Q3 2022 Bank of New York Mellon Corp Earnings Call
Good morning, and welcome to the 2022 charge closer earnings conference call hosted by being White milk.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference call and webcast will be recorded.
And consist of copyrighted material.
You may not record or rebroadcast these materials without being why mellons consent.
I will now turn the call over to various smarts being one Melanie head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to our third quarter 2022 earnings call.
As always we will reference to our financial highlights presentation.
Can be found on the Investor Relations page of our website at Ian why Mellon Dot com.
I'm joined by Robin Vince.
President and Chief Executive Officer.
Emily taught me, our Chief Financial Officer.
Robin will make introductory remarks, and Emily will then take you through the earnings presentation.
Following the prepared remarks, there will be a Q&A session.
Before we begin please note that our remarks include forward looking statements and non-GAAP measures.
Information about these statements and non-GAAP measures are available in the earnings press release financial supplement and financial highlights presentation.
All available on the Investor Relations page of our website.
Forward looking statements made on this call speak only as of today.
<unk> 17, 2022, and will not be updated as well that I would turn it over to Robyn.
Thank you Marius and thank you everyone for joining us this morning.
Having formally taken over as CEO , a little over a month ago. It is a tremendous honor to usher in a new chapter for this great institution.
After spending a significant portion of the past few months engaging with clients regulators employees and other business leaders I'm excited about our exceptional client franchise, a central role in global financial markets and the opportunity that lies ahead.
Now as a new CEO and considering the current environment and it being the time of year when budgets and strategic plans are healthily debated and brought together naturally I'm using this opportunity to take a particularly close look at our priorities.
Well I'm still reviewing everything it's apparent to me that while we've made good progress in a number of areas over the last couple of years. There are also clearly opportunities to further enhance being why melons performance for our clients and shareholders alike.
First I see exciting growth opportunities and numerous examples of innovation like Pershing ex the re imagining about collateral and custody platforms digital assets and real time payments that we need to continue to invest in and execute on with great discipline and urgency.
Second we're not just reviewing the top line. We are also closely examining our cost base and margins.
Questioning how we do things and I must abuse it our margins should be better in some areas for.
For example, we talked to you about improving our pre tax margin and securities services to 30% over the medium term.
More broadly we are also going to be looking for efficiency opportunities as we drive our operating model transformation and we'll be very determined to see them through.
And third while we have been providing more holistic solutions to clients that we believe our unique collection of businesses is better placed to deliver we have the potential to do a lot more <unk>.
I touched on this on the last earnings call, but I continue to believe that the opportunity to deliver the whole firm through a more unified one being why mellon is meaningful.
As we continue to work through and bottom out all of these opportunities in the coming months will be regularly providing you with progress updates along the way.
Moving onto the quarter.
Start with some broader perspectives before I run through a few financial highlights and then I'll turn it over to Emily to review our financial results in more detail.
As you're all aware during the quarter, we continued to see high levels of volatility across both global equity and fixed income markets consistently high inflation driving increased expectations for significant rapid rate increases by central banks in developed countries.
<unk> U S dollar and a complex geopolitical landscape.
We also began to see some government intervention for example, Japan stepping into the FX market to manage that currency and this was particularly on display in the U K where in the last few weeks there has been extraordinary volatility in the market as a result of the U K government spending and taxation plants. This led to a series.
Of actions by the bank of England, including delaying that Q T plans announcing a guilt purchase program and the liquidity facility aimed to stabilize the market.
Our business model as a core provider touching so much of the financial system gives us a terrific vantage point on what's going on in markets for.
For example, our data shows the building up throughout the quarter and heading into quarter end. The market was extremely short euros to levels not seen in quite a few years and we've seen international holders selling U S treasuries and more broadly it's clear the market liquidity continues to be challenged in some markets.
More so than in others.
As we sit here today, most markets have continued to function in a relatively orderly fashion.
Just circling and fails and overdrafts are fairly normal levels.
Clearly risks are elevated and the system feels more fragile than it was a few months ago.
While the environment is quite uncertain our platform of trust and innovation is very much in demand by our clients as their cost pressures rise. We are seeing a lot of interest in engaging with us to review operating models. The scale of our platform should allow us to lower operating costs.
Clients, enabling them to focus on that core strengths.
Turning to our performance in the quarter and referring to page two of our financial highlights presentation. We reported EPS of <unk> 39 cents on $4 $3 billion of revenue and a return on tangible common equity of 7%.
These results were impacted by a goodwill impairment charge that Emily will discuss in more detail shortly.
Excluding the impact from notable items EPS was $1 21.
Up 11% year over year, and our return on tangible common equity was 22%.
Revenue grew 6% year over year, a testament to the diversity and resiliency of our business model.
This performance reflected the benefit of higher interest rates as well as continued strength in client volumes and balances across our security services and market and wealth services segments.
While investment and wealth management was naturally more affected by the continued decline in global market values, particularly in investment management. The business delivered positive net inflows in the quarter and continued to deliver solid investment performance for our clients.
Touching on a few business highlights.
Servicing continued to deliver solid top line results and our sales momentum remains strong with wins in mandates from a strong 2021 and yet to be installed AUC, a meaningfully higher than last quarter.
In Etfs, we continue to see strong net inflows in the total number of funds service is up almost 10% from the beginning of the year.
We're also seeing strong momentum and traction in the <unk> space and have an active pipeline across credit private equity and real estate.
And we were pleased to announce that Aviva investors, a large European based global asset manager recently appointed us to provide a fully integrated operating model for certain front office support services as well as middle and back office activities, allowing them to focus on delivering an exceptional client experience.
Howard in no small part by the scale and capabilities of our platform.
And finally, following the formation of our digital assets unit in 2021, we are now live with our digital asset custody platform in the U S.
To this point, we continue to see significant institutional demand for resilient scalable financial infrastructure built to accommodate both traditional and digital assets and we see digital asset custody as an important foundational capability for the future of financial markets.
As blockchain technology allows for <unk> of all kinds of assets and currencies.
But just to be clear, we did not invest in this space just for the purpose of custody crypto, we see this as the beginning of a much broader journey.
<unk> had a solid and resilient quarter benefiting from its diverse revenue mix that includes not only market based fees, but also transaction fees balance base fees subscription fees and net interest revenue with many of these income streams, playing well in the current environment.
We also gathered a strong $45 billion of net new assets in the quarter and the pipeline remains healthy boding well for flows in the months ahead.
Pershing ex reached another milestone through an equity investment and partnership with conquest planning, a fintech, which uses AI and powerful analytics tools to help advisors improve their efficiency and create highly customizable financial plans for their clients.
<unk> minimum viable product remains on track to launch in the fourth quarter.
Client engagement together with the product design inputs, which that brings is helping us to accelerate and enhance the delivery of an exciting end to end digital experience for advisers.
Clearance and collateral management delivered strong growth on the back of higher U S clearance volumes as market volatility continues to drive secondary trading activity in U S. Treasuries in fact in September settlement volumes were the highest they've been since March of 2020.
We also saw growth in margin related services, reflecting the industry, leading work that the team is doing to help our clients comply with Uncleared margin rules and derivatives trading Treasury services achieved a number of wins this quarter as we continue to bring innovative new solutions to the market.
We were awarded a contract for white labeled trade processing for a major U S Bank.
We sponsored our first supply chain financing program for a major investment grade corporate client and we were awarded and we'll be managing payroll and digital asset transfers for a major digital asset clients.
Recognizing our momentum in this business the banker named US 2022 global transaction bank of the year.
Also proud to have been recognized by them with additional awards for our work to transform the real time and digital payment space and optimized trade finance payments by leveraging emerging technologies.
Let me conclude with a note of humility about the uncertainty that we're all witnessing in markets. These days.
None of us can predict the exact path of market and economic conditions from here and the level of uncertainty is greater than many have become used to.
As a firm we are positioning ourselves conservatively in this environment and recognize the strength and stability of our platform is important for the uninterrupted functioning a significant part of the global capital markets.
We're proud of this role and the service that we deliver to our clients around the world.
With that I'll hand, it over to Emily for a more detailed review of our financial performance in the quarter.
Thank you Robin and good morning, everyone.
I walk you through the details of our results for the quarter all comparisons will be on a year over year basis.
Otherwise starting on page three.
Total revenues increased by 6% to $4 3 billion in the third quarter fee revenue was down 1% as the benefit of lower money market fee waivers and organic growth across our security services and market services segment was offset by the impact of lower market values across <unk>.
And fixed income markets.
Unfavorable impact of the stronger U S dollar.
Firm wide assets under custody Android administration of 42, two trillion decreased by 7%.
The impact of lower market values and currency headwinds with tempered by continued growth from new and existing clients.
And assets under management of one eight trillion decreased by 23% also reflecting lower market values and the unfavorable impact of the stronger U S dollar partially offset by cumulative net.
Investment and other revenue was $117 million in the quarter.
This included a 37 million gain on the sale of our hedge Mark subsidiary.
You are a minority equity stake in the combined company, we will continue participating in their growth and.
And our clients will certainly benefit from a robust suite of managed account solution.
Net interest revenue increased by 44%, primarily reflecting higher interest rates.
Reported expenses were up 26%.
This included a 680 million dollar impairment of goodwill associated with our investment management reporting unit, which was driven by lower market values and a higher discount rate.
Well, how they impacted our earnings for the quarter. This impairment represented a non cash charge and does not affect the firm's liquidity position tangible common equity or regulatory capital ratios.
Excluding notable items expenses were up 4%.
Provision for credit losses was a benefit of $30 million.
Primarily reflecting reserve releases related to cash balances and the exposure to Russia as well as a modest benefit from our commercial real estate portfolio.
Our effective tax rate was 38, 4%.
95%, excluding notable items.
Reported EPS was 39% pre tax margin was 15% and return on tangible common equity was 7%.
Excluding the impact of notable items.
With a $1 21 pre tax margin was 31% and <unk>.
Return on tangible common equity was 22%.
Now on to capital and liquidity on page four.
Our consolidated tier one leverage ratio was five 4% up 19 basis points sequentially, reflecting the benefit of lower average assets, which was partially offset by a decrease in tier one capital.
The sharp increase in interest rates, especially in the last two weeks of the quarter resulted in an increase.
Unrealized loss on our available for sale securities portfolio of approximately 900 million after tax during the quarter.
And we distributed approximately $300 million of earnings to our shareholders through common stock dividends.
As I mentioned earlier, the goodwill impairment did not affect our regulatory capital ratios.
Our CET one ratio was flat sequentially at 10%.
And finally, our LCR was 116%.
Five percentage points sequentially.
Turning to our net interest revenue and balance sheet trends on page five which I'll also talk about in sequential terms.
Net interest revenue of $926 million was up 12% sequentially.
This increase primarily reflects higher interest rates on interest, earning assets, partially offset by higher funding expense.
Average deposit balances decreased 7%.
Just trying to think of the U S. Dollar contributed approximately one percentage point to the decline.
Overall this is largely consistent with our previously expressed expectations or the trajectory of deposit balances through the remainder of the year and they continuously rising interest rates as well as typical seasonal declines in deposit balances in the third quarter, while noninterest bearing deposit balances continued to hold up better.
We had previously expected.
Average interest, earning assets decreased by 5% underneath that cash and reverse repo declined by 10%.
Loan balances decreased by 1% and our securities portfolio balances were down 2%.
Moving on to expenses on page six.
Expenses for the quarter were $3 7 billion on a reported basis.
Excluding notable items expenses of 3 billion were down 1% quarter over quarter and up 4% year over year.
This year over year increase reflects investments net of efficiencies and higher revenue related expenses, including higher distribution expenses related to the abatement of fee waivers.
As well as the impact of inflation.
Partially offset by the benefit of the stronger U S dollar.
A few additional details regarding noteworthy year over year expense variances.
Distribution and servicing expense was up 16% driven by higher distribution cost associated with money market Fund.
Business development expenses increased as travel and entertainment expense continued to normalize off a low base last year.
And lastly, the change in other expenses reflects litigation expenses in the prior year.
Turning to page seven for a closer look at our business segments.
Security services reported total revenue of $2 1 billion, an increase of 13% compared to the prior year.
Fee revenue was up 1% and net interest revenue increased by 54%.
Driven by higher interest rates, partially offset by lower deposit balances.
As I discuss the performance of our security services and marketing <unk> services segments.
I'll focus my comments on investment services fees for each line of business, which you can find in our financial supplement.
In asset servicing investment services fees were down 3% as.
As it grows from abating money market fee waivers higher client activity and net new business was more than offset by the impact of lower market values and the strengthening of the U S. Dollar.
We continue staying healthy organic growth from both new and existing clients and our sales momentum continues with wins year to date up meaningfully compared to an already strong 2021.
In issuer services investment service fees were up 2%.
Primarily reflecting the reduction of money market fee waivers, partially offset by previously disclosed lost business in corporate trust in the prior year and lower fees from depositary receipt programs for Russian issuers.
Next market services on page eight.
Marketing <unk> services reported total revenue of $1 4 billion up 17% compared to the prior year.
Revenue increased 11% and net interest revenue was up 34%, reflecting higher interest rates and higher loan balances, partially offset by lower deposit balances.
Encouraging investment services fees were up 16%.
Positive impact of lower money market fee waivers and higher client activity was partially offset by the impact of previously disclosed lost business in the second half of last year and lower market level.
Net new assets were 45 billion in the quarter.
On an annualized basis this translates into a 9% growth rate highlighting our strong order inflows from both new and existing clients, especially in this current environment.
And average active clearing accounts increased by 3% year on year in.
In Treasury services investment services fees were up 3% driven by lower money market fee waivers and new business and slightly higher payment volumes, partially offset by higher earnings credits for our clients on the back of higher interest rates.
And in clearance and collateral management investment services fees were up 5%.
Primarily reflecting higher U S government clearance volumes driven by continued demand for U S. Treasury securities due to elevated volatility amid a rapidly evolving monetary policy backdrop, now turning to investment and wealth management on page nine.
Investment in wealth management reported total revenue of $862 million down 16%.
Fee revenue was also down 16% and net interest revenue was up 21%, reflecting higher interest rates and higher loan balances.
As I mentioned earlier assets under management of $1 eight trillion decreased 23% year on year.
The decrease primarily reflects lower market values and the unfavorable impact of the stronger U S. Dollar is about 40% of our AUM.
Are denominated in foreign currencies.
Partially offset by cumulative net inflows.
As it relates to flows in the quarter.
We saw 23 billion of net inflows into long term product and 2 billion of net outflows from cash.
In investment management revenue was down 20%.
Primarily reflecting lower market values, the unfavorable impact of the stronger U S dollar as well as changes in the.
Partially offset by lower fee waivers.
Robin mentioned, the extraordinary volatility in the U K government bond market earlier.
This has caused some significant challenges for U K pension scheme over the past few weeks.
As a manager of liability driven investment strategies insight has been working closely with our clients to maintain the appropriate hedging levels in their portfolios.
And I'd like to note that as an agent between our LTI clients and their market Counterparties, we have no balance sheet exposure.
In wealth management revenue was down 7% as the decline in fee revenue, resulting from lower market values with partially offset by higher net interest revenue, reflecting higher interest rates.
Client assets of 256 billion were down 17% year over year, primarily driven by lower market values.
Page 10 shows the results of the other segment.
As always I'd like to close with a few comments on our outlook for the remainder of the year as we see it today acknowledging the heightened uncertainty about the macroeconomic environment and continued market volatility.
Based on current market implied interest rate, we now expect net interest revenue for the full year to be up approximately 30% compared to 2021 as we expect another quarter of sequential growth.
Given the continued decline in equity and fixed income market as well as the continued strengthening of the U S. Dollar. We now expect fee revenue for the full year to be down slightly compared to 2021.
Assuming equity and fixed income values as well as currency stay at the levels, where they ended the third quarter.
We continue to expect expenses, excluding notable items for the full year to be within a range of up five to five 5% that we had guided you throughout the year.
That being said we are intensely focused on disciplined expense management and are working hard drive us towards the bottom half of that range.
And we still expect an effective tax rate between 19, and a half and 20% in the fourth quarter.
And finally.
Note that we continue to manage to a tier one leverage ratio target of five 5% as well as a CET one ratio target of 10% as.
As we think about the right timing for a resumption of buybacks in the coming months, we will continue to be prudent and consider capital level. The expected trajectory of deposit balances at <unk> as well as the economic outlook at that time.
With that operator can you. Please open the line for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
As a reminder, we ask you to please limit yourself to one question.
One related follow up question.
Our first question comes from the line of Glenn Schorr from Evercore. Please go ahead.
Hi, Thank you.
So.
I appreciate your thoughts about acting as agents in the cases in the U K I Wonder if we could get a little more.
Of the ins and outs impacted both BK and clients because insight has been a great acquisition. That's produced a lot of flows for you in the past so I'm curious on that sure.
You get more collateral clients have lower balances and what you think clients are going to do with this business going forward. Thank you.
Yeah.
Sure well good morning, Glen and thanks. Thanks for the question. Obviously this topic has been in the news a lot over the course of the past few weeks lets maybe just start by stepping back and remember what a L. D. I actually stands for and what it is so its liability driven investing and the principle at work as I think you you you know but.
Let me just recap it is really the investment approach that ensures that the assets ultimately all moving more in line with the value of the liabilities and so we think that principle, which has been very important to the pension space over time is an important one.
And and he is going to be something that we would expect to continue I mean these strategies have been employed by many years they've been extensively embraced by the pension regulators in the U K and then the consultants who advise all pension clients in this space. The second thing I'd say is the more broadly higher interest rates have actually served.
Improve the funding positions of most pension funds because the value of the liabilities has decreased by more than the decreases in the gilt holdings and so that has been a net positive in terms of contributing to the pension funds funding status, but clearly as you pointed out the speed and the magnitude of the rise in the U K.
Hey, government bond yields has been pretty unprecedented and suddenly has created challenges in the market with the sort of speed and magnitude of everything that's been going on and that's created issues, including liquidity issues for many of these pension funds you've had to sell gilts and mobilize other forms of liquidity in order to be able to meet the margin calls on <unk>.
Liberty as soon as you know they are the principal on the derivatives. This is clearly put a strain on the markets. I mean, you know the sheer size of the pension market versus the U K market just sort of shows the degree of impact that they can have and it's also highlighted some operational challenges. If you just think about the two day settlement Oh.
Margin versus the time to liquidate assets across the wider asset pools and thats been exacerbated actually by some operational providers are we actually don't provide a direct operational support to insight that's done by a third party.
And yet you know what's happened as a result of all of that will clearly people are raising additional liquidity, which makes a lot of sense. We've been pleased to the other part of your question. We've been pleased with insights performance.
<unk> been focused actually on building collateral buffers throughout the year and this prudence I think has been quite helpful. In protecting client portfolios and insights also being over time working on a strategy that they called integrated solutions, which is really encouraging pension funds to be able to look across all of the types of assets that they have.
They see the hole and not just the individual pieces. So the investment of maybe less liquid components is done with a mind in our view to what's being done and where the leverage might exist elsewhere in the portfolio and I think that that integrated approach, which they've been a big proponent of there's actually been a good solution in.
This particular crisis and so we actually think that net net our solutions being strengthened in the market insights reputation has has done quite well in fact, they are turning away new business as they've seen and benefited frankly from the incoming and a bit of a flight to quality. So you know clearly.
The situation is still evolving today's market looks a little bit better following some of the news at the end of last week and over the weekend, but we're watching it very closely.
Okay.
So I appreciate all that color I thought everything and it feels like.
Nothing on balance sheet risk.
Didn't have major client outflows the last part I wasn't sure about is why would they be turning away new business, who are our clients.
Not going to use this as much forward or just just use less leverage I'm curious on your outlook.
Again, I think it was a good source of flows in the past just to.
What you think going forward.
Yeah. So the reason why we've been turning away some new businesses, because really we want to protect the interest of our existing clients and so taking on.
More problematic situations and there are some in the market, which has less funding and liquidity available and then essentially taking them into our franchise and having to deal with that problem. This didn't seem like the smartest moment to do that and also frankly wasn't in the interest of our existing clients who have been along with insight along the journey. So that's actually the reason there.
But more broadly we do expect to continue to get incoming phone calls given some of the differentiated nature of how insights performed through this and we would view that to be positive for the franchise. So actually I view that as something of a tailwind because these types of reputational events in the market.
Frankly can sift out some of the some of the different players.
Okay I appreciate all that Robin Thank you.
Yes.
The next question comes from Mike Brown from K B W. Please go ahead.
Hi, good morning.
Good morning.
So robyn I noticed that the AUC a decline just about 2% quarter over quarter. This would be less than we'd expected given the market backdrop here.
You talked about the strong sales momentum in recent wins, so how much did organic growth contribute this quarter. If you could if you could kind of quantify that and when did that come in in the quarter.
Hi, Good morning, it's Emily I'll I'll take that.
The AUC that it really speaks to the trends in ACI speak to the diversity of the franchise overall, so our firm wide HCA was down about 7% that was based on lower security services AUC a of about 11%, but very much tempered by growth in market and well servicing.
As led by CCM.
If you wanted to kind of drill down a bit more in terms of security services and what you're seeing there about the 11% decline about 13% of that was due to lower market values as well as the strengthening U S. Dollar and that was partially offset by about 2% of net new business.
Okay, great. Thank you Emily.
And then if I heard your comments correctly on the share buybacks. It sounds like it's really dependent on the capital levels, but.
Did I understand that correctly that it's still possible that you will that you could be in the market for for buybacks this quarter, if the capital levels.
Perform as expected.
Yeah.
As I said in my prepared remarks, and I you know its very important that everyone really understands we're going to continue to be prudent with respect to buybacks. So I think thats natural given the continued volatility that we're seeing across the markets and frankly, the uncertain macroeconomic environment. We also we do you want to be.
Both our internal targets for our capital ratios before we consider resuming buybacks.
So.
It is true that when we think about capital distribution frankly, our approach hasn't changed you know whether it's this quarter or next quarter.
He is going to be informed by the right trajectory and the corresponding impact on AUC I you know the size of our balance sheet market conditions of course, and frankly, our forward outlook, but what I would remind everybody is that beyond the near term we have a business model that really allows.
A meaningful amount of return to a lot of our capital to shareholders and pending the sale of our central as well as over time as you know as rates do move in a different direction. That's a OCI will be pulling back to par and that will both of those things will free up meaningful capital level.
Okay, great. Thank you for taking my questions.
Thank you Mike.
We will now take our next question from Stephen Ju back from Wolfe Research. Please go ahead.
Hi, good morning.
Good morning, I wanted to.
I wanted to start off with a question on the operating margin while the operating backdrop Robin as you noted remains highly uncertain.
Last fed tightening cycle. The company was generating mid Thirty's operating margins fairly consistently so well above current levels.
I just wanted to get your perspective or take on whether you see a credible path to getting to those type back to those types of operating margins and what are some of the drivers that could potentially help you close the gap here.
Sure Stephen well.
I'll just start by reminding you and I mentioned this in my prepared remarks, but the but when we announced our re segmentation in December last year, Emily and I. Both commented on the fact that we draw.
Driving towards a 30 plus margin and all security services segment, which as you know is not where we have been and we said at the time that was going to be made up of a variety of different components. It was going to be top line organic growth. It was also going to be of course, the rate cycle, which is a meaningful contributor and we do view that as an important.
Contribute to our firm and then thought it was going to be through focus on the bottom line and so if you take that as a microcosm for a second that's exactly how I think about the strategy for the whole firm with laser focused on executing on our growth investments things like Pershing X real time payments and some of the other things that ive detail.
Before but we also have to be a very good steward of expenses and although we've made significant investments in resiliency over the course of the past four to five years I feel that there is more room for us to be able to invest in efficiency related technology. So.
So investing in technology on the topline and bottomline, but with a more sense of tangible payoffs that are available than maybe we've seen in the resiliency space, which is really a cost of doing business.
Emily can comment maybe just for a moment on our budget process because we're in that season and we've adjusted our budget process to really try to get at this margin question that you that you raise.
Sure.
We are and as Robin said intensely focused on our forward expense trajectory and in the <unk>.
Digit cycle that we've just kicked off we actually doubling down on our rubric that we've actually used historically, but mostly just for tech and now we're looking at it and applying that rubric across the entire company and in effect what were doing is stratified all of our expenses across three buckets. So first is really structural or run the bank.
Second is change the bank and we're really drilling into that category should be very clear about from making investments are they for growth are they to transform transform or for that matter are they to continue to meet ongoing regulatory obligations and third of course, the third bucket is just revenue related which obviously.
Rise with topline growth.
So I you know I can share that you know as we go through this even more than 50% of our expenses are structural in nature. They are certainly higher whereas.
Higher than we think they should be as Robin has alluded to.
And we're very very heavily focused on on driving these down.
Some areas, we have multi year programs like transfer agency fund accounting et cetera, which are businesses that are highly manual in nature, and we do have programs to make them more efficient and we'll come back to you when we finish the planning process.
No. Thanks for all that color, it's really helpful perspective, and maybe just for my follow up on the deposit outlook.
You noted that the noninterest bearing outflows had been tracking better so far this cycle.
As a percentage of total deposits, it's still fairly elevated at 28% I believe last cycle trough somewhere around 22, and what's your expectation in terms of the pace of noninterest bearing outflow, what's driving the better outcome this cycle and where do you expect.
I B is to ultimately trough this cycle relative to last.
Okay.
So I think I've mentioned in and we still believe that.
<unk> will ultimately revert to what we saw pre pandemic, which would be about 20%, 25% of our total deposit base, we actually think that that might happen here in the fourth in the fourth quarter.
In terms of why they've held so so steady I think some of that is probably you know risk off behavior.
Some of that is just our businesses are a bit a big a bit bigger and ultimately you know.
What I would say is that we.
We have seen when we look at our deposit trend overall and this is very important irrespective niv either ivs. The the run off we've seen thus far has been largely non operational in nature and that's actually did you know we're seeing the right run off and I think very much due to our very significant you know what.
Become much more sophisticated pricing across clients and segments and businesses.
Oh boy color. Thanks, so much for taking my questions.
Yeah, and I would take our next question from Ken Houston from Jefferies. Please go ahead.
Please go ahead, Sir your line please.
Can't hear you.
Please ensure you're gonna be function is turned off to allow your signal to reach our equipment.
Operator, let's move on to the next question.
Come back to kind of later.
We will now take our next question from Betsy Cross it.
Morgan Stanley . Please go ahead.
Hi, This is Ryan <unk> on behalf of Betsy and good morning.
Good morning.
I'm wondering if you could give us some more color on the goodwill charge, what specifically was the driver of the charge this quarter and does it give you more flexibility on your strategy and investment management.
Sure happy to so first of all let's be clear about what it is and what it isn't and so it's not the outcome of any changes in our strategy. It's also not related to the pending sale of our sentra and it's also not a statement about the fundamental health of the business as we see it.
Today and going forward.
Is the outcome of a regular impairment testing process and that's a reflection of both the lower market values that we've seen across equity and fixed income markets and also a higher discount rate.
So inevitably wrapped up in your question is the strategy and so maybe I'll just recap for a second where we are on that investment management journey as you know over the course of the past.
15 years or so we've streamlined the investment portfolio, we used to have 27 independent and investment management firms that's down to seven one south central is closed that helps us to sharpen our focus as does the fact that we've improved substantially the alignment between strategy and the individuals.
And so we've realigned melons investment capabilities into parts of meat and using that insight and dry for us we think that helps make it less confusing for our clients externally and sharpens the focus.
Lee we're also investing in the types of solutions that of course people one in this day and age and some of those outcome oriented solutions active Etfs responsible investing we talked about bold I think on our last earnings call in the money market Fund space. It's another example of that and then very importantly in the investment management space.
The investment performance has improved and remains healthy so it's kind of that as well that's where we are.
Thank you.
Youre welcome.
We will now take our next question from Alex Bluestein from Goldman Sachs. Please go ahead.
Hey, good morning, everybody. Thanks for the question.
Theres been a number of liquidity challenges in the market and Robin you alluded to those in your in your prepared remarks as well so.
B K serves obviously, a fairly critical function in sort of the capital markets plumbing globally.
Or does some of the risks I guess your most mindful mindful of that we should be looking after and as you think about any opportunities that this kind of environment creates for the bank as well, we would love to hear your thoughts on that.
Sure.
Alex We've got a bunch of different cross currents at the moment in the system on the cash side, we're coming off the back of QE Sentry.
Central banks, obviously, driving very aggressively at inflation clearly necessary given the continued prince but then on the flip side in these two things don't necessarily always happen at the same time, which is what makes it complicated is we've got supply chain issues ongoing geopolitics energy prices risks of recession ready very much upfront.
<unk> Center, and so we got sort of a risk on a risk off angles sort of happening at the same time, we have.
Also seeing some pretty unprecedented starting places for some of these markets and I think that's a little bit for us where we see some of the concern which is the usual toolkits around market stability on available. They may be may be quite the same way you saw that in the U K, where just to take that as a microcosm for a second.
That bond market goes through a little bit of tumult as a result of some news in the government actions and at the time the bank of England was still in the Qt process, which they had to suspend to then go do some buying should not really be doing buying and selling at the same time.
I'd say that's a good example of the fact that the toolkits aren't fully available.
We look at the.
The scale of moves in the market and we look at the amount of liquidity and so much has been done in the banking sector, particularly over the course of the past decade post financial regulatory reform the regulators have been very much at it so banks massive amounts of liquidity large amounts of capital very well set up for this but if you have huge.
Selling from other market constituents, there was a little bit of a question there where the buyer is going to be and we've seen we see echoes of that in the U K market. There there were legitimate concerns about that in the U S market. If there was a significant episode as we've seen in the past what does that pivot looks like and to some extent those are the consequences of of haves.
And benefiting from the most liquid markets in the world on a normal basis and also being the place where people still that cash when they won't cash they need it back and they are selling so the question becomes who are the buyers we've seen the central bank of Japan, having to be.
Sellers of treasuries as they defend that currency, so theres a lot going on in the world.
It's a bit complex.
I think we have a healthy amount of caution.
As as we saw this play out over the course of the coming weeks and months.
Got you alright, Thanks, and then my follow up just around the LTI dynamic again and I. Appreciate your comments around inside on the asset management side, but I guess as a servicer I'm curious how you're thinking about your exposure to UK pension plans on the asset servicing side of the business either as custodian or.
Middle or back office administrator, any sort of implications for fees or deposits, we should be thinking about as as U K pensions post more collateral.
Yes, it's been pretty business as usual for us on the servicing side.
As I've mentioned before that isn't the case everywhere I think clearly there have been issues in that market and there are a couple of providers you've had some more stresses associated with the massive upsurge in volumes, but that has not been our experience plenty there is more cash in the market.
Generally and let me just make a broader point about cash because I think it's a very interesting position for us as a company the various different roles that we play in cash because yes, we have deposits on our balance sheet and that tends to be a lot of the focus that we talk about in terms of cash, but we actually manage over.
A trillion dollars of daily liquidity for our clients in markets all around the world and this goes way beyond deposits on our balance sheet. It goes to a money market fund business. It goes to a market leading liquidity direct portal, which helps treasuries and other cash managers be able to direct cash through the system and so we actually feel pretty well positioned.
<unk> as a company on the topic of cash because sort of irrespective of exactly where the flow is heading we set ourselves in a in a little bit of an orchestration role in the middle of that which we think is really quite good for a franchise over time.
Great that makes sense.
Thanks for that.
Thanks.
We will now take our next question from Mike Mayo from Wells Fargo Securities. Please go ahead hi.
How can you hear me.
Yes, yes, Mike Okay great.
I'm going to answer my question, I think you're guiding a little bit lower fees, but youre not guiding lower for expenses and I guess the answer is because youre looking to invest through the cycle. If you could validate that and then just more on the digital asset custody platform.
You said that.
Today, our digital assets and crypto or simply the start of a journey and there's a lot written.
Pro and con as it relates to digital currencies clearer.
Clearly you think this has legs, maybe that's one reason why you're.
Going to invest maybe more even with softer fees, but if you could elaborate on that.
Sure.
Let me I'll take the whole thing.
So so first of all in terms of when we're not re guiding on expenses Emily said that the original guidance of five to five 5% is intact, but she also said that we're aiming towards the lower end of that range. So that's meant to be.
Sort of a vote of confidence in our own active management of expenses, which were really driving at and we are very very focused as Emily said earlier on on this journey and so you should expect us to continue to give you updates on how we do on that overtime.
Let me talk a little bit about digital assets because it is a very important question and I tried to stress. This in my prepared remarks around the fact that it really isn't just about crypto. So one of the things that we did recently was we did a survey of large institutional asset managers asset owners hedge funds about 40% of them all.
Already hold crypto in that portfolio is about 75% of them are actively investing we're exploring investing in digital assets, but here's the important stuff, which is over 90% of them are interested in investing in some type of token highest asset within the next few years and so what we've heard from us.
Clients as they want institutional grade solutions in this space and the way that we think about the world is yes sure. There are cryptos and those are things that are clearly had a lot of spotlight recently, but we view that token is Asian of other types of assets, whether they're traditional financial asset. So it may be assets that happen.
<unk> been as easy to manage in the financial system like unlike hard commodities real estate forests. There all sorts of things you could think about certificates.
And with the world of ESG some of those things could be much better managed using tokens and then also <unk> currencies, where we're real currencies Fiat currencies or proxies for Fiat currencies. We also think could be quite interesting now all of this is over the course of the next few years, the actual dematerialization of assets from paper.
Her into technology back in the <unk> and <unk> took a long time to actually happen. It was not coincidentally happening with the rise of computing in business now we've got a new technology. The rise of that in business. We think is going to be important, but I'm not going to put an exact time scale on it but it's years maybe.
It's even decades for full adoption, but we thought that with a longer term view. This was an important space now we're not spending a ton of money on it but we are deliberately investing in small places in that ecosystem. So that we are prepared to be there for our clients over the long term on this important journey.
And what was the tipping point just as a follow up the tipping point for you to really highlight this I mean this is front and center here. This is the third area that you've mentioned investing he said purging excess collateral digital assets real time payments. This was number three on your list. So certainly its move.
Up in priority.
And Chris it's been around a little while now what was the tipping point here, what sort of a new survey of your clients did you see something in the market what's changed.
So I mentioned the survey. This survey was the tipping point, but it was it was an affirmation, but the answer to your question is client demand our clients one institutional grade custody and solutions in this space and I enjoyed equipped that I read in.
The media may be a year or so ago, which is you know what it's not a real asset until being why Mellon say they'll look after it.
Got it thank you.
We will now take our next question from Brennan Hawken from UBS. Please go ahead.
Hi, good morning, Thanks for taking my questions a couple of follow ups on deposits. So Emily you've previously indicated that you had expected by the fourth quarter. The deposits on an average basis would be down 5% to 10% there they were actually down but they're already down seven.
Just on the the <unk> average.
Should we still think about that range of five to 10.
Or might that end up being different and maybe if you could update on how beta is tracking and your expectation there too.
Sure Good morning Brendan.
So you are correct I did guide I think you look around second quarter that we'd expect a decline of about 5% to 10% by will average to average Q2 to Q4.
In the third quarter as you also rightfully pointed out deposit down 7% now that's in part due to the strengthening of the U S dollar, which was a headwind of about 1% and also just seasonality that you normally see lower deposit levels in the third quarter.
For the fourth quarter.
We are anticipating.
The decline of about 3% to 4%.
And as I mentioned before we expect it to be mostly in niv, that's the percentage of <unk> as it is.
The total of our deposit base.
Back to pre pandemic levels.
And <unk>.
Like anything you know there are there.
There's a lot of uncertainty out there. So this is what we are anticipating based on the forward curve and Ah and ultimately.
The forward curve and and while we haven't seen so far and so.
So far this year in terms of betas.
David do you continue to be a little better than we had anticipated.
Just as a note to you they do vary widely by line of business. So Treasury services and end markets are certainly have much higher betas than say asset servicing our corporate costs. So it's just important to keep that in mind.
Looking ahead, we do expect a marginal beta to continue to ramp higher as rates continue to rise.
But at the end of the day, we you think that they will largely retrace what we saw in the last cycle and so ultimately end up higher than where they are today and again I would just say that's just another factor whether its deposit balances or betas.
All factors that are somewhat uncertain based upon the macroeconomic backdrop.
Yeah, Okay. Thanks for that.
And then another sort of related question.
Helpful to get the full year 2022, NII expectation for sure.
But when we step back a bit and think about I know I know, it's too early to comment on next year, but just sort of generally speaking.
At this point, we've gotten back to triple digit NIM.
Rates continue to be pretty robust.
You think of your beta is going to largely retraced last cycle. You just said you know.
Is there any reason why the NIM can't retrace the prior cycle NIM.
When we think about the security reinvestment tail wins for 2023.
The reason why once policy rates stopped moving higher.
You you're going to largely see some stabilization because that's what kicks off most of your deposit repricing and then you've got a tailwind from reinvestment.
That continues to flow through into 2023.
Is there anything wrong with thinking about things that way and how.
How long do you think it might take for the NIM to is it possible to retrace the last cycle and how long do you think that might take.
Well, there's a lot there so let me try to unpack it a bit.
As you have seen from our financials, we've seen several consecutive quarters of sharp.
Our increases in them.
We do expect another step up in the fourth quarter and even beyond the fourth quarter based on a lot of the factors that you mentioned.
Would you expect that NIM will continue to expand up probably at a slower a slower rate.
In terms of portfolio positioning.
Do you actually think that rates will continue to surprise to the upside.
And so we're therefore really positioned for greater asset sensitivity.
But of course, we'll continue to be nimble nimble there.
And as we think about the portfolio overall, obviously, we're managing it with the objective of optimizing capital liquidity as well as NAR.
Okay. Thanks for that color.
We will now take our next question from Brian <unk> from <unk>.
Deutsche Bank. Please go ahead.
Great. Thanks, good morning folks.
Good morning.
That was good it was kind of my question on the on net interest income as well maybe just one point on that I just technical on the fed funds purchased spread on the asset and liability side see that spread went up to about $72 million in.
<unk> versus 38 and <unk> in this in the second quarter.
I guess, how should we think about that book.
It's more of a matched book with a.
Spreads sort of contained in that area or we're actually is that poised to dramatically rise in the next couple of quarters.
Yeah, I think on that particular question I think is just to follow up specifically with with IR. Okay. If.
If you're asking if you're asking more specifically about the kind of the outlook for <unk>, which is kind of the broader based a broader based question.
Based on the forward curve that we see today, we would probably expect some growth from our Q4 exit rate.
And just to kind of talk a bit about the drivers there and of course as I mentioned earlier, we expect central banks to continue to increase rates now probably remain elevated for most of the year.
Do you think that a large majority of the deposit outflows will be behind us by yearend and again, that's largely because our client base is institutional more rate sensitive than a rate sensitive then.
Sensitive to the size of the balance sheet.
We could have a little bit more run off but we do expect also some organic growth.
And I view that I've already talked about and marginal betas will increase so all of those factors just are kind of coming into the fact that we would expect some growth from our fourth quarter.
Exit rate of course lots of uncertainty.
That's great color and maybe if I can pivot to the organic growth initiatives that you talked about in your prepared remarks Robin maybe if you could just focus on real time payments you you've talked a lot about purging X.
Recently in and of course, the digital platform.
But maybe just.
If you can talk a little bit about sort of what you're thinking in that area.
And.
To what extent you think these initiatives can enhance that organic growth rate I don't know.
It's too early to put out a target there for two or 3%.
Or do you think you know we're going to stay in this sort of 1% plus range for a little while.
So it's a little too early for a specific target.
As I've mentioned in my prepared remarks, we're working through all of the various different businesses understanding the priorities for each one and as we come out of all of that we'll have a we'll have a better sense in that part of the question, but let me talk about real time payments because I think this is quite interesting for a few different reasons.
Is a new payment rail and whenever there's a disruption or change in the ecosystem you have some degree of change in sort of the established order or at least the opportunity for that disruption and so for US we think that those opportunities don't come along every day and so we are quite focused on taking advantage of that but it's also part.
A broader solution set because providing faster payments is nice and safer payments is good but when its combined with the ability to do digital invoicing in the request for payment and when that's combined with payment validation fraud protection and other data services.
They can become very interesting solutions for clients and we view ourselves as not just a payment provider, but a but a platform provider for entry into the banking system and we think this is where it overlaps very nicely youll remember that week, we cover 97% of the world's top 100 banks that makes us.
With that installed customer base and then the leadership on the product side. It makes us a very appealing partner for fin techs in regional banks as they are thinking about wanting to take advantage of all those capabilities, but either because they don't actually want to be a bank in the case of some fintech or in the case of the fact that it's very expensive to make all of this.
And we've done that in the case of other regional banks, we're now providing access to RTP Zelle account validation soon to be fed now white label solutions and with the real time invoicing and we think that whoever gets that collective set of rails up and running really frankly has an advantage and as you know we were the first bank to.
Real time payments, we were the first to launch real time E billing and we're leading.
In the whole process with with fed now as part of that rollout as well working very closely with the fed and other banks as well so.
It's for all of those reasons that I think this is an interesting space, we haven't put a number on it but we're certainly getting franchise traction.
That's great color. Thank you.
And our final question comes from Gerard Cassidy from RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
Emily can you share with us.
Can you share with us.
Your where you guys are managing your securities portfolio and view I think you said you think rates will be going higher.
As we go forward in terms of the strategies of moving some into held to maturity versus available for sale to protect you on the Aoc.
And then as you go forward how are you looking at the Aoc I issue.
Sure so.
I'd say before we do expect the environment to remain volatile and actually rates to continue to surprise to the upside.
And frankly, we really would need.
Some change in tone from from central banks or some.
Some evidence that.
Inflation is is is declining probably to change our view on that.
So we are continuing to position the portfolio for greater asset sensitivity.
Year to date.
We have reduced <unk> by about 50% duration.
Duration is also the lowest it's been in a really long time, you you mentioned that.
Certainly we can also take measures earlier in the year to protect against MSCI volatility and until we did move a portion of the portfolio about 40% of it now is in held to maturity that certainly has helped.
With diminishing Aoc.
Well unrealized losses, they would have been more of course than <unk>.
Then they have been if we had not taken that action.
But ultimately the portfolio is is that is positioned for greater asset sensitivity.
Having said that we are going to be very very nimble and should the environment change we do benefit actually from the fact that 60% of the portfolio is designated as available for sale and has a short duration. So we can be pretty flexible and Act act very swiftly.
Does it make sense since you have so much in available for sale you're in advanced approach bank. So it's already going through your CET, one ratio to actually take some realized losses, and then redeploy those funds at higher yields.
We feel very comfortable where we are in terms of held to maturity, we really want to retain flexibility and also certainly.
What's the flexibility around not only.
Managing interest rate risk, but of course liquidity as well.
Very good just as a follow up question I know you've touched a lot about your deposits today and your answers to questions.
Just one last question on deposits Q T. Now is in full speed operation here in the United States.
Have you noticed any change in the deposit outflows since we've gone to the 90 495 billion a month and how do you see I know you've pointed out deposits and they come down in the fourth quarter, but when you look out to next year.
Is that going to change your thinking at all or is it behaving as you expected.
Yeah, I think as I indicated.
Deposit outflows are are behaving pretty much as we anticipated we do think the lion's share of the runoff will be behind us by the end of this year.
And what why we think that.
Our client base is predominantly institutional in the past and even now they have proven to be much more sensitive to rates than actually just the size of the fed balance sheet also just as a reminder, our businesses are much much.
Much bigger they've grown significantly since what we've seen in the last cycle. So treasury services as much bigger AUC a in asset servicing is much bigger with that comes just naturally more more deposits and even what we've seen in the runoff as I suggested or said before it's been mostly non operational so I think.
We feel pretty good about our expectations here in that the large majority is behind us.
Having said that could there be more run off yes, I mean, there's so much uncertainty whether it's you know.
Interest rate volatility the levels of the RFP macroeconomic uncertainty in general So that's our best estimate based on the forward curve and what we've seen thus far.
Great. Thank you.
Okay.
And with that that does conclude our question and answer session for today I will now hand, the call over to Robyn with any additional or closing remarks.
Thank you operator, and thank you everyone for your interest in being why Mellon.
Do you have any follow up questions. Please reach out to Meredith and the IR team B well.
Okay.
Thank you.
This does conclude today's conference and webcast a replay of this conference call and webcast will be available on the <unk> Mellon Investor Relations website at two P. M. Eastern standard time today have a great day.
[music].