Q2 2023 Bank of New York Mellon Corp Earnings Call

Speaker 1: Thank you.

Speaker 2: Please stand by.

Speaker 2: Good morning and welcome to the 2023 second quarter earnings conference call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

Speaker 2: Please note that this conference call and webcast will be recorded and will consist of copyrighted material.

Speaker 2: You may not record or rebroadcast these materials without BNY Mellon's consent.

Speaker 2: I will now turn the call over to Marius Mertz, BNY Mellon Head of Invest Relations. Please go ahead.

Speaker 3: Thank you operator and good morning everyone. Welcome to our second quarter 2023 earnings call.

Speaker 3: As always, we will reference our financial highlights presentation which can be found on the investor relations page of our website at bnymelon.com.

Speaker 3: I'm joined by Robin Vince, President and Chief Executive Officer, and Dermot McDonough, our Chief Financial Officer. Robin will start with introductory remarks and Dermot will then take you through the earnings presentation.

Speaker 3: Following their remarks, there will be a Q&A session.

Speaker 3: Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures.

Speaker 3: 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.

Speaker 3: Forward-looking statements made on this call speak only as of today, July 18, 2023, and will not be updated. With that, I will turn it over to Robin.

Speaker 4: Thanks Marius, and thank you everyone for joining us this morning. Dermot will walk you through the financials for the quarter shortly, but in summary, the company delivered good financial performance amid a very dynamic operating environment, and we've continued taking actions to position the firm for higher underlying growth.

Speaker 4: and enhanced operational efficiency over time. Referring to slide two of our financial highlights presentation, BNY Mellon reported second quarter earnings per share of $1.30, which was up 26% year over year on $4.5 billion of revenue.

Speaker 4: an increase of 5% year over year. Consistent with our focus on driving pre-tax margin expansion in 2023 and beyond, we drove meaningful positive operating leverage as we maintained strong expense discipline.

Speaker 4: while continuing to make significant investments to improve our growth trajectory and transform our operating model.

Speaker 4: As a result, our pre-tax margin improved to 30% and we generated a return on tangible common equity of 23% in the quarter. As I've said many times before, disciplined execution and consistent progress has been

Speaker 4: from milestone to milestone is the key to unlocking the financial opportunity inherent in our high quality franchise.

Speaker 4: While we're conscious of the work ahead of us, we're pleased to see the momentum building across the company.

Speaker 4: First, we're getting an increasingly firm grip on our expense base.

Speaker 4: I'm proud of our people who are embracing the task of making BNY Mellon a more efficient and scalable company, which gives me confidence in our ability to deliver tangible results in 2023 and beyond.

Speaker 4: Remember, in January we committed to essentially cut expense growth in half this year, roughly 4% growth excluding notable items in 2023 compared to roughly 8% ex-currency in 2022.

Speaker 4: Halfway through the year, I'm pleased to report that we're on track, even a little ahead of our plans.

Speaker 4: Second, the strength of our balance sheet, the resiliency of our business model, and our proactive balance sheet management continue to differentiate us with clients and create value for our shareholders.

Speaker 4: Net interest revenue and deposits were both bright spots in the quarter, and the Federal Reserve's 2023 Bank Stress Test demonstrated our capacity to withstand an extreme stress scenario. As a result of the test, our preliminary stress capital buffer requirement remains in the range of 0.5 to 0.5 times the stress of the year.

Speaker 4: at the regulatory floor of 2.5%.

Speaker 4: And while our overall approach to returning capital to shareholders remains unchanged, we increased our quarterly common dividend by 14% to $0.42 starting this quarter.

Speaker 4: Third, we remain laser focused on driving sustainably higher underlying growth across the firm.

Speaker 4: We've talked before about the advantages of our business model.

Speaker 4: Businesses such as Clearance and Collateral Management, Pershing, Depository Receipts, Corporate Trust and Treasury Services offer us a breadth and diversification in comparison to traditional trust banks.

Speaker 4: We saw strength in some of these differentiated businesses in the second quarter, and new business pipelines are healthy across the board.

Speaker 4: And importantly, we continued pushing ahead with new, innovative client solutions that we expect to become growth accelerators for the medium and long term.

Speaker 4: Less than two years after hiring employee number one, PershingX is now live with Wove, our open architecture wealth management platform that addresses a major pain point in the advisory market by better integrating advisors core applications.

Speaker 4: Wove allows us to integrate some of the best solutions from around BNY Mellon, including from our investment management business, as well as from leading third-party fintechs.

Speaker 4: Our launch of Pershing's Insight Conference in June has garnered significant early enthusiasm from clients and industry influencers who see Wove as a promising solution. The client pipeline is growing nicely, which we will report on more in the quarters ahead.

Speaker 4: More broadly, Wove is a proof point of our ability to execute at speed. We can deliver leading solutions quickly when we empower our people, surround them with the expertise and tools that they need, and drive forward with a product mindset, leveraging our great platforms. It's also a reflection of the change in mindset.

Speaker 4: We are cultivating here more commercially oriented with a greater sense of ownership and a greater focus on execution. I'll also call out Treasury Services which continues to innovate in areas like faster payments and banking as a service.

Speaker 4: This quarter, the business announced a strategic alliance with Mobility Capital Finance, or MoCAFI, a black-founded fintech whose mission is to enable underserved communities to access banking services. This is just the latest example of how we are deploying our capabilities.

Speaker 4: to advance financial inclusion in an innovative way. Now I've spoken in the past about the opportunity to do more things for our clients by connecting the dots for them through our One BNY Mellon initiative and how we're going to operationalize that.

Speaker 4: To help us realize this potential and more broadly to sharpen our commercial focus and elevate the client experience across the firm, in May we welcomed Katinka Wahlstrom as our first Chief Commercial Officer and member of our Executive Committee.

Speaker 4: In addition to taking on oversight responsibilities for global client management, I've tasked Katinka to embed 1B and Ymellon into the operations of our company. It's important that we commercialize this opportunity through training, by properly incentivizing our people to collaborate across the firm and by developing deliberate approaches.

Speaker 4: to multi-product solutions.

Speaker 4: Stepping back for a moment, let me provide a few thoughts on the macro environment.

Speaker 4: We acknowledge that the path of interest rates, continued QT, and elevated U.S. Treasury issuance activity carry meaningful uncertainties for the environment in the months ahead.

Speaker 4: From our vantage point, as the primary clearer of U.S. treasuries and through touching roughly 20% of the world's investable assets, our data tells us that more than half of recent T-bill issuance has been absorbed by funds flowing out of the Fed's RRP, but a good chunk of the balance has come from the banking system. Most of the money market fund demand for T-bills has been concentrated at the top of the top of thec Cooper survived after overdose, a later third. lights shooting up. Recycling.

Speaker 4: are negative and have been for some time. Together, this is likely going to put some incremental pressure on domestic funding sources, funds, banks, and corporates, as well as state and local governments, to absorb upcoming supply and less T-bill prices cheapened materially from current levels.

Speaker 4: For this reason, we do expect some further pressure on deposit balances across the industry in the months ahead.

Speaker 4: As you would expect, we are positioning ourselves prudently given these uncertainties, but see these flows as benefiting our broader cash ecosystem. We manage over $1.3 trillion worth of cash on behalf of clients across deposits, money market funds, repos and securities lending.

Speaker 4: And we're the biggest provider of collateral services globally as well, with about $6 trillion of tri-party balances on our platform.

Speaker 4: This $7 trillion of relevance to money market flows allows us to retain a connection to the money when it moves around various short-term investment alternatives and allows us to help our clients find the right solutions for their investment needs. Let me conclude my comments on a reflective...

Speaker 4: As I've acknowledged before, strategy matters, but execution and culture matter even more. As we close the books on the second quarter, we're entering the back half of the year with good momentum and confidence in our ability to drive change by executing consistently and at pace.

Speaker 4: Over the past couple of years, we've been able to attract high caliber talents to upgrade multiple important roles across the company. Our existing team, together with these new leaders, are rising to the challenge of unlocking our potential. And it's clear to me that we have a tremendous opportunity in front of us by leveraging our unique combination of businesses, and our partners.

Speaker 4: our preeminent client franchise, and the power of our culture and people. I'm encouraged by the initial progress over the past couple of quarters and excited about what lies ahead. With that, over to you, Doma.

Speaker 3: Thank you Robin and good morning everyone.

Speaker 3: Let me start on page 3 of the presentation with some additional details on our consolidated financial results in the second quarter.

Speaker 3: Total revenue of $4.5 billion was up 5% year over year. Net interest revenue was up 33% year over year, primarily driven by higher interest rates, partly offset by changes in battle sheet size and mix.

Speaker 3: Fee revenue is down 2%, driven by the sale of El Centro in the fourth quarter, the mix of cumulative AUM net inflows and lower FX revenue on the back of lower volumes and volatility, partially offset by the abatement of money market fee waivers.

Speaker 3: Firmwide AUCs of $46.9 trillion increase by 9% year over year. This increase reflects the impact of higher market values, client inflows and net new business.

Speaker 3: Assets under management of $1.9 trillion decreased by 2% year over year. The impact of lower market values driven by a year over year decrease in the UK fixed income markets and the sale of Alcintra was partially upset by cumulative net inflows over the last year and the favourable impact of a weaker US dollar.

Speaker 3: Investment in other revenue was $97 million. We continued to see strength in fixed income trading and positive see capital results. Expenses were flat on a reported basis and up 1% excluding North Poleism.

Speaker 3: This was driven by higher investments and revenue related expenses and the impact of inflation, partially offset by efficiency savings and the al-centra divestiture. Provision for credit losses was $5 million in the quarter, reflecting changes in the macroeconomic forecast resulting in higher reserves relating to commercial real estate.

Speaker 3: largely offset by reserve releases related to financial institutions.

Speaker 3: As Robin mentioned earlier, Earnings per share were $1.30 up 26% year over year or up 20% excluding multiple items.

Speaker 3: Pre-tax margin continues to improve to 30%.

Speaker 3: Our return on tangible common equity improved to 23%. Returning to capsule and liquidity on page 4.

Speaker 3: Our regulatory capsule ratios remained roughly unchanged.

Speaker 3: The Tier 1 leverage ratio was 5.7%, down 14 basis points quarter over quarter, primarily driven by an increase in average assets.

Speaker 3: Tier 1 capital increased slightly, driven by capital generated through earnings, net of capital returned through buybacks and dividends.

Speaker 3: The CET1 ratio is 11.1% up 10 basis points quarter over quarter, primarily reflecting higher CET1 capsule.

Speaker 3: As we said in our earnings call in April , we tapered buybacks in the second quarter to maintain conservative buffers above our management targets, being mindful of the uncertain environment.

Speaker 3: Overall, we returned 72% of earnings, including approximately $300 million of common dividends and approximately $450 million of buybacks in the second quarter.

Speaker 3: On a year-to-date basis, we have returned 119% of earnings.

Speaker 3: The Consolidated Liquidity Covered Ratio was 120%, an increase of 2 percentage points compared with the prior quarter. Our Consolidated Net Stable Funding Ratio, which we are reporting publicly for the first time this quarter, was 136%, well in excess of the regulatory requirements.

Speaker 3: Moving on to net interest revenue and further details on the underlying balance sheet trends on page 5.

Speaker 3: which I will describe in sequential terms. Net interest revenue of $1.1 billion was down 2% quarter over quarter, driven by deposit mix-shifts partially offset by higher interest rates.

Speaker 3: Overall, deposit balances have remained elevated relative to our expectations as they increased 1% sequentially on an average basis.

Speaker 3: interest-bearing deposits were up 5%

Speaker 3: Non-interest bearing deposits were down 11% in line with our expectations.

Speaker 3: Average interest earning assets increased by 4% quarter over quarter.

Speaker 3: Underneath that, cash and reverse repo is up 15%.

Speaker 3: Cash and reverse repo is up 15%. Loan balances were flat.

Speaker 3: Our investment securities portfolio is down 5%.

Speaker 3: Turning to expenses on page 6.

Speaker 3: Expenses for the quarter were flat year over year on a reported basis and up 1% excluding notable items relating to litigation and severance.

Speaker 3: As I mentioned earlier, this reflects higher investment and revenue related expenses and the impact of inflation.

Speaker 3: partially offset by efficiency savings and the El Centro divestiture.

Speaker 3: To summarize, we continue pushing forward with our multi-year investments to increase the growth trajectory of the firm and transform our operating models for greater scalability over time.

Speaker 3: Importantly, we remain focused on driving positive operating leverage and delivering continued pre-tax margin expansion.

Speaker 3: As an example of the expense discipline that Robin mentioned.

Speaker 3: For the second quarter, we self-funded the entirety of our incremental investment spend, and importantly, are on course to do the same for the full year.

Speaker 3: Turning to our business segment, starting with security services on page 7.

Speaker 3: Security services reported total revenue of $2.2 billion, up 12% year-over-year.

Speaker 3: Fee revenue was down 2%. Within this, Investment Services fees were flat.

Speaker 3: FX revenue is down 20% on the back of lower volatility and volume.

Speaker 3: Net interest revenue was up 46%. In asset servicing, investment services fees were flat with healthy underlying growth from new and existing clients, offset by lower client transaction activity reflecting the current market environment.

Speaker 3: Importantly, strength in attractive market segments continued. Despite an industry slowdown for private markets and hedge fund launches, we saw strong growth in our oath servicing business.

Speaker 3: By single digit growth, both ETF-ACA and number of funds serviced continued.

Speaker 3: Within issuer services, investment service fees were up 3% driven by our repository receipt business.

Speaker 3: Here, the impact of a large client corporate action in the current quarter was tempered by the absence of Russia-related client activity in the second quarter of last year.

Speaker 3: Next, Marks and Wealth Services on page 8. Marks and Wealth Services reported total revenue of $1.4 billion, up 10% year over year.

Speaker 3: Fee revenue was up 5%. National interest revenue increased by 24%.

Speaker 3: In Pershing, investment services fees were up 4%.

Speaker 3: The increase reflects the abatement of money market fee waivers and higher fees on sweet balance.

Speaker 3: partially upset by lower transaction volumes consistent with the decline in US equity exchange volumes and the impact of lost business.

Speaker 3: The net new assets number was a negative $34 billion in the quarter, reflecting the deconversion of a regional bank fund that was acquired in May.

Speaker 3: Excluding the impact of this ongoing deconversion, which we expect to weigh on our reported net new assets for several quarters, net new assets grew at a mid-single digit annualized growth rate.

Speaker 3: we remain confident in Pershing's underlying momentum and prospects. Importantly, our continued investments to enhance Pershing's core platform as well as the business' access to the strength and breadth of the whole company is being recognized by clients as a differentiator, especially in the current market environment.

Speaker 3: Also, as Robin mentioned earlier, WOAF is off to an excellent start. In Treasury Services, Investment Services fees decreased by 2%, reflecting higher earnings credits for non-interest-bearing deposit balances and lower payment volumes, partially offset by continuous momentum across payment.

Speaker 3: and liquidity solution.

Speaker 3: In Clearance and Collateral Management, Investment Services fees were up 10% driven by US Government clearance volumes reflecting elevated volatility and US Treasury issuance following resolution of the debt ceiling.

Speaker 3: In Clearance and Collateral Management, Investment Services fees were up 10% driven by US Government clearance volumes reflecting elevated volatility and US Treasury issuance following resolution of the debt ceiling. We also saw healthy growth in classroom management fees.

Speaker 3: As the largest truly global collateral manager, we continue to increase market connectivity by expanding our tri-party platform to include new markets, trade types and collateral pools.

Speaker 3: Our average tri-party collateral management balances increased by 16% year-over-year to $6 trillion.

Speaker 3: Turning to Investment and Wealth Management on page 9. Investment and Wealth Management reports a total revenue of $813 million, down 10% year over year.

Speaker 3: Fee revenue was down 10%. Investment and other revenue was $12 million in the quarter, primarily reflecting seed capital gains.

Speaker 3: and net interest revenue declined 37% year over year.

Speaker 3: Assets under management of $1.9 trillion decreased by 2% year over year.

Speaker 3: As I mentioned earlier, this decrease largely reflects lower market values driven by the year-over-year decrease in UK fixed income markets and the Alcentra divestiture, partially offset by cumulative net inflows and the favourable impact of the weaker dollar.

Speaker 3: In the quarter, we saw $9 billion of net outflows from long-term products as clients continue to de-risk and rebalance their portfolios.

Speaker 3: And despite competitive investment performance, we saw 9 billion of net outflows from cash.

Speaker 3: In investment management, revenue was down 9% year over year, primarily reflecting the sale of Alcintra and the mix of cumulative net inflows partially offset by improved C capsule results and lower money market fee waivers.

Speaker 3: While in wealth management revenue decreased 10%, driven by lower net interest revenue and changes in product mix.

Speaker 3: Client assets of $286 billion increased by 8% year over year, reflecting higher market values and cumulative net inflows.

Speaker 3: Page 10 shows the results of the other segment. I will close with a few comments on our current financial outlook for the second half of the year.

Speaker 3: shows the results of the other segments. I will close with a few comments on our current financial outlook for the second half of the year. Number one.

Speaker 3: Our net interest revenue outlook for the full year 23 remains unchanged for 20% growth year over year.

Speaker 3: This is based on market implied forward interest rates toward the end of the quarter. We are pleased with our net interest revenue trajectory and balance sheet management to year to date but mindful that we are operating in a very uncertain environment with continued rate volatility.

Speaker 3: a higher-for-longer rates market backdrop, and uncertainty surrounding meaningful U.S. Treasury issue in the coming months.

Speaker 3: We are ahead of plan when it comes to executing on our efficiency effort.

Speaker 3: We remain focused on outperforming our target of 4% expense growth excluding notable items for the full year 23 and will work hard to drive this closer to 3% in the coming months.

Speaker 3: While we expect the operating environment to continue to weigh on sea growth relative to what we expected at the beginning of the year, our progress on the expense side continues to give us confidence in our ability to deliver positive operating leverage this year.

Speaker 3: 3. We still expect to return 100% of our earnings or more to our shareholders over the full year 23 while continuing to position ourselves conservatively with respect to our capital levels considering the amount of operating uncertainty.

Speaker 3: 3. We still expect to return 100% of our earnings or more to our shareholders over the full year 23 while continuing to position ourselves conservatively with respect to our capital levels considering the amount of operating uncertainty. In conclusion 3. We expect to return 100% of our earnings or more to our shareholders over the full year 23 while continuing to position ourselves conservatively with respect to our capital

Speaker 3: I am pleased to report that the company continues to perform well against the backdrop of complex operating environments, and we continue to execute with a great sense of urgency against our growth and efficiency initiatives.

Speaker 2: With that operator, can you please open the line for Q&A? Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and one related follow-up question.

Speaker 2: And our first question will come from Brennan Hawken with UBS.

Speaker 5: Good morning, thanks for taking my question. Dermot, I'd love to... Good morning, brother.

Speaker 5: Good morning. Thurmond, I'd like to start with what you just touched on, the unchanged NI outlook. Curious what you're seeing as far as deposit cost pressure. We've begun to see that emerge.

Speaker 5: There are peer firms of Bank of New York's that have flagged some upward pressure in the back book. How is it that you are able to avoid these pressures and keep on your NII outlook that you had provided earlier? How is it that you are able to avoid these pressures and keep on your NII outlook that you had provided earlier?

Speaker 5: firms of Bank of New York that have flagged some upward pressure in the back book. How is it that you are able to avoid these pressures and keep on your NII outlook that you had provided earlier? How is it that you are able to avoid these pressures and keep on your NII outlook that you had provided earlier?

Speaker 3: Thanks for the question Brennan and good morning everyone. So, I will accept the fact that the pressures are there, but I think the team is doing a great job managing both sides of the balance sheet in a very dynamic environment.

Speaker 3: If we kind of look at the first half of the year, I think we're very pleased with where we've come out in the first half of the year and feel we're on a very good footing for the back half of the year. In January when we spoke to you, we kind of gave a guidance of 20% and that was with a mid-singular digit decline in deposits over the balance over the course of the year.

Speaker 3: If you reflect on the two quarters just behind us, we had elevated deposits in Q1 on the back of uncertainty around regional banks. We had elevated deposits in Q2 on debt ceiling which really speaks to the strength of our balance sheet and the strength of our franchise and clients looking to use us in times of uncertainty. We have elevated deposits in Q1 on debt ceiling which really speaks to the strength of our franchise and clients looking to use us in times of uncertainty around regional banks.

Speaker 3: Now, when you look to the back half of the year, you know, on our deposit, average deposits in Q2 were around 277 billion up 1% sequentially. We do expect this growth to moderate in the back half of the year and we do expect declines in our balances. We expect this growth to moderate in the back half of the year and we expect declines in

Speaker 3: as a result of the Treasury issuance which I think is going to be announced in August in terms of what they're going to do between bills and coupon payments and the interplay between QT, RRB and bank reserves is something that we're all watching carefully. So we do expect our balances to go down to mid to high single digits from here.

Speaker 3: But when we reflect back and do the bottoms up, top down and talk to clients and see what's happening in the marketplace, we come back to the same place as where we started at the beginning of the year in terms of our overall feel good about the guidance of 20%.

Speaker 3: And specifically to your point on deposit costs, look our client base unlike others is largely institutional and our bases are in the mid to high 70s and we feel our book is kind of we passed on the rate rises to our clients over the last one and a half.

Speaker 3: Notwithstanding, there are pressures given the higher for longer rates environment and people looking to optimise their net interest income. So that's it.

Speaker 5: That's very helpful. Thanks, Dermot. I appreciate that. And so switching gears a little bit on the fee revenue side, this is a pretty good outcome for you guys here this quarter. How should we be thinking about jumping off into the next quarter? Is there anywhere in particular What the f*** you gonna do one more time?

Speaker 3: where you would flag some adjustments that we should be making to the baseline or is this a fair way to think about it? So as it relates to fees Brennan, look I think when I look across the various businesses and the feedback that we're getting from clients and when I talk to our teams our backlogs are good.

Speaker 3: We're winning our fair share of deals. I have to say the enthusiasm and the energy of the team when they came back from the Insight conference having launched the Wolf product gives us great optimism about the future and what we can do for our clients. So overall I would say our backlog is good in a very uncertain environment.

Speaker 3: We're winning our share and our yet to be installed book of business in asset servicing is healthy and strong. Excellent. Thanks for that, Keller. And our next question will come from Alex Bosting with Goldman Sachs.

Speaker 5: Hey guys, good morning. Thanks for the question. Just a quick follow up first, maybe around the deposit discussion. So Dermot, if I hear you correctly, no kind of catch up from the back book that you expect to see in your deposit pricing for the rest of the year. But I guess if we look at the deposit beta over the course of this quarter, it looks like it was pretty close to 100% on a currency adjusted basis.

Speaker 3: We kind of said our Q1 results were kind of largely a little bit of the price lag there Which we feel is largely behind us and that catch-up has happened in Q2. So overall I think we feel pretty good about the catch-up. Q1 basis are in the mid to high 70s for dollars.

Speaker 3: 80% dollars and then 10% split between euros and sterling. And the basis for sterling and euros are roughly in the 50 to 60% range.

Speaker 3: And then I just reiterate the point, and I think it's a very important point, you know, the deposit book is largely institutional, sophisticated clients, and we've really repriced our book quite efficiently over the last one and a half years and that's really the message I'd like to leave you with.

Speaker 5: Makes sense, thank you. And then Robin, a question for you maybe a little bit more on the strategic side. When we look at the investment management business at BNY Mellon, there are some areas that one could maybe characterize as sort of subscale. The organic growth has been muted and obviously margins is something you guys as previously said you need to sort of work on. So are there any strategic areas where you feel like you could you know…

Speaker 5: address some of these issues by either divesting or you know adding scale to businesses that are subscale so just kind of thinking more holistically about that business in the context of BNY Mellon. Thanks for the question Alex. Obviously this is an area segment we spent a lot of time on.

Speaker 4: Just to remind you, we did a series of strategic reviews all across the company, going back over the course of the past nine months. We've looked at every function, we've looked at every business, and we did spend a particular amount of time digging in to our investment and wealth management segment. Look, in terms of IM in particular,

Speaker 4: you know if you think about it as part of the IWM segment, two years ago that whole segment was a 30% pre-touch margin segment. There's no reason to think we couldn't get back there over time. But there are a series of different things that we have set out to do ourselves. And so the execution of all of that is going to be really important.

Speaker 4: There's going to be a combination of improving top line, you know, what you'd expect in terms of really focused on meeting client needs, strong investment performance, new products, etc. And also some of the de-siloing and expense management that's really in there. But the thing I'm going to call out to you, which I really think of as the BNY Mellon superpower, and I think everyone needs to have a super...

Speaker 4: there in its silo, but our distribution capabilities, $2.5 trillion worth of retail distribution as one example, but obviously we have other distribution as well in the company on the institutional side, was separately landlocked over in a different corner of the company. So our plan here is really...

Speaker 4: to lean in to what we think of as one of our superpowers, distribution, and then allow the business in this newly configured format to really be able to stretch its legs in this non-siloed format, and then go from there. And we think that that's a good path forward.

Speaker 6: Great, thank you both. Thank you.

Speaker 2: And we'll take a question from Betsy Grasick with Morgan Stanley .

Speaker 2: question from Betsy Grasick with Morgan Stanley . Hi, good morning.

Speaker 7: Morning Betsy. I know we talked a lot about deposits, but I did just want to drill down on how you're thinking about the life of the deposits and is that at all changed versus history and part of the reason for asking is just trying to understand if there's any impact on the securities portfolio as you put those. You know, put those, you know, that that deposit flow to work. Thanks.

Speaker 3: When you say life of deposit, Betsy, do you mean like tenor and duration of the deposit that stays with it? Just to clarify the question.

Speaker 7: Yeah, how you, you know, what you are assuming the life of the deposit is because I'm expecting that drives how you're investing those deposits.

Okay, so let me start by talking about the $277 billion of average balance sheet that we have. Important point number one, two-thirds of those deposits are operational or what we call sticky. So, let me start by talking about the $277 billion of average balance sheet that we have.

Here at BNY Mellon we don't classify between insured and uninsured, we call it sticky and non-sticky. So the vast majority of our deposits are with us because the clients are in our ecosystem for the long term and need to have cash with us to execute their business. So that's why we...

we think about it in that way. On the asset side of the balance sheet, like I would like to go back 18 months when we kind of made some strategic decisions about positioning for this rise in interest rates, I think that we took a view in terms of how we wanted to set up.

the balance sheet with a rapid increase in interest rates. And so we've done a lot of work last year in terms of repositioning the portfolio in terms of hire for longer. 60% of our portfolio is in AFS and a big part of that is 60% of the portfolio is also fixed.

that has a weighted average maturity of about four years. So think about rolling off a quarter every year. So if you take on the asset side the amount of money that we have in cash plus the amount that's rolling off from fixed to floating and the investment yield pick up of that is about 300 basis points. We feel when you look at both asset and liability together combined we're really well positioned.

over the next 12 to 18 months to manage through this rate environment. Okay, and you would say that the deposits already reflect the rates that obviously have come through to date, right?

Largely yes, absolutely, which is why cumulative basis are in the mid to high 70s and we expect them to grind a little bit higher from here but we, as I've said, we pay our clients a competitive rate and they are sophisticated and they know what they're doing.

Yeah, okay, and then just separate question on OPRIS, GARWA, you know, next week I guess we're getting the Basel III endgame rules. And just wondering, I know we don't have the final rule, but I'm sure you've thought a lot about this OPRIS, GARWA component that's being added to standardize. Maybe you could give us...

a sense as to how you're thinking through and how we should think through assessing your position when those rules come out next week. Thanks.

So again, look, we've talked about this pretty much for the last 12 months, so just to kind of recap what we've said before, based on what we know, we expect operational risk RWAs to be in the standardized approach and that will drive an increase in our standardized RWAs.

Based on our internal analysis, we think that will have a smaller increase than what the QIS has shown in the past.

And so we kind of feel like, you know, capital levels will be a little bit higher, but we feel we will have the ability to adapt and live with whatever the outcome is. But again, you know, it's been delayed a couple of times, so I think for us we're just waiting to see and we will turn it around quickly and we'll communicate to you when we have something tangible to say.

Got it. Okay, thanks so much. Appreciate it. Thanks Betsy. And our next question will come from Steven Schuback with Wolfe Research.

Hi, good morning, Robin. Good morning, Dermot. Morning, Stephen. So, wanted to dig into non-interest-bearing deposits. They're now firmly within your 20 to 25% guidance or target range. Your peers have offered more conservative guidance on NIB deposit trends.

I know some of your businesses in your mix is pretty unique or idiosyncratic, but I wanted to just better understand what's driving the resiliency in NIB trends and your confidence level at that 20-25% range is still appropriate.

Okay, thanks for the question, Stephen. Let me again go back to my last call when it was at 26%.

I guess everybody on the call was looking to see why weren't we guiding higher. We kind of said history has told us that through the cycle and the trough, our history and our experience, and we have data going back 20 years, and we look at that.

the history tells us we should be in the 20% zip code. So we've done a very much a bottoms up analysis looking at the history. Important point to make here is our mix of businesses today is a little bit more diversified than it was 20 years ago pre-merger 2007.

We have a more diversified range of business as you said. We have corporate trust, treasury services, asset servicing, clearance and collateral management. And each of our clients in each of those business segments uses for different reasons and deposits behave in a slightly different way within each of those businesses. And the mix between NIB and NIB in those businesses varies.

And so that gives us a really good confidence level in terms of the diversified business model nature that we have. So our internal analysis is kind of pretty solid. And then we look at what industry is saying and what you analysts are writing about and we kind of take that into accommodation. Also what other people have guided and what our clients are telling us.

And we take all of that together and we kind of feel at the end of the day, consistent what we've said in the last two quarters is 20% is as best we can give you in terms of through the cycle, which importantly then feeds into our NII guidance of 20% over the course of 12 months.

So it's important to remember it's a 12-month guidance as opposed to managing a court reporter. No, it's really helpful. And just for my follow-up, encouraging to see the 30% margin for security services this quarter. Now that said, the IWM margin remains subdued, running in the low teens year-to-date.

I know Robin you had talked about distribution being a big focus, but what do you see as an achievable target versus that low teams level you're running at today? And how much of that margin improvement is contingent on revenue opportunities like improved distribution versus efficiency gains? Sure, so looking at the whole company, the security service...

security services point, we are laser focused on continuing to drive that margin higher. We're not complacent about this at all just because it happens to be approaching our original target. But look on investment management and this goes a little bit to to the prior question, you know two years ago this was a 30% pre-tax margin segment. So we look around the world, we look at what's happened, how has it come down.

distribution, remembering that we are a diversified set of businesses of BNY Mellon. And we've had these tremendous distribution capabilities, which we have really not put alongside this investment management manufacturing capability as well as we could have. And so that's a strategic change in the company. And as we pursue that strategic change, and it will take a little while.

additional expense that duplicates to the rest of the firm and we can find better ways of bringing those capabilities together to actually execute better. So there's opportunity there as well. So collectively we're going to pursue all of these things. It's going to take us a couple of years realistically to see all of the benefit of all of this work but we feel reasonably optimistic.

Hello, how are you?

Hello, how are you? So the FET now platform is...

Hi. So the FedNow platform is starting for instant interbank payments. I'm assuming you're going to be playing a big role in this, but I'm curious what you think the expected impact for the industry and for BK is like these things are usually good for expenses, good for capital efficiency, but bad for revenue. But I'm just curious if you can tell us what you think.

Sure, so immediate payments which is the umbrella I'll put both FedNow which is the new service coming into production from the Fed and also the clearing houses real-time payments rails that the whole immediate payments world does to us represent an interesting disruption opportunity in the ecosystem of payments because there hasn't

So we've deliberately invested to be ready as a market leading participant in the real time immediate payments, let's call it evolution. So yes, we think it's important. Yes, we think it's an opportunity. We were the first bank to do a test in the original rails. We've seen good traction. It's still early days. I think FedNow will be a bit of an accelerant.

to this because it creates more awareness of real-time payments and it broadens out the overall sort of participation rate, I think. We've been very involved in them, with them on this initiative. And we're trying to position our payments platform

as rail agnostic. And so clients of ours can come to us and say, hey, BNY Mellon, I want to make a payment. They don't need to care about is it going to be Fed now, or is it going to be the RTP rails? How do they want to migrate away from checks? How do they want to treat a payment on the Fed wire versus ACH versus one of these new capabilities? And remember...

We wrap them in new services. So the ability to offer real-time request for payment, bill pay capabilities, the ability to wrap additional fraud services in this whole thing, we think this will be quite an interesting evolution. And to your point about volumes versus price, one of the good things about being a disruptor when you don't have as big a share of some of the...

credit card flows and some of those other things, which admittedly have a higher price on them, we aren't. So we get the opportunity to bring this unconflicted approach and benefit from the upside, frankly, without sacrificing much on the other side. Very interesting, thank you for that. Separate but related. I think you guys have done a very good job of taking that 20% net interest income growth you expect this year, while setting the...

a couple of percent expense growth and bringing that operating leverage. I'm trying to think out loud. The mid to high single digit expected deposit decline in the back half makes for a tougher full year 24. So even with good expense control, I guess my question is how much do you need more of those, you know, get clients to do more with Bank of New York cross selling men?

NYMEL and Client franchise, we go at it every single day with incredible intensity. We want clients to do more with us across different parts of the firm and we're really working hard at that. The second point is expenses.

Two quarters in, we're very pleased with where we are, we like the forward in terms of how we're executing and how the firm has set up to execute. I will remind you, like this time last year we conducted a bottoms up exercise where we took 1500 ideas across the company from all our team members around the world.

put a bit of investment dollars behind it, digitisation, automation, eliminating manual processes and in the expenses flat quarter over quarter you're beginning to see the dividends of that paying through and importantly in my prepared remarks I said that we funded the entirety of our investment plan from the second quarter from efficiency.

across our strategy, we were very clear at the beginning of the year about what we wanted to achieve this year. We set out these three points of our outlook, our guidance for 2023. And of course the year is always going to evolve a little differently than you imagine it will right at the beginning of the year. And we've certainly had a year like that this year where...

thing that we're doing every day generating more fees focused on NII focused on expenses what we're really doing is preparing our company for this medium and longer term journey of delivery and achieving our objectives and so they're always going to be a little bit of pluses and minuses in the border

But we really think that that sort of broader strategy is what we're about. Just deliberately executing and bringing the culture to bear. So I hear you on the next couple of quarters, but I would just continually remind you and put you back to that guidance that Dermot mentioned about what we're trying to do this year.

Totally fair, thanks. And we have a question from Ibrahim Poonawalla with Bank of America.

Hey, good morning. Just a follow-up, Girma. On the NII side, so I heard everything that you've talked about. You've done a good job in terms of forecasting NII and depositor behavior.

Give us a sense of if we don't get any rate cuts over the next 12 months, where does NII trough given the repricing on the security side that you expect and assuming no big surprises on deposits relative to your current expectations? Is there a natural trough to NII?

Before we break into it, any Fed moves? So look, the path of interest rate matters. The rate, the level of rates, timing, if you look at the last 8 months.

The market, broadly speaking, hasn't got it right relative to Fed dots and has now come into line over the last several weeks.

broadly speaking, hasn't got it right relative to FedDots and has now come into line over the last several weeks.

The two things that I'm looking at are, you know, it's pretty baked in that the Fed will hike in July , then you have Jackson Hole. That's going to be a very important meeting and then what happens in November because it is one hike every two meetings between July and November is a long time.

there would be a lot of data in that period and so if they pass on November it's going to be very hard for them to restart again. So I think when we look at our balance sheet we positioned it higher for longer.

and that kind of has informed our guidance of 20% for this year and the book over the next 12 months, 12 to 18 months, we're broadly neutral on the outcome for rates up a little bit or rates down a little bit and that's kind of how we think about it.

I guess just one follow-up maybe. Robin, you made efficiency improvement a huge focus for the last year or two. And as we think about and without sort of asking for guidance into next year, as we think about these efficiency benefits to the bottom line.

Should we think about it in increments much like you achieved it this year? Or should we expect a larger move at some point as you have the time to assess operations and maybe we see something larger next year or so?

It's an important question, Ibrahim, and I'm going to frame it slightly differently to you, which is we have focused on things that are going to be relatively quick wins associated with cleaning things up that we thought were inefficient.

And we've also laid out for ourselves a series of medium-term things and a series of long-term things. And so we have a variety of initiatives in each of those buckets. Of course, we've been executing on them in parallel, but you only see the benefits of some of the shorter-term things.

right now. So Dermot gave you the example of the ideas that our people generated and we're going after those and we said those were sort of a three year or so implementation to get after that. We've talked about the fact that we did some work, some de-layering in the organisation at the end of last year into the beginning of this year.

a lot of embedded platforms within that. Platforms that have been operated in sort of non-platform ways as a result of our sort of slightly siloed past. So now we're getting after organizing those things a little bit differently. And as we organize that, there'll be some expense benefit from that.

But also then having organized them in that way, we get to really deliberately go after the duplication of systems and processes that are inside the company. And that's also when we really get to go after the digitization. So it's harvesting a little bit for the short term, focused on the things that we think make the company a well-run company.

organizing ourselves to be able to structurally operate ourselves as we think of the company, and then harvesting the benefit of that. So there's a one year story, a 2, 3, 4, 5 year story associated with doing all of those things. But as with everything, we have to execute it really well, and we want our people to come along with us on that journey, because a lot of this is change of behavior from how people have worked in the past, which is why I'm here.

for the year and in reaction to a little bit different outcome on the fees than initially expected. I just wonder if you could just talk to us about both sides of that. Number one, the beating on the expense side, is that doing anything incremental in terms of either the severance effects or delaying the

delaying investments or is it just the core? And on the fee side, I'm just wondering if you kind of catalog for us, you know, which businesses have have underperformed a little bit and do you have a better line of sight for, you know, the better rate of change for those going forward? Thanks. Okay, so I'll take that on the expense side. So like the guidance was 4%.

Okay, so and that's kind of down from 8% ex notables ex currency important point to kind of stress there and so then it's like it really comes down to Executing and operational excellence in everything that we do on all the points that Robin made and I think the executive committee committee and the firm and the team

investing in that segment, we're putting big budget dollars to work there and that's evidenced by our launch of Wove.

If you go to our security services segment, that is about increasing our margin through the cycle to 30%. And within that, we're insanely focused on our cost to serve. Automation, digitization, serving our clients in a more differentiate way.

that brings down our cost to serve. So it does mean different things to different businesses at different points in the cycle, but in the first instance it's all about how we show up and how we execute. On the fees, I think generally we feel very good about our backlog, we feel very good about the pipeline, we're winning our share of what the market has to offer.

and our clients like what we have to offer. So on the forward, we feel we have excellent momentum and we're executing well with our clients. Thanks a lot.

like what we have to offer. So on the forward, we feel we have excellent momentum, and we're executing well with our clients. Thanks a lot. Thanks, Ken.

And moving on to Brian Videl with Deutsche Bank. Great, thanks. Most of my questions have been asked and answered, but maybe just to follow on the 1BNY Mellon Initiative, maybe on the revenue side of that, it sounds like obviously there's a lot of low-hanging fruit on the cost side.

that will run well over the next one to two years. But on the revenue side of that, I guess how would you, just in a comparison perspective, relative to expenses, how would you cite the revenue potential for 1BNY over the next couple years, and if you can point to any.

one early example of cross-sell traction. Sure. So let me, Brian , I'm going to split this into two pieces. So one is specifically on 1B and YMelon, which we think of as increasing wallet share with our clients, being able to do more with existing clients, also attract new clients, of course, to the platform and sort of dealing with this issue that the median client...

ourselves targets for 2022. We exceeded them. We set ourselves targets for 2023. By the way, we've achieved 80% at the half year mark, 80% of our full year sales targets for that initiative, and at least 50% of our sales force has made at least one referral. So we feel good about the way that we started. But as I mentioned in my prepared remarks, actually kind of industrializing that embedding it into the way that we act.

remarks because we needed to put somebody and wrap up that strategy it deeply in to how we actually operate the company. So that's that's the specific one BNY Mellon initiative we feel very good that that creates an underlying boost to whatever our growth would have been without that on the on the new business side.

businesses in addition to the new innovations that we've talked about like PershingX and Outsource Trading and others. And so I'll give you a few examples of that. Let me give you one good classic example which is we're a large clearing firm. We're known for having that as one of our businesses but we actually had two institutional clearing platforms at BNY Mellon.

one embedded in our clearance and collateral management business, and one embedded in our purging business. And remember, I'm talking about institutions here. So this isn't including the wealth piece in purging. And it didn't make any sense because we had multiple platforms, clients were confused, we did it in different ways. And so we've taken those two businesses and we've combined them. And now we have one institutional clearing business at BNY Mellon. We're in the process of executing that change right now. I can give you the

And part of our growth is by bringing those together. Yes, we will get benefits in terms of efficiency, but we expect more client business from it too.

Maybe if I could just finish off on the deposit, one more on the deposit side for you Dermot. You mentioned your pricing is already very good and you're not seeing a great deal of pressure on deposit costs other than the grind higher that you cited. I'm in the asset servicing segment.

specifically, so the asset servicing part of security services. Are you seeing a different dynamic there whereby clients are looking to either shift out of NIBs or look for better deposit pricing? And then in those contracts that you have, servicing contracts that you have, do you have provisions for embedding sort of a level revenue type of payment?

you a firm view. So I wouldn't say I'm not seeing anything within asset servicing as it relates to the mix of IBs and NIBs that would cause me to think there's been an outlier change quarter over quarter or something that's unusual and out of line with what we expected at the beginning of the year.

Fair enough. Thank you. Thanks, Brian . And we have a question from Gerard Cassidy with RBC.

Thank you. Good morning, gentlemen. Dermot, earlier, Robin pointed out that obviously there's going to be a lot of Treasury issuance in the second half of the year. Can you guys quantify the benefit or the monetary benefit that you'll see from this type of issuance because you're the primary clear-

We can have market appreciation. We can have transaction balances. The total addressable market can go there are different ways in which We see opportunity and in the Treasury market given the role that we play in the Treasury market at the end of the day more Treasuries is a is a benefit for us Because there are more treasuries that get traded in the market There are more treasuries that need to get funded in the market. There are more treasuries that get issued in the market So there's a broader

and only think about that being driven by treasuries, but clearly treasuries is a market we serve and so when there are more of them and more activity, we regard that on average as good. Very good, I appreciate that. And then Dermot, you were talking about the balance sheet and how the portfolios, the securities portfolios are positioned.

going forward, especially if we're in a higher for longer rate environment, what if we get surprised sometime in the spring of 24 and the Fed starts cutting rates, how quickly can you reposition the portfolio for that or would you need to do that? Can you give us some color on you know the

opposite of what everybody expects today of hire for longer? So the quick answer is a large part of our portfolio is cash so we price is very quickly up or down so we kind of think of our balance sheet as broadly neutral so if they cut by 25 basis points or 50 basis points

broadly neutral up or down over the next 12 to 18 months.

And then just if we were to move into this lower rate environment because your deposit bidders are so high You know so far, you know year to from the beginning to where we are today I would assume you would be able to cut rates pretty quickly deposit rates pretty quickly Symmetrical 100% accurate. Yeah

Price equally on the way down, it's down on the way up, yeah. Thank you. And we have a question from Rob Wildack with Autonomous Research. Good morning guys, I wanted to go back to the theme of fees versus expenses and drill down a little bit into security services and the margin in there.

I mean, what portion of the margin improvement you're aiming for do you think will come from sheer expense discipline? And then what portion do you think comes from all the fee opportunities that you're speaking to?

So, I'm not too sure I would like to give guidance at that granular level of detail, but what I would say is...

Emily and Roman are intensely focused on delivering a better cost to serve model than what we've done in the past. And we want to give clients a better experience with respect to automation, digitization and how we deliver our products to them.

And so that is an intense focus of the team. Also, we feel we have, you know, we're the world's largest custodian. We're number one in a lot of different things in the security services space. And so we like our hands, we're winning our share. As I said earlier, our backlog is very strong.

And we have a good medium term opportunity set in front of us that we're looking to win and execute on. Our yet to be installed book of business is very healthy. So I think we're going after the two legs with equal intensity and both will deliver that margin of 30% through the cycle, very important. You know this quarter we had a nice healthy pick up from the rate back up but as Robin said in answer to another question.

We're just not relying on that. We know we have a lot of work to do and we're getting about it. Thanks, Jeremy. And just one more on Pershing, you know, excluding the deconversion performed pretty well again in terms of net new assets. Can you speak to some of the drivers there? Remind us what the revenue impact is and how you're thinking about the pipeline.

know, X to D conversion over the quarter, we had like, you know, 4% growth. Pershing is a business that's grown really well over the last number of years. We're very competitive. We're number one, top three in different things.

And so I would say the feedback from our conference in Florida, Insight, where we launched Wove, was really, really good. And Robin spoke about this at length in terms of, you know, the appetite about Wove. So we kind of think over the next several quarters, we like the business momentum.

We have a lot of stuff in the pipeline. I think come October we're going to have a couple of deals that we're going to be able to talk to you about that are quite exciting and will make you feel pretty good.

Okay, appreciate the call. Thank you.

And our final question comes from the line of Rajeev Mejia with Morningstar.

Good morning, and thank you for taking my question. Just on that Pershing business, can you remind us how much of your revenue is from RIA custody side? And then can you talk about what you're seeing from a competitive standpoint? Goldman Sachs seems to be expanding in this area. Investment has partnered with FNC. SEI has also made some moves here. So I'm curious how you see the competitive landscape evolving.

Sure, Rajiv. Look, we don't split out the RIA versus the broker-dealer. As you know, we're number one in broker-dealer and we're in the top three in RIA, so we're clearly a market leader. You know, it's interesting the names that you picked because none of them are in the top three on either of those measures. So having said that, we're obviously not complacent.

about newer entrants into the market or other people who want to sort of get into this. This is a business that we've been in for a long time. We understand it. We have scale. I'm just going to re-point you to the 2.3 trillion dollars of assets on that platform that we think gives us a tremendous...

starting point with clients and then the innovation that we've got in it. So we've gone multi custody which is very important in that business. We're innovating a lot of our services traditionally have been focused on the investor but now we're delivering to the advisor as well with the Wove platform. We've innovated into direct indexing capabilities, financial planning capabilities, tax aware investing capabilities. We're deploying BNY Mellon advisors and the capabilities from investment management.

course welcome the competition from some of these other folks. I don't think any of them can deliver that breadth of capability to our clients and so for advisors and investors we feel very good about our direction of travel in this business.

the competition from some of these other folks. I don't think any of them can deliver that breadth of capability to our clients. And so for advisors and investors, we feel very good about our direction of travel in this business. Thank you.

Thank you. And with that, that does conclude our question and answer session for today. I would now like to hand the call back over to Robin with any additional or closing remarks.

Thank you, operator, and thank you everyone for your interest in BNY Mellon. If you have any follow-up questions, please reach out to Marius and the IR team. Be well.

Thank you. This concludes today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Mellon investor relations website at 2 p.m. Eastern Standard Time today. Have a great day. Thank you.

We.