Q4 2022 Bank of New York Mellon Corp Earnings Call
Please standby we are about to begin.
Good morning, and welcome to the 2022 fourth quarter earnings conference call hosted by being why Mellon.
At this time all participants are in a listen only mode.
We will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material.
You may not record or rebroadcast these materials without being wide mellons consent.
I will now turn the conference over to Marriott merits being why Mellon head of Investor Relations. Please go ahead.
Thank you operator and good.
Morning, everyone welcome to our fourth quarter 2022 earnings call as always we will reference our financial highlights presentation, which can be found on the investor Relations page of our website <unk> Com I'm joined by Robin Williams, President and Chief Executive Officer, and Emily Portney, Our Chief Financial Officer Robert.
Let's start with introductory remarks, and Emily will then take you through the earnings presentation. Following their remarks, there will be a Q&A session. Before we begin. Please note that our remarks include forward looking statements and non-GAAP measure.
Information about these statements and non-GAAP measures are available in the earnings press release.
Just a couple of months 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 January 13, 2023, and will not be updated was that what were trying to over to Robyn.
Thank you Morris.
Morning, everyone and thank you for joining us before Emily takes you through our quarterly results I'd like to make a few broader comments on our performance in 2022 and on some areas of focus for 2023.
As you can see on page two of our financial highlights presentation, we reported earnings per share for the full year of $2.90 down 30% compared to the prior year and our return on tangible common equity of 13%.
Excluding the impact of notable items, we reported earnings per share of $4 59, which was up 8% year over year and a return on tangible common equity of 21%.
<unk>, our solid underlying performance against the backdrop.
Operating environment in 2022.
Our results. This year included several notable items for example that as it relates to Russia in the first quarter and the goodwill impairment related to investment management in the third quarter.
Our fourth quarter results reflect the impact of a number of decisions that we made to improve our revenue growth and efficiency trajectory moving forward.
Excluding notable items revenues grew a little faster than expenses as we continued to see strength in client activity and volumes, while continuously positioning ourselves to derive meaningful benefit from the upward move in interest rates together these factors more than offset the stiff.
Winds from lower market levels.
On the back of organic growth and AUC, a we're continuing our role as the worlds largest custodian and we saw cumulative net inflows and assets under management.
Beyond the numbers I would like to highlight a couple of areas, where I'm, particularly encouraged by our performance in 2022.
First our sales momentum, which speaks to the strength of our client franchise and our capabilities in asset servicing we continue to elevate our client dialogue, while maintaining a strong focus on service quality to support our clients through a difficult environment.
<unk> wins increased off a strong 2021, and we are winning larger and higher value deals, which is where the elevation of client dialogue matches.
<unk> <unk> reached one four trillion.
As we saw strong net inflows throughout the year and the total number of funds serviced rose by 12% and in <unk>, We grew AUC.
2014% and fund launch as well by over 25%.
Treasury services delivered strong broad based growth throughout 2022 in the fourth quarter, we announced a collaboration with conduits to be that trusted payments infrastructure provider as they launch a digital integrated payments hub for businesses and the public sector.
This hub will enable access to more secure foster and cost effective options to send request and receive payments and refunds in a matter of minutes using real time payments and other proven payment technologies.
Also on boarded several new clients during the quarter as we continued to build our digital payments and related FX businesses and finally, while 2022 was no doubt a difficult environment for the wealth market, our wealth management business acquired more clients with particular strength in the ultra high net worth.
Family Office segments, and we continued to deepen existing relationships through our expanded banking offering where the percentage of advisory clients, who also banquet us rose by about five percentage points.
Withstanding the tough backdrop, Hershey, which is in fact, our largest play as a company in the wealth space brought in net new assets of over $120 billion, representing 5% growth in the fourth quarter, we announced two very exciting wins, demonstrating the broad based capabilities.
<unk>, who is now leading a global digital family office that uses advanced technologies to empower investors with tools to invest intelligently. This win is an important proof point of our proven set of API and digital capabilities and demonstrates our ability to win with Chegg.
With clients.
The secondary performance I'll call out is that we continue to forge ahead with our longer term growth initiatives, such as Pershing ex real time payments the re imagining of custody and collateral and digital assets. These initiatives will help position the company for the next leg of growth beyond the medium term.
We went live with our digital asset custody platform in the U S. In October and as I highlighted in my op Ed in the financial times, a month ago. This will continue to be a focus for us not so much from crypto, but really the broader opportunity that exists across digital assets and distributed.
Ledger technology.
If anything the recent events in the crypto market only further highlight the need trusted regulated providers in the digital asset space.
We are also now live with our first release Pershing X just one year after launching the initiatives. This release to a small number of select clients includes three core products portfolio solutions, including direct indexing client servicing and data and reporting tools, but equally importantly, this release.
Is about our ability to set a goal on a tighter timeline execute.
Finally, the third and probably most important highlight of the year for me is our people and our systems once again demonstrated remarkable resilience.
Across the war in Ukraine, the extraordinary moves we saw in several government debt markets and volumes such as the operational readiness of our people and our systems consistently enabled successful outcomes for our clients.
Channel. Thank all people enough for their hard work and dedication to serving our clients.
While we're proud of these accomplishments. It's also important to humbly recognized an area, while we fell short this past year.
Acknowledging the inflationary headwinds expense growth for a second straight year it was around 5% ex notables.
We consider that number too high, especially considering the expense growth benefited from a stronger U S. Dollar throughout the year on a constant currency basis expense growth ex notables was approximately 8%.
While I'm encouraged by the renewed sense of urgency across the organization over the last few months to better manage our expenses, we still have a ways to go on this journey.
Which brings me to our key focus areas for 2023.
First expenses my leadership team and I are fully committed to bending the cost curve this year that.
That will come from instilling further expense discipline across the firm and from focusing more on profitable new business growth, saying no to more things when the economics aren't what they should be.
Efficiencies are also going to come from implementing ideas that will make <unk> mellon a simpler more efficient place to do business with and so here. We've embarked on an enterprise wide initiative led by senior leaders and high performing employees from around the world focused on driving greater efficiency.
And enabling sustainable growth.
No one knows the ins and outs of products services and processes better than our people and so all of our staff have had the opportunity to take an active role in this initiative by submitting ideas. How we can run the company in a better way for all our stakeholders.
To date, we have approved about 1500 high quality ideas of which about 200 are already completed and another 500 are on track to be implemented this year with a meaningful amount of these ideas requiring little upfront investment.
And Lee will cover this in more detail, but as a result of these initiatives and a renewed determination we expect to achieve nearly double the amount of efficiency savings this year compared to what we achieved in any of the recent years.
But our priorities are of course, not just about managing expenses. We are also focused on reinvigorating profitable growth our budget commits to achieving positive underlying growth this year across almost all of our businesses with particularly healthy growth coming from asset servicing Pershing.
And Treasury services.
We will continue full speed ahead with our critical long term growth investments that I mentioned earlier with clear and specific targets that we expect the teams to hit over the course of the year.
Lastly on the top line our priorities include goals for one being one melon program, which incentivizes cross business referrals and development of innovative multi business solutions that only be in one melons unique collection of businesses is equipped to provide.
In 2022, we saw good initial momentum and we surpassed our initial goal for the year and we intend to deliver a further pickup in 2023 as we increasingly sell our platform and better connect the dots for our clients.
Finally on capital management.
Highlight that our board of directors has authorized a new $5 billion share repurchase program, which provides us ample flexibility and having ended the year comfortably above our capital management targets. We're now resuming buybacks and so in summary, while none of us can predict exactly what the operating environment.
<unk> will look like in 2023, we are laser focused on growing the franchise and executing against our efficiency plans with discipline and urgency to drive some positive operating leverage in 2023, while returning a healthy amount of capital to our shareholders. This year.
With that let me turn it over one last time.
As our CFO .
Thank you Robin and good morning, everyone.
They want peace and the details of our results for the quarter all comparisons will be on a year over year basis, unless I specify otherwise.
On page three of our financial highlights presentation total revenue of $3 9 billion in the fourth quarter was down 2% on a reported basis.
9%, excluding notable items as Robin mentioned earlier and as you can see the vitamin page our reported results in the fourth quarter included a few notable items, resulting from actions to improve our revenue and expense trajectory reported revenues included approximately $450 million of debt securities laws.
Is recorded in investments and other revenue, resulting from a previously disclosed repositioning of our securities portfolio, which I will expand upon later.
<unk> revenue was flat as the benefit of lower money market fee waivers and healthy organic growth across our security services and market services segment was offset by the impact of lower market values, and our equity and fixed income market.
The unfavorable impact of a stronger U S dollar.
Firm wide assets under custody <unk> administration of <unk> four three trillion declined by 5%.
The headwind of lower market values and currency translation was tempered by continued crowd.
New and existing clients.
And assets under management of $1 eight trillion decreased by 25%. This also reflects lower market values and the unfavorable impact of the stronger U S dollar and again.
Headwinds, partially offset by cumulative net inflows.
<unk> and other revenue was negative $360 million in the quarter on a reported basis.
Excluding notable items investment in other revenue and positive $100 million.
Good result, reflecting another quarter of strong fixed income trading performance.
And net interest revenue increased by 56%, primarily reflecting higher interest rates.
<unk> were up 8% or 2% excluding notable items.
And provision for credit losses was $20 million, primarily reflecting changes in the macroeconomic forecast on a reported basis EPS was <unk> 62.
Pretax margin was 17% and return on tangible common equity of 12%.
Excluding the impact of notable items EPS was $1 30 up 25% year over year.
Pretax margin was 31% and return on tangible common equity of 24% touching.
Touching on our full year on page four.
Total revenue grew by 3% on a reported basis and nine 6% excluding notable items.
Fee revenue was flat.
And other revenue was negative $82 million or positive $340 million, excluding notable items and net interest revenue.
34%.
Expenses were up 13% on a reported basis and up 5%. Excluding notable items consistent with our call to drive 2022.
Towards the bottom half of the five to five 5% range that we guided you throughout the year.
Excluding the benefit from the stronger U S. Dollar expenses ex notable for the year were up 8%.
Revision for credit losses was $39 million compared to a provision benefit of approximately $270 million in the prior year.
On a reported basis EPS was $2 90.
Pretax margin was 20% and return on tangible common equity was 13% excluding the impact of notable items EPS was $4 59.
8% year over year.
Pretax margin was 29% and return on tangible common equity was 21% on to capital and liquidity on page five.
Our consolidated tier one leverage ratio was five 8% up approximately 35 basis points sequentially.
Primarily reflecting capital generated through earnings.
Alabama, and Georgia, and an improvement in accumulated other comprehensive income partially offset by capital returned through dividends.
Our CET one ratio was 11, 2% up approximately 120 basis points driven by the increase in capital and lower risk weighted asset.
And finally, our LCR was 118% up two percentage points sequentially, turning to our net interest revenue and balance sheet trend on page six which I'll also talk about potential tax net interest revenue of $1 1 billion was up 14% sequentially.
This increase primarily reflects higher yields on interest, earning assets, partially offset by higher funding cost.
Once again NII in the quarter exceeded our expectations as non interest bearing deposits remained elevated.
Average deposit balances decreased by 2%.
Within net interest bearing deposit increased by 2% and noninterest bearing deposits declined by 11%. Despite this decline in the quarter the share of non interest bearing and heartland as a percentage of total at Havas has held up better than expected at 27%.
This higher than historical averages.
And we continue to actively manage our deposit footprint to optimize our costs and IR liquidity value and return on.
Average interest, earning assets remained flat underneath that cash and reverse repo increased by 4%.
Loan balances were down 1% and our investment securities portfolio was down 3% as I mentioned in the fourth quarter, we took actions to reposition the securities portfolio to improve our NII trajectory for the coming years.
We sold roughly $3 billion of longer dated lower yielding municipal and corporate bonds, which we've been replacing with significantly higher yielding securities, earning roughly 5%.
Our 250 to 300 basis points more than what we were earning on the securities that we sold while we realized approximately $450 million pre tax loss with this sale is transaction with virtually capital neutral because the unrealized loss was already recognized in Mci and.
In fact, we freed up roughly $150 million of CET, one capital and the higher credit quality.
<unk> portfolio.
And then secondly, lower RW.
Moving on to expenses on page seven.
Expenses for the quarter were $3 2 billion up 8% year over year.
Excluding notable items expenses were up 2% year over year. This year over year increase reflects investments net of efficiencies savings higher revenue related expenses, including distribution expenses as well as the impact of inflation, partially offset by the benefit of a stronger U S. Dollar.
Turning to page eight for a closer look at our business segments.
Securities Services reported total revenue of $2 2 billion up E, 2% compared to the prior year.
Revenue increased 2% and net interest revenue was up 79% driven by higher interest rates, partially offset by lower balances.
And then discuss the performance of our security services and market and well services segment I will focus my comments on investment services fee for each line of business, which you can find in our financial supplement and asset servicing investment services fees were down 1% as the impact of lower market values and a stronger U S. Dollar.
Mostly offset by the abatement of money market fee waivers higher client activity and net new business.
In issuer services and Thats been services fees were up 7% driven by the reduction of money market fee waivers and higher depositary receipt issuance and cancellation fee.
Next market and wealth services on page nine.
Marketing <unk> services reported total revenue of $1 4 billion up 19%.
Revenue was up 14% and net interest revenue increased by 33% and Pershing investment services fees were up 22%.
This increase reflects lower money market fee waivers higher fees on three balances and higher client activity, partially offset by the impact of lost business in the prior year and lower market level net.
Net new assets were <unk> 42 billion, reflecting a very healthy level of growth from existing clients, while flows related to dividend and year end capital gain distributions were naturally more muted than in the prior year quarter and.
And average active accounts were up 4% year on year.
In Treasury services investment services fees reflect the benefit of lower money market fee waivers and net new business was offset by the negative impact of fees from higher earnings credit on the back of higher interest rates.
And in clearance and collateral management investment services fees were up 6%, primarily reflecting higher U S government.
Driven by continued demand for U S Treasury securities due to elevated volatility and then evolving monetary policy now.
Now turning to investment and wealth management on page 10.
Investing in wealth management reporting total revenue of $825 million down.
19% fee.
Fee revenue was down 18% and net interest revenue was up 2%.
<unk> under management of $1 eight trillion declined by 25% year over year.
This decrease largely reflects lower market values and the unfavorable impact of the stronger U S dollar, partially offset by cumulative net inflows.
As it relates to flows in the quarter, we saw $6 billion of net outflows from long term product and $27 billion of net inflows into cash among our long term active strategies liability driven investments continue to be a bright spot with $19 billion of net inflows in the quarter, a real testament to our market leading capabilities.
And resilient performance during the recent market dislocation the very healthy net inflows into our cash strategy come on the back of strong investments.
Performance, most notably in our money market funds and.
In investment management revenue was down 22% due to lower market values and next of cumulative net inflows a stronger U S dollar and a calendar sentra, partially offset by lower money market fee waivers.
And finally in wealth management revenue was down 12%, primarily reflecting lower market values.
Assets of $269 million were down 16% year over year, primarily driven by lower market value page.
Page 11 shows the results of the other segment where investment in other revenue includes the net loss and the repositioning of the securities portfolio and expenses include that right.
Now, let me close with a few comments and how we're thinking about 2023 with.
With regards to NAR, we have positioned ourselves for another year of healthy growth.
So we currently project, an approximately 20% year over year increase for the full year and that assumes current market and high interest rates.
Having said that the range of potential outcomes remains relatively wide.
Quarterly trajectory in NAR will be dependent on various factors, including the passive deposit level and mix as well as interest rates.
As it relates to fees.
As you know market driven factors like equity and fixed income market level currency and interest rates dominated fee dynamics in 2022, while underlying growth across securities services and marketing services was offset by headwinds in investment and wealth management for.
For 2023, we expect to return to some underlying fee growth for the firm now Robin talked about the work we've been doing over the last few months to bend, our cost curve, while making sure we're continuing to invest.
For 2023 this translates into expenses, excluding notable items, increasing by approximately 4%.
Assuming exchange rates remain flat to where they ended 2022.
Or by approximately four 5% on a constant currency basis. This compares to 8% in 2022.
And then on taxes, we expect our effective tax rate for the year to be in the 21% to 22% range, primarily due to an increase of the corporation tax rate in the UK This year and.
And finally, I want to close with a few remarks on capital management.
As you saw we ended 2020 to comfortably above our management target and our board of directors has authorized a new $5 billion share repurchase program, which provides us ample flexibility as always the timing and the amount of repurchases is subject to various factors, including our capital position.
And prevailing market conditions, among others based on our current expectation for continued earnings growth in combination with our estimated trajectory of LCI, calling to par are now resuming buyback and would expect to return north of a 100% of earnings through dividends and buybacks in 2023.
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 that you please limit yourself to one question and one related follow up question.
Our first question comes from Brennan Hawken. Your line is open. Please go ahead.
Good morning, Thanks for taking my questions first congrats on your new role.
I am sure you I'm sure you won't Miss.
Sure.
[laughter].
It was a real pleasure to work with you hear these past few years.
So I'd love to drill down on the NII expectations, you indicated that it assumes current market rates, but but maybe you could please walk us through some of the more specific drivers primary assumptions and moving pieces that underlie that 20% growth assumptions.
Good morning, Brennan and it's been great to work with all of you as well.
As you think about the NII outlook. The first thing I would just mentioned is that we use the forward curves too.
As at the basis of our projections. So we don't try to get cute and as all of you know.
For the fed that assumes another 50 basis points of hikes in the first quarter, probably followed by a pause until the end of the year.
That the curves.
Outside the U S or assume about a 125 to 150 basis points worth of hikes by both <unk> and <unk>.
So as a result of these curves and rising rates as well as I would say all of the actions that we've taken in the securities portfolio and by that I don't just mean, the rebalancing that we did in December but we obviously positioned the portfolio throughout the year maintenance and shortening duration, adding floaters et cetera, so with all of them.
We do continue to expect to benefit from significantly higher reinvestment yields.
Now tempering that a bit we do expect.
Pilots to decline modestly call it low to mid single digits from fourth quarter average and finally as it relates to marginal beta as we would expect them to continue to increase but of course more so for non dollar balances. So that's really what's behind the 20% guide year on year, but I would also.
There is a lot of uncertainty in the market and certainly we're prepared for many different outcomes will be highly dependent upon.
Deposit deposit levels and there is some upside there if we retained more than IV.
Great.
That's very helpful. Thank you Emily.
Capital accretion was was really encouraging this quarter you guys had the rather large buyback announced.
And you made some positive comments on it in your prepared remarks, Emily So so how should we aici was really the I think the source of the big surprise from my perspective, how should we be thinking about a OCI accretion if yields.
<unk> stable from here, what does that timeline look like.
Sure so assuming the portfolio doesn't change in forward rates are realized the latest our latest forecast we would expect to recover probably close to 50% of the $2 5 billion of unrealized loss on the portfolio over the course of call. It 15 to 18 months.
Okay excellent. Thank you very much.
Our next question comes from Alex <unk>. Your line is open. Please go ahead.
Hey, good morning, everybody and goodbye.
Congrats again.
I was hoping we could start with a question around six weaker markets Theres generally a broad sort of bullishness on the outlook for.
Fixed income flows, particularly with respect to Etfs.
I'm curious is it very large servicer of fixed income assets.
Just kind of touch that whole ecosystem in multiple different ways.
Help us frame, how vk's fees overall in servicing fees specifically.
Benefit from an improved outlook for our from fixed income flows both mutual funds and Etfs.
Is there a particular difference when it's like inflows versus outflows, just hoping to get a little more granularity as we think about the outlook for 2003.
Sure. So just as we think about the fee outlook, what I would say is just our base case assumption is that there is a relatively soft landing in the U S. So that would be an average equity markets as well as fixed income markets are not that far off from what we've seen.
Averages in 2022.
You are correct that our money our money market.
Platform does.
And that to a degree having said that we do expect some modest runoff in balances as well.
Money market funds and what I would also just highlight is that.
Any strength in the fixed income markets really does play to the strengths of our investment management business.
Yes, Alex.
And I would just add a couple of things to that just as you think across the breadth of our franchise and Emily mentioned a couple of them.
We have a lot of oars in the water on fixed income generally so our asset servicing business as fixed income heavy that gives rise to a fixed income heavy security lending business. We have a one three trillion dollars worth of cash on our investment platform. So that plays in the short end of the market.
Which obviously has an overlap with fixed income as well we have a dreyfus money market fund, which has done which has performed really quite well over the course of the year in terms of performance in asset gathering we have our treasury business in terms of our clearance business, we have a treasury market repo business. So we've got a lot of different.
<unk>.
Come from all of this and we're obviously paying attention to all of them.
Got you great. Thanks.
And then maybe just my follow up on.
On the operating leverage in the business broadly you mentioned, Robert a number of different efficiency.
Programs do you have in place that sounded like they are ramping nicely and that's kind of incorporated in your expense guidance for this year, but when you sort of take a step back in assuming that.
Short term interest rates.
<unk> sort of range bound or whatever the forward curve as forecasted.
How are you thinking about the pre tax margin for the firm as a whole over time.
Our programs, but also what's going on with the top line.
So youre right in that we're still working on it for five months into my tenure, we've talked about the strategy reviews. They are ongoing we've made some good progress it's true on the business side. It's also true on the function and the support side as well.
But we are focused to your question on margin. We are focused on driving profitable growth, which is top line, but with an eye to the bottom line and also just exuding expense discipline through doing the work.
We think we've got a high performing culture, but we continue to drive on things that relate to that and I think when you look across revenue gross pre tax margins in our OTC you have the key metrics that we're really using now we are considering a variety of different kpis and we look forward to giving you all more transparency on.
Some of those kpis as the year progresses, and so as we do the work we're going to come talk to you about it.
Great. Thanks very much.
Our next question comes from Brian Bedell. Your line is open Sir Please go ahead.
Great. Thanks, good morning.
Okay.
With your peers.
Maybe if you could talk a little bit just shifting gears a bit to a scenario in which we don't have a soft landing, let's say, we do have a recession.
And a lot of pressure on markets in.
In that scenario, if we assumed.
There is still is actually pretty good allocations to fixed income which of course, you would benefit from can.
Can you just talk about throughout your platform to what extent you would expect to be resilient against than some of the areas or even in deposits.
Deposit growth could outperform the expectations that you described Emily and then if you could also just remind us on the on the fee revenue sensitivity to equity market declines I think it's 1% plus for every 10% I think.
Sure. So a couple a couple of comments there and I think Robyn will add on probably so just in terms of our sensitivity overall, our fee sensitivity to fixed income market just remember.
5% or so gradual change in fixed income markets that impact annual fee revenue to the tune of about $40 million.
So that gives you some idea and how do you size that.
And then <unk>.
As Robin pointed out earlier.
Have many different businesses that that ultimately would benefit from also strength in fixed income markets.
But Brian let me just add something else you know one of the things that we're a trust bank, we often get obviously compared to trust banks and I understand why but we have a broader portfolio that I think is quite relevant in answer to your question, particularly and they happen to be higher growth higher margin businesses for us so things like Pershing things.
Treasury services, our clearance business, our collateral management business and those really do contribute to the underlying diversification that we have as a firm that portfolio helps us with the stability of underlying revenues through different market conditions, because they're essentially driven by different things.
So we get a balance for that now on top of that we're of course thinking about how to make sure that we are increasing.
Increasing the mix of the types of revenues that we have as well. So yes, we have fees, yes, we have.
Net NII, but we're also.
Howard by transaction volumes and we're also powered by subscription fees and so the combination of the diversification of the businesses and the diversification of the types of revenue streams, we think helps us quite a bit in the different markets conditions and that's why you've seen us in fact perform.
And in an effective and relatively stable way through some pretty significant gyrations.
That's great color and then maybe Robin if you just wanted to continue on the growth initiatives that you've outlined pershing ex the payments venture with digital payments.
Especially.
In terms of.
These are definitely long term invest.
Investments and trajectories, but maybe if you can sort of thing sort of telegraph, what you think might be the contribution this year or just outline what you think might be reasonable organic growth rate revenue growth rate for this year.
So we've talked about the fact that these are medium term initiatives and they are the contribution to revenues today from real time payments really small, but we do see this as us.
The rails of the future and we see it as creating an opportunity for a connected set of services think fraud prevention and account validation and bill pay related things. So there is an ecosystem that builds around the actual capability and we think that thats a significant opportunity for us you've seen.
Some announcements that we've made but if I ticked through very briefly and I will try to be quick about it but through each of our businesses look in Pershing. We've had a strong year of net new asset growth, we talked about it in my prepared remarks, and we and we think that we'll have growth in the near term through Onboarding. The pipeline and then we've got the medium play of Pershing X.
In asset servicing we've been growing sales and at the same time, we're leaning into the future with things like digital asset and we're focusing on the expense base as well. So again, it's something for the near term and for the medium term in markets, we're driving with foreign exchange liquidity in securities lending and then for the medium term exit.
<unk> services and new products in CCM, we expect the evolution that will come from the gradual tend to repo into Tri Party, which we think we're well positioned for in Treasury services, we're picking up cross border activity in terms of U S. Dollar clearing and we're planning for the longer term that I talked about with real time payments so across so many.
Any of our businesses, we've got opportunities in the near term, we're focused on executing them and we're investing for that for later.
That's great color. Thank you very much.
Our next question comes from Robert <unk>. Your line is open. Please go ahead.
Good morning, guys I appreciate the color on deposits for 2023, I wanted to ask a little bit more about what you saw in the quarter interest bearing deposits flip to growth I'm wondering what the drivers are there and on the noninterest bearing side that outflow accelerated quarter over quarter. So any more color on either of those would be great. Thanks.
So on deposit balances overall for the quarter were down very.
Very modestly as you can as you can see and.
Most of that was a runoff in non operational but niv and still are remaining at elevated levels. So just for what it's worth when we're talking about the trajectory for deposits in 2023.
As I said before we would expect average deposits to decline very modestly call it low single digits.
For the fourth quarter averages and you should expect and we are expecting.
The large majority of that to be from niv, because they will probably revert back to about 20, 25% of our total deposits deposit balances as we've really seen in historical the historical average.
Okay. Thanks, and then Robert you highlighted healthy growth in asset servicing is a priority for this year. That's a business that's well established sometimes can be more difficult to differentiate so what are the kinds of things you can do and you want to do to to accelerate growth there.
Well.
I'm going to start off on this one but they're not going to give it over to Emily because she is going in to run that business and those are pretty well already from a prior time, but I think there are a variety of different opportunities for us I mentioned in my prepared remarks that we really elevating the conversation more into the C suite of some of these firms because <unk> really are the days when we are selling.
A small component of a service on an isolated basis, we see more opportunities to sell bundled deals with data and digital capabilities all wrapped up in it.
And that we see we are getting traction from that we had a very significant new client that.
We announced earlier on in the year last year that that is a good example of that type of package sale. So that's one thing. We also have the Bottomline focus I want to continue to point you in the comments that we've made before that the margin in that business is not.
Acceptable and that we will continue to invest both in the top line will benefit some from rates and investing and making the cost of execution cheaper and more efficient in that business. So it's really a package of all of all of the things I don't know Emily if you want to add just a few things that so as robin alluded to it.
His prepared remarks, we are winning larger and higher value deals.
Also very focused on the profitability of the mandate and the relationship overall and so that also means we're being more selective even the rfps that we participate in.
Likewise, we're leaning into higher growth areas like Paul and Etfs.
At 20% also of the wins that we have.
<unk>, we're having.
A component indeed is very critical especially in the forward trajectory too to our client.
Our pipeline is very.
Very strong.
And the other thing of course is as Robin mentioned is we are very very focused on driving our costs down across the security services segment inclusive of asset servicing for those businesses, which remain pretty manually intensive so think transfer agency fund accounting, so there's opportunity there for sure.
Thank you very much.
Our next question comes from Steven Chu Bank. Your line is open. Please go ahead.
Hey, good morning.
So ultimately we onyx.
I'm going to ask the question I had asked you 12 months ago roughly on the earnings call about Basel four we still don't have a proposal, but we know something is coming in early 'twenty three and given his speech had hinted at capital requirements moving higher for the G SIB cohort recognizing.
There is still no proposal, but I was hoping you could just speak to how your scenario planning for the Finalization of Basel III, whether that has any influence on the potential cadence of future buybacks or just capital management more broadly how you see that potentially evolving.
Sure so.
Look we're obviously very involved with regulators in the industry around the conversations around out before.
It's true of course, the introduction of operating our operational risks <unk> into the standardized approach would by itself drives an increase in our standardized are going to be ways. When we crunch the numbers.
Sure.
<unk> suggests something a bit less than probably what you've seen for the G. SIB aggregate in the in the queue.
And there also we do also expect theyre going to be some offsets for us so lower credit lower credit risk <unk> and.
And also we'll probably benefit.
Honestly for more risk sensitive markets the market the more risk sensitive excuse me market framework, so there'll be puts and takes.
We'll have to wait really until the regulators released their proposed version.
And we already any review obviously.
For us we're always looking at <unk> optimization, you can actually see that arguably rates came down in the quarter again from some optimization that we have been ongoing that's ongoing and we've been doing and as I would just remind you too that the industry will have time to leg into whatever the result, and the pain.
No fair enough and just for my follow up on an expense is.
Was hoping you can help us reconcile what the expense guidance for 'twenty three implies for both the op margin and dollars of expense as it relates to security services segment, specifically it feels like that's the area, where there still some of the most low hanging fruit if you will to drive efficiency gains and just given the plant efficiency.
The actions how should we think about that second derivative for expense growth should we expect that to steadily improve over the course of the year, where you implement the plan you start to realize some of the benefits and the exit rate on expenses. Therefore in 'twenty three should reflect a lower level of expense growth relative to the other quarters.
So I'll kind of answer that more focused on margin for security services and that's really what we've been talking about is very.
Very critical API for RSO.
And I think Robin already said, we are very committed to a 30% margin over the medium term.
Youll see we printed in the fourth quarter margin of about 27% for the full year that was closer to 21%.
In 2023, we will benefit somewhat from NAR, so a higher ratio, partially offset perhaps by.
A modest decline in NII.
Also we are absolutely extraordinarily focused on executing against the revenue growth as well as the efficiency initiatives that we have been talking about.
When you think about security services, though I'd also just mentioned there is going to be some non recurring activity.
We enjoyed in 2022 that we won't have in 2023 in issuer services in particular.
So kind of net net putting it altogether when you look at the margins for security services overall.
There.
They're going to be lower than what we printed in.
In Q4, but certainly higher than the full year level, So we're making progress.
And just the expense growth on a firm wide basis, whether the exit rate for 2003 should reflect some of those.
<unk> efficiency benefits that you had cited I'm just trying to think about the cadence for how we should think about the expense trajectory over the course of the year.
Yes so.
I'm not going to kind of give too much detail on just what we expect quarter on quarter I mean, the only thing I would say to all of you guys know this is that for the first quarter staff expenses are typically a bit higher get a long term incentive comp associated with retirement eligible employees.
And of course see the actions were taking their frontloaded, but.
Youll see that over the course of the year.
So I think.
I would just go back to we are absolutely bending the cost curve.
We are.
Expecting to deliver and are very committed to deliver.
Year on year growth of about 4% four and a half constant currency and again that compares to 8% in 2022.
Global color on really thanks for taking my questions.
Our next question comes from Mike Mayo. Your line is open. Please go ahead.
Okay.
Hi.
Can you hear me Hey, Mike how are you.
Good Robin I think you inherited a tough hand here.
So I mean bank.
<unk> historically has had periods.
When they do a better job of controlling expenses, but that typically coincide with periods of slower topline growth.
But youre starting off here.
Fees were down 3% last year it looks like your guide for NII implies that's flat with the fourth quarter.
So it's not so much.
Okay revenues or slow you can throw expenses, how much they've already.
Slowed or thereabout two so it just seems like your efficiency savings are going to be tougher and as part of that this predates you robin but when it comes to notable items or one time items you had some this quarter, but if you look over a decade.
Notable items add up to $3 $5 billion, that's almost a year's worth of earnings. So the real question here is how can you improve your.
Profit margin and your efficiency ratio.
And squeeze more out of <unk> Mellon when the revenue environment has been tough and.
You have inflationary pressures I guess, how confident are you can turn this around in terms of the positive operating leverage on a core basis.
So so Mike without reflecting on the past in terms of what people have done and how they've done. It I'll just say that we acknowledged that the past decade has been disappointing in terms of our company's broad financial performance you can look at some spots on the topline and Bottomline expenses, we pick your spot, but we're not.
Comfortable with the broad performance of the company over the past decade, and Thats, how we talk to our board about it that's how we've talked to our employees about it and we are determined to change that and so you are hearing from us.
Inc. I hope a determination around changing that outcome now to your question.
Yes.
Let me take the two parts of the things that you've really talked about so first of all the notable items and so we are very very clear and we do this in our earnings release and we do it in our prepared remarks, we talked GAAP first so you can see the reported numbers and it's very clear and you can judge us on that but we also want to give you the transparency.
And frankly, the insight into the way that we're running the company under the Hood and we think Thats why that additional element of disclosure is helpful. But you will make your judgment based on that transparency and the insights that we're trying to provide now I.
I own that four to four 5% number 4% if you use the exit rate of currency four and a half on a constant currency basis and thats essentially half of what it was in 2022 and the environment from an inflation point of view isn't expected to get any better we had inflation over the course of the past few months CPI between six and change.
And change we've still got that environment, but we've been very deliberate in terms of staffing choices of things that we're going to do choices of how we're going to do it I talked in my prepared remarks about a variety of.
Involving our employees.
Bending the cost curve, because I think it's a cultural thing for us as well we're attacking it on all of those fronts.
Now once we've done all of those things. So the implied question of what do we think the future holds well we don't want to stop that we don't have line of sight to all of the things that we're going to do in the future, but we see opportunities for instance, I'm just going to pick one and then I'll finish which is on technology, we've invested a ton.
Brightly so in resiliency as a company resiliency is incredibly important to our products and services, it's wrapped up in our brand and we wanted to make sure that we really took ourselves to a better place than where we were five years ago, but now we've largely done that it's a continuous journey, we always have to do stuff, but the next leg for us is.
Investing in things like the applications the digitization of our footprint, we're the world's largest custodian, but we've got more than one custody system.
We've got multiple loan systems, we've got five different call centers and so we're going in and seeing all of these opportunities and then over time, we will do the work to resolve the issues, but we can't do it all at once because otherwise we would spike on the expense base in order to solve the problems and we only have finite bandwidth. So we're working through it.
We will continue to work through it.
Yeah, that'd be great. If you can share more of those metrics over time and what your targets are the other part of that is your you said you have four growth initiatives you did mentioned.
Digital assets.
And.
Post.
The recent debacle can.
Can you put any concrete metrics to put more meat on the bones as far as where you'd like to eventually get to or revenues or what's the end game. It's just something more on this whole. It's one of your four key growth initiatives, just a little bit more color.
Sure. So I just want to make one comment about the four things that I mentioned and this is that you are quoting those aren't the only growth initiatives in the company I pick them out because I think they're good and representative examples, but there are different things and they have different timelines associated with them as well, but there are other things that I havent mentioned at least half.
Given great as much prominent stupid that there could be very interesting to us over time, but specifically for digital assets. It is the longest term play out of any of the things that we talked about I expect it to be negligible from a revenue point of view over the course of the next couple of years it might be negligible for the next five years, but as the world's largest custodian.
We are in the business of looking after stuff. We look after 44 trillion dollars worth of stuff and if theres going to be new stuff to look after we should be in the business of looking after it if the way in which we look after stuff, which is the point about the technology changes, we have to adapt to that and.
So we're investing for our future.
Probably will come to be but it may not but if it does come to be we have to be that it would be like being the custodian of 50 years ago, and sticking with paper and not adopting a computer that's not going to be us. So we're investing we're being cautious we're being deliberate and we've got R&D in different parts of the company and its measured.
But we do think it's important for us to participate in the broader digital asset space.
Great. Thank you.
Thank you.
Our next question comes from Gerard Cassidy. Your line is open. Please go ahead.
Hi, Emily Hi, Robyn.
Emily.
Uh huh.
On the noninterest bearing deposits you mentioned.
We're a little higher than normal I think you said, 27% of total deposits, but you do expect them I think you said the drop to more normal levels.
The 25.
What's keeping them up so high in the second could they remain maybe higher for longer this year or do you see some real trends that know, they're definitely going to get back to normal.
Great question, and frankly, there is a lot of uncertainty around that.
So more generally as it as it relates to NAV.
I think.
They are high they are probably elevated because of.
Certainly when risk off behavior.
The other thing that I really mentioned is that we've gotten a lot more sophisticated to and just how we manage our deposits and the tools with which we manage our deposit. So I think there's something to that also as well.
We do expect the niv shrimp.
Until about 2020% to 25%.
But youre right I mean to the extent they remain elevated that is going to be very helpful. And we will have upside you are our NAR our NII projection.
The other thing I'd mention is that we've seen cigna.
Significant growth in for example, asset servicing corporate trust et cetera, which naturally those businesses attract niv.
Very good.
We all know that obviously your bank is a fee based bank is not a bank than any of us are concerned about credit quality.
But I would just like to get your guys' thoughts.
You had a small provision increase again nothing material and again I emphasize nobody is really concerned about bank of new York's credit quality.
With the expectation of a soft recession or slowdown whatever you want to call. It.
Are you guys seeing any trends in the loan book.
You're just watching maybe a little more closely today than 12 months ago.
So just.
As a reminder, and I think you've already alluded to it the quality of our portfolio remains very high weighted average rating of AA minus.
That's been great as over 90%.
Npls and delinquencies are stable.
The only area that of course, we're monitoring very closely is the CRE portion of the portfolio and the office segment in particular at the moment occupancy and rent collections remain remained high but it is it is an area that we're playing paying closer attention to.
And what percentage of the CRE loan book is that about Emily.
It's about 9% of the funded loan.
Great. Thank you.
Our next question comes from Ken Anderson. Your line is open. Please go ahead.
Hi, Thanks, good morning.
Robert I know you talked to earlier just about the general view for fees to an increase in some thoughts on asset servicing just wondering if you have a view on just what you think organic growth can look like and also.
Thanks to also see some of the movement in the fourth quarter in asbestos specifically in Pershing and collateral management. Just wondering if you had a thumbnail on what the outlook for those two areas as well. Thank you.
Sure so from a from a from an overall fee point of view, we all focus on this internal growth.
Forgetting about.
M&A or any of those other those other ways to grow just the blocking and tackling and execution of what we think we can do.
In the company over the course of the year, we haven't given fee guidance because of the reasons that Emilie alluded to which is there are just so many things going on in the market. So we are just too many puts and takes for that to be credible for us. So that we are but we of course have our internal budget and that's what we've been working working through over the course of <unk>.
Time that you called out to businesses in those businesses, where we both we think those are bright spots for growth.
So we expect those to be above the average growth of the company theyre not the only ones that would be above the average, but they are too that would be and we feel quite good about the prospects for a variety of the different underlying reasons that we've that we've talked about already.
Okay very good and then just just one quick one in terms of that follow up on the.
On the on the balance sheet mix.
Emily is there anything changing with regard to how you think about the mix of securities that you add from here in terms of as we get towards the peak of the rate cycle.
Whether you start thinking about putting on more more fixed rate versus the floating type in what that means for the types of yields that you are able to get on your kind of front book investments.
Sure. So there's a lot in there so.
But we've been very nimble and continue to be very nimble in terms of managing our portfolio.
Bottom line rate right now, we're positioned to benefit from higher rates, but.
This call everyone's attention to the fact that the duration of our portfolio is the shortest it's been in recent memory and more than 60% of the portfolio isn't available for sale. So we really retained a lot of flexibility and we can act very swiftly should the environment that ultimately ultimately change.
And as it relates to reinvestment yields.
I guess it was in the second quarter I believe in 2020 to that.
The investment rate, we began to exceed a roll off rate.
The difference between the Q has steadily expanded to about 250 basis points in the second quarter.
And when you just think about how much of the portfolio resets at any moment in time that 40%.
<unk> of the securities or you actually can see at 40% of the securities portfolio was floating rate assets.
And the duration.
Fixed asset Securities is about three years. So you can kind of do the math there.
That's great. Thanks Edwin.
And our final question will come from Michael Brown. Your line is open. Please go ahead.
Yeah.
Great. Thank you for taking my questions.
Most of the banks.
In answer but.
Yeah, Hi, Robyn <unk>.
I guess my question was kind of as we think about further out into 2023 and so the market is assuming some rate cuts could occur before year end as we get if we get to that point.
What is your view on how deposit pricing performs there right because if your deposit betas were generally higher than the broader banking system on the way how.
How do we think about it to the point, where we start to see some early rate cuts.
Okay.
I guess in that backdrop, it's not an.
Expectation that we're heading back to where we were just some modest rate cuts. So how do you think about the deposit pricing in that environment.
Sure I'll take that so we do expect deposit pricing to perform.
Similarly on the way down as it did on the way up so we'll get the benefit of course because R. R.
We will get the benefit should should rates suddenly start to come down of deposit cost also coming down very quickly.
<unk> I'll, just remind you that to the extent that rates start to come down then Aoc I'll.
Pull to par faster.
Okay, great. Thank you for that and then just one more on NAV.
I appreciate the full year annual guidance.
When you look at the fourth quarter, it was up about 14% sequentially.
Within the annual guidance any any view on how we should think about the first quarter I know, it's a moving target, but any range here just to.
Help us think about the trajectory.
Yes, as I mentioned the range of outcomes is very is very wide. So it's really hard to predict the trajectory in any given quarter. It really is very dependent probably most specifically on the deposit trajectory and like I said, if niv remain elevated theres upside there.
Okay, great. Thank you for taking my questions.
And with that that does conclude our question and answer session for today I would like to hand, the call back over to Robin for any additional or closing remarks.
Thank you operator, I'd like to close today's call by thanking Emily time, as our CFO and to congratulate her on taking a new role starting February 1st as the CEO of asset servicing which as you know is our largest business Emily brings a set of experiences and relationships. This role is going to be in <unk>.
<unk> and driving profitable growth of our client franchise, and finally I would like to welcome Dummitt Mcdonough, our next CFO to the <unk> Mellon team, who joined US in November and he has hit the ground running I know that you are all looking forward to his first earnings call with.
With him in April so with that I'd like to thank you for your interest and being why Mellon and if you have any follow up questions. Please reach out to Meredith on the Iot.
Yes.
Thank you.
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.
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