bank of new york mellon corp january 25, 2016

U.S. Research Published by Raymond James & Associates

Please read domestic and foreign disclosure/risk information beginning on page 11 and Analyst Certification on page 11.

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Bank of New York Mellon Corp January 25, 2016

(BK-NYSE) Company Comment David J. Long, CFA, (312) 612-7685, [email protected]

Daniel Tamayo, CFA, Sr. Research Associate, (312) 612-7688, [email protected]

Josh Goldberg, Sr. Res. Assoc., (312) 612-7739, [email protected]

Banking _____________________________________________________________

Reducing EPS Estimates for Lower Fees

Recommendation: We reiterate our Outperform rating on BK shares following the release of 4Q financial results. Although core business trends softened in 4Q, expenses remained well-managed and it should realize additional benefits from higher rates in 1Q. We remain bullish on BNY Mellon’s long-term organic revenue growth prospects, profitability improvement from expense rationalization, and leverage to rising rates, and believe shares are attractively valued.

Operating EPS beat. BNY Mellon reported 4Q operating EPS of $0.68, exceeding our estimate of $0.66 and consensus of $0.64. Relative to our estimate, lower operating expenses, a lower provision, and higher net interest income were partially offset by lower fee income. GAAP EPS of $0.57 included impairment and litigation/restructuring charges.

Core fee income falls. Fee income fell 3.4% from 3Q due to a seasonal decline in issuer services (depositary receipts), a 3.2% decline in custody servicing (although AUC grew 1.4%), a 1.6% decline in asset and wealth management (AUM flat), and a 8.3% decline in forex trading (lower volumes and volatility). New custody business wins were only $49 billion in 4Q, although they can be choppy. Fee waivers should moderate in 1Q.

NII stable as wider NIM outweighs balance sheet shrinkage. Net interest income (NII) rose 0.1% from 3Q due to a 1 bp NIM expansion to 0.99%, mostly offset by a 1.0% decline in average earning assets. Management guided to further excess deposit runoff thus far in 1Q, which will pressure near-term NII growth (despite helping NIM).

Expenses well-managed again. Operating expenses rose 0.2% from 3Q but were below our forecast and consensus, and drove the upside to our EPS estimate.

Securities lending increases on wider spreads. Securities lending revenue rose 21.1% from 3Q, driven by wider spreads due to the increase in rates (3-mth. LIBOR/Fed Funds).

Reducing EPS estimates. We are reducing our 2016 EPS estimate by $0.02 to $3.10 and our 2017 estimate by $0.04 to $3.50 to reflect lower fee income forecasts.

Valuation: BK shares trade at 11.3x our 2016 EPS estimate, a 25% discount to the S&P 500 (15.1x), compared to an average discount of 14% over the last five years. Our 12-month target price of $42 is based on BK shares trading at 12x our 2017 EPS estimate, bringing its discount to the S&P 500 closer to its historical level.

Non-GAAP Q1 Q2 Q3 Q4 Full GAAP EPS Revenues EPS Mar Jun Sep Dec Year Full Year (mil.)

2014A $0.57 $0.62 $0.63 $0.58 $2.40 $2.15 $14,664 Old 2015E 0.67A 0.76A 0.75A 0.66 2.85 2.81 15,126

New 2015A 0.67 0.76 0.75 0.68 2.88 2.73 15,083 Old 2016E 0.72 0.76 0.84 0.80 3.12 3.12 15,866

New 2016E 0.70 0.75 0.85 0.80 3.10 3.10 15,506 Old 2017E UR UR UR UR 3.54 3.54 16,901

New 2017E UR UR UR UR 3.50 3.50 16,652

Rows may not add due to rounding. Non-GAAP EPS exclude non-core and one-time items. UR: Under Review.

Rating _________________________________ Outperform 2 Current and Target Price __________________ Current Price (Jan-22-16) $35.15 Target Price: Old: $41.00 New: $42.00 52-Week Range $45.45 - $34.24 Suitability Medium Risk/Growth Market Data ___________________________ Shares Out. (mil.) 1,085.3 Market Cap. (mil.) $38,148 Avg. Daily Vol. (10 day) 8,572,982 Dividend/Yield $0.68/1.9% Book Value (Dec-15) $32.69 Tang. BVPS (Dec-15) $15.27 Earnings & Valuation Metrics ______________

2014A 2015A 2016E 2017E

P/E Ratios (Non-GAAP) 14.6x 12.2x 11.3x 10.0x Company Description ____________________ Bank of New York Mellon (BNY), headquartered in New York City, is one of the largest and most diversified financial institutions in the world. It is the world’s largest securities servicer, the largest global corporate trustee, and is the world’s largest provider of depositary receipts programs. The company operates in 36 countries and serves more than 100 markets.

mailto:[email protected]





Raymond James U.S. Research


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2

Fourth Quarter Results BNY Mellon reported fourth quarter operating EPS of $0.68, exceeding our estimate of $0.66 and consensus of $0.64. Relative to our estimate, lower operating expenses, loan loss provision and tax rate, and higher net interest income were partially offset by lower fee income. GAAP EPS of $0.57 included a $0.10 impairment charge related to a recent court decision involving a loan to the former Sentinel Management Group, and $0.01 in litigation and restructuring charges.

.

4Q15 3Q15 Q/Q 4Q14 Y/Y

Operating EPS $0.68 $0.75 -9.3% $0.58 17.1%

GAAP EPS $0.57 $0.74 -23.0% $0.18 216.7%

Book Value per Share $32.69 $32.59 0.3% $32.09 1.9%

Income Statement

Net Interest Income (FTE) 774 773 0.1% 726 6.6%

Loan Loss Provision (7) 1 NM 1 NM

Net Credit Income 781 772 1.2% 725 7.7%

Asset Servicing 986 1,019 -3.2% 982 0.4%

Securities Lending 46 38 21.1% 37 24.3%

Issuer Services 199 313 -36.4% 193 3.1%

Clearing Services 339 345 -1.7% 347 -2.3%

Treasury Services 137 137 0.0% 145 -5.5%

Total Securities Servicing Fees 1,707 1,852 -7.8% 1,704 0.2%

Asset and Wealth Management Fees 809 822 -1.6% 841 -3.8%

Foreign Exchange Trading 165 180 -8.3% 165 0.0%

Other Noninterest Income 248 177 40.1% 194 27.8%

Total Fee Revenue 2,929 3,031 -3.4% 2,904 0.9%

Operating Revenue (FTE) 3,703 3,804 -2.7% 3,630 2.0%

Total Operating Expenses 2,674 2,669 0.2% 2,724 -1.8%

Pre-tax Income from Continuing Operations 1,073 1,134 -5.4% 978 9.7%

Income Taxes (FTE) 259 299 -13.4% 249 4.0%

Net Income from Continuing Operations 814 835 -2.5% 729 11.7%

Balance Sheet

Average Interest Earning Assets 312,610 315,672 -1.0% 318,608 -1.9%

Average Total Loans 61,964 61,657 0.5% 56,844 9.0%

Average Interest Bearing Deposits 160,334 169,753 -5.5% 163,149 -1.7%

Average Total Equity 35,664 35,588 0.2% 36,859 -3.2%

Performance Ratios

Operating ROA 0.82% 0.89% -7 bps 0.7% 13 bps

Operating ROE 8.47% 9.31% -84 bps 7.2% 123 bps

Net Interest Margin - reported 0.99% 0.98% 1 bps 0.91% 8 bps

Noninterest income / Total revenue 79.1% 79.7% -58 bps 80.0% -90 bps

Efficiency Ratio 72.2% 70.2% 205 bps 75.0% -283 bps

Pretax Margin 29.0% 29.8% -83 bps 26.9% 203 bps

Operating Margin 22.0% 22.0% 3 bps 20.1% 190 bps

Asset Quality

NPL Ratio 0.45% 0.19% 26 bps 0.19% 26 bps

LLR / Total loans 0.25% 0.29% -4 bps 0.29% -4 bps

Net charge-offs / Avg. loans 1.08% -0.01% 109 bps -0.01% 109 bps

Source: Raymond James research and company reports; millions except per share data

Fourth Quarter 2015 Financial Results




Reported EPS (GAAP) 0.57

Non-Core Items

Impairment charge related to recent court decision (0.10)

M&I, litigation and restructuring charges (0.01)

Total Non-Core Items (0.11)

Core EPS 0.68$

Source: Raymond James research

BK 4Q15 EPS Reconciliation

Consensus

Raymond Consensus Consensus # of

Actual James dif (+/-) Consensus dif (+/-) High Low Estimates

PER SHARE DATA

Operating EPS $0.68 $0.66 $0.02 $0.64 $0.04

Book value per share 32.69 32.99 -0.30 34.26 -1.56 38.54 32.81 7

Tangible book value 15.27 15.42 -0.15 14.88 0.39 18.49 12.26 9

Dividends per share 0.17 0.17 0.00 0.17 0.00 0.20 0.17 9

Avg. fully diluted shares (mil.) 1,096 1,093 3 1,096 1 1,103.0 1,089.5 10

INCOME STATEMENT

Net interest income (FTE) 774 766 8 766 8 781 728 10

Loan loss provision -7 5 -12 3 -10 13 -2 10

Fee income 2,929 2,980 -51 2,988 -59 3,045 2,943 10

Revenue 3,703 3,746 -43 3,764 -61 3,807 3,712 10

Non-interest expense 2,674 2,716 -42 2,724 -50 2,787 2,680 10

Pre-tax income 1,073 1,053 20 1,037 36 1,081 1,005 10

Taxes 259 280 -21 268 -9 297 251 9

Net income 755 724 31 712 43 764 662 10

BALANCE SHEET

Loans 63,703 64,100 -397 63,998 -295 64,892 63,309 7

Average Deposits 246,212 254,647 -8,435 257,045 -10,833 268,102 251,374 4

FINANCIAL RATIOS

Net interest margin (NIM) 0.99% 0.97% 2 bp 0.98% 1 bp 1.01% 0.97% 10

Efficiency ratio 72.2% 72.5% -29 bp 72.6% -39 bp 74.0% 71.2% 8

Net charge-offs / Avg. loans 1.08% 0.04% 104 bp 0.02% 106 bp 0.05% 0.00% 7

ROA 0.82% 0.77% 4 bp 0.76% 6 bp 0.83% 0.70% 8

ROE 8.5% 7.6% 89 bp 8.1% 34 bp 9.7% 7.4% 8

Source: SNL Financial; Thomson Financial; Raymond James research

Note: Dollar amounts in mill ions, except per share data

BK 4Q15 - Actual vs. Raymond James and Consensus




Management Outlook

Assets Under Custody and Administration

Total assets under custody and administration (AUCA) rose 1.4% from September 30 to $28.9 trillion.

New AUC wins totaled $49 billion in the fourth quarter, down from $84 billion in the third quarter and below the five-year average wins of $272 billion per quarter.

We continue to see significant growth opportunities in custody and servicing globally for BNY Mellon, including growth from its role in global collateral services – a segment with strong growth opportunities due to increased regulation of the derivatives industry.

Guidance Tracker – Bank of New York Mellon Corporation (BK)Source Category Target Period Trending Guidance

2015Q4 Earnings Deposits 2016Q1

Average deposits fell ~$9 billion in the fourth quarter and are down ~$8 billion thus far in January. It

previously estimated it would see a $20 billion decline in average deposits after the first rate hike and a

total of $40-70 billion decline when rates are normalized.

2015Q4 Earnings Net Interest Income 2016Q1 Looking for a modest sequential increase in net interest income in 1Q.

2015Q4 Earnings NIM 2016Q1 Looking for a modest sequential increase in NIM in 1Q.

2015Q4 Earnings Noninterest Expense 2016Q1

In 1Q, bank assessment charges will rise $15 million (and remain at that level for 2016) and staff expense

will rise to reflect the seasonal acceleration of long-term incentive compensation expense for retiree-

eligible employees.

2015Q4 Earnings Noninterest Income 2016Q1 The pipeline for new business continues to look healthy.

2015Q4 Earnings Asset Quality 2016Y Remains on track to achieve at least $500 million in cost savings by 2018.

2015Q4 Earnings Asset Quality 2016Y It expects annual loan loss provisions of $10-30 million in 2015-2017.

2015Q4 Earnings Capital 2016YRemains very confident they will be in compliance with all regulatory ratio requirements at the time or

ahead of compliance dates.

2015Q4 Earnings NIM 2016YFor 2015-2017, on an operating basis: NIM should be 0.95-1.00% in a flat-rate environment; 1.25-1.50% in

a normalizing environment.

2015Q4 Earnings Noninterest Expense 2016YGoal is to keep operating expenses flat in 2016, but higher rates will result in higher distribution expense,

which will likely result in 1-2% overall expense growth in 2016.

2015Q4 Earnings Noninterest Income 2016YExpects to recover 70% of total money market fee waivers with the next 25 bp increase in rates. It should

recover the first ~35% with the current hike.

2015Q4 Earnings Noninterest Income 2016YDespite the loss of 3 clients to self-clearing, clearing services is expected to be pretax income neutral in

2016, with pressure on revenues.

2015Q4 Earnings Profitability 2016Y

On track to reach its 3-year (2015-2017) targets of: grow operating EPS by 7-9% in a flat-rate environment

and by 12-15% in a normalized environment. It expects to have an ROTCE of 17-19% in a flat-rate

environment and an ROTCE of 20-22% in a normalized environment.

2015Q4 Earnings Profitability 2016YFor 2015-2017, it believes it can achieve operating margins of 30-32% in a normalized environment.

Operating margins would be 28-30% in a flat-rate environment.

2015Q4 Earnings Tax Rate 2016Y Effective tax rate should be 25-26%.

2015Q4 Earnings Total Revenue 2016YFor 2015-2017, it expects to grow revenues by 3.5-4.5% in a flat-rate environment and by 6-8% in a

normalized environment.

Press Release Noninterest Income 2016Q2Announced it will acquire Menlo Park, CA-based Atherton Lane Advisers ($2.7 billion AUM), which is

expected to close 2Q16.

Goldman Sachs Conference 2015 Interest Rate Sensitivity 2016Y

Estimate net interest income will rise by $290 million per year given a gradual 100 bp parallel rate ramp.

Should recover 70% of fee waivers when rates rise 50 bps; 100% recovery at 100 bp increase. Currently

losing $0.06-0.07 per quarter in EPS from fee waivers.

2015Q2 Earnings Capital 2016Y

Authorized to repurchase $2.4 billion in common shares through 2Q16, plus an additional $0.7 billion, the

latter contingent upon the issuance of $1 billion in preferred equity (completed in 2Q). It did not ask for a

dividend increase.

Morgan Stanley Conference 2015 Profitability 2016YIts acquisition of ~220 accounting and record-keeping employees from T Rowe Price will be a little bit of a

drag in 2015 but will be accretive in 12-18 months.

Source: Raymond James research; company correspondence




Assets Under Management

Total assets under management (AUM) were flat from September 30 at $1.6 trillion.

BNY had $11 billion in net long-term outflows offset by $9 billion in market appreciation and $2 billion in net money market inflows.

Deconstructing BNY Mellon’s AUM by client segment: mutual funds AUM rose 0.5% ($2 million) and private client AUM rose 1.3% ($1 billion), while institutional AUM fell 0.3% ($3 billion).

On January 20, it announced plans to acquire Menlo Park, CA-based asset Atherton Lane Advisers, which had $2.7 billion in AUM.

Source: Company Reports

Assets Under Custody and Administration

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Total $25.5 $26.3 $24.8 $25.1 $25.7 $25.2 $26.4 $26.3 $26.3 $26.2 $27.4 $27.6 $27.9 $28.5 $28.3 $28.5 $28.5 $28.6 $28.5 $28.9

$22

$23

$24

$25

$26

$27

$28

$29

$30

(Tri

llio

ns)

Source: Company Reports

Assets Under Management

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Institutional $701 $733 $719 $757 $829 $835 $882 $894 $915 $945 $1,016 $1,047 $1,092 $1,084 $1,106 $1,164 $1,188 $1,163 $1,129 $1,126

Mutual Funds $451 $462 $406 $427 $404 $388 $398 $411 $404 $377 $407 $426 $415 $440 $430 $438 $445 $454 $419 $421

Private Client $77 $79 $73 $76 $75 $76 $79 $81 $79 $79 $82 $84 $85 $85 $84 $84 $84 $83 $77 $78

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

(Bill

ions

)




Revenue Highlights

BNY Mellon is the most diverse of the custodian banks, and it remains the world’s largest securities servicer, with $28.9 trillion in assets under custody and administration, and one of the largest asset managers, with $1.6 trillion in assets under management.

It is one of the world’s largest corporate trustees and one of the largest providers of depositary receipt (DR) programs, with nearly 1,200 sponsored American and global DR programs.

The company’s revenues from international sources as a percentage of total revenues fell to 34% during the fourth quarter from 37% in the prior quarter.

The following table details the diversity of the company’s operations by breaking down revenue by each business segment. Over the next several years, we believe non-U.S. revenues could approach 50% of total revenue, primarily due to the modernization of public pension schemes and the development of capital markets outside the United States, which could be complemented by strategic bite-sized acquisitions.

Asset Servicing

Total asset servicing revenue fell 3.2% ($33 million) from the third quarter and was $43 million below our forecast.

The sequential decrease was driven by lower client activity.

We see significant long-term opportunity in BNY’s Global Collateral Services segment to increase asset servicing revenues due to the changing regulatory environment, which has led to increased costs and compliance demands for affected firms, in turn making BNY’s expertise more appealing.

Issuer Services

Issuer services fees fell 36.4% ($114 million) from the third quarter, but were $4 million above our forecast. The sequential decline was driven by seasonally higher depositary receipts revenue in the third quarter.

The number of sponsored depositary receipts serviced by BNY Mellon fell 2.6% from September 30 to 1,145 but the company is working to keep only profitable clients.

Clearing Services

Clearing services fees fell 1.7% ($6 million) from the third quarter and were $25 million below our forecast.

Sequentially, a loss of business due to industry consolidation in U.S. wealth management drove the decline.

Securities Lending

Securities lending revenues rose 21.1% ($8 million) from the third quarter and were $5 million above our forecast.

The sequential increase was driven by wider spreads due to the increase in 3-month LIBOR.

Investment Services Investment Management

Investment services fees: Investment management and performance fees:

Asset servicing $1,005 Mutual funds $294

Issuer services 199 Institutional clients 350

Clearing services 337 Wealth management 155

Treasury services 135 Performance fees 55

Total investment services fees $1,676 Total investment management and performance fees $854

Foreign exchange and other trading revenue 148 Distribution and servicing 39

Other 102 Other 25

Total fees and other revenue $1,926 Total fees and other revenue $918

Net interest revenue 632 Net interest revenue 84

Total revenue $2,558 Total revenue $1,002

Provision for credit losses 0 Provision for credit losses 0

Noninterest expense 1,805 Noninterest expense 715

Income before taxes 753 Income before taxes 287

Pre-tax operating margin 29% Pre-tax operating margin 29%

Source: Company reports

Note: Data may not match model due to reporting differences and inter-segment eliminations

4Q15 Revenue by Segment ($ millions)




Foreign Exchange and Other Trading

Foreign exchange (forex) trading revenue fell 8.3% ($15 million) from the third quarter and was $7 million below our forecast, due to lower volumes, lower volatility and lower depositary receipt-related activity, partially offset by hedging activity for foreign currency placements.

Other trading revenues were $8 million during the fourth quarter, which can be choppy from quarter to quarter, rising from -$1 million during the prior quarter.

Investment Management

Asset and wealth management fees fell 1.6% ($13 million) from the third quarter and were $21 million below our forecast.

The sequential decrease was driven by index and equity outflows, partially offset by higher equity market values and lower money market fee waivers.

Performance fees rose seasonally by $48 million to $55 million from the third quarter.

We expect wealth management revenues to benefit from the company’s investment in the segment, as it recently completed a 50% increase in sales professionals.

Net Interest Income

Net interest income (NII) rose 0.1% ($1 million) from the third quarter and was $8 million above our forecast.

The sequential increase was driven by a 1 basis point (bp) expansion of its net interest margin (NIM) to 0.99% (above our forecast of 0.97%), mostly offset by a 1.0% decrease in average earning assets.

Investment securities gains were $21 million during the fourth quarter, compared to $22 million during the prior quarter.

Expenses

Operating expenses rose 0.2% ($5 million) from the third quarter but were $42 million below our forecast.

Sequentially, staff expenses rose 3.1% ($44 million), driven by $55 million in severance expense and a $30 million adjustment to benefits. Other expenses fell 25% ($67 million) driven by $35 million in adjustments to bank assessment charges.

Excluding the $170 million impairment charge, the company reported a loan loss provision credit of $7 million, compared to a $1 million charge in the prior quarter and below our forecast of a $5 million charge.

4Q15 Avg. Balance4Q15 Interest 4Q15 Yield / Rate3Q15 Avg. Balance3Q15 Interest 3Q15 Yield / Rate4Q14 Avg. Balance4Q14 Interest 4Q14 Yield / Rate

4Q15 4Q15 4Q15 3Q15 3Q15 3Q15 4Q14 4Q14 4Q14

Avg. Balance Interest Yield / Rate Avg. Balance Interest Yield / Rate Avg. Balance Interest Yield / Rate

Interest-Bearing Deposits with Banks $19,301 $22 0.45% $20,549 $23 0.45% $24,623 $30 0.49%

Interest-Bearing Deposits with Fed $84,880 $39 0.18% $84,175 $42 0.20% $97,440 $54 0.22%

Fed Funds Sold and Repurchase Agreements $24,147 $42 0.69% $25,366 $39 0.61% $18,536 $26 0.56%

Margin Loans $19,321 $53 1.09% $19,839 $53 1.05% $18,897 $48 1.01%

Domestic Offices $27,751 $144 2.06% $27,411 $149 2.15% $25,103 $139 2.20%

Foreign Offices $14,892 $44 1.17% $14,407 $41 1.13% $12,844 $39 1.21%

Total Non-Margin Loans $42,643 $188 1.75% $41,818 $190 1.80% $37,947 $178 1.86%

U.S. Government Obligations $23,955 $92 1.53% $23,935 $92 1.52% $24,331 $91 1.48%

U.S. Government Agency Obligations $55,441 $253 1.81% $55,624 $247 1.76% $49,106 $210 1.70%

Obligations of States and Political Subdivisions $4,164 $29 2.80% $4,465 $32 2.81% $5,305 $35 2.61%

Other Securities $35,972 $113 1.25% $37,164 $120 1.28% $38,501 $119 1.23%

Trading Securities $2,786 $20 2.79% $2,737 $19 2.74% $3,922 $26 2.64%

Total Securities $122,318 $509 1.65% $123,925 $509 1.63% $121,165 $483 1.58%

Total Earning Assets $312,610 $851 1.08% $315,672 $859 1.08% 318,608 819 1.02%

Money Market Rate and Demand Deposit Accounts $9,292 $3 0.12% $10,623 $3 0.13% $8,869 $3 0.12%

Savings $1,217 $1 0.27% $1,279 $1 0.27% $1,262 $1 0.30%

Other Time Deposits $43,061 $3 0.03% $43,529 $4 0.04% $41,507 $4 0.04%

Foreign Offices $14,892 $44 1.17% $14,407 $41 1.13% $12,844 $39 1.21%

Total Interest-Bearing Deposits $160,334 $4 0.01% $169,753 $9 0.02% $163,149 $12 0.03%

Fed Funds Purchased And Repurchase Agreements $20,349 ($2) -0.03% $14,796 ($1) -0.04% $20,285 ($3) -0.05%

Trading Liabilities $638 $2 1.34% $475 $2 1.42% $1,024 $4 1.44%

Other Borrowed Funds $733 $2 1.13% $2,823 $2 0.35% $5,270 $3 0.25%

Payables to Customers and Broker-Dealers $12,904 $2 0.06% $11,504 $2 0.06% $10,484 $2 0.08%

Long-Term Debt $21,418 $64 1.19% $21,070 $64 1.21% $21,187 $68 1.27%

Total Interest Bearing Liabilities $216,376 $76 0.14% $220,421 $78 0.14% 221,399 89 0.16%

Net Interest Margin 0.99% 0.98% 0.91%

Source: Company data, Raymond James research

Note: Figures include taxable equivalent adjustments

Historical Snapshot: Net Interest Margin Composition (millions, except yield/rate data)




Capital

BNY Mellon paid a quarterly dividend of $0.17 per share during the fourth quarter and repurchased 10.1 million common shares ($431 million).

It was approved in March through the Comprehensive Capital Analysis and Review (CCAR) process to repurchase $3.1 billion of its common shares from 2Q15-2Q16, with the last $0.7 billion contingent upon a $1 billion issuance of preferred stock, which it issued in the second quarter.

Investment Summary It is our view that Bank of New York Mellon shares provide investors with an opportunity to own a global leader in securities servicing, asset management, and issuer services, along with attractive growth opportunities relative to its large-cap financial peers. We believe the company is well-positioned to benefit from the growth of global financial assets and that its ability to capitalize on attractive secular trends will drive long-term EPS growth. Furthermore, recent expense rationalization initiatives should improve BNY’s profitability metrics as it continues to operate in a challenging (low interest rate) backdrop, while revenues will benefit significantly once rates begin to rise. We believe its shares are relatively inexpensive, given BNY Mellon’s attractive organic growth opportunities and leverage to rising rates.

(bp) (bp)

4Q15 / 4Q15 /

($ mil) 4Q15 3Q15 2Q15 1Q15 4Q14 3Q15 4Q14

Tier 1 12.3% 11.9% 12.5% 10.8% 12.2% 40 10

Tier 1 common 9.5% 9.3% 9.9% 9.1% 9.8% 20 -30

Total 12.5% 12.2% 12.8% 12.0% 12.5% 30 0

Leverage 5.9% 5.9% 5.8% 5.7% 5.6% 0 30

Supplementary leverage 4.9% 4.8% 4.6% 4.6% 4.4% 10 50

Tangible common equity ratio 3.8% 3.9% 3.7% 3.8% 3.8% -17 -5

Source: Company reports

Capital Ratios

Base + 5 bp - 5 bp - 10 bp - 15 bp - 20 bp

Net Interest Margin 1.05% 1.10% 1.00% 0.95% 0.90% 0.85%

EPS impact 0.10 -0.10 -0.21 -0.31 -0.42

% impact 3.2% -3.2% -6.8% -10.0% -13.5%

Base - 100 bp + 50 bp + 100 bp + 150 bp + 200 bp

Efficiency Ratio 69.7% 68.7% 70.2% 70.7% 71.2% 71.7%

EPS impact 0.10 -0.06 -0.12 -0.17 -0.22

% impact 3.2% -1.9% -3.9% -5.5% -7.1%

Base - 5 bp + 5 bp + 10 bp + 15 bp + 20 bp

NCO Ratio 0.03% -0.02% 0.08% 0.13% 0.18% 0.23%

EPS impact 0.02 -0.02 -0.05 -0.07 -0.09

% impact 0.6% -0.6% -1.6% -2.3% -2.9%

Base + 100 bp - 50 bp - 100 bp - 150 bp - 200 bp

Avg. Earning Asset Growth -3.4% -2.4% -3.9% -4.4% -4.9% -5.4%

EPS impact 0.02 -0.01 -0.02 -0.03 -0.05

% impact 0.6% -0.3% -0.6% -1.0% -1.6%

Source: Raymond James; company reports

2016 EPS Sensitivity Analysis

2016 EPS Sensitivity Analysis-

Net Interest Margin and Average Earning Asset Growth

-0.20% -0.15% -0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20%

-2.50% 2.64 2.74 2.84 2.94 3.04 3.14 3.25 3.35 3.45

-2.00% 2.65 2.75 2.85 2.95 3.05 3.16 3.26 3.36 3.46

-1.50% 2.66 2.76 2.86 2.96 3.07 3.17 3.27 3.37 3.48

-1.00% 2.66 2.77 2.87 2.97 3.08 3.18 3.28 3.39 3.49

-0.50% 2.67 2.78 2.88 2.98 3.09 3.19 3.30 3.40 3.50

0.00% 2.68 2.79 2.89 3.00 3.10 3.20 3.31 3.41 3.52

0.50% 2.69 2.80 2.90 3.01 3.11 3.22 3.32 3.42 3.53

1.00% 2.70 2.81 2.91 3.02 3.12 3.23 3.33 3.44 3.54

1.50% 2.71 2.82 2.92 3.03 3.13 3.24 3.35 3.45 3.56

2.00% 2.72 2.83 2.93 3.04 3.14 3.25 3.36 3.46 3.57

2.50% 2.73 2.84 2.94 3.05 3.16 3.26 3.37 3.48 3.58


Net Interest Margin (NIM)

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Base + 5 bp - 5 bp - 10 bp - 15 bp - 20 bp

Net Interest Margin 1.16% 1.21% 1.11% 1.06% 1.01% 0.96%

EPS impact 0.10 -0.11 -0.21 -0.32 -0.42

% impact 2.9% -3.1% -6.0% -9.1% -12.0%

Base - 100 bp + 50 bp + 100 bp + 150 bp + 200 bp

Efficiency Ratio 68.9% 67.9% 69.4% 69.9% 70.4% 70.9%

EPS impact 0.11 -0.07 -0.12 -0.18 -0.24

% impact 3.1% -2.0% -3.4% -5.1% -6.9%

Base - 5 bp + 5 bp + 10 bp + 15 bp + 20 bp

NCO Ratio 0.04% -0.01% 0.09% 0.14% 0.19% 0.24%

EPS impact 0.02 -0.03 -0.05 -0.07 -0.10

% impact 0.6% -0.9% -1.4% -2.0% -2.9%

Base + 100 bp - 50 bp - 100 bp - 150 bp - 200 bp

Avg. Earning Asset Growth -1.9% -0.9% -2.4% -2.9% -3.4% -3.9%

EPS impact 0.02 -0.02 -0.03 -0.04 -0.05

% impact 0.6% -0.6% -0.9% -1.1% -1.4%

Source: Raymond James; company reports

2017E EPS Sensitivity Analysis

2017E EPS Sensitivity Analysis-

Net Interest Margin and Average Earning Asset Growth

-0.20% -0.15% -0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20%

-2.50% 3.03 3.13 3.23 3.33 3.43 3.54 3.64 3.74 3.84

-2.00% 3.04 3.14 3.24 3.34 3.45 3.55 3.65 3.75 3.86

-1.50% 3.05 3.15 3.25 3.36 3.46 3.56 3.67 3.77 3.87

-1.00% 3.06 3.16 3.26 3.37 3.47 3.58 3.68 3.78 3.89

-0.50% 3.07 3.17 3.28 3.38 3.48 3.59 3.69 3.80 3.90

0.00% 3.08 3.18 3.29 3.39 3.50 3.60 3.71 3.81 3.91

0.50% 3.09 3.19 3.30 3.40 3.51 3.61 3.72 3.82 3.93

1.00% 3.10 3.20 3.31 3.42 3.52 3.63 3.73 3.84 3.94

1.50% 3.11 3.22 3.32 3.43 3.53 3.64 3.75 3.85 3.96

2.00% 3.12 3.23 3.33 3.44 3.55 3.65 3.76 3.87 3.97

2.50% 3.13 3.24 3.34 3.45 3.56 3.67 3.77 3.88 3.99


Net Interest Margin (NIM)

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Bank of New York Mellon (BK) Raymond James & AssociatesEarnings Forecast David J. Long, CFA (312) 612-7685

$ in millions, except per share data 2013 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E

Operating EPS $2.25 $2.40 $0.67 $0.76 $0.75 $0.68 $2.88 $0.70 $0.75 $0.85 $0.80 $3.10 $3.50

% Change (annual) 0.9% 6.7% 17.5% 23.0% 19.2% 17.1% 20.0% 4.5% -1.3% 13.3% 17.6% 7.6% 12.9%

GAAP EPS $1.73 $2.15 $0.67 $0.73 $0.74 $0.57 $2.73 $0.70 $0.75 $0.85 $0.80 $3.10 $3.50

Dividends Per Share $0.58 $0.66 $0.17 $0.17 $0.17 $0.17 $0.68 $0.17 $0.17 $0.19 $0.19 $0.72 $0.78

Average Fully Diluted Shares (mil.) 1,154 1,137 1,126 1,122 1,106 1,096 1,113 1,084 1,071 1,058 1,046 1,065 1,017

Operating Revenue (FTE) $14,766 $14,664 $3,731 $3,845 $3,804 $3,703 $15,083 $3,735 $3,850 $3,973 $3,949 $15,506 $16,652

% Change (annual) 3.6% -0.7% 3.5% 4.0% 2.0% 2.0% 2.9% 0.1% 0.1% 4.4% 6.6% 2.8% 7.4%

Net Interest Income (FTE) 3,072 2,942 743 794 773 774 3,084 778 790 798 816 3,181 3,450

% Change (annual) 1.5% -4.2% -0.1% 7.9% 5.0% 6.6% 4.8% 4.7% -0.6% 3.2% 5.4% 3.1% 8.4%

Loan Loss Provision (35) (48) 2 (6) 1 (7) (10) 4 5 6 8 22 29

Net Credit Income 3,107 2,990 741 800 772 781 3,094 774 785 792 808 3,159 3,420

Asset Servicing 3,750 3,917 995 1,011 1,019 986 4,011 976 1,001 1,026 1,051 4,053 4,408

Securities Lending 155 158 43 49 38 46 176 45 56 45 46 192 201

Issuer Services 1,090 968 232 234 313 199 978 234 236 319 205 995 1,020

Clearing Services 1,264 1,335 344 347 345 339 1,375 351 354 355 349 1,409 1,448

Treasury Services 554 564 137 144 137 137 555 140 141 143 144 567 587

Total Securities Servicing Fees 6,813 6,942 1,751 1,785 1,852 1,707 7,095 1,746 1,788 1,888 1,795 7,217 7,665

Asset and Wealth Management Fees 3,265 3,377 852 858 822 809 3,341 841 869 895 917 3,522 3,870

Foreign Exchange Trading 608 578 217 181 180 165 743 174 192 189 190 744 781

Other Noninterest Income 1,008 825 168 227 177 248 820 196 212 203 230 841 887

Total Fee Revenue $11,694 $11,722 $2,988 $3,051 $3,031 $2,929 $11,999 $2,957 $3,060 $3,175 $3,133 $12,325 $13,203

% Change (annual) 4.1% 0.2% 4.4% 3.0% 1.2% 0.9% 2.4% -1.0% 0.3% 4.7% 7.0% 2.7% 7.1%

Staff Expenses 6,019 5,845 1,485 1,434 1,437 1,481 5,837 1,503 1,488 1,488 1,507 5,986 6,241

Professional, Legal, and Other Purchased Services 1,252 1,339 302 299 301 328 1,230 — — — — — —

Software and equipment 933 942 228 228 226 225 907 — — — — — —

Other Operating Expenses 3,102 2,800 688 707 705 640 2,740 1,186 1,187 1,229 1,218 4,820 5,225

Total Operating Expenses 11,306 10,926 2,703 2,668 2,669 2,674 10,714 2,689 2,676 2,717 2,725 10,806 11,465

% Change (annual) 3.3% -3.4% -1.3% -1.7% -2.9% -1.8% -1.9% -0.5% 0.3% 1.8% 1.9% 0.9% 6.1%

Gains (losses) Related to Investment Securities 141 91 24 16 22 21 83 — — — — — —

Income from consolidated asset management funds 183 163 52 40 (22) 16 86 10 5 2 1 18 8

Pre-tax Income from Continuing Operations $3,819 $4,040 $1,102 $1,239 $1,134 $1,073 $4,548 $1,052 $1,174 $1,251 $1,217 $4,695 $5,166

Income Taxes (FTE) 1,039 1,092 294 312 299 259 1,164 281 313 335 329 1,258 1,473

Preferred Dividends 64 73 13 23 13 56 105 13 56 13 56 138 138

Net (income) / loss attributable to noncontrolling interests 81.0 84.0 31 36 (6) 3 64.0 — — — — — —

Net Income to Common Shareholders $2,595 $2,734 $764 $868 $828 $755 $3,215 $758 $806 $904 $833 $3,300 $3,555

% Change (annual) -1.4% 5.3% 17.9% 23.2% 16.0% 13.2% 17.6% -0.8% -7.2% 9.1% 10.3% 2.6% 7.7%

GAAP Net Income $2,000 $2,451 $766 $830 $820 $637 $3,053 $758 $806 $904 $833 $3,300 $3,555

Balance Sheet

Total assets $374,516 $385,303 $392,337 $395,254 $377,371 $393,780 $393,780 $381,967 $374,327 $370,584 $370,213 $370,213 $366,511

Average interest earning assets 272,791 303,875 308,104 318,596 315,672 312,610 313,746 307,983 303,669 301,089 299,426 303,042 297,406

Loans and leases 51,657 59,132 62,326 63,138 63,309 63,703 63,703 64,022 64,662 65,308 66,125 66,125 68,638

% Change (annual) 10.8% 14.5% 15.3% 6.6% 10.1% 7.7% 7.7% 2.7% 2.4% 3.2% 3.8% 3.8% 3.8%

Allowance for Loan Losses 210 191 190 183 181 157 157 156 156 157 159 159 154

Total deposits 261,129 265,869 281,259 284,430 266,768 279,610 279,610 261,312 258,647 256,111 254,326 254,326 254,217

% Change (annual) 6.1% 1.8% 11.5% 0.7% 0.7% 5.2% 5.2% -7.1% -9.1% -4.0% -9.0% -9.0% 0.0%

Loans / Deposits 20% 22% 22% 22% 24% 23% 23% 25% 25% 26% 26% 26% 27%

Tangible common equity 13,410 13,883 14,056 13,911 14,025 14,025 14,025 14,178 14,378 14,673 14,886 14,886 15,920

Book value per share $31.46 $32.09 $31.89 $32.28 $32.59 $32.69 $32.69 $33.19 $33.73 $34.36 $34.92 $34.92 $37.43

Tangible book value per share $13.95 $14.70 $14.82 $14.86 $15.16 $15.27 $15.27 $15.61 $15.99 $16.46 $16.87 $16.87 $18.74

Performance Ratios

Operating ROA 0.76% 0.73% 0.83% 0.92% 0.89% 0.82% 0.86% 0.80% 0.86% 0.97% 0.90% 0.88% 0.97%

Operating ROE 7.5% 7.5% 8.6% 9.8% 9.3% 8.5% 9.0% 8.0% 8.4% 9.4% 8.6% 8.6% 9.1%

Operating ROTA 0.76% 0.76% 0.83% 0.93% 0.91% 0.83% 0.88% 0.83% 0.90% 1.03% 0.95% 0.93% 1.02%

Operating ROTCE (adjusted) 17.4% 16.4% 18.9% 21.0% 20.1% 18.2% 19.5% 18.2% 19.2% 21.2% 19.2% 19.4% 19.8%

Net Interest Margin - reported 1.13% 0.97% 0.97% 1.00% 0.98% 0.99% 0.98% 1.01% 1.04% 1.06% 1.09% 1.05% 1.16%

Net Interest Margin - excluding accretion 1.05% 0.92% 0.94% 0.98% 0.97% 0.98% 0.97% 1.01% 1.04% 1.06% 1.09% 1.05% 1.16%

Efficiency Ratio 76.6% 74.5% 72.4% 69.4% 70.2% 72.2% 71.0% 72.0% 69.5% 68.4% 69.0% 69.7% 68.9%

Noninterest income / Total revenue 79.2% 79.9% 80.1% 79.3% 79.7% 79.1% 79.6% 79.2% 79.5% 79.9% 79.3% 79.5% 79.3%

Tax Rate 27.2% 27.0% 26.7% 25.2% 26.4% 24.1% 25.6% 26.8% 26.6% 26.8% 27.0% 26.8% 28.5%

Pretax Margin 25.9% 27.6% 29.5% 32.2% 29.8% 29.0% 30.2% 28.2% 30.5% 31.5% 30.8% 30.3% 31.0%

Asset Quality

NPL ratio 0.30% 0.21% 0.20% 0.19% 0.19% 0.45% 0.45% 0.26% 0.28% 0.28% 0.30% 0.30% 0.47%

Net charge-offs / Avg. loans 0.02% 0.03% -0.01% -0.01% -0.01% 1.08% 0.27% 0.03% 0.03% 0.03% 0.04% 0.03% 0.04%

LLR / Total loans 0.41% 0.32% 0.30% 0.29% 0.29% 0.25% 0.25% 0.24% 0.24% 0.24% 0.24% 0.24% 0.23%




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The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.

Ratings and Definitions

Raymond James & Associates (U.S.) definitions

Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months.




Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions

Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Argentina S.A. rating definitions

Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions

Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.

Rating Distributions

Coverage Universe Rating Distribution* Investment Banking Distribution

RJA RJL RJ Arg RJEE/RJFI RJA RJL RJ Arg RJEE/RJFI

Strong Buy and Outperform (Buy) 55% 68% 59% 47% 22% 38% 0% 0%

Market Perform (Hold) 40% 32% 41% 37% 7% 16% 0% 0%

Underperform (Sell) 5% 1% 0% 16% 6% 0% 0% 0%

* Columns may not add to 100% due to rounding.

Suitability Ratings (SR)

Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.

Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program.

High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital.




High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal.

High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.

Raymond James Relationship Disclosures

Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months.

Company Name Disclosure

Bank of New York Mellon Corp

Raymond James & Associates makes a market in shares of BK.

Raymond James & Associates received non-investment banking securities-related compensation from BK within the past 12 months.

Stock Charts, Target Prices, and Valuation Methodologies

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies.

Target Prices: The information below indicates our target price and rating changes for BK stock over the past three years.

Valuation Methodology: For BNY Mellon, our valuation methodology utilizes a 12-month estimate of intrinsic value and also takes into consideration the company's P/E ratio in comparison to the broader market, historical levels, and P/E ratios from a peer group.

Risk Factors

General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects.




International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Specific Investment Risks Related to the Industry or Issuer

Banking Industry Risk Factors Risks include various geopolitical and macroeconomic variables, including credit quality deterioration, sudden changes in interest rates, M&A risk related to deal announcements, integration risk, and regulatory and mortgage-related concerns. Furthermore, competition for loans and deposits could exert downward pressure on revenue growth.

Company-Specific Risks for Bank of New York Mellon Corp. Acquisition Risk As an acquirer, BNY Mellon faces integration risk. While it has a great track record in client retention rates following acquisitions, there is no guarantee that future retention rates will match past results. Furthermore, upon integrating new employees into its current infrastructure, there is culture risk. During pre-deal announcement due diligence, it is difficult to measure how cultures match. Finally, cost savings and revenue synergies may not materialize as anticipated and restructuring costs could exceed original expectations, therefore disappointing investors.

Weak New Issue Volume As the global leader in corporate trust (debt issuance) and depositary receipts (equity issuance), BNY Mellon would likely face revenue headwinds if new issue volume declined.

Equity Market Risk Roughly 50% of custody banks revenue comes directly from fees tied to assets under custody and assets under management. We estimate that a 10% change in the value of the global equity markets has a corresponding impact of 2% on revenue and roughly 4% on net income (all else equal) for the custody banks (slightly lower for Bank of New York Mellon given its diversity). We view weakness in the global equity markets as the biggest risk to our EPS estimates for the custody banks, even though equity market sensitivity is lower than some other financial services companies, such as asset managers.

Capital Market Risk Foreign exchange trading revenue was unusually high during the global recession, peaking in 4Q08. While foreign exchange trading revenue is down from two years ago, secular trends support continued growth of foreign exchange trading activities over the long term. Despite a positive long-term outlook, foreign exchange revenue can be volatile from quarter to quarter, therefore contributing to upside or downside to EPS expectations. As was the case with foreign exchange trading revenue, securities lending revenue peaked in 2008 due to unusually high market volume and volatility, as well as an unusually high federal funds/three-month LIBOR spread. The level of securities on loan has declined substantially since the recession as hedge funds and other asset managers have de-levered. Securities lending revenue is likely to remain somewhat volatile, which could cause divergences from EPS expectations, as markets remain somewhat volatile and interest rates remain low. While some institutional asset managers have dropped out of securities lending programs, the volume of activity is driven by hedge funds and other borrowers of securities. Long term, most custody clients continue to lend securities, and we expect securities lending to remain an important ancillary business for the custody banks.

Operational and Technology Risk Asset processing and global payment services are highly dependent on technology platforms and communication systems. Although most custody banks appear to have strict controls and safeguards in place, failure, security breaches, or errors in its systems could disrupt critical operations and could result in the loss of business or reputation damage. In addition, custody banks must continually innovate and invest in processing platforms to adapt to rapidly changing technologies. Clients are demanding increasingly sophisticated services that address the evolution of their own businesses, such as complex derivatives valuation and international settlement. Failure to keep up with these trends could harm a company’s competitive positioning.

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th Floor, 880 Carillon Parkway, St. Petersburg, FL

33716.

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