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

All right, great. Well, welcome, everybody. Good morning. We're going to get started with our next session. Next up, I'd like to welcome management team from BNY Mellon. With us today are Emily Portney, the company's CFO; and Robin Vince, Vice Chair and CEO of Global Market Infrastructure. Earlier this morning, the company revamped its reporting structure to some extent, providing the market with additional granularity around a number of its segments and various KPIs. So thank you for doing that. I'm sure a lot of people would appreciate digging a little bit deeper into the business. Emily and Robin are going to kick us off with a couple of slides and then we'll go into a Q&A. So over to you.

Thanks, Alex. And actually, it is great to be here live and in person.

Yes, I was going to say it's the first time we've seen each other not on Zoom, so this is awesome.

Exactly. So we have slides, so I have to do the obligatory cautionary remarks beforehand. So I'd like to note that our remarks today will contain forward-looking statements and non-GAAP measures. Information about these can be found in the appendix of this presentation, which is available on the Investor Relations site at www.bnymellon.com. And our forward-looking statements speak only as of today. So let's get started.

Let's do it.

As Alex mentioned, we issued an 8-K this morning. And we've announced that we are going to begin to report Investment Services, which is our largest segment, as 2 new distinct business segments: Market and Wealth Services and Securities Services. I'll go into each of those in just a moment. But before I do, I thought I would just take a step back and talk about some of the themes that really transcend the entire organization. And that's really the power of the franchise, our focus on execution and our financial performance and trajectory. So turning to Page 2. We play a critical role as a central orchestrator in the financial ecosystem. Across all of our businesses, we touch in excess of 20% of the investable assets worldwide. Some stats, which speak to the power of the franchise as well as the scale, are on the circles at the top of the slide. So we are the largest custodian with $45 trillion of assets under custody or administration. We are the sole clearer of U.S. government securities and clear about $10 trillion per day. We process in excess of $2 trillion U.S. dollar payments. And we have $2.3 trillion of AUM across Investment Management and Wealth Management. We also have an exceptional client list that we have built over decades. So for example, we service 93 of the top 100 investment managers worldwide. We service 84 of the top 100 U.S. pension and employee benefit plans, 97 of the top 100 banks and more than 70% of the Fortune 500. We operate in 35 countries across 100 markets and have leadership positions across many of our businesses, and Robin will actually go into detail on some of those. So the second theme is execution. We have been intensely focused on our investments and on accelerating our organic growth. This year, we will report in 2021, we will achieve organic growth in excess of 2%. That's compared to 1% in 2020 and actually no organic growth in 2019. So clearly, the investments and the focus on execution are paying off. And we're not just investing in growth, we're also investing in innovation as well as efficiency. And speaking more on the execution, we've been mining the scenes across the company much better and providing holistic solutions to clients that deepen our relationships. And that's actually evidenced by the BlackRock announcement this morning that we're going to begin to service a part of their iShares platform. Now let's just talk about long-term shareholder value. So a combination of the capabilities I just talked about, the client list, again, the exceptional client franchise, our hyper focus on execution and the fact that we actually are and have momentum in organic growth give us the confidence that we will accelerate EPS growth from here. And just as a reminder, we're poised for meaningful uplift when rates rise. And we also are committed to returning 100% of our earnings to our shareholders over time. So now turning to the new segments. So as I said, we're going to take Investment Services, which was our largest segment, and start reporting in 2 distinct segments: Market and Wealth Services, which includes Pershing, Treasury Services and Clearance and Collateral Management; and Securities Services, which includes Asset Servicing and Issuer Services. Our third segment, Investment and Wealth Management, remains unchanged. We issued the 8-K this morning, has lots of granular information and restated financials from 2019. So hopefully, everyone has plenty of information to realign any models [indiscernible] of earnings. So why did we do this? It's actually really simple. First, it increases the visibility of some of the most differentiated assets' businesses in our enterprise. Two, it better aligns with how we actually manage the business. But just to be clear, we are not reorganizing, we're not restructuring, we're just resegmenting to align with how we actually manage the franchise. And three, it provides more detail for all of our stakeholders to better track our performance against our strategy. And of course, with this comes more KPIs. So with that in mind, let's just turn to the financials of each segment. So with almost $5 billion in revenues and more than $2 billion in pretax income, Market and Wealth Services is our most profitable segment and has been over the last couple of years. It generates in excess of 40% margins. Robin is going to talk about the businesses within Market and Wealth Services in more detail. But it's also worth noting that not only does Market and Wealth Services generate outsized profitability but also it has seen and experienced outsized fee growth over the last several years. Securities Services, which is in the middle, continues to be our largest segment by revenue, generating in excess of $7 billion in revenue over the last 12 months. And by the way, that is despite significant headwinds in the form of lower rates that obviously impact NIR and waivers, fee waivers. You can see that that headwind, if you will, probably most clearly in the operating margins for this segment in the middle of the page. So in 2019, operating margin for Securities Services was 26%. Year-to-date operating margin for this segment is about 22%. Embedded in that decline over 2 years is about 900 basis points of the impact of lower rates [indiscernible] through lower NIR and also fee waivers. We did offset some of that with growth, further efficiencies. And of course, markets did help. At the bottom of the Securities Services segment, you can see the fee growth. And like Market and Wealth Services, Securities Services has also experienced healthy fee growth in the last couple of years. Markets, of course, have helped. But we're also seeing a nice uptick in new business from both existing and new clients. We're seeing growth in key areas like alts, ETFs. And we're also moving up the value chain with our clients into the mid-office and the front office. And that is generating new sources of revenue and income. In terms of Investment and Wealth Management, our third segment, it generates 1/4 of revenue and 1/4 of PTI. Its margins are in excess of 30%. And it, too, has seen healthy growth, fee growth, in the last 12 months. Markets predominantly have driven that. Having said that, we had our sixth consecutive quarter of client inflows into long-term products. We continue to see growth in our cash franchise, our cash products. And we're also seeing a nice uptick in client assets in Wealth Management. So with that, I'm going to hand it over to Robin for more on Market and Wealth Services.

That's great. Thank you very much, Emily. Alex, thanks for having us, and great to be back here. In full disclosure, I'm an alumnus, so it's kind of fun to be back here at the GS Financial Services Conference on this side of the dais. So as Emily described, there are 3 businesses under the heading of Market and Wealth Services: Pershing, Treasury Services and Clearance and Collateral Management. And all 3 of these businesses are important differentiators for us as a company. And they're a little bit different than the traditional trust bank businesses. And they have different competitors as well, hence the desire to show them with our resegmentation. We enjoy leading market positions in each of the 3. And we enjoy growth opportunities across them all. And each one of the 3 is significant in the financial ecosystem that it operates in. So let me just touch on each of them in turn. I'm going to start with Pershing, which really provides mission-critical infrastructure and technology that really enables wealth management and institutional capital markets firms. Clients avoid the burden of complex infrastructure. And we take those problems from them. Pershing is organized into 2 divisions: Wealth Solutions and Institutional Solutions. And that separation, which we executed earlier in the year, has really sharpened our focus on each of the unique needs that each of those 2 client segments have. It's also brought more precision to our investment process. So first, in Wealth Solutions, that serves wealth-orientated broker-dealers, RIAs and trust companies. And we serve about 1/3 of all RIAs with assets under management of $1 billion or more here in the U.S. We also have 7 million dollar investor accounts and $2.6 trillion of assets under custody and administration. We're not only the #1 clearing firm in the U.S., we're also a top 3 RIA custodian. Now the industry, as you all know, in the wealth space is growing and evolving. There's an increasing expectation among our clients and their clients for sophisticated advice, best-of-breed technologies and a real great digital experience. Now our platform, and that's unlike some of our competitors, does not compete with our clients' advisers. And we think that that relatively unconflicted platform is a really important differentiator for us over time, as is the fact that we are open architecture, we have global reach, we have bank and brokerage custody capabilities. All of those things position us really very well with our larger and more complex clients in particular. We also enjoy the connectivity across the BNY Mellon set of capabilities and businesses that Emily was describing before, think our lending products, think our investment capabilities, think our models. And all of that -- as part of that, we have $1.1 trillion of the AUC/A that we actually distribute from our other asset management clients in the franchise in the form of mutual funds and other packaged products. A couple of months ago, we made an exciting announcement with the launch of Pershing X, which is intended to be an adviser platform that's really going to solve for some of the pain points and issues that advisers experience, helping them with their data, helping them with the integration of that data and really creating for them a consumer-grade digital experience, which is something that they very much call out for from their clients. Now this is going to be a multiyear journey. It's one of the larger investments that we're making as a company in our overall growth agenda. I'll touch briefly on the Institutional Solutions piece. Pershing Institutional Solutions provides the infrastructure, technology and operations that supports capital markets firms, hedge funds, broker-dealers, nonbank financial and bank financial institutions all on a single platform, helps them to variabilize their costs and to be able to reduce expenses and to get more efficient on capital. They get more efficient, they leverage our scale. Next business, Treasury Services, where we're top 5 in U.S. dollar payments. That's about $2.3 trillion a day that's passing through our pipes. We have over 2,500 clients. And this franchise enjoys a particularly high synergy with the rest of the BNY Mellon franchise. It's both an entry into BNY Mellon and it's also a business that we regularly introduce to clients that are existing across the franchise. We're a leader in real-time payments. We make FX payments in over 100 different currencies. We have a scalable platform, healthy margins. But even despite that, still less than 1% market share because it's a very fragmented, and as you know, both fragmented and fast-growing market, where even the very largest participants only have relatively low single-digit market shares. We have a terrific footprint, and we're not as conflicted by some of our other businesses and channels. And again, back to this less conflicted point for our franchise, we don't have any retail bank branches. We don't have commercial bank branches. And we don't have credit cards. And that has, we've discovered, allowed us a little extra freedom to innovate. We don't have that first-mover hesitancy around disruption of existing businesses. And you can really see that firsthand with our RTP, real-time payments, real-time request for payments e-bill announcement that we made with Verizon a couple of months ago. We're also embracing digital. And we're helping clients with that journey from the kind of boring but necessary lockbox check processing, which we can also do through to the full digital liquidity and payment solutions. The last of the 3 businesses, Clearance and Collateral Management, we're a primary provider of U.S. treasury clearing and settlement. We're the #1 provider of collateral services globally on a $5 trillion platform. We serve buy-side and sell-side clients. We're the only truly global collateral manager. And this is a franchise that we've been building for the past 3 decades. And it really leverages a whole bunch of characteristics, including our unique U.S. treasury role. This is a space that's getting more complex for clients, think they have more collateral in more places with more needs to move it around. And so this is where the seamless mobility of our platform really comes into force. It's a long-time strength for us, we help clients take whatever they have, wherever they need to move it. And our platform essentially does it without them having to get involved in the mechanics. The next slide, Slide 6, shows some of the underlying growth in our franchise, Pershing, the mid- to high single-digit net new asset flows. We're growing clearing accounts at a 6% CAGR since 2019. In treasury, our dollar payment volumes are now above pre-COVID levels. And of course, we've had a lot of deposit growth, not surprising given the fact that the world is sort of somewhat awash in central bank liquidity. But we've had a very healthy growth in stable operational deposits, which are obviously important. And then lastly, in Clearance and Collateral Management, we process nearly $10 trillion a day of U.S. treasuries. That's a platform, if ever there was a definition of one. And our tri-party balances have also grown at a 9% CAGR since 2019. Let me finish, if I can, on a slightly different note and just reflect a few comments about BNY Mellon as a whole. I'm a year in to my journey with BNY Mellon as Vice Chair of America's oldest bank. And over the course of that 237-year history, we have accumulated a very deep reservoir of trust with our clients. And we're very, very grateful for that. I've heard it firsthand from so many of them how they trust BNY Mellon, not only to serve their business but also to be a partner with them as they evolve their businesses. Emily touched a few moments ago on the fact that we touch 20% of the world's investable assets. That's kind of a remarkable stack when you sit back and think about it. And that incumbency is a powerful advantage for us. Now incumbents lose out if they don't evolve. But we're also very focused on innovation, again back to things like the first bank to make a real-time payment, first bank to do e-billing in the U.S. And our one BNY Mellon culture really enables that as we pull together as a firm across the franchise. Taken together, our incumbency, our culture and trust and innovation, that's a very powerful combination, and to me, super exciting for the forward. And so with that, Alex, Emily and I very happy to take your questions.

Great. Perfect. Well, thank you both very much. And again, appreciate the extra disclosure. Hopefully, that will help people move away from asking why assets under custody did this and servicing fees did that, so definitely looking forward to see how the KPIs will continue to evolve over time for you guys. So thanks for that. I guess, just dissecting some of the things we talked about, Robin, I wanted to start with you with a question on Pershing. Obviously, one of the biggest drivers for the firm, and as you pointed out, you recently introduced Pershing X as a way to really integrate different providers for advisory and services they use under one umbrella. What's sort of the white space opportunity you think about when you think about Pershing X and some of the economics that you ultimately expect to achieve from that new initiative?

Sure. Alex, it's funny you used the term white space, and I do like that and that is what it is. But we aren't starting from a blank sheet of paper. Because again, back to the point about incumbency and the fact that we have all of this connectivity existing with clients, the $2.6 trillion of AUC/A, we're touching 1/3 of the larger RIAs in the U.S., that's allowed us to go out there and really listen to those clients, understand their needs, understand their pain points, understand the competitive landscapes that they are facing and, of course, looking at our own landscape. And when you think about the life of an adviser, they have to worry about planning and tax reporting and order management, and there's increasing demand for direct indexing and all of these things, which for them they're having to knit together through a plethora of different apps and capabilities. And so for us, the vision is creating a platform, open architecture, we'll provide some of the solutions on the platform. But it is open architecture and we'll definitely want the best of breed, but then our ability to knit it together for a seamless experience in the ecosystem. And that's really how we're starting Pershing X up in that sort of open architecture, smart, modern mindset. We're partnering with our own innovation center in BNY Mellon to get it stood up. And equally important is who. And so I'll just finish with that and then the point about economics. We've hired a terrific leader, who's native to the wealth space. She's an entrepreneur, but she also knows how to operate in the context of a bigger company. And so we're excited about that journey. But on economics, this isn't going to drop much to the bottom line over the course of the next couple of years. This is a medium-, longer-term investment for sure. Having said that, we're already -- based on the feedback we're hearing from our existing clients in Pershing, there's a lot of excitement about Pershing X. And so we do expect this to be very helpful in the core Pershing franchise as we really engage with those clients around what's around the corner.

Great. My next question I wanted to touch on is around innovation and fintech. It's certainly been top of mind for investors throughout this conference yesterday, and I'm sure today as well. But you talked about the secular growth tailwinds that Market and Wealth Services are exposed to. That makes a lot of sense. Some of these markets are also clearly primed for some disruption. So I'm curious how you think about your drive for innovation and the ability to compete with some of the fintech providers that are also out there.

Sure. Look, we've been around for 237 years, so we sort of know what competition is like. And it's not the first time we've had somebody -- some groups that are coming at us. But in all seriousness, we love the competition and the innovation that we see as a result of fintechs. It really does accelerate the innovation in all candor. And there are markets in the ecosystems that we all operate in that are clearly overdue for some disruption. But we're investing in those same disruptions and those same innovations. And so for us, we're following the sort of the classic build, buy, partner, invest model. So just to give you some examples, we built earlier this year in the Google Cloud, a fails prediction service, which is helpful for our clients in our U.S. treasury clearing business. We partnered with a state-of-the-art AI company, [ Beyond AI ], who did a terrific job. And together, we've delivered that. That was a build. We bought just last week, actually, Optimal Asset Management, a direct indexer, which we're using as one of the solutions inside Pershing X. It's also speeding us to market in Pershing X. So that's an example of a buy. We partnered recently with Microsoft Azure Cloud for payments in the cloud. That's exciting. That's part of our journey in that payments business. And then we've invested earlier this year, for example, in HQLAx, which is a collateral management blockchain capability in Europe. And so build, buy, partner, invest, we've got all of those tools in our tool kit.

And just to add to that, I mean, Robin is actually talking a lot about Market and Wealth Services. But again, also we're doing the same thing, we've invested in Fireblocks, for example, for digital assets. We recently bought Milestone on the asset servicing space. So this cuts across the company.

Great. So you mentioned -- Robin, this one, I guess, for you as well. You mentioned payments, and it's not the first question that comes to mind, I think, when a lot of people think about BNY Mellon, real-time payment structure that you set up, including the one earlier this year, e-bills with Verizon solutions. Can you talk maybe a little bit about your vision and kind of aspirations in that space?

Yes. Look, in all candor again, people don't necessarily think of BNY Mellon as first, but we were the first bank in the U.S. to make a real-time payment and we were the first in this new request for payment e-bills space. We made the announcement with Verizon, as you said, Alex. Now I'm very excited about this space because this is a capability for us to be able to partner with our existing clients and new clients and help speed them on their journey to digitization. And look, we were already a Verizon treasury bank, so we were helping them with some of the boring things around the checks. But think about that for a second, which is you've got all of the expense of handling paper, you've got the poor ESG footprint of handling paper, both the paper itself and then the energy to move it around and with this whole process of real-time payments, there's no interchange fee. So there's no expensive paper, there's no expensive interchange fee. So Verizon are now, as are our other clients on these platforms, able to very seamlessly deliver an e-bill into the retail account of their customer and then using our capabilities and the rails of real-time payment to be able to make that efficient payment. It's also empowering actually for consumers. Because if you're a consumer who cares, as so many Americans do, about whether the payment goes today or tomorrow or this morning or this afternoon, that control over the precision of when the payment occurs is also a very powerful thing. We're live with a bunch of clients, it's not just Verizon, although they were the first. And we've got hundreds of clients in conversations or stages of onboarding.

Great. Well, in the interest of time, I want to pivot a little bit, Emily, over to you. I want to spend a couple of minutes on the financials, maybe starting with the fourth quarter. Obviously, given the time of the year, we're almost through the fourth quarter. Maybe an update on how Q4 is shaping up with respect to both revenues and expenses.

You mean on the [ boring stuff ]. So the quarter is very much in line with expectations. So as I take the different component parts, from a revenue perspective, I think last time I guided, we talked about fee revenue ex waivers for the year being up close to 8.5%. And that is indeed where we expect to land. That implies that in the fourth quarter, fee revenue ex waivers will be up about 6.5%. Waivers themselves, by the way, are very much in line with guidance, kind of close to where they were in the third quarter. On expenses, the last time I guided, we said expenses for the year ex notables will be up about 5% for the full year. And that's still the case. About half of that is revenue-related and the other half evenly split between investments that we've accelerated as well as the impact of a weaker dollar over the course of the year. And then I guess, finally on NIR, when -- on our third quarter earnings call, I said we were likely to be about down 1% to 2%, but maybe there was some upside. Actually, we expect NIR now to be up about 4% sequentially, largely on the back of higher interest-earning assets. So deposits are trending pretty much flat to where they were last quarter. And also we've, of course, benefited from higher short-term rates, slightly higher short-term rates.

Yes. It's a little better than in my note.

Yes.

There you go. So sticking with some of the financial points and maybe going back to one of the slides that you highlighted earlier, I was writing this down. But if I look at the Securities Services profitability, so kind of the new segment, the way you broke it out, where I guess the traditional custody fund administration businesses, that's where they reside, that margin looks like it was 22% in 2021 and you said -- down from 26% a couple of years ago. And you said about 900, I guess, basis points was rates-related. So curious how you're thinking about the profitability of the business in a more normalized rate environment. Should we think about 900 coming back? Or there's room to scale that further? What's your thought about -- what are your thoughts there?

Well, also you have to keep in mind about the time period over which you're talking about as well. But as you did say, year-to-date margins for the Securities Services segment, about 22%. In a more normalized interest rate environment and in the medium term, we would expect that to be north of 30%. And I say the medium term very specifically because it isn't next year. In terms of how we're going to get there, about probably half of that gap is when you get to a more normalized rate environment with higher NIR as well as just starting to recoup those fee waivers. And by the way, those are very high-margin revenues, if you will. The second driver for sure is just continuing to invest in revenue growth as well as profitability. We have a very ambitious growth agenda under Roman Regelman. That's actually playing out. You can see that in the growth in terms of alts and ETFs, which are higher-margin areas. You can see that in terms of some of the innovation and the investments in new capabilities like data and analytics, which are becoming much more meaningful to our clients, giving us new streams of revenue as well as existing -- blocking and existing types of business. And then the third leg is definitely efficiency. So we've got to continue to deliver efficiency. We've got -- in my mind, that means doubling down on some of the things we're already doing: automating manual processes, decommissioning legacy systems, digitizing the way we communicate with clients, but I think more importantly also, attacking some of the areas in Securities Services that are still highly manual and not just for us but for the whole industry. So fund accounting and striking a NAV, or for that matter, transfer agency, or for that matter, loan administration, all of those things are highly manual and ripe for change.

Yes. Emily, staying with you for 1 more second since we were talking about the fourth quarter earlier. Your comments around larger balance sheet size and presumably a larger deposit base in the fourth quarter, any implication of that for share repurchases we should be thinking about for the fourth quarter?

So just a reminder, we entered the fourth quarter with excess capital versus our binding constraint, which is Tier 1 leverage. And we manage ourselves to about 5.5%. That, combined with the earnings we're generating this quarter, mean that we will return more than 100% of earnings to our shareholders in the fourth quarter.

Great. Awesome. Well, in the interest of time, I have one more question. Robin, this one is probably for you. And it's kind of pivoting back to the Pershing business again, an important growth driver. And this is a question around self-clearing. We've talked about some of the potential challenges. You talked about opportunities obviously. But there's some challenges potentially facing this space as well, where we're seeing larger kind of broker-dealers acquire pretty aggressively and they do self-clear. So think about firms that we also cover, Raymond James, Ameriprise, LPL. Is that a risk at all to the ambitions in the growth rate you see in Pershing?

So there are clearly puts and takes, Alex, across that business. We've seen -- you mentioned some of the industry trends, but remember there are others as well, breakaway RIAs and also RIA roll-ups, which don't get to the level of a self-clearing firm. And actually, over the whole landscape, there are relatively few firms that actually self-clear. And there's a good reason for that. Because it's a big burden on them. And it can be quite a significant distraction. And you have to have really enormous scale for it to really work. So we've seen a move where we've benefited from some of these. Some of our clients have actually been acquirers. Now clearly, that's not always the case, and we can certainly lose business from time to time as a result of a large competitor or a self-clearing firm actually going roll-up. But we've actually seen moves towards clients sort of really moving to us. And remember, our sweet spot as a firm, given the breadth of BNY Mellon and all the other capabilities that we can bring to the table, is actually with larger and more complex RIAs. I'll just take you back to the stat again. We touch 1/3 of all RIAs in the United States with $1 billion or more of AUM.

Great. Well, perfect. I think we're actually out of time. We have less than a minute left. So we'll wrap it up there. Thank you both so much for coming over today, not too far of a commute, hopefully not going to wait on [ T&E ] for next year, you guys are across the street. But thank you both for being here. Always a pleasure to have you, and happy holidays.

Thanks for having us.

Thanks. Thank you, Alex.