Q2 2020 Bank of New York Mellon Corp Earnings Call
Please standby speaking.
Good morning, and welcome to the 2022nd quarter earnings Conference call.
Alan.
I'm all participants are in English and only mode.
Conducting question answer session. Please note that this conference call with cash will be recorded in will consist of copyrighted material not recorded or rebroadcast these materials.
Since then.
I will turn the call over to.
You might know ones global head of Investor Relations. Please go ahead.
Good morning today being why Mellon when he sits results for the second quarter of 2020, <unk> earnings press release, and the financial highlights Cushing patient to accompany this call our fault available on our website I'd be in why melon Dot com.
Talk Gibbons.
Being one melon C O wouldn't meet the call then like sometime a female our CFO will take you through our earnings presentation.
Following Mike's prepared remarks, there will be a key went a session.
As a reminder, please limit yourself to two questions before we begin. Please note that our remarks. Today may include forward looking statements actual results may differ materially from those indicated or implied by our forward looking statements. After we felt very factors, including those identified in the cautionary statement.
The earnings press release, the financial highlights presentation in our documents filed with the FCC all available on our website.
Forward looking statements made on this call speak only as of today July 15th 2020, and will not be updated without I will hand over to Todd.
Thank you, Matt and good morning, everyone.
Before diving into the numbers, let me share a few thoughts about how our business has been performing as we've adapted to a new normal during the second quarter volumes and volatility normalized somewhat across our businesses from the extreme first quarter disruption.
In conversations with clients have shifted from dealing with the crisis, how we can help support their business in this new one barb.
But much uncertainty remains over the timing in shape of the global economic recovery.
In addition, the low interest rate policy, it's a significant had one for us that it's unlikely to change in the near term.
Operationally, we continue to navigate the brick repercussions or the pandemic around 95% of our employees continue to work probably going to phenomenal job delivering excellent service to our clients.
Our operating platforms and infrastructures are supporting the current markets are working model well.
Record volumes in certain areas all of which has put us at a good position as we discuss new business opportunities with our clients.
Turning to our second quarter financial results.
We reported solid pretax income of $1.2 billion and earnings per share of a dollar one as a reminder, we did not buy back shares in the second quarter in line with other big bags.
We accreted capital and ended the quarter with a common equity tier one ratio of 12.6% up around 120 basis points from the last quarter.
Our average balance sheet increase year over year to $415 billion, mainly driven by strong deposit inflows and associated gross and the securities portfolio.
Revenue was up 2%, despite the impact of lower interest rates and related money market fee waivers.
All of our investment service businesses showed resilient performance asset servicing in particular is showing nice pockets of growth and our focus on service quality is paying off the.
The challenges that asset managers are dealing with our driving more of them to outsource and our unique capabilities and fund accounting and transfer agencies as well as investments, we've made and building out our digital and data kept capabilities positions us well.
Last month more than 800 attendees, representing over 160 client firms and 25 consulting firms and vendors that we work closely with participated in our virtual engage 20 in that.
Engage which has long been to premiered data and technology conference for Buyside investment managers highlights next generation cloud first of business applications. During the event, we announced the launch of our new data and analytics offerings and expanded relationship with Microsoft to vote to provide the solutions on the Microsoft I'm sure a public.
Cloud, we're pleased to have clients, such as Charles Schwab and new been share case studies, but how their businesses will benefit from our newest offerings.
Those include a new cloud based data malls that supports the rapid onboarding of data whether public markets data private proprietary or unstructured data.
You offer greater flexibility and accelerate Klein innovation and discovery.
Intermediary analytic services leveraging data from broker dealers and or I used to predict drivers of demand for mutual funds any t. ups. So they can identify how to successfully gained market share.
Across all our businesses there are opportunities to capture greater market share within products services target client side segments end markets. Much of this is the outcome of consistently investing in technology.
Alan.
There's been an accelerate this year and the adoption of digital solutions by our clients, who continue to review opportunities to automate the progress, we're making a digitizing our business positions us well on this fraud and we're increasing our investment spend on technology driven automation initiatives in 2020.
In March through June alone, we migrated over 100 clients to digital solutions and our accelerating our plans do the same across all of our asset servicing clients. We're now accepting digital signatures on many tax related forms to support remote processing digitizing. These processes will help thousands of clients and reduce the millions of physical documents, we deal with each.
Here.
We also developed a new apiay enabled FX solution jointly with Deutsche Bank that can dramatically improved confirmation times for restricted emerging market currency trades to provide front office users with faster execution and enhance to work flow transparency. So we've accelerated our progress on the digital fraud and there are dozens of other examples.
I'm proud that we've been working with the regulators and the industry to bring our capabilities and supporting the markets since last quarter, we've been administering the primary dealer credit facility, which facilitates dealers' inventory financing our corporate trust business has also been mandated as the term asset backed securities loan facility administrator and we're also serve.
Yes in California and asset servicing.
Additionally, we're playing an important role in the fed supportive liquidity in the municipal markets via the municipal liquidity facility.
Just wanted to demonstration of the power of our uniquely broad range of solutions, we're able to bring together the expertise from asset servicing corporate trust investment management and capital markets to create a complex solution to support the facility.
Looking ahead to the second half a 2020 were confident that our business model expense control and conservative credit risk profile will serve us well our efforts with clients are yielding results with higher win ratios that are revenue retention had a good pipeline and pursuing it asset servicing in particular, we're pleased with the momentum we're seeing across all of our business.
Yes.
The low interest rate environment will present, a significant challenge go through net interest revenue and money market fee waivers and purging investment management and two ilecs lesser extent other investment services businesses.
But at the same time, we will benefit from increases in transaction volumes FX volatility stronger market levels and activity in our clearance and collateral management business.
The recent de fast and see CCAR results demonstrate the strength and resilience of our business model, we had the lowest peak to trough reduction in CTG, one capital under the Feds model relative to other U.S. phase G. Sibs, adjusted 20 basis points now that's well below the minimum SCB requirement.
Looking ahead at our capital returns, we expect to maintain our quarterly common stock dividends at 31 cents and we will not buy back shares during the third quarter.
We have a very strong capital position and lower risk model, which should allow us to perform well under a wide range of scenarios, we will commence buybacks as soon as possible depending on the economic and regulatory environment, our outlook for the business at outcome of the resubmitted capital plans based on new scenarios, we expect to receive later this year.
The second quarter, we Opportunistically issued $1 billion and preferred stock and we think this gives us opportunity restack our capital down the road.
Longer term our growth is not dependent on increasing risk weighted assets, which gives us the ability to return at least 100% of capital to shareholders and we're confident in our ability to continue returning attractive levels of capital.
And while the outlook for the economy remains uncertain for the foreseeable future I know that we will continue to navigate this environment well by deepening our client engagement as demand for our service gross benefiting from improving quality and improving efficiency of our operations.
Last week, we announced that with the upcoming retirement of Mitchell Harris, we've elevated Hanukkah Smith CEO of investment management effective October Onest product has been leading Newton investment management since 2016, and as spearheaded Newton's business momentum and client centric culture under Mitchell's leadership, we've made great progress in building a diversified.
Restaurant management business and we thank him for that as we move forward Hanukkah is ideally suited to build on the strong foundation to continue to drive performance in innovation across our investment products.
From Keating will continue in her role as CEO of being why Mel and wealth management and both Catherine at Hanukkah will report directly to me.
Mitchell as cultivated a strong bench of leaders, including Hanukkah and Kathryn.
Continue to drive the execution of our strategic priorities to deliver a leading investment solutions to our clients underpinned by exceptional investment performance.
Now before I hand, it over to Mike Let me address how we've been responding to recent events that have drawn attention to the very real racial and societal issues in our communities.
Our board and our Executive Committee are passionate about using our voices and being positive change agents as a company, we take great pride and all of our differences and our diversity of experiences and perspectives leads to better business outcomes.
Starts with the diversity of our board, which is 30% African American, 40% minorities and 30% female.
We are challenging ourselves to do more we're supporting activities they create sustainable change, including philanthropy targeted at creating opportunity matching employee donations to nonprofits that support and strengthen the well being of underrepresented communities encouraging community volunteer isn't doing pro Bono legal work to advance minority Bill.
Mrs raising cultural awareness and strengthening our commitment to attract develop and retain a diverse workforce. We are holding more open forms that foster meaningful dialogue and that we hope will bring us closer together during these challenging times, we're learning from each other building empathy and strength running inclusive of leadership skills.
Will serve us well and continuing to drive a high performance culture.
Were expanding support for the well being and emotional resilience of our people and their families with additional employer services resources and coaches who have called cultural competence. We know these efforts like all the other components of our corporate social responsibility strategy are making us a stronger company last week, we released our 2009.
Teens, CSRA report, which introduces our new strategy pillars with associated goals and key performance indicators for the next five years.
They include increasing senior leadership positions held by women and ethnically racially diverse employees.
While we're proud that for the sixth consecutive year, we've been named to the Dow Jones Sustainable World Index, we're going to continue to challenge ourselves to do more in the long run we firmly believe that doing what's right for the community our employees and our clients isn't the best interest of our shareholders with that I'll turn it over to Mike.
Thanks, Todd and good morning, everyone. Let me run through the details of our results for the quarter in all comparisons will be on a year over year basis, unless I specify otherwise.
Beginning on page three of the financial highlights document.
In the second quarter of 2020 reported earnings of 901 million down 7% while earnings per share was flat at the dollar in one sense.
Total revenue was 4 billion up 2%, even as we felt the impact of lower interest rates your money market fee waivers and in our net interest income.
The revenue increased 2%, primarily reflecting higher purging asset servicing.
Partially offset by money market fee waivers lower investment management fees.
The unfavorable impact of a stronger us dollar.
Fee waivers negatively impacted growth by approximately 3%.
Net interest revenue declined 3% year over year to 780 million.
And was down 4% versus the prior quarter.
Our provision for credit losses was 143 million in the quarter.
And this was primarily driven by ratings downgrades, particularly across our commercial real estate book and the continuation of a challenging macroeconomic outlook.
We had no actual charge offs during the quarter.
Expenses were up approximately 1% as we continue to balance ongoing expense discipline with our technology investments.
And we still expect full year expenses to be flat to last year.
We had a solid return on tangible equity of 19% and maintained a pre tax margin of over 29%.
Moving to capital and liquidity on page four.
Our capital and liquidity ratios remained strong and well above internal targets regulatory minimums in terms of shareholder capital returns.
In one quarter, we suspended share repurchases along with other financial services for a member banks and we'll do so again a third quarter.
In line with Federal reserve requirements.
We continue to pay our quarterly cash dividend, which totaled 278 million in the second quarter and believe we have ample capacity continue to pay the dividend or in a variety of economic scenarios.
Common equity tier one capital to 20 billion at June Thirtyth, NRC tier one ratio was 12.6% or the advanced approach and 12.7% under the standardized approach under the new stress capital buffer rules that will become effective October onest, we will need to maintain SCG, one ratio of 8.5%, including a 2.5.
Percent stress capital buffer, which is the minimum.
1.5% GCIB surcharge.
As we think about our binding capital ratio constraint going forward tier one leverage can be more binding that's easy one due to the buffers, we need to hold for potential growth and deposits, which are more volatile than RW way during times of market volatility.
Very much like what we've seen over the last two quarters.
As always we will continue to optimize our capital ratios across all the constraints.
Our average LCR in the second quarter was 112%.
Now turning to page five my comments on interest revenue will highlight the sequential changes.
Net interest revenue was 780 million down 4%.
While client driven deposit growth drove the increase in our average balance sheet. This benefit was more than offset by full quarter impact of lower interest rates.
Hedging activity added modestly to the linked quarter comparison as you can see on the bar chart and is primarily offset in foreign exchange and other trading fees.
Average deposit balances were up 25 billion versus the first quarter averages and are up 62 billion or 28% versus last year.
This growth across all of our businesses some increasing.
From the monitor reserves.
Reserves in the system clients like to cash in some from internal deposit initiatives that are linked to operational and fee generating activities.
As we've mentioned in the past, we generate and managed significant amount of cash across our franchise.
As a key client differentiator for us, particularly in volatile markets. We provide cash management services that have led to good growth in deposits in our balance sheet growth in money market funds in our open architecture money market investment platform and to try theres cash products.
We've passed along the fed rate cuts as interest bearing deposit rates declined to minus three basis points in the second quarter.
This was the result of the combination of very low rates paid in the U.S. plus negative rates on euro denominated deposits.
As a reminder, approximately 25% of our deposits are non U.S. dollar.
On average the securities portfolio increased approximately $19 billion versus the first quarter and around 32 billion in the last year as we have deployed growing deposit base.
The net interest margin of 88 basis points was down 13 basis points versus the first quarter driven by the increase in deposits and lower yielding low risk interest earning assets.
We continue to focus on optimizing net interest revenue rather than just net interest margin.
Now moving to page six must provide some color on our asset mix.
Our average interest, earning assets increased to 358 billion.
Approximately 40% of these assets are holding cash or reverse repos, while 43% or in our securities portfolio and 16% enter our loan portfolio.
In addition to the funded loan shown on the page. We also have unfunded committed lines the details of which can be found in the 10-Q.
During the quarter, we saw about 1 billion of the 3 billion of borrowings drawn down from revolving credit facilities repaid.
And we're closely monitoring the portfolio, particularly the commercial real estate exposure and other sectors more acutely impacted by the current environment.
The impacted credits, including commercial real estate are performing well, but may see additional downgrades, depending on the shape and speed of the recovery.
Turning to the securities portfolio.
We have a high quality liquid portfolio much of it is in U.S. government agency Securities Us treasuries and sovereign debt.
The portfolio increased as we deployed more cash into securities, including the commercial paper in Cds, We purchased from our affiliated and third party money market funds.
The $4 billion of clothes are highly rated with 99% AAA or double a.
100% into non agency, CMBS or AAA and have solid subordination.
The rest of the ratings break that down we found the supplement.
Page seven provides an overview on expenses.
Consolidated basis expenses of $2.7 billion were up around 1% driven by higher technology expenses and pension costs offset by lower business development expenses, namely travel and marketing in the favorable impact of stronger us dollar.
Distribution expenses were only slightly impacted by money market fee waivers and investment management as the bulk of the impact from money market fee waivers Imperva was encouraging from third party funds.
Turning to page eight.
Total investment services revenue was up 3%.
Assets under custody and administration increased 5% year over year to 37.3 trillion, primarily reflecting higher market values, partially offset by the unfavorable impact of stronger us dollar.
Foreign exchange and they're trading revenue in the segment increased 16% year over year, driven primarily by higher volatility as well as organic flying growth and foreign exchange, even as industry volumes were down slightly.
Within asset servicing revenue was up 5% to 1.5 billion, primarily reflecting higher FX higher client volumes across securities lending liquidity services and transaction volumes.
Well as a onetime fee.
Securities lending revenues were higher on improve spreads and a strong demand for U.S. government bonds.
In purging revenue was up 1% to 578 million despite the impact of money market fee waivers, reflecting much higher money market fund balances.
They were up 40% higher transaction volumes down from the exceptional volumes, we experienced in the first quarter.
The net impact of money market fee waivers, partially offset by higher money market fund balances negatively impacted Persians revenue growth by 3%.
Yes, sure services revenue decreased 3% to 431 million, reflecting declines in both corporate trust and depository receipts revenue.
Sorry, Ses revenue was primarily impacted by lower corporate action volumes, while in corporate trust, new business and deposit growth was offset by lower volumes and some products and interest rates.
Treasury services revenue was up 7% to 340 million driven by higher liquidity balances and related fees offset by lower payment volumes correlated to lower economic activity.
Deposit balances increase year on year by 40% as investments and you capabilities and increased focus on deposit gathering are critical to reaching most of the growth from earlier in the year.
Clearance in collateral management revenue was up 4% to 295 million from higher clearance volumes, mostly from non us clients as well as fees and deposit balances.
Average Tri party collateral management balances are up 4% in the U.S. and 9% outside the U.S.
Page nine summarizes the key drivers that affected the year over year revenue comparisons for each of our investment services businesses.
Now turning to investment in wealth management on page 10.
Total investment in wealth management revenue was down 3% investment management revenue was roughly flat to 621 million, reflecting the unfavorable change the mix of assets under management since the second quarter 2019, and the impact of money market fee waivers, partially offset by equity investment gains net of hedges, including.
Seed capital.
Please note the gains from seed capital include results from unconsolidated and consolidated investment management funds, both of which can be lumpy in any given quarter, depending on market conditions.
Details can be found in the supplement on the comp consolidated income statement. The gains are either an investment in other income or income from consolidated investment management funds, while the negative impact from their hedging or approximately $30 million recorded in other trading.
We had inflows of $20 billion in the quarter, reflecting continued cash inflows as well as long term flows into index funds and fixed income.
Overall assets under management of just under two trillion are up 6% year over year, primarily due to higher markets and cash inflows.
Wealth management revenue was down 9% year over year to 265 million, primarily reflecting lower net interest revenue due to lower interest rates and client migration of to lower the fixed income and cash products.
Now a few comments about the third quarter.
First I would caution you as we did last quarter that the environment remains fluid and variables are changing quickly.
Looking ahead at net interest revenue.
We will have a full quarter of lower rates in the third quarter, especially short term LIBOR rates, which declined throughout the second quarter.
We have also seen some pickup in prepayments speeds in our mortgage backed securities portfolio, given current and expected refinancing volumes.
Significant excess liquidity in the system continues to drive elevated deposit levels versus 2018, but the exit rate from Q2 is just a little lower than the average for the quarter.
And as a result, we currently expect net interest revenue declined 8% to 11% sequentially.
However, based on current market conditions, we would expect net interest revenue to begin to stabilize in the third quarter.
Now in money market fee waivers to pretax impact in the second quarter was 18 million net of distribution expense with the biggest impact from purchasing.
It's important to note that the big that approximately 50 million of this impact has been offset by a substantial increase in money market fund balances, resulting in a net impact of approximately 30 million in the second quarter.
Expect the impact from fee waivers to increase in the third quarter by about 30 to 45 million net of lower distribution expenses.
This additional impact in third quarter would also be reduced it money market fund balances continue to grow a little over half of that impact will be in presented with the rest of the investment management asset servicing.
We currently expect that we will incur incremental 25 million in the fourth quarter and we'll be at full run rate impact from fee waivers of about 135 $250 million offset by the incremental money market fund balanced growth that we've seen in the second quarter for net impact of about $85 million to $100 million.
Per quarter by yearend.
This quarterly impact could be reduced if money market fund balances continue to grow further.
Current equity market level should be a modest positive if they hold we saw transactional activity and FX continue to normalize over the course of the second quarter. Assuming this continues only modest headwind sequentially. Although we expect that related fees will be higher than the prior year. If we see some volatility in the equity markets transactional activity could pick.
Yes.
On expenses, we will expect them to be flat versus 2019. Excluding notable items. This includes the 50 basis point full year over year impact from higher pension expense credit costs will be highly dependent upon individual credits the future path of the health crisis, and how the economic forecasts changed by the time, we get to the into third quarter.
In terms of our effective tax rate, while it was little lower this quarter, we expected to be approximately 20% for the full year versus prior guidance of 20% to 21%.
With that operator can we please open the lines up for questions.
Thank you know if you'd like to ask your question. Please press star one on your telephone keypad. Our first question comes from the line of decreasing with Morgan Stanley. Please go ahead.
Hi, good morning, Thanks for the time this morning.
Couple of questions one.
Todd you you mentioned the virtual presentation that you gave the personal conference that you, Dave and I wanted to understand.
How important that is for generating new.
Client activity and if you think that that.
Virtual.
Kind of format in forum can deliver the same kind of.
Client activity growth that you've seen in prior years, one space phase.
Yes first of all in terms of engaging with our clients. It's been pretty it's been pretty effective I think initially I think there was a little.
Since we moved into the crisis, but now we've basically see this is our view.
So both clients and I think ourselves have gotten quite a bit better.
Managing the technology to actually communicate and connects and share with what we're doing so this particular conference where we had about a thousand clients and vendors.
Come into it.
We also posted on our website a whole series of detailed analysis. This under the new capabilities that are out there and available to them and the hits against that have been.
And been very high so I think it's I think it's been pretty effective we've actually seen the pipeline grow.
We've also seen retention high and actually sales are up in the first half of the year over where we where last year.
Okay. All right that's helpful. Thanks, and then.
Like on the guidance could we just again a little bit on the Eni commentary you gave I think you said Eni down 8% to 11% me give us some color on.
The drivers there and is it.
Why do you see it ameliorating as you go into Threeq and Fourq here and if you could give us a sense of.
The differences in the driver it's between deposit growth and yield compression that the helpful.
Yes, sure Thanks Thats it.
So I think when you look at the third quarter, it's really all about low.
Rates coming down and getting the full impact that that for the for the full quarter, that's really the primary driver.
And there is a series of actions that I think you can see that we're taking in the results both in increasing the securities portfolio and optimizing sort of how we're.
Howard investing there and so I think as you sort of look out past the third quarter and you look at all the actions we're taking.
Plus you look at where the forward curves are.
It gives us some confidence that it begins to stabilize in the third quarter as we look forward and obviously the.
The forward view on deposits will sort of have some impact on that but the marginal dollar gets a little less impactful with rates where they are so.
Okay. Thank you.
Thank you. Our next question comes from the line of Glenn Schorr with Evercore ISI. Please go ahead.
Yeah.
Hi, Thanks very much.
Maybe just a quick follow up on on the rate impact.
We used to think.
Thank our might be but 2015 and low but I guess I. Appreciate the long again has come down more than it was that.
You mentioned.
Focusing on Eni over net interest margin. So I guess, there could be more down there. So my question My quickie is deposit sticking around despite.
The interest bearing deposit rate being minus three basis points I'm curious to hear any color on client conversations there and and if that's now at its resting point or is there.
More room.
On the negative side as as clients Park and have no other alternative.
Mike why don't I start that one and then you can probably.
A little bit of color.
I think that.
Well again, the mix of deposits makes a big impact Glenn on that rate. So there are a fair amount of foreign deposits in European deposits that are actually carrying a negative rate and weve passed through to.
To the clients in the us with.
Our around 10 basis points that seems to be.
Anchoring somewhat around around that rate and wise.
We see.
Changes going on in the in the money markets, which we haven't seen a whole lot of whole lot of noise. Yet. So I think most of the downside pass through has has already been has already been made like if you have anything to add to that.
I think I think thats right I mean, I think the negative is really driven by euros as Todd So Glenn and when you look at the U.S. dollar deposits.
A low single digit sort of.
Interest rate paid down on the book and so there's not a lot of room to continue to bring that down.
I'm with you.
That one qualifier on the provision.
Obviously, where we're writing too.
Worse economic backdrop, but you also mentioned the impact that downgrades have.
So so.
My question is if we move forward and the economic scenarios.
Don't change in other words, we feel like we're kind of where we add.
We'll we'll further downgrades.
Keep continue to be the gift that keeps getting on the on the provision will just trying to dimensionalize, how how much the bake in the.
Economic scenario doesn't change.
Okay.
[music].
Yes sure Todd.
I think thats, a it's a tough question to ask right and so if things don't get worse from what is being projected now in the scenarios than you would expect that the issue or downgrades should be somewhat limited from from here, but there will be idiosyncratic issues that may.
That may or May change some of that so I think obviously these the downgrades and and the scenarios are somewhat inter inter related.
We sort of look at both of them.
Okay I appreciate that thank you guys.
Thank you. Our next question comes from the line of Houston with Jefferies. Please go ahead.
Thanks, Good morning, Hey, Mike just a follow up on the fee wherever commentary just wanted make sure that we're talking about at the right way in terms of the.
The total number versus the gross so are you saying that.
You'd expect that growth to continue when you gave us the two sets of numbers. So just the cadence going forward.
I guess, maybe if you can just help us understand.
The net trajectory from here would be the better way I think to help us think through that.
No no sure I know and I can appreciate it's probably a little complicated, but so as you sort of look at the net impact of $80 million to $100 million by the time, we'd get to year end underpinning that assumes that balances holds two about where they are so it does not assume that there is additional growth there.
So I think if we do continue to see growth.
In the balances we will we will see that.
Offset a bit as we look towards end of year.
Okay. So so so right that net number the 80 to 100 minus 50 from growth.
That assumes the balances are flat from here okay.
Okay.
Geographically couple of quick things could you just help us understand the size of the onetime gain an asset servicing.
And then just can you talk through the just the income statement line asset servicing just whats happening underneath the surface. There in terms of core servicing collateral and broker dealer services. Thanks, Mike.
Okay.
[music].
Yes, so the onetime fee Ken is actually in other income it's not in the asset servicing fee line.
It's not something.
We have disclose exactly what it is not super meaningful but it does show up in the are there other income line.
So it does impact your feet your asset servicing fees at all as you sort of look at what's what's underneath asset servicing.
In the fee line I think you're seeing growth in both.
Clearly clearance and cloud alone.
Clearance in collateral management business any asset servicing business, you know sort of Tom pointed out.
Different drivers, there that or sort of impacting that.
That that line.
Okay. Thank you.
Thank you. Our next question comes from the line of Brian bundle with Deutsche Bank. Please go ahead.
Thanks, Good morning folks.
Maybe just one on the fee waivers can we track the level of money market fund balances I. Appreciate obviously, they're there Greg concerns and the asset management business, but also.
A number of third party from Cushing platform I'm, sorry, I didn't know if you've got that disclosed.
For the level of those balances and this is something that we can track given given the pershing. So I don't think we can see.
And.
Yes, sure Brian there's actually a couple a couple of drivers underneath the the fund balances one we're obviously seeing as emerging and thats not something that.
We've disclosed.
In two we're also seeing growth in asset servicing as well.
Where.
We sweet lumpy in money market funds through.
Open architecture platforms there.
But also a bunch of other.
Thanks.
The numbers are not something that.
We disclose.
Two.
We've seen growth across the platform, we've seen growth really in all channels.
Right. So you could have an organic growth dynamic in miss that that's different than the money market fund industry at large.
Keep that the fee waivers closer or even less than 8500.
Is that a feasible.
Conclusion, potentially yes, yes potentially okay.
And then just maybe just to talk on the on the new business and asset servicing card you mentioned a lot of initiatives, partly from the tech investments I'm on the data both and also the distribution analytics system.
In any way to frame what type of or what level of new difference you think you're getting from these initiatives.
In saying that extra where are you expecting in the next six months or so and they kind of revenue impact.
Or growth impact asset servicing you think as a result cookies initiative.
Yes, I think first of all some of these are very new and some of the applications that we've just put out there. We're just going live in the past.
In the past month or so so our estimates is that we could see some meaningful growth driven by the data and.
Digital data analytics that we that we're offering that we that we've talked about so it's just it's just now gathering momentum there is a lot of a lot of discussions and but it's early we've got a couple of data.
Clients on it that we described and they actually participated in the engage conference both.
Charles Schwab and a and B.
[music].
I think underlying that if you look at the if you look at our pipeline. If you look at the the growth rate that we demonstrated we are seeing a little bit of organic growth for the for the first time alone.
Okay, great I'll get back into queue for another question. Thanks.
Thank you. Our next question comes from the line of Alex Boosting Goldman Sachs. Please go ahead.
Great. Thanks, and good morning, everybody. So a couple of quick follow ups I guess first one is around and IR.
Do you guys talked about optimizing and I are up of sort of three key trough levels, which makes sense can you can you walk us through sort of the opportunities that you see to invest some of the excess cash.
That kind of coupled with the balance sheet and security portfolio. So anything specifically can point in terms of how much could ultimately be moved to securities over time and sort of the yields you guys expect to earn on that.
And then any do you guys could doing a liability side as well so deposit cost will be kind of what they are with the market.
But curious if there's an opportunity to further we stack long term debt, which are you guys do would've been about in the quarter.
Mike.
Sure.
Hello.
Just trying to get all of those pieces, Alex and remind me if they don't so as you sort of maybe I'll start the last one for so if you look at the the liability side, where we're always looking for ways to sort of optimize that she said.
Deposit costs are probably.
The near where they're going to bottom it in the U.S., but.
On the margin there, maybe a little bit here and there with.
Particular clients on the long term debt side. We are we are looking at optimizing that more I think you'll see us kind of bring that down maybe just a little bit as we sort of look forward over the next quarter.
But I think obviously you know we need to keep.
Long term debt to meet a bunch of different constraints that we've got but where do you think there's a little bit of opportunity to optimize that as we look as we look forward.
On the on the security side, you can see the increases over there sequentially and year on year are pretty significant in terms of what we've been able to redeploy the majority of that has gone into sort of highly liquid assets sort of each key Q outlay is sort of the term goes.
Right and.
And I think you'll see see us continue to put more into HQLA assets as well as look for opportunities, where we can get the right risk profile in the right return for some less less liquid assets as we sort of look forward.
As we sort of get more experienced with the deposit base than we've been talking about this now for a couple of quarters.
As we sort of see the behavior of the deposits come onto the balance sheet each month.
30, 60, 90 days, you get a better sense of what the what the operational nature and the duration of those deposits are look like and so you can sort of keep.
You can keep.
Optimizing how much you're going to deploy each month in each quarter as you look forward and so we're we're doing that so we still think there's some opportunity to continue to deploy more.
Great that's helpful.
And my second question just around the expense outlook I think early in the quarter on you guys spoken to conference and the outlook for expenses for 2020, I believe was flat to down and it sounds like it's flat now so so whats changed or could expenses still decline this year and maybe just a quick reminder, in terms of how much incremental.
Tech spend is running therapy, now in 2020, which which part of that I guess as opposed to phase out into 2021. Thanks.
Okay, Mike why don't I start with us and maybe you can add some additional color I think we've guided for a while it will be flat or around flat for the rest of year and I'm confident that we'll do that at least at or better.
And as we as we look out to next year I think we've got significant opportunities around our efficiency programs, especially in operations.
And the increase spend that we've made over the past couple of years in tech will begin to be.
As the investments in infrastructure and resiliency will be largely behind us.
So we think we've got we've got more that we can do here looking out over over the next over the next year or two might want to give a little more color around the text fund.
Yeah look I think you know as we've talked about none of the last couple of years, we've as Todd said, we've been making those investments in the operating platform as well as other capabilities like we talked about but with data and analytics and other other new new products across the different businesses.
I think the Walt while the growth rate has been slowing over the last year I think as Todd said, we've got much more flexibility to sort of look at that as we sort of exit.
The year the only thing I'd add is we're seeing the benefit of the efficiencies come through.
We're spending less than operations. This year than we did last year, we're going to spend less next year than we did this year.
And we feel very confident that we've got line of sight to to continue to execute on the efficiency agenda.
As Todd mentioned.
Great and I think into since 2020, Alex I'll add to that I think we probably made the biggest spend that we've made an increase in tech and increasing efficiencies cost operating efficiencies across the company.
Great that makes sense. Thanks again.
Thank you. Our next question comes from the line of Brennan Hawken with GBS. Please go ahead.
Hi, good morning, Thanks for taking my questions.
What first actually I'd like to just start with the request the fee waiver.
AMAK is there is it seems like there's a lot of moving parts I just some to consider.
For coming quarters, maybe a little enhanced disclosure or maybe a memo disclosure. So we could try to consider how to model. Some of these components given that there's balance movement and all this other stuff I know, it's probably tricky, but it might help.
But.
Taking a step back widening back that lends a metal.
Yes, we're clearly in a rate environment, that's a lot more challenging for your business model.
The idea that monetary policy in low rates isn't monetary policy tool. It certainly seems to be now than normal and it's not a temporary thing we're dealing with here.
Are you starting to think about different ways in which you can engage with your customer base different ways in which you can structure your relationships and the deposit dynamics that you can have more confidence in the duration of the deposits.
How are you, making adjustments or how are you thinking about making adjustments to sort of fundamental ways in which you engage with your customers can ensure that you can monetize.
The components of all of these relationships and the most effective way given low rates are going to be around for probably sometime.
So Mike Mike why don't I take that and then I think you can add some color towards first the first of all brand in the comments around.
The fee waivers and we'll take that department I want to make sort of somethings something's clear because maybe a little confusion here.
What we've indicated is that we think said the full impact of interest rates to our net interest income will begin to stabilize third quarter and with which is which is basically saying that we're coming out with approximately that run rate as we go forward and that's taking into consideration what we what we know today with the shape of the.
Okay. So we see some stability here as we reset around very low interest rate environment as we fully we sent around it that same impact is going to be fully reset through fee waivers by the by the end of year and.
If you look at the disclosures that might have given you. It's very specific to what that is we don't know what the actual balances are gonna be so if the balances grow.
In saying that impact can be quite a bit less because there'll be additional additional income related to the money market balances.
So I wanted to make that clear in terms of how we're working with our clients and and pricing whether it's around whether it's directly around deposit activity, where I Treasury services. There is certainly taking the interest rate environment into consideration and any time, we put together more of our platform business.
Like an asset servicing we take that into the pricing discussion.
Taking whatever market conditions would be and likely implication to.
Our margins in that type of activity to that that we're doing that on a day to day basis like you have anything to add to that.
No I think thats right and we're continuing to have pretty close.
Dialogue with a lot of the clients that have large or medium sized sort of balances with us and and I think in part as you look at a business like Treasury services, its ensuring that we get our fair share of the the payments business and the fee revenue that comes along with having these balances.
So I think it's not only about optimizing sort of the reinvestment side of the balance sheet. It's also about making sure that we're monetizing the fee relationship with with these clients as well and that's as much or focus for us that are or Klein and sales folks as you know the balance sheet side of it.
Yeah, I appreciate that and that's that's all very very fair.
When we think about.
Capital.
You flagged the strong showing a bank in New York through the de fast process.
You talked about like clearly you have in low risk mottos, clearly showcase during the de fast but.
Kaiser catheter categorized as he said you are now continue your constrained in the ability to return capital and so even though you're pretty far above a lot of your requirements you cannot manage the capital based as much as you well.
How are the engaged housing engagement with the regulators as far as trying to point that out are is there going to be a staggered start based upon risk inherent risk in the business model, where the G sibs that or.
Lower risk.
Should be able to start returning capital sooner or is this going to be one of these things at all the G. SIB are.
Lumps together and therefore firms that have really really minimal credit risk profile as like decay.
Yup.
At the same starting line as some of that some of the big investment banks and commercial banks.
Yeah, So Mike I'll start with this one too so I mean as you know the stress test is a idiosyncratic test for us and so as we go through it we have performed quite well we have submitted our capital action plans and we have indicated that we will we will look and we then we performed quite well and another.
It's going to be a reevaluation using soon.
Some scenarios.
Sometimes we ended the third and.
And so we'll go through that process.
That being said, we expect to perform quite well and office given the resiliency as you point as you point out.
Our of our of our balance sheet, and our and our business model.
One of the one of things that comes out of the news stress capital buffer that SCB.
So is that.
You get a little more flexibility around around buybacks you don't have to not limit on quarterly basis, you just need to stay within your SCB. So there could be a timing difference based on whatever regulatory considerations are the environment might look like but ultimately as we accrete capital letters books as soon as stronger position to.
In fact, when that when that when the opportunity arises.
So I think I like where we.
Like the way, we are creating capital.
And I think that puts us in a position to buy back a considerable amount of stock as soon as possible.
Thank you. Our next question comes from the line of my carrier with Bank of America. Please go ahead.
Hi, good morning, and thanks for taking the questions.
So first just want to try to understand it again can you that has been covidien pathways in could normalize the head to any color on how much does a deposit balance growth has been driven by some of the policy response normalized and then you guys noted, yes, new business ways. That's an area that would have expected.
To be a bit more challenging just in this environment.
How do you see much impact.
Hey, you see like a pipeline, Washington actually you start to normalize.
As we get back.
So Mike can you clarify the first part is that the first part of that question I didn't quite catch it.
Yes curious first partly from smart.
And Mike sorry.
Yes sure. The first part was just on the growth in deposit balances, yes, it's hard to determine.
That really drives some of this out is that you. Some firms had tried to quantify what said yeah, hi that.
Patrick Bye.
Try to virus and some of the policy the sizes.
Versus what's more just sort of core.
Yes.
Operations.
Got it the first part and then the second part.
Just on the new business wins, where it expected that you a little bit more challenging environment, but it seems like you continue to have some you. Some weight. There. So just wanted me to try to gauge you has that been yeah Pat.
The pipeline.
Okay, Mike you want it takes the the deposit component of the question.
Yeah sure sure Mike So he sort of look at what's happened since the middle of March what you. What you saw was this massive increase and if you recall what our spot balance was at the end of the first quarter was 337.
Billion in terms of deposits and so that that.
Huge volatile piece of the of the deposit balances come come off already.
And as you can see where we where we were for the quarter.
In the two eightys in terms of the.
The average and so you've already seen that sort of.
Massive spike retreat and so.
While it's you know in hindsight, you'll you'll have better view in terms of what's driven the increase from the February balances of around 230 to where we are today, but I think it's hard to ignore that the environment. That's been caused the economic environment. That's been caused by the pandemic is is a big driver of.
The pace at which those deposits have.
I would have increased from.
You know from from the February levels.
But as we look forward.
While we're in this environment for short it feels like we're in this environment for longer.
You know, it's hard to see given all of the response the policy monetary policy response from.
From the fed and others that that the balances would retreat.
Much more from from where they are.
And.
I can I can take the second component.
Question, Mike which ones around.
The new business wins, I mean clients are still making servicing decisions and relative to last year, we've probably seen we've been waiting and retaining more deals and higher.
Your deals, which is which is important.
No I think we've we've we've learned how to work from home, we've ramped down or focus on ramped up our focus on client management over that time.
And we're actually seeing an increase in activity with reviews and presentations being being done in virtually.
And we've got some nice wins around he asked around our mid office space and we continue to implement.
In a rapid pace.
Against the mid office.
We've got the top servicing.
Related wins as well so the pipeline remains strong I think we're just we're we're getting used to this as being the current normal.
Guided Patrick said.
Like you said a quick cleanup there were just a few positive items during the quarter automating some like investment Eaton funds in it you mentioned that other investment income asset servicing fee.
Away from that yes, I'm, assuming that but most of it was just market related just given what you saw in the quarter, but was there any other factors in today's line items I'm, assuming we just you expect that to normalize lower hedge that you see any color there any other nuances there.
No I think it's pretty straightforward on those.
Other income you can see the breakdown of that in the supplement.
The thing that will be.
Other income line that will be.
Volatile, obviously seed capital and how the market sort of moves within the quarter.
Then the other trading line, you'll have some impact there as well from from the same from the same moves.
Got it thanks.
Thank you. Our next question comes online make me with Wells Fargo.
Using Wells Fargo Securities. Please go ahead.
Hi.
I guess that try to reconcile a couple of thoughts on the I pod Gibson, Yeah really positive comments.
With your introductory remarks, and maybe can you elaborate some on your work with the government and.
Kind of fees, you get from that and how sustainable those fees are.
Like you certainly commented about the impact of lower interest rates on you're certainly not sugar coating that.
So that's kind of connect those two different costs and the other two different thought they had no you guys I'm certainly service more fixed income assets than your peers.
So you should be benefiting.
From that quite a bit and I'm not sure that's showing up as much as you might expect with the increased fixed income activity. Thank you.
Yeah, Mike. Thanks. So in terms of there are a number of government programs that were participating or that we're supporting or administering some of them are showing.
Showing some growth for example, the PTC out.
As where we use our Tri party repo system. So it's just it's reflected in the and the in the amount of Tri Party repo activity, which we did see go up in New York into first quarter, and ER and sustain itself to a certain extent, although it's starting to its starting to come off a little bit in the thing that's in the second third quarter.
We are seeing good activity and the global side of the of the Tri Party book.
And then it's really going it's gonna be a matter of how much those programs are taken off before we see anything any revenue I think the most the more important is the other component of of our global revenue growth across our investment services business in terms of fixed income excuse me fixed income activity.
Where you're seeing and clearing Oclaro managements, you are seeing increased clearing volumes on our on are clearing platform.
And we are we are benefiting.
And extend from that and I think that was reflected in if you looked at the investment services.
Dick and highlights you could you could you can see that.
And I think we've been very directive, where we are with the interest rate I think the important thing to know is that where we see ourselves reaching a bottom here in a very short period of time.
So we add it all together do you think you said flat expenses for the year.
Revenues.
Hey, any guidance for the year for that should it.
Relative to those expenses.
Well I think that the the headwinds for revenues, we we've disclosed to you.
That's all interest rate related.
Okay.
And so I do think you can get flat operating revenues. This year are positive or negative or you just.
Don't want to make a call on that.
Right now I wouldn't make good call and that just given the uncertainty around some of those elements.
Okay. Lastly, <unk> that you are investing in technology. So that we said that elevated this year and that should fall off some next year.
So thats your you're not going to sacrifice those investments.
Over the long term that's correct that's correct, Mike I mean, we in fact the investments we made an operating inefficiencies that we'll see the benefit over the next couple of years from is the highest we've ever made will be times, we've ever made in 2020.
Got it alright, thanks a lot.
Thank you, ladies and gentlemen, as a reminder that is star one in your telephone keypad to signal for question. At this time, we'll next go to Rob while Heck with Autonomous research. Please go ahead.
Good morning, guys. There's been some headlines with some of your peers are rolling out what seems to be a similar integration to the partnership you struck with Aladdin and Blackrock.
Can you talk about what you're seeing on that front, maybe highlight you think differentiate your integration there versus some of the other options.
Mike you want to you want to do that where you want me to say what once you take it Mike.
Yeah Sure me Rob. The you know look I think you know as as you would expect Blackrock works with a whole series of providers and those providers reviews allowed and in some form.
Or fashion and I think that's a that's kind of come to me to be expected and what's happening already I think the good news is where the only provider that has our capabilities embedded inside of Aladdin and so the widgets or the capabilities of the functionality that we've built or actually accessible through Aladdin and we're the only ones that you can do that.
So so I think you know we've got a really strong relationship with Blackrock on the servicing side in the partnership side and we look forward to continuing to build new capabilities with them that continue to differentiate what our common clients can do versus versus others, but we do think there's some differences there.
Got it thank you.
Thank you. Our next question comes in the line of Gerard Cassidy with RBC.
Right.
Hey, good morning, Thank goodness.
The question anything has to do with the credit quality clearly you guys are not credit centric bank like some of the universal banks.
Can you give us some color on the position that you put up.
You broke out your portfolio.
That position allocated to that portfolio and is it just general allocations or were there some specific reserves that you put it in specific ones.
Mike you want ticket.
Yeah, Jarred, so I would say generally the the the build was related to commercial real estate.
Portion of the portfolio.
That's certainly where the biggest piece of it was it's not a general sort of you know allocation. Obviously, it's a very detailed sort of name by name and then you apply all the model and that goes around with it.
But as you sort of look at the build the biggest portion of it would be related to the commercial real estate portion.
Very good and then come back to the deposit rates you sort of done I guess 11 or 12% increase in your your further enhances deposits.
Integrate when can we improve quarter, you paid 20 basis points, if things go 29 basis points downturn, maybe to 12.
What interest rates should we be watching overseas to the negative rates.
The growth, even though you went to maybe the grades in deposits since it lasted meaning zero point here.
Be concerned that people would move money negative rates went to two Newton.
Mike you want take that.
Yeah, I think when you 29 to 12 yeah.
Yeah in a in Gerard when you look at the the disclosure their domestic first foreign offices that doesn't necessarily did note.
Currency denomination a good chunk of the deposits in the foreign offices are actually U.S. dollar deposits and so I think you really sort of need to look at the rate in in aggregate.
When you think about what what's happened over the quarter.
I think when you looked at the into and and so as you sort of look at that rate coming down the biggest driver of the rate coming down in the foreign office is actually the us paying lower amounts on U.S. dollars not increased negative rates outside the U.S.
But obviously the biggest driver for us other than U.S. dollar is going to be or euro deposits. When you think about negative rates and that's something we're focused on I think when you think about you know are deposits you know inelastic.
Thank you know Theres a portion of the deposits that are very much tied to the underlying operational activity.
And so I think that you know there is we have we have we do we do try it when we charge clients were negative rates there our spreads attached to those.
To those negative rates and we haven't seen much movement as a result of of the pricing in the spreads that we've applied to those deposits.
Thank you.
Thank you. Our next question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.
Great. Thanks, I'm just a real quick question first on that tax rate kind of easier for the full year. This year, but that's also a good number to use on a go forward basis, the 20 prefer.
Right.
I would probably think 20 to 21 is just sort of look forward a based on what we know today, but but I think for this year and stuff like closer to 20.
Okay, and then just a quick follow up on the expenses I heard the facts those guys. This year, but obviously, there's a lot of kind of one timers and unique nature going on I'm getting the current situation for the right. We think about expenses as we look forward to 21 and that there should be at natural.
Downward progression to expenses at the these onetime its go away.
And then the rest of it you know kind of thing about expenses is really driven by revenue growth for next year. So that you know, there's some kind of downward by phone extends if we start with for 21.
Well, we did what it but I'd indicated there are a couple of a couple of good things number one is I think the efficiencies that we've invested in will continue to register themselves next year.
And over the next couple of years and we're not we're not slowing down on that there's a lot more automation a lot of additional things that we can do to.
To make ourselves.
More efficient actually improve the client experience.
At the same time.
And on top of that we had been growing our tech extends quite a bit over the past three years, a lot of that was infrastructure resiliency as well as some of the somebody you efficiency investments and some of the product capabilities.
We think a fair amount of the infrastructure component of that will be behind us, which should give us a bit of a tailwind as we look out over the next couple of years.
Thanks.
Thank you and next in queue and the follow up question from Ryan bundled with Deutsche Bank. Please go ahead.
Great. Thanks for taking my follow up I'd like just maybe just diving a little bit more on the on the balance sheet.
It's hard to levels I think I period end were up about three or five or the 283 average. So maybe just some commentary on whether you think there was a typical quarter end spike or do you or do you think.
Levels or the end of period levels of deposits are sustainable as you see it right now in three Q and then just on the Securities mix, you talked about moving more short term and you're shifting the balance sheet composition.
Toward Securities you get pay as you get confidence in their durability the deposit.
What type of level do you think that mix could go up to from the 43.
Percent because I guess you can you could potentially gets and then expansion. After this bottoms and through Q if he does.
Sure the L., let's start with the first one.
Ryan I think the you can't read much into you know one days worth of deposit balances and here, though I would sort of put that in a bucket of a.
Typical you know quarter end spot number and so sometimes that'll be higher sometimes it will be lower and there was there was one deposit that sort of drove that up a little bit for a particular particular client, but so I think the guidance I I gave around the current levels or you know or slightly below.
You know where the average was is is probably a good way to sort of think about where we are right now.
I think as you sort of think about how much we can deploy into the securities portfolio.
I think that's something that's a that's that's dynamic just on sort of how we feel about this stability and the longevity of those of those deposits.
You'll see us continue to optimize as we go into the quarter.
It's not something we'll give you a specific percentage on because obviously there are other drivers of that but we do think there's continue up continued opportunities there.
Okay Fair enough and then just on the deposits in money market fund balances, we got agnostic, mostly between near that client usage is as that cash moves around between third party money market balances and drive because of course as well versus deposits on the balance sheet and those programs or.
Our I guess the question there you're agnostic as to where that ran through or are you.
Or you're trying to favor you know one area or over the other in terms of from your revenue generation capability take it from a fee versus the balance sheet.
Let me take that time, yeah, Mike.
The I think it I think the answers it depends Brian.
I think when you think about short term balances that that we know won't be around for very long I think we are relatively agnostic with higher we are at 10 basis points.
Where they go whether it's in money market fund or on on on the balance sheet I think will learn about the same.
I think as you sort of think about operational deposits go. We we are you know overtime will make more money with them being on the balance sheet.
Okay, great. Thanks for taking my problem very specific yeah, I'd be very specific clients, but thanks for the question.
Okay. Thanks for taking the comp.
Thank you. We also do have the follow up question from Alex Blostein with Goldman Sachs. Please go ahead.
Hey, Thanks for the fall guys, sorry to Nick but back to this money market fund dynamic real quick so some I think on the last update you guys had said you expect the pre tax impact on a quarterly basis for money market fee waivers to be about 50 to 75 million you talked about that been probably at a higher into that range.
In the second quarter.
Now you guys got into 80 200 million Oh by the end of year. So I just want to make sure that needs to of course, I kind of comparable and essentially we're just talking about $20 million more instead of incremental pretax but from the way worse.
Yeah. That's good question, Alex I think the when you look at the 50 to 75 at that point. It was unclear what was going to happen with money fund balances.
So I think the 50 to 75 was the gross impact.
And you know as we sort of look at the 85 to 100, that's the net impact of now accounting for the fact that we think the balance growth that we saw is going to kind of stick with us for awhile.
So if you look at what I gave in my script I said by the fourth quarter gross impact will be hundred 35 to 150, which is a bit which is equivalent to that 50 to 75, but it'll be offset by the fact that we think the balances will stick around.
So you get that Guy I wonder.
Great that's clear thanks very much.
Thank you and it does appear we have no further questions in the queue at this time.
I'd like to turn the conference back over to Mr. documents for any additional for closing remarks.
Okay. Thank you everybody for your questions and obviously you can reached out to magazine Investor Relations for any any further follow up I have a good day.
Thank you. This concludes today's conference call webcast a replay of this conference call webcast will be available on the being my milling Investor Relations website at two P.M. Eastern standard time today have a good day.
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