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 history of predictable and favorable results, as well as its low risk, strong balance sheet. BNY Mellon’s business model diversification and scale, its track record of successful technology investment and risk management help support consistent financial results. We view BNY Mellon’s franchise as having the broadest, deepest product set of the custody banks. BNY Mellon typically performs well in times of stress, as evidenced by its recent results during the pandemic, and even benefits from a deposit flight to quality, augmenting an already very liquid balance sheet.
Consistent with all trust banks, the ratings also consider the operational, technological, and reputational risks associated with the integral role BNY Mellon plays in the global financial markets. Fee pressures within the Company’s businesses, the shifting interest rate outlook which is now driven by inflationary pressures, 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 impact franchise strength, or the inability to rebuild a comfortable cushion of capital above regulatory capital minimums 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 globally, and has the lead position globally in U.S. government securities clearance, is the world’s twelfth largest asset manager, and the tenth largest private bank 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’s earnings have proven resilient in the last year, despite unusually high volatility in markets and interest rates. For the year 2021, meaningful organic growth across businesses was largely offset by pressure from low interest rates. Higher market valuations supported fee income, with assets under custody/administration (AUC/A) increasing to $45 trillion. In the 1H22, with the increase in interest rates, higher interest income, reductions in money market fee waivers and higher transaction activity with new and existing clients offset pressure from lower market valuations and a stronger US dollar. Lower market valuations reduced investment management and performance fees, and lowered AUC/A to $43 trillion, with assets under management down 17% from 1H21 levels to $ 1.9 trillion. We expect earnings trends to improve in the 2H22, in part due to the expected absence of notable items, and the normalization of interest rates, still strong business volumes, and reduced market impacts on valuations.
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. We recognize the significant operational and reputational risks the Company faces given its important role in global financial markets. The Company's risks are increasing with its scale and business complexity, with key risks including cybercrime, data security and integrity, AML, and compliance with sanctions terms throughout its global network as BNY Mellon increasingly pursues open architecture platforms and end to end integrated solutions. We view BNY Mellon as having a strong track record on operational risk management to date. Credit risk remains minimal. At the end of 2Q22, loan balances represented 15% of total assets. These loans are largely secured by real estate or securities, with strong collateralization levels.
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 Treasury Services provide a substantial and stable source of funds. Total deposits increased 32% from 2019 levels to their peak in 2020, and have decreased about 5% since that time, to $326 billion. On the asset side, BNY Mellon had $320 billion of cash and securities at the end of 2Q22, representing approximately 70% of total assets, with 98% of the securities portfolio rated at least AA (low). BNY Mellon manages liquidity to required levels and to internal stress tests, while the Company maintains strong minimum levels of cash at the holding company.
Capitalization Combined Building Block (BB) Assessment: Strong
BNY Mellon manages capital conservatively, as evidenced by current actions to restrict shareholder capital returns due to erosion in capital levels recently. With CET1 capital at 10.0%, down from 11.2% at year-end 2021, and a Tier 1 leverage ratio of 5.2%, below the Company’s target of least 5.5%, the bank’s capital has come under pressure from the impact of sharply lower market valuations on the securities portfolio. BNY Mellon anticipates that capital levels will recover over the near term on improved earnings and lower market impacts. The bank’s lower risk business model continues to perform well in Federal Reserve stress tests, but its capital levels in the stress scenario are now lower than median levels.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/403665
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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:
The last rating action on this issuer took place on October 6, 2021 when all the ratings were confirmed.
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: https://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: Rebecca Clarke, 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.
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