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

Next up, very pleased to have BNY. Did I get that right?

You sure did.

Fantastic.

Congratulations.

Oh, it's even on the screen, we got it right. That was all Jessica.

But if we could just put the first ARS question. From BNY, very pleased to have Dermot McDonogh return, Chief Financial Officer. Great to have you back. I think last year was your first appearance at an investor conference. You've done several since. But maybe fast forward 12 months on, a lot has been going on at BNY. And maybe just start off by catching us up on what you've been up to over the last year and maybe key lessons so far.

First of all, thanks for having me here. It's great to see you all. What a 12 months for us. Very pleased. It's gone by very quickly. We've just celebrated two years of Robin's leadership at the firm. Over the last 12 months, the market and the investors who put their trust in us have given us a good return. The stock is up over 50% since I was last here. S&P is 22% and the KBW is a little over 30%. So, the market is happy with the work that we've done. Just to go back to September and roll forward a bit. In the fall of last year, internally, Robin outlined the three strategic pillars in which we wanted to really drive the firm forward. And that is: Be More for Clients, Run Our Company Better, and Power Our Culture. We spent a lot of time internally with comms, talks, strategy sessions, really communicating to our 53,000 people around the world what that means day in, day out. In January of this year, at our year-end earnings call, extended earnings call, we outlined what that meant for our medium-term financial targets. We feel that the market and our investors responded well to that. The stock was up 4% on the day. They liked it, they digested it. They reflected on the fact that we set out to do a few things last year. We executed well. We set out to do a few more things this year. And we're on target and executing the hell out of that strategy. In the spring of this year, we outlined five principles to support what the three pillars are: Be Client Obsessed, Stay Curious, Own It, Thrive Together, Spark Progress. That's the what, the pillars are the how. And then we underpin that with Platforms Operating Model, which is changing the way we work, day in, day out. And we went live with the first wave of that in March, 7,000 people. We'll go live next week with wave two, another 7,000 people. And by the spring of next year, we will have 50% of the firm operating in the model, which is a different way of working on delivering for our clients. Also, along the way this year, we did the corporate rebrand. You joked a little bit about it at the start. But I think Robin and the leadership team felt we needed to reflect where we were as a firm today, bringing a sense of modernity to it, the brand, the color and give more of a sense of belonging on what we're about in terms of the corporate strategy. And we did this in a year where we look back and reflect on the history of 240 years as a firm. So, it's been a really good year in terms of the things that we've accomplished, the financial goals that we've set out to attain, and three quarters since I've been here of solid financial results. Overall, a lot of hard work every day, and we feel like we're executing well.

You referenced a lot in that response in terms of what you've done to strategy and action plans and laid out the financial targets. Maybe in the near term, what are your top two or three priorities and where you're focusing your immediate attention?

If you go back to when Robin took over as CEO of the firm, I joined as CFO a couple of months after that. There really was a bottom-up analysis of where we were as a firm and what we felt our capabilities are. And there was a general sense inside the firm that we needed to demonstrate to everybody that we could run the company well and deliver on targets. I think we've done that over the last 15 months. We've talked a lot about on earnings calls and in other investor shows that the firm historically has been a very siloed organization. We've set about dismantling those silos, and we've talked about some of those things in previous interviews. But I think we've come a long way in getting people to communicate. We synthesized that. And then operationalizing One BNY. That's about delivering different parts of the firm in a holistic way for clients. I had a client lunch yesterday where the purpose of the meeting was to talk about custody and how do we retain that client as a custody client. We ended up talking about eight other things in addition to that, but they didn't fully appreciate that we provided those services. The person on the other side of the table was asking me, "What exactly is Pershing?" When I finished explaining what Pershing was, he said, "Could we do that? Can we have that?" So, it really is equipping our teams to be able to talk about the firm as One BNY to their clients. The other point I would make, which is really our focus going into budget season, is Cathinka Wahlstrom joined us last year as the Chief Commercial Officer, and her mandate is to really unify the sales force of BNY, as opposed to a sales force by line of business. She spent the last 12 months putting the scaffolding in place, the infrastructure, the training, the accountability of the sales force. That culminated in a three-day on-site/off-site coming together with all our salespeople around the world, which hasn't happened for a very long time at BNY, where we did a lot of presentations, talking to each other, the different products, how we can show up for clients in a different way. One person was doing a presentation, a senior person from another line of business said, "Wow, I didn't realize we have that product to sell. I can sell that all day to my clients." It's been demystifying the firm for internal clients, and I think that is really a big opportunity. We won a nice piece of business in May of this year that we just couldn't have won two years ago, because we were able to pick different parts of the firm, put it together, and deliver a solution to a client that no other firm could do. We feel like we have unfulfilled potential to do a lot more of that for clients.

I guess at the onset, you referenced the stock price performance. And I think one of the drivers of that is also the organic growth opportunity you just referenced. So maybe just put external factors aside for a moment like rates and the market, and just talk about the opportunity to drive sustainable, higher underlying growth at BNY over time and where do you see the greatest potential?

To be honest with you, it's everywhere. The one that we have talked about the most over the last year is Wove in Pershing, which has been an exciting opportunity for us in terms of developing a completely new platform, software. Very sophisticated, clients love it. We guided in January that we would do $40 million of sales this year. Through the end of Q2, we signed 21 clients. We continue at pace to deliver that. By the end of this year, I suspect we will meet or beat our target in terms of our expectations for Wove. It's a steady burn and it takes a lot of effort, but we're attracting new clients to the firm, and existing clients are adding that capability into their portfolio. I think if you take our most profitable segment, which is Market and Wealth Services, the two other businesses in that segment are Clearance and Collateral Management, and we've had a good year there. We've performed very well through the first half. Brian, who runs that business, said at the beginning of the year, international is where we were going to see the big opportunity this year, and that's where we're doing it. And we are out there hustling for business and doing well. Then Treasury Services, a digitized business, very sophisticated. We're a top five dollar clearer in the world, and we're growing, new clients and new products. If you take a step back and look at that margin, it's a 45% margin, and we're growing at the margin. For wealth and asset management, which I constantly get challenged on, Jose Minaya joined last week, and he's spending all the time with the team, understanding the strategy that we've put in place, and we expect great things from that business now that Jose is with us. So, I would say there are lots of things that will add up to allow us to sustainably grow organic growth into the future.

I guess you -- and even Robin before have talked about this operationalizing the steps you're taking to improve underlying growth into a nuts and bolts processes of BNY. It sounds easier said than done, given what we've seen. How are you going about that?

You go back to the three pillars: Be More for Clients, Run Our Company Better, and Power Our Culture. For me, I fundamentally believe it all starts with the culture. So, you get the culture right, and you evolve the culture into - the way I think about it, we want to be high-performing but human. We've done a lot over the last two years to do that. We are investing in -- when Robin took over as CEO, one of the first things he did was to launch an analyst class. The first year was 500. The next year was 1,000. This year, it's 2,000. So we're seeding BNY with fresh energy, good schools, fresh energy, growing the leadership of the future. We want to be known as a world-class learning culture. We're investing in learning. People go on a really good training program when they join the firm. We're giving people all the financial skills to really do their job in a first-class way. We're spending a lot of time digitizing and automating the firm, so that people are doing higher quality work and they're not doing spreadsheets and reconciliations, but the work of the future. We're embracing AI in the way that everybody else is. There's a lot of cultural energy in the firm and optimism. What somebody said to me yesterday in one of my skip-level meetings was, "Dermot, in the past, people talked about risk and conservatism and manual processes. And now we're talking about opportunity." It's a big shift in the mindset of the firm. And when you get 53,000 people talking like that, opportunities come. When people are talking and they're networking, you get the network effect of salespeople reaching across the aisle to talk to each other. It results in good outcomes. That then feeds to running the company better. We don't talk about cost management in the firm. We don't talk about expenses. We talk about, does this run the company better? Would you do it at home? If you were an entrepreneur, would you spend the money like this? As I say, I'm not cheap, but I hate waste. That has really instilled good financial discipline in the firm. People are stewards of their own budget, their own resources. When they want money, they come and ask for it. If they have a good project, we'll fund it for them. Then, all of that shows up in being able to deliver better things for clients. Client service is everything, and we want to be unreasonably hospitable to our clients, and that's what it's all about.

Then maybe shifting gears to the inorganic growth front. Last week, you announced the acquisition of Archer, which provides managed account solutions for the wealth and asset management industry. Maybe just talk about the strategic rationale for the acquisition and how will it help with growth?

I'll say a couple of things about that. One is, it's an important signal externally, because it tells you that we feel good about how we're running the company internally. Because over the last couple of years, we said, when we're ready, we'll be ready, and we'll tell you. So that's a signal to say we feel we have the firm in a good place in terms of knowing what we need to do to run the company better from an internal standpoint. At the beginning of this year, we did a strategic business review on a particular topic, and we realized that we had a capability gap. And so then, the analysis, build versus buy. So we were doing too many things in terms of building for ourselves. We felt that if we were to build this capability, it would distract from other priorities. I think this year, we've funded $0.5 billion of investments for the future. We felt that was going to be a bridge too far for our engineering folks to take on an additional projects. So we said, who's the best at this? We scanned and we talked to our new friends. We met them a few times, and culturally, it was a super fit. And as I was saying to the team before I came on stage, if this was an acquisition that we did five years ago, Asset Servicing would have brought it into their business, and the rest of the firm wouldn't have seen it. Now the firm is buying it, and it's going to deliver capabilities to four different lines of business. It's going to close in November. We really like the team. The CEO, Bryan, is a top-class individual. I think, culturally, it'll be a great fit, and we're going to integrate it in a first-class way. We're very excited about the project, and it generated a lot of optimism internally as well.

I guess the natural follow-up question is should we expect more M&A from BNY? And then, are there other areas you think you need to lean into acquisitions? And then, I guess, in that vein, any other businesses maybe you think you need to exit?

I think Robin has said a few times that we don't see anything transformational on the horizon. But for sure where we feel we have capability gaps, we will look for opportunities. Now that the bankers around the city know that we've done an acquisition, we'll look for plenty of ideas for them to bring, ideas about capability gaps, that we might want to have. And so, will we do more? I think so. Is there anything immediately in the horizon? No.

Got it. Maybe quickly run through the key businesses and what you're seeing. Start with Asset Servicing. A lot of talk about improving the pre-tax margin in the Securities Services segment through profitable growth in Asset Servicing. What are you doing differently to improve profitability in your largest business?

Last year, I funded two big projects with Emily, who's the leader of that business. It had suffered from a lack of investment over a period of years. They needed two big projects in terms of tax processing and corporate actions, to really get it to where it needs to be in terms of leading edge, and we're delivering those. The other thing that we're doing a lot with clients is, if you change your behavior and do it this way, we can reduce all these manual processes, give you a better service, it would result in less risk operational or otherwise, and you can get a better product. We've had great conversations with clients this year who have changed their behaviors, which result in a lot more straight-through processing. Also, we've hired a bunch of leadership where we have gaps in our bench who are adding new ideas and new products, and we're showing up in a better way with clients. This time last year, we had a very good momentum going into the fall. We had a lot of good sales wins. This year has been very good for us in terms of client wins. The conversation is less about repricing downwards. It's not a conversation that we're having with clients at the moment. I keep saying when I meet clients, we don't want to be the cheapest, we want to be the best. And we walk away from business if it doesn't hit our hurdles, we won't take it at any price. So, we've put in pricing standards. It has to be a profitable business that hurdles our margins. I continue to work with the team to figure out how we take cost out, so we can improve their margin, so that they can price more competitively. We have a number of initiatives underway to achieve that.

In Issuer Services on the last earnings call, you highlighted the pickup in Corporate Trust activity and also market share gains. Maybe just talk to some of the secular drivers of that business. Do you think of that business as more of a top-line growth story, efficiency story, or combination?

I think it's an everything story, to be honest with you. Trivia question, how many clients do you think Corporate Trust has?

I would say a very large market share.

We've got 21,000 clients. That's a great opportunity. Again, a business that was neglected for many years in terms of investments, because it had a high margin. So we ended up with a lot of manual processes, a lot of operational risk in the business, and our market share declined. Last year, we made a strategic decision to invest more in the infrastructure, to hire high-quality people, and to go after market share at good margins. We've achieved all of those. And it's been a beneficiary of the Platforms Operating Model, what we went live with in March. Our loans platform went into the model in March. That services Corporate Trust, it services our on-balance sheet lending activity, and it services our loans activity in Asset Servicing. Three years ago, that would have been three separate projects. Now it's one strategic project for the firm, done once, done well to a very high standard. Last week, we had a review of the platform, and we've processed 54% more loan activity, volume of actions from 2 million to 3 million, with less headcount. It shows that we're now able to scale the business and are in a position to grow market share with our clients. We're very excited about the forward for that business, and more to come in that space. The last point, which is really important. As you said, top-line and bottom-line. It allows us then to have more strategic conversations with the C-suites of those companies where we're doing the servicing for them. So, we can go in and offer more products and services. It's a good way in. That's one of the reasons why I like the investments we're making there.

Makes sense. Pershing, obviously, serves the U.S. wealth management market. I think there's over $2.5 trillion of AUC on the platform. You've obviously talked a lot about Wove, which is your platform for wealth advisors. Maybe just talk about what level of organic fee growth do you think is realistic in that business? Over time, you mentioned in-line to better than planned for this year, but maybe longer term.

The thing I like about that business, Jim Crowley runs it. Great team. We've earned our way through a tough situation with the FRC takeout, because that's pretty much gone and behind us now, so I don't really have to talk about it on earnings calls anymore. That undisclosed one is finished. I think we've said on a bunch of calls in the past, we believe that we can grow that business low to mid- single digits. We've still got our underlying pieces. We are number one with broker-dealers. We have very, very strong market share with RIAs. It's a very fast-growing, very competitive segment. But we believe our unconflicted position in that space allows us to do things for the clients that others can't. So, we feel very strong about that business.

And then just lastly, on Clearance and Collateral Management, we've seen double-digit fee growth the last several quarters now. Is that sustainable? And if not, what level of growth do you see for the foreseeable future? And what are you watching in terms of evolving headwinds or tailwinds for that business?

When the Treasury market grows, we grow. When the volumes are there, we're going to do well. So, you see a lot of volume in the Treasury market, you think positive things about BNY. I feel very strong about that. The headwind is the Treasury central clearing mandate coming up, but we believe we're going to earn our way through that, and we have an opportunity to do more with clients internationally. Fundamentally, I feel, again, very, very strong about the future of that business because we are a dominant player and the network effect of once clients come on to our platform is very, very strong.

Helpful. All right. Now, the financials.

I thought we were nearly done. No?

We've got at least another 15 minutes. Net interest income. Last year, you kept your NII guide unchanged throughout the ups and downs of 2023. You ultimately outperformed that. This year, again, you stuck with your guidance through the beginning of the year, although the first half did come in slightly better than expected. Can you give us an update on how 3Q is playing out? I know you typically experience a seasonal decline in deposit balances over the summer months, but any further insights would be helpful.

Last year, we guided 20%. We ended up at 24%. We had used the word "skew to the upside" throughout the year because it's just a volatile time. And I was chatting with the team yesterday, and this one is an interesting time for us, too. If you think about it, it's the first time in 30 years where we're probably going into an easing cycle which is a classic one. Maybe the economy is softening a bit, and the Federal Reserve just wants to get ahead of it, as opposed to the last 30 years it's been like from 5% to zero in 24 hours because of bad stuff that's happening, whether it's 2008, 2009, 2011, COVID. So, this is a different type of easing cycle. So, specifically for the quarter - or for the year, we guided down 10%. As best I can tell, the models of the analysts have us down 6% to 7%. We're probably closer to down 6% to 7% than we are down 10%. I feel reasonably confident nearly three quarters in that we outperform the down 10% guidance. As it relates to balances, NIBs largely behaved as we expected them to in Q3, and IBs behaved a little bit better. We're doing well for Q3, which gives my confidence in being able to say we're at where the analysts have us at the moment in terms of the full year.

So, when you say down 6% to 7%, that's 2024 full year?

Yes.

Helpful. Okay. Maybe talk on deposits. The audience has a view on betas. Fed's going to cut next week. We saw obviously trust banks have very high betas on the way up. How are you thinking about betas in the down cycle?

Largely symmetrical. So, I feel okay. I have to say and I've said this many times before, the way we have structured our team between the Treasurer, the CIO, and the head of our deposit book, it's working really well, and we've done a bunch of things over the last few months to make it even better. We're having much more proactive conversations with our clients. And we don't lead with deposits. When we're doing well on deposits, it typically means that we've got good flows and good volumes in our other businesses. So, overall, that feeds to decent fee performance as well.

The other piece that's resonated with the market is the change in expenses since Robin and you took over that. But I think 3% growth last year. Core expenses this year are up about 1% in the first half of the year. Maybe just talk to what are some of the actions you're taking to continue to drive the lower rate of expense growth that we've seen. And then, you've talked to flattish expenses for this year. How do you think about that?

Just to recap again, it was 8% in 2022. We guided 4% last year. We ended up at 2.7%. We guided flat this year. I think it's just important to anchor everything in this in terms of when we set the budget and when we talk as a management team. We anchor everything in positive operating leverage, all in. You've got three levers. You've got fees, you've got NII, and you've got expenses. And we set up the firm this year to deliver some positive operating leverage to the market, which, in turn, set our medium-term financial targets in January. We think we're accomplishing that for our investors. The thing that we control the most is the $12.5 billion of expenses that we get to invest every year. As a firm, we've become very disciplined about how we spend that money. We've done a lot of hard yards over the last couple of years. I feel, as I said in a couple of questions ago, we've instilled a sense of financial discipline in the company that wasn't there before. When we make investments, we want to see a return to the investment that we're making. We have very high standards, and we hold people to account. That has created a very good stewardship of our financial resources, not just me as the CFO doing it, it's the whole firm doing it. I think the EC, the Executive Committee, under Robin's leadership, has really come together to deliver that for the firm, not just for each line of business. I feel very proud about that. It feels like an easy thing to say, but when you do that every day, it adds up to a lot of money. I think we've become really good stewards. For this year, I think we'll be in that zip code that we guided. If we're a smidge up, it'll be due to revenues being higher, and so more brokerage, revenue-related expenses. But excluding that, I feel very good about where we guided at the start of the year and where we're going to end up.

Got it.

We get a lot of questions from investors, are you doing things that you shouldn't be doing to prove you can manage expenses? Are you starving businesses from investments? And then, when the next CFO comes, expenses will be up 10%? The answer to that is absolutely not. As I said a few minutes ago, we invested $0.5 billion this year in future projects. We're investing and running our company well at the same time.

And then, on the revenue side, we talked about net interest income, I glossed over fee income. I know originally you talked to up 4% for the year there. Any updated thoughts in terms of what you're seeing?

I think Eric said it well yesterday, constructive markets. When the S&P is at where it is, we benefit from that, and the flows have been good. We feel that's working well, and we feel the firm is running well at the moment.

Got it. And then, maybe talk on capital returns. You had talked about the Archer acquisition earlier. Obviously, evolving macro backdrop, lower interest rates, helping things like AOCI. Have you had any - when you put that all together, when you think about buybacks for the rest of the year? You've talked about 100% or more return of earnings to shareholders, dividends, buybacks.

I think we pay a good dividend. It's competitive. We increased it this year, 12%. We've been consistent in our messaging on buybacks. We have a capital-light business model. We've been running at the upper end of our management buffer as it relates to capital for the Tier 1 leverage ratio, which is our binding constraint. Comfortably absorbing the acquisition, our guidance is consistent in the 100% plus a little zip code for capital buybacks for the year.

Helpful. I appreciate it's only September, but I suspect you're starting the 2025 budgeting process.

Four hours on it today, just so you know, before I came up here.

Do you want to share your first cut? We're more than happy to listen. But I guess maybe just fast forward, when we have you back next year, what do you think we'll be chatting about? And any early views on that 2025 plan?

Robin has done a terrific job in assembling a world-class team. It was interesting, at the commercial liftoff sales force event that we had a couple of months ago, the general remark from a lot of people in the audience, and we had a few hundred people there, was how well the leadership team were gelling together. That makes a very important cultural signal to the firm that we're not running in silos. People enjoy working together and delivering for clients. That collaboration really is -- our attrition levels are low, and we're attracting really good talent. I know people are showing up in a different way, and that really is down to Robin's stewardship. I keep thinking that we're just going to execute the hell out of the strategy that we have. And then, over time, we're going to see more products. You're going to see more interesting things come from us, because we're developing a flywheel of innovation, and the client engagement is very strong. I was really excited to join two years ago. The two years have gone by in a heartbeat, and I feel more optimistic about the future for the firm than I did when I joined first, and I felt optimistic then.

I think last year at this conference you signed up for positive operating leverage for the following year? I don't remember.

So, I don't know. If you don't see me next year, that means Robin won't be happy with the answer I'm about to give you. But I personally will sign up for positive operating leverage for next year.

Fair enough. I did write something I wanted to go back to if we had time, and it looks like we have some time. But you mentioned before, moving people over to this Platforms Operating Model. What does that mean? What does that do for you? Maybe build more into that.

So, I'll give you two examples. If you click underneath the three segments, we have roughly seven lines of business. Three years ago, we would have had seven different client onboarding platforms. Everybody had their own. That seems, from a regulatory standpoint, inefficient. From an operational standpoint, inefficient. From the deployment of technology and leadership, inefficient. And that ended up, if a client was dealing with more than one line of business, very unsatisfactory and clunky client outcomes. So, earlier this year, we put it all into one platform, all under one leadership, Brad Ockene. So when you come to BNY to be onboarded, no matter what the business, you come through one funnel. So you end up with a much better client experience, a more seamless outcome. Then we can deliver top-line satisfaction and over time, hopefully, top-line revenue because of that satisfaction, better regulatory outcomes, and greater efficiency in the process. I talked about loans. So, very unwieldy, clunky loans, servicing, infrastructure built up over many years, acquisitions, legacy tech, mainframe. You name it, we have it. One platform, one leadership team servicing the firm, one set of KPIs, one set of OKRs, one spend envelope for investments. Then you can manage the metrics, which resulted in me sitting down with the team last Thursday, and they're saying up 54% in volume. Less errors, less manual, less heads, more efficiency, more strategic, happier clients. You do that for 53,000 people, you're going to have a much more culturally strong organization, better run company, and really we're going to deliver for clients, which will drive organic fee growth.

Great. On that, please join me in thanking Dermot for his time today.