NEW YORK--(BUSINESS WIRE)--The Bank of New York Mellon Corporation (BK) controlled its cost base in the first quarter of 2016 (1Q16) and reported net income of $804 million on revenue of $3.7 billion. Revenues were flat from the linked quarter and down modestly compared to the year-ago period. BK continues to focus on holding down its expenses, which remains the key driver for producing positive operating leverage, according to Fitch Ratings.
BK's 1Q16 net income equated to a 0.93% annualized return on average assets (ROAA) up from both 0.86% in the sequential quarter and 0.88% a year ago. The company's adjusted 1Q16 annualized return on average common equity (ROACE) was 9.7%, up from the 8.9% it generated in 4Q15 and 9.2% in 1Q15. BK's returns this quarter were stronger than the other U.S. Globally Systemic Important Banks (G-SIBs), reporting to date, which averaged ROACE of 7.3%. These banks were affected by volatile trading conditions and higher credit costs related to energy loans, which had less of an impact on BK given its business model.
Total fee revenues were up 1% on a linked-quarter and down 1% on a year-over-year basis. Linked-quarter results mainly reflect improvements in depositary receipts due to higher dividend fees and lower money market fee waivers in investment management, clearing services and corporate trust, offset somewhat by seasonally weaker performance fees and lower investment management fees. Year-over-year results were affected by weaker foreign exchange trading and lower asset management fees due to net outflows, offset somewhat by lease-related gains and lower money market waivers. Management indicated that roughly half of money market fee waivers have been recovered following the Fed's December rate increase. Fitch regards overall performance to be stable.
Net interest revenue (NIR) was up 1% on a sequential basis and was up 5% year-over-year due to 2- and 4- basis point (bp) improvements in the net interest margin (NIM), respectively, to 101bps. NIM expansion was mainly driven by the Fed's December rate hike, which lifted yields on cash investments and floating rate loans, offset by slightly higher deposit costs and interest rate hedges. Management noted deposit betas experienced were somewhat lower than anticipated, which led to lower deposit cost increases relative to the Fed rate increase. Fitch continues to believe BK's NIR is quite sensitive to further movements in short-term interest rates.
Expenses were down 2% sequentially and 3% year-over-year, as BK remained focused on driving incremental improvements across the company, leading to reductions in nearly all reported expense categories. BK continues to approach expense management as an ongoing process. During the quarter, it moved staff to lower-cost locations, brought more technology development in-house, and lowered its real estate footprint relative to previous quarters. Fitch believes that in a stronger rate and economic environment, much of the work BK has done on the expense front will become more evident through further increases in operating leverage.
Management indicated there could be some expense pressure for the remainder of the year due to regulatory investments needed to address deficiencies identified in BK's resolution plan. Regulators identified deficiencies related to BK's plans for continuing to provide critical services throughout resolution under Title I of Dodd-Frank (bankruptcy). Additionally, BK must also make progress on deficiencies in its legal entity rationalization framework by the Oct. 1, 2016 resubmission deadline. Fitch does not view the lack of acceptance of BK's resolution plan by regulators to be indicative of the company's current and ongoing financial health. BK's ratings incorporate the expectation that it will satisfy the regulators' requirements around its resolution planning.
BK's assets under management (AUM) through 1Q16 were $1.64 trillion, which is up 1% from 4Q15. The result was driven by modest net inflows in liability-driven investments, offset by outflows of index and equity investments. Compared to 1Q15, AUM was down 5% due to unfavorable currency effects and net outflows from equity, index, and cash funds. Assets under custody and administration (AUC/A) were up 1% sequentially due to net new business and favorable currency effects. AUC/A totaled $29.1 trillion at the end of 1Q16.
BK's fully phased-in Basel III CET1 of 9.8% (advanced approach) reported at the end of 1Q16 improved by 30bps sequentially. The increase in CET1 was primarily attributed to organic capital generation while risk-weighted assets under the advanced approach increased slightly. Other transitional Basel III capital ratios remain solid despite modestly decreasing due to additional phase-in of the full rules. BK also continues to exceed the fully phased-in liquidity coverage ratio (LCR) requirement.
The company continues to make progress toward achieving compliance with the U.S. supplementary leverage ratio (SLR), BK's binding constraint capital ratio, having now reached the required ratio at the consolidated level. BK reported a consolidated 5.1% SLR, which is up 20bps from the prior quarter. BK also reported that its main bank subsidiary, The Bank of New York Mellon, had an estimated 5.2% SLR, which improved 40bps during the quarter. Improvements were driven by capital generation and a reduction in average deposits during the quarter likely due in part to the Fed's rate movement, though period-end balances spiked due to clients 'dressing up' their balance sheets for financial reporting.
In Fitch's view, BK has thus far held off from implementing more broad measures to push client deposits off its balance sheet, preferring to wait until closer to the rule implementation date to possibly take more forceful actions. U.S. rules will require BK to have at least 5% at the holding company and 6% at the bank level. Fitch continues to believe that BK has adequate levers and time to bring itself into compliance well ahead of required implementation, as demonstrated this quarter by the achievement of compliance at the holding company level.
Additional information is available at 'www.fitchratings.com'.
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