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

Just making sure.

Yes, tougher than ever. But the growth on expenses is happening in the right way. So I would say, revenue-related expenses. And also with the Trump accounts, there's a gross up in terms of revenue and expenses and the net. And so that has impacted a little bit as well. And so -- and also, look, we have invested a little bit more, particularly in the areas where we see opportunity. We're investing in our data. We're investing in AI, as you would expect. There's been some investment into the response to all the related activity that happened this year. And so all those odds and ends add up. And -- but in the context of the overall guide of in January, we delivered or we guided for 100 basis points of operating leverage for the year at the end of Q2, we reguided to 400. And so in the context of the year and the firm and how we're driving that North Star positive operating leverage, expenses, I think, are well contained within that.

All right. So in the main then of no good ecos on potash, 400 basis points of positive operating leverage in 2026. I know you're kind of going through the 2027 budgeting process, right now. Just how do you think investors should think about kind of the magnitude of operating leverage going forward as the businesses continue to grow in scale?

So the planning process is like solving a quadratic equation at this stage. We've moved away, I would say, Like, obviously, you do -- it's a bit like quarterly versus annual in terms of earnings and the January 1 versus the other quarters and how you lay out the year. We've become much more of a dynamic budgeting company. And that's as a consequence of our move to the platform operating model. Next week, we will have 5 days of what we call quarterly planning reviews. I will sit in 80% of that, where we go through platform by platform, how are you doing, what do you need, what we learned, how you create capacity? What are you doing to self-fund your investments? So that's kind of platform owners are giving a lot of autonomy to run their platforms and create capacity to fund growth. So we need to get the balance right between capacity generation through the investments we've made in the past, and then where we want to invest for the future. And so we start with the solving for the North Star of positive operating leverage. We solve for what we need to do to deliver for our clients, and what are the new ideas that we're going to bring to the table, and we kick started that process last week. And so over the next 2 months, we will really kind of bottom out that plan, and we presented to the Board in early December and get their input and endorsements and we'll -- we'll be there in January, kind of telling you how we're going to deliver positive operating leverage next year. And so I think the important thing to remember in all of this is as a leadership team, and Robin is quite strong on this, we're not short termism. We're in it for the long haul, which is when Robin started his tenure -- it was all about taking the decade view and not trying to go -- we've got to get it right this year. And so we make decisions for the future generations of BNY not just now -- and so you have to have a certain eye for now. But our decisions are strategic in nature always that way. And I think that has really stood us in good stead over the last 4 years. And those investments -- remember, we've taken roughly over the last 4 years, we've taken $2 billion of efficiency which is a chunky number and reinvested every dollar of it back into the business. And so sometimes we do get asked that question of you -- are you investing enough given 400 basis points of operating leverage. And so I think that's where financial discipline comes in. You just don't want to invest because you can. You want to invest because they are the right decisions to make. And if you feel you don't need to invest to generate those kind of returns we should give it back to the audience in terms of shareholder returns and buybacks.

I guess, on that point, you have kind of recently discussed deploying additional capital to support client growth and strategic investments. Just how do, I guess, investors balance between reinvesting in the franchise, returning capital over the next several years? And just maybe talk to what role acquisitions play. I remember back when you did that Archer deal, you said, you might see more and you haven't.

It's offer the lack of looking. So I would have said, post Archer, I would say, the general -- "Oh, wow, I didn't expect BNY to be doing that." So we get a lot more inbound from the investment banking community. We get a lot more C-suite dialogue from partners and clients about what's happening because they know, a, I think we've established credibility with the market about -- it's okay for us to do these things now. In a way as a leadership team, we've earned the right to be more outward facing in terms of what's happening in the world, and that can be either partnerships, new products or M&A. But as we've said consistently, the bar for transformative M&A is extremely high from a cultural standpoint, financial standpoint and an execution standpoint, -- and so we screen a lot of things because you learn from that research and thinking. And so -- and also on a more lower level less than transformative. We do look a lot at Archer type stuff in terms of capability gaps and bolt-ons. So -- in the future, there's like nothing on the horizon. I would say you probably see more of the capabilities. Transformative is not off the radar but are very, very high. We don't feel, I guess, some of your peer group in the past have commented, are they running out of steam in terms of what's happening inside the firm and now they need to pivot towards acquisitions to keep going. I can tell you, my yellow pad has a long list of things that we can do better at that will make us a better firm that has no need for M&A.

Got it. I guess on that point, you kind of recently set out kind of new medium-term targets that you raised. You're kind of already above those. So right, 38% pretax margin target, you did 39% in the first half, 28% ROTC target, you did 30% in the first half. As you look out, should we expect another kind of upward bias of targets over time? And then maybe you talked about this YelloPad you have a long list of ideas. The natural follow-up is what are some of the brightest and best ones?

So I would have said, again, you delivered and then everybody wants more. And the counter to that is the market rewards you from delivering. So you're constantly resetting. So I understand the point very well. But I would, again, we set -- 2 years ago, 2.5 years ago when we gave our first set of guides, the markets respond as well. We delivered and then we had a real debate pluses, minuses, what should it be? Should we do it? How should we say it, just to be transparent to everybody. And we came out with our new guides in January. So we thought as the management team that there were meaningful changes, like they're 500 basis points to both. And so then it kind of -- there is the question of how much of it is alpha and how much of it is beta. The answer is it's both there. And I would say the other thing for folks that I'm quite passionate about is I think we've demonstrated the resilience of the business model in a wide variety of different scenarios because there's been a lot of volatility over the last 4 years and a lot of ups and downs. But generally, we have a very stable resilient recurring revenue platform. When we wake up into January of '27, roughly 75% of the revenues are recurring. And every time you win a new mandate or you're adding to that recurring pile. Yes. Because when you land large mandates, which we've done quite a few of this year, they're 10-year contracts, they're with you for a while. Everybody kind of focuses on the organic growth for that year and that win. But you really are building quite a foundation of forward durable revenue stream. And so again, the medium-term targets are -- they're not end points their milestones and guideposts on the art of going higher. And it's all about the hard work and like I guess, you've been a Michigan graduate in Michigan having a nice win at the weekend. It's all about that 1% every day and everybody in their zone saying, "Okay, how can I get better tomorrow?" and that's really what the firm is yes, you win, you forget it, you move on, how do we get better? So I would have said, it's high, yes. thanks, RoTE. We're up there, yes. Margin, like -- do I think margin will be higher in 3 years from where it is today as a Dermot like person inside the firm. I think that otherwise, what do we do? Yes, I think so. But am I going to give you a guide this quarter? The other thing I get a share we get over earning. I don't -- I think about it slightly differently. I think about we have created a leadership team and a product set and a business model at BNY that can take advantage of the market opportunities that present itself. And so I actually don't -- I think of it very differently to over-earning.

Got it. That's helpful. Maybe shift gears and talk about AI. You guys have been vocal about deploying AI throughout the company. I think there's like hundreds of use cases out there. So maybe looking out 3 to 5 years, where do you see the largest economic benefit from AA to come from revenue growth, productivity gains, new products, new services, just how are you thinking about that?

So I was doing media last week when the -- we might be around to see the benefits of AI in a few years' time. And so I would have said this is how I think about AI at BNY. Financial services CEOs of the future have to be very engineering forward leaning. And I'm unapologetic in saying it, but I do think. Robin is one of the most financially sophisticated -- or technologically sophisticated CEOs on the street at the moment. And that's been validated by his appointment the Board of Open AI. And so I would have said over the last 3 years, if you were to use a kind of a farming analogy. We've been preparing the soil -- we've been showing the plants. We're watering the plants and over the next few years, we expect to have the harvest. Now I think a lot of people have gone very 1 dimensional on what the definition of the harvest is. Everybody thinks it's headcount. Now I actually we fundamentally use a different word inside BNY, we call it capacity creation to reinvest. And so we're very keen to have a 40,000, 45,000 person, whatever the size of the organization is doing the work of double. So you can just have more capacity to grow faster. So if you take the platform operating model, the commercial model, our data, our product suite powered by AI and Eliza, which is our platform, it just allows us to do things in a much more strategic way at a much faster pace than we've done before. And I would say the investments over the last couple of years have strategically positioned us for that. Now I get asked the ROI question quite a lot, but I don't think of it that way because I don't -- every AI investment doesn't necessarily have a fixed ROI. I would say the way I think about it is, are we spending the right amount of money on the architecture of the future. And we have a $4 billion engineering spend every year. So we have a meaningful budget. So we feel like we have the right strategy and we have a right to win with AI, and we have the right partnerships with the West Coast. And so I think you're going to see AI at BNY deliver in a more meaningful way for clients and for the firm in an enterprise way. And so yes, I think as part of the 27 planning season, would become a lot more deliberate. Again, we were the only firm, I think that talked to you in a meaningful way with disclosures on AI in Q1. So we are quite thoughtful. We are quite deliberate. We're not spending for the sake of spending because it's AI. So therefore, spend whatever you want. It's quite deliberate. It's quite thoughtful, and we're being quite strategic about what we're doing. But you should take it in the context of a $4 billion engineering budget. So our AI investment for what we have is quite modest, and I'm very pleased with the returns from an enterprise standpoint that has given us so far.

Maybe shift gears to just digital assets. You've talked to them about this kind of always on financial ecosystem. Just how do you see this playing out? Maybe just talk to kind of the greatest opportunities for BNY to create value for clients and for itself?

So we have a session going on at BNY today with clients, market infrastructure of the future. Carolyn Weyenberg, who leads our digital asset business. He likes to say we've been around for 240 years. So we've been a part of what's happened come before. And so who better to write the future. And so that was one of the reasons that attracted her to BNY. And so she -- we I think there's the digital natives and there is traditional. And I think there's going to be room for both for a long, long time. And I would say digital assets is an evolution that will move at different paces at different times for different markets and different people. You would have seen last week there's 1 firm who's kind of talking about tokenization of equities, and there's a lot of pros and cons and there's a lot of debate around. Equities are pretty efficient, what does tokenization of equities do for that. So there's a lot of debate in the market about that. But I think where we see it's building architecture of the future. It's allowing clients to have certainty of settlement -- so that's the, I guess, 24/5 or 24/7. So it allows clients to do more things and have certainty of settlement, which is quite important. And I think BNY has a lot to offer clients in that space due to the network effect and the size of our platforms. So we feel like we have a right to win in this space, and we have a lot of partnerships with digital natives who we're working with them on, like we announced one with Bally Gifford and transfer Digital Agency, I guess, the first time in a long time that you have had a new product innovation in transfer agencies. So you're going to see more from us in that space. But -- yes, digital natives are doing traditional stuff with us while we partner with them on writing the future. So I guess we get the best of both worlds at the moment. And look, clearly, there is a disruption threat and opportunity. And always when I get asked these questions about AI or digital assets, I'm always reminded February. Many of you in the room will have been there in Florida at the investor circuit the Sapaclips Week where, again, somebody wrote an article about the to guys, to go and the garage are going to write the software in an AI friendly way and take your moat and take your business. And that narrative has changed quite a bit over the last several months and software is back in fashion again, and they're responding. So my only advice to people would be don't be quick to assume that the disruptors will always win and that the incumbents aren't figuring out how to disrupt themselves in an opportunistic kind of way so that we can grow our revenue as well with our clients.

Got it. 4 minutes left. I'm going to ask you the top 4 business line question, a lightning round. First Asset Servicing, Obviously, new products, ETFs, alternatives, more client activity. What's your biggest opportunity to further improve growth and profitability from here?

I would say more of the same, new geographies and new product segments and we are working the asset servicing team had their strategic offsite this week and a lot of really good stuff came out of that in terms of opportunities. For those who follow asset servicing quite a lot, at Emily and the asset servicing leadership to whom have done over the last 4 years in terms of execution and repositioning the perception in the eyes of the market, is nothing short of amazing. So more to follow more to come.

I guess we didn't really touch much on asset investment in wealth management. But probably if you kind of look at where the margin is relative to what potential is probably the most potential upside, what are you doing there and you do better?

We can absolutely do better, I think. I am beginning to see Jose is beginning to transform truthfully, probably harder than we thought, more siloed than we thought. -- more desiloing more cultural transformation, more bringing that business closer to BNY. And -- but you are beginning to see green shoots the quartile performance of our funds is pretty good. right where you'd want it to be, if not better. So now it's all about attracting AUM into that performance. And I think in certain products, this year, we've done a particularly nice job. So I believe the path for margin is higher, and that's really been investment. And -- it's really been in the investments in talent. And so we've brought on quite a bit of talent this year and good people hire good people. And so it's slow, -- but we are reasonably confident in our ability to deliver what we've previously guided to the market, which was that 25% margin in the medium term. So I think we're on the path.

And just lastly, Corporate Trust, we have private credit CLOs, increased capital markets activity. How much more room for growth is there?

I would say Corporate Trust is the leading platform anchor for Trump accounts. That's where a lot of the work has happened. When I joined -- and we started Corporate Trust. It had legacy tech underinvested in for many years, both in terms of talent and infrastructure. We've made those investments over the last couple of years, and you're beginning to see the benefit. The biggest opportunity for us there is, like we have, I don't know, $15 trillion of debt there that we service. Just think about that, how many clients that is and the cross-sell opportunity of, "Oh, you do all of that as well as Corporate Trust." That's like untapped potential that we really are getting after. And we've made progress like it's shown up in the results of the past couple of years, but the flywheel of momentum, I feel like we have more to go. And in terms of the loan market, a lot of those markets are quite we want spreadsheet based. And so there is an opportunity for AI to help us to be a lot more strategic in that space. And that capability will allow us to go faster. So I feel good about Corporate Trust.

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

Thank you.