The Bank of New York Mellon Corporation's (BK; 'AA-/F1+') announcement of a pretax charge of $4.8 billion in order to reduce risk in its $54 billion investment portfolio has not affected the company's credit ratings, according to Fitch Ratings. BK has sold $3.6 billion of non-agency residential mortgage-backed securities (RMBS) and other securities. BK will also restructure another $8.5 billion of non-agency RMBS and will mark these holdings to market. Although some of these transactions have not yet been completed, BK has reflected the full expected writedown in earnings for the third quarter of 2009 (3Q'09).
This series of transactions will have no net impact on BK's tangible common equity ratio (TCE). TCE, one of the most fundamental measures of a bank's capital cushion to absorb losses, is among the key capitalization ratios analyzed by Fitch. The securities in question have carried substantial market value depreciation for several quarters, with the degree of depreciation calculated in Fitch's calculation of TCE. Accordingly, TCE has improved to 5.2% at 3Q'09, from 4.8% the prior quarter. The improvement in TCE reflects BK's positive operating income in the quarter as well as a reduction in overall market depreciation levels.
The pre-tax loss does reduce BK's Tier 1 capital ratio to 11.3% at 3Q'09 from 12.5% the prior quarter. The Tier 1 Common ratio has also declined, from 11.1% to 9.8%. Still, the lower regulatory ratios are within Fitch's expectations for this ratings category, compare well to those of other large banks, and also compare well to BK's historical ratios.
BK's 3Q'09 operating earnings excluding the investment-related charges were relatively solid, increasing about 7% sequentially. Asset quality remains satisfactory, with loss provisions well controlled. Liquidity remains strong.
These investment securities transactions reduce but do not eliminate BK's remaining exposure to the weak U.S. residential mortgage sector. At 2Q'09, BK had placed about $26 billion of securities on an internal watch list, with many of these consisting of Alt-A, subprime and prime residential mortgages. The sales and writedowns recorded here will reduce this watch list to about $19 billion. Fitch believes that this remaining exposure is manageable in light of the substantial writedowns already taken as well as BK's good capital position and solid core earnings generation capacity.
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