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

Good afternoon, everyone. This is Gerard Cassidy. Thank you for joining us for our next presentation at the BancAnalysts Association of Boston's [ 39th ] Annual Fall Conference. With us is Bank of New York, and we are very privileged to have their CFO, Emily Portney; as well as their Chief Executive Officer of Asset Servicing and Head of Digital, Roman Regelman. So Emily and Roman, thank you for joining us this year.

Of course.

Thank you for having us.

You're very welcome. Obviously, as being one of the large custody banks around the world, it's a little different than most traditional banks. So Emily, if you could just maybe -- the elevator kind of description of some of your key businesses. I know many investors know them, but there are a bunch that really do not. So maybe just to start off, if you could give us just a quick overview of the key businesses that Bank of New York has.

Sure, sure. So we have a very diverse set of businesses across the enterprise. And the way we think about it or manage the company is that we've got 2 divisions. One is Investment Services. It represents about 75% of our overall revenues, about 80% of our pretax income. So it is the bigger division. And in there, I would highlight 5 lines of business. And just to go through them very quickly, asset Servicing is probably the best known. That's where we have all of our custodial activities. We are the largest custodian in the world with just under $39 trillion of assets under custody or administration. But Asset Servicing is much more than that. So it's also fund administration, it's a transfer agency. We're one of the few providers of global transfer agency services. It's mid-office outsourcing, it's digital and analytics. Obviously, Roman will talk about all of those things. And it also houses our -- is very tied to our markets business, where we do, obviously, a lot of SEC lending and FX trading for our asset servicing as well as the rest of the firm's clients. The second business that I highlight in asset -- Investment Management, sorry, or investment -- sorry, Investment Services is Clearing and Collateral Management. Clearing and Collateral Management, we are the sole provider of clearing for all U.S. government securities. So that's a very unique position, a unique asset. Likewise, in that business, we also provide tri-party collateral management services, both domestically and globally. The third business I'd highlight is Pershing. Pershing also is a pretty unique asset that we acquired back in 2003. Pershing provides execution, clearing and custodial services for broker-dealers as well as the RIA community. And when you just think about our standing there, we have about a 30% market share with the broker-dealer community. And we -- I think the last I checked, we're top 3 with RIAs that had client assets greater than $1 billion. The fourth business would be Treasury Services. Treasury Services offers global payment liquidity services as well as trade finance capabilities to institutions around the world. And finally, Issuer Services, which really has 2 different lines of business, Corporate Trust, where we provide both trustee. We are -- we act as a trustee and provide servicing functions for issuers of debt, all kinds of debt: Structured, corporate, munis, you name it, and similar types of services in our depository receipts business. So that comprises Investment Services. And then just moving very quickly to the other side of the house is Investment and Wealth Management. And there, it's really 2 businesses: Investment Management or Asset Management. That business has about $2 trillion of assets under management. And it's organized across 6 boutiques. We actually have a new leader of that business, Hanneke Smits, who was the CEO of one of those boutiques up until recently, and now is the CEO of the entire Asset Management franchise. And that franchise is very well-known for our credit capabilities, our LDI capabilities, our thematic equity capabilities in investing as well as our cash services. And finally, just rounding out, everything is our Wealth Management business. We have about a little over $260 billion of assets under management. And that services high net worth individuals, and we are a firm believer in growing that business and have been retooling it and building it and investing in more holistic advisory capabilities as well as talent and other digital capabilities and product. And so I think if you just step back, and I know that was a lot, but it does show the diversity of the businesses that we have. And the other thing I would just mention is that when you look at Bank of New York Mellon, and you look at that set of businesses, really, it's -- we are comprised largely of stable recurring fee revenue.

No, very true. And that was a very good job of summarizing the businesses. Thank you. This conference is all about how are the banks going to combat the structural challenge of low interest rates maybe for the foreseeable future. Now granted, fee revenues are critical for your organization. We all know that they represent about 82% or so of total revenues. But can you -- it's kind of amazing that the impact on net interest income has such a kind of outsized impact sometimes on the stock price.

So you guys have come out in your last recent quarterly report or conference call, talking about what your outlook is for net interest income in the fourth quarter and into next year, can you expand upon that? And what gives you the confidence of what you guys are feeling about that line item?

Sure. So just as a reminder, for guidance, we did guide on our earnings call that NIR for the fourth quarter will likely be anywhere from 3% to 5% below what it was in the second quarter. And we did also just talk about the fact that as you look into next year, you probably can take slightly below the fourth quarter and use that as a run rate to project out to next -- throughout next year. It will, of course, continue to be a headwind. But how we think about modeling in IR, it's actually -- there's a lot of inputs. The most important, of course, is the forward curve. We don't try to be cute. We just use the forward curve. And I guess, if you look at that now, it indicates that rates are relatively stable or should be relatively stable from here, which also, I think, implies anyway that the worst is behind us. So that's the first thing I would say. Obviously, we also look at our deposit levels. That's another major input. And as you all probably know, our deposits are up about 23% year-on-year. In the fourth quarter, they're trending even up further than they were in the third quarter. And we do expect them to remain at these levels for certainly at least throughout next year. And as those deposits season, we can reinvest them into other activities like our securities portfolio. And we have grown our securities portfolio by 29% year-on-year. We've also extended the duration of that portfolio in certain places, certain areas in a disciplined manner where we think it makes sense. We continue to invest in high-quality non-HQLAs. So think CLOs, investment-grade corporate debt, munis, again, within our current risk profile and where it makes sense and it can provide a bit more yield. And by the way, it's not just about the securities portfolio. It's also -- we are also intending to redeploy some of those deposits into our loan portfolio where we see opportunities. And where, frankly, that also just helps build relationships, trust and fee revenue with clients. The only other two things I just will mention about giving us comfort around how we estimate and model NIR through -- towards -- to the future. It's -- we do also take into account the expected rate of MPS prepayment activity. We expect that to slow modestly in the future, albeit still remain at elevated levels, but that's baked in there. And the very last thing I would mention is just that we do have a large securities gain, an unrealized gain on the securities portfolio. And that will -- that is associated with longer-term securities and that will take some time to kind of come into NIR, and that will also help. So that's how we think about modeling it. And look, at the end of the day, we have a very resilient model. In the third quarter, I would just remind everybody that despite the major headwinds, with NIR and money market fee waivers, our revenues were down less than 1% overall. So it is a resilient model.

Yes. No doubt. Maybe you can share with us, before we get to some questions for Roman, in the balance sheet, obviously, the Federal Reserve's expansionary monetary policy has contributed to your balance sheet growth. But what else drives the balance sheet growth besides monetary buy in? And if you want to talk about the monetary policy, please do as well.

Sure. Well, I mean, it's definitely true that from -- our balance sheet is deposit driven for sure. And yes, the FIB policy, expansionary policy has absolutely resulted in a lot of excess liquidity in the system. We are -- our deposit base is a beneficiary of that. What I would also say is that in stressful times, there -- we benefit from what I would call the flight to safety. People like our credit profile. And ultimately, that's what we saw in March and part of the second quarter and those deposits are proving to be sticky. But what I don't want to do is overshadow the fact that in addition to just the impact of the Fed, we also have made and continue to have very deliberate deposit campaigns. And we have actively increased deposits off the back of those campaigns across asset servicing, treasury services, wealth management. I mean, just to give you an idea, our Treasury Services balances are up 45% year-on-year. And so -- and that's through real efforts in building out banking product and liquidity services and a whole host of things. So I mean that's -- that just gives you a flavor. And like I said, I mean, we talked about previously, I think we do feel that deposits will be -- remain relatively kind of around these levels for the -- for at least the foreseeable future.

And just a clarification, when you were talking about the guidance on the fourth quarter NII being down, I think you said 3% to 5%, that's versus third quarter, correct?

Yes. Yes. Yes.

Okay. Good. Roman, maybe we'll start with the conversation with your responsibilities. And can you share with us how important it is to have the Head of Digital, also the Head of Asset Servicing?

Great. First of all, our business is becoming increasingly digital. What I mean by that, the client expectations are changing, drive for efficiency and utilization is increasing, and client, they increasingly expect end-to-end solutions. In order to provide end-to-end solutions, you have to tap into innovation everywhere in the world. So all these things make our business digital. And on the other hand, digital is our business. There is no digital incubator without the core business. So when people ask me, hey, which had in a way, I'm saying the same thing. Our business is digital and digital is our business.

Very good. And when you look at your businesses, can you share with us the strategic priorities and, in a sense, servicing? And then within those strategies, what are some of the most compelling growth opportunities?

Great. So I look at this question probably from two dimension, right? There is a conceptual dimension, and there's a kind of practical investment dimension. So starting with conceptual, I mentioned some of these things. Clients' patience, client experience, client service are pretty important. We really differentiate it on client service and the quality of that, but we absolutely are raising the bar on what gains we actually provide client treatments and solutions, not just a slew of products, but really front of end solutions for our clients. Now number two is the drive for digital. And drive for digital is efficiency, it's risk mitigation and it's also experience itself. And a -- I would say the goal -- number two. And the goal number three I mentioned is about open. In these day and age, no company no matter big they are, how well-funded they are can do everything themselves. So we're recognizing that, and we have a very robust ecosystem of industry participants that we really connect with, not just the marketing alliances, but really data and process integration. Large technology companies like Microsoft, we do a lot of this in Azure, and then fintechs that we're really incorporating in our overall ecosystem to provide solutions to our clients. You might have heard our alliance with Milestone, for example. For example. So that's a conceptual answer. Then if I want to just be very sort of practical in this thing. We really believe that our core business is our custody and accounting, need to be digitized, we need to create a very consistent experience for clients globally. We often call that kind of future of custody. So that's number one. And number two, our ongoing investments is the data analytics. That has dual benefits. One, it's a stand-alone revenue as a new source of revenue; and two, it's really becoming a connecting tissue for our clients, to the extent that we offer them solution to become something that underpins the total equation that we're providing. And number three, in a sense of creating much more of an end-to-end value proposition, that's our continued for inter middle office, into front office with risk solutions, with the front office solutions, having the dialogue not only with a traditional operations buyer but with the Chief Investment Officer, with the Chief Marketing Officer, we have applications in ESG, in distribution analytics. And then, of course, we are supporting our client growth in things like in private markets. And as Emily mentioned before, transfer agency, which is a unique ability that we have, allows us to really round up all this capability globally for our key clients, the asset managers and asset owners.

Roman, as your clients fully embrace technology and digitalization, we're going to finally get rid of the fax machines?

We're absolutely determined get rid of fax machines. We actually have a whole program on that, which I champion even before they were old. I think it's actually a great example of what we're talking about. Because fax, it's costly. It's not a great experience and it's also prone to risk.

Yes.

Right? Sometimes people can create a little bit of a dichotomy, hey, great service, efficient, right? And try to create, this is one or the other. Eliminating faxes, like a lot of our digital efforts, a lot about data efforts, really accomplish and lowers cost. You decrease the cost you simultaneously gain a better service at a low risk.

Totally great. That day is coming. That's for sure. Can you share with us some of the synergistic opportunities that you might be able to have when you cross different business lines in asset servicing?

So let's maybe talk about the data, right? Obviously, we're talking about -- well, if you look at the history in this industry, and I've been in the industry for 20 years, even though I've been here only a couple of years. And as a consultant I worked across the world, in North America, EMEA, APAC for many of our competitors as well. People always connect -- dabbles in data. People, the head of data solutions that sometimes would sold to clients, kind of tapping into the technology bucket or short-term category. But I think what we're doing with data is really making that this what I call connecting tissue, the chassis for the total equation. Think of a kind of typical complex client and we have many of them, of course. They discussed it in accounting, there's middle office, there's transfer agents. And I think if we can uniquely connect all these things, decreasing your on-boarding time, increasing efficiency, strong connection of processes and data and also offering much more of consistent client experience, right? So that -- these are the clients that we're focusing on. We're actually experiencing 3 solid win ratios in these kind of complex situations. And frankly, that's what I feel what that our differentiation is. At the end of the day, large clients that might split a custody book, as you already know, but by us, really being strong and occupying the data space, the middle office pace, the transfer agency space, we will be indeed a preferred partner for them.

Just to add to that, if I may. And Roman obviously highlighted it a lot as it relates to data. But when you just think about asset servicing and just the synergies across the entire enterprise, there are so many places where we're interconnected. So for example, we provide custody and admin for all -- for many of the boutiques in asset management. Many of our asset manager clients in asset servicing leverage Pershing's distribution capabilities. Likewise, some of our clients in like the OCIO space are now clients of wealth and the OCIO advisory capability that they just rolled out. So again, many of our clients are leveraging our SEC lending and FX capability. So there's a lot of interconnectedness and synergies across the enterprise as well, just outside of even the data that is incredibly important.

Speaking of data and analytics, how do you guys charge or do you charge for this? For example, the ESG app, do you kind of bundle that with other services and it is combined -- it's a total bundle? Or do you price it separately? Can you share with us some of your thoughts there?

Sure. I mean, I would highlight kind of 3 things on the data. I mean, first of all, it's a stand-alone source of revenue. Both for underlying data management as well as for things like HGF, which have a very robust pipeline, 50-plus kind of clients that we're working with right now. So that's I think one. Two, to the extent you have very complex -- clients with a complex separated model, data is becoming differentiated. Something that may look as a simple custody at of fee, really requires data as a foundational element of an operating system. And yes, you can charge for that, but also allows you to increase the win ratio. So that's number two. And then number three, it allows you to really expand the range of conversations you have in this one. Because the traditional buyer for custody, accounting, is the front-end operations, right? They obviously have a certain wallet but it's being switched. But if you look at the kind of whole value chain of our clients, even the largest asset managers and asset owners, they are all, needless to say is much larger. So our data products target the Chief Investment Officer and opportunities there. The distribution analytics app as an example, targets marketing and salespeople. It really -- so you -- instead of being a cost, you're absolutely becoming part of their revenue and differentiation.

And staying with data, can you explain or share with us the benefits of an open platform model versus the CRD model? What kind of traction that's making with your clients?

I think the open platform is, a, I would maybe say, b, major differentiation. And first nuance, there are a number of OEMs in the market. Some of them are more -- some of them better than others, some of them are going to have greater market share than others. If I focus on one open line system, let's say, it's at 20% market share. I have some integration with them and are really focused on the clients that have the same. The 80% become in on that. We have deep connectivity, so my geology of auto management systems in the market. And when I say deep connectivity, I don't mean just the marketing alliance. I really mean we're passing data back and forth. We have processes that are integrated, the screens themselves are integrated. So this way, if the market changes, if one of them has becomes more popular than another, we are hugely proofing our clients in providing this connectivity, right? You don't need to own assets to really support them. So I really feel we're offering better efficiency to the clients, a lot more choice at a low investment footprint.

[Operator Instructions] Emily, pivoting back to you. Maybe you can share with us this week, all the big banks submitted their CCAR 2.0 numbers to the Fed, we're going to hear by the end of the year what those results are. Can you share with us the process, how comfortable you guys are with what you went through for the new CCAR?