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

With our fireside chat with The Bank of New York Mellon Corporation. As many of you know, the company has over $400 billion in assets as well as over $2 trillion in assets under management and assets under custody now are well over $52 trillion, which is an amazing number in our view. The market cap of the company, obviously, has come down a little bit like everybody, but it is around $64 billion, which is one of our largest market caps in the U.S. Banking space. So many of you know Dermot. He's the CFO for Bank of New York and came over in 2022.

Fall of '22, yes.

Yes. From Goldman Sachs across the street, from their office in downtown and has been very focused on delivering incredible results and keeping and giving guidance and hitting those numbers, particularly on expenses, which is really, I think, favorably, as you know, affected the stock price.

But maybe in view of what's going on in the world today, maybe we could start with how the operating environment is looking from your perspective in 2025, granted it's only two months in and talk to us about maybe the outlook that you guys see with kind of the cross currents that are going on.

So, first of all, thanks for having me.

You're welcome. Thanks for coming.

Yes. We're coming in the car on the way up. And I said it's been like literally a year since I was here the last time and I was reflecting on that conversation. So, I said, let me have a look at what the stock price was a year ago today. And so, the stock price was about $55. It's about $85 right now. We'll see what it is in 27 minutes. And so, I think BNY and the team and the firm under Robin's stewardship has had -- '24 was a good year, yes. We're pleased with the results. It was record revenues, record PTI, we delivered four quarters of positive operating leverage. So, I think over '23 and '24, we kind of set out to do the things that we advertise in our year-end results and kind of outlook for the following year. So, I think with all of you in the audience and listening in, I think we feel we've established credibility in terms of do what we say, say what we do, mantra. And so, we kind of finished the year with some really strong momentum. We've built out a lot of things last year, particularly on the commercial side, the sales side of the house. Really kind of de-siloing the firm. So there was a strong, I would say energy in the firm in terms of the art of the possible coming into this year. And so, as I said on the earnings call at the end of the year, we're setting up for what we believe, given all reasonable outcomes in the market, another year of delivering positive operating leverage. We kind of gave a 1% to 2% guide on expenses. We gave mid-single-digit guide on NII. And so, we feel like if we execute well every day and constantly get better, '25 is going to be a solid year for us.

Very good. No. In fact, coming back to last year, at the beginning of last year, Robin presented some detailed strategic road maps for Bank of New York and to the investment community. Can you remind us of some of those key areas, One Bank of New York, possibly? And how that is your focus to increase long-term shareholder value.

Yes. So, you kind of internally and externally -- I think Robin said about what's the best way to communicate and harness the energy of the firm. So, we get everybody kind of going in the same direction. And we kind of came up with three strategic pillars: Be More for Our Clients, Run Our Company Better and Power Our Culture. And so at first glance, you may say, okay, that's straight out of Consulting 101. But one thing that's very, very important is how you communicate it internally and externally. And for those of you who haven't read it, I would take a moment to read his shareholder letter, we put a lot of effort into the shareholder letter. We really want to communicate what we're doing in the firm. I think last year's shareholder letter was very well received by our investors and clients and people can see what we're about. And so, the same one again this year, which we just published last Thursday. And so, we talk a lot internally about how we want to show up for our clients and differentiate ourselves and win the trust of clients who want to do more business with us. We've talked a lot over the last couple of years about BNY over several decades, had grown up to be quite a siloed company in terms of businesses operated in a fairly autonomous way independently of each other. And it was a bit like a holding company with a discrete set of businesses, not very joined up. I think Robin and the leadership team have done at chipping away at that and bring the firm closer together, kind of one example of that would be we had our Commercial Liftoff last July, Cathinka Wahlstrom as our Chief Commercial Officer. We never had a Chief Commercial Officer before, and she set about bringing the sales organization of the firm together, so we could cross-sell and bring bundled solutions together for clients. And for those of you who watched Robin's interview on Cramer last Thursday, he went through one of those examples in some specific detail where we were able to bring the firm together and deliver four different products in a bundled way for quite an important client. And so, we plan to do more of that. And so, when you take our discrete set of businesses, add them together, not many firms have what we have, and so the clients can't get the bundled solution anywhere else. So, we believe we have a unique opportunity to differentiate ourselves. And so Cathinka is really driving that the commercial organization as one together, lifted off, started last July, and we really are making very, very good progress on the commercial side of the house. Run Our Company Better, I never use the word internally expense cuts, costs, efficiency. I'm like, would you do it at home? Would you spend your own money this way? How do we get value for dollars? How do we do vendor management, accountability for initiatives? If I give you money to run a project, I'm going to come knocking on your door and want to see the return, but I want to be like the Annoying Orange. I want to see the return. So, I think Robin has instilled in all of us a sense of be house proud, and be accountable and deliver. And so molecular is the word that we use quite a lot internally. We're into the weeds, we're into the detail. We're all player coaches in terms of getting stuff done. And that has grounded everybody in a desire just to run the company better. You run the company better, you're going to show up for clients in a different way. So, running the company better means being more for clients. And then the last one, I think the most important one is the culture. I think BNY has a great culture. It's been around for 240 years. So it's done something well. And but I think there's more we can do, and we want to be an organization that's high performing in human, and we're instilling a breathing fresh air into the organization and evolving the culture. We're not changing it. We just wanted to be in a different place. And I think part of that is hiring grads, like BNY didn't have a grad program up until when Robin joined. Now every year, we're hiring 1,500 grads. We're investing in technology. We're doing tons in the AI space. We're giving people a sense of belief and optimism that BNY is a place to work and a destination company and where you can come and do great things. And I think we've made a lot of progress there, and we continue to work hard at it. And I think more good things to come in that space.

You mentioned Robin's interview the other night on CNBC and giving that example and there's initial success, which is great. How long is the runway? I mean I would think there's many more opportunities in multiple years of this cross-selling and combining the packages.

Yes. Look, I have an Irish accent, I'm not American, but I have American Passport [ both ], to use the baseball analogy, like we're in the early innings, yes. And I do have a lot of optimism about the future. I think Robin has assembled a great team over the last few years. And we're all kind of rallying around his stewardship of the company. And we've got a lot of runway.

Yes. Good. Let's talk for a minute about measuring the progress and the ultimate success of what you guys are doing and -- last year, you provided some comprehensive set of medium-term financial targets. First, can you remind everyone what those targets are? And then second, what gives you confidence that those are achievable?

So, I guess in some ways, the confidence is they're achievable in that we've met some of them already and probably faster than we thought. And when I get challenged on that, so why aren't you changing your medium-term guidelines because you've already met them. I think the important thing is to meet them consistently through the cycle in good times and bad times. And so, we're a capital- light business model. So, return on tangible common equity to be in the 23% ZIP codes. Margin to be in the 33% ZIP codes, at or above to consistently drive positive operating leverage. So, I would say a positive operating leverage for the company is really the North Star because it's something that you can really explain well internally, and it gets people anchored around revenues minus expenses is positive. Keep doing that and good things will happen to the stock price. So, we're quite focused on that. And this year's I guess the guide, I've mentioned it already 1% to 2% on expenses, mid-single digits on NII, positive operating leverage. So, the thing is, like a lot of people look at the operating results, I look at the total results and so if you kind of take notables and put them in, we really haven't met the medium-term target yet. So, I think it's the medium-term targets, including notables. So, we have ways to go to show that. But I'm pretty confident we can do it.

Yes. You mentioned that you got to some of these targets faster than you would have expected. What occurred to get there sooner? What was the upside surprise, if you will.

So, I would say we're a scaled platform company. Last year was high volume, constructive markets and a transformation underway. So, as I said a few minutes ago, there's a lot of energy in the firm for change, right? People want to change. At the initial stages, change is hard. People like change as long as it's happening to somebody else. And so, people now see the change is delivering. "Oh wow, I didn't think we were capable of that." And I would say BNY in some ways had lost a little bit of its mojo. And I think Robin has done a spectacular job at giving the firm back belief in itself. And so, a little bit of self-belief and a bit of self- confidence as an institution to show up in a different way has gone some way with constructive markets and high volume to deliver that outperformance.

Got it. Very good. In January, on the earnings call, you all talked about Bank of New York transitioning to this Platforms Operating Model. Can you bring it to life and expand on some of the benefits you're expecting from this move that you put into place? And how is the transition going?

So, first of all, I would say it's -- a lot of tech companies run like this -- but I think it's the first financial services firms who embrace this method of doing it. It's hard work, but we believe -- like as I said, we believe ourselves to be a financial services platform company at scale who plays -- a firm plays a very crucial role in the financial ecosystem. So -- and it helps us do a number of things. It helps us de-silo because you use one thing well, one place to go. We set up just about a year ago, our payments platform. We process a lot of payments every day, but we have had and continue to have more than one payments platform, but now it's all in one place under the leadership of Isabel Schmidt who runs the payments platform. And she has that spend envelope to consolidate, rationalize, invest. And so what does that do? It shows up in a different way for clients. It runs the company better, and it powers the culture because the whole platform is run on KPIs and OKRs and everybody is in pods, everybody is working in an agile way. And everybody knows when they look up the -- they know what good looks like and they know what they're rooting for within their platform. And so, it cuts out a lot of bureaucracy and inefficiency. And what we've learned is people enjoy working in it. And so, you're in a much more agile way. You know what you're doing, you get the feedback on your work immediately. And things just happen a lot quicker. So, speed to decision is quicker, execution is quicker, design is better and it's just a lot more fun. When we were here a year ago, I was making a pitch explaining how passionate I was about our Corporate Trust business. We have one part of the business in the platform and another part of the business going into the platform into the model in 2 weeks' time. Then our whole Corporate Trust business is going to be in the model. And so over the course of last year, we increased revenue, we reduced expenses, and we gained market share. And so that's a combination of team, talent acquisition and execution and a benefit of that is from being in the model.

Yes, absolutely. You touched on and we talked about positive operating leverage, how you've achieved it in the last 4 quarters. What are the levers that you have to manage positive operating leverage as we go forward in case markets go sideways for a period of time?

So, the one we don't like to talk about compensation. Two, you can delay, defer, postpone investments. You can accelerate the initiatives for efficiency, you can delay hiring. We run ourselves in a pretty conservative way. But we have the playbook if things were to slow down. But I don't see that at the moment. It's not something that I'm unduly worried about. I think there's more opportunity for us to invest and grow the business rather than worry about the downside. But we're into the safety and soundness game and one of the big hallmarks of our strategy is resiliency being a core feature of what we do. So being up 24/7 and investing in that resiliency is very important to us. So yes, I think we have the playbook if there was a downturn, but and we're ready to do it if we had to do it. But we're more focused on the growth at the moment.

And speaking of the growth and the investments, how do you calibrate between making these investments and the drive for your pretax margin goals?

So, I'm not a big fan of hockey stick style investments. So we meet very regularly with people. I'm into dynamic budgeting as well. So we spend a lot of time on the budgets. We set up on the plan, but we can always change the plan if the opportunity is there. We had a meeting last week where we decided not to do something as part of that. It just fell below the line. The new administration is throwing up different kinds of opportunities to do different things in a different way. And so we said, "Well, okay, well, that's now gone from #7 to #4. But number 4 is still a good idea. So can we do everything." And so we went through it and at all made incredible sense, and I said, okay, go do it. And so now I have to go find the money somewhere else, but that's what we do. Yes, we're into more dynamic. If you think you have a good opportunity come, let's talk about it. But you have to be accountable for it, that you're going to deliver it. So I like -- I do like to do investments where you can see the return pretty quickly. Obviously, something like a Wove, we invested in 3 years ago, and we committed a fair amount of capital to it, and that was a big change. But now we're beginning to see the payback and the revenues are beginning to flow, and we're pleased with that investment.

Got it. One of the areas that's always a hot topic in technology and for banks is AI. How is Bank of New York now using AI? And where do you see the greatest opportunities for that going forward?

So we had a meeting a couple of weeks ago to decide as a firm how do we want to strategically think about AI. Shout out to Robin. Robin is a very sophisticated technological CEO, and he has spent a lot of time thinking through AI. He has spent a lot of time on the West Coast with all the CEOs. So he has a really good sense for the strategy for BNY and how we can leverage it. Leigh-Ann Russell is our new CTO, who joined us last September. She's very sophisticated in AI as well. And I won't mention the other person because otherwise people might try and hire them. So we have a deep bench in AI. And over the last couple of years, I think you have to put some money to work, honestly, you're not going to necessarily see the return in the short term because people have to learn it, fail a bit, try it out. So, I think a lot of firms are in the experimentation phase of what it means. We have had significant take-up in the firm and people are using it quite a lot internally. And so, we have a couple of very cool prototypes where if we can get it to work, which I think we will it's going to be -- make some significant changes for us. At the early stage, it's about AI doing things that humans don't want to do. And so we had our first digital employee and beta testing, doing kind of basic repair work on payments that humans just don't like doing that kind of work. And in a world where you have lots of volume going through it, you have a lot of repairs to do and the digital AI person who is not worried about return to office policy or anything like that, they work 24/7. They can do the work yes. So it means other folks can focus on higher-value tasks. And so, I think we've got a lot of prototypes in where you can do credit underwriting much faster than you can do with humans because you can just do the research a lot more quickly, writing research papers, there's a lot of opportunity there. So, the list is endless in terms of the opportunity, then you have to narrow it down and say, what are my big bets going to be. So, we have a couple of things in the hopper that we think are going to be quite exciting and are definitely going to, I think, generate more revenue ideas, definitely help run the company better and drive positive operating leverage. And I think the last thing is, as people become more accepting of the potential of AI, there will be less scared of it, because there is a bit of a scare factor for people about job security, et cetera, et cetera. And I think the more people use AI, the less fearful they will become on that topic.

No, we're not going to get a digital CFO, though, right?

I certainly hope not.

There you go. When do you think you guys will be able to say to investors that our positive operating leverage was helped directly because of our AI investments. When can we get to like a concrete where you can actually framing out so that investors -- because we hear a lot of good stuff about AI, but when do we actually like, wow, it showed up.

I think that's a very good question. I would say you will start to hear Robin and / or myself talk about AI on the earnings calls. And in the same way, earnings calls for me are a little bit of a check in, like these conversations. So, you'll hear us kind of sprinkling more, and this is what we've done this quarter, and this is what we're going to do next quarter. And because of this AI thing, this is how it's showing up here. And so you're going to see you're going to see more of that kind of incrementally over time. There won't be a big splash, but we'll definitely be telling you more stories in quarters to come.

Got it. Speaking of quarters, maybe we're two months into this quarter. Any update you'd like to share with us how the quarter is shaping up as we're sitting here on March 4 at the InterContinental?

Yes. Look, I think at 3:00 yesterday, nobody thought today was going to be the day it was, yes. So, it changes a lot. I would say, broadly speaking, the year has started in line with expectations. We had a strong pipeline coming into the year of what we wanted to do this year. The new administration hasn't really changed that. So, we still feel very good about the year. And we still feel very good about the guides we gave everybody in January. So, I would say for the now, it's kind of steady as she goes. Let's see where the next 3 weeks go. But yes, I would say, broadly in line with where we were in January.

Okay. Can you share with us possibly when we get at the front end of the curve at 3.75% to 4% or 4.25% and maybe the positive slope will come back. We lost it, obviously, in the last couple of days. But if we go through the year, where it's a little higher for longer at the front end, let's call it 4%. And we get a 4.75% in 10-year and maybe 5%, how does that affect your guys' net interest income? Now granted your fees are the major driver of revenues, but you still have, obviously, net interest income in there, too.

Yes. So, look, preparing for the mid-single-digit guide, again, this is 2 months ago now, there was a big move in the curve right at year-end as well and we snapped it for the purposes of giving the guide. And then we ran thirty scenarios, puts and takes and we cut the tail off in terms from a risk management perspective in Q2 and Q3 of last year by locking in some NII for this year. So relative to the guide given where the curve is, we feel very good about the guide for the year. So, I would say we're kind of plus or minus. We're close to home with the shape of the curve in terms of the outcome.

Okay. Got it. Maybe we could talk a little bit about deposits. During the pandemic, obviously, you guys saw your deposits grow quite meaningfully with QE as well. Now we're in QT, of course. What's your view of where deposits could be over the next 12 months here for Bank of New York?

So, I would say last year, we kind of outperformed NII last year. And so, I guess the -- some of the factors to that were the overall level but crucially NIBs, which is the real needle changer and so the back half of the year, strong deposits and good NIBs. That's continued this year. So, I think the important point to remember for BNY is, we do well when clients do more with us not just on fees, but also on deposits. So, we talk a lot about operational deposits. 2/3 of our deposits are operational. That means they're sticky and they stay with us for a long time. And so that means clients are doing things with us over and above just pricing for deposits. And so, as we kind of attract more clients onto our platform and they're doing more volume with us, they're leaving more deposits with us. And so, our deposit base is not just a function of the interest rate environment, it's about what we're doing across the piece. So, the One BNY de-siloing, it's going to be good for our deposit base in the long run. And so, I'm pleased with our level at the moment relative to what we thought it would be at the beginning of the year. But deposits are quite volatile, they move around quite a lot, but the trend is roughly in line with where we ended last year, and that's kind of where we see it going for the near term.

Moving over to regulation or deregulation. Obviously, the change in administration has now led to changes in the heads of our regulatory agencies, they aren't permitting yet. What's your guess take on how this all could maybe impact you, maybe a much softer Basel III Endgame versus what was originally proposed.

So, I guess, I would say -- sometimes it's easier to say it than to do it, but the direction of travel is positive, but nothing's happened yet yes. And so, for me, as I sit here, the big check-in will be, what if anything will happen in terms of CCAR '25, whether they make any change to the models. And so, if that happens, and I don't know what the insights coupon it is, but that is something that I watch to see how fast their intentions are going to be realized. So, if we see something changing in CCAR '25, then I think you could say moving in the right direction, then I feel more confident of real change happening as it relates to Basel III Endgame.

And finally, hopefully, you'll join us again next year. You've made a lot of progress since you guys have come together, you and Robin. What do you think we'll be talking about if you do come back next year, next year at this time about the prior 12 months?

I think you'll say -- hopefully, you'll say, sorry. I think you'll say -- so that's 3 years in a row, Dermot. Are you, as a leadership team, what is it that's going to make you keep going? Have you created a flywheel of momentum that is going to out-sustain you as a leadership team and that the firm is definitely in a different direction. At that point, over 80% of the firm will be in the Platforms Operating Model we would have executed a ton of transformation between now and when we sit here again next year. And I think I feel pretty confident that BNY will be a much different place than it is today.

Great. Please join me in a round of applause, thanking Dermot for coming.