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

Wonderful. Good morning. I'm Susan Katzke. I cover the large-cap banks for Crédit Suisse. I am pleased -- after a short delay, my apologies. I'm pleased to now turn our attention to BNY Mellon and introduce Emily Portney, Bank's CFO; and Bridget Engle, the Bank's Chief Operations and Technology Officer. If I'm not mistaken, this is Bridget's introduction, first presentation in this role to the investment community at large. Thank you for being here and giving us this opportunity to host you despite a little technology snafu on our part. I know you've got formal remarks to help us better understand your organization and its priorities. So let me turn the screen over to you, Bridget, and we'll hear from you first.

All right. Thank you, Susan. And good morning, everyone. I'm happy to be here today to be able to share my perspective. Together, our operations and technology organization represents more than 60% of our company's employees. And we're responsible to operate the infrastructure of the firm and execute for our clients day in and day out. There's always been a really strong partnership between our operations and technology organizations. But combining these teams has really been a catalyst for us to accelerate our digital journey. Today, I'm going to share how our operating model, our investments and our infrastructure have evolved over the last few years, and how we believe that will differentiate the firm. So turning to Slide 2. We have the standard legal disclaimer. Today's remarks will contain forward-looking statements and non-GAAP measures. Information about these are available in the appendix of the presentation, which is available on our Investor Relations' page of our website at www.bnymellon.com. Forward-looking statements made on the call speak only as of today and will not be updated. So turning to Slide 3. BNY Mellon plays a critical role in the global financial markets. Our clients entrust us with over $40 trillion of assets under custody and over $2 trillion of assets under management. Every day, we process $9 trillion of government securities and clearance transactions, and we're the #1 clearing firm for broker-dealers. What you see on the screen isn't just a pretty room. It's a glance into our industry-leading Cyber, Technology & Operations Center. It's where we monitor everything necessary to run our businesses. We call it our CTOC for short. And interestingly, the visual displays that you see in the room are secondary to the advanced monitoring, artificial intelligence and machine learning that we've built to ensure detection, rapid response to potential issues or threats that might be happening. Our aim: to protect the firm, secure global financial markets and provide exceptional service to our clients. We've democratized information that had been previously locked in separate silos and created transparency to the entire firm. We created new ways of monitoring so that everyone has the same view into what was happening. We implemented intelligent alerts, which saves us time when an incident's unfolding, enabling us to react to the first alert on one of those screens well before it actually becomes an issue. And we've created virtual capabilities. So today, the employees that you see in the picture are doing their jobs safely and effectively from home. These tools provide end-to-end visibility and stretch across 45,000 deadlines and monitor major market events such as the U.S. Treasury auctions. Our investment in our infrastructure has paid off as the industry experienced really unprecedented challenges with market volume and volatility, we navigated those challenges without disruption. In fact, I'd say we did better than navigate those challenges. We generated insights well in advance of the market. We identified an outage with a critical market participant, and we alerted them before it became a bigger issue. And in another example, a major client transaction triggered a monitoring threshold that indicated the trade would fail due to insufficient client shares. We quickly brought the team together to engage the client and ensure that the transaction was actually able to settle before the deadline. These insights improved our decision-making and reduced time to identify and resolve problems. We process about 1/3 of the world's investable assets, and we see ourselves as critical to the world's financial infrastructure. As a result, ensuring our resiliency is a responsibility and an accountability that we take very seriously. So when I arrived at the firm 3 years ago, the first things I focused on was strengthening our organization, creating a technology operating model and building technical resilience required for an institution this important. Turning to Page 4. We've really evolved. Like many companies, we grew through a series of mergers and acquisitions, which, frankly, resulted in complex, redundant and siloed applications and infrastructure. Not only is redundancy inefficient, but really, it's a barrier to achieving resiliency and agility. So over the past 3 years, we focused on transforming from the siloed teams to a unified global technology organization. Why is a transformation like that important? Well, I believe that a unified technology team can deliver more. We operate on a consistent set of standards enforced across our businesses, ensuring we're building high-quality technology and implementing consistent operating disciplines to protect and enhance our resiliency. And we're more efficient because there's less duplication of effort, and we're able to deliver solutions faster and cheaper. And finally, breaking down the silos enables collaboration that allows us to deliver the whole firm to our clients. As a part of this transformation, we established a core set of horizontal technology functions, which you can see on the right, which sets standards and operating practices in key areas. For example, our architecture function established controls, which oversee the requirements to design, build or operate any of our major development initiatives. And as we work to integrate operations and technology more fully, we're extending our technology operating model to build new capabilities in enterprise-wide data, shared services and modular business capabilities. Just like LEGO blocks, these capabilities can be used and reused to implement a variety of business capabilities across the firm. Turning to Slide 5. To create the investment capacity required to execute our transformation, we were disciplined in managing the firm's operating expenses. So starting on the left, you can see that we committed significant incremental funding to invest in modernizing our infrastructure, advancing our cybersecurity capabilities and ensuring robust compliance with industry regulations. To drive the firm's financial performance, we also invested in business growth. We have a disciplined process to prioritize the best product and strategies across the franchise. And we're making investments to redesign and automate our key processes to improve our scale and efficiency. And we're investing to transform how we work to become a more agile firm. These investments are game changers, and they'll enable us to commercialize our business strategies faster and more efficiently than ever before. Moving to the right. You can see that we've predominantly self-funded these investments with targeted cost reduction efforts. Those include improving our organizational health by reducing the number of management layers, raising the bar on our performance, optimizing our location footprint and reducing the number of vendors we work with. And as you can see on the bar on the right, our 2020 total technology spend was $3.2 billion, which was a little over 50% supporting our core operating platforms with the remainder aligned to our application development efforts. We expect 2021 to be roughly the same with 2020. With this end-to-end approach, really looking to manage our expenses, we've been able to absorb significant volume growth, as the chart on the right demonstrates, without a material change in our operating expenses. Turning to Slide 6. We're committed to driving productivity improvements and creating operational efficiencies by investing in automation. As we look at the opportunities for investments, we see compelling multiyear benefits. And you can see that in 2020, we doubled down on that investment, investing at 4x the level we invested in 2019, and we'll be close to doubling that again in 2021. These same investments are key to achieving the scale necessary for us to support our growth plans. At last year's conference, we spoke about launching a program to automate reconciliations. In 2020, we've already automated over 6 million reconciliations, and we're just getting started. We have many other efficiency initiatives underway as well. This will not only help our operations but our clients' operations as well. At a macro level, we see evidence that we're improving our operating scale as a result of those investments. Recently, we kicked off an effort to systematically map our end-to-end business processes for our operational services. We're using the output to drive standardization, use it to target areas of automation as well as enhancing our control capabilities. We'll measure our progress by absolute efficiencies, increased productivity. Our goal: to add meaningful scale to our businesses so that we can grow our franchise without growing our expense base. Turning to Slide 7. We've been working hard these past few years, modernizing our systems and infrastructure to deliver consistent, reliable services that our clients expect. We refreshed our data centers with state-of-the-art technology. This modern infrastructure goes beyond traditional compute and storage. It's a hyper-converged infrastructure that allows us to operate as software-defined data centers; effectively, a private cloud, which extends the benefits of the cloud to our on-premise applications. And best of all, we've kept it agnostic to any one cloud provider. We virtualized over 90% of our applications and their workloads through this modernization. It provides the ability and increased agility to manage workloads on our internal cloud. We've redesigned our data center's layouts with business-based neighborhoods. This allows for segmentation between our businesses, the ability to isolate failures, and ultimately, faster problem identification and recovery. And we've added a new data center as well to our footprint. It provides faster recovery of data as well as improved operating agility and resiliency. Through this modernization effort, the teams delivered impressive outcomes and results. Our teams are delivering hardware and operating system in the low single digits, which has really reduced the risk in our operating environment. And we're seeing significant business benefits as well. For example, in our clearance business, we've delivered a 30% performance improvement in transaction processing speeds. As a part of our operating model, we also established a dedicated production services function, whose priority is to monitor our applications and infrastructure. They also ensure that our application development teams adhere to disciplined operating standards. Above all else, the most important investment we've made was in our talent. Over the last 3 years, we raised the bar on our organization and we attracted top talent from the best organizations in the world. They bring a wide diversity of technical skills and experience, and they know what great looks like. Our result, we've upgraded 50% of our technology organization over the last 3 years. And 90% of the technology leadership team is new within the last 3 years as well. Our focus has been to acquire the best engineering talent or what some call 10x developers. Paraphrasing the late Steve Jobs, a 2:1 ratio is big for most things in life. But the difference between the average software developer and the best is 50:1, maybe even 100:1. It's about building innovative DNA to solve the most complex challenges and deliver transformational capabilities. Making it real, there are just over 300 Java champions in the world, and 3 of them work at BNY Mellon. This extraordinary base of talent has enabled us to modernize the infrastructure of this firm in half the time it would have taken most other organizations. With our modern infrastructure and our talent in place, we have the foundation to drive the next phase of our transformation, simplifying and modernizing our applications and enabling rapid product innovation, which we see as a catalyst for our growth. Turning to Slide 8. As we complete our investments here, we're -- in modernizing our infrastructure, we're shifting more of our discretionary investment and our application development capacity from that modernization towards our strategic business initiatives. To deliver on our growth potential, the next horizon for us in the firm is to transform that application landscape into an agile ecosystem of business capabilities that could be used and reused to deliver competitive advantage. A few examples where we see our efforts coming to fruition. In asset servicing, we're focusing on being great at servicing, and we're also focusing on being directly relevant to the front office, where clients are investing more of their discretionary budgets. For us, this starts with our Data and Analytics Solutions group. We have a 20-year track record in data management, and we've taken all that we've learned, and we've brought the next generation of solutions to market. These are not simply our existing platforms running on cloud. They're cloud-native and they empower clients to manage structured and unstructured data sets and use modern machine learning to help clients manage data quality. With these tools, we believe we're giving a differentiated set of capabilities to our clients, supporting their data scientists and investment managers. But we aren't just delivering an innovative data management platform, we're marrying this platform with the unique data sets we have within BNY Mellon to create analytics toolkits and applications that we can bring to our clients, selling into their portfolio managers and heads of distribution. As an example, we've built an application using machine learning models to predict client buying patterns based upon the metadata available from multiple distribution channels serviced by BNY Mellon. Fintechs and other servicers just can't match this content. I'm especially proud this team won the prestigious Waters Award for Best New Technology in the category of artificial intelligence and machine learning. And we're taking the power of this data platform and using it as the foundation of OMNI. OMNI gives clients control over their front-to-back operating models with tools that they need to be able to run their business, relying on us to manage the data, integration and operational functions. And as our clients look to differentiate themselves through their front office, they demand access to best-of-breed capabilities, and that's why we've launched our partnership program. These partnerships focus on deep integration with several order management systems, such as Aladdin, Bloomberg, SimCorp and, ALTO*. So clients get access to business functionality like real-time cash availability within those OMSs. We also recognize that OMS platforms are just a piece of the front-office puzzle, which is why we're working on partnerships in other areas such as performance and risk management. A few years ago, we recognized that we needed to support increased product complexity and scale with the latest technology, and we've delivered a modern middle office that's modular, scalable and efficient. We've also launched what we're calling the future of custody. Our program will modernize our custody systems, and we hope influence market practices. For products like derivatives that are increasingly important to our clients, we'll be extending our capabilities beyond safekeeping and position reporting. And finally, as we recently announced, subject to regulatory approval, we'll launch custody for digital assets, an integrated experience to our -- for our clients across our traditional and our emerging asset classes. In Treasury Services, we continue to drive paper to digital by working to solve the legacy friction that institutions deal with across their receivable and payable operations, creating digital solutions to move them into real-time channels via APIs. This provides our clients significant opportunity to improve their cash flow and their liquidity. And we're also advancing market visibility and transparency by creating operational intelligence in a platform we call Merlin. Merlin implements a unique approach to tracking payment transactions, leveraging proprietary blockchain capabilities that we built to create real-time operational intelligence for our clients. That team was recognized by Celent's Model Bank Award for excellence in payments for the unique and now patented approach. In Pershing, we're continuing to expand our addressable market in the evolving RIA space, which represents a $7 trillion market. We're currently the third largest custodian of advisory assets, serving over 1,000 broker-dealers and RIAs. And we're differentiating our offering by providing solutions that health advisers uniquely differentiate their digital offering to their clients. Here, we've really worked on building a product that we're calling Site Builder, which is our new self-service digital creation solution that enables RIA clients to build their own branded websites. To draw an analogy, you could think of this as Shopify for the wealth and advisory industry. And at the core of our growth plans is our client focus. Our purpose, to deliver an extraordinary client experience. We know we can achieve that, and we are -- we have -- given that we've built this resilient foundation and we have this increasing scalability and frankly, our pioneering product innovation. Turning to Slide 9. This exceptional team we've built shares an ambition to make our company great. And we continue to attract top talent who bring their diverse perspectives and innovative game to the table. We set out to fix what needed to be fixed so we could operate the infrastructure of the financial world resiliently and with confidence, and we've done that. Now, we've set our ambition on building competitive advantage for the firm and for our clients through innovating new products, services and operating models for the future. We have the required foundation, we have the DNA, and we have the client relationships and partnerships required to shape the future of our markets. And frankly, we're humble. We know our success is linked to our client's success. We'll continue to listen closely, collaborate intentionally to achieve our shared objectives. Like everything, though, this is a journey. And we get up every day committed to making this company great. We set audacious goals, and we continue to deliver competitive advantage to our shareholders and our clients. With that, Susan, I'll turn it back over to you so that Emily and I can address any questions.

Wonderful. Bridget, thank you so much. This was incredibly comprehensive. I want to go back to Slides 5 and 6, which were very helpful to us in the investment community to take some of this detail and really synthesize it down to what it means for the numbers. And when I think about 2018 and really through to 2021, where you've self-funded the lion's share of your investment in technology and operations through the savings that you've generated, when we think about -- and you mentioned stability in 2021. But over the next -- let's call it, the next 3 to 5 years, how do you think the pace and the nature of tech and ops priorities change? You moved from efficiency to growth. That's pretty clear. What more changes in terms of the magnitude of the investment that you need in the business?

Yes. I think about that, I think, in really 2 buckets. As we mentioned, we increased the pace over the last 3 years, growing at like 10% CAGR, $2.4 billion to $3.2 billion. And much, as you said, was really focusing on modernizing that. We see that investment leveling off in terms of where we are. What I would highlight, though, is the mix is changing. With the resiliency completing, we had application development teams that were working on that, and they have been freed up. And so we have more discretionary dollars as well as application development capacity that's available now to work on our business growth agenda. So I think on the tech front, it's really pivoting to what we talked about in terms of setting our sights on modernizing our applications and focusing on areas where we see growth. When I think about operations, there's really 3 key pillars: delivering a best-in-class client experience; making sure we're really driving, like I talked about, our productivity and our efficiency through automation, which is really one of the reasons to bring tech and ops together; and then reducing risk in our operating environment. Ultimately, as we said, being able to add growth to the company without adding expenses and to have that scale that we can continue to grow.

Great. And I'm curious, as investors try to benchmark your progress, it's hard to dwell on something like the efficiency ratio in a low interest rate environment because it really doesn't indicate the progress that you're making in your area of the business. So what would you suggest that we look at to measure the rate of decline in unit operating costs and the best indicators of the progress you're making?

Yes, that's a great question. And I have to say, it is hard. I think that there are some measures which can be independently verified. I think overall headcount, we've managed our headcount well. And in operations, it's actually down year-over-year while we've had business growth and general organic volume increases. I think there's probably other measures in terms of where we've done our location strategy and balancing across lower cost and market center locations. Last year, we migrated close to 1,000 of our operations role to lower cost centers. Operating expense and scale, again, driving efficiency, in our overall expense base, increasing operational scale to support growth of the businesses. And I think as one metric maybe is the operating expense as a percentage of fee revenue as we continue to develop. Now internally, there's obviously lots of measures that we're looking at. So our engineers, we're looking at software engineering productivity where we can measure quality and quantity within our other side of our infrastructure engineering. We look at and create gearing ratios for the number of assays to machines they manage or database administrators to the databases. So we've got a discipline that we built within the environment. And I think as we do that mapping that I talked about earlier, I think we'll be developing more of those. But I think going back to the question, it's really -- I think operations or expense as a percent of fee revenue, ultimately, will be the barometer.

Okay. And just in terms of the pace of spend and how you determine and prioritize the investments that you're making within that $3.2 billion budget, can you talk a little bit about the prioritization process and return on investment, payback periods, et cetera?

Sure.

Sure. Susan, I...

Yes, I was going to say, Emily can take that.