The Bank of New York Mellon Corporation ($BNY)

Okay. Up next, we have BNY and we have the CFO of BNY Dermot McDonogh. With me on stage, Dermot, thanks so much for joining us.

Pleasure to be here. Good to see so many familiar faces in the crowd. Yes.

We appreciate you being at the conference. Dermot, maybe to start with on the macro environment on the earnings call, I think you described the operating environment is dynamic, and you described it as constructive. Can you give us an update on what you're seeing in the overall environment today?

So look, as I've said to a couple of you before we came on stage, -- we've just wrapped up our kind of summer board meeting. We held it in D.C. for the last couple of days. D.C. Great Place to be in Americas 50th -- there was a lot of energy, a lot of optimism in D.C. You can see a lot of work happening on the regulatory agenda in a very positive way. You can see all the kind of noise in the early part of this year around the Fed share, all that settling to look forward to seeing Mr. Washes first press next week. And I think the markets have held up really well in what is a really tough geopolitical environment. I kind of describe myself as in CFO speak a risk-adjusted optimist. I think there's a lot to be optimistic about I think where we are with BNY in terms of the firm and how we're set up in terms of taking advantage of the environment. I feel very optimistic about that. But there's a lot of things to be worried about. But overall, I think continuing on from Q1. I think the setup for the firm is quite positive.

What is the risk-adjusted part of that? Is that, I guess, what we're seeing in the geopolitical environment? Anything else you worried about here?

So like I think the American consumer to the automotive has hovered well, the U.S. economy has held up pretty well. I think there was 1 commentator who follow quite a loss in terms of the backdrop of trading and how people are setting up for the summer like people will look back on this time in their career as being a very seminal time in terms of an era of a lot of uncertainty in the geopolitics huge transformation in the technology space. And I think it's a very exciting time to be part of the market in that. And one of the things that I put in my materials for the Board is all the events that happened in the quarter where we track is when you look back over the course of this year, like if you are planning for '26 in the fall of last year, there isn't -- you wouldn't really have expected it to be played out the way it's played out. So I think firms who are able to be dynamic and adjust and react in a nimble fashion to the environment, which I think we have become over the last couple of years with our transformation, really allows you to take advantage of that environment. And also, it comes back to clients. Clients continue to be active. and doing a lot. And with our kind of strategic investments, we're able to support clients in a much more meaningful way.

So you mentioned transformation and BNY has gone through a big strategic transformation as well. You've now entered I guess, Phase 2 of your transformation to reimagine BNY to become more integrated, more de-siloed, -- can you provide a brief overview of this transformation for those who are new to the story and touch specifically on the platform's operating model and the commercial model?

So I like again, 2 insights to how I kind of think about things as well. Look over the last -- the only thing that's constant at the moment has changed. And it's not like when we say transformation, I kind of think for us, transformation will be never done. because we're always looking to change and adjust. And it's like, okay, we're done. Now we go back to normal. We want to move on, as Robin said in his first shareholder letter, we've taken a decade-long view and which for shareholders and investors and people who follow the firm, that's like we're going to make long-term strategic investments. And one of the investments that we made Three -- nearly 4 years ago now was to move to be a platform's operating model company, financial services platforms company at the center of global markets. That's what BNY essentially does. And the setup of the firm 4 years ago didn't play to that strength. And so over the last 3 to 4 years, we've kind of set around a different way of working, aligning on a platforms model, putting skills, tech everything in centers of excellence, client platforms, enterprise platforms, desiloing the firm, getting rid of duplication and that has many short-term benefits, but I do believe quite strongly that the long-term benefits of that are yet to be revealed. And just to be a little bit more specific, like the firm now, Q2 of 2026 is fully active in the new way of working. -- the firm is now kind of speaking 1 language, whereas before with the transition into the new way of working, some people working in the old way, some people working in the new way. And that was kind of hard going for our people. but now we're all in one way. And so now we can really kind of talk to the firm, talk to our platforms, really get the strategy going. So I say a lot internally for us being fully active in the platform operating model. It's the end of the beginning. And I'm very excited about the benefits that we can realize, both for top line and continued redeployment and creating capacity. And 1 of the little vignettes that I gave to the Board in my update was we have 1 platform, change of leadership, a new person coming in fresh eyes, which also is a very important part of our strategy is leadership mobility. And they took a fresh look at stuff and said, okay, -- we're going to move this. We're going to move this. I'm going to generate $5 million of capacity, and I'm going to reinvest that in our AI strategy for this particular platform. Four years ago, that leader would have come to me and asked me for $5 million to invest where they created the capacity themselves. And so you can see AI strategy plus platform operating model, plus commercial model working together to deliver a great outcome for the firm and for clients. So very pleasing to see at the moment.

And you can certainly see it in the operating leverage that you guys have generated over the last 2-plus years. When I think at 126, you had mentioned that about 70% of your employees have migrated over to the platform's operating model. Did you just say 100% now?

So like I'll channel my inner accountant here, it's not quite 100 plus if you're, call it, 99%, I think there's 200 or 300 people, stragglers left to go, but to all intents and purposes were 100% in the model.

Okay, fine. That's great. And I guess what were the last few areas to get transitioned over? And I guess what you're saying is that the benefit of that is yet to come, right? -- the shorter-term benefits and some of it are yet to come and then the longer-term benefits of everything yet to come.

So like it's -- I would say the last wave was mainly corporate functions. And so yes, largely corporate functions, I would say. But if you -- we had 5 waves over 3 years, the maturity of Wave 1 relative to wave 2, wave 3, wave 4, now wave 5 is very different. And so I think in 2 years' time, 3 years' time, when Wave 4 is at the same level of maturity as wave 1 now, then I think we really see some great benefits for the firm. not just in terms of efficiency, but just how the firm operates and shows up for each other and for clients. I just think as a firm, we'll be able to move faster. And so that is really the power of the model, I think, yes, for sure. Very exciting.

And then what about the commercial model? Can you talk a little bit more about how that's driving organic growth?

So look, it's a big very focus for everybody who's listening in this morning. I think if you look back to our organic growth numbers of '22, '23, '24 and look at it on the sliding scale up, we're moving in the right direction. I know those challenges quite a base on the January earnings call, I used the phrase accelerating organic growth. And I think 1 of the analysts wasn't that happy with the number of basis points equal accelerated. But when you come from where we were in '22, which was flat to, I think last year was kind of 3-ish -- and I think we continue to grow that number. 10% of sales last year were with new logos. We announced in our Q1 earnings call, a significant deal with AGI, which is a decade-long deal, which is a real partnership and allows us to grow our franchise in Europe. We're able to support the administration with a very important piece of public policy in terms of Best America or Trump accounts, which will go live on July 4. The reception in D.C. over the last couple of days has been very positive around that. And so that creates an environment where clients really want to know what's happening at BNY, how can you help us? And so the client dialogue, the client backdrop, what the leadership team is doing on the commercial model -- you just remember, we started the commercial model in terms of the way we're setting up at the moment, only 2 years ago. And last year was a record sales year. We had individual quarters of record sales. Q1 was a record sales quarter. So what we're doing strategically inside the firm is showing up in the numbers. And so I believe we've got very strong momentum there. Part of it is talent. Part of it is just going at it in a more strategic way. And part of it is just listening to what clients want and explaining to clients what we can deliver for them. So much more of the bundled solutions, cross-selling. -- we had a 64% growth in clients who buy from 3 or more lines of business. And so we have a lot more data and we can track it and we can create a lot more accountability inside the firm to deliver these results for clients. So I feel very positive about it. And I feel like the firm is kind of moving in the right direction.

So my next question is the full potential of the integrated model and the transformation. But you just told me that the change is the only constant, right? So you're constantly evolving there. I guess, as we go through these phases, what are the key KPIs that you're looking at that continue to show progress along the continuum that you expect?

Well, top line revenue is a good 1 to start with. So for us, fundamentally, like to be consistent. Positive operating leverage is fundamentally the North Star like we talk to the market and to you in terms of positive operating leverage, margin, ROCE and how we want to move the needle on that. We updated our guide on that in January. We believe what we guided is entirely within our core competency within the medium-term target medium-term time frame. We're always looking to outperform. We're always looking to go faster. And in the world of AI and technological innovation and the leadership team we have in place, I just feel very constant, are very comfortable about saying that. And then when you take that and you drill it into the platforms and the targets and the individual accountability and how Robin has set the leadership team up to be very much in service of the firm and BNY and we work as a team. And that really has allowed pillar #3, which is power our culture. It really is the transformation and the culture that's powering to run our company better and be more for clients. I'm here a little over 3 years at the firm. I feel like I've been at the firm a lot longer, not because it's been hard work, but because the enjoyment factor and the ambition level that Robin has generated in the firm is quite exciting. Yes.

Got it. Okay. So we -- we should talk about AI because the transformation program is deeply rooted in AI. You've spoken about your vision of AI for everyone, everywhere and everything. Can you talk a little bit more about your AI strategy and where you are in this journey right now?

Yes. So again, it's a very -- I'm an optimist on AI. I actually think a lot is written about -- when we were doing the spring circus of investor conferences, there are some people in the room that I was meeting with, I can't remember what exact week it was, but it was the fast ocalipse week. And everybody saw us, everybody who's going to set up new companies overnight and what the moats were and what's your moats this, that and you kind of have to see through all that fog and be in a position to, in a way, red team yourself constantly. We live in a world of disruption. And it's important for everybody to understand that we recognize that we have to disrupt ourselves too. Otherwise, you're going to get disrupted. So we have a big tech budgets. We have the power to invest -- we believe we have a very good strategy, and we believe competition is good because it makes us better as a firm. So we like healthy competition. We believe we have healthy competition in our segment but we believe that we have a strategy. And so we feel good about our ability to execute that strategy. Now if you kind of go back 3 years for BNY, Robin -- Chat GPT was like the fall of '22, early 2023, we said AI is fundamentally important to our future, and we set about what you just said for everyone, for everywhere, for everything. And to the last couple of years has really been about how do you get AI as part of the cultural transformation. So people don't feel threatened worried, job insecurity. And so we've given people the tools, the training, the skills. We've built an agentic workflow model, Eliza, very strategic, very powerful, gives us lots of capabilities and lots of opportunities, close partnerships with the labs on the West Coast. And so we kind of feel we're at the center of the AI transformation. We're not fast followers, we believe we are setting the strategy. And I believe it's very CEO-led. And I think for you to be successful in the world of AI, the strategy has to be toned from the top and CEO led. And I believe we have that unique set of combinations within the firm. And we have a great engineering team who is kind of like could be more exciting than transforming a 242 year-old firm in the age of AI. We came from D.C. where we had our Board at Mount Vern and we went through George Washington's artifacts and we were in the national archives yesterday morning, seeing the constitution, et cetera. BNY is only like a little bit we're in that ZIP code it. So we know how to adjust and transform with the times, and I just think we fundamentally believe AI is a superpower that we're going to harness to help us drive growth. And so -- we're excited about it and what it brings. And I think our people broadly don't feel threatened about it because we've invested in their upskilling over the last 3 years.

So what's the next thing as you think about Eliza and you think about AI overall? What's the next thing that you're most excited about? What's the next phase of this strategy?

So actually, so look, I'm sure there are a lot of firms in the room who have this as well. But to have large language models and COB coexist in the firm at the same time is quite exciting because you want AI to be able to transform Cobal and Fortran and green screens and et cetera. But now everybody was worried about the engineers who are experts in cobal retiring because they're getting to the end of that. Like now you can -- with large language models, you can do that transformation in a much more smoother way. And so I think engineering being able to use tools like windsurf so to be able to deliver software faster in a more controlled way. being able to handle change management in a more controlled way. So just enabling your resources to do more and have more interesting work to do. I think that's a really fundamental part that doesn't get talked about enough allowing -- giving our engineering organization more capacity, more tools to be able to be more innovative and more creative and respond to client needs in a more dynamic way. That's really, really powerful, very important, and we're excited about that. And then having all our platforms being able to build AI into their strategic road maps about how they can serve clients, better client experience. I think the last time I checked, we have roughly somewhere between 250 and 300 AI solutions in place, datas around the firm. And some of them are very powerful. A lot of people talk about onboarding, we're very -- like we feel very sophisticated and very advanced in where we are on the onboarding, but a lot more to do. client conversions, I think there's a lot more we can do there. A lot more in the payment space, AI plus digital assets together. I think there's a lot we can do there. And so all of those things will actually attract more talent to the firm. So there's an important cultural dimension to it because it feels like BNY is a place to be at an exciting time. So we're not talking about rising attrition, all that kind of stuff. We're talking about growing, investing, creating capacity, doing more with the existing clients. So we're on the other side of the ledger in terms of positive versus negative like. So -- and so yes, I'd say the mood inside the firm as it relates to AI is very constructive.

Any challenges you're thinking about 1 of the things that came up at this conference is token usage costs and eventually that will those costs will scale up. So how are you thinking about that? Any other challenges you're thinking about on the AI side?

So I think that's definitely part of the worry set of a risk-adjusted CFO. But that's a bit like cloud as well in the early days. So cloud usage, cloud bursting, -- so there are a lot of similarities, a lot of parallel. So I would say the important thing there is to have a risk-adjusted approach to labs and LLMs and not to be hostage to any 1 because then you're a price taker. And so at some point, they will be competing with each other. For sure, I think token usage will go up over time and then it will become more of, like, what's the ROI on the AI investment versus other ways. So at the end of the day, it's just math yes. And as long as you feel like your AI strategy is set up to be, okay, you're too expensive, we're moving here because there's a lot of people in the space. It's not like 2 people and 1 or the other. It's just -- and somebody said to me last week, in 2 years' time, the worst LLM model in 2 years' time will be better than the best LLM model today. That's how quickly things are moving. And so you need to have a strategy that can adjust and be nimble and calibrate with that -- and so you make the right financial decisions when you have the right data and the right return metrics to make those assessments. So I feel like we've created the right infrastructure to be able to analyze that as we go through that next phase of pricing and token usage.

So is it about developing some sort of harness and also like training for employees or anything else?

Yes, so I think I would say part of our strategy over the last couple of years is it's everywhere for everyone, for everything. And then over time, you have -- you end up with more discipline of like where are the strategic bets, what are the top 3 things, what are the top 5 things that we really want to get after where AI will really move the needle as opposed to just a super spreader everywhere. And so I see that as being an important next step as well like anchoring on 3 or 4 big, big strategic decisions.

Got it. All right. Let's talk about some of the core businesses, custody, collateral management, treasury settlement. You clearly have a breadth capabilities there. From a traditional finance perspective, where do you see the greatest opportunities to pull ahead?

So we spent a lot of time on this in terms of where I would say an opportunity for us is, so we're #1, #2, #3 in a lot of our businesses in a lot of subsegments of our businesses. And so you can kind of -- you can get into the complacency mode if you're #1, while you're #1. And so in the world of only the paranoid survive, we're now a lot more -- becoming a lot more focused and granular in terms of the products, we've set up a product practice. So now we will have -- in the same way we have targets by salespeople. We will have targets by product people, and that is an exciting, I think, next phase for us next year in terms of really developing in a more sophisticated way our product shops, looking at TAM, where are we, how can we grow domestically, internationally, where are the clients who are buying 1 and big in 1 space, but could do a lot of other things. AI can help us with that in terms of analysis. And so we're becoming much more granular about the what the opportunity set is in each market. And as a consequence of that, 1 of the things that we did with our Board this week is if you take our medium-term target for margin being 38% and you wanted to be the best of in everything that you do, even notwithstanding the fact that you are the best in some of them, there's still room to grow. Then you can get higher than that. And so we're doing a lot of work to look for opportunity, new areas, new products, new markets. So I kind of think most businesses that we have, have room to grow top line. And -- so we're quite excited about that in terms of I would have said, look, Market & -- well Services, high-performing segment over the last 3 years. really good margin, I think, roughly 50% margin for that segment. So I think it can go higher, absolutely. Custody, 4 years ago, our business even though, though we were the world's largest custodian, there was a lot of work that we had to do. And I think like we've changed. I think Emily guided when she was the CFO at Goldman Conference in '21 margin that we've just blown through. And so -- and we still feel like we haven't reached the end of that. And so like if you were to do a measure of excitement inside the firm in terms of the opportunity, you would feel okay. That's pretty good. So yes, we feel very optimistic about our ability to grow across pretty much everything. And segments like I don't really talk about that much, everybody wants to ask me the question about IWM. But you know what I mean, that's a business that is in the industry has been quite challenged over the last couple of years, and our margin in that segment is being quite challenged over the last couple of years. But we believe that we can strategically make better inroads in that over time and Jose is doing the right thing and he's making all the right calls. And so you have that segment not performing where it needs to be, but beginning to turn around in the context of a firm that's really performing well. When that starts to work as well, just think where organic growth can be.

So you you're constantly challenging ourselves to be better in every segment. You're making the right investments. You continue to execute on that. One area that you have been making investments in is digital assets, as you just mentioned, can you give us a quick overview of your competitive positioning in the space and how your leadership in traditional rails translates to digital finance?

Yes. So I think very important strategic focus for us. We've assembled a great team under Carlin Weinberg over the last couple of years, very, very important collaboration between Carolyn and Lean, who's our CIO, engineering, digital as coming together. And in a way, the way how I think about digital assets is that it's in service of the firm because if you think of us as a financial services platform company at the center of financial markets and -- we have the rails. We've been at the part of this for the last 240 years, and we want to be -- we want to write the next chapter. And so each business has to think about how the next chapter is going to disrupt itself. So Carolyn is really in service of all the lines of business in terms of how they with AI can disrupt over the next 5 to 10 years. What is the consequential impact on P&L there. You're going to gain in some areas, you're going to lose in some areas or you may leak in other areas. There's a lot of discussion like what does it mean for deposits, et cetera, et cetera. But all of that will evolve over time. And we believe by looking to support clients, we have some traditional clients who are not thinking about it. You have some clients who are digitally native, that's all they think about. And so they've come to our platform for tort leadership and are doing traditional business with us. And so we're kind of merging the 2 over time and kind of working that -- evolving that ecosystem because they're not distinct where you're just going to cut from 1 to the other, the 2 will margin in time. So I would say -- I know this has been largely supported by the positive tone from the regulatory agenda and with this administration, having a different view to that space. And so I just think that it's going to be very helpful to BNY because of the network effect that we have by being #1 in a lot of the spaces, the world's largest collateral manager settling nearly 100% of the treasury market every day. And so our payment rails are quite sophisticated. And so we will like to bridge that gap between the old and the new in a way that will be seamless for our clients, and I think that will allow more clients or attract more clients onto our platform because they want one-stop shopping and not have to worry about it. And we will deliver that resilient, safe innovative product that will reduce friction for them that will allow us to grow our platform and grow our revenue. So I think our strategy will help clients and grow our business.

So 1 of the areas you mentioned for disruption, you spoke about deposits. A lot of your clients leave their liquidity with you would BNY? How are you thinking about cash sorting in a world where you get -- you have more AI patients there?

So I think you need to think of cash sorting in 2 dimensions. Does the retail and there's the institutional. And so our clients are already very, very sophisticated in terms of managing their liquidity. And so if you kind of think of our deposit base as being 2/3 operational. So it's a lot of velocity, a lot of movement supporting payments. So -- we have a big balance sheet. We have a nice core set of deposits, but it's constantly turning. It's constantly being managed and it's constantly been optimized by clients already -- and so I don't really -- I don't really worry about the cash sorting so much for our set of businesses in a way that others do for theirs.

Got it. All right. Perfect. So I know we're reaching the end of our time. We've gone through a lot of the medium and longer-term drivers for BNY is worth thinking maybe to bring this more near term rates have been moving around a lot over the past 3 months or so. How are you thinking about interest rate positioning for the balance sheet? And what impact does the higher belly and higher long-end have on the income statement?

So again, like taking the risk management has, we talk about reducing the corn of outcomes. When we guided first in January, we kind of guide us top line at the 5%. We didn't give a specific NII -- at Q1, we talked about 10% year-over-year. We feel very good about that guide. I said at the Q1 earnings that deposits probably moderate slightly into Q2. That's largely panned out as follows: record sales quarter in Q1. Again, not necessarily expecting record sales quarter in Q2, but the client dialogue is very strong, and we feel very good about delivering that for the year. So I would say we are largely on the impact of the rate environment on our overall portfolio. It's consistent with what I've spoken about before. And so we respond in a fairly dynamic way to us. And so look for idiosyncratic opportunities when they pop up, but largely feel pretty good about where we are vis-a-vis rates at the moment.

Got it. All right. I think with that, we're out of time. Dane, thanks so much for joining us.

Pleasure. Thank you.