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

Good morning. I'm Jason Goldberg, and I cover the U.S. large-cap banks here at Barclays. Welcome to day 2 of our Annual Global Financial Services Conference. Yesterday was very informative and today could be more so. In track 1 alone, we're holding 12 large-cap banks in a row. That's half of the top 25 banks in the U.S., including at least a CEO, CFO and/or COO. Before we begin, some housekeeping items. [Operator Instructions]. I'm hosting all 12 of the large-cap banks in its track today, which I'm told is a record for a sell side analyst. So help me out with the Q&A, and the having issues, feel free to e-mail me directly at jason.goldberg@barclays.com. Just so please include the ticker in the subject. Kicking off this morning's global financial services conference, we're very pleased to have BNY Mellon, which is both global and touches many aspects of the financial services industry. From the company, we're pleased to have CEO, Todd Gibbons, and relatively new CFO, Emily Portney. Good morning, Todd and Emily.

Good morning, Jason, good to be with you.

Good morning.

So Todd, thank you for joining us once again. Emily, you're not as well-known to our audience. Maybe we could start off, you discuss in your background and maybe how your prior roles at Bank of New York Mellon and even Barclays will helped you transition to new position as CFO?

Sure. And Jason, thanks for having us. It's a pleasure to be here. So as you mentioned, I have 25-plus years of experience in financial services, and I've had the pleasure of working at many different firms and of course, spent several good years at Barclays, as you said. I've also had various different types of roles. So whether it has been the CFO of various different businesses, actually running various different businesses like clearing and collateral management, to some of the businesses that we have here at Bank of New York Mellon. Whether it is running a sales teams or relationship management functions, which I was just previously doing for the last 2 years. We're executing a large-scale transformation programs, regulatory or technology. So I'd like to think that, that's a pretty diversified business experience. And that allows me to bring many different disciplines to the role of CFO that I ultimately have an understanding of how to run a business end-to-end. And that as a CFO and as running a finance function, we really are partners with the business and the functions to achieve the goals of the firm.

No, makes sense. I guess, Todd, maybe as an adjunct to that, there has been turnover in senior management this year, whether on the operations side, the asset management front, we had to pick another hire yesterday, Lobby Vince at Goldman, that many of us know. Just how are you thinking about the management team?

Jason, actually, thanks for asking that question right up front. I'm really excited by this team. I think it's very strong. It's a very diverse team. We've got a good diverse set of experience, some with many years of experience at BNY Mellon and others from a number of leading financial institutions, including Robin, who's going to join us shortly from Goldman Sachs. Let me share with you a couple of our recent appointments. Bridget Engle, who is our Head of Technology, has now been named Head of Ops and Tech. And what I believe was combined the 2 function under her leadership is going to accelerate our automation efforts and our efficiency efforts. So I'm really excited what's going on there. Hanneke Smits will become our new CEO of Investment Management on October 1. And Hanneke has the benefit of actually having experience as a manager in one of our boutiques and many years' experience in the industry. And I think our positions are well for us to get more out of the asset management business as we go forward. Of course, Emily, who we've just met now is our new CFO, and she brings energy, as you can see as well as transparency. And I think it's a really nice combination of business skills and finance experience. So as we go into the planning, there's a deep understanding around that. I've been actually -- and she and I have been talking about this role for some time. So I'm really excited that she's in it, and she's already having, I think, an immediate positive influence. And just yesterday, we announced that Robin Vince will be joining us in October to lead a number of our businesses, including markets, Pershing, clearing and the treasury services business. I've known Robin for a long time. I've always thought he would be a great addition to our firm. He's a respected leader. He's got a very nice background in operations, in markets as well as balance sheet management and risk. So I'm very excited to have him on board to help us grow the franchise. So I'm frankly, I'm proud of what I've been able to assemble. And I think it's a very talented leadership team. And frankly, in the 34 years that I've been here, I think it's probably the strongest that we've had.

So you have this, I guess, strong management team in place. Maybe you can just elaborate on how BK expects to grow the franchise over the next couple of years? And then just maybe one impact -- what impact COVID-19 has had on your strategic vision?

Well, I would say that if anything, the recent crisis has reinforced the value of the business model, what we do is important, and the demand for some of our services like outsourcing as well as data and analytics, which is already a pretty sizable business for us, should grow just given the need for additional resiliency. Many of our clients actually commented that they were really glad that they had given the work to us that they did because they wouldn't have been able to get through the disaster on their own. Also the -- really the arms raised in the investment around cybersecurity, they can benefit from the third party's efforts. The balance sheet as a partner, and we were able to step up and support our clients when and if they needed it. And finally, the benefits of scale and technology and operations that we're able to offer. So I think it's actually heightened what we do. As I look back, our initial response for the disaster was to follow basically 3 guiding principles. One was to protect our employees, especially those what we call essential in office, it was about 3% or 4% of our employees that hadn't be in the office, but we wanted to make sure that they were socially distance. So we worked from home with everybody else, and we moved very, very quickly on that globally as well. So there was no region where we are unable to work from home. And the -- 1 of the other themes, not only were we looking for their employee safety, and that, obviously, of our clients, but we wanted to make sure that they were serviced without disruption, which we were able to accomplish. And finally, we wanted to make sure that we maintained a very strong balance sheet so that we could use it when the clients needed it. I think the -- as I think about this, the other thing that the crisis demonstrated was the value of a low-risk balance sheet. We had limited credit risk, so we're able to provide credit liquidity as needed above and beyond any commitments that we had. And at the same time that we were doing that, we were generating excess capital. Now as we look forward, like many CEOs that I've spoken to, we do expect that there will be some meaningful changes to the workplace over the future. I think disaster recovery sites are more likely to be virtual. So there should be some savings there in real estate and equipment. I think work-from-home, I'm a strong believer in the value of collaboration. But I think through this, we've learned a lot. And I do believe that work-from-home will be much more prevalent going forward, not just for disaster recovery purposes, but it will become a standard, not in its entirety, I think, but we will see it being more prevalent in our firm. And that will have some knock-on benefits to real estate. I also think our travel and entertainment budgets are likely to come down in the future. There is -- there really is no substitute for an in person meeting. But once relationships are built, virtual meetings have been very effective, and I've had many, many of them, obviously. And in fact, I have built relationships completely virtually at this point. We also see significant investments in the tools around working virtually. So I think you'll see the improvements around training, on-boarding and importantly, networking. So making sure that we can connect our employees so that we -- as they join the firm to other folks in the firm. And I think that's going to improve the work-from-home experience. Now as we look forward, a couple of observations. One is the pace of digitization is increasing. It's increasing as we speak, it really picked up dramatically immediately in the midst of the crisis and the move to the work-from-home. I think you'll see -- and we've actually inventoried all of our manual processes that we can eliminate and automate. And we're going to do everything we can to reduce the reliance on paper. There still are physical checks. There still is subscriptions and redemptions done by paper in the TA business. And we're working hard to make as much of that electronic as possible. Also as we look forward, obviously, rates are going to be a bit of a headwind. But despite the rate headwinds that we see, the underlying core fee businesses should be able to grow as we continue to demonstrate terrific quality in the services that we're providing. And we increase capabilities in a number of areas. We will maintain significant upside when a yield curve does return. So there will be meaningful changes. But at a high level, our strategy continues to be grounded really on 3 things, and the business model, I think, post-COVID is important, if not more than it was pre-COVID. One is to generate organic growth by building on the core and adding capabilities in a number of growth areas. And where we're most focused in those growth areas is asset servicing, Pershing, our clearing and collateral management as well as wealth. And we're going to constantly be working into new appointments that I announced, I think, point to this at getting more and more efficient through digitization and automization -- automation. And finally, I would say that -- and one of my focus is one of the big differences between being the CFO and the CEO is how important I have found culture to be in terms of execution. And we're really working to build a performance culture. I think we've made great progress there. That's going to drive the 2 strategies that we've got above. So the model is intact. There's definitely going to be some changes, and we're going to try to take advantage of those changes going forward.

That was very comprehensive, Todd. So thanks for that. I guess maybe we could delve into some of those growth areas you highlighted, maybe starting with asset servicing. You talked to a good pipeline in that business, higher win ratio, better revenue retention of late. Maybe talk to what's driving that and maybe discuss Bank of New York's approach in terms of how you're marrying front office with back office new office solutions?

Emily do you want take that?

Todd, do you want me to take that?

Yes.

Sure. Well, first and foremost, what I'd say is the traction that we have been seeing in asset servicing is certainly off the back of it. And underpinning that is just continuous and consistent investment in technology, in client service and in talent. So I mean that's underpinning the story. Having said that, and this goes back to a lot of the comments that Todd just made, that also, it's really about having a very disciplined approach to the sales cycle and sales management as well as relationship management. And I'm a firm believer that you cannot manage what you cannot measure. And when I came into asset servicing a few years ago and started to look after the client coverage organization, one of the things we did is implement very rigorous performance metrics, goals, regular performance reporting with -- around all things like pipeline, win-loss ratios, retention stats, average size deal, business at risk and ultimately, why it might be at risk, C-suite engagement, so how frequently and early, our C-suite was engaging with our key clients. And really, those efforts really helps to focus the mind and understand where to prioritize your attention and your resources. And so the combination of that very disciplined approach, along with the investments that we were making really did and have translated into green shoots and growth in asset servicing. And as you already alluded to, Todd has shared in other forums, whether it is our win-loss ratios that are twice as high as what they were last year, retention stats that are also higher, average size deals are higher, the pipeline is stronger. So I think you're starting to really see the combination of both the investment and the focus. The one area -- or the one other thing I would probably highlight and perhaps this goes more towards the second part of your question around just front office solutions and entirety of the offering. We also have pivoted very much so from a product-oriented approach to a solutions-oriented approach, and working in partnership with our clients around their complex needs and how do we help them across the entire investment life cycle. So whether it is bringing to bear investment in trading solutions, whether it is helping them again with the robust back office and now much more so mid-office capabilities and outsourcing and solutions, whether it is helping them to enhance distribution, we're very fortunate. We have very unique assets in terms of TA, sub accounting and Pershing. So we see a lot of flow and can really help our clients understand distribution. And finally, as Todd talked about really data and analytics, and data analytics as well as what I talked about in distribution really helps us move up the value chain. And one of the great examples, and I know it well, only because I was selling it less than 6 weeks ago, was is a pilot app, it's called Distribution & Analytics. And what we have built based upon all the data that we have, it's very unique to us is literally an application that any asset manager or asset owner for that matter could double-click on any Zip code in the United States and see what mutual funds or ETFs are actually selling and what isn't selling, and then to compare that to their own product offering. I mean, and that, to me, is just a great example of how we're moving up the value chain and starting to really solution our clients from end-to-end.

Interesting. I guess, another area you mentioned was wealth management. I guess, Mitchell Harris alluded kind of retires after several years in a couple of weeks. You're kind of anything splitting apart, investment management and wealth management. Maybe talk to any changes we could expect there and maybe elaborate what you're doing on that front?

Sure. So as I mentioned earlier, we do have a new incoming CEO, Hanneke Smits, and I actually should thank Mitchell for his many years of service. I've enjoyed working with Mitchell. And what he's really done is help us make a very smooth transition with Hanneke in this role. So I think that's going to work out quite well. We have an interesting collection of assets on the investment management side. Insight is our liability-driven investment boutique. We're clearly the leader in the U.K., and we do think there's some opportunity to grow that business both in Germany as well as in the U.S. and we've got some investments there. We've got a good credit manager in Alcentra. Here too, we recently announced a new CEO, Jon DeSimone. Alcentra is primarily a European credit manager. I don't think it's grown as fast as it should have. And I do think there's some opportunity in the U.S., and I think Jon is going to accelerate that. We've had very strong performance at Walter Scott, one of our boutiques in the U.K., and we've seen nice inflows even into active equity strategies there. We've consolidated and repositioned under the Mellon brand in the U.S., our businesses in the U.S., and we're about halfway through that now. And we've got a good cash business. I mean you would think this is a natural synergy to the rest of our investment services business, and we've got nearly $330 billion of AUM in our cash business. So on the investment management side, some of the investments that we're making is, again, building on the performance that we're getting out of Walter Scott, beefing up its sales team, especially in the U.S. We're capitalizing on the credit strategies at Alcentra and also building out retirement and DC capabilities that at Insight. And we're continuing to consolidate operations at Mellon. And then more broadly, I think we've incented an encouraged investment in product development. So that was the investment management side. And on the wealth side, it's a business that we like. It's obviously a good return on capital. It's been a little bit of a slow-growing business, but we're investing in it. We did put a new leader, Catherine Keating in front of that business a couple of years ago. And I think it's going to take a couple of years before we really see some of the benefits of our recent investments kick in. Obviously, it's been -- as any private banking business has been impacted by lower rates and some client derisking, but we're pretty encouraged with the pipeline now. We're actually starting to see more and more in-person, socially distance but in-person meetings. And the pipelines continue to grow through the pandemic, it's up about 20% year-over-year. We've added some very cool digital and technical tools. The website is much improved. I think the app is much more user friendly. We developed an active wealth approach, which focuses on 5 things to focus on, which has been helpful in us generating some new business. It's been cited regularly. Within the wealth space, we're building an outsourced OCIO Investor Solutions business. We just announced that back in May. And that will be offered to institutions and individuals around the world. We continue to invest in talent, both in leadership and growing out the sales team. We've been exiting some of the small offices that really don't have the scale and really want to double our focus on the high net worth side, on the higher and the ultra-high net worths. And we're also building out synergies with Pershing. I mean we've done a little bit there around both custody and offering bank custody, our Pershing clients as well as being able to offer some banking services from our wealth platform to Pershing clients. But I think there's more that we can do there. One example could be developing ETF allocation models to Pershing clients, OCIO offerings to Pershing clients and so forth. So we do see potential opportunities for closer interactions between our wealth management and investment services business. One of the things I'm looking for Robin to actually really focus on when he joins us. So the wealth and investment management business can generate some very good returns on capital. And we think we've got some interesting opportunities and to be able to squeeze a little bit more out of it.

Helpful. Maybe we could switch gears for a moment. Todd, in the beginning, you alluded to downward pressure on net interest income. I think previously, you talked about an 8% to 11% decline in the third quarter and things beginning to stabilize in the second -- in the fourth quarter. Just maybe how comfortable are you with that 3Q guidance, given what's going on? And what gives you confidence that stabilization will start, if that's still the case? And maybe within that, discuss kind of what deposit trends you're seeing?

Okay. Why don't I put Emily on the spot for that one? She can -- Emily, you want to take that one?

Sure. So despite a further contraction of rates in the third quarter, we still feel very comfortable with the guidance that we gave on our past earnings call of NIR down 8% to 11% sequentially. Having said that, I would think, just so for everyone to, in terms of their model, that's going to be closer to the 11%. In terms of the fourth quarter, we still expect NIR to continue to decline off the back of rates churning lower, faster MBS prepayment speeds and ultimately lower contribution from FICC repo balances as the market deleverages. But the most important thing certainly to underscore is that, that rate of decline, quarter-on-quarter, will begin to slow. And to dimension that, I would think of it as the rate of decline will be roughly half of what we're seeing between the second and the third quarter. As we look into next year, we do expect NIR to be more stable. If you think about forecasting next year, our best expectation is that it's -- our expectation is that if you take the fourth quarter run rate or slightly lower than that, that's probably a relatively good point in terms of thinking about how to dimension NIR next year. And why do we have some confidence that it's going to -- that it's going to be more stable, while we have a significant portion of our securities portfolio in fixed rate as well as the largest unrealized gains associated with that portfolio will take some time to be reflected in NIR, given they have long-dated maturities. We don't expect significant further deleveraging. And I think we've talked about, we are taking proactive steps to optimize our balance sheet. So whether it is as some of our deposits that are at elevated levels continue to season, we can actually extend duration. We can invest in non HQLA. Likewise, we can redeploy some of those deposits in our lending portfolio at slightly higher yields. And of course, that helps with customer satisfaction as well.

Okay. That's helpful. So I guess in this challenging rate backdrop, obviously, expenses become more in focus. You've talked to them being flat versus last year, excluding notable items, including a 50 basis point year-over-year headwind from higher provision. And that's after expenses declining last year. Obviously, within that, you've been generating efficiencies and investing. So I guess 2 questions on that. First, where have you been investing and kind of where are you in the investment spend might cycle?