NEW YORK--(BUSINESS WIRE)--The Bank of New York Mellon Corporation (BK) continued to have good expense management in the second quarter of 2016 (2Q16), reporting net income of $825 million on revenue of $3.8 billion. Revenues were up modestly from the linked quarter but down 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 2Q16 net income equated to a 0.93% annualized return on average assets (ROAA), flat from sequential quarter and down from 0.96% a year ago. The company's adjusted 2Q16 annualized return on average common equity (ROACE) was 9.7%, also flat from the linked quarter and down from the 10.3% it generated in 2Q15. BK's returns this quarter were stronger than the other U.S. Globally Systemic Important Banks (G-SIBs), reporting to date, which averaged ROAA of 0.83%.
Total fee revenues were up 1% on a linked-quarter and down 2% on a year-over-year basis. The increase in the linked-quarter results mainly reflects higher market values combined with some net new businesses in the asset servicing business.
Assets under custody and administration (AUC/A) were up 1% sequentially due to net new business. AUC/A totaled $29.5 trillion at the end of 2Q16.
BK generated higher investment management and performance fees in its asset management business, driven by improved equity market values as well as the impact of BK's April 2016 acquisition of assets from Atherton, an asset manager based in California.
Overall, year-over-year results were mainly affected by a decline in investment management and performance fees, which were driven by outflows in 2015 and the unfavorable impact of a stronger U.S. dollar, though partially offset by higher money market fees and the Atherton acquisition.
BK's assets under management (AUM) through 2Q16 were $1.66 trillion, which was up 2% from 1Q16, reflecting stronger performance in many of BK's boutiques that supported lower net outflows in the quarter. Compared to 2Q15, AUM was down 2% due to the unfavorable currency effects, net outflows primarily in 2015, and net outflows from index investments in 2Q16.
Net interest revenue (NIR) was about flat on a sequential basis and was down 2% year-over-year due to modest declines in the company's net interest margin (NIM) to 98bps as of 2Q16. The modest NIM compression was mainly driven by the negative impact of interest rate hedging activities and higher premium amortization adjustments on residential mortgage backed securities. Fitch continues to believe BK's NIR is sensitive to an increase in short-term interest rates.
Expenses were down less than 1% sequentially and 4% 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, the company 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 more meaningful potential operating leverage.
However, management did indicate that 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. However, management expects these higher expenses will be funded with savings generated by its Business Improvement Process (BIP), which reflects the benefits of technology insourcing strategy and renegotiating of vendor contracts.
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 fully phased-in Basel III CET1 of 9.5% (advanced approach) reported at the end of 2Q16, declined by 30bps sequentially. The decrease in CET1 was primarily attributed to higher risk-weighted assets under the advanced approach.
Fitch believes BK's binding constraint capital ratio is the Enhanced Supplementary Leverage Ratio (SLR). In 2Q16, the company remained in compliance with the SLR at the holding company (5% minimum requirement) with a fully phased in SLR of 5% at the parent company as of 2Q16, though it declined 10bps from the prior quarter. The fully phased-in SLR at its main bank subsidiary, The Bank of New York Mellon, had an estimated 5.3% fully phased-in SLR, which improved 10bps during the quarter, though remains below the 6.0% requirement. Further improvements will be predicated on continued internal capital generation and further reductions in deposits during the quarter.
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 by the achievement of compliance at the holding company level in the prior quarter.
BK also continues to exceed the fully phased-in liquidity coverage ratio (LCR) requirement.
Additional information is available at 'www.fitchratings.com'.