AUC/A) grew 21% from a year ago to $45.0 trillion led by higher market values, net new business and the favorable impact of a weaker U.S. dollar. Similarly, assets under management (AUM) increased 18% to $2.32 trillion, benefiting from higher market values and net inflows.
Risk Combined Building Block (BB) Assessment: Very Strong
We view BNY Mellon’s risk profile as very strong, considering that its balance sheet is generally less risky than most financial institutions, but recognize the significant operational and reputational risks the Company faces given its important role in global financial markets. Credit risk remains minimal, as the Company primarily targets investment grade companies or high net worth individuals. At the end of 2Q21, loan balances represented less than 15% of total assets, with about 30% of the portfolio comprising fully collateralized margin loans.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
We consider the Company’s funding profile to be very strong, as deposits generated by the asset servicing and corporate trust operations provide a substantial and stable source of funds. Total deposits were up 11% from 2Q20, benefiting from high levels of liquidity in the system. On the asset side, BNY Mellon had $309 billion of cash and securities at the end of 2Q21, representing approximately two-thirds of total assets, with 96% of the securities portfolio rated at least AA (low).
Capitalization Combined Building Block (BB) Assessment: Strong
Consistent since inception, the Company remained a top performer in the Federal Reserve’s 2021 stress testing exercise, including the strongest results among the U.S. G-SIBs, reflecting its lower risk balance sheet. At the end of 2Q21, BNY Mellon’s CET1 ratio was a solid 12.6%, in line with the prior year quarter.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/385567.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” (July 19, 2021) was used to evaluate the Issuer and the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (February 3, 2021) was used in assessing potential ESG implications for the ratings.
The last rating action on this issuer took place on October 8, 2020 when all the ratings were confirmed.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Michael McTamney, CFA, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 2 July 2007
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277