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Fitch Affirms BNY Mellon Corporation's IDR at 'AA-'; Outlook Stable
July 12, 2017 / 3:15 PM / 4 months ago

Fitch Affirms BNY Mellon Corporation's IDR at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, July 12 (Fitch) Fitch Ratings has today affirmed The Bank of New York Mellon Corporation's (BK) Long- and Short-Term Issuer Default Ratings (IDRs) at 'AA-'/'F1+'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this rating action commentary. KEY RATING DRIVERS IDRs, VR AND SENIOR DEBT The affirmation of BK's ratings reflects its strong franchise in the asset servicing, asset management, clearing businesses, conservatively managed balance sheet and strong liquidity position. BK's ratings continue to be supported by its leading franchise in global trust and custody and a competitive position in the asset management and private wealth management businesses, along with its dominant position in securities clearing. This scale and breadth of product offerings, in businesses that have high barriers to entry, result in strong and sticky client relationships. Fitch views BK's low risk and highly liquid balance sheet as a key rating strength, with about 49% of its assets invested in cash and high quality securities. This is a product of BK's conservative risk appetite and its business model, which generates significant operational deposits. Fitch believes custody and clearing deposits are core in nature and notes that the trust and processing banks have historically been viewed as safe havens during periods of market stress that further enhances the liquidity and funding profile. Management continues to be focused on improving the company's processes in order to address several challenges facing BK, including highly competitive pricing for trust and processing business, industry-wide revenue headwinds in asset management, and elevated regulatory costs. In order to achieve positive operating leverage, management has continued to digitize and automate previously manual processes, consolidate and modernize technology platforms, and reduce structural expenses through location, vendor management, and other programs. BK has also built new technology solutions such as its collateral management and NEXEN platforms to drive new revenue. Fitch believes management has demonstrated good execution on these initiatives. BK's returns following the Great Recession generally lagged peers on a return on equity (ROE) basis and fell short of Fitch's estimated cost of equity (10% to 12%). Over the past five quarters, ROE has hovered around 10% and is now roughly in line with peers. Fitch notes this has occurred while BK has maintained its strong underwriting standards and conservative balance sheet positioning. Fitch expects that BK's earnings will show further improvement over the medium term as management's technology investments and expense initiatives will allow the company to better realize the economies of scale embedded in its business model. Additionally, Fitch believes BK's remain sensitive to higher short- term interest rates. Since the Federal Reserve began rising interest rates late in 2015, BK's net interest margin (NIM) has risen from 0.98% at the end of 2015 to 1.14% at the end of the first quarter of 2017 (1Q17). Fitch considers BK appropriately capitalized in the context of its low-risk balance sheet. As of 1Q17, BK's fully phased-in Common Equity Tier 1 (CET1) Ratio was 10.0%, essentially unchanged from a year ago. Its Fitch Core Capital Ratio of 8.1% at 1Q17 is also similar to prior periods. Similar to State Street, BK's more binding capital ratio is the Enhanced Supplementary Leverage Ratio (ESLR), which comes into effect on Jan. 1, 2018. U.S. rules will require BK to have at least a 5% ESLR at the holding company and 6% at the bank level. During 2016, BK came into full compliance with the final rules and further improved its ratios to 5.9% at the holding company and 6.6% at the main bank in 1Q17. This comes as management has continued to optimize the balance sheet for the new regime by pushing out some excess deposits. Fitch believes this has been achieved without damaging client relationships or the company's funding profile. DERIVATIVE COUNTERPARTY RATINGS The Derivative Counterparty Ratings (DCRs) of BK and its subsidiaries are at the same level as the respective companies' Long-Term IDRs because they have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BK becomes non-viable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities are notched from BK's VR of 'aa-' in accordance with Fitch's criteria for such instruments. Subordinated debt is one notch below the VR for loss severity. Hybrid securities are rated five notches below the VR, reflecting three notches for non-performance and two notches for loss severity. Capital trust securities have been notched down four notches from the VR. HOLDING COMPANY The VR of BK is equalized with the VRs of its U.S. depositories, including its main bank subsidiary, The Bank of New York Mellon (BNYM). This reflects BK's role as a bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiary. Fitch notes that BK's holding company common equity double leverage is above 120% as of 1Q17. The holding company's VR remains equalized due to its significant liquidity resources, which offset the higher debt burden. SUBSIDIARY AND AFFILIATED COMPANIES BNYM and the other U.S. depositories' Long-Term IDRs are one notch above the parent company's Long-Term IDR. This reflects the implementation of total loss absorbing capital (TLAC) requirements for U.S. Global Systemically Important Banks (G-SIBs). The VRs remain equalized between BK and its material operating subsidiaries, namely BNYM. The common VR of BK and its operating companies reflects the correlated performance, or failure rate, between BK and these subsidiaries. BK's material international subsidiaries, The Bank of New York Mellon S.A./N.V. and its branches and The Bank of New York Mellon (International) Ltd., have IDRs equalized with BK's because of their integration and core strategic role within the group. Fitch believes a default at one of these entities represents significant reputational risk for the parent. The support rating of '1' reflects Fitch's view of an extremely high probability of institutional support for these entities. LONG- AND SHORT-TERM DEPOSIT RATINGS BK's domestic (uninsured) deposit ratings are one notch higher than its senior debt ratings reflecting uninsured depositors' superior recovery prospects in case of default given depositor preference in the U.S. These ratings are sensitive to any changes in BK's VR. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT BK's ratings are already near the top of Fitch's global rated bank universe. As a result, Fitch believes there is limited potential for upward rating momentum. Fitch believes that the main threat to BK's business model and ratings would result from a large idiosyncratic technological or operational loss resulting in reputational damage that causes clients to flee the firm. BK has been making significant investments in its technology systems over the past several years, which we believe helps to reduce potential idiosyncratic events that are prone to cause large losses. Fitch believes these operational risks have been well monitored and controlled, but also acknowledges that they are inherently difficult to predict and quantify. As such, a large occurrence that causes a revenue loss of 5% or greater would likely prompt Fitch to review the ratings to determine if a negative rating action was appropriate. Additionally, negative ratings pressure could emerge should BK materially alter its strategy, for example by entry into or divestiture of a key business line, which in Fitch's opinion alters the agency's view of BK's risk appetite. Currently, Fitch does not expect the affirmative BREXIT vote to overly impact BK's business; however, it may change the way that BK conducts business with some of its foreign clients. Finally, Fitch also notes that BK and its peer trust and processing banks are beginning to face the risk of technological disruption to their business, though this is likely to occur over a very long-term time horizon. Distributed ledger technology, or "blockchain", is an electronic means of settling, reconciling, and reporting on transactions, which is the core of BK and its peer banks' businesses. While Fitch believes it is highly probable that BK and its peer trust and processing banks will work to harness this technology to drive efficiencies across their respective platforms, it is also possible that over a long period of time a technology company could offer a distributed ledger solution that causes clients to go elsewhere for their core custody business. At present, Fitch views this risk as well outside of the Outlook horizon. DERIVATIVE COUNTERPARTY RATINGS DCRs are primarily sensitive to changes in the respective issuers' Long-Term IDRs. In addition, they could be upgraded one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are sensitive to any change in Fitch's view of the U.S.'s propensity to support its banks. While not impossible, Fitch views this as highly unlikely. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES BK's subordinated debt ratings are broadly sensitive to the same considerations that might affect the company's VR. HOLDING COMPANY Fitch could notch the holding company's IDR further from the operating company's IDR if holding company liquidity were to deteriorate, raising concerns as to the parent's ability to meet its obligations. SUBSIDIARY AND AFFILIATED COMPANIES Given that the VRs of BK and its U.S. depositories, including BNYM, remain equalized, the U.S. depositories' ratings are broadly sensitive to the same considerations that might affect BK's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by BK and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings would be similarly impacted. Fitch has affirmed the following ratings: Bank of New York Mellon Corporation (The) --Long-term Issuer Default Rating (IDR) at 'AA-'; Outlook Stable; --Long-term senior at 'AA-'; --Long-term subordinated at 'A+'; --Short-term IDR at 'F1+'; --Viability Rating at 'aa-'; --Preferred Stock at 'BBB'; --Derivative Counterparty Rating at 'AA-(dcr)'; --Support Rating at '5'; --Support Rating Floor at 'NF'. The Bank of New York Mellon --Long-term IDR at 'AA'; Outlook Stable; --Long-term deposits at 'AA+'; --Long-term senior at 'AA'; --Short-term deposits at 'F1+'; --Short-term IDR at 'F1+'; --Commercial Paper at `F1+'; --Derivative Counterparty Rating at 'AA(dcr)'; --Viability Rating at 'aa-'; --Support Rating at `5'; --Support Rating Floor at `NF'. BNY Mellon National Association --Long-term IDR at 'AA'; Outlook Stable; --Long-term deposits at 'AA+'; --Short-term IDR at 'F1+'; --Short-term deposits at 'F1+'; --Viability Rating at 'aa-'; --Support Rating at `5'; --Support Rating Floor at `NF'. BNY Mellon Trust Delaware --Long-term IDR at 'AA'; Outlook Stable; --Long-term deposits at 'AA+'; --Short-term deposits at 'F1+'; --Short-term IDR at 'F1+'; --Viability Rating at 'aa-'; --Support Rating at `5'; --Support Rating Floor at `NF'. The Bank of New York Mellon Trust Company, National Association --Long-term IDR at 'AA'; Outlook Stable; --Long-term deposits at 'AA+'; --Short-term deposits at 'F1+'; --Short-term IDR at 'F1+'; --Viability Rating at 'aa-'; --Support Rating at `5'; --Support Rating Floor at `NF'. Mellon Funding Corporation --Long-term IDR at 'AA-'; Outlook Stable; --Long-term subordinated debt at 'A+'; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; --Support Rating at '5'; --Support Rating Floor at 'NF. BNY Institutional Capital Trust A --Trust Preferred Securities at `BBB+'. The Bank of New York Mellon S.A./N.V. --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Derivative Counterparty Rating at 'AA-(dcr)'; --Long-term deposits at 'AA-'; --Short-term deposits at 'F1+'; --Support at '1'. The Bank of New York Mellon S.A./N.V. - Milan Branch --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Support at '1'. The Bank of New York Mellon S.A./N.V. - Luxembourg Branch --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Support at '1'. The Bank of New York Mellon (International) Ltd --Long-Term IDR at 'AA-'; Outlook Stable; --Short-Term IDR at 'F1+'; --Support at '1'. 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