OREANDA-NEWS. January 26, 2016. The Bank of New York Mellon Corporation (BK) generated positive operating leverage in the fourth quarter of 2015 (4Q15) and reported net income of \\$637 million on revenue of \\$3.7 billion. Revenues were down slightly from the linked quarter, though up compared to the year-ago period. BK continues to hold down expenses, which is a key objective in improving operating leverage, according to Fitch Ratings.

Results were impacted by a \\$170 million impairment charge taken due to an appellate court ruling which invalidated BK's lien on collateral in the Sentinel Management bankruptcy. Fitch does not expect this magnitude of impairment charge to be recurring due to BK's low risk business model and it does not have an impact on BK's ratings.

Overall fee revenues were down 3% on a linked-quarter and up 1% on a year-over-year basis. Linked-quarter results were impacted by typical seasonality in depositary receipts and lower client activity in asset servicing, offset somewhat by stronger investment management performance fees. Year-over-year results were up slightly as stronger business volumes in a number of areas were offset by unfavorable currency impacts. Fitch regards the overall performance to be fairly stable.

Net interest revenue (NIR) remained flat on a sequential basis and was up 7% compared to 4Q14 due to an 8 basis points (bps) improvement in the net interest margin (NIM) to 99bps from lower interest expense and higher asset yields. BK has attempted to stabilize NIR and NIM through shifts toward more securities and loans and less cash. BK continues to be negatively affected by the rate environment despite the recent short-term rate move due to continued low long-term rates which depress earnings on securities.

Expenses, excluding one-off items, were flat sequentially and down 2% on a year-over-year basis, as BK continues to be focused on finding incremental improvements in a number of areas. BK has preferred to approach expense management as an ongoing process to drive efficiencies across the company. Examples include real estate footprint consolidation, moving staff to lower cost locations, automating certain back-office processes, and reducing the use of external consultants and legal professionals.

BK's assets under management (AUM) through 4Q15 were \\$1.63 trillion, which is flat sequentially from 3Q15. The result was driven by modest net outflows in equity and index funds, offset by favorable net market/currency/acquisition impacts. Compared to 4Q14, AUM was down 4% due to unfavorable currency effects, lower markets, and net outflows from equity, index, and cash funds. BK recently announced the acquisition of Atherton Lane Advisors, a Silicon Valley wealth management firm, which will bring an additional \\$2.7 billion of AUM and 700 clients to the company. Assets under custody and administration (AUC/A) were up 1% sequentially due to net new business and higher markets. AUC/A totaled \\$28.9 trillion at the end of 4Q15.

BK's fully phased-in Basel III CET1 of 9.5% (advanced approach) reported at the end of 4Q15 improved by 20bps sequentially. The increase in CET1 was primarily attributed to an improvement in risk weighted assets under the advanced approach while regulatory capital was roughly flat. Other transitional Basel III capital ratios also improved modestly and remain solid. 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 reported a consolidated 4.9% SLR, which is up 10bps from the prior quarter. BK also reported that its main bank subsidiary, The Bank of New York Mellon, had an estimated 4.8% SLR, which improved 20bps during the quarter. Improvements were driven by a \\$9 billion 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 year-end.

In Fitch's view, BK has thus far held off from implementing more broad measures to push client deposits out, preferring to wait until closer to the rule implementation date to potentially take more forceful actions. U.S. rules will require to 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.