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

Good morning, everybody. Apologies for a little bit of late start. Our next session is with BNY Mellon. It is my pleasure to welcome Todd Gibbons, BK's CEO; and Emily Portney, the company's CFO. BNY Mellon's business has been resilient over the course of the pandemic. The firm's wide and unique range of capabilities have helped offset a lot of the macroeconomic challenges, particularly related to lower interest rates. And with the potential recovery on the come, momentum in the business across a number of products seems to be accelerating and building. Today, we will focus on key growth initiatives for the firm as we look out into '21. So Todd and Emily, thank you both for joining us today.

Thank you.

Thank you for having us.

Perfect. So why don't we pick it up there? So I was curious to start the conversation with sort of top of the house priorities. And throughout the pandemic, as I mentioned, BNY Mellon demonstrated significant earnings resiliency and very strong capital generation in large part to your business model and kind of the breadth of capabilities. Can you talk a little bit more about that and the resiliency in the model? And what ultimately kind of drives that? And with investor focused now shifting towards recovery, what are some of your top of house priorities in '21? And what are some of the key lessons learned for the pandemic that may inform your go-forward strategy?

Okay. Sure. I'd love to. Thanks for having us, Alex. And I'll get to priorities and kind of lessons learned. But before I get to that, I'd like to give just a little bit of background here. We play a unique role in the functioning of the global capital markets. In many instances, we're infrastructure. We feel very good about our business model. It's proven to be resilient, as you pointed out. It generates significant capital. And our breadth of service and capabilities, it's unrivaled amongst our competitors. That diversified set of businesses, we believe, differentiates us from the traditional trust banks. So we're not just a custodian. Our Asset Servicing business where custody sits, it's only about 1/3 of our total revenue. The balance is driven by Pershing, Issuer Services, Clearing and Collateral Management and Treasury Services. And that offers our clients kind of a unique partnership and an opportunity for us to cross-sell across each of those businesses. And also, on top of the Investment Services business, we -- about 20% of our total revenue is driven by investment in Wealth Management. Our model and our franchise is incredibly strong and interconnected. We are a top 3 provider within asset servicing where the custody business resides, issuer services, collateral management and Pershing. We rank top-10 within the fragmented industries that we're in, such as wealth, investment management and treasury services. And I think the real power of the franchise is how we can deliver our full suite of complementary capabilities to our clients. Now that's a mouthful. But what I mean is we're connecting businesses like Pershing and wealth, to provide banking and brokerage product to Pershing clients that nobody else can do. We're integrating issuer services, markets and asset servicing to provide unrivaled solutions to alternative managers and in a couple of instances to the government. And we're deepening relationships with asset management clients by enhancing their own distribution capabilities through Pershing -- through a number of our platforms, including Pershing, Liquidity DIRECT, which is an open money market mutual fund platform as well as our wealth business. We've also got a fantastic client roster. We've got 94 of the top 100 banks do business with us. 93 of the largest investment management firms globally and 76% of Fortune 500 have connectivity to us. So we're working with the institutions that are growing and that are the most important institutions in our space around the world. Finally, we believe our resilient franchise offers a compelling proposition to our shareholders. We provide exposure to the fast-growing core global financial market ecosystem or even infrastructure. We combine the characteristics of a bank with those of a fintech. We've got a stable, recurring revenue profile. It's combined, if you combine that with a low credit and market risk business model. And our pre-provision pretax income, as you point out, has been steady and in line or better than most peers. And with respect to profitability, we've got strong year-to-date pretax margins and one of the highest returns on tangible common equity. And through this, we've built significant excess capital. So taken together, we believe we're currently undervalued versus our peers, and this doesn't even factor in the long-term growth prospects that we've got within the diversified model. Now getting really to your point, looking ahead, what are we doing? What are our priorities? Well, we're going to continue to invest for the long run. And we have the ability to do that while maintaining leading margins from what we think about the top of the house strategic priorities, they're pretty simple. We're going to invest in the core and a number of growth initiatives, which we'll, I'm sure, get into in this discussion. We're going to scale the resilient operating model, get more and more efficient. And then again, my focus is also in building an innovative culture across the enterprise, one that wants to win and is capable of doing those first 2 things. We're also building on our leadership position to increase market share in certain instances, and we can kind of point to that; expand addressable markets, which is, I think, something that has come out of COVID, the opportunity to do that even more; and continue to build scale and the network effects that we get on a number of our platforms. We're focused -- when we really get down to it, we're focused most closely on growing the security services business. And in particular, what we think is an exciting space around data and analytics. We're going to expand our role in WealthTech, which includes Pershing and the wealth management businesses, and we will continue to play an even greater role in the capital markets infrastructure. So our model is such that our organic growth rate that we've seen this year in the 1% to 2% range, when you take that and you combine it with capital actions in more normal times and the expense efficiencies that we think we can drive, will drive significant EPS growth over time, even if the macroeconomic backdrop stays as it is for a while. And that does not include the upside that we could get from the benefit of rates recovering, even if they just recover modestly. So let me just end with a couple of comments on the lessons learned from the pandemic. One is resiliency really matters. So the investments that we've made over several years' service and our clients well, we were able to move into a work-from-home environment and meet all of our requirement -- our clients' needs over that time. So that platform not only benefited our stakeholders, I think it validated our strategy of consistently investing in technology, cyber defenses as well as the operations themselves. Secondly, the strong balance sheet really served us well. So in the time of crisis, we were there, we had the capital, we had the liquidity to support our clients when they needed us most. And that's when it really matters. And then third, there's no question that digitization has accelerated and will continue to accelerate. So it drove us to advance our own digital agenda more aggressively. It also heightened our clients' focus on it. And around automation, and that work is being moved forward even faster. And finally, we've really partnered with our clients to share knowledge, best practices, the demands around cyber defenses continue and sharing of that with and continues to grow. And I think that's put us in a position to build more value. On the expense side, there are clearly going to be long-term opportunities that come out of this, things that we are assessing and where we see opportunities, again, for greater automation, we are reconsidering what the workplace of the future is going to look like, where and how we work. It will be different. And I think there will be an impact on other expenses, travel, and we've had huge investments in infrastructure and physical space around disaster recovery. The fact that we've now introduced a virtual recovery should give us some pretty good opportunities there. So overall, that I think the experience will add to our efficiency programs and it proved to us just how valuable our financial and operational resiliency is to us and to our clients.

Great. That was really helpful. Thanks for kind of setting the stage there. I was wondering if we could dive into some of the specific topics when it comes to the revenue growth. And look, not surprisingly, lots of focus on the institutional services business and how can sort of accelerate organic growth that you talked about, which sounds like it was in the 1% to 2% range this year. Obviously, a lot of that is masked by some of the macro factors, whether it was challenging markets at the beginning of the year, obviously lower interest rates and the impact of the money market dealers that comes through your fees line, right? And that obviously masked some of these dynamics. Can you help us rank order some of the largest organic growth opportunities you see in the institutional business over the next few years? Some of them you probably have already mentioned, but I was hoping you can highlight maybe kind of 3 top ones investors need to think about.

Sure. So it will be nice to get the full impact of rates and fee waivers behind us, which we expect to pretty much run its course early next year. But as we look at -- in the Investment Services business itself, I'd say, Pershing is one of those areas. We're a top 3 provider to the high-growth RIA segment. We have relationships with 1/3 of the largest RIAs that have $1 billion in assets. So our focus has been on that corporate RIA, and there continues to be opportunity there. We're the dominant provider to institutional broker dealers with market share approaching 30%. And that is a market which is also growing, not quite at the same rate as the RIA market, but with increasing regulations and the cost of sole player, we see opportunities there. And then also within Pershing, we're seeing net assets growing at 4%, and activity remains strong. So although the impact of waivers and low interest rates, as you point out, it's going to mask that growth for a number of months. In Clearing and Collateral Management, this is where we are uniquely positioned. We're the sole player of U.S. treasuries and we've got the leading tri-party platform, both domestically and globally. We are investing in that platform so that it's interoperable around the world. What that will do is it will enable our clients to manage and squeeze a lot more out of their liquidity as well as reduce the cost and capital that they've committed to their repo books. So we believe once we have completed that, we will be in a position to gain even greater market share where we already have a leading position. And Asset Servicing, there's a number of opportunities for us there. We're going to invest in the core. We think we can digitize further. There are middle and front office solutions that we're building out for our clients. And finally, as the leader around data and analytics, we think we're positioned to generate real revenue. We already have a business there. But we think we can accelerate the revenue growth in that business. And finally, I'm going to mention Treasury Services. I think I've got to the fourth, you said 3, but I'm going to mention Treasury Services, where we're investing in automation. We're also innovating around integrated solutions using real-time payments. We're one of the first to connect to the RTP system in the New York Clearing House. We expect now to rapidly move collections from a low-margin paper-based product to a higher margin, scalable real-time product. So that's something that's a little bit further out there, but we're going to be announcing some things probably over the course of next year. So some opportunity there as well, Alex.

Great. Well, let's continue working down the P&L here. And I want to bring Emily into the conversation as well. So next, maybe we can talk about net interest margin and net interest revenues. Your latest guidance suggested that NIR is expected to be down 3% to 5% in the fourth quarter versus the third quarter. And for '21, you talked about down marginally from 4Q levels. But should be a pretty good run rate from there. So clearly, some signs of stabilization from there. While there hasn't -- I don't think there's been a major move in forward rates, but the curve did steepen a bit in the fourth quarter. So maybe one, kind of given these market conditions, update us on your latest thoughts around Q4 and 2021 with respect to NIR. And then I guess, bigger picture, maybe you can help us frame BK's NIR sensitivity to kind of medium, longer-term rates. Obviously, there's a lot of focus on the steepness of the yield curve. I think myself and investors generally [indiscernible] is very short end of the curve sensitive. But to what extent could that be helpful to '21 NIR, and then understand you're probably not going to give too much guidance just yet. But how could that be helpful to NIR in Q1 2021?

Sure. Thanks, Alex. So I'll start with just the fourth quarter, and our guidance really does remain unchanged, and I think in our third quarter earnings call. And since then, we've guided that the fourth quarter, we expect to be down sequentially anywhere from 3% to 5%. We're still very much expecting in that range. Obviously, LIBOR has come down quarter-on-quarter, deposits are slightly -- our deposits are up, but the marginal yield on each and every deposit is obviously pretty limited. So that's for the fourth quarter. You asked about 2021. And also, the guidance there is pretty much unchanged. So if you take the fourth quarter run rate, discount that a little, that's a good jumping off point for what you should project for the full year in 2021. In terms of how we project that. We don't try to get cute. We just use the forward curve, which indicates or implies that rates are relatively stable. Certainly, a steepening of the curve helps, and I can talk about the sensitivity in a moment. Also the other major factor is deposit levels, and we do expect deposit levels to kind of remain at kind of where they are. And of course, as those deposits season, we will continue to redeploy them into our securities portfolio and, of course, our loan portfolio. So that too will help. In terms of the sensitivity to rate, obviously, we do benefit from a steepening of the curve or an upward shift in rates, for sure. In our Q, I think we've disclosed that for, for example, for a 50-point steepening in the longer end of the curve. And actually, we define that as just greater than a year. That would equate to an uplift in revenue per annum of about $140 million. A full 100% or full -- sorry, 100 basis point parallel shift upward in the curve would actually equate to about an additional $340 million in NIR, again, over -- per annum and assuming that's just evenly split quarter-over-quarter over the 4 quarters. So that gives you some idea of sensitivity, certainly a lot of upside. But I wouldn't also forget the sensitivity to the short end. Our floating rate securities as well as our loan portfolio obviously are sensitive to the short end.

Right. And I guess just building on that, as we think about the remaining risk on the fixed portion of the securities portfolio and to an extent that, that's still repricing lower, do you see the opportunities to remix on the balance sheet to essentially offset that, that sort of gives you confidence in that sort of flattish run rate NIR starting 1Q, 2Q next year?

Yes. And we've talked a bit about -- we have a pretty significant unrealized gain that's associated with the fixed rate securities that are longer-dated in our portfolio. And of course, the average weighted life there is much longer, and it will take time for that to kind of come into NIR, and that's going to be helpful. Of course, as it does, we'll be -- we will reinvest at lower rates. But as you also rightfully point out, we are taking optimization efforts like investing in non-HQLA at the margin, whether it's high-grade -- ultimately, whether it's high-grade ABS, munis, corporate bonds, et cetera. So we are taking advantage of those opportunities as they present themselves, of course, within our risk profile.

Got it. Great. So since we're on the topic of financial updates and market to market, any other notes you'd want to make as far as the fee revenues into the fourth quarter, macro proxies are generally favorable, I want to say, obviously, high equity markets sort of help, a little better rate and maybe FX volumes quarter-over-quarter might be helpful as well. But curious [indiscernible] other than fee dynamics shaking out and maybe you can have a money market fee waiver guidance that you provided earlier as well.

Sure. So just speaking about activity levels in the fourth quarter. I'd first remind everybody that October was incredibly subdued. Pre-election, it was very much a risk-off environment. In November, we've seen a very healthy uptick in volumes and client activity pretty much across the board. So whether it's FX, whether it's our clearance volumes, whether it's sec lending or for that matter, tri-party repo balances, both domestically as well as internationally. So all of that has been a healthy uptick. Having said that, as you rightfully point out, fee waivers will be a larger headwind in the fourth quarter than it was in the third quarter. And I can talk a little bit about that. And also, just as a note, DR, depository receipts, business is generally higher -- seasonally higher just because of corporate actions in the third quarter. So that will come down in the fourth quarter. And of course, market levels being what they are going to help IWM, investment wealth management, and also performance fees are generally higher in the fourth quarter for that business. In terms of waivers and what we had guided to previously, and it still stands, is the net impact of waivers of about $135 million to $150 million in the fourth quarter. What I would say there is yields, excuse me, yields on money market funds are coming down, but coming down a bit slower than we had expected. So whereas we expected to kind of hit the top end of that in December, it is likely that we will hit the top end of that more like January or February. But the guidance for the fourth quarter is still very much in that range. And of course, the only thing I would say is any guidance we give is very much dependent upon money market balances and, of course, at the short end.

Got it. Perfect. All right. Why don't we switch gears a little bit to talk about expenses? Now you've been consistently focused on driving greater efficiencies and cost savings throughout the organization, while at the same time, investing for growth. And clearly, Tod talked about this earlier as a theme for you guys into '21, an important theme. How should we think about the balance between the 2 into the fourth quarter? And any early thoughts around 2021 expenses you could offer here that would helpful.

Sure. I'll start, and Todd, I'm sure you want to add. In terms of guidance for the full year, we are still expecting essentially flat year-on-year, which in fairness, I think, is a real testament to the cost discipline that we've demonstrated this year. We've made investments. We've self-funded those investments. The only thing I'd mention is that we are planning for some one-off adjustments in the fourth quarter, very much responding to the COVID environment. So whether it is optimizing our real estate footprint, whether it is realizing some efficiencies across the organization due to automation efforts or exiting some noncore activities, marginal noncore activities in certain businesses. So if you wanted to mention that, that's probably about $150 million or so. So you should think about that in terms of fourth quarter projections, one-off items. In terms of 2021, we have completed an extensive planning exercise, both bottoms-up and top down. As Todd has discussed and talked about with the full impact of NIR and money market fee waivers, next year, it's going to be a challenging rate and -- sorry, a challenging revenue environment, which just underscores the need for continued cost control and cost discipline. For the plan, we have -- we're planning at the moment for expenses, what we're projecting is essentially flat net of any currency moves that we might expect. And in that, of course, is embedded investments, investments in growth and investment and efficiency efforts, which, of course, we'll also continue to self-fund.

And when you're saying flat, just to clarify, does that include the $150 million extra expenses that you expect in Q4? Or are you backing that out?

Sorry. Those would be nonoperating. I'm talking on an operating basis, very good point of clarification. Thank you.

Got it. Okay. Perfect. All right. So we have a couple of minutes left. I want to shift gears towards capital return dynamics and maybe a couple of comments on M&A. And look, I'm sure you're all eagerly awaiting for CCAR 2.0, as we've talked about in the past. And I'm not sure there's a whole lot more you can add to that other than you think you have a lot of excess capital and you would like to return as much as you can. So anything else you would want to add to that would be helpful. But I do want to spend a minute on M&A as well. I mean, there's been a flurry of activity, particularly in the asset management space. You guys do have a big asset management business. That's more of a boutique kind of, not want to call it affiliate, but kind of partnership model, right? That sits underneath the BNY Mellon's umbrella. Is this interesting to BK to participate in some of the M&A that's unfolding out there? And just remind us on your kind of priorities when it comes to deals.

So Todd, do you want me to take capital and you take M&A? Or how do you want to do it?

Yes, why don't we do that Emily, go ahead.

Sure. So I'll do capital real quick. So from a capital perspective, I mean, yes, we are eagerly awaiting the results of, I guess, CCAR 2.0. In fact, my alarm is set for December 18, at 4:30 p.m., which I think is when we get the results. Look, we're optimistic that we will be able to return -- that we will be able to resume buybacks. Our risk profile as such, we're much more conservative and have a -- we want to -- we do think that capital should be returned based on differentiated risk profiles. We support the SCB framework because it does allow for that differentiation and that flexibility. We will, of course, if we're allowed to, resume buybacks, take into account market conditions. And I think just in terms of thinking through it, certainly, because we have so much excess capital, you would -- we will be returning more than our earnings over the course. So that's the intention over the course of next year.

Yes. And so, Alex, I'll follow up on the M&A component of it. So I think as you've listened to Emily, we certainly have been accreting a significant amount of capital, and it's not a matter of if, it's a matter of when we actually start to do something with that capital. So because we've accreted capital, we don't feel any pressure to pursue an acquisition just because we got excess capital sitting around. That's going to be short-lived. We're -- but in terms of what we're looking at on the M&A front, we're always taking a look at things and seeing if there are strategic investments. We have made a series of modest strategic investments in fintech mostly that is very much oriented to some things that can get on our platform and can make us better at what we do, and adjacencies are complementary businesses. We do have a team under Emily that's constantly reviewing opportunities, and it's a very disciplined approach. So if it makes sense, if it can meet our hurdles, if it can justify the risk, if it's got a strategic long-term benefits to it, we'll pursue it. Otherwise, we won't. And so it's -- we don't feel there's urgent need to get something done. There is a lot going on out there. There are some interesting opportunities, and we're looking.

Does that include things in the asset management space or more kind of fintech focus?

As we look at asset management, our own Asset Management business, we kind of like the collection of assets that we've got. And so it's more likely that you would -- it's not impossible that we wouldn't do something there, it's not out of the question. But it's more likely we'd see something on the fintech investment services space.

Great. Well, perfect. Look, we're almost out of time. So I want to thank you both for joining us this morning. Hope you have a very productive day. And next year, hopefully, live. You guys don't even have to walk that far. You're across the street.

It will be. We're looking forward to it. Thanks for hosting us, Alex.

Thank you.

Take care.

Bye-bye.