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

We're going to continue this morning's festivities coincidentally with another trust bank. Very pleased to have BNY Mellon up with us next. The relatively new Chief Financial Officer, Dermot, thank you for joining us today.

Pleasure to be here. Thank you.

If we could put up the first ARS question as we get going. But as the audience responds to this question, and obviously, we're going to discuss a wide range of topics this morning. But I thought, given this is the first time you're really talking to an audience in your current role at an investor conference, it would be helpful to maybe start with a little bit of your background about yourself, your experiences prior to joining BNY and just how they apply to what you see lying ahead for the company?

Sure. Thanks, Jason, and thanks for having me, my first fireside chat, so hopefully it goes well. So for those of you that don't know me, Dermot McDonogh, originally from Ireland, and I've spent most of my career in financial markets industry toggling between New York and [ London ] over the last roughly 30 years, 28 years at my last place. And over the course of my career there, I started my career, I grew up in the finance side of the division where, over the course of a long period of time, I developed a deep understanding of capital, liquidity, resource allocation and just financial discipline and accountability in executing large-scale projects. And then, for the latter part of my career, I switched from a finance type role into more of the COO role, where I was the COO for Europe. And I know you'll hear me talk about this either today or on future earnings calls, very much about connecting the dots across the organization, to bring business leaders together to execute large-scale transformation. And I think the COO background and the finance discipline backgrounds, I think, hopefully, over the course of my time at BNY Mellon will help me add value to the enterprise.

Helpful. Maybe just distill that a bit further, and I expect this was a factor in you joining BNY after over 25 years at Goldman. But just what are your strategic priorities for the next 3 to 5 years? In other words, what does BNY Mellon looks like at its best?

So the first thing, I guess, Robin talked about it, I talked about it. Over the next 3 to 5 years, we're very much about de-siloing BNY Mellon. BNY Mellon over the past years, through acquisitions or otherwise, has largely run as a line of business type operation without the benefit of the enterprise. So we really want to de-silo BNY Mellon and deliver for our clients more of an enterprise-wide view. And I think that will lead to a number of things. One is it will allow us to deliver sustainably stronger underlying fee growth, which I think is quite important. And historically, we've been neat on that front. Second, I think it will allow us to run the company in a much better way. When I talk to our team back in the company, I don't really talk efficiency, I don't talk about cost cutting; I talk about running the company in a better way. And third, I think -- and this is really a critical component, which allows the first two to happen, we need to evolve and drive cultural transformation. And with that, we're going to give more transparency to our people. We're going to empower our employees to do more things. I think Robin made a very strategic decision towards the end of last year, where he made every single employee of BNY Mellon, a shareholder or a stockholder in the company. And so, we're about very much a culturally transformation to drive change through the organization. When -- up until a couple of years ago, we never really had a formalized analyst program. Last year, we hired 500 analysts from college. This year, we've hired 1,000 analysts from college and so we're investing in the future today, and we believe it will allow us to culturally transform the company in the medium term.

You mentioned de-siloing. On the past earnings call, there have been a lot of discussion about bending the curve on expenses. You seem to be making good progress this year. Just maybe talk about some of the actions you've been taking, maybe what you've uncovered since January and just comfort in your guide to The Street that you expect to be even better than your prior guidance.

Okay. So again, just a little bit about me. I'm a little bit of a nerdy guy at my heart. I like -- I'm quite a hands-on CFO. So I'm into root cause analysis. So I spend a lot of time in the bowels of the organization, how costs happen and what we can do to take them out. So I was fortunate, I'm nearly a year at BNY Mellon now, and I was fortunate enough to observe quite a lot of last year's budget cycle, which has helped me go into this budget season. And we are very much about talking to the business leaders and setting top-down KPIs, OKRs, operating targets for the business. And every 6 weeks, I hold what we call management business reviews, where we really hold the business leaders to account for delivering on those targets. We heard from the market that expenses were a challenge for us, and we listened and we communicated to the market in January that we were going to halve the growth rate for last year ex FX, which was 8% to 4%. So like framing from the top down on how we run, to how we do it day in and day out. And the bottoms-up approach predates me a little bit, but we have a project in the institution called Project Catalyst, where we went out to all our employees and asked for their ideas on what they would like to see investment dollars put to work in terms of automation, digitizing and cleaning up manual process, et cetera, generally tactical stuff. And we have 1,500 ideas back. We prioritized them, put money to work, and we meet every month. And I watch those expenses leave the door of the company. And that top-down, bottoms-up, executing on tactical stuff has allowed us –- and we're outperforming to those trends. So we started the year at 4%, I think at Q2, in July, I said we were outperforming those. And as we head into closing out this quarter, we're working very hard to get that number to closer to 3%. And I feel very good about where the team is at and what we're doing about our ability to hit 3%.

Impressive. Okay. But yes, no good deed goes unpunished. So as you enter the 2024 budgeting process, any early thoughts? Are there another leg of efficiencies we could expect?

So the way I -- so I think I'm starting this year's budget season with what I communicated with the executive committee. I'm committed to delivering positive operating leverage for the firm for the medium term. I think it's fair to say we will do it this year, and I'm very determined to do it next year in terms of how I'm going to set up the budget. And they know that. And so I think we're going to have a very promising conversation about where we want to put the money to work. And so just as an anecdote, this year, we doubled the efficiency savings from last year. So we're saving to invest in growth initiatives. And I think that's a really important point. The other thing that I've observed over the course of this year, a lot of our firm, how we're set up or how we, I think, do things, we are effectively a platform company, but we don't operate like a platform company. And if I give you a small example of that. So roughly speaking, we have 3 segments. We have 8 lines of business that roll up into those 3 segments. Many of those lines of business have their own KYC, onboarding, account opening properties. Each business runs their own stuff. We took a decision earlier this year to take all of that out of the line of business, put it in one place. That's the platform. We're going to have more efficiency, better automation, better service to our clients, better ability to interpret and meet regulatory demand and drive down our cost to serve for the enterprise. That's working well. We're going to do that across a number of other platform opportunities. And we believe that would help us drive meaningful operating leverage into next year.

And when you talk about positive operating leverage, you're including both fee income and interest income, so total revenues relative to expenses?

So I look at both. I'm conscious of NII won't be us forever. And so I look at expenses as a percentage of fees and as a percentage of the total. And I strike those every which way because the last thing you want is to do it as a percentage -- your growth as a percentage of the total NII to turn, and you end up with a high fixed cost base that punishes you on the operating leverage side. So I'm acutely aware of that and I think about it really in terms of a percentage of fees.

And I guess just maybe moving to a little bit more into fee income. If you -- just maybe ignoring maybe some of the external factors like rates, market levels, activity for a moment, just how confident are you that the company can deliver sustainable, higher underlying growth over time? Maybe just discuss what are some of the areas in which you see the greatest potential.

Of course, I've spent a lot of time studying the history of BNY Mellon since I've arrived. And I would say, call it for what it is, it's been tepid. Yes? And so we've hit 2% some years. Other years, we haven't. So the fact that we've done it tells me we can do it. So now I want to set the organization up in a way to do that in a more structured way over a longer period of time. And so we have a number of opportunities that we've identified through our strategic business review process where we've identified growth opportunities and we've put money to work. Like a classic example of that for this year really is Pershing X, that's now commonly known as Wove. We launched that initiative a couple of years ago. So from employee number 1, to launch at the INSITE conference in June, we hit the budget on time. We executed in a first-class way. Everything worked. So that gives me a lot of confidence that we can do that across the enterprise. The product was very well received, big pipeline activity. And as a CFO, I like to see the cash register ring. So we've had a couple of clients who we signed, but we expect towards the latter part of '24 into '25 as Wove could be a decent contributor to Pershing –- to the bottom line of Pershing. And look, that was a 1% of expenses investment that we executed on time. So it's allowed us to -- it's given us confidence that we can execute delivery of growth opportunities in an agile way for our clients. And I think the other important point, again, to come back to is the de-siloing of the company. This is like -- time will tell, and our ability to execute, but we have hired recently Cathinka Wahlstrom as our Chief Commercial Officer. This is the first time in BNY Mellon's history, as best I can tell, that we've had such a role. And she is really charged with the responsibility of delivery of BNY Mellon to The Street and to our clients, a very de-siloed approach. And I'm -- based on what I've seen so far, I'm highly confident that we can really make meaningful change here.

I guess you mentioned Wove and ringing the cash register. Can you just help us -- you mentioned and costs are 1% of expenses. Maybe just talk to how do you think about ROI or a payback period or maybe just some more financial metrics around that.

So look, Wove was 1%, so not a meaningful amount of money in the overall scheme of the business. We set the bank up, I think of the expense base, run the bank, grow the bank, transform the bank. So as we go into the budget season, it's like, what's the cost to run the bank? And then what did we do last year to automate, to digitize, to reduce the cost to serve? As the CFO, I'm very much about margin expansion. And so cost to serve is the critical ingredient. I get a lot of questions from people about fee compression, but as long as your expenses are going down faster than your fees, then you can still have margin expansion. So as I said earlier, we have 8 businesses. Each business is slightly different, so I will approach each business in a different way. In Asset Servicing, cost to serve is critically important. I work very closely with Roman and Emily to drive improved margin through reducing our cost to serve in that business. If you take Treasury Services, which is led by Jennifer Barker, that's a very dynamic business. We're at the cutting edge of change there. We've launched a lot of new products and services this year in the real-time payments space. The turnover, the return there is much faster, and we're investing in growth initiatives there. So if you take our high-margin segment, which is Market and Wealth Services solution, it's a 45% margin segment. So we're growing to invest there, while at the same time keeping our margin. Whereas in Securities Services, we have a margin that's not -- we're not happy with where our margin is. So we're very much focused on reducing cost to serve while at the same time, looking at ways to grow underlying fee revenue like we talked about earlier.

And I guess how does M&A fit into your perspectives on growth? Or any particular areas you're more open to lean into? Anything it doesn't -- you don't think fits well into BNY's businesses, you've had a -– in fact, you'd be interested taking a fresh look?

So we looked at every business bottoms-up, top-down, feedback from a lot of bankers on what they could do for us, sell for us, et cetera, et cetera. But I think we have -- as I've said over the last 20 minutes, we have more than enough work in our current operating environment to deliver meaningful change for our shareholders and for our clients. So for me at the moment, I would say the bar is very, very high. There's nothing really there that I see that I would love to own that I think is a strategic fit for us. But we have a team. We're constantly looking. We've done a couple of small things where we need software, a couple of bolt-on acquisitions, but it's nothing meaningful and we've sold a couple of small things. But for now, I'm -– no, I don't really see it. The bar's very high for me.

Got it. Maybe we could pivot to balance sheet management. You obviously started at an interesting time. The Fed hiking aggressively, the bank turmoil, debt ceiling impasse in June. Despite all that, you guys have consistently guided to 20% NII growth for 2023. But obviously, I think how you get there probably has evolved over the past 9 months or so. So I guess the first question would be, is 20% still the game plan for 2023? And then my follow-up would be, just are you managing the balance sheet through all of this?

So a lot of people say, do you remember where you were on such and such a day. So I do have a very vivid memory of March 9th, yes. And that was the day I realized I was heading into my first earnings call, and I was like I thought it was going to be reasonably straightforward until that particular day. So look, at the beginning of the year, we guided up 20% and there's been a zigzag around the course of the year between March and debt ceiling and a lot of other things. But I'll go back and talk about the 20% again a little bit later. But on just general balance sheet management, the intersection between my Treasurer, my CIO, and the person who leads Global Liquidity Solutions. And I've talked about Global Liquidity Solutions on earnings calls, where a couple of years ago, we had -- we have deposits in a lot of different businesses, and they were priced separately and they weren't thought of as one deposit base with this enterprise. And we've consolidated that under one person, one leadership, a bit like a platform like I described earlier. And we are beginning -- we are seeing this year the benefit of that approach. Those 3 individuals, very connected, very coordinated, and I think –- you know our CIO took the view of the rising interest rates higher for longer. And we positioned the balance sheet accordingly. So I feel very good, feel very proud about what the team has accomplished. We're humble about it. We are in the preparedness game, constant evaluating risk assessment, where can we go from here. And so it's not by luck we found us where we are. It's hard work. And we did that repositioning back in December that positioned us for this year. So feel very good about where it is and the work that the team has -- did before I came and continues to do. As it relates to the guidance, got a lot of pressure from the analyst community to hike guidance after March. Got a lot of questions on it on the last call as well. But from where I see and see how our business is performing, I have no reason to change the 20% guidance for the full year. The deposits have behaved in line with what we expected, seasonally quiet August, and the last couple of weeks have started to pick up again. So I feel pretty good about where the 20% ZIP Code for the full year.

I guess -- and maybe we could talk about deposits. I mean you just touched on it. Noninterest-bearing deposits probably outperformed our expectations, year-to-date, certainly have outperformed some of your closest competitors. Maybe just talk about why noninterest-bearing deposits were better than feared. And then maybe to follow up on your comments about what you're seeing this quarter.

So look, NIBs -- I think in a nutshell, really, why have NIBs outperformed your expectations of us. It's really, I call it the portfolio effect. Like the businesses that we have that attract noninterest-bearing deposits, it's not just one business. It's Asset Servicing, Corporate Trust, Treasury Services, Clearance and Collateral Management. They will attract healthy amounts of noninterest-bearing deposits. Why did you -- why is that? Clients are in our ecosystem. They're using our products and services. And we know when they're using them, how they're using them. And we have a rich history of information in order for us to determine the bottoms-up forecast. We've gone back 20 years in terms of our history and analyzed what's happened over different cycles and how noninterest-bearing deposits and deposits in total for that matter have performed. So we have quite a granular feel for it. And then we listen to what's going on in the marketplace and what our peers and competitors are doing. And then, talking to our clients and what their expectations are for the forward. So we kind of -- when noninterest-bearing deposits were at 26%, we kind of said like our forecast calls for that to go down over the course of this year. And that's what's happened, and it's entirely within what we forecasted to do. And so it's really kind of the portfolio effect that has allowed us to outperform expectations.

I think on the earnings call, you talked about the mid- to high-single-digit decline in average deposits from 2Q levels. You talked about staying within that 20% to 25% NIB mix. Is that still the way to think about it?

Yes.

Got it. And I guess we talked about 20% NII growth for the year, talked about earlier 3% expense growth for the year. I guess, was there anything in particular about the third quarter that you'd care to highlight?

So I would say expenses, I feel very good about. Yes. I think we're executing very well. I think we're -- I feel good about being closer to 3%. And so a lot of hard work day in, day out. It's a grind, it's tactical, it's execution and then holding people to account. But we will get there. On NII, I think for Q3, we're coming in at around -- in numbers, we'll be about $1 billion for the quarter, which I think Q-to-Q of last year to this year, that's up about 8%. And I think overall, that kind of informs me that I feel reasonably confident that the full year will be at the 20% guidance. And fees, look, August was seasonally quiet. Summer season, holiday slowdown, particularly in FX. So we'll see what September brings, and we'll see where the number lands for Q3. And then I think on buybacks, we've been consistent about -- we guided on buybacks at the beginning of the year to 100% of buybacks. And that is still in our plan and executing on that strategy.

Got it. And I think the earlier company talked about getting this special FDIC assessment in the fourth quarter. Is that your expectation or?

Yes. Look, it's -- that assessment is -- it's disappointing. Just to talk numbers for a second, it's roughly $460 million. The comment period closed in July. So we'll see when it gets announced [indiscernible] announced. But if it comes as written, that'll be loosely $460 million for us pretax. We'll disclose it separately, and be very transparent about the number. We're not happy about where it is because it doesn't reflect -- all it looks at is uninsured deposits. It doesn't take account of our low-risk business model. Our success in managing both sides of the balance sheet, the fact that our balance sheet is highly liquid, and the fact that 2/3 of our deposits are operational and sticky. So we advocated strongly as you would expect us to do, and we think it doesn't reflect the reality of our business model. But it is what it is and we'll live with whatever comes out.

Why don't we throw up the next ARS question, please. Similar question number 2 in prior presentation, but what do you expect the impact in RWAs and the recent Basel III end-game proposal relative to 2Q? Yes, some of the audience responses, just interested in your take on the Basel III NPR. I appreciate you take very limited credit and market risk for that matter, particularly relative to maybe some of the other G-SIBs. But there is some specific operational risk and just how it treats the fee income generating businesses. If adopted as proposed, what would you expect the impact on BK would be?

Okay. Can everybody see the answer or everyone in the audience can?

Yes.

Okay. So and the answer is, I think at this stage, as written the 1,100 pages, we're #2. Yes? We're in the 13% category, up 5% to 10%, a little bit better than the buyside consensus. So look, I guess this is going to be an interesting conference. You have a lot of people here who have a lot of passion for the 1,100 pages and will be telling you what they think. So for BNY Mellon, it's manageable for us. Yes? Notwithstanding the fact that we will be with the rest of the pack in terms of advocating and putting what we believe our views are on some of the topics forward. Plus market risk, credit risk, et cetera, et cetera, it doesn't really impact us. The big impact for us is $30 billion of operational risk, RWA inflation (sic) [ under the expanded risk based approach ] to the advance ratio. So that's where we are. Look, objectively speaking, I sit here and I see BNY Mellon having spent north of $1 billion over the last few years in improving the resiliency of the enterprise and reducing operational risk. And we have Basel III end-game, which tells us our capital rules have to go up in this space. So on a macro level, I disagree with it. But we will advocate alongside everybody else what's going to be an interesting Q4. But I think the message I'd like to leave everybody with here is, it's manageable for us. It won't cause us to we reprioritize businesses or change our buyback approach or everything like that. It's -– while I don't agree with a lot of it, we can take it up.

All right. So you don't think you change anything in terms of your businesses, it doesn't change your buyback or capital expectations, RWAs go up, so effectively capital has to go up. And it does have the potential to impact your profitability target aspiration. But just, I guess if -- to the extent that RWAs are going up, it does have the potential to impact ROE.

Yes. No, so we'll set about optimizing. We have some offset on the credit side. And I think ROTCE is in like the north of the 20% ZIP Code. We're a capital-light business model. I don't think these rules will meaningfully change that outlook, and we will adapt, and innovate around it.

Maybe, we'll go to the next ARS question, is what do you think is the most compelling bull case for BK shares? Wait to see the answer as well where I can see at my next question. So it doesn't appear to be a clear consensus, but accelerated organic revenue growth and additional expense efficiencies. I feel like we covered both of those.

Yes. I thought like I would -- I would agree in which the order of those have been ranked. Yes? So expense efficiency is we have a plan, we're on track, we're going to execute, we're going to stay the course. And I feel confident about it. So point number one, I think it's a multifaceted one. And there are a lot of subparts to it. But the important message that I would leave with you is BNY Mellon is 239 years old, America's oldest bank. It's been around for a long time. And I was a client of BNY Mellon so I understand the criticality of the firm in the financial markets' ecosystem. And we feel strongly that by de-siloing BNY Mellon and coming at it from a more enterprise approach, that we can deliver a much better service to our clients, which, over time will lead to an acceleration in revenue growth form. So I think as a management team, we feel good about number one as well.

Maybe we'll go to the last ARS question. For Q2 '24, what do you expect expense growth for BK to be? Coming off of an expected 3% or so for this year.

Come on guys, don't be too hard on us.

So up 3% to 4%, similar to what is going to come up with this year and then 2% to 3%, so around this year?

Yes. So look, we're working very hard at it. I'm not looking at my IR person who's saying, don't say something that you're not supposed to say. But look, we've delivered -- we're going to deliver positive operating leverage this year. I'm determined to do it next year, and we want to set up the budget in a way that does that. Notwithstanding the fact that NII is not going to be with us forever. So we're going to be in the category two and category three ZIP Code and work very hard to outperform both of those things.

So why don't we pull up and see if there's any questions from the audience. I'll ask. We talked a bit about how you're thinking about 2024 expenses. We talked earlier how you manage the balance sheet this year through a volatile backdrop. As you begin to think about the 2024 budget season for net interest income and the balance sheet and you talked about deposits, just how do you think about that plays out? So one of your peers presented right before you, talked about net interest income potentially bottoming like maybe early next year. Just how do you think about all that?

So look, I'm not very good on the tea leaves. Yes? But like I have to say, I'm a big J. Powell fan. I think he's done a great job. I arrived in the States in November of last year, and I couldn't really understand why the market, generally speaking, wasn't listening to him. And there was a real tussle between the market and J. Powell over the course of this year. I feel probably J. Powell won the tussle. And everything says the U.S. economy is very resilient, of landing higher, but at the same time, higher for longer. I guess the market is pricing cut -- I think Bowman assumes cuts in Q2 of next year or Q3 of next year. So I think NII is going to be reasonably with us for most of next year. So again, I think the important thing for us is, is the balance sheet management, both sides of the balance sheet, working in tandem. And the fact that as we roll out of our fixed rate securities, we're going into higher-yielding assets. So I feel overall very good about how our book is set up for next year with the way the forwards are currently priced. But it's dynamic and it could change. So we're mindful of that in terms of how we manage the day-to-day business.

Any questions? Here we go.

Question about recognizing what you're doing on the onboarding process and overall expense management. Historically, particularly in Securities Service, a new client came in, we would tend to automatically assume that it costs you more in the first year to have that client than they would make. Then, when you got them fully installed, there would be a return. But is there a structural change in the onboarding process like a shortened period, low to negative margins as you start it up and then bring forward the period of better returns for a relationship?

So I think that's a terrific question. So I think if you are a client of BNY Mellon Asset Servicing, generally, you're very happy because we like to serve our clients in a first-class way. So we end up pricing and then serving. But serving ends up with a lot of bespoke-iness that we don't price, which costs and then reduces the margin over time. So this year, we've set about or are in the process of setting about a lot more standardization. And so when we onboard you, we onboard you in a standardized way, which makes client service a lot easier. You know what you're paying for, you know what you're getting. It's like you buy an iPhone, you go into the Apple store, you buy the phone and it is what it is and as advertised. If you want a different kind of iPhone, you buy a different thing with different products and services and you pay for that. So we're much more about streamlining what we're doing and less bespoke. And then customize the product offerings that if clients want those services, they'll pay for them as opposed to us doing it in a manual way. So I give you a different answer to the question you asked, but we're much more about streamlining and automation rather than bespoke and then bespoke comes with the next rollout of product innovation. So again, to go back to my platform point, we're trying to take a platform approach to everything, so that it's one platform, one set of products, one set of services. The client knows what they're buying and if they want to upgrade, they can upgrade, and we will -- and they will pay for that upgrade.

We're at the 2-minute warning. Any questions? I guess you mentioned earlier in your prior role, you were a client of BK, and now you're obviously CFO of BK. In your role, maybe what's your biggest surprise as an insider?

Woah. I think it's a very proud storied organization. Like the interesting thing is we have a lot of people at BNY Mellon who've come from different walks of life and industry, different backgrounds, different companies. So I would say there's much more diversity of thought and the opportunity for us is to channel that into the enterprise view. So surprise to the downside has been struck by how silos the organization has been and the surprise to the upside is the opportunity that -- the opportunity is bigger than I thought it was when I went through the interview process.

And in the 30 seconds left, I have to ask. We were chatting earlier. You're taking a swim in the Hudson River tomorrow. What made you want to do that?

Yes. So I don't know. It's –- let's just say, he's a good friend of mine now. It's one of those things that happened through COVID. Lewis Pugh, he's the UN ambassador for the Ocean. A very, very good guy and I've become very good friends with him over the last couple of years. And he highlights the impact of climate change is having on our ocean through very difficult swims in extreme climates. He's mostly known for doing things in very cold geographies of the world to highlight the impact of melting on the oceans. And this one is kind of a positive one because 6 years ago, the Hudson was very polluted and a lot of people have done a lot of work and spend billions of dollars to make the Hudson much less polluted. So he started 4 weeks ago up at the source of the Hudson at Mount Marcy. And he's swimming down to the Statue of Liberty, and he will finish the swim on Wednesday, ahead of UN General Assembly Week. And he'll do a lot of speaking at the UN General Assembly about the impact of polluted rivers on the ocean. So tomorrow, I'm heading up to the GW Bridge, and I'm going to swim from -- I'm going to try and swim from George Washington down to Pier 25. I was there on Saturday in Peekskill, if you know that area. So I have a little bit of a taste of it. It's just the taste is not too good, actually. But anyway, it's all in a good cause, and it's leaving the world a better place for our kids and our grandkids. That's what it's all about.

We wish you luck. Please join me in thanking Dermot for the time today.

Thanks for having me.