The Bank of New York Mellon Corporation (NYSE:BK) Q4 2022 Earnings Call Transcript

The Bank of New York Mellon Corporation (NYSE:BK) Q4 2022 Earnings Call Transcript January 13, 2023

Operator: Good morning. And welcome to the 2022 Fourth Quarter Earnings Conference Call hosted by BNY Mellon . I will now turn the conference over to Marius Merz, BNY Mellon, Head of Investor Relations. Please go ahead.

Marius Merz: 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 Web site at bnymellon.com. I’m joined by Robin Vince, President and Chief Executive Officer; and Emily Portney, our Chief Financial Officer. Robin will 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 measures. Information about these statements and non-GAAP measures are available in the earnings press release financial supplement and financial highlights presentation, all available on the Investor Relations page of our Web site.

Forward-looking statements made on this call speak only as of today, January 13, 2023, and will not be updated. With that, I will turn it over to Robin.

Robin Vince: Thank you, Marius. Good 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 2 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 a 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%, reflecting our solid underlying performance against the backdrop of a complex operating environment in 2022. Our results this year included several notable items.

For example, those related to Russia in the first quarter and the goodwill impairment related to investment management in the third quarter. And 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 headwinds from lower market levels. On the back of organic growth in AUCA, we’re continuing our role as the world’s largest custodian, and we saw cumulative net inflows in assets under management.

Beyond the numbers, I’d 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 continued to elevate our client dialogue while maintaining a strong focus on service quality to support our clients through a difficult environment. Sales wins increased off a strong 2021 and we’re winning larger and higher value deals, which is where the elevation of client dialogue matters. In ETFs, AUCA reached $1.4 trillion as we saw strong net inflows throughout the year and the total number of funds serviced rose by 12%. And in , we grew AUCA by 14% and fund launches were up by over 25%. Treasury Services delivered strong broad based growth throughout 2022.

In the fourth quarter, we announced a collaboration with Conduent to be their 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, faster 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. And we also onboarded 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 and family office segments, and we continued to deepen existing relationships through our expanded banking offering where the percentage of advisory clients who also bank with us rose by about 5 percentage points.

Notwithstanding the tough backdrop, Pershing, 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 to very exciting wins, demonstrating the broad based capabilities that Pershing is uniquely positioned to offer. The first was State Farm, which is an exciting relationship given State Farm’s size and reach with its thousands of agents across the country serving tens of millions of households. And we also onboarded Arta Finance, which was founded by a team of former Google executives who are 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 APIs and digital capabilities and demonstrates our ability to win with tech forward clients. The second area of performance, I’ll call out is that we continue to forge ahead with our longer-term growth initiatives such as Pershing X, real-time payments, the reimagining 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 US in October. And as I highlighted in my OpEd in the Financial Times a month ago, this will continue to be a focus for us, not so much for 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 for trusted regulated providers in the digital asset space. We are also now live with our first release at Persing X, just one year after launching the initiative. 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 tight timeline and 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 volume surges, the operational readiness of our people and our systems consistently enabled successful outcomes for our clients.

I cannot thank our 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 recognize an area where we fell short this past year, acknowledging the inflationary headwinds, expense growth for a second straight year was around 5% ex-notables. We consider that number too high, especially considering the expense growth benefited from a stronger US 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 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 BNY 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 our 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 for how we can run the company in a better way for all our stakeholders.

To date, we’ve approved about 1,500 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. Emily will cover this in more detail, but as a result of these initiatives and our 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 project 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 our One BNY Mellon program, which incentivizes cross business referrals and development of innovative, multi business solutions that only BNY Mellon’s 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, I’ll 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 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 to Emily as our CFO.

See also 15 Countries that Produce the Most Wind Energy and 21 Biggest Airports in the World.

Emily Portney: Thank you, Robin, and good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year-over-year basis unless I specify otherwise. Starting on Page 3 of our financial highlights presentation. Total revenue of $3.9 billion in the fourth quarter was down 2% on a reported basis and up 9% excluding notable items. As Robin mentioned earlier and as you can see at the bottom of the 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 net securities losses recorded in investments and other revenue, resulting from a previously disclosed repositioning of our securities portfolio, which I will expand upon later.

Fee revenue was flat as the benefit of lower money market fee waivers and healthy organic growth across our Security Services and Market and Wealth Services segment was offset by the impact of lower market values from both equity and fixed income markets and the unfavorable impact of a stronger US dollar. Firm wide assets under custody and/or administration of $44.3 trillion declined by 5%. The headwind of lower market values and currency translation was tempered by continued growth from both new and existing clients and assets under management of $1.8 trillion decreased by 25%. This also reflects lower market values and the unfavorable impact of the stronger US dollar. And again, this headwind was partially offset by cumulative net inflows.

Investment in other revenue was negative $360 million in the quarter on a reported basis. Excluding notable items, investment in other revenue was a positive $100 million, a good results reflecting another quarter of strong fixed income trading performance. And net interest revenue increased by 56%, primarily reflecting higher interest rates. Expenses were up 8% or 2% excluding notable items. Notable items amounted to approximately $200 million in the quarter, primarily severance expenses and provision for credit losses was $20 million, primarily reflecting changes in the macroeconomic forecast. On a reported basis, EPS was $0.62, pretax margin was 17% and return on tangible common equity was 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 was 24%.

Touching on the full year on Page 4. Total revenue grew by 3% on a reported basis and by 6%, excluding notable items. Fee revenue was flat. Investment and other revenue was negative $82 million or positive $340 million, excluding notable items and net interest revenue was up 34%. Expenses were up 13% on a reported basis and up 5% excluding notable items, consistent with our goal to drive 2022 expense growth towards the bottom half of the 5% to 5.5% range that we guided to throughout the year. Excluding the benefit from the stronger US dollar, expenses ex notables for the year were up 8%. Provision for credit losses was $39 million compared to a provision benefit of approximately $230 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, up 8% year-over-year. Pretax margin was 29% and return on tangible common equity was 21%. On to capital and liquidity on Page 5. Our consolidated Tier 1 leverage ratio was 5.8%, up approximately 35 basis points sequentially, primarily reflecting capital generated through earnings, the sale of Alcentra and an improvement in accumulated other comprehensive income, partially offset by capital returned through dividends. Our CET1 ratio was 11.2%, up approximately 120 basis points, driven by the increase in capital and lower risk weighted assets. And finally, our LCR was 118%, up 2 percentage points sequentially. Turning to our net interest revenue and balance sheet trends on Page 6, which I will also talk about in sequential terms.

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 costs. Once again, NIR in the quarter exceeded our expectations as noninterest bearing deposits remain elevated. Average positive balances decreased by 2%. Within this, interest bearing deposits increased by 2% and noninterest bearing deposits declined by 11%. Despite this decline in the quarter, the share of noninterest bearing deposits as a percentage of total deposits has held up better than expected at 27%, which is higher than historical averages, and we continue to actively manage our deposit footprint to optimize across NIR, liquidity value and return on capital. 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 NIR 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% or 250 to 300 basis points more than what we were earning on the securities that we sold. While we realized an approximately $450 million pretax loss with this sale, this transaction was virtually capital neutral because the unrealized loss was already recognized in AOCI. In fact, we freed up roughly $150 million of CET1 capital as the higher credit quality replacement portfolio consumes significantly lower RWA.

Moving on to expenses on Page 7. 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 efficiency savings, higher revenue related expenses, including distribution expenses as well as the impact of inflation, partially offset by the benefit of the stronger US dollar. Turning to Page 8 for a closer look at our business segment. Security Services reported total revenue of $2.2 billion, up 18% compared to the prior year. Fee revenue increased 2% and net interest revenue was up 79%, driven by higher interest rates, partially offset by lower balances. As I discussed the performance of our Security Services and Market and Wealth Services segment, I will focus my comments on investment services fees for each line of business, which you can find in our financial supplement.

In Asset Servicing, investment services fees were down 1% as the impact of lower market values at a stronger US dollar were mostly offset by the abatement of money market fee waivers, higher client activity and net new business. In Issuer services, investment services fees were up 7%, driven by the reduction of money market fee waivers and higher depositary receipt issuance and cancellation fees. Next, market and wealth services on Page 9. Market and Wealth Services reported total revenue of $1.4 billion, up 19%. Fee revenue was up 14% and net interest revenue increased by 33%. In Pershing, investment services fees were up 22%. This increase reflects lower money market fee waivers, higher fees on suite balances and higher client activity, partially offset by the impact of lost business in the prior year and lower market levels.

Net new assets were $42 billion, reflecting a very healthy level of growth from existing clients while flows related to dividends and year end capital gain distributions were naturally more muted than in the prior year quarter, and average active clearing accounts were up 4% year-on-year. In Treasury Services, investment services fees were flat. The benefit of lower money market fee waivers and net new business was offset by the negative impact to 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 US government clearance volumes driven by continued demand for US treasury securities due to elevated volatility and an evolving monetary policy.

Now turning to Investment and Wealth Management on Page 10. Investment and Wealth Management reported total revenue of $825 million, down 19%. Fee revenue was down 18% and net interest revenue was up 2%. Assets under management of $1.8 trillion declined by 25% year-over-year. This decrease largely reflects lower market values and the unfavorable impact of the stronger US 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 products and $27 billion of net inflows into cash. Among our long term active strategy, liability driven investments continued 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, a very healthy net inflows into our cash strategies come on the back of strong investment performance, most notably in our drives money market fun.

In Investment Management, revenue was down 22% due to lower market value, and mix of cumulative net inflows, a stronger US dollar and the sale of Alcentra partially offset by lower money market fee waivers. And finally, in Wealth Management, revenue was down 12%, primarily reflecting lower market values. Client assets of $269 million were down 16% year-over-year, primarily driven by lower market value. 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 severance. Now let me close with a few comments on how we’re thinking about 2023. With regards to NIR, we have positioned ourselves for another year of healthy growth. And so we currently project an approximately 20% year-over-year increase for the full year and that assumes current market implied interest rates.

Having said that, the range of potential outcomes remains relatively wide and the quarterly trajectory of NIR will be dependent on various factors, including the path of deposit levels and mix as well as interest rates. As it relates to fees, as you know, market driven factors like equity and fixed income market levels, currency and industry dominated fee dynamics in 2022 while underlying growth across Security Services and Market and Wealth Services was offset by headwinds in Investment and Wealth Management. 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 the 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 4.5% 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 finally, I want to close with a few remarks on capital management. As you saw, we ended 2022 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 AOCI to par, we’re now resuming buybacks and we’d expect to return north of 100% of earnings through dividends and buybacks in 2023.

With that, operator, can you please open the line for questions.

Q&A Session

Operator: Our first question comes from Brennan Hawken.

Brennan Hawken: First, congrats to Emily on your new role. I’m sure you won’t miss our current quarterly, but it was a real pleasure to work with you here these past few years. So I’d love to drill down on the NII expectations. You indicated that it assumes current market rates, but maybe you could please walk us through some of the more specific drivers, primary assumptions and moving pieces that underlie that 20% growth assumption.

Emily Portney: Good morning, Brennan. And it’s been great to work with all of you as well. So if you think about the NIR outlook, the first thing I would just mention is that we use the forward curves to as a basis of our projection. So we don’t try to get . 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. The curves outside the US assume about 125 to 150 basis points worth of hikes by both the and the ECB. 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, meaningfully shortening duration, adding floaters, et cetera.

So with all of that, we do continue to expect to benefit from significantly higher reinvestment yields. Now tempering that a bit, we do expect deposits to decline modestly, call it, low to mid single digits from fourth quarter average. And finally, as it relates to marginal betas, 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 say there’s a lot of uncertainty in the market and certainly, we’re prepared for many different outcomes. It will be highly dependent upon deposit levels and there’s some upside there if we retain more NIVs.

Brennan Hawken: Capital accretion was really encouraging this quarter you guys have the rather large buyback announced and you made some positive comments on it in your prepared remarks, Emily. So how should we — AOCI was really, I think, the source of the big surprise from my perspective. How should we be thinking about AOCI accretion if yields remain stable from here, what does that timeline look like?

Emily Portney: So assuming the portfolio doesn’t change and forward rates, are realized. The latest — our latest forecast would expect to recover probably close to 50% of the $2.5 billion of unrealized loss in the AFS portfolio over the course of, call it, 15 to 18 months.

Operator: Our next question comes from Alex Blostein.

Alex Blostein: I was hoping we could start with a question around fixed income markets. There’s generally a broad set of bullishness on the outlook for fixed income flows, particularly with respect to ETFs. I’m curious, as a very large servicer of fixed income assets, and you guys just kind of touched that whole ecosystem in multiple different ways. Can you help us frame how BK’s fees overall and servicing fees specifically could 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 fee outlook for ’23.