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

Good afternoon, everyone. We're here today with The Bank of New York, with the President and CEO, Robin Vince. Robin, as you may know, joined Bank of New York Mellon in 2020 and very recently was appointed the present position of President and CEO about 7, 8 months ago. And he's been -- prior to his position here at Bank of New York Mellon was a long-time employee of Goldman Sachs, joining Goldman Sachs back in 1994. Just a couple of statistics we like to share with folks. Bank of New York Mellon has over $405 billion in assets, market cap of $42 billion, assets under custody of $44.3 trillion. That's -- I got to tell you, just to say trillion, I mean I don't know...

Yes, we have a lot of trillions actually in terms of the things that we do. Yes. It really is 20% of the world's investable assets.

That is so impressive. It really is. Assets under management, $1.8 trillion. On a price-to-book level when you back the AOCI back into book value and tangible book trades at about 1.1x stated book and just over 2x tangible book, and it has a P/E ratio of about 10.5x. So Robin, thank you so much for coming. Really appreciate it.

Good to be here with you, Gerard. It's good to be with you.

So maybe following up on my opening comments of you being here about 7 months. I saw that quote in the media about the Bank of New York's performance over the last decade has been disappointing, and you're determined to change things. First of all, I have to applaud...

That was quoting me, by the way.

Yes. That's what I mean -- yes. And I applaud you for saying that. I wanted to get that out there because that takes courage. And so I really think that's important. So maybe to start off, can you lay out your plan on how you envision changing Bank of New York's performance? But before you do -- I was saying to Marius when I came in to see you guys. I walked into your lobby, 1.5 months ago, I think it was. And the greeters were great. I just -- I mean it's all the way down to that. I wanted to make sure you as CEO know that. It's just -- because they're the first people you see.

Well, look, I appreciate the point on the lobby experience. Maybe we'll talk about culture later. I don't know if it's up to you if you want to double click on it because I think that is, from my point of view, a very important part of the change. But let me just step back and just think for a second about kind of where are we right now? And I made the point about the fact that I think we've had a disappointing last decade, and that was what I wrote about in my CEO letter. And the fact that I think that we've underperformed our potential to some extent. And so what have I been doing just in my early -- you reference fact that I've been in the seat sort of 7 or so months? And what have I been doing during that time? Well, first of all, I've been doing what I think you think any new CEO would do, which is really looking and reviewing business by business, function by function, everything we do. So we've done strategy reviews up and down the organization. And I've been focused not only on what we do, but also how we do it because I think some of the unlock relates to the how as well. And look, the good news is, from my point of view, we have a terrific set of businesses across the company. I mean you equipped about the $44 trillion worth of assets under custody. And yes, we are the world's largest custodian. But we're also the world's largest collateral manager. We're also the world's largest depositary receipts firm. We're the world's largest securities lender. We have $1.8 trillion worth or so of assets in our wealth management and investment management businesses. We touch across all of our Pershing business. We're #1 in the broker-dealer space in that market, and we're in the top 3 in RIA. So we have these terrific crown jewels, as I think about them from a franchise point of view, and we have incredible client franchise, which for me is the most exciting piece. So a great installed book of business and then a terrific client franchise where they really value our perspective. For me, that's been the starting point. And then the question is, why have we been underperforming? And what is it that we're going to do about it. And there's some top line stories in that, and there are some bottom line expense-driven stories in that as well because ultimately -- some of this is about expenses and unlocking the potential.

So when you look at those businesses on how they were executing, to your point, just then, you've got some crown jewels, was it just weaker execution? I know you said expenses were a part of it, but when you look and checked under the hood, what did you find versus what you're going to do going forward?

So I think it's a bunch of different things. When we look through, we should definitely talk about the client franchise and the unlock associated with that because for me, that's a very important part of it. We've operated as a pretty siloed organization. And so I think some of the answer is there, and we can sort of talk more about that if you'd like. Some of the answer is just making sure that we're being super disciplined and clear about product innovation and the journey of that. So for me, that's the investments that we've been making since I've been in the company around Pershing X as an expansion for our Pershing franchise around Real-Time Payments and the innovations that exist at the edge of what it is that we're actually doing. And then very importantly, it's not glamorous, but the blocking and tackling of being a really well-run, tightly managed institution and that comes down to the expenses and also how we do things. And so there's some unlock there. So those are the 3 buckets I call out for that.

And where are you in your strategic planning process where you can say, "Okay, it's completed. I understand what has to be enhanced, fixed, changed." How far are you where you can say, "Okay, we're now going to really move forward on it."

Look, -- I believe that there's a certain humility associated with operating in the world today. The world is a dynamic place, and I don't want to be one of these folks who says, "Hey, we've got some grand master plan and it's going to take 10 years, and this is what exactly we're going to do in year #4.5. So it isn't like that. It's really identifying our main areas of focus, the things that we really need to change. And then we're going to have to be dynamic about it because the world is a dynamic place. And so that isn't to say that it's not very clear and tangible for us. It is -- but I don't view this as some big unveil of, hey, BK 3.0. This is about us having a series of different things that we're going to do. They're each going to move the needle in a pretty meaningful way. And then very deliberately, very relentlessly executing.

Yes. When you look at the lines of businesses that you have, you mentioned some of the crown jewels, which are the ones reaching their really peak performance? And then what are some of the lines that it's going to take heavy lifting to get them to that kind of peak performance?

So Gerard, maybe I'll pick out on the ones that are particularly interesting right now and things where I see a lot of opportunity going forward. I mean -- hey and this is not meant to be an exhaustive list. So it's not to say that these are the 3 things that are the only interesting things that we're doing, it's far from it. But I'll pick them as examples. So Pershing is first. So in Pershing, we added last year about 5% of net new assets. Remember, this is a wealth business, right? So it's not a wealth management business. It's a wealth platforms and infrastructure and custody business. But we added 5% of net new assets. That's about $120 billion because, call it, a $2.2 trillion assets on platform business. And so not only is there the growth in the core platform of Pershing, but we've also resolved to innovate in what we call Pershing X, which is a fintech that we've started next to Pershing under the same leadership. So it's all going to be joined up. But we're giving it the freedom to break some things and innovate, as you'd like a fintech to do. That's something that we announced, call it, 1.5 years ago. We went live with our beta at the end of last year. And now we're in the process of really ramping up for a full go-live later on this year. That's a set of software and services that are really going to improve the lives of advisers. And so while providing support and classic Pershing for the investor base of the advisers, now we're really going to target advisers themselves. We think that's exciting. Take our Clearance and Collateral Management business. We've been in that business for a long time. It's not novel or new but underlying growth currents. There are more U.S. Treasuries being issued. That's a U.S. Treasury business. And so at the end of the day, more transactions, more volume going through those pipes. That's a growth story for us, albeit steady in the background, but nonetheless important. And the other part of that business is our collateral management business. We're the largest collateral manager in the world. We're the only global collateral manager in the world that truly has those global capabilities across all the markets, including the U.S. And that's a place where we see the opportunity to capture business that's moving from the deliver, manage it yourself market to the outsource, let us manage it for you tri-party market. So we think that's quite interesting. The third one I'd call out is asset servicing. And that's a business that has struggled from a margin point of view but is one that there is definitely innovation opportunity in, particularly in data, particularly in Alts, ETFs and evolving asset classes. So I'd call those 3 out just because I think they're good and representative. But if I zoom out for a second, because this is also part of the answer to your first sort of set of questions. If you look at our business from a segment point of view, Market and Wealth Services, 45% pretax margin last year, healthy margin and the Collection Treasury Services, Clearance and Collateral Management and Pershing, are the fastest-growing businesses in the company, so highest margin, fast-growing, very exciting. Then our Securities Services business, which frankly is on the other extreme, 21% pretax margin last year, disappointing. So that's a place where our focus is disproportionately, yes, we want to grow revenues. Yes, we want to innovate on new products, and we are, but we're disproportionately focused on the efficiency, cost to serve and expense base of that business. And then the third segment, investment and Wealth Management sort of somewhere in between, suffered last year as a result of the downdraft in markets. That's understandable, bonds, equities, et cetera. So therefore, it suffered from a margin point of view, and it's somewhere in between. But that's a business that is at a bit of a down point of the cycle but yet has some real good opportunities in it.

And on the security servicing, as you mentioned, the execution, bringing expenses down, is the nature of that business a lower-margin business generally versus your Pershing business or the Asset and Wealth Management?

Yes. I mean, look, I don't have a target of Asset Servicing being at a 45% pretax margin. So by definition, the answer to your question is, yes. But we have got a stated target to drive it to 30%. And that's going to come through, as we've said publicly before, a combination of top line fee revenue growth, some NIR and also, very importantly, a focus on the expense line.

Speaking of expenses, and you touched on technology, which is increasingly important in your businesses, can you share with us how much money do you invest annually in technology and just how it interplays throughout your organization?

So our tech spend in the past couple of years has been between $3 billion and $3.5 billion. So we're spending a decent amount on tech. What I think is maybe more interesting is the fact that the sort of the shape of that spend is changing. So the past 4 to 5 years, it's been disproportionately on resiliency, infrastructure, network, building cloud capabilities, the backbones and infrastructures of what it is that we do, very important. And for us as a franchise, given how important resiliency is and what we do in the markets is essential. And so no regrets about that spend. We've seen the benefits of it, by the way, because if you look at what happened around COVID, you see what happened around the meme stock story, the volume spikes, we were never out. We never turned off orders, and that was very unusual back in the meme stock moment when you see all sorts of other providers who were having to throttle. We didn't throttle. So that's great. But now it gives us the opportunity to pivot a little bit, and that's what we want to do. And that's a pivot towards more focus on applications, application capabilities, product enrichment and then, ultimately, efficiency and how do we digitize and streamline the how of what it is that we do. So of course, we're always going to spend money on resiliency. We're always going to be investing. It's a continuous process that you don't fall behind, but that subtle pivot in how we're spending the money is an important one.

Yes. And you mentioned the cloud. When you think about what can be moved to that kind of environment versus the traditional data center type of environment, where do you see that going for value? Could half of the business go in the cloud someday? Or is that just crazy thinking or so?

Yes. Well, actually, it's already more than half on the cloud. So let me step back for a second. So about 90% of our applications are what we would describe as virtualized and containerized, and that is to say they're sort of cloud-ready. 65% are actually running on the cloud. But we use a combination of private cloud and public cloud. And that's important because our public -- private cloud, which are these state-of-the-art capabilities that we've been just investing in that I just described a few minutes ago, the combination of that and the public cloud, frankly, gives us more flexibility. It avoids lock-in with individual cloud providers. It allows for a higher degree of resiliency, the fact that we can operate in that way. But there are some things that are better done natively on the public cloud. So for instance, we've built our new data and analytics, our data vault capabilities natively on the public cloud. If you think about one of the other products that we launched over the course of the past 9 months or so, which is our Treasury Fails prediction service, that's enriching the service that we provide to Treasury Clearing clients by helping them to predict what's going to happen, AI models running on that. That we do in the public cloud as well. So our payments, we do payments in the private cloud and in the public cloud, and we think that gives us more resiliency because we can route really live, live, live across those environments.

So we're talking about cutting-edge technology here, but I have to ask, do people still use fax machines to fax you?

Yes, people use fax machines. The question is do we see faxes.

Yes. It's just as much as we're -- I'm just surprised to hear that, but I always -- so you guys have said that..

Yes. So less than 1% -- don't worry, less than 1% is -- of our transactions come in by faxes. But it's true. Look, -- and by the way, it's important to understand the drivers of that. When you touch 20% of all investable assets in the world across all of those different platforms, we're touching very, very large institutions, but we're also touching smaller institutions. And so in reality, in the client service space, the process of coaching and evolving some of those clients off that is a little bit more involved. But digitization, like just use your question around faxes to make it maybe the key point from my point of view, which is really digitizing the environment, that is the key for us. And sometimes we talk about faxes and isn't it better if it's electronic instruction in e-mail. But like e-mail is only marginally better to me than faxes. Because you can put a machine on top of a fax. You can do the OCR, the optical character recognition. You can put natural language processing on it. And you can turn a fax into a sort of digitized text, e-mail pretty simply. But actually, the real win, it comes in 2 different places. One is really translating that into APIs, really translating that into self-service for clients, SWIFT messaging, whatever type of structured message that you want to use. And then related to all of that, how do we truly take people and manual processes out of our environment. So some of its robotic process automation, but more of it is just making things go STP, straight through all the way without having to be touched. So that's point number one, and that's about how we do it again, and that's our environment. But then the other point is how can we sort of digitize and play our role in digitizing the world and the financial services system that we touch in a way that benefits us and, importantly, benefits our clients. So that's somewhere where I'd call out Real-Time Payments and e-billing because that's exciting. You think about the old way, and this is still much more prevalent than you'd think sometimes in the U.S., old way -- big institutional client, we did a pilot with Verizon. It's public. So we announced that together. Verizon sends out phone bills to its clients, $100 million-plus bills. And they send a lot of them in e-mail, and obviously, they still send a lot of them by mail. And people are writing down their bank account numbers on a piece of paper. They're sending checks. They're using the phone to call in details. All of those are very analog ways of ultimately paying a bill. It's slow. It's expensive. It uses water, paper, energy to transport stamps, you name it. There's nothing particularly good about it, and it's not particularly secure. So the e-bill process around e-delivery of an invoice into the customer's bank portal, click-to-pay Real-Time Payment rails fraud validation packages wrapped up in there, it's better, it's cheaper, it's quicker, it's safer. And so that's digitizing not just the last mile inside BNY Mellon, but actually the whole process coming into us. And so that's a business that we're very excited about as one example. And there are other examples of that in the industry where we want to really try to digitize the end-to-end chain wherever we can.

No, that would be, I think, customers of Verizon would be very happy to have that kind of easy access, that's for sure. Talking about assets under custody, it's an area that you folks as well as your peers have talked about pricing pressure for a very long period of time. Is there any relief in sight? Or is it just -- that's just the nature of the business that assets under custody is such a competitive business and pricing pressure always present?

So I have a slightly different take on this. I understand that we can look at it and say, "Hey, woe is me pricing pressure and the price of assets. Always going to be the world's worst oligopoly, whatever you want. But I look at it a little differently, and this is where we have an advantage as a company, I think, that's a little different than some of our trust bank peers. We have a breadth of services that I just want to remember. So yes, there are many trust banks who are in the wealth space or in the custody space or in the asset management space, but we also do treasury services, $2.5 trillion a day of payments. We also do depositary receipts and securitizations in our Issuer Services business. We also have Clearance. We also -- we're the largest clearer of treasuries. We also have Collateral Management that we just talked about. We also have Pershing. We have all of these things that are around it that ultimately allow us to go to customers and say, "Hey, maybe this is interesting to do as well." And it's relevant for pricing pressure because I'd rather solve the pricing pressure problem by going to an asset servicing client and say, "Hey, maybe you should outsource your trading to us as well because it's a pretty commoditized thing. Maybe we can also help you with some more payments in your ecosystem. Maybe there is more data services that we can do for you that help you connect the disparate service providers that you've got. You've got different custodians, you've got different outsourced kind of execution venues, maybe we can tee that up with our data assets to be able to give you a better view of your world." Those types of value-added services, to me, as we go up the value chain and we make more of the CIO sale as well as the Head of Operations sale and even the CEO sale, those are actually more interesting ways because, otherwise, it's just a little bit -- you're trying to run up the down escalator, and all services over time ultimately have pricing pressure and competition. And so they should. So I'd rather go around it in those types of ways and find ways to leverage some of the strengths of our franchise, which may be a little differentiated.

And how successful have you guys been -- because it makes all the sense in the world to approach it your way. Is it a hit rate of every 10 customers you contact, 5, say, yes, we want -- any -- can you kind of put some -- not numbers but just how successful is that going?

So this is a pivot, I would say, for us, and so it's early days. But clients are very receptive to the conversation. And as I look at BNY Mellon, this comes back to the sort of not only the crown jewel assets but the reputation and the relationship we have with clients, our clients trust us, we're pretty unconflicted platform. So I was just having lunch with a very significant client today, and we were talking about how we could do more together. And they initiated the conversation with me. We would like to do more with you. We think there are more parts or facets of BNY Mellon that we don't properly connect with. And they don't view us as in any way threatening to them, but they do view us as very client-centric and focused on them. So I think there's an unlock around that, that we have to continue to really drive that in our company. It's relevant for Asset Servicing, but it's not only relevant for Asset Servicing.

Sure. And also it enhances the margins, obviously, to the overall relationship.

100%.

Yes, yes, big time. Maybe if we go back to January, a lot of things have changed. It's a fast-moving environment regards to inflation rates, obviously, geopolitical concerns. Have your macro expectations changed much from the outlook you guys gave on fourth quarter earnings in January?

Well, maybe I separate macro and outlook. But so from a macro point of view, clearly, the world's evolved a little bit since the end of last year, beginning of this year. We've had a point of view which has ended up largely playing out so far that rates would probably be a little higher in their terminal rate than the market was originally pricing in back in January. And we've also had a point of view that they'll probably stay higher for a longer period of time and we thought that rate cuts in 2023 were pretty unlikely. Now those things have happened to have ended up playing out over the course of the past month or so in market space. But we wanted to separate out, when we were talking about outlook, our view from what was in the market. So we were quite careful to say, hey, the points from a macro point of view, while it relates to our outlook are -- we'll just assume the forward curve in rates as you can superimpose your own judgment and what you think the case may be over the path of the year. In terms of equity markets, we said, sort of mid-single digits in terms of point-to-point on the equity markets. We assumed constant currency, i.e., no change in currency, in terms of our outlook. So that's what we did for an outlook. But from a macro point of view, look, inflation is a gnarly thing -- I ran a fixed income trading business. It's one of the things that I've done in my past. And I remember rates being 6.5%, and rates get to those types of levels. And so, yes, we've been super conditioned over the course of the past, call it, 15 years in having extremely low interest rates. But there's absolutely nothing to stop rates going to 6% or beyond. And so it's going to be data-driven. We'll have to watch jobs this week. We'll have to watch nonfarm payrolls, Chair Powell was talking today. And the markets taking that as a slightly more bearish signal. But it's not only about U.S. rates. The world is a complicated place right now. There's a lot of going on in geopolitics. I was just in the Middle East visiting clients. I was in 5 different countries last week in the Middle East and visiting our offices in India as well. And there are a lot of different things going on in different parts of the world. We've still got a war going on. We've got China and the uncertainties, both geopolitically and economically about what will be the impact of the reopening. And so I take all of that. I have a point of view about some of those things, but we've tried to separate that point of view from sort of baking ourselves into some path. Because as a large financial institution, risk management and preparedness are really what it's about. So if rates end up being at 4% or they end up being at 7%, whatever the case may be, that's what -- we prep for these types of things, and we prep for different eventualities because I think, ultimately, that's the muscle that's the most important to me. Now you mentioned outlook. And so I'm not -- we're 2.5 or 3 month-ish into the year. I'm not going to mark-to-market for you. But given how we framed it, we didn't guide on fees, we said 20% increase in NII year-over-year and we said we were going to be very disciplined on expenses, just remember that, last year, if you take out the benefit of the currency, we were up 8% in expenses last year with the benefit of -- it's a bit of luck on the expense side from a currency point of view last year. But it was sort of 5-plus percent last year and 5-plus percent the year before with some good fortune on currency. And we've said that this year, we want to approximately half the ex currency benefit, so sort of plus or minus half of 8%. And that's what we've guided to. And so we're not updating that guidance at this point and see no particular reason to do so.

Yes. Okay. Good. A different question. And I think you're a good one to answer this because you've got a lot of experience. As you're saying, there's been a lot of change in the world, in the markets. You look at interest rates going a year ago, there were 0% to 0.25% heading as you point out, to over 5%. I've been so surprised there hasn't been some giant calamity -- like back in '94, '95, Fed took rates from 3 to 6 in 12 months. Orange County, California files bankruptcy; Mexico, major problems. Have you been surprised -- I guess we had the U.K. pension kind of flare up. But in your experience, what's your view why we haven't seen kind of a flare-up somewhere? .

Look, I think it's too early to call it, to be quite honest. So I'd like to see where we ultimately get to, and I'd like to see that persist for a while. We've certainly seen some tremors. We saw the whole U.K. issue in terms of gilt markets. So to be honest that was sort of just poorly coordinated and all thought out execution of policy. And the markets really punished the U.K. for that. We've seen some of the issues around crypto that have happened, and we see sort of other tremors in different places. But -- so I wouldn't say that just because we haven't seen anything yet that we won't necessarily see anything, but that goes back to what are we at our heart. We have to be risk managers. We have to be preparers. We've got the whole debt ceiling thing coming up at some point this year more than likely. And so that's another thing. Again, we're just preparing the heck out of that, which is I think what you'd expect us to do.

Yes. Coming back to expenses, assuming you're successful this year, like you just gave us, no change to the guidance, you want to reduce it to half of what it was the last couple of years. Is that a good measurement we should use for Bank of New York that you guys are making? So we're sitting here -- if you're kind enough to come back, but we're sitting here a year from now, could we use that as a good marker "so wow Bank of New York is really getting it done?"

Well, I think a year from now, you absolutely should judge us on our execution. I don't want to call it again, 2 to 3 months into the year -- we're not updating the guidance, though, which means that we're very much focused on this particular threat of execution. Again, revenues matter a lot, both in fees and in NIR. But expenses are the other part of operating margin. And so we're very deliberately focused on that. And we've been doing a lot of things under the hood. So maybe to give you a little bit of sort of inside look on that, in terms of the efficiency savings, we're on track to approximately double the efficiencies -- versus what we've had in the past couple of years. And so that's part of the change in the expense story. We've gone out to all of our people. We've really asked them. I said, culture is important. And this is a good example of it, which is going out to our people and saying, "Hey, we want your ideas in terms of how to really drive this." And so the cultural angle around getting our people aligned to the mission, really wanting to change the expense story, thinking about the digitization, figuring out not only the tactical things that we're going to do now but then preparing ourselves for the more strategic questions of how might we operate a little differently in the future, and that's very important. And what I considered to be important right from the beginning from a culture point of view was aligning the whole organization to these type of missions. We made everybody a stockholder at BNY Mellon through our BK shares initiative. We gave 10 shares of BK to every single employee that was potentially -- where stock was permissible around the world as part of that alignment. It helps them to align with the expense story. It helps them to align with the execution story and really that commercial drive. It also helps to align with this sort of cross-sell what we call ONE BNY Mellon initiative, which is really helping to connect the dots across the franchise and having people want to work for the purpose of the mission of where we're trying to go.

And actually, we're running out of time here. Aside from my little feedback about the entry into your building, have you gotten feedback from your folks inside the organization that they're embracing what you just explained?

Yes. I think people are really wanting to come along for the mission. If you're an employee of the firm and you've been around for a little while, you're frustrated about the fact that we have underperformed our potential. And so the sense of the possibility of the pride of, hey, let's make something. We've got all of these underpinnings great client franchise, great real installed books of business and products, and we've got a good culture. And so making something of that is a point of pride increasingly, I think, amongst our population. And I want to fuel that. We have new communication formats. I do short-form video every few weeks, they're 3-minute video. Here's what we're up to. Here's what's happening in your company. And so collectively, culture is a very important enabler to strategy. There's no question about it in my mind.

And just finally, just quickly, can you share with us your thoughts on capital levels? You're comfortable where you are. How do you manage -- what do you think about when you manage capital?

Sure. Well, we came out of last year in a very strong capital position, and we said that we expected over the course of 2023, to return in excess of 100% to shareholders, and so that's what we stated was our objective for the year. But look, at the end of the day, there's a waterfall for these things, right? We're a pretty capital-light business. We're a pretty capital-generative business. At the end of the day, a lot of our investments are driven through expenses as opposed to capital. So that's first. What are we trying to do? How are we trying to grow, but we don't need a ton of capital to do inorganic -- to do excuse me, organic growth. And then on the organic side, it's not a top priority for me to do big inorganic things right now. So I'd be much more focused on, yes, we'll do some small things which we have done. By the way, we'll do some divestitures as well, which we have done. And then the safe, stable, growing over time dividend, that's obviously important to us as well. And then at the bottom of the waterfall is, hey, if we don't have anything else that we should be doing with it, putting it to great use, beating our 21% ROTCE, by the way, which we feel very good about last year, then we'll return to shareholders, and that's what we're doing.

Great. Well, we did go over. So thank you so much, Robin. Please join me in a round of applause in thanking Robin for coming.

That's right.

Great.

Thanks for having me, Gerard.