Bank of New York Mellon Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 18, 2022

There are 14 speakers on the call.

Operator

Good morning, and welcome to the 2022 First 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. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent.

Operator

I will now hand the call over to Marius Mertz, BNY Mellon Head of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to our Q1 2022 earnings call. Today, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymelon.com. I'm joined by Todd Gibbons, our Chief Executive Officer Robin Vince, President and CEO Elect and Emily Portney, our Chief Financial Officer. Todd will provide introductory remarks and then Emily will take you through the earnings presentation.

Speaker 1

Following their remarks, there will be a Q and 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 Evonik's press release, financial supplements and financial highlights presentation, all available on the Investor Relations page of our website. Forward looking statements made on this call speak only as of today, April 18, 2022 and will not be updated. With that, I will turn it over to Todd.

Speaker 2

Thank you, Marius, and thank you, everyone, for joining us this morning. Referring to Slide 2 of our financial highlights Presentation. We continue to see healthy underlying momentum across most of our businesses and reported revenue of $3,900,000,000 Which was roughly flat year over year. And it was up 2% if you exclude the impact of government sanctions and the additional actions that were taken related to Russia. Now we're in an increasingly uncertain environment, including the war in Ukraine, volatile markets and persistently higher inflation, which will require more meaningful monetary policy Mellon.

Speaker 2

It is in times like these that our strong lower risk balance sheet and the resiliency of our business model differentiates us. In the face of the tragic events occurring in Ukraine, we ceased new banking business in Russia and suspended investment management purchases of Russian securities. Since the beginning of the war, we stepped up our humanitarian efforts as well as the support for our employees and the members of our community who have been impacted. And we continue working for our multinational clients that depend on our custody and record keeping services to manage their exposures. Expenses of $3,000,000,000 were up 5.5% as we continue to invest in further growth and efficiency initiatives.

Speaker 2

And we reported EPS of $0.86 and that included an $0.08 impact related to Russia. We continue to generate a significant amount of capital and return close to 60% of earnings to our shareholders, primarily through common dividends. Throughout the quarter, we took actions in the investment securities portfolio to temper the immediate impact to capital from higher interest rates. And we expect higher rates to be both a positive for fees and net interest revenue going forward. Emily will discuss the details for the quarter shortly, but let me briefly touch on a few business highlights.

Speaker 2

In Asset Servicing, we managed to keep the strong sales momentum with which we entered the year. Wins and win rates improved off of what had been a healthy quarter a year ago. 1 in mandated AUCA is up meaningfully both year over year and quarter over quarter, producing a strong pipeline of AUCA to be installed in 2022 and beyond. And our retention rate was an exceptional 97%. Our ETF business continues Stand out having increased the number of funds serviced by 4% since the beginning of the year and we were recognized as Best ETF Custodian at the ETF Express European Awards last month.

Speaker 2

We also continued building momentum as a leader in digital assets having been selected by Circle as primary custodian for the And late last week, we announced an exciting data and digital collaboration with Aon. Together, we will focus on supporting the ESG needs of clients globally, leveraging our collective data and analytics capabilities and unique data sets to help clients make better, more informed investment strategy decisions by providing enhanced data sets, advanced analytics and actionable insights into ESG portfolio level exposures. In Pershing, year over year comparisons continue to be impacted by the previously closed lost business in the second half of last year. And remember the Q1 of last year was exceptionally strong on the back of elevated transaction activity. Now while there are puts and takes here that can impact the amount of organic growth in any given quarter, we remain extremely excited about Pershing's prospects.

Speaker 2

Our clients are doing well and as they capture new assets, we're growing with them and we're well positioned to benefit from a number of secular growth trends Such as the rapid growth in number of Breakaway Advisors and digitally oriented wealth firms. Of course, consolidation in the sector can leave us on either side of any particular transaction, but over time we find that our clients who are typically the largest and most complex players in the industry are more often than not on the acquiring side. And in Pershing X, we continue to make solid progress since announcing the initiative back in October. Following on last quarter's acquisition of Optimal Asset Management, this quarter we made several key hires which completed the filling out of our leadership team And we folded Allbridge's wealth reporting and data aggregation tool under the PershingX umbrella. This alignment strengthens PershingX's data offering, allows it to draw on Allbridge's engineers to accelerate development of the platform and provide clients with access to a broader suite of technology solutions.

Speaker 2

Shifting to clearance and collateral management, there we delivered a strong quarter of organic growth on the back of higher securities clearance volumes and as collateral management balances remained elevated at a record $5,000,000,000,000 in the quarter. Market volatility is driving dealer demand for U. S. Treasuries And we're also seeing a promising pickup in new collateral balances related to our future of collateral initiative, with asset balances already being mobilized to the EMEA region And growing, providing our clients with optimization and funding benefits. Treasury Services also delivered another solid quarter of growth driven by higher payment volumes and an improved product mix.

Speaker 2

The business continued to build on its recent track record of industry first, this quarter being the 1st bank to successfully connect Mellon. And we're excited to welcome Jennifer Barker The company as the new CEO of the business starting in May. Jennifer brings almost 2 decades of global client experience in the treasury service industry And she is the perfect leader to build upon the business' recent success and innovative track record. In Investment Management, given the environment, Mellon. That said, investment performance remains strong With over 80% of our top 30 strategies by revenue in the top 2 quartiles on a 3 year basis.

Speaker 2

We're also seeing good traction with our Mellon. We launched the bny Mellon Responsible Horizons corporate bond ETF managed by Insight And total ETF AUM grew by 8% quarter over quarter. I also want to highlight an exciting new share class for the Dreyfus Government Cash Management Fund called BOLD. This share class, which provides investors the opportunity to make a direct social impact Supporting Howard University, a historically black college and university already grew to over $1,000,000,000 in AUM within only weeks of launch at the end of February. We also continue to be pleased with the healthy growth that we're seeing in wealth management, client acquisition rates continue trending in the right direction And our improved digital tools and expanded banking offering are driving deeper client relationships as evidenced by the solid loan and deposit growth.

Speaker 2

As an example, during the quarter, we successfully completed the initial rollout of LoanPath, our new digital platform for investment credit lines, which allows us to streamline our processes and significantly improve the client experience at the same time. Across the franchise, we're honored to have 50 companies around the world for deploying blockchain technology to speed up business processes, increase transparency And potentially save substantial cost for the industry. We're also proud to have been named to Barron's 100 Most Sustainable Companies list, which recognizes the companies that score highest across 230 environment, social and governance indicators. Now before I turn it over to Emily, I'd also like to touch on my decision to retire as CEO on August 31 and the appointment of Robin as my successor. When I joined BNY Mellon 36 years ago, I was drawn by the company's rich history, its special culture and the important place it occupies in the global financial system.

Speaker 2

Over the last 4 decades, we have undergone an incredible transformation from the traditional commercial bank that we once were to the globally significant lower risk financial services company that we are today. And I'm particularly proud of what we've accomplished over the last couple of years. With a new leadership team in place, we launched a compelling agenda for growth and innovation under which we've already seen a meaningful pickup in organic growth. We've also really evolved our culture. Today, we're much more performance oriented and client centric.

Speaker 2

We're more nimble in our decision making And we're doing a lot better at connecting the dots across our differentiated businesses. When our strategic ambitions and the strength of our franchise were tested by the global pandemic, Our people once again rose to the occasion and not only delivered on our commitments to our clients, communities and shareholders, We also have made continue to make significant progress in our journey to position the company for the future. In Robin, we have found an outstanding leader to build on this agenda And to lead BNY Mellon into its exciting next chapter. Having known Robin as a client for almost a decade, I was thrilled to recruit him for the company in 2020 and to work directly with him these last 2 years. Since then, he has not only had a profound impact on the company through his leadership of Pershing, Treasury Services, Clearance and and our markets businesses, but he has been a trusted strategic advisor to me and the rest of the executive management team.

Speaker 2

Rob and I are working closely together and with our executive committee to ensure a seamless transition in the next couple of months. With that, I'll turn it over to Emily.

Speaker 3

Thank you, Todd. And I'll add my congratulations to you on your retirement, and I want to thank you for your leadership and mentoring over the years. So good morning, everyone. As I walk you through the details of results for the quarter, all comparisons will be on a year over year basis unless I specify otherwise. Starting on Page 3.

Speaker 3

Total revenue was flat and included an approximately $90,000,000 reduction related to Russia, a notable item this quarter. Fee revenue was down 3% or flat excluding the impact related to Russia. The benefit of higher market value as well as continued momentum across many of our businesses was offset by the impact of lost business in Pershing and Corporate Trust in the prior year, lower FX revenue off elevated levels in the Q1 of last year and the unfavorable impact of a stronger U. S. Dollar.

Speaker 3

While not on the page, firm wide AUCA of $45,500,000,000,000 increased by 9%, of which 8% is growth from new and existing clients and 1% is driven by the impact of higher market values net of currency headwinds. AUM of $2,300,000,000,000 increased by 2% year over year, reflecting cumulative net inflows and higher market values, partially offset by the unfavorable impact of the stronger U. S. Dollar. Money market fee waivers, net of distribution and servicing expense, were $199,000,000 in the quarter, an improvement of $44,000,000 compared to the prior quarter.

Speaker 3

This reflects The benefit of higher average short term interest rate partially offset by higher money market fund balances. Once again, our growth in money market fund balances meaningfully outpaced the industry. Together, the impact of lower waivers and higher balances drove a sequential increase in pre tax income of close to $60,000,000 On a year over year basis, fee waivers had a de minimis impact to our fee revenue. Investment and other revenue was 70,000,000 And net interest revenue increased by 7%, reflecting higher interest rates on interest earning assets, Change in mix and lower funding expense. Expenses were up about 5.5% or 6% excluding notable items.

Speaker 3

Provision for credit losses was 2,000,000 The benefit from the continued improvement in the credit portfolio led by commercial real estate was more than offset by a $15,000,000 reserve build on interest bearing deposits with banks in Russia. And our effective tax rate was approximately 17% as expected due to the annual vesting of stock based awards in the Q1, which provided a seasonal benefit. EPS was $0.86 and included an $0.08 negative impact of the notable items related to Russia. Pre tax margin and ROTCE were 23% 15%, respectively, on a reported basis and 25% 17% excluding notable items. On to capital and liquidity on Page 4.

Speaker 3

Our consolidated Tier 1 leverage ratio, which continues to be our binding constraint, was 5.3%, down 15 basis points sequentially. The sharp rise in interest rates resulted in a $1,500,000,000 impact to unrealized losses in our available for sale securities portfolio. And we distributed roughly 60% of our earnings to our shareholders predominantly through dividends. The impact of the reduction of capital on our Tier 1 leverage ratio was partially offset by the benefit of a smaller balance sheet quarter over quarter. Our CET1 ratio was 10.1%, down approximately 100 basis points compared to the end of the prior quarter, primarily reflecting the negative mark to market of the AFS portfolio as well as an approximately 30 basis point impact from the adoption of STACKER.

Speaker 3

Finally, our LCR was 109% consistent with the prior quarter. Turning to our net interest revenue and balance sheet trends on Page 5, which I will talk about in sequential terms. Net interest revenue was $698,000,000 up 3% sequentially. This increase reflects higher rates as well as continued growth in loan balances, partially offset by lower cash and securities balances. Average deposit balances declined by 3%, while average interest earning assets were down 2% sequentially.

Speaker 3

Within this, loan balances were up nicely about 3% sequentially. Moving on to expenses on Page 6. Expenses for the quarter were $3,000,000,000 up about 5.5% year over year and up 6% excluding notable items from last year. This increase primarily reflects investments net of efficiency savings and it also reflects higher revenue related And this is, which were partially offset by the favorable impact of the stronger U. S.

Speaker 3

Dollar. A few additional details regarding noteworthy bmwymelon. And net occupancy expense was down 8% as we continue to optimize our real estate portfolio. Turning to Page 7 for a closer look at our business segment. Securities Services reported total revenue of $1,800,000,000 flat compared to the prior year.

Speaker 3

Excluding the impact of the reduction related to Russia, revenue was up 4%. Fee revenue was down 5% and up 1% excluding the impact of Russia. And net interest revenue was up 6%, reflecting higher interest rates partially offset by lower deposit balances. As I discuss the lines of business within our Security Services and Market and Wealth Services segments, I will focus My comments on the investment services fees for each business, which you can find in our financial supplement. In Asset Servicing, investment services fees grew by 5%, primarily reflecting higher market values and net new business, partially offset by slightly lower transaction activity from existing clients.

Speaker 3

As Todd mentioned earlier, Our sales momentum continues to be strong compared to the Q1 of last year. Our Issuer Services business was significantly impacted by the reduction related to Russia. Investment Services fees were down 43%. Specifically, we accelerated amortization of deferred costs for the depository receipt services of Russian companies, which is a contra revenue item. Excluding this impact, investment services fees were down approximately 9% And this primarily reflects lower depository receipt fees and the impact of lost business in the prior year in Corporate Trust.

Speaker 3

Next, Market and Wealth Services on Page 8. Market and Wealth Services reported total revenue of $1,200,000,000 flat compared to the prior year. Fee revenue was also flat and net interest revenue was up 2%, reflecting higher interest rates and higher loan balances partially offset by lower deposit balances. In Pershing, investment services fees were down 6%. This reflects the impact of lost business in the prior year as well as lower transaction activity versus a very active Q1 of last year, partially offset by the impact of higher market value.

Speaker 3

Pershing continued to deliver solid underlying growth. Clearing accounts continued to grow at a 4% annualized growth rate and we gathered net new assets of $18,000,000,000 in the quarter. In Treasury Services, Investment Services fees were up 4% as the business saw growth from both new and existing clients and continue to gain traction in higher margin products such as digital payments. And in Clearance and Collateral Management, Investment Services fees were up 8%, reflecting both higher tri party collateral management balances as well as higher clearance volumes. Now turning to Investment and Wealth Management on Page 9.

Speaker 3

Investment and Wealth Management reported total revenue of 964,000,000 down 3%. Fee revenue was also down 3%. Investment and other revenue was a negative $8,000,000 and included losses on seed capital. And net interest revenue was up 19%, reflecting higher interest rates as well as higher Deposits and Loan Balances. As mentioned earlier, we ended the quarter with assets under management of $2,300,000,000,000 up 2% year over year.

Speaker 3

This increase primarily reflects the benefit of cumulative net inflows into both cash and long term products as well as higher market value, partially offset by the unfavorable impact of the stronger U. S. Dollar. As it relates to flows in the quarter, we saw $1,000,000,000 of net outflows from long term products and $11,000,000,000 of net outflows from cash. Having said that, LDI continued to be a bright spot with $17,000,000,000 of net inflows.

Speaker 3

In Investment Management, revenue was down 6%. Higher market values were more than offset by lower seed capital results and lower equity income, as well as the unfavorable impact of the stronger U. S. Dollar, which is more impactful in Investment Management given that approximately 50% of our revenue is earned in foreign currencies. Wealth Management revenue grew by 4%, primarily reflecting higher net interest revenue and higher market value.

Speaker 3

Client assets of $305,000,000,000 were up 4% year over year reflecting higher market and cumulative net inflows. And we continue to see healthy growth in both deposits and loans as we've expanded our banking offering and deepened our client relationships. Page 10 shows the results of the other segment. I will close with an update on our outlook for the full year of 2022. Obviously, given the backdrop of geopolitical uncertainty, rapidly evolving global monetary policy and the continued overhang of the pandemic, The macroeconomic environment is very uncertain.

Speaker 3

For our outlook, we assume a scenario where interest rates follow the forward curve and market values stay relatively flat to where they were at the end of the Q1. With this in mind, We project full year NIR to be up roughly 13% compared to 2021. Embedded in this assumption, We expect the correlation between rates and deposit runoff to be consistent with what we have seen in the past. We now expect fee revenue to be up 4% to 5%. This includes a tailwind of about 5% from the reduction of fee waivers, Organic growth of 1% plus and a 1% to 2% headwind from the impact of Russia market value, currency and other factors.

Speaker 3

For expenses ex notable items, we now expect an increase of approximately 5%, slightly lower than our previous guidance. With regards to capital management, we've taken a number of actions to reposition our portfolio to reduce the impact of higher rates and credit spreads. For example, we've lowered duration in the AFS portfolio, reduced credit exposure and moved assets to HTM. These actions have reduced our AOCI rate sensitivity by about 25% going forward. Having said that, we remain cautious on buybacks in the near term.

Speaker 3

And based on the environment we described earlier, we ultimately We do continue to expect to return close to 100% of earnings to our shareholders over time. Last but not least, we continue to expect our effective tax rate for the year to be approximately 19%. With that, operator, can you please open the line for questions?

Operator

Thank you. We will now take our first question from Brendan Hawken from UBS. Please go ahead.

Speaker 4

Good morning. Thank you for taking my Questions. First, Todd, congrats on your pending retirement and Robin, Congrats on the new role. Look forward to working closer with you. Before A question though for Robin.

Speaker 4

I'd love to drill down a little bit, Emily, on what you talked about more tactically around The actions you've taken with the balance sheet to reduce the AOCI sensitivity, could you maybe expand on that a bit and touch on Some of the specific actions in greater detail and what impact we could expect on the outlook For NIR and how that might inform your updated expectation?

Speaker 3

So, Brennan, good morning. Just taking a quick step back, I do want to do a shout out to our CIO because I think that team really did do a great job in terms of both Optimizing NIR, but also protecting against AOCI volatility during the quarter. As I mentioned in my prepared remarks, and I'll give a bit more color, We shortened the duration of the AFS portion of the portfolio. It's now a little over one and Half years down from more than 2 years at the end of last quarter. We've transferred longer dated securities to HTM.

Speaker 3

You'll notice That HCM now as a proportion of the securities portfolio is about 40%. That's up from about 36% at the end of last year. We've also reduced convexity and credit risk in the portfolio. And so all of these things, I mean, we did obviously, there was a reduction in AOCI of $1,500,000,000 during the quarter, but it would have been larger had we not taken these actions. And as you rightfully point out, These actions have also made us a lot less sensitive to rising rates going forward.

Speaker 3

And As I also, I think, mentioned, we've reduced just to put a finer point on it, we've reduced DV01 in the AFS portfolio in excess of 20

Speaker 4

Robin, maybe one for you stepping back and widening out here. Understand that you've just been named to the job, But you're not new to Bank of New York for sure. So at this point, can you provide any details or Plans about your goals or targets or maybe at least like a roadmap for when we could expect to hear more from you about your goals and your plans.

Speaker 5

Sure. Good morning, Brennan. And I appreciate the comment and the question. So you're right. I'm not completely new to the firm, which is certainly an advantage for me in coming in and taking on the role.

Speaker 5

But I will say that I'm being very diligent, as Todd referred to earlier on in his comments about the transition. And so we're working very closely together. And I don't want to be complacent about the fact that there's a great opportunity for a CEO elect To have the opportunity to come in and to really benefit from a transition. Having said all of that, when I joined the firm, I was really Struck by the breadth of the franchise. I mean 93% of the world's top investment managers are clients of ours As are 97% of the world's top 100 banks.

Speaker 5

And that breadth, coupled with the depth of the franchise, That real client trust that we've talked about before is a super powerful foundation. And so job number 1 for me is to really build on that. And that's been an investment that Todd has been very focused on during his time as CEO. Now what I also would reflect on Some of the things that I've been focused on in the market and wealth services businesses. And the first of those is innovation.

Speaker 5

You've seen that we've launched purging X. We've been very focused on real time payments in the treasury services space. And that concept of really Driving innovation across the enterprise is another important pillar of how I think about the firm and the opportunity that's ahead of Another thing that we've been doing in that segment, which I'm very excited about across the company is really deepening the wallet, connecting the dots Across the firm, helping clients, their existing clients of the firm to do more with us. And that whole ethos of 1 BNY Mellon, I think, is a real Important and deep vein for us to continue to mine. And then the last point that I'd mention is operating leverage and focus on margins.

Speaker 5

In that segment, we had a 41% margin in the Q1. And having run operational businesses in the past, I'm very focused And that will continue to be a focus of mine along with these other pillars. So that's how I'm thinking about the world. But I just remind you that I'm still in the transition and enjoying working with Todd, and we're already focused on making this a smooth and effective handover.

Speaker 2

All right. Thanks for that color, Robin.

Speaker 5

Thanks, Brennan. Thanks, Brennan.

Speaker 6

Next question, operator.

Operator

We will now take our next question from Mike Mayo from Wells Fargo. Please go ahead.

Speaker 7

Hi. Well, I was going to ask you, Rob, and I asked that at the shareholder meeting, but maybe just a little bit more about Your background, I just say that when Northern changed their CEO, they said the old CEO was more about marketing and more about numbers. When State Street changed their CEO, they said, well, the new CEO was more about understanding asset management and their clients. Anything else, since we don't know you as well as Todd, who's been there for in his 4th decade, anything else about your background that You could share that could give investors confidence as you are about to enter the CEO role in several months.

Speaker 5

Sure, Mike. Well, I'm all about being a great all around CEO. But to answer The sort of question a bit more directly in terms of my background. I feel like I've been prepared for this role Mellon. I started off in the markets business and I ran the money markets business at my prior which was a great opportunity to really get into the markets, capital markets, interest rates and really the client franchise.

Speaker 5

And of course, a lot of Same clients are clients of ours, and so that was a great formative start for me. I ran operations at my prior I was a treasurer. I was the Chief Risk Officer. I was the CEO of the International Bank. I operated internationally.

Speaker 5

And so when I put all of that together, I think it really gives me the opportunity, having touched a lot of different aspects of our franchise and our activities To really bring all of that to bear in the role going forward. And I'm very excited about that. And as I joined the firm, as I commented before, I've been struck by a few things, Including the depth and breadth of the franchise, but also the culture of the firm. And I think that there's a lot of opportunity for us, and I'm excited to have at it.

Speaker 7

And so to summarize, you kind of want to have like 1 BNY Mellon and improve the wallet share. And hopefully, I'm not sure if you guys can give this Now I don't think so, Todd. There's not too many firms that do it. But what's your market share by large client? Where was it a

Speaker 8

few years ago and where

Speaker 7

do you hope it to be? Do you have any metrics around that? Or do you think we

Speaker 9

can get that in the future?

Speaker 6

Yes. We haven't disclosed that Publicly, but what I would say is we have grown with our clients and we have continued to increase market share with Our largest clients over the past couple of years, especially in our servicing business, our asset servicing business. And I think some of the stats That we even did disclose this morning that Emily mentioned. We retained 90 actually I mentioned that we retained 97% of All of the business that we rebid on, which is an enormously high number. And we've got some capabilities, I mean, the investments that we've made in service quality And some of that is in some of the technology that we've got around that keeping us much closer to our clients, much better informed, much more responsive.

Speaker 6

The investments that we've made in our data management and data analytics, which where I think we are the leader, not only in the servicing capabilities, But also the fact that we can we've got the ability to bundle all the back office services, not just custody and And Accounting Administration, but TA as well is a differentiator. So I think we are seeing increased market share. I haven't disclosed it specifically against the major clients, but I think the fact that we are with just about every one of the major clients reflects that.

Speaker 7

All right. Thank you.

Speaker 5

Thanks, Mike.

Operator

We will now take our next question from Keith Ustin from Jefferies. Please go ahead.

Speaker 8

Thanks. Good morning, everyone. Emily, wanted to ask you a little bit on net interest income and some of the changes that you're referencing. So I guess to start, can you help us understand your point about historical Reference of deposits versus QT or rates environment that we saw deposits come down this quarter. Can you tell us what you're expecting to see out of the balance sheet going forward?

Speaker 3

Sure. So when it comes to Deposits and run off, what I'd first say is that we're just using the forward curve. So assume that it's just as baked into the forward curve, Fed funds is about 2.5% by the end of the year. Also, we're just assuming that betas largely retraced what we've seen in the last cycle. It means that we will get to the end Faster, but they're going to largely retrace.

Speaker 3

It's correlated to rates and largely retrace what we've already seen. So with all that said, we would expect deposits To probably run off maybe about 10% over the course of this year, and that's from where we are in the average of the first Quarter, we've already seen them come down a bit from the 4th quarter. And just as a reminder, our deposit base is largely NIBs, part of the growth you've seen has been in NIBs and so we expect that to kind of normalize too over time. And the other thing I would mention is that as we see deposit runoff, we also could see a migration to money market And if that does indeed happen, then obviously that could be a nice tailwind for us as well.

Speaker 8

Okay, got it. And then in terms of the shortening up of the duration, can you tell us how I don't know if you can size the magnitude of how much that might have Changed your current views of full year NII up 13% versus what it might have been otherwise and how you're now redirecting incremental cash flows into versus what you might have done otherwise if rates haven't gone up this quickly?

Speaker 3

Yes. We are we've obviously Shortened duration across the portfolio, we've swapped fixed to floating and considering just the uncertain environment Also continuing to be cautious and nimble.

Speaker 8

Okay. And then you mentioned The more cautious on buybacks in the near term and maybe returning 75% this year. How will you evaluate that? Obviously, we can do math on what it means for But in terms of how much could the swings in AOCI continue to impact even being able to do 75%? Thanks, Emily.

Speaker 3

Sure. So, as I mentioned in my prepared remarks, we still intend to return 100% of our earnings to our shareholders over time and that's of course across dividends and buybacks. We've been cautious and I think it's We feel pretty confident that we would expect to return at least 75% of our earnings to our shareholders over this year. And the nice thing about SCB and the SCB framework is that we can be nimble, we can be flexible and ultimately Depending upon the runoff we see, we might be able to do more.

Operator

We will now take our next question from Steven Chubak from Wolfe Research. Please go ahead.

Speaker 10

Hi, good morning. So I wanted to ask a follow-up on the NII guidance. Appreciate the color Emily on the deposit balance trajectory based on what we experienced last cycle. I was hoping you could just speak to the deposit beta assumptions Underpinning the guidance for the full year and also how much of a helper was PremiumM this quarter and how much of a benefit Do you expect to realize over the course of the remainder of this year?

Speaker 3

So from a beta As I said before, we just expect betas to largely retreat what we've seen historically. It does mean you'll get to the end state Faster. In the first rate rise, it's generally and what we've experienced, it's very much as we've been In terms of what was your last sorry, I missed the first

Speaker 10

part of the question. The premium

Speaker 3

Yes, it was helpful this quarter. I don't have it right off hand, But it was obviously definitely helpful this quarter, but and we just expect it with rates Rising as we go forward, it will continue to be a bit helpful, but frankly, at a more modest level.

Speaker 10

Understood. And maybe just switching over to the fee side, you spoke to fee revenue up 4% to 5%. I believe Emily and I'm sorry if I missed this, you alluded to organic growth of 1% plus being the underlying assumption. I know you had been running at 2% plus of late. I wanted to get a sense, is that organic growth guide more a reflection of Conservatism, challenging macro or just what you're actually seeing in the backlog of new mandates?

Speaker 3

It's definitely not so much at all on the mandate side. We still fundamentally our businesses are in really good health. The growth is really just considering the more challenging environment that we're in. And specifically, when you look at market levels or Client activity across some businesses have slowed down. You're seeing or expecting a bit more risk off behavior.

Speaker 3

And so the particular businesses, which Probably most which are going to be most impacted, we think are Investment Management, Corporate Trust, Depository Receipts, To a lot lesser extent, asset servicing and so that's what's all baked into the 1% plus guide, but the fundamentals are very good and we feel pretty good

Speaker 10

I couldn't agree more. Just one follow-up

Speaker 3

We don't disclose that concrete item.

Speaker 6

Yes. I would just add to that, Emily. So if you look at our investment and other income, it was about In line with the guidance that we had given. On the asset servicing, we do have some investments that we've said and some fintechs that we work very closely with Strategically and they performed pretty well. But as you might imagine in this down cycle in the Q1, we got hit pretty hard in our seed cap And some of our other things.

Speaker 6

So net net, they basically offset each other.

Speaker 10

Got it. Okay. Thanks for taking my questions.

Operator

We will now take our next question from Alex Blostein from Goldman Sachs. Please go ahead.

Speaker 11

Hey, good morning, everybody. Thanks for taking Congrats again to both Todd. Todd and Robin here. So my first question is around the Kind of connectivity between organic growth and operating leverage in the business. So organic growth sounds like 1% -ish this year, fees were Flattish year over year expenses up 5%, right.

Speaker 11

So I understand that there's obviously investments that you guys are making in the business. But when you think about this on a 18 months to 24 months out, should we expect BK to get to a point where Fee growth is more in line with expense growth. I think this kind of dovetails maybe some of Robin's comments earlier around his focus on operating leverage.

Speaker 3

So what I would say is, look, we are very focused on driving positive operating leverage. And I just would remind you that overall, If you look at all total revenues, we will be our plan is to deliver positive operating leverage this year. And frankly, that's with the impact of the Russian notable items. So I think that's pretty good. In terms of fee, when we think about just fee revenue versus expenses, what I would say is that When you look at our the guide that we gave for the rest of the year, it does our expense guide does include Slightly more inflationary pressures, as well as the investments, of course, that we've talked about extensively that we think are very compelling and some will pay off And some will pay off a bit over the course of the next couple of years.

Speaker 3

And as we talked about, it's way too early to kind of talk about like what it's going to look like in say 24,

Speaker 11

All right. We'll stay tuned for that. My second question around maybe the Issuer Services business and really Doctor specifically. I think in the earlier release when you guys announced the Russia laws this quarter, there is a comment there around just a more The level of revenue growth, I think there is an ongoing effect from the Russia exit business as well. Can you just level set us what the Doctor business does in revenues now per year kind of net of these changes on a run rate basis.

Speaker 11

And then ultimately, how should we think about any other sort of geopolitical risk within that business? I don't know to what extent China is part of that revenue stream. Thanks.

Speaker 6

Emily, you want me to take the tailwinds?

Speaker 3

Sure. Go ahead.

Speaker 6

So I think there's a couple of questions there. So Russia was a It was a material component of the total Doctor revenue. And the indication that we gave is there was a contra hit on Kind of prepaid expenses there. So that got reversed in the Q1, and that was the most of the $88,000,000 that we were talking about. And on a go forward basis, we'd expect probably something like $20,000,000 probably $15,000,000 a quarter, Specifically from DRs.

Speaker 6

There are I mean China is an important market to us too. So we saw what we have seen, Alex, is a little bit of Fewer transactions, fewer new issuance in China, a little bit down and that's reflected in those numbers. We don't break out The entire ADR revenue line, it's a small or a modest percentage of The total Issuer Services. But it is impactful and as you can see it hit the bottom line in the Q1.

Speaker 12

Got it.

Speaker 11

Great. Thanks very much.

Operator

We will now take our next question from Glenn Schorr from Evercore. Please go ahead.

Speaker 6

Okay. Glenn, you're on mute or we if you're still there. So operator, maybe we should go to another Questioner and we'll ask Linda.

Operator

Perfect. We'll now take our next question from Betsey Garcek from Morgan Stanley. Please Go ahead.

Speaker 4

Hi, this is Ryan Kenny on behalf of Betsy. Good morning. Good morning, Ryan. Just a question on the Pershing X initiative that was announced a few months ago. Wondering if you could dig in more on what specific areas you're looking to grow in And help us size the investment dollars, timing and the ROI of the investments here and any expected impact on margins?

Speaker 4

Thanks.

Speaker 5

Sure, Ryan. So look, it's an investment that we're excited about. As we step back from our Pershing business, where as you know, We're a real market leader in that business. We touch about 15% of RIA accounts In the U. S, we touch a little over 30% of all RIAs with $1,000,000,000 or more In AUM, one of the things that we've heard from our clients is that the world is getting increasingly complex For them, as they think about how to really pull all of the capabilities that they need to run their businesses together.

Speaker 5

And as we've really listened to our customers on that point, we decided that there was a great opportunity for us to help solve some of those problems. And so Collecting the various different capabilities, focusing on the data and the smooth movement of data across Those various capabilities, we saw that as an opportunity to really deliver something new and incremental to our customer base. And we've tried to speed our way along that. We hired, as you know, Ainsley Simmons to run that for us. She's recently completed the rounding out of her top leadership We tried to speed our way to market with the acquisition of a direct indexing capability in the 4th quarter Asset Management, that was an example of a bolt on capability that we think can just help us to accelerate.

Speaker 5

But as we've disclosed before, We're not expecting this to drop much to the bottom line over the course of the next couple of years. This is an investment in Peurging and the aggregate wealth management platform services platform And so this is an investment in the medium to long term. We think it's important. Our customers very much want it, and we're excited for it.

Speaker 2

Thanks.

Operator

We will now take our next Question from Brian Bedell from Deutsche Bank. Please go ahead.

Speaker 12

Hello. Hi, Can you hear me? Hey, Brian. Hey, sorry. Yes, great.

Speaker 12

Well, first of all, congrats again, Todd and Robin. And Robert, Looking forward to working with you. The first question is just on the short term 2nd quarter outlook. I know, Emily, you gave the outlook for the full year. Maybe just to focus a little bit on the pace

Speaker 3

Yes. We really decided to do a more of a full year guide versus the second But, I mean, to size, what you're thinking about, and I think specifically on waivers, if we do see The Fed raised rates by 50 basis points in May, as I think we're all kind of expecting. Obviously, that will be a nice uptick in terms of recouping waivers and it's to the tune of call it like $100,000,000 or so is what I'd is how I'd estimate it.

Speaker 12

Okay. And then to focus a little bit longer term on the organic revenue growth outlook, the 1% plus. Just, I guess if we do get a better let's say if we get a risk on backdrop in the second half opposed to the current sort of view of a challenging market backdrop, how might that influence that organic revenue growth outlook? Is that enough To put you back in that 2% area, where do you really there's a lot of things you're working on to really build that organically. And if you can just remind us The sensitivity of fee revenue to equity markets, global equity markets improvement.

Speaker 12

And then just lastly, whether you would be considering any Type of major acquisitions to accelerate revenue growth or really it's just going to be a focus on organic?

Speaker 3

So I'll take a couple of parts of that and Todd or Robin might want to chime in about the inorganic opportunities. But in terms of organic growth, I mean, just remember when we define organic growth, we are normalizing for market or depreciation, but it is fair that risk on or risk off behavior associated with that could also impact organic growth. And so what I would say is, it's hard, we don't really say like what's the sensitivity, but yes, there certainly could be more upside if you see more risk On behavior and ultimately that means more trading, more transaction volume, etcetera. So that is upside, so it's certainly not out of the realm of possibility that it could be higher. In terms of what was your It was

Speaker 12

the equity the fee revenue sensitivity to so like every 10% increase in equity margins?

Speaker 3

Yes. We've disclosed this. I think you can find it in the case. So basically any like a 5% move in equity markets is Kind of happening gradually throughout the year is about an additional $75,000,000 in revenue.

Speaker 12

Yes, great. And then just the interim, yes.

Speaker 3

Todd, do you want me to take it again or do you want to

Speaker 6

Yes, why don't you

Speaker 12

go ahead and take it. So, Brian, before

Speaker 6

you do, Emily, just to add. So, Brian, just that 5% was that was not an average at $75,000,000 That means if it goes up on average over the course of the year, 5.

Speaker 3

Over the course of the year, yes.

Speaker 6

We get about 75.

Speaker 10

Yes. That makes sense. Thank you. Okay.

Speaker 6

You want to follow-up on organic, Emily?

Speaker 3

Sure. I mean, on inorganic, what I would say and Todd and I I've been very consistent on this is that we are of course we always are evaluating inorganic opportunities, but At the same time, the bar is really, really high. And it's not high just from a return perspective, it's also very high from an execution risk perspective. So, we have been doing several deals, but they've been mostly kind of digestible bolt on things that are adding capabilities For markets or clients, and we will continue to look out for those.

Speaker 12

Okay, great. Thank you very much.

Operator

We will now take our next question from Michael Brown from KBW. Please go ahead.

Speaker 7

Hi, good morning.

Speaker 5

Good morning, Mike. Good

Speaker 3

morning, Mike.

Operator

Good morning.

Speaker 9

I just wanted to ask about So with average loans was were up 3% sequentially and 18% year over year. So just wanted to To ask a little bit about where you're seeing the strongest demand and what are your expectations moving forward and the ability to meet that demand Given the expected trajectory of the deposit balances from here?

Speaker 3

So Actually, we've been very proactively growing the loan portfolio. So yes, as you mentioned, it's up 3% on average and 10% year on year, we will continue it's our expectation to continue to grow that over the course of this year. And where we're seeing it is really on a couple of different areas. So capital haul facilities, certainly, trade finance, Likewise, margin loans, CCLs and mortgages and wealth. So like pretty much Across the board and that's we want to be there and leverage our balance sheet for our clients when it makes sense.

Speaker 9

Okay. Thank you, Emily. And then just thinking about the capital ratios today and your comment on returning 75% of net income, Any thoughts on the trajectory in terms of the quarterly pace, just given that the Tier one leverage is at 5.3 We ended the quarter at 5.3%. It seems like the buybacks may need to be a bit more back half weighted as the capital ratios kind of accrete higher From here, is that a fair expectation?

Speaker 3

I'm not going to really comment on kind of how it's going to be paced throughout the year. I think you can kind of look at all of our ratios and make your own assumptions. But and the thing I would just remind everyone again is that the SCB framework is Really allows us to be very nimble and very flexible.

Speaker 9

Okay, great. Thank you for taking my questions.

Speaker 6

Thanks, Brian.

Speaker 3

We will

Operator

now take our final question from Jared Cassidy from RBC. Please go ahead.

Speaker 13

Thank you. Good morning, everyone. Emily, can you share with us And if it's not available, maybe you could answer it in a different way. But in your quarterly and 10 ks's, you and your peers always give us 100 basis point parallel shift in the curve leads to an x percent increase or decrease in net interest revenue. How does it how do you stand today at the end of the first Quarter versus the end of the 4th quarter.

Speaker 13

Do you have that number? And if you don't, will it be lower by 30% or 40% compared to the 4th quarter?

Speaker 3

We don't we will obviously be updating that when we release the What I would say is, we're much more sensitive, of course, to short term rates and long term rates. That continues, of course, To be the case, and you'll see more of that when we actually release the Q.

Speaker 13

Okay, very good. And then following up on the Tier one leverage ratio, I think last quarter you mentioned that you guys trying to manage to 5 0.5%, obviously you're slightly below that today. Where do you think how low can it go From where we are today or just your views on how you're managing that number?

Speaker 3

So in terms of Tier 1 leverage, we've always said that given the extraordinary circumstances we're in and all of the excess liquidity in We would be it makes perfect sense to dip into our buffer to a degree, which is what we've done. We would expect of course as we start to see some probably deposit run off that that will take a lot of pressure off Tier 1 leverage. And what I'd also just Ag is that by the end of the year, it's not it's likely, that's not out of the realm of possibility, but frankly, probably likely that our binding constraint will become CET1 versus Tier 1 leverage. And frankly, I think if you're toggling between Tier 1 and Tier 1 leverage in CET1 that actually is very good. It means you're managing your balance sheet optimally.

Speaker 13

Great. And then just quickly On the HCM, I think you said you lifted your HCM portfolio to 40% of total securities. Is there a limit on how high you would take that too?

Speaker 3

There isn't a limit per se, but we obviously do that very With our partners in risk and we're always making sure that whatever we move there is high quality liquid assets that generally speaking you can repo it, Repo those assets, etcetera. So I wouldn't expect it to increase a lot more from here.

Speaker 6

Okay. Thank you. Hey, Gerard. It's Todd. I'll follow-up.

Speaker 6

I just want to add to, I mean, Emily made, I think, all of the right points around The capital ratios and the Tier one leverage. But remember, we're probably too precise in it when we give you a number of something like 550. If you remember, that's 150 This point, bulk for to what the requirement is. And the reason it's there is because we recognize that you can have a spike in the balance And for us, it's not a risk spike. It's because deposits have increased.

Speaker 6

And we've certainly seen that through the quantitative easing over the past couple of years. Or you could have a sell off and some impact in the OCI. That's exactly why the buffer is there. So eating into the buffer in this type of It's exactly what we would expect and it's not really particularly constraining to us As we still have that 130 basis points. To Emily's point, and in our modeling, if things run the way we would expect them off of the forward curve, Those deposits are going to come down 10% or so and that's going to free up quite a bit of Tier 1 leverage.

Speaker 6

And basically and we're estimating that we're going to get pretty close to Equity in Tier 1 which is a great place to be. And it also means common equity is a little easier to manage because that's a risk based asset ratio Where we can manage, it's not just what comes on to the balance sheet. So I want to make that clear. We probably in the future, we should give you guidelines that There are more ranges and we can kind of calculate where we are in the range.

Speaker 13

Very good, Todd. Thank you. And great run, Todd, with Bank of New York and

Speaker 6

Top of the hour. Operator, do we have any other questions?

Operator

There are no further questions in the queue, sir.

Speaker 6

Okay. Thank you, everybody. Thank you, for joining us Today, I look forward to following up. I guess you can call Marius if you have any follow-up questions. Be well.

Operator

Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor website at 2 p. M. Eastern Standard Time today.

Operator

Have a great day. Thank you.

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Earnings Conference Call
Bank of New York Mellon Q1 2022
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