Fitch Ratings has affirmed the The Bank of New York Mellon Corporation's (BK) Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+', respectively.

In addition, Fitch has affirmed the IDRs of BK's operating subsidiaries, including The Bank of New York Mellon (BNYM) and The Bank of New York Mellon Trust Company, N.A., at 'AA' and 'F1+', respectively. The Rating Outlook remains Stable.

Key Rating Drivers

VR Underpins IDR: BK's IDR is driven by its 'aa-' Viability Rating (VR), strong franchise, conservatively managed balance sheet and strong liquidity. These attributes are offset by Fitch's assessment of the company's weaker earnings and profitability, and capital and leverage, relative to similarly rated banks. The Outlook is Stable, as Fitch expects BK's credit fundamentals to remain in line with its current ratings despite Fitch's expectations for a weaker economy in 2024.

Leading Franchise Supports Ratings: The ratings receive continued support from BK's leading franchise in global trust and custody, along with a competitive position in the asset management and wealth management businesses, and a dominant position in securities clearing. The company's business model produces high levels of relatively stable fee-based revenue at about 75% of total revenues at FY23, which Fitch views favorably. The scale and breadth of product offerings, in businesses with high barriers to entry, results in strong and sticky client relationships.

Strong Risk Culture: Fitch believes BK has strong controls and effective oversight across all risk domains and the conservative risk culture is embedded throughout the organization. Fitch considers the company's operational risk, its main risk factor, well managed, supported by low operational loss history over time. Cyber risk is a prominent risk factor for the bank, given BK's significant role in providing market infrastructure, particularly in U.S. treasuries within its Clearance and Collateral Management unit.

Low Credit Footprint: BK's loan book, at 16% of total assets, is among the lowest of Fitch-rated U.S. banks. Fitch considers outstanding and off-balance sheet credit exposure is high quality, with exposures primarily to financial counterparties with strong collateral. Investment portfolio holds limited credit risk with 99% of the portfolio rated 'AAA' to 'AA-'. The company has demonstrated near-pristine asset-quality metrics over the past decade with an average nonperforming asset to total assets of 3 bps. In the Federal Reserve's 2023 severely adverse stress test scenario, provisions and loan losses of $1.6 billion represented one of the lowest loss severity rates (2.5% of total loans) among the 23 reported banks.

Expense Control Offset NII Headwinds: Operating profit increased 27% in FY23, driven by $841 million increase in net interest revenue(NIR) compared to FY22. BK's new management team (including CEO and CFO) has demonstrated expense control discipline in FY23, excluding notable items, expenses grew by 2.7% yoy outperforming the 4.0% growth target for the year. Fitch expects NIR to pressure operating profit in FY24, in line with BK's estimate of 10% yoy decline.

The company expects flat or positive operating leverage in FY24 despite NIR headwinds, driven by flat expense growth and moderate fee revenue growth. Fitch considers Federal Reserve policy, which drives both NIB balances and market levels, to be a significant driver of operating profit in FY24.

Solid Capital Levels: Fitch considers the bank's capital, measured by common equity tier 1 (CET1) adequate, particularly in the context of our view of the bank's relatively low-risk balance sheet. CET1, at 11.6% at 4Q23, is above its newly announced target 11%. Tier 1 leverage, the bank's binding capital constraint, improved to 6.0%, driven by deposit outflows which reduced total assets. Fitch expects BK to distribute excess capital in excess of 100% of earnings in FY24, supported by BK's projected AOCI burndown of $700 million, using YE23 forward curve.

Fitch believes BK will continue to run CET1 above its target range in the short-term while Tier 1 leverage remains the bank's binding capital constraint. The company reiterated its long-term strategy to distribute close to 100% of earnings over time. Fitch believes the capital strategy implies nominal asset growth over the medium given its leverage constraint.

High Balance Sheet Liquidity: Fitch considers BK's low-risk investment portfolio and highly liquid balance sheet profile a key rating strength, complemented by high levels of cash balances and a reputation as a safe haven for deposits. Average 4Q23 loan to deposits, at 24%, is among the lowest across Fitch-rated banks globally. The core business as the world's largest securities servicer and its leading treasury services segment brings in significant levels of operational and non-interest-bearing deposits. Notably, BK's deposit base has proven countercyclical during times of market stress. The rating also reflects a strong access to global capital markets and high level of contingent liquidity.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

BK's ratings would be at risk if the CET1 were to approach, or ultimately dip below, 10% for several quarters in the absence of a credible plan for recovery in CET1 to levels consistent with recent years at, or near, 10%. Fitch expects the bank to maintain Tier 1 leverage above regulatory minimums. A capital level below the regulatory well-capitalized minimum at either the holding company or operating company could lead to a lower rating.

The ratings could be negatively affected by outsized deterioration in the level and volatility of earnings. Should the bank's level of annualized operating profit/risk-weighted assets fall below 1.5% for several quarters, Fitch may revise the Rating Outlook on the LT IDRs to Negative or downgrade the VR and Long-Term IDRs.

Fitch believe the main threat to the business model and ratings would result from a large, idiosyncratic technological (including cyber), counterparty or operational loss leading to reputational damage that causes clients to withdraw assets from the bank. Fitch believes these risks are well-monitored and controlled but acknowledge they are inherently difficult to predict and quantify. A large incident that causes a loss equivalent to 5% of revenue or greater would likely prompt Fitch to consider a negative rating action.

Although not expected, should specific protections within BK's legal structure not hold up and not allow for uninterrupted liquidity availability from the IFE under business as usual, the holding company's VR and IDRs could be notched down accordingly.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The 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.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Government Support Rating (GSR): BK's GSR of 'ns' reflects Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BK becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation provides a framework for resolving banks that are likely to require holding company senior creditors participating in losses, if necessary, instead of/or ahead of the company receiving sovereign support.

Senior Debt Ratings: BK's senior debt ratings are aligned with the firm's IDRs, as a default on these obligations equates to a default of the holding company.

Subordinated Debt and Other Hybrid Securities: The subordinated debt and hybrid securities are notched down from a common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The preferred stock is notched four levels below the VR of 'aa-' which serves as the anchor rating. The rating is notched two times for loss severity and two times for non-performance. Consistent with Fitch's base case for notching subordinated debt of bank holding companies classified by the Federal Reserve as Category I, II, or III, the rating is notched two levels below BK's VR for loss severity.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Government Support Rating (GSR):In Fitch's view, BK's GSR would be sensitive to any change in U.S. sovereign support, which Fitch believes is unlikely;

Long-Term and Short-Term Deposit Ratings: The long-term and short-term deposit ratings for BNYM are sensitive to any change to BK's Long-Term and Short-Term IDRs;

Senior Debt Ratings: Senior debt ratings are sensitive to any change in BK's IDRs;

Subordinated Debt and Other Hybrid Securities: Subordinated debt and other hybrid ratings are primarily sensitive to any change in BK's VR.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

Domestic Subsidiaries: The VRs remain equalized between BK and its material domestic operating subsidiaries, namely BNYM, BNY Mellon National Association, BNY Mellon Trust of Delaware and BNY Mellon Trust Company N.A. The common VR of BK and its material operating subsidiaries reflects the correlated performance, or failure rate, between the bank and these subsidiaries.

BNYM and other U.S. depositories' Long-Term IDRs are one notch above its VR. This reflects the implementation of total loss absorbing capital (TLAC) requirements for U.S. Global Systemically Important Banks (G-SIBs). The presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities, relative to holding company senior debt.

In addition, the intermediate holding company, BNY Mellon IHC, LLC (IHC), is meant to improve the resolvability of BK. Under this structure, the bank's holding company contributed substantial liquidity and capital to IHC, which it will then hold for the benefit of material entities. When assessing the parent's common equity double leverage, an important consideration for notching holding companies under Fitch's criteria, we consider the resources available through the parent company and IHC.

International Subsidiaries: The IDRs of BK's material international subsidiaries, namely The Bank of New York Mellon S.A./N.V, Bank of New York Mellon S.A./N.V. - Luxembourg Branch, Bank of New York Mellon S.A./N.V. - Milan Branch, and The Bank of New York Mellon (International) Ltd., are shareholder support driven and are rated in line with BNYM, their intermediate parent, to reflect their role as material operating entities in the BK's mature resolution framework. Fitch believes a default at one of these entities represents significant reputational risk for the group.

Bank of New York Mellon S.A./N.V. - Milan Branch's Long-Term IDR is rated above its sovereign, Italy (Long-Term Foreign Currency IDR 'BBB'), but in line with Italy's 'AA' Country Ceiling.

Long- and Short-Term Deposit Ratings: BNYM'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. Uninsured deposits outside of the U.S., through The Bank of New York Mellon S.A./N.V., do not benefit from a rating uplift as they may not benefit from U.S. depositor preference rules unless the deposit is expressly payable at an office of the bank in the U.S. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get a rating uplift.

Derivative Counterparty Ratings: Derivative Counterparty Ratings (DCRs) were affirmed for BK and its main operating banks as they either have significant derivatives activity or are counterparties to Fitch-rated structured finance transactions. The DCRs are at the same level as the respective companies' LT IDRs as they have no definitive preferential status over other senior obligations in a resolution scenario and; therefore, the ratings will move in line with the IDR.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

Domestic Subsidiaries: BK's material domestic operating subsidiaries' common VR and Long-Term IDR would be sensitive to the intrinsic creditworthiness of the group as a whole. Additionally, the subsidaries' Long-Term IDR would be sensitive to changes in existing TLAC or long-term debt requirements which impact the size of junior debt or resolution buffers.

International Subsidiaries: The Long-Term IDRs of BK's material international subsidiaries would be sensitive to a change in BNYM's Long-Term IDR, a change to these entities' entitlement to intragroup resources under BK's resolution plan or Fitch's reassessment of the plan's credibility. Moreover, the Long-Term IDRs of BK's international subsidiaries are sensitive to Country Ceiling constraints.

Long- and Short-Term Deposit Ratings: Deposit ratings of domestic or international depository subsidiaries would be primarily sensitive to changes in their respective Long-Term IDRs.

Derivative Counterparty Ratings: The DCR is primarily sensitive to a change in BNYM's Long-Term IDR. In addition, it could be upgraded one notch above the IDR if a change in legislation 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.

VR ADJUSTMENTS

A Business Profile score of 'aa-' was assigned above the implied score of 'a' due to the follow adjustment reasons: Market Position (positive).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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