BNY Mellon hosted a conference call and webcast to discuss their second quarter 2023 earnings. Marius Merz, the Head of Investor Relations, welcomed the participants and Robin Vince, President and Chief Executive Officer, and Dermot McDonogh, Chief Financial Officer, gave introductory remarks. The company delivered good financial performance during the quarter and is taking actions to position the firm for higher growth and efficiency.

BNY Mellon reported a 26% increase in earnings per share and 5% increase in revenue year-over-year. The company is focused on driving pre-tax margin expansion and has achieved positive operating leverage as a result. They are also cutting expense growth by half this year and are ahead of their plans. The balance sheet is strong and they have demonstrated their capacity to withstand an extreme stress scenario.

BNY Mellon increased their quarterly common dividend by 14% and remain focused on driving higher underlying growth. They have a diversified business model which saw strength in the second quarter. They launched Wove, an open architecture wealth management platform, which has been well-received by clients and industry influencers. Wove is a proof point of BNY Mellon's ability to execute quickly when they empower their people and leverage their platforms.

BNY Mellon has been cultivating a more commercially-oriented mindset with a greater focus on execution and innovation, such as their strategic alliance with MoCaFi to enable underserved communities to access banking services. To help operationalize this potential, Cathinka Wahlstrom was welcomed as the first Chief Commercial Officer and a member of the Executive Committee. BNY Mellon is looking to embed their ONE BNY Mellon initiative into the operations of the company through training, incentivizing their people to collaborate, and developing approaches to multiproduct solutions. The macro environment carries uncertainties for the months ahead due to interest rates, quantitative tightening, and elevated U.S. treasury issuance activity.

In the second quarter, total revenue was up 5% year-over-year and net interest revenue was up 33%. Fee revenue was down 2% due to the sale of Alcentra and lower FX revenue, partially offset by the abatement of money market fee waivers. Firm-wide AUC/A increased by 9%, and assets under management decreased by 2%. Investment and other revenue was $97 million.

In the second quarter, expenses were flat on a reported basis and up 1% excluding notable items due to higher investments and revenue-related expenses, partially offset by efficiency savings. Earnings per share were $1.30, up 26% year-over-year, and the pre-tax margin improved to 30%. Capital and liquidity ratios remained roughly unchanged, with the Tier 1 leverage ratio at 5.7% and the CET1 ratio at 11.1%. The company returned 72% of earnings in the quarter, including $300 million of common dividends and $450 million of buybacks, and 119% of earnings year-to-date. The consolidated liquidity coverage ratio was 120%, and the net stable funding ratio was 136%.

Net interest revenue was down 2% quarter-over-quarter due to a shift in deposit mix, but was partially offset by higher interest rates. Expenses were flat year-over-year and increased 1% excluding notable items. Investments and revenue-related expenses were higher, but were partially offset by efficiency savings and the Alcentra divestiture. Securities Services and Market and Wealth Services segments had investment services themes described in the earnings press release and financial supplement.

Securities Services reported total revenue of $2.2 billion, an increase of 12% year-over-year, with fee revenue down 2%. Within this, investment services fees were flat and FX revenue was down 20%. Asset Servicing saw healthy underlying growth from new and existing clients, offset by lower client transaction activity. Market and Wealth Services reported total revenue of $1.4 billion, up 10%, with fee revenue up 5% and net interest revenue increasing by 24%. In Pershing, investment services fees were up 4%, but net new assets were negative $34 billion due to a deconversion of a regional bank client. Despite this, Pershing's underlying momentum and prospects remain confident.

Pershing's core platform and access to the company's strength and breadth is being recognized by clients as a differentiator. Treasury Services saw a 2% decrease in investment services fees, but Clearance and Collateral Management had a 10% increase. Investment and Wealth Management reported total revenue of $813 million, a 10% decrease year-over-year, partially due to a decrease in U.K. fixed income markets and the Alcentra divestiture. Net outflows from long-term products were seen in the quarter as clients derisk and rebalance their portfolios.

The Other segment's results are shown on page 10, while net interest revenue is expected to grow 20% year-over-year. Expense growth is expected to remain at 4%, excluding notable items, with the goal of driving it closer to 3%. Despite competitive investment performance, there were $9 billion of net outflows from cash. Revenue decreased 9% and 10% in Investment Management and Wealth Management, respectively, due to the sale of Alcentra, lower net interest revenue, and changes in product mix. Client assets increased 8% year-over-year.

Bank of New York has managed to avoid deposit cost pressure and maintain its NII outlook by managing both sides of the balance sheet. The company is pleased with the results of the first half of the year and is confident in its outlook for the back half, with a mid single-digit decline in deposits expected.

Q2 saw elevated deposits due to the debt ceiling, and average deposits were around $277 billion, up 1% sequentially. In the back half of the year, deposits are expected to decline due to treasury issuance. Despite this, the company expects 20% growth overall. The company's client base is largely institutional and deposits are priced competitively. Fee revenue was good in this quarter, and the company expects it to continue in the next quarter.

Dermot McDonogh states that their backlogs are good and they are winning their fair share of deals. He also mentions that their yet to be installed book of business in Asset Servicing is healthy and strong. In response to a follow-up question about deposits, McDonogh states that the catch up from last quarter has happened in Q2 and the cumulative basis are in the mid to high 70s for dollars.

BNY Mellon has spent the past nine months conducting strategic reviews of their Investment Management business and have concluded that it is possible to bring the pre-tax margin back to 30%. They have set out to make changes to achieve this goal, such as re-pricing their deposit book and looking to divest or add scale to subscale businesses.

BNY Mellon's plan is to focus on improving their top line, meeting client needs, strong investment performance, and new products, as well as streamlining and expense management. They plan to lean into their superpower, distribution, and use their $2.5 trillion worth of retail distribution to stretch their legs and grow. Betsy Graseck asked about the life of the deposits and how that would impact the securities portfolio, to which Dermot McDonogh replied.

BNY Mellon has $277 billion in average balance sheet, two-thirds of which are operational or "sticky" deposits. The company has repositioned its portfolio with a focus on higher for longer interest rates, with 60% of the portfolio in AFS and 60% of that fixed with a weighted average maturity of 4 years. This repositioning will result in a 300 basis point yield pickup over the next 12 to 18 months. Betsy Graseck then asked if the deposits already reflect the current rates, to which Dermot McDonogh confirmed.

Dermot McDonogh and Betsy Graseck discuss the upcoming Basel III and game rules that will add an operational risk RWA component to the standardized approach. McDonogh explains that the bank has been preparing for the new rules for the past 12 months and expects capital levels to be higher, but they will be able to adapt. Steven Chubak then questions McDonogh and Vince about noninterest-bearing deposits, which are now within the 20-25% guidance or target range, but other banks have offered more conservative guidance.

Dermot McDonogh explains that the resiliency in NIB trends is driven by the more diversified range of businesses the company has, compared to 20 years ago. They also take into account what industry analysts and their clients are saying, and have concluded that a 20% to 25% range is the most appropriate for their NII guidance over a 12-month period.

BNY Mellon's Securities Services margin is currently at 29%, with a goal of reaching 30%, and they are pleased with the progress. However, the Investment Management margin is currently at a low teens level, and they are aiming to get back to a 30% pre-tax margin. To do this, they need to focus on execution, and take advantage of their superpower of distribution by combining their distribution capabilities with their Investment Management manufacturing capability.

Robin Vince explains that immediate payments, which includes FedNow and the clearinghouses' real-time payments rails, is an opportunity for disruption in the payments ecosystem as it hasn't been disrupted in the past 20 years. This disruption could be beneficial for expenses, capital efficiency, and revenue for Bank of America.

BNY Mellon has been investing in real-time immediate payments, and was the first bank to do a test in the original rails. They are positioning their payments platform as rail-agnostic, so clients can make payments without having to worry about which rails to use. BNY Mellon is also offering new services such as real-time request for payment and bill pay capabilities, as well as additional fraud services. They believe they can benefit from this unconflicted approach without sacrificing much on the other side.

Dermot McDonogh discussed the strategies Bank of New York is using to achieve operating leverage for the year. These strategies include encouraging clients to do more with Bank of New York, controlling expenses through digitization, automation, and eliminating manual processes, and managing net interest income outlook.

Dermot McDonogh discussed the bank's strategy for the year and how they have managed to stay on course despite unexpected events in the financial markets. He then addressed a follow-up question from Ebrahim Poonawala about the bank's outlook for net interest income over the next 12 months. McDonogh stated that the bank's forecast for NII will depend on any rate cuts that may occur, as well as any surprises in terms of deposits.

Dermot McDonogh and Robin Vince both discuss how the Federal Reserve's decisions will affect NII. McDonogh believes that the market has come into line with the Fed's decisions in the past 8 months and that the Fed is likely to hike in July. He also suggests that the balance sheet is positioned for higher rates in the next 12 to 18 months, and that they are neutral on the outcome. Vince states that they are focused on quick wins to clean up inefficient operations, and that they are looking for larger moves in the future.

The company is taking a variety of initiatives, both short-term and long-term, to increase efficiency and reduce costs. These include ideas generated by employees, organizational restructuring, and digitization of systems and processes. The benefits of these initiatives will be seen over the course of the next few years, but success depends on proper execution.

Dermot McDonogh discussed the firm's strategy for meeting their expense expectation of 4%, which is down from 8%. He discussed how the Executive Committee and the team are working together to execute this in a different way. He then focused on two segments, Market and Wealth Services and Securities Services, and discussed how they are investing in the former and increasing the margin in the latter.

The ONE BNY Mellon initiative was started as a movement to increase wallet share with existing clients, attract new clients, and get people focused on the opportunity. The median client at BNY Mellon is a consumer products from one of their businesses, so this initiative is a way to change that. There is potential for revenue in the next 1-2 years, and BNY Mellon is looking for cross-sell traction.

BNY Mellon has set targets for 2023 and has achieved 80% of them at the half year mark. To further their growth initiatives, they have hired Cathinka to help industrialize their sales and relationship management. They are also investing in growth in terms of their existing businesses, such as their institutional clearing platforms. These platforms are embedded in their Clearance and Collateral Management and Pershing businesses.

BNY Mellon has taken multiple platforms and businesses and combined them to form a single institutional clearing business. This has been done to increase efficiency and client business. Bedell then asked McDonogh if clients were looking to shift out of NIBs for better deposit pricing, and if contracts had provisions for revenue depending on whether they paid VFC or compensating balance. McDonogh declined to answer in detail, stating that he could only give a firm view.

Dermot McDonogh and Robin Vince discussed the potential monetary benefits that State Street will receive from the increased treasury issuance in the second half of the year. They noted that the growth of the treasury market would be beneficial to State Street due to the role they play in the market, and mentioned that Clearance and Collateral Management has seen growth as a result.

Gerard Cassidy is asking Dermot McDonogh about how the company can reposition its portfolio in the event of a surprise rate cut. McDonogh explains that since a large part of the portfolio is in cash, it can be quickly repriced up or down, and that the CIO has taken steps to protect against a rate cut. McDonogh also states that the company is broadly neutral up or down over the next 12 to 18 months. Rob Wildhack then asks about the margin improvement the company is aiming for and what portion of that will come from expense discipline.

Dermot McDonogh states that Emily and Roman are focused on providing a better cost-to-serve model through automation and digitization. They have a strong backlog and a good medium-term opportunity set. Excluding the deconversion, Pershing had 4% growth and is a competitive business that is #1 or top 3 in different areas.

The speaker discussed the positive feedback received from the launch of Wove at the Florida Insight conference and their plans for the next few quarters. They plan to have some exciting deals to discuss in October. When asked about the revenue from the RIA custody side, the speaker noted that they are a market leader, and have $2.3 trillion of assets on their platform. They are aware of potential competitors but are confident in their scale and innovation.

BNY Mellon has been innovating their services to focus on the investor and the adviser, offering direct indexing, financial planning, tax-aware investing, and market-leading technology. They are confident that their breadth of capabilities will set them apart from the competition and provide the best service to their clients.

This summary was generated with AI and may contain some inaccuracies.