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

Thank you for joining us this morning. We are pleased here at the Morgan Stanley Financials Conference to be joined this morning with BNY Mellon's Mike Santomassimo. Mike, thanks so much for joining us.

Yes. Thanks, Betsy. Glad to do it virtually. Hopefully, we'll do it in person soon.

That sounds great. So I wanted to kick off just about your overall approach as CFO during this current health and economic crisis. What's changed in your strategy? What hasn't? What are some of the challenges and the opportunities that you say that present us with?

Yes. I think as we sort of thought about it, obviously, when you sort of think about your strategy and how you're positioned over a longer period of time, and I think as we sort of went into the crisis, we were very well positioned, had a strong balance sheet, both from a liquidity and a capital position. And our strategy for the businesses has been consistent now for a number of years. And we've been very good about staying within our risk appetite and using the balance sheet to support our operating services businesses. And I think that served us well as we sort of came into the crisis, both across sort of the lending that we do, which is pretty -- which is very high quality as well as the nature of the securities portfolio that we had. So we didn't really need to change approach much on that at all. And I think the position that we sort of had allowed us to really to support our clients through the significant increase in deposits that they gave us as well as sort of the draws on credit facilities as well as participating in the money market liquidity fund with the Fed for some of our clients. And among a number of other actions, I think that we were there to sort of support our clients. Operationally, we were absorbing huge increases in volumes across really every business. While we were moving 95% of the company to work from home in a very short amount of time, I think most of it was done in probably 10 to 12 or 13 sort of business days as we sort of went through the crisis, and all that went extremely well. And I think that was possible because of the investments that we've been making over the last couple of years, 2 or 3 years now in sort of our operating platforms, the underlying infrastructure, data center networks and providing capabilities for our clients as well as our employees to keep working. And so while we shift -- while in the near term, when we were in the middle of the crisis, we sort of shifted some of our priorities around a little bit, the long-term strategic priorities really remain unchanged. And the investments we're making in technology and talent are continuing. We haven't stopped any of our material -- or significantly changed any of our material investments. I think all of them have sort of endured as we sort of thought about the environment and where we want to go going forward. We're increasing sort of the efficiency in organic growth and put an emphasis on that. That hasn't changed. And I think these are the times where you can see that delivering value for our clients is even more clear as you sort of deal with a situation like this. And then in finance, we had to adapt like the rest of the company, and it's been working really well. And I'm very proud of how the team -- my team and the rest of the company really stepped up to handle it all.

Could you -- so you brought up a lot of different topics here. And I wanted to dig into a couple of them. First, on the investments that you're making, could you give us a sense of what the highest priority investments are? Are these investments to enhance capabilities to get new clients or to enhance capabilities to address client needs that you have? I know you've talked about the client reviews that you get that you've been very successful in answering incremental requests from existing clients. So I just want to understand that dynamic and where the investments are going.

Yes. It's really both of those things. And as we sort of think about just day-to-day service quality, we've been very focused over the last few years really just making sure that we're differentiating ourselves through the quality of the service that we deliver every single day to clients. And what we do, as you know, is very vital to clients, and they can't operate without a lot of it. And so it's important to make sure that the quality is there. And 9 times out of 10, as we sort of make those investments to improve the quality, they lead you to automation and efficiency opportunities in -- primarily in operations. And so I think there's that -- the side benefit of you save a bunch of money and you become more efficient as you sort of make those investments in the quality. And we're investing more this year than we have in really any other year, certainly since I've been at the company, in driving those efficiency opportunities, which, as I said, to start with, like how do we improve quality and then sort of lead you very quickly down the efficiency route. So that's one bucket of investments. I think then each of the businesses have investments they're making to grow their market share in existing products or extend their capability. In our Corporate Trust business, we've been continuing to build out new capabilities for structured product servicing, CLOs and other products. We've been improving client -- the client reporting and interfaces we have there. In Pershing, we're continuing to build out capabilities to service RIAs in the traditional broker-dealer market. In the Asset Servicing business, it's in the alternative space. It's in our data and analytics business. And there's a whole series of things that are cutting across each of the business areas where we're making those investments. So I'd say it's a good chunk of sort of the efficiency. It's a good chunk of growth investments. And then I think this is sort of our last year. We've been talking now for the last couple of years about the investments we're making in the operating platforms. And I think this is the year where we get sort of past most of those underlying operating platform investments. So there's still a chunk of the investment dollars going there as well.

And what about the desired demand for back to front? I mean this has been a topic that has been around for many, many years and has gotten some reacceleration of discussion recently. I mean how important is that for your clients for you to have a seamless back to front?

Yes. Look, I think the industry has struggled.

Or front to back?

Yes, the industry has struggled for a very long period of time with dealing with middle office capabilities as well as sort of making sure that the front office of our clients has all the information they need to transact in as efficient way as possible. And we've been doing -- I think it is important to our clients, and it will continue to be important to our clients. And we've been going about it in a couple of different ways, which is different than maybe some of our competitors. First is we've been working with the front office system providers, the OMS providers, the order management system providers, whether it's Aladdin, Bloomberg, SimCorp and others, to really work with them to build in more seamless data movement and more capabilities for their users to make the whole process a lot easier. And I think we're seeing that resonate with many of our clients. And I think the other thing that we've been doing in that space for the last couple of years is building -- kind of rethinking and rebuilding middle office capabilities. And instead of thinking about it in this big monolithic capability for clients, we've really broken it down into 6 or 7 different verticals and think that we're pretty close to having that all sort of completed where we think we can build it in a way that's scalable for our clients but also sort of takes away some of the -- most of the inefficiencies that our clients see as a result of the disjointed connectivity between the front and back that we've seen over a long number of years.

Okay. So you're enhancing that ability through more seamless stitching together of the various systems that you have?

Yes. Some of it's stitching together systems. Some of it's building new capabilities, and some of it's working with the front office system providers to create more seamless solutions for clients. So it's a series of initiatives that I think come together and give you all of the benefits of having a closed front-to-back system. And -- but all -- but makes it much more -- appeal to a much wider set of clients who have different needs in the front office.

Got it. Okay. Just last on the custody servicing area, at least for now. How has the COVID-19 issue impacted your ability to execute on pipelines? I'm just wondering because it's hard to get into client on-prem. Is there a shift in how you can service clients and deliver capabilities off-prem? Or does the pipeline just build up until you're allowed to go back into client facilities?

I think initially, there was -- some of the opportunity set was put on hold for a few weeks as people sort of figured out how to adapt to the kind of new normal that we've all been in now for a while. But I think that a lot of that sort of clear -- has kind of cleared up. And I think we've seen a whole number of situations move from start to finish, all in a virtual environment. And people are making decisions, and clients are moving back to sort of more normal activities. And the pipeline, actually, is very strong in our Asset Servicing business. And it's as strong as it's been in a while. I think our win rate is -- looks good relative to what we've seen over the last year or so. We've seen good client retention as well in the environment. And we are seeing people make decisions to move forward. And so we feel encouraged by what we're seeing. And inevitably, individual opportunities may get delayed or moved around given the environment. But I think, on large, I think things are moving forward, and clients are moving back to a more normal kind of decision-making environment.

Okay. And then just on Pershing, you mentioned the RIA space, obviously, you've been servicing for many years. How much more of an opportunity is there? I thought you were already pretty big there. So what kind of investments are you making that could drive that share higher?

Yes. We're actually -- we think we're third. I mean market share is a little hard to get at exactly, but we think we're third in market share. So we do think we've got opportunity to continue to grow in that market. And you may know, we've been historically focused on sort of larger or kind of more professionally oriented firms. And I think there's more to do as those firms grow. But also, as we look at the next tier of firms down from that, I think there's more we can do there. And I think the other thing that sometimes gets lost is, even with the clients we serve in Pershing, many of them use multiple custodians or their advisers use multiple custodians. And so I think there's more we're seeing -- more opportunity we're seeing as the advisers that are on our platform, the clients that are on our platform, consolidate more of their business on to Pershing. So I think there's more we can do to grow with our existing client base, and there's more we can do to grow with the market as that continues to grow. And I think the work that Pershing did through the last few months, I think, has shown sort of the stability and the sustainability of sort of their model, I think, has worked sort of really well and is resonating with clients.

Yes. And I was interested, too, in what you're offering on cyber because from some of the conversations I've had with folks, it looks like maybe some of the smaller RIAs, but there is an increased need, demand to have best cyber capability. So maybe you could help us understand what your offering is to the RIAs that you serve and onboarding and cyber controls?

Yes. I mean what they get when they use our capabilities is sort of the -- all of the controls that we have in place for the whole firm, right? And so I think as they sort of think about all of the -- and cyber is just sort of one element of it, obviously, but the -- as they sort of think about all of the controls they need to have in place. But also, we saw a number of providers not be able to handle the volumes that they saw during the crisis. And you saw that with websites going down or with capabilities going down from time to time over -- in March and early April. And so I think they're looking for capabilities that they know can endure through the volatile times and also have all the controls in place. And what they get is they get the benefit of all the investments we're making across the whole business and the whole company when they do that. So I think they appreciate that.

So those RFPs or call-ins to discuss that accelerated recently post the volatility at all?

I think the sales volume in Pershing actually has been consistently strong now for a while. And I think it's been -- I'm not sure if there's been necessarily an uptick over the next -- over the last month or so. But I think there's -- it's been pretty consistent and the pipeline is continuing to sort of grow there.

Now you have -- you're servicing RIAs, but you also have your own Wealth Management platform. I realize it's a little bit of a higher net worth type of focus. But could you help us understand what you're doing there? Where you're investing? And are you looking for it to be a bigger piece of the pie of BNY Mellon? Or are you happy with the size that it is today?

Well, I -- we do think there's opportunity to grow, likely more organically than not. And as you know, we brought Catherine Keating in -- it's probably -- it will be 3 years, I guess, this summer that we brought Catherine in to run that business. We have a good presence across the country. It's predominantly a U.S. business, but we have good presence in all the places that we think we need to be. We've been making a number of investments in our family office and investor solutions or OCIO capabilities. We just announced some new -- a group and some enhanced capabilities in the OCIO space, which we think will provide some -- another avenue of growth in that business. We've been making investments in people, hiring more people to sort of grow the business. We've been making a bunch of investments in our technology tools there as well, as well as sort of the investment offering and wealth framework that we use to roll out to the clients. So I think -- we do think we're encouraged by what we're seeing, what Catherine and the team are doing. And I think we do think there is some opportunity to continue to grow that as we build out our capabilities there.

Okay. Great. So Mike, let's turn to the 2Q outlook. We're almost done with the quarter, I guess, 10, 12 of the way through. I wanted to get a sense on how you're thinking about NII. I know you guided down 2% to 5% sequentially on the earnings call, but are you still comfortable with that range as we stand here today?

Yes. As we sort of look at what went into that, I think as we sort of think about the components of it, deposits have trended a bit higher than we modeled. We finished the first quarter at -- the average for the first quarter was $258 billion. Our quarter-to-date average is about $280 billion. The spot balances are a little bit lower than the $280 billion. But I think right now, the quarter-to-date is about that. So that's up a little bit from the averages that we saw in the first quarter, down a little bit from what we saw in March, which was roughly $300 billion -- a little over $300 billion. And so I think we feel good about what we're seeing there on the deposit base. I think rates are a little bit lower given what's happened with 1- and 3-month LIBOR as you -- as that sort of changed and come down a bit from what it looked like at the time of the earnings call. But I think net-net, we're still in that range.

Okay. Great. And what about the money market fund fee waivers? I think you described a $50 million to $75 million net impact in 2Q. Is that still in the ballpark?

Yes. That's playing out as expected. I think we'll probably be towards the upper end of that range, but it's basically playing out as we would have expected. And as I mentioned on the call, where we're seeing the impact there first is in our Pershing business, where they've got a big money fund. Clients have big investments in money funds there. I think the other note I would say is we've all seen, through all the business we do plus the market in general, money fund balances are up significantly year-over-year. So some of the impact of waivers is offset just by activity levels growing. But the waivers are within that range, probably towards the top of it.

Yes. You mean like down $50 million being the top end?

Yes -- no down $75 million. $75 million. So we said it would be -- the impact would be $50 million to $75 million. So the impact's closer to the $75 million, sorry.

Got it. Got it. Okay. When I'm thinking about top, I was thinking about smaller decline. So I get it.

Well, unfortunately not.

It's okay. And then as we're thinking about the forward look, this is just something that would continue. You get to that run rate and then that stays in that kind of ballpark until rates start to move higher, is that right?

Well, I think it's difficult to forecast exactly how that will play out throughout the year. And as I said, the first place we saw the impact is Pershing. And I think we'll see additional impact over time in Asset Management and then the Investment Services businesses probably later in the year, depending on how short-term rates stabilize. So I think you'll see a little bit more impact over time depending on how the short end of the curve sort of -- where the short end of the curve sort of stabilizes. And then once you get to a full run rate, then it looks pretty similar, but we're not quite there yet.

Okay. Next question on, just generally speaking, the quarter has to do with how you're thinking about credit provisions. And your 10-Q describes about every 10% increase in weighting applied to the recession scenario, right? So you have a recession scenario, every time you increase that probability by 10 percentage points, you get a higher reserve of about $20 million. And I guess I'm just wondering, is that something that would have gone up? Would you have increased the weighting? Do you think this quarter, given the fact that unemployment is higher than it was in March? And maybe if that's too specific of a question, just how you're thinking about provisions in 2Q? Or what kind of stress are you seeing in your loan book, if any? I mean I know you do lending. Most of it is collateralized. But maybe give us a sense of how you're thinking about the credit risk there.

Yes. Maybe I'll start with the loan book, and then I'll come back to the provision. So look, I think the loan book is actually performing quite well. As you say, a lot of it's collateralized, and all the margin loans that we've got have done just fine through the crisis. We've seen minimal to no sort of charge-offs or default at this point in the underlying book in total. I think the -- and we did see some draws on the revolving credit facilities, call it, roughly $3 billion in the first quarter. And a good chunk of that's been paid back already. And so I think with all the underlying loans, books are performing pretty well. I think as you sort of think about the provision, I do think you sort of need to zoom out just slightly because I think the scenarios continue to evolve and change. And it's still pretty -- we're still not quite done with all the work for the quarter. But obviously, you got to take into account things like the actual downgrades you're seeing, the forecasts, which are evolving all the time and then all of the qualitative factors that go into it. So I think we have seen some downgrades, as you would expect in commercial real estate, REITs and other places. Nothing that I would sort of highlight as overly concerned about, but sort of that you would expect to see some of that activity. And then as I said, the economic forecast continues to sort of evolve a bit. So I would expect that we would book over -- an increase in the provision in the quarter. And I don't think it's not like -- it's likely that it will be lower than what we saw in the first quarter. So let me just make sure I said that clearly. So it's likely that it will be lower than the first quarter. And so I think we're kind of working through that as we get towards the end of the quarter.

Okay. Got it. So the question is just how much lower than 1Q is really what you're working on?

Yes.

Any other overarching themes in the quarter that I missed that you want to touch base on?

No. I mean, I think, we've covered a fair amount of them in other forums as well. I think as you sort of look at each week that goes by in the quarter, I would sort of characterize it as becoming more normal. We saw the huge increase in volumes and activity in March. Some of that continued into early April. And then as you sort of progress through the quarter, I think things continue to get to kind of more normal.

Now let's turn to just how you're managing the securities portfolio. I think you've got 1/3 of the securities portfolio repricing every quarter. And with that very simple algebra, if I can call it or maybe I should just call it math, that means that by the end of the year, we should have the vast majority of the curve compression baked into the run rate. Is that a fair statement? And maybe you could give us a sense as to what you can do to mitigate further NIR compression into 2021?

Yes. Look, I think if you sort of believe rates stabilize from here, then I think -- and maybe the yield curve continues to steepen a little bit depending on sort of the day you're kind of looking at it, then I think the impact from lower rates is largely sort of baked in as you get to year-end. So I think that's probably a good assumption. I think as you sort of think about the things that we're doing, though, and you really have to sort of go back a few quarters and start to look at the third and fourth quarter of last year where we started seeing deposit balances stabilize, start to grow, and so we've been redeploying some of the balance sheet into the securities portfolio for some time now. And you saw that increase 20 -- roughly $20 billion from the first quarter of '19 to the first quarter of '20. And I think as we get -- as we understand the behavior of those deposits, and obviously, some of them will continue to stick that we sort of talked about earlier, we'll continue to redeploy them in a way that makes sense given the characteristics of them. And so I think that's the way you could potentially offset some of the decline as well as you continue to put more of them to work in other assets. So -- and we're doing that.

And it's interesting because, obviously, we have, for the last decade or so, this operating, nonoperating deposit differential. And I remember prior cycle that -- when the whole thing started, it took a couple of years to determine whether or not a new deposit would be an operating deposit. But I feel like nowadays, it's a little bit faster of a turn, right? You get a deposit and you can make that decision more quickly, is that right?

Well, I think there's a lot of science that goes behind figuring out what's operational and what's not. And I think you know -- it certainly starts to become clearer more earlier than a couple of years. So I think that's a bit, I think, extreme in terms of the time frames. And so you start getting -- you start understanding the behavior, you're probably 30, 60 days into sort of when you start seeing these client deposits. So I think if you start to -- you can start putting them to work and understanding what's going to stay. And I think then you have to sort of look at the macro environment with reserves in the system increasing and growing your business. And so I think there's a lot of things that go into it, but you certainly can start to deploy them much quicker than that.

And then just lastly on deposits before I turn to expenses. The Fed has been increasing the balance sheet. Obviously, we're going to hear from them later today. This is, on the one hand, good for you. On the other hand, if you can't deploy it in a really profitable fashion, it could be a bit of a drag on your ROE. So I'm just wondering at what point do you start charging, even if rates aren't negative for deposit growth. Or is that something that you would not consider doing?

Look, I think it first starts with how -- where do these deposits come from, right? And most of our clients are doing other things with us, and deposits are part of that overall relationship. And so I think we still got plenty of room to support clients if deposits grow a bit. And so I think it's hard to see us charging for deposits unless the Fed sort of cut rates again, at least hard to see us charging in the U.S. Obviously, we charge already in Europe where there's a negative benchmark rate already. But really, what we're trying to do is make sure we grow the overall relationship with these clients. And I think that deposits is going to be part of it. But we're always looking to make sure that we understand what's happening with each client and have a pretty rigorous and disciplined view of that. And so if there's situations where we don't have the bigger operating service relationship, we'll have that conversation with the client. But I think the majority of what we see and -- what we see every day is coming from our clients where we do a lot with them, and I think we'll continue to support that.

Got it. And then just on expenses, I know you've done a ton in real estate already. But a couple of weeks ago, Todd alluded to more opportunities there. Is that something that could be impacting your expense ratio, something that we could actually notice? Is there that much more room to get more efficient on the real estate side?

Well, we've been on a path to get more efficient on the real estate side for a couple of years now, 2 or 3 years. And I think we're sort of in the middle of a journey on that already. And I think that will continue to play into the expense base. I think any -- as probably every company in the U.S. -- in the world right now is sort of thinking through what the future is going to look like and what the workplace is going to look like. And while I think on the margin, there'll be some opportunities in the short run to reduce real estate, I think it will take -- it will play out over a little bit of a longer period of time as you sort of think about lease expirations and then how you redesign, sort of how you want to work. So -- but I do think there'll be a little bit of opportunity.

Got it. And then just lastly, on capital. I know you, along with other banks, stopped the buyback. That said, you have less credit risk. You have much higher level of capital than peers. And I'm wondering how the Board, how you think about what the triggers and timing is for reinstating that buyback?

Yes. And look, I think, as you know, we're in the middle of CCAR. We'll all hear the results in a couple of weeks, it appears. And so we don't want to get too far ahead of that. But I think as you sort of think about the considerations, it's sort of all still the same. And then you sort of -- it starts with how you're thinking about the environment and what that looks like. And while I think, certainly, the equity market has -- seems to have a view of where things are going, I think it probably takes a little bit more time to really play out in terms of how you really -- what your confidence level is on the recovery and the shape of that recovery. And so I think we're going to keep a really close eye on what the environment looks like over the coming months. And then I think as you sort of think about us and other banks, I mean, I think you'll start to see differences across banks as to the timing of the buybacks and when they come back. And I think that will be driven by the business models and the risk profiles. And, as you say, I think our profile is very different in a lot of ways than others. And then I think, importantly, we have to sort of see how the stress capital buffers and all of the CCAR stuff works out. Having said that, I think as you sort of approach the end of the year, the new regime gives you a lot of flexibility to deliver capital returns based on how you're individually sort of running and how you feel about the environment. And so I think we'll sort of continue to look at that as we go over the next couple of months.

Okay. Great. Well, yes, we're all looking forward to that 25th release, right? June 25, we get those -- get that data. All right. Well, thank you very much for joining me this morning, Mike. Really appreciate it.

Yes. Thanks, Betsy. Talk soon.

Okay. Take care. Have a good day. Bye.

Bye.