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The Bank of New York Mellon Corporation’s (NYSE:BK) first-quarter earnings from continuing operations of 49 cents per share came in slightly below the Zacks Consensus Estimate of 53 cents. However, this compares favorably with earnings of 31 cents in the year-ago quarter. BNY Mellon experienced an increase in assets under custody and administration during the reported quarter.

Income from continuing operations was $601 million, compared with $712 million in the prior quarter and $363 million in the prior-year quarter. GAAP net income for the reported quarter was $559 million, compared with $593 million in the prior quarter and $322 million in the year-ago quarter.

Behind the Headlines


Total revenue for the quarter was $3.3 billion, up 1% sequentially and 4% year over year. The increase in revenue was primarily due to improvement in almost all the line items except Foreign exchange and other trading activities.

Fully tax equivalent net interest revenue increased 6% sequentially but decreased 1% year over year to $770 million. The sequential increase reflects the higher yield related to the restructured investment securities portfolio and higher hedging gains, partially offset by lower spreads. Net interest margin improved 12 bps sequentially and 2 bps year over year to 1.89%.

Investment income for the reported quarter came in at $108 million, up from an investment income of $78 million in the prior-quarter and an investment loss of $17 million in the year-ago quarter. The increase reflects higher lease residual gains and positive foreign currency translations.

Non-interest expense decreased 5% sequentially but increased 3% year over year to $2.2 billion. The year-over-year increase primarily reflects the impact of the Insight acquisition as well as higher incentive expense, subcustodian and clearing expense and software expense.

Evaluation of Credit Quality


Credit quality significantly improved during the quarter. The provision for credit losses decreased substantially to $35 million from $65 million in the prior quarter and $59 million in the year-ago quarter. The sequential decrease in provision was primarily due to improvements in BNY Mellon’s highest-risk asset classes. Total allowance for credit losses increased 2% sequentially and 14% year over year to $639 million. Net charge-offs decreased 24% sequentially and 50% year over year to $25 million. Non-performing assets declined 17% sequentially but increased 9% year over year to $459 million. The sequential improvement in Non-performing assets resulted from repayments and charge-offs.

Assets under Management

Assets under management (excluding securities lending assets) totaled $1.1 trillion as of Mar 31, 2010, down 1% sequentially but up 25% year over year. The sequential decrease was due primarily to outflows of money market assets under management. However, the acquisition of Insight Investment Management in the fourth quarter of 2009 helped improve assets under management on a year-over-year basis.

Assets under Custody and Administration

Assets under custody and administration totaled $22.4 trillion as of Mar 31, 2010, almost flat sequentially but up 15% year-over-year. The year-over-year increase reflects higher market values and new business.

Asset and wealth management fees were $696 million for the reported quarter, down 5% sequentially but up 13% year-over-year.

As part of its initiative to expand its global market share, BNY Mellon is in the process of acquiring Germany's BHF Asset Servicing GmbH for $343 million. The deal, which is expected to close in the third quarter of 2010, will make BNY Mellon the second largest organization in fund administration in Germany.

In February 2010, BNY Mellon acquired PNC Financial Services Group's (NYSE:PNC) investment services division for about $2.3 billion. This acquisition has increased BNY Mellon's assets under administration by $855 billion.

Though BNY Mellon is well-positioned to benefit from the growth of global financial assets, supported by expense management, modernization of public pension schemes and growth in cross-border investing, we expect interest-bearing deposit costs to rise faster than asset yields due to competitive pressure, thereby negatively impacting net interest margin as well as net interest income.

Source: BNY Mellon Falls Short, But Is Well Positioned for Growth