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

Our next fireside chat, the company, obviously, Bank of New York Mellon Corporation, really doesn't need any introduction. But it's the ninth largest commercial bank in the United States with $410 billion in assets. It also is unique in being a fee-based bank, 75% of total revenues come from fees, similar to its peers in the custody business. And it has a market cap now of $42 billion. And in the fourth quarter, they put up an ROTCE number of about 19.9%. I'm very pleased to be with Dermot McDonogh, who is the Chief Financial Officer. As many of you know, he's been Chief Financial Officer since 2022 when he joined Bank of New York Mellon from Goldman Sachs, where he had many senior management roles at Goldman Sachs. Dermot, thank you for joining us.

Thanks for having me, Gerard. Pleasure to be here.

So maybe to start off, when we look at what happened in 2023, your first year as CFO of Bank of New York Mellon, maybe – it was obviously a complicated operating environment for many banks, yours as well. What are some of the lessons that were learned and your perspective being a CFO and how that sets you up for 2024?

Okay, great question. So, I joined the firm on November 1, 2022. People were still figuring out how to come back into the office. So, I was sitting there on my own doing the transition with Emily, who is a great partner, and we really had a great handover. And then I guess this is the week this time a year ago, it all kicked off. So, a year is a long time. But I was zooming along thinking Q1 was going to be okay, doing my scripts, getting rehearsed, quarter's looking good and then boom. And so, I learned a lot about the BNY Mellon culture in a very, very short space of time. The coming together as a team, a lot of experience, long-tenured people who really knew how the market was functioning. The interaction between the first line and the second line about how to show up for clients because a lot of clients needed some credit, a lot of clients wanted go to a safe balance sheet so we had a lot of inbounds, we had to open a lot of accounts for clients. And regulators wondering whether – we're settling the U.S. Treasury market every day. So, there was a lot of stuff going on, and it was good for me to learn about the firm and how it came together when a tough situation was there. And at the same time, we were telling you and the outside world what we wanted to accomplish in that year. It was slowing expenses, growing NII. A lot of people were saying, hey, the Fed is going to cut rates in the middle part of last year. Remember that? And here we are a year later and we're still wondering when they're going to cut. As Robin talks a lot about, when he's talking to the market, we really are in the preparedness game, the resiliency game. Very clean, liquid balance sheet. If there's trouble, we are the go-to place. That showed up again in the debt ceiling crisis over the summer, safe balance sheet, people came to us looking for solutions. And so, I learned a lot about the firm, and I learned a lot about how we were able to achieve our goals for last year where we had a good solid set of financials. We achieved a lot and we delivered what we told the market we would do 12 months later. So overall, I think it was a good year of transition for Robin and myself to get to know the firm, new people came on board. And the people that were there really came together so yes, I was very pleased.

So it sounds like it was baptism by fire?

Yes. Best way to do it, yes?

That's for sure. In January, on the earnings call, you provided a lot of specificity in terms of strategy and financial outcomes, that you expect for Bank of New York Mellon over the medium term. Maybe if we start with the strategy, can you talk about the process of the clarity of getting that strategy out?

So look, Robin started as CEO in August -- September of 2022. I came along in November, officially took the reins this time last year as CFO. And over the course of the last year, we did a lot of strategic reviews, understood the business in detail, how we made our money, strengths and weaknesses, efficiencies, opportunities. And it was really born out of a bottoms-up analysis with top-down intuition about where the opportunity was. But it was a very granular analysis. And we've talked a lot on earnings calls over the last 12 months about Project Catalyst, which was our efficiency project. In the summer of '22, we asked the firm to give us ideas, we came up with 1,500 ideas. We ranked them, put investment dollars after them. And so, there's a lot of hard work that's gone into that project which delivered half the growth rate last year, and we communicated to the market in January that we're going after flat this year. So, it's execution, execution, execution every single day that gives us the confidence that we can tell you that our targets that we gave to you in January are ambitious, but realistic, and we feel we can achieve them.

On the strategy, when you talked about digging down in a granular way with Robin, were there any -- when you got down and really saw things in front of you, were there any real surprises that you're like, wow, I didn't realize we were this good or vice versa? We still do this function manually or something?

So, I'll give you the yin and the yang. The good thing is, probably, you only get to know so much about a firm in an interview process, yes? And so, I would say we have a lot more jewels than the market fully appreciates. Now we say we're a trust bank and we're very proud to be a trust bank, but there's a plus-plus element. And I think, as a management team, we can and will do, over time, a much better job at bringing BNY Mellon together and explaining the story to the market. Because we have many businesses, we have 3 segments where we have 6 to 7 really important businesses wrapped up in those 3 segments. And we're known as the world's largest custodian, but we're a lot more than just a custodian. And last year, we hired our first Chief Commercial Officer in its corporate history. And it was more about how do we better, as an institution, connect the dots to deliver the enterprise of BNY Mellon to clients? We have an incredible client franchise, but it's very siloed. So, the yang of it is we're a very siloed and have been a very siloed company. And we run very vertically by lines of business, both in terms of people and tech. And so that creates a lot of inefficiency. We say we're the world's largest custodian, but we have more than 1 custody platform. We're the ninth largest bank in the United States. We have more than 1 deposit platform. And so that creates tremendous opportunity for efficiency or, as we like to call it now, we like to run our company better. So, we have opportunities to optimize and just show a better way to run the organization for our employees, for the shareholders and for clients at large.

You touched earlier about expenses from the comments you guys made in your fourth quarter earnings call in January. And you bent the curve, as you pointed out, and I think the stock has -- the valuation reflects some of that success. Now we're talking maybe flat expense growth in 2024. When you look at 2024 and maybe a little further out, how are you going to realize or what's the focus to make sure that you can really keep your foot on keeping expenses from growing?

So somebody -- there's an adjective that's used to describe me and the team, molecular. So, we do get down into the weeds. And, as the CFO, when I hand out budget, I expect a return, in either terms of revenue or efficiency or delivering what was advertised on the tin. So, I think we've raised the bar of accountability internally, in terms of we spend roughly $12.5 billion a year. It's a lot of money. And I would say there was a reasonable amount of leakage outside of the firm, in terms of whether it's our policy around how we spend on consultants, how we do procurement, vendor management, et cetera, et cetera. So that's our money and I'm very keen for us to get value for it. So, we've become much more disciplined about how we spend our money externally and the value we get for it, and then internally about prioritizing the projects that we want to get after and really kind of say, okay, these are our priorities for this year, this is what we're going to deliver. And then if it's a really good thing but maybe not for this year, maybe next year. And so, we've become quite disciplined. And we run the firm from a governance standpoint, we have what we call strategic business reviews. Which is where we potentially see an opportunity to go after something, we sit in a room, we brainstorm. It's a messy meeting. It's not a budget meeting, it's not it costs too much. And it's like what we ideate, yes? And then if we like the idea, then we figure out how to cost it and then we prioritize it. And then we have a process called MBRs, which is basically the operating budget of the company day in, day out. Are we hitting our targets? Are we overspending? Are we underspending? What's going on? And we've become very disciplined and rigorous about that.

And in that thinking, how do you manage your goal of expanding the pretax margin, but at the same time, understanding investments have to be made in the organization?

So, I like the concept of operating leverage. And so, positive operating leverage is even nicer. Positive operating leverage, net of NII, is the Dalai Lama for an institution like ours. And so that's what we aspire to. That's what we're working towards. And at the same time, we're cognizant of the fact that we need to invest and we need to allocate resources for the vision of 2, 3, 4, 5 years out, where is the market going? An example, we spent a significant amount of money last year on Wove, which is our new wealth tech platform in Pershing. That wasn't cheap, but we did it at the same time of a 2.7% increase in expenses down from 8% the prior year. And so, we're making considerable bets and investments in our technology this year, particularly in Asset Servicing and other parts of the firm. We don't necessarily advertise it because you think when we're a flat expense firm, we're not doing anything. But underneath the hood, we are investing significantly in AI. We're investing significantly in cyber resiliency. We're investing significantly in cloud. We're doing some cutting-edge stuff, which will bear fruit in the years to come. At the same time, keeping flat. Now you have upset people internally because they don't get what they want, but we come together as a team. We decide what the priorities are and we get behind that and root for it.

Got it. When we talk about growth, you didn't give any explicit fee guidance growth on the fourth quarter earnings call for 2024. But when you look at some of the components that you gave, one could imply that there's probably 3% embedded year-over-year growth in fees '24 over 2023. I guess one question why weren't you more specific and just give the guidance. And then the other is, what are some of the real underlying growth metrics over time that fee growth could actually be stronger in the future?

The reason why we don't give the fee guidance is because, I think historically, at least this is a folklore with inside the firm, we would give the fee guidance and then explain in subsequent quarters why we didn't make it. So, I prefer if I'm going to give you guidance that you, the market, believe that when I say something, it's something that we really feel we have a good chance of getting after. And so the fee guidance is a lot of it -- there's some elements of it that we control, and there are some elements of it, a decent amount, we don't control, market level, risk appetite of clients. So, it's a tricky thing but I know everybody takes the model, puts in expenses, puts in NII, backs out and get into the number. And so that's -- but it's your number, not my number. So, you can't say you said 3% so why didn't you hit it? So that's the reason why I don't give the fee guidance. The true answer is, in our biggest business – if you think about the 3 segments, right, let's start with our most profitable segment, which is Market and Wealth Services. And if I -- a person on the street probably would have said custody because that's what we're known for, but Market and Wealth Services is our most profitable segment and it's our highest growth business. Clearance and Collateral Management, we clear the U.S. Treasury market every day. We're known for that. I think we do an excellent job of that but we're humble about it, and we constantly innovate and invest to suit our clients. And we -- I think I said on the last call, we did 1,000 code releases last year on the U.S. market because of client need for innovating products as the year progressed, and we're dealing with more difficult funding issues. We feel like we have a lot of opportunity to grow internationally and scale, and we can bring the benefit of being a large player in the U.S. internationally. So. we feel quite excited about the volume on the platform, our scale, our efficiency. It's a high-margin business that we feel has opportunity to grow. Treasury Services, run by Jennifer Barker, we're a top 5 player in the U.S. dollar payments market. We have a big enterprise platform. We think we can penetrate corporates a lot more than we do today. We feel like we have a lot of digital solutions. We have a top-class engineering team supporting that business. So, we feel like, we set a very ambitious target 2 years ago to our Board to deliver by 2026, and we're on track to do it. And so -- and then the last one is Pershing. #1 with broker dealers, top 3 with RIAs, investing in Wove. We're big in that market and we feel we can continue to grow. So that's our most profitable segment, you go, keep investing, keep growing. And our main goal there is to invest in the segment at the same margin that we currently have. We don't want to dilute the margin that we have, which is mid-40s. Securities Services is made up of Asset Servicing, Corporate Trust and Depositary Receipts. Depositary Receipts, small niche business, high margin. We love our market share. We love our position. We can grow. As M&A returns, IPO market returns, we'll be there punching above our weight. We feel we have a strategy this year of big plays, and we feel we're making some big bets. Not a huge amount of dollars, but we feel we have ideas to grow that business. Corporate Trust, tons and tons and tons of opportunity to become more efficient, grow market share, more products for clients. I'm personally very excited about that business. And Asset Servicing is just the elephant in the room. And I'd say since Emily has moved over to Asset Servicing, she's brought in some tremendous talent. Product specialists, engineering specialists, operational specialists, real cream of the crop stuff. Which is going to allow us to develop new products in a better way to deliver for clients in an efficient way that will allow us to get the segment to the pretax margin we advertised in January, as part of our medium-term target, which I think is 30%. And we've got the last 5% to go, which we acknowledged are the hard yards. But by hook or by crook, we're going to do our best to get there.

And in getting there, how much is reliant on efficiency improvements versus just revenue growth?

I think it's both to be honest with you. For the enterprise, if somebody comes to me with a good idea and says, look, it's happened this year because budgets are dynamic. And it's not like you fix the budget and then say, call the CFO January 2025 and we'll do it again. And so, if somebody has an idea. At every meeting I have a say, how can we go faster? Do you need more money? If I gave you another $5 million to invest, what would you do? And so, people are on their toes. And hey, if you're not doing the right thing, I'll take it away from you. So, everybody knows that if you have a good idea that's going to deliver a good return for the firm, we as a management team are going to get behind you.

Yes. This may sound like a naive question, but coming back to the Treasury clearing business, which obviously you're in, can you frame out how important is new issuance driving revenues versus trading in Treasuries? Can you frame that out?

It's just pure volume. So, it's pennies on notional. And we have a very scaled platform. So last year, Treasury was issuing a lot. We think that's what's going to happen for the next few years. And volatility is high. So, when you have a combination of risk-on, risk-off, Treasury issuance, high volume, that's good for BNY Mellon and that's good for our business.

Okay. Coming back to the Market and Wealth Services business, I think you mentioned the mid-40s margin, which is very impressive. Does acquisitions ever filter or come into your thinking for that business? What’s your thought on that part of it?

So, I get asked that question a lot. And so, how I answer that question, I would say it's two ways. One is a reflection on the year. So, I was asking Marius this on the way up, I said, "Does anybody read the shareholders' letter anymore?" And he said, "Well, I wish more people would read the letter, given the amount of work we put into it," was his answer. And so, if you read the shareholders' letter this year from Robin and then you read the shareholders' letter last year from Robin, you will see 2 completely different sentiments. Last year's letter was reflective, looking back. Understanding what our assets were and figuring out how we're going to move forward. And he signed it off, "onwards to opportunity." So, we had a good year of execution. And this year, the sentiment, I think, in the letter is much more forward-looking, much more offensive. And even the conversation at our Executive Committee. We have it every Tuesday, 7:30 for an hour and a half. Today, it was much more revenue opportunities, serving clients. It felt high energy inside the firm. And so, to the M&A-specific point. I don't think we're ever going to do -- and now -- not in my lifetime, it will be great in my lifetime, but not in the near term, a transformational acquisition. But could I imagine that we would do bolt-on to make us go faster to market or a software acquisition to give us a capability that we currently don't have? Yes, I could see that. We've started to screen, because I think you learn a lot by looking at clients and looking at acquisitions. We need to build the muscle memory of how to do it. I come from a place where we had lots of bankers. Now we don't. So, we have to do it a little bit ourselves. And so, we spend time thinking about it. And I think it speaks to the psyche of the firm and where we are in terms of moving forward to be able to think about it and screen for it. But I would say nothing big on the horizon.

Right, got it. Maybe shifting over to the net interest income. Last year, obviously, was a very volatile year as we talked about and ended up, I think, exceeding your guidance when you look at the whole year. How should we think about the sensitivity for the 2024 net interest guidance with the various macroeconomic scenarios and client behaviors?

So, I think this is -- I think it's a little bit of a jewel actually that we have, how we're set up our ecosystem. In terms of 2/3 of our deposits are operational. Big debate now that we're at the 1-year anniversary, big debate with the FDIC. We had to take it on the chin, they didn't like operational deposits, or they thought of it as more uninsured. And so, our deposits are sticky because clients are doing other businesses with us, and they leave cash with us. And so, the combination of our treasurer, the person who leads our deposit pricing and deposit raising efforts across the enterprise and our CIO, is a very, very strong partnership. And I think that really stood us in great stead last year. We started to take actions the prior year, where we took a view that rates were going to go up quickly and we repositioned the book. We did the restructuring in Q4 of 2022. It's history now at this stage. But it gave us muscle memory, it gave us confidence. We have a very clean balance sheet. We have a very liquid balance sheet. Our ratios are very, very healthy. And we're very conservative. And so, we gave guidance, I think, in January, roughly down 10% from last year. And I said at Barclays in September and again, Goldman in December, we hit a trough in August of last year, and we saw deposits climbed from there and Q4 was good for us in deposits. And by and large, that trend has continued into Q1 of (sic) [ that continues to be true ] this year.

And speaking of deposits, obviously, your deposits were greatly affected by the actions of the Fed during the pandemic, QE. Now we're into QT. What do you think the final impact will be to Bank of New York's balance sheet when we look back on this period 3, 4 years from now?

I think we'll be fine. We're 240 years this year. I think we'll be 245. I think we'll be in good shape. We'll weather the storm. We have very, very strong relationships with our regulators. We're there to serve. We have a huge role to play in the financial markets. Like there's a reason why we're a GSIB and we take that role very, very seriously. And we plan to be around for a long time and regulation will come. We won't like some of it, we'll advocate for it. But when the dust settles and it gets implemented or rules passed, we'll follow it.

When you think back on the pandemic, what are some of the lessons you guys picked up because of what we went through? I mean, it was an extraordinary period of time. And are there any 1 or 2 things that you say, wow, we really learned this and we'll be able to use it going forward?

So, I wasn't there in the pandemic, so I can tell you what I've learned about. So, I started with the culture point in terms of the coming together of the firm in March. So, what I would say to you is, in Q4 of last year, we laid out 3 strategic pillars for the firm, be more for clients, run our company better and power our culture. And for me, the power of the culture is the most important thing. I think they eat the other 2 for breakfast, yes? Because if you have the culture right – We have 53,000 people. If you can get 53,000 people rallying around the mission, it makes 1 and 2 so much easier. And so, you learn a lot in stressful situations. For the planet, the pandemic was a stressful situation. And we learned how to adapt, how to innovate, how to work in different ways. But fundamentally, I think financial services is a working together, close your ears, in-office culture. And so, I really think the firms that have more of a togetherness culture will prevail in the long term. Because it's all about ideation, about networking. We've invested heavily in the apprenticeship culture, hiring analysts. And the only way these analysts can grow and become experienced and get positioned for senior positions is by being together and learning. So, we have a good amount of investment going into our learning culture and giving people professional development, it was something that was underinvested in. And we spend a lot of time on the culture point. And another, I think, really important thing and I was -- I missed this at the start. You can't underestimate the importance of communication internally. And I think Robin as CEO does a world-class job in communicating with the firm about what's going on. And I do think it's created true followership. The ambition of people in the firm has raised significantly over the last 14 to 24 months.

That's great. We have time for maybe one more question here. On the first quarter, is there anything you want to share with us in terms of how the first quarter is shaping up?

So, I guess the short answer is, if you give BNY Mellon credit for what we did last year, you should continue to give us credit for what we're going to do this year. And so, I would say the short answer is, no surprises. I like the consensus.

Good. And with that, I see a 0 on the screen so it's perfect timing. Please join me in a round of applause. Thank you, Dermot, for attending.

Thank you.