The Bank of New York Mellon Corporation (BNY) Earnings Call Transcript & Summary

Good morning, and welcome to BNY Mellon's 2020 Annual Meeting of Stockholders. Please note that this broadcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will turn -- now turn the call over to Joe Echevarria, Chair of the Bank of New York Mellon Corporation Board of Directors. Please go ahead.

Thank you, and good morning. We are very pleased that you're able to join us this morning for our 2020 annual meeting of stockholders. As the Chair of the Bank of New York Mellon Corporation's Board of Directors, I will preside over the meeting. To begin, in light of public health concerns regarding the coronavirus outbreak, we are holding our meeting solely by remote communication. You will be able to participate in the meeting by voting and by submitting written questions through our virtual annual meeting portal if you held our stock as of the close of business on our record date, February 18, 2020. In the event of a technology failure during the meeting this morning that prevents us from continuing, we will adjourn the meeting and resume at 9 a.m. April 24, 2020, through the same virtual format. We extend our thoughts to those who have been impacted by COVID-19 as well as to all the health care workers, frontline public health officials, essential services workers and worldwide community as we all continue to grapple with the situation. And we are truly indebted to our health care workers for putting themselves on the front lines to protect all of us in our communities. Let me provide an overview of how our meeting will proceed. First, I'll call the meeting to order. Then I'll turn the meeting over to our newly appointed Chief Executive Officer and fellow Board member, Todd Gibbons. As you may know, Todd served as our interim CEO until a couple of weeks ago when our Board removed his interim title. Once again, congratulations, Todd, very well deserved. Todd will make several introductions, go over some procedural housekeeping necessary for our corporate record-keeping and introduce the formal business of the meeting, including the 5 items on our agenda. We will then open the polls for voting on those 5 items. After the polls are closed, our Corporate Secretary will report on the voting results. Following that, I'll adjourn the meeting, and Todd will present an overview of our business. Immediately following that brief presentation, Todd will use the remaining 15 minutes to take general questions from the stockholders through our virtual annual meeting portal. I now call this meeting to order and turn it over to Todd.

Thank you, Joe, and thank you to our stockholders who are joining us this morning. I echo your words about our worldwide community, particularly our health care workers who are indeed on the front lines in our fight against the coronavirus outbreak. I also want to say how very proud I am of our nearly 50,000 talented employees for continuing to adapt and persevere through these challenging times to ensure that we remain in position to service our clients. I also appreciate everyone on the phone, their understanding and flexibility with our change to a virtual format of the meeting as a result of the outbreak. And again, in the event of a technology failure this morning, preventing us from continuing, we will adjourn the meeting and resume at 9:00 a.m. on April 24 through the same virtual format. First of all, let me introduce the other members of the Board of Directors who are joining us through the webcast today: Linda Cook, Jeffrey Goldstein, Ted Kelly, Jennifer Morgan, Elizabeth Robinson, Sam Scott and Al Zollar. In addition to our directors, we are joined on the webcast by a newly nominated Director candidate, Fred Terrell. If elected, Fred will formally join the Board following this annual meeting. Fred's breadth and depth of knowledge, understanding of and experience in the finance industry will be a huge asset and will complement our Board's expertise. Now Joe and I will be speaking on behalf of the Board this morning. Also joining us through the webcast today are Mike Santomassimo, our Chief Financial Officer; and Kevin McCarthy, our General Counsel. In addition, Jason Jacobs and Megan Reardon of KPMG LLP, our independent registered public accountants, are on the line. They will be available to take questions during the question-and-answer portion of the meeting. The proxy holders for this annual meeting are James Killerlane, [ Ben Joselson ] and Blair Petrillo. Other inspectors of election are Fran Carlucci and Emily O'Connor. The following rules have been established to govern the conduct of this meeting. Because this is a meeting of our stockholders, only our stockholders are permitted to vote and ask questions during the annual meeting. You need to have held stock at the close of business on the record date of February 18, 2020, to vote or submit questions while participating in this virtual annual meeting. To vote or submit questions, please follow the instructions available on our dedicated virtual annual meeting portal. And as a reminder, we will only be answering questions that are submitted in writing via the portal. Business will be taken up in order set forth in the agenda, a copy of which is available online through the virtual annual meeting portal. Stockholder questions are welcome, but conducting the business set out in the agenda for the benefit of all stockholders will be paramount. The company does not intend to address any questions that are, among other things, irrelevant to the business of the company or the business of the annual meeting, related to personal grievances, derogatory references to individuals or that are otherwise in bad taste, repetitious statements already made by another stockholder in furtherance of the stockholders' personal or business interest or out of order or not otherwise suitable for the conduct of the annual meeting as determined by the Chair or Corporate Secretary in their reasonable judgment. In the interest of fairness to all stockholders, these rules, which are available on the meeting website, will be strictly observed. Please note that this meeting is being recorded. However, no one attending via the webcast is permitted to use any audio recording device. Please don't hesitate to submit your questions through our portal even now. I will now turn to the formalities that are necessary for our record-keeping. We must ascertain that we have a meeting duly called and organized and that a quorum is present. Will the Corporate Secretary please present his report?

Thank you, Todd. I will now proceed with my report on the formalities of the meeting. I have in my possession a copy of the notice of this meeting, together with affidavit showing that the notice, the proxy statement and the annual report were duly mailed on March 3, 2020, to stockholders of record as of the close of business on February 18, 2020, which is the record date for determining persons entitled to vote at this meeting. In addition, I have in my possession the oaths subscribed to by the inspectors of election. I also have in my possession certified list of the stockholders of the corporation as of the close of business on February 18, 2020. A copy of the list of stockholders entitled to vote at this meeting has been opened for inspection by any stockholder desiring to do so for at least 10 days prior to the meeting during normal business hours at the corporation's offices at 240 Greenwich Street, New York, New York and is available for inspection by any stockholder attending this meeting through the webcast. As of the close of business on February 18, 2020, there were 885,051,415 shares of common stock outstanding, with each share being entitled to 1 vote per share. The number of shares necessary for a quorum is the majority of the shares outstanding on the record date. The number of votes for which proxies have been received to date totaled approximately 85.00% of the total eligible votes. Accordingly, a quorum is present, and the meeting is duly constituted. Votes represented by proxies received this morning as well as those to be voted in person will be included in the inspector's report, which will be filed with the records of the meeting. That concludes my report on the formalities of the meeting. Back to you, Todd.

Thank you, Jim. The meeting is now duly called and organized and a quorum is present. I will now proceed with the business of the meeting. I have moved all of the management proposals set forth in the proxy statement. We will take questions on the proposals after all of them have been presented. The first proposal for stockholder consideration is election of the slate of the 10 directors nominated in accordance with the bylaws as set forth in the proxy statement. The second proposal for stockholder consideration is an advisory vote for the approval of the 2019 compensation of our named executive officers as disclosed in our proxy statement. The third proposal for stockholder consideration is the ratification of the appointment of KPMG LLP as the corporation's independent auditor for 2020. The fourth proposal for stockholder consideration is a stockholder proposal regarding a pay equity report. I would ask that the operator please play the prerecorded message from Arjuna.

Good morning. My name is Natasha Lamb, and I move proposal #4 on behalf of Arjuna Capital, asking for a report on gender and racial pay equity. On its face, Bank of New York Mellon has taken an important first step by publishing statistically adjusted pay parity numbers, assessing the pay of men and women performing similar jobs and the pay of minority and nonminority employees performing similar jobs in the United States. Yet this statistically adjusted pay parity reporting is only half the story, the other half is median pay disclosure, which is the objective of this proposal. Pay gaps are comprised of 2 parts: equal pay for your current job versus peers and equal opportunity to high-paying jobs. Median pay gaps reflect a lack of equal opportunity by measuring whether women and minorities are holding as many high-paying jobs. The gender pay gap is literally defined as the median pay of women working full-time compared to the median pay of men. Women in the U.S. make $0.82 on the dollar on this basis. African-American women make $0.62, and Latina women make $0.54. Median pay gaps are considered the valid way of measuring pay inequity by the U.S. Census Bureau, the Department of Labor, the Organization for Economic Cooperation and Development, the OECD, and the International Labor organization, the ILO. Not to mention the United Kingdom, which now mandates disclosure of median pay gaps. To choose to ignore median pay gaps and for the Board to label them "a misleading portrayal of our compensation practices" is a disservice to the group's these pay gaps affect. We can see Bank of New York Mellon's pay gaps in the U.K. because they are mandated. Our company reported an 18% hourly pay gap and a 36% bonus pay gap for its U.K. operations. But notably, our company has not published median information beyond the U.K. Yet companies like Citigroup, Mastercard and Starbucks are already showing leadership by publishing their median pay gap data globally. These disclosures can improve performance and provide a baseline for measuring progress moving forward. A 2019 study in the Harvard business review found that wage transparency in countries that mandated narrowed the median wage gap. There are many ways to shrink gender and racial pay gaps of the company. Improving diversity, ensuring statistically adjusted pay parity, advancing women and minorities into positions of leadership, but the only benchmark to measure whether the pay gap is actually shrinking from these various levers is to publish the pay gap itself. Thank you for your time as we firmly believe our company is best served by a transparent and fulsome accounting of pay equity.

Thank you. And moving on to the fifth proposal for our stockholder consideration is a stockholder proposal regarding a stockholder vote on bylaw and charter amendments. If Kenneth Steiner, John Chevedden or a representative is on the line, I would like to ask that the operator unmute their lines so they can please present the proposal, which is set out in detail on Page 74 of the proxy statement.

Hello. This is John Chevedden. Can you hear me okay?

We can, John.

This is Proposal 5. Let shareholders vote on bylaw and charter amendments. It's sponsored by Kenneth Steiner of Great Neck, New York. Shareholders request that the Board of Directors take the steps necessary to adopt a bylaw that requires any amendment to the bylaws or charter that is approved by the Board, be subject to nonbinding shareholder vote as soon as practical. For example, our directors could act in a seeking manner and adopt bylaw provisions that limit the rights of shareholders or reduce the accountability of directors and managers. The proposal -- this proposal would add transparency to the tendency of the Board to act in a sneaky manner in changing the bylaws, and the BNY Mellon directors do act in a sneaky manner. For instance, they adopted a right for shareholders to act by written consent in 2019 but varied a provision in this right that is like a poison pill if shareholders want to make use of shareholder written consent. The BNY Mellon version of written consent requires amassing 20% of all shares in existence to simply ask for an okay to start the shareholder written consent process. With this high-entry barrier to amass 20% of all the shares in existence to just get started, the BNY Mellon version of written consent is like a shadow version of the already existing shareholder right to call a special meeting. Mr. Samuel Scott, who chairs the Corporate Governance Committee shares responsibility for this decapitated form of written consent. At age 75, Mr. Scott received the highest negative votes in 2019 of any directors still with the company. Mr. Scott also has 17 years long tenure, which can seriously damage his independence. It would help to announce at this meeting the director received the highest votes and the lowest votes. Plus the BNY Mellon directors do not want a level-playing field at today's meeting. For instance, the directors put a negative image in a big box next to this proposal in today's proxy. The negative image for the other shareholder proposal that was just read was in a huge box that was 22 lines deep. Please vote for a level-playing field and improve transparency for the Board of Directors. Let shareholders vote on bylaw and charter amendments, Proposal 5.

Thank you. If any stockholder has a question or comment regarding any of the proposals, please submit it to our virtual meeting portal. You may do so by typing it in the question box on the lower left-hand side of the virtual annual meeting portal. I'll pause for a moment to see if there's any questions. Okay. Being none, and we will open up to more general questions later in the meeting. Thank you now. I will now call for a vote on the proposals. Any stockholder who hasn't yet voted or wishes to change their vote may do so by checking on -- clicking on the voting button on the virtual meeting portal and following the instructions. Stockholders who have sent in proxies or voted via telephone or internet and do not want to change their vote, do not need to take any further action. The polls are now open and will remain open until voting has been completed. I'll pause for a moment. [Voting]

Okay. Jim, could you go forward?

Yes.

Okay. I hereby declare that the polls are closed and all matters being voted upon by the stockholders. I would now ask the Corporate Secretary to report the preliminary voting results.

Thank you, Todd. I will now proceed with my preliminary report on the vote. The inspectors of election have counted the votes cast and have submitted their preliminary report. There were 752,306,818 shares voted, equal to 85.00% of the common shares outstanding. Actual vote totals for each agenda item will be posted on our website, bnymellon.com and reported on the current report on Form 8-K filed with the SEC. As to the election of directors, of the total votes cast, each director received between 97.10% and 99.31% of 4 votes. As to the advisory resolution to approve the 2019 compensation of our named executive officers, approximately 94.82% of the votes cast were voted in favor of such resolution. As to ratification of the appointment of KPMG LLP as independent auditor for 2020, approximately 98.04% of the votes cast were voted in favor of such proposal. As to the stockholder proposal regarding a pay equity report, approximately 7.41% of the votes cast were voted in favor of such proposal. And finally, as to the stockholder proposal regarding a stockholder vote on bylaw and charter amendments, approximately 1.47% of votes were voted in favor of such proposal. That concludes my report on the voting results. Todd?

Thank you, Jim. I hereby declare that the slate of 10 directors has been elected. I hereby declare that the advisory resolution on executive compensation has been approved. I hereby declare that the appointment of KPMG LLP as the corporation's independent auditor for 2020 has been ratified. I hereby declare that the proposal regarding a pay equity report has not been approved. I hereby declare that the proposal recording -- regarding a stockholder vote on bylaw and charter amendments has not been approved. And I now turn the meeting back to the Chair.

Thank you, Todd. This concludes the formal business for which this meeting was called. Since I am aware of no other business, I will now entertain a motion to conclude the meeting. Is there a second?

So moved.

All those in favor, please say aye.

Aye.

Aye.

The 2020 annual meeting of stockholders of The Bank of New York Mellon Corporation is hereby adjourned. Todd will now present a short business overview presentation, comment on the businesses of our company and take any questions you may have through the online portal.

Thank you, Mr. Chairman. I will now present a brief business overview. Before opening up to questions, let me make some comments about our business. First of all, we'll touch on how we're navigating the unprecedented coronavirus situation. Why our franchise is financially and operationally resilient. And what our priorities are for the near as well as the long term. Let me begin with our readiness in response to the coronavirus. From the start, our focus was on supporting the well-being of our people and the continuity of service to our clients while maintaining our strong balance sheet, so we can continue to support those clients. We quickly transitioned the vast majority of our people to working from home. And importantly, that opened up space for us to create social distancing for essential in-office staff. Less than 5% of our global employees are working in our offices today. The response of our people has been absolutely exceptional. You couldn't ask for greater professionalism or dedication to our clients at a time when we're also dealing with unprecedented levels of market activity and, of course, the personal challenges. Please note that while our people are caring for our clients, we've been caring for our employees. We've made available to them a host of health and well-being resources, including a 24/7 support line and pre-confidential counseling and advice for employees and their families. We're supporting our colleagues who may have been exposed by guaranteeing full pay for absences for those who have tested positive or are self-quarantined. We're also providing a pay time off to care for immediately family members with COVID-19 or COVID-19-like symptoms. And we decided that we will not conduct layoffs in 2020. Our leadership team agreed it's absolutely the right thing to do at a time when the pandemic is creating so many personal uncertainties for our people. We're also supporting our communities. We've made philanthropic contributions and support and pandemic relief. We also will continue to work with health organizations in providing aid to first responders, transit and other frontline workers. For example, BNY Mellon had donated over 50,000 surgical masks to hospitals in New York as well as in Manchester, England. We're also encouraging and supporting efforts of our employees. A direct matched giving campaign has been established for COVID-19 relief efforts. BNY Mellon will match and play donations at 200% up to $10,000 per employee. We've also donated hundreds of video-capable tablets to public hospitals in New York, help patients communicate with loved ones, and we're continuing to look for opportunities to do more. We remain fully operational and open for business throughout, and we've been there for our clients during this unprecedented period of market disruption. We engaged earlier with our clients to discuss their own continuity plans to ensure we were ready to adapt. And finally, our third priority is to protect our balance sheet and maintain its capital strength, liquidity and low-risk profile. This allows us to continue to support our clients during very challenging times. Turning to our business. We have a well-diversified and stable franchise. Our model is different from a traditional retail, commercial and investment bank. What we do is help markets function smoothly. We help investors access a broad range of banking and investment products, and we are viewed as one of the safest institutions that helps facilitate investing globally. We have a broad set of capabilities, which gives us more ways to address client needs and opportunities to build deep lasting relationships. We're effectively a servicing company -- a services company within a bank with a global franchise, about 35% of the revenue comes from non-U.S. clients. In 2019, we reported around $15.7 billion of operating revenue, around 75% of that was generated in investment services, which includes a number of businesses that all operate at scale. For example, we're the world's largest custodian with $37 trillion in assets under custody and/or administration. Our Investment Management business, which generated about 25% of 2019 revenue is 2 businesses. Within Asset Management, we have about $1.9 trillion of assets under management, making us the seventh largest asset manager globally, and we're a leading U.S. wealth manager with almost $270 billion in private client assets. Moving on, our business model is financially and operationally resilient. We have a low-risk model focused on providing custody, safekeeping, asset management and other operational services to an extraordinary client base of highly rated institutional clients, including governments, pension funds, endowments and financial institutions. The majority of our revenue is recurring in nature, both in terms of fees and net interest revenue, and we have a conservative risk profile. Our business model generates significant cash and requires relatively low levels of capital to grow. We're not in the traditional lending business. We have a relatively small but high-quality credit portfolio, where a majority of loans support our operating businesses. We have a stable deposits that our investment services clients leave with us in a highly rated liquid securities portfolio. In addition to our financial resiliency, we devoted significant resources in recent years to improve our technology, infrastructure and operational resiliency. As you can see here, we're well capitalized with meaningful buffers that exceed regulatory requirements. We have consistently received nonobjections to our CCAR test. Those are our stress tests. Since its inception, with demonstrated capital buffers under significantly adverse scenario, which is a further testament of our ability to withstand extreme stress. We seek to maintain a liquidity cushion in both normal and stressed environments and make sure that our funding sources are well diversified. The combination of a strong capital and liquidity profile and our low-risk assets makes us financially resilient and well prepared for the crisis we now face. You see here the long-term strategies that I laid out in my letter to shareholders in our annual report, including building a technology-driven and digital culture, enhancing our operating model to improve the client experience, deepening relationships and boosting the value that we provide our clients and expanding our services and driving growth. While these remain our guiding imperatives in the short run, for as long as we are dealing with the coronavirus and its global implications, everything we do is centered on the following: the well-being of our employees and communities, ensuring continuity of service to our clients and maintaining a strong balance sheet. To the extent that we can advance our work to drive future growth without detracting from or impeding our current priorities, we will absolutely do them. Once this passes, we will revert to our long-term strategic priorities. Our financial performance in 2019 was impacted by both a challenging interest rate environment and outflows that we saw in Asset Management. Against that backdrop, we controlled overall expenses reasonably well, while maintaining our investments in technology. Looking at our financial base -- performance on an operating basis, revenue was down 4%. Investment services fees grew slightly with fees up in a number of our businesses, led by strong growth in Clearance and Collateral Management, where we were the clear leader -- where we are the clear leader, and Pershing, where we have seen nice growth from existing and new customers, driven by the strongest pipeline that we've seen in several years. As a result of our overall expense management that I just mentioned earlier, expenses were down slightly for the year. Net income was down 11%, and our operating margin remained solid at over 30%. On a reported basis, EPS was up 12%. Although, when we exclude some notable items on an operating basis, we considered it down 5%. Despite some challenges, our strong business model delivered attractive returns to shareholders. We generated more than $5 billion in capital. Of this, we returned $4.4 billion to shareholders through dividends and share buybacks for a payout ratio of more than 100%, while maintaining a strong capital level. And our return on tangible common equity remained well above 20%. In closing, as we navigate this unprecedented period, I want to reiterate that our priority is the well-being of our employees and communities. At the same time, we will be a trusted partner to our clients. It's always top of mind for us and delivering operational resiliency and continuity, and we are doing this, thanks to the efforts of our employees. We will maintain our conservative risk profile, strong capital and high-quality liquid balance sheet. These allow us to withstand extreme stress and to ensure our ability to support our clients when they need us most. We are facing unprecedented challenges, but I am pleased how the company has risen to the challenge and the fact that it is performing well. With that, I am happy to take your questions. So we've got a few minutes to take questions. So you can submit them. As a reminder, to submit a question, type it into the question box on the lower left-hand side of the virtual annual meeting portal. We require that you comply with the rules of conduct for the meeting available on the meeting portal. If we don't have enough time to answer questions, they may be raised separately. So please just contact our Investor Relations team via the Contact page on our website. And we'll pause for a moment to review the questions that are being submitted.

So here is a question. I will read it out loud. The carpenter union pension funds with combined assets of $70 billion have a collected ownership position of 1,500,784 shares of Bank of New York Mellon's common stock. We strongly support the Board and management team and appreciate the positive and constructive engagement over the years on various governance issues. Could you speak to the company's initial experience with the paycheck protection program provisions of the small business lending program under the coronavirus relief legislation? So as I've mentioned in my remarks, BNY Mellon is not a traditional bank. We don't have typical lending. We don't have retail. We're not in the commercial banking space. So frankly, we don't have the relationships and are not -- we've never participated in the SBA programs nor we have participated in the paycheck protection program. I'll move on. We do have some more questions. Please elaborate on the impact of 0 interest rates and net interest income. And so I think as we've described it before, we are sensitive to a number of things when it comes to interest rates. First of all, the overall level of interest rates, the shape of the yield curve and then spread. So as we look out, obviously, the very low interest rates has a negative impact. There is some shape to the yield curve, some steepness to the yield curve, which is positive. And spreads have actually widened a little bit. So overall, a low rate environment is not a positive. Next question is what percentage of BNY Mellon is working at home? As I mentioned to you, it's greater than -- in my remarks, we are greater than 95% working from home. The only individuals who have working in offices are what we call essential in-office staff, doing things, for example, whether it's check collection or things that, unfortunately, just have to be done in the office. But we are making sure that they get adequate protection, significant social spacing so that they can work safely. I don't think there are any other meaningful questions at this time. And if you do have additional questions, I can -- we can ask you again to contact our Investor Relations team via the contact page on our website. So I think at this point, there being no more questions, that ends our session. Thank you for attending and for your interest in our company and be safe. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.