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

Good morning, everyone. Thank you for joining us for our next presentation and fireside chat with the Bank of New York Mellon Corporation. I'm Gerard Cassidy here at RBC Capital Markets. We're very -- the Bank of New York Mellon participate in this year's conference. As many of you may know, it's the seventh largest bank in the United States with about $470 billion in assets, and it's true that our strength is obviously its custody business, has over $41 trillion in assets under custody and about $2.2 trillion of assets under management. The market cap of the organization is about $40 billion. Stock trades at about 1x book value. And it has a dividend yield of just under 3%, at 2.8%; has a very strong Common Equity Tier 1 ratio at 13.1%; and the company has announced that it is -- has a buyback going on in the first quarter of about $625 million. We're very pleased to have with us today Emily Portney. She's the Chief Financial Officer, with Mellon -- Bank of New York Mellon, and she became CFO back in July 21, 2020. And she was with Mellon since 2018, and prior to that, she had been at Barclays and JPMorgan. Also joining us for today's fireside chat is Robin Vince. He's Vice Chair and CEO of the Global Markets Infrastructure for Bank of New York Mellon, and he joined in 2020. And prior to that, he was a long-time member or employee over at Goldman Sachs, joining them in the mid-1990s. Emily and Robin, thank you for joining us today.

Thanks for having us.

It's good to be here. Thank you for having us, Gerard.

You're very welcome. Maybe we'll start off, Robin, with you. And as Vice Chair of Bank of New York and CEO of the Global Markets Infrastructure since, as I mentioned, last fall, you're a head of 4 businesses, apologize, Clearance and Collateral Management, Treasury Services, Markets and Pershing. So maybe first to start off, why did you come to Bank of New York Mellon? You're there, obviously, less than a year, maybe you can give us some of your insights in the decision to join forces with Bank of New York.

So actually, it's a good question. I'll admit that a few weeks ago, a colleague of mine actually asked me how Alexander Hamilton might feel having a British guy as Vice Chair of this institution that he founded 236 years ago just after the revolutionary war. So I have to say that did make me smile a little bit.

That's very good.

As you know, Gerard, I'm very fortunate. I had a great collection of leadership roles at Goldman over the course of 25 years. I was Chief Risk Officer, Treasurer. I ran the money markets business, the international bank, I helped to run the EMEA region. And so I retired with a diverse set of experiences that frankly have shaped how I lead, how I think about the industry, how I think about how capital markets work and evolve. And I remember sitting with Todd, thinking how neat it would be to be Vice Chair of an institution like this to take all of those experiences and lead a super interesting set of businesses with tremendous potential and apply my background at a bank, which has an incredible client roster, great people, a terrific collection of assets and one that enjoys a privileged position in the capital markets ecosystem. And so for me, simply, I was attracted to the history, the people, the culture and the opportunity to shape something that I think really could be pretty compelling.

Very good. Very insightful. And thank you for giving some of the color on your background. What are your impressions so far? Again, I know it's about, what, 6 months, I guess, and we're kind of in a unique operating environment with the pandemic, but what are your impressions so far?

So you're right, I've been here a little less than 6 months. And right from the beginning, I embarked on a listening tour because I thought for me, it was going to be very important to just hear from our people, from clients and from stakeholders just broadly of the bank. And you're right, as you said, joining in COVID is certainly a little weird, but look, it has certain advantages in the same way that the technology makes this conference very inclusive around the world. It was actually easy for me to be able to span the globe using technology as well. So it actually made my listening pretty efficient. I didn't have to get on a plane. I'm looking forward to getting on planes and go visiting people, but it -- I haven't had to do it in order to be able to just connect initially. But look, one of the key themes that shone through for me is client trust in BNY Mellon. I was a longtime client of the firm in my prior roles, and I remember innovating with BNY Mellon together as a partner. I felt they were there for me, and they were certainly critical to running some of the businesses that I ran over the course of my career. But that client trust is something that our clients really appreciate about BNY Mellon. And I see that now firsthand, and I've heard it from clients, as I've been meeting them during my listening tour. It's pretty humbling actually because clients trust us to do things that, frankly, they don't always trust others to do and that client trust is something that's really deeply recognized and appreciated inside the company. I mean our people have a lot of company pride on this particular point. And Gerard, as you know, trust isn't always a common theme in our industry. So that actually does create something of a privileged role for us that we take very seriously. And that's very commercial. It really does sow the seeds for commercial opportunities for us.

So those are really good insights, and you're so right about trust. It's an incredible cement that you have with your clients, but boy, if you have to lose it, it's very, very tough to have it -- get it back. So no, that's very, very helpful. Maybe moving over to now, you did your listening tour, and not to say, it's over, and you probably still are working on that, but what opportunities do you see on this platform for the company?

So you're right. I think of myself as a lifelong learner. So the process of listening is super important to leaders. And certainly, that's the way that I conduct myself. But look, to answer your question, there are 3 things that really attracted me to BNY Mellon on the commercial side. I touched on a couple of other broader points. But one is the scale of the incumbency that we enjoy as a company. And the second is the collection of businesses and the relevance of those businesses to capital markets today, which I think is an important point. And then the third is our clients. And so let me just touch on incumbency first and a couple of stats on that. Look, you mentioned the $41 trillion worth of assets under custody that we have, which is just an incredible starting point for so many things. To throw a couple of other things on that, with a sole clearer of U.S. treasury auctions, I mean, the U.S. government trusts us to run that $9 trillion U.S. government clearing market every single day efficiently. And we touch across the breadth of our businesses and platforms 20% of the world's investable assets. I mean just think about that for a second. We touch 20% of the world's investable assets across the company. And that's a pretty remarkable statistic. Now why does all of that incumbency matter? Well, it gives us a great view into what clients are thinking and doing. And that is a great vantage point to be relevant to them as we help them on their various investing journeys. So the second point that I mentioned is the collection of our businesses and the relevance to today's capital markets of those businesses. And our products and services are really pretty synergistic. And it's one of the reasons why Todd grouped together some of these activities under the heading of Global Markets Infrastructure, as you touched on at the beginning. Security Services and Market Infrastructure are a couple of businesses, which we see particular synergies in on our platform. And if you take that and recognize that we're plugged in with global connectivity into the core of what's going on in capital markets, there's a really powerful network effect that comes from all of that. And then the third point is our clients. And we enjoy one of the best, deepest client rosters in the industry, and we are deep with them at the very heart of what they do in their financial ecosystems. And then you add that to that theme of trust that we talked about, we take those 3 things together, the scale of the incumbency, the collection of our businesses and our clients, then put that against the backdrop of what's happening in capital markets. And we think this comes together in a pretty compelling way. We can help clients navigate what are increasingly complex market structures. We can help them connect the different pieces together. We're open architecture, so we allow the outside world to come in. We're not just providing our own unique capabilities. And that really helps us to elevate ourselves not just as a provider of components but also real orchestrator of solutions to the clients.

No, very helpful and insightful as well. When you look at these different opportunities, where do you see the best growth? You touched on the sole clearer of treasuries and the deficits this country is running or staggering, and not to say that, that's a growth market for you, even though I know it'll be more business. But where are the growth opportunities when you look at the landscape within Bank of New York?

Sure, Gerard. I mean, look, that probably is a growth business, but maybe not one that we would wish for, but of course, we'll help the government and the country to manage that as it grows. Let me give you 2 other examples. The first one is we really want to be a critical platform across the wealth industry. It's one of the fastest-growing parts of financial services, as you know, and we're really leaning into that to further build out real end-to-end advisory solutions for our broker-dealers, RIAs as well as regional banks. Now we've got a great, huge building block for that ambition that we start with, which is Pershing. And remember that Pershing is an unconflicted platform. It's not tied to an adviser business, and that's quite an important distinction. And we're already a top 3 provider in the RIA space. We're already #1 for broker-dealers. We already placed over $1 trillion worth of assets on behalf of our asset management clients, and again, it's got the open architecture design. So we can incorporate other capabilities, components and fintechs into the overall ecosystem for our clients. So that's an exciting space, and certainly, more opportunity for us there over time. The second example I'd give you is one where we leverage the synergies of the business, back to that theme I touched on before. And there are other examples of this, but I'll just take one collateral as an example. And if you look at the Collateral Management market, it's probably a $20 trillion market in notional terms, along those lines, probably more. But we have a unique position to be able to create efficiencies to clients that others really cannot do. Asset owners, liability managers, treasurers, they all want efficient use of collateral, but it's pretty complex, actually. And it's easier said than done. There are lots of different product types, repo, securities lending, margin, all the asset types you can think of. Locations all over the world, and then the decision of how to try to make the right trade-offs between collateral and cash, what goes where, to whom, how does all of that happen in the real world. You really want to have the most efficient collateral against each obligation from the client's global asset pool, placed to the right counterparty in the right place at the right time. I mean it's a pretty complex problem. But who's better to solve those problems than us because we can leverage our large Treasury Services business, our Security Services, Custody, our significant liquidity portal in the middle of all of that. And then critically, we've got the largest global Collateral Management Service, a $4 trillion platform of assets. And so no one else has all of those components in that way we do. There's a lot of synergy there. And joining those dots between those businesses together for our clients is a really powerful capability. I mean we can create solutions for them, which really matter in a place which is really evolving. And then maybe if you'll let me, I'll just make one last point, which is on innovation, which is critical to growth as a theme. Everybody talks about innovation. It is key, particularly in our businesses, as we look over the horizon at evolving market structure. But just to tie it back to your question from earlier on about initial impressions, I've been super impressed by our engineering teams and the innovation that I'm seeing in the businesses. We have some very cool solutions that we're applying to some of these growth opportunities, and I'm pretty excited about how we can bring innovation to bear on these different businesses. So look, there's a lot to do. But as you can probably tell, I'm excited about the opportunities there and the journey. Emily, I don't know, maybe you might have something to add on growth or your take on what differentiates us as well.

So actually, I think you've done an extraordinary job of talking about not only your sets of businesses but how the whole thing -- our whole franchise fits together, and it's very differentiated. Just the only thing I'd probably add is if you took a step back and look, say, at 1,000 feet, I just wouldn't forget that we are differentiated from many of our traditional banking peers and that our revenues are diverse, resilient and comprised predominantly of recurring stable fee revenues. That's 80% of our revenue base. We have a conservative risk profile and credit profile and really de minimis exposure to retail. We require very limited capital to grow. And so we are very capital accretive. We are returning -- we're committed to returning 100%, or actually, in this environment, in excess of 100% of our earnings to our shareholders. And as Robin has alluded to, we've really been consistently, deliberately investing in all of our businesses, and we do expect that to translate into accelerated organic growth. So we feel very good about our story.

No. That's very helpful. And Robin, in the way you were describing the complexities, and you described it very well. It resonated with me that with all of those complexities, you also have to do it with minimal to no errors. And that's another critical part that customers come to trust Bank of New York is to be able to execute and not have any real errors in execution.

Yes, Gerard, that's a very important point. And we've invested very significantly in the underlying components of that resiliency platform because it's about being -- about reducing errors, of course, and being efficient and effective for clients, but it's also about being there and working. And that resiliency platform is something that we've invested a lot in over the past 3 years, and we're very proud of it, and it's very important as an underpinning to our business.

Very good. Moving on to another subject. Bank of New York announced recently that it will provide custodial services for digital assets. You were talking earlier about collateral, Robin, but now digital assets, and maybe share with us how this asset servicing business will service the digital assets? And what's your view on the digital asset opportunities?

So I can actually -- Gerard, I can take that, and I'm sure, Robin, you can add. So first thing I would just clarify is that digital assets are much larger than bitcoin. I think everyone is very focused on bitcoin, but it also includes things like ether; Libra, which is Facebook's digital asset currency, and actually, I think just renamed Diem; stablecoins, which are actual digital assets backed by hard assets or basket of assets or currencies. So it's all of those things. And so I just want to clarify that. Also, it's becoming much more mainstream. So you -- we've all read, BlackRock is opening up some of their funds to offer exposure to digital assets of all kinds, including bitcoin. There have been ETFs that have been launched in Canada, many that are looking to be launched in the United States, again, to get more exposure to digital assets. And so really, the announcement is a culmination of our clients asking, actually, frankly, demanding that we offer the same types of services for digital assets that we offer for more traditional assets. And so it's really becoming kind of digital assets, but think of it as becoming an asset class in its own right. And in terms of the services we're talking about, it's holding and safekeeping. So safekeeping, for example, the keys. It's accounting and valuation. It's reporting. It's also actually using digital assets for payments and settlements. And our announcement is very much around, we intend to offer integrated to all of these services on an integrated -- in an integrated manner, with -- just as we do and alongside more traditional assets and currencies. I don't know, Robin, if you want to add anything?

Yes. The thing that I would add, Gerard, is that if you think about it, the world's going through this transition from a more analog world of treating assets to a more digital world, and it's actually not the first time that we've seen an evolution like that. It's going to be a very important evolution. If you go back to the '60s and '70s, there was dematerialization of paper was a very significant evolution. This will probably be more significant. But one of the things that we want to do is really just help our clients play -- navigate that evolution. And I think, as Emily touched on it, the response that we saw from our clients is a real validator of that and the fact that they see us as being very well placed to help them in that journey, which is obviously what we want.

Sure. And maybe Emily or maybe for Robin as well, but can you share with us the parallels or the similarities of providing these services for digital assets as it compares to your traditional business? Obviously, you're taking a lot of the success in the technology that you use for the traditional Custody Services. How much additional investment or how difficult is it to move over to the digital assets and moving into this business?

So it's -- I mean, there is definitely some investment involved for sure in new technology and some innovation, some of which we're still working through, which is why we're going to go -- we're only piloting now, we're going live in the second half of this year. But ultimately, look, I think there's a large opportunity perhaps not in the next 6 months or 12 months, but ultimately, over time, and also it's important for retention. This is something we -- if it's becoming more mainstream, then we also want to support that in terms -- because our clients are asking for integrated services.

No, very true. And we just don't know the opportunities. As you pointed out, it's not the next 6 or 12 months, but for the next 5 to 10 years that it could turn out to be something very significant. Very good. Coming back to -- when you look at the Asset Servicing, Clearance and Collateral Management and Treasury Services, you're in the process of launching a solution that allows clients to buy money market funds, offer your liquidity direct platform and plugs them as collateral. Can you provide any insights or updates on this project, how it's moving?

Sure, Gerard. Look, if you step back from this particular project and just use it as an example, the -- increasing the mobility of assets, making them more useful and more usable in the various different ways that a client wants to be able to use collateral, that's a very important client service. And what this particular development is enabling is allowing clients to be able to take money market funds and use them across a wide range of transaction types in a way, frankly, that they haven't really been able to do it before. And so again, back to the point of joining the dots in our organization and the competitive advantage that comes from that, we're able to take the liquidity direct portal, which is where a client would come in and purchase the money market fund, use our capabilities around custody, and then take the assets and be able to leverage it in the Collateral Management Service. So for instance, with the uncleared margin rules, which were a significant challenge for many clients coming to the next phase in about 6 months from now, prior to that, they weren't really able to use the money market fund asset as flexibly as they would have liked to. Now they can come in, they can buy that asset liquidity direct, they can custody it with us, and we can move it in our Collateral Management Service. So that's a very significant development for us leveraging the ecosystem, putting the pieces together and being able to deliver these types of solutions.

Very good. Very good. Another interesting area is that Bank of New York continues to invest in automation and is in the process of advancing real-time payments capabilities within the Treasury Services business. How much do you expect these investments to contribute to the growth over time that you were talking about?

So the evolution of payments to more of a real-time basis is something that's going on across the world. In fact, the U.S., you could argue, is a little bit of a laggard in this respect compared to what's been going on in Asia and in Europe. But we were the first bank in the U.S. to do a real-time payment here in the U.S. on the new clearing house real-time payment rails. And we're very excited about the capabilities that come from that. And so sort of I'll come to the specific point on growth contribution, but let me give you an example. And we're very excited about the large-scale commercial pilot that we're running with one of the world's largest billers. And what we're able to do, leveraging the rich messaging capability that comes with this enhanced real-time payment service is integrating the delivery of an invoice and making it click-to-pay on a client's bank portal. So essentially, a large biller can send a rich invoice to a client where they are on their retail bank portal and make that invoice visible and click-to-pay. So the clients' no longer having to mail checks, is no longer having to deal with credit cards, auto pays, super easy and STP. And we hope that, that capability is actually going to be able to reach tens of millions of consumers via their retail banks in 2021. And that's just one example of innovation in the space. But Treasury Services as a business is a very fragmented market. Even the largest global players are still, call it, low to mid-single digits in size. And so we feel that we've got a lot of growth potential, and it's going to be through innovations like that one that's going to allow us to do it. And so our -- at the moment, our Treasury Services business, and we would expect this to be able to continue, is growing higher than the average growth rate of the company.

Very good. I'd like to pivot to a balance sheet type question for Emily. I know the SLR supplementary leverage ratio is not a big concern for Bank of New York, of course. But for some -- and also for the other trust banks, but for some of the other large banks, it's becoming an issue. And if the exclusions that were given to the very large banks last March expire at the end of this month, what are the implications, if there are any, for you, at Bank of New York? And do you have any concerns of your balance sheet actually getting too big?

It's a great question, and obviously, a very hot topic today and, I think, over the last few weeks. So as you rightly point out, SLR is not our binding constraint. I will say though, we, as an institution, do support an extension of the exemptions to the impacted banks. I think, ultimately, just given the current monetary and fiscal policy, I think it's everyone's expectation that we'll see a -- continue to see a significant increase in liquidity and reserves in the system. And frankly, an exemption just means that -- or extending the exemption just will ensure that banks will continue to support deposit-taking activity, repo activity and other important market functions that are dependent upon the size of one's balance sheet. I think we fear that if it's not extended, then some of our peers, maybe less us, but some of our peers will end up or could end up turning deposits away. In which case, they might come in our direction. And although that -- the SLR is not our binding constraint, Tier 1 leverage is our -- is a binding constraint. So we do also proactively manage our capital ratios and Tier 1, which is impacted by the size of the balance sheet. And we also want to look at the balance of optimizing returns to shareholders. So that's also a part of the picture. So we will continue to monitor deposits closely. We want to be there to support our clients. We want to use our balance sheet to support our clients. But we will also, if necessary, proactively work with our clients to support moving cash to some off-balance sheet options, whether it be through our liquidity direct portal or our Dreyfus funds?

Very good. And obviously, as a follow-up for this, you have excess reserves. And can you share with us what you're earning on those excess reserves?

Sure. Right now, most of the excess reserves are -- at least we're talking about U.S. dollar, are just sitting at the Fed and earning IOER of 10 basis points.

Yes. Okay. Good. Maybe we can walk through some of the sensitivities to the money market fee waivers. The numbers -- many bank stock investors want to own banks that have the potential of rising interest rates, and potentially longer term, the rise, and short-term interest rates because of the asset sensitivities, and that certainly will affect you. But you have an added, I think, catalyst of benefit when rates go up in the short term, which is your money market fee waivers. And they're running approximately based on your disclosures at about $175 million in the first quarter of '21 as an estimate. Can you share with us where do Fed funds or short-term rates need to go to where you can recapture all of those waivers that you've been having to grant to your customers?

Sure. So a few parts of that question, so I'll just take a second. But just -- so waivers, as you rightly point out, are really a function of short-term rates, and most notably, 3 and 6 months T-bills and repo rates. I'd also just mention that we have seen those rates come down since January. Having said that, there's always a lag. There is a lag in terms of money market fund reinvestment. So the fact that rates are declining is not going to impact our estimate for the first quarter. Having said that, to the extent rates remain here, short-end rates, or go lower, that could have an impact on the size of waivers' total amount between Q2 and beyond. But the other thing I really want to make sure folks understand is that money market balances continue to also increase. So they're at elevated levels, they're higher than they were in the fourth quarter. And as balances increase, waivers are increasing, but you're also making more in-fees, albeit at a lower rate. So that -- it could be revenue neutral. And that's a dynamic not everybody understands. The very last thing I'd say, which is really the heart of your question, is that based on our most recent estimates, we'd recover over 50% actually of the waiver impact when Fed funds hits 25 bps and 100% when Fed fund hits 100 basis points to give you some idea. That's based on our most recent estimates.

Right, right. And right now, I think the forward curves are calling for the Fed to move on short-term rates in 2023. But should any Fed funds obviously come sooner, Fed fund rates could come up sooner in 2022, which would, again, benefit you. It's an almost turbocharge for your organization versus some of your peers. But I just checked the clock, and we, unfortunately, have run out of time. I can't thank you enough for -- both of you for joining us, Robin and Emily, it's been great having you, and I really appreciate you joining us. Thank you very much.

Thank you. Thanks for having us.

Thanks for having us.

You're very welcome. Have a good day.