The Bank of New York Mellon Corporation

Good morning and welcome to the fourth 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 webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I'll now turn the call over to Mr. Scott Friedenrich. You may begin.

Thank you. Good morning and welcome to the BNY Mellon fourth quarter 2018 earnings conference call. This morning, BNY Mellon released its results for the fourth quarter of 2018. The earnings press release and a financial highlights presentation to accompany this teleconference are both available on our website at bnymellon.com. Charlie Scharf, BNY Mellon's Chairman and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mike Santomasimo, BNY Mellon's Chief Financial Officer. Following Mike's prepared remarks will be a Q&A session. Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in the cautionary statement in the earnings press release, the financial highlights presentation, and in our documents filed with the SEC available on our website. Forward-looking statements made on this call speak only as of today, January 16, 2019, and will not be updated. Now, I will turn the call over to Charlie.

Thank you, Scott. Good morning, everyone. Thanks for joining us. As usual, I'll make some comments and then turn it over to Mike. You can see that we reported earnings per share of 84 cents, down 22% from last year's fourth quarter. Both this quarter and last year's fourth quarter included a number of notable items that make comparisons difficult, but we will do our best to explain what's included so you can perform your own analysis of the quarter. Notable items in the fourth quarter of 2018 reduced earnings by 16 cents. This includes costs related to the relocation of our corporate headquarters, severance charges, and litigation expenses. Those costs were partially offset by some tax adjustments. As a reminder, our fourth quarter results in 2017 included notable items that increased earnings by 17 cents per share. These items were related to the estimated benefit of U.S. tax legislation partially offset by some actions we took. On a GAAP basis, our revenues grew 7%, expenses decreased 1%, pre-tax earnings grew 40%, and after-tax earnings decreased 26%. If you were to exclude these notable items in both periods, which you can see in the reconciliation table on the second page of the earnings release, revenue declined 1%, expenses were essentially flat, pre-tax earnings decreased 3%, After-tax earnings increased 4% and earnings per share increased 9%. My comments will refer to our results excluding notable items in both periods. Let me mention a few things about the overall results. First, While we aren't happy with the revenue decline of 1%, it's important to note that we saw growth in many of our investment services business. In total, investment services revenue grew 3%, and investment management revenue declined by 8% due to the combination of outflows, currency, and the impact of lower equity markets. And we continue to benefit from increasing interest rates, albeit at a slower rate than prior quarters. The second thing is that we remain extremely focused on controlling our expenses while we continue to significantly increase our technology and infrastructure investments. Excluding the notable items, our expenses were essentially flat to the prior year. Our technology expenses increased about $100 million versus the prior year, while all other expenses decreased a little more than the same amount. I mentioned on last quarter's earnings call that we see meaningful opportunities to become more efficient across the company. While we're looking to automate many of the manual tasks we perform, we also see broader opportunities to continue to drive efficiency. On last quarter's call, I used the example of a significant opportunity to reduce management layers and increase spans of control. This quarter's GAAP results include a severance charge which includes these actions, many of which we've already completed. We anticipate that the payback on this severance will be less than one year. These savings and other efficiencies we continue to drive towards will allow us to continue to increase our investment in technology and infrastructure without significantly increasing our expense base. But as I also said on last quarter's earnings call, while these changes result in lower costs, They help advance our culture by improving decision-making, allowing us to move more quickly, and making sure we have our best people in roles which allow them to grow and contribute more significantly to our growth agenda. And thirdly, as we've said consistently, the road to increase our organic growth will take time, but we do see some progress. The impact of the markets and interest rates will ebb and flow, but we must grow the franchise, and we remain focused on methodically building our capabilities to increase our rate of organic growth. As 2019 unfolds, we hope to provide a clearer roadmap of how this is playing out. Let's go through our businesses, starting with asset servicing. Asset servicing revenue was down 2%. Although we continue to have a healthy pipeline, the impact from new business was minimal. There were negative impacts from asset outflows from existing clients. These clients did not leave us but saw outflows from their accounts. This can shift based on market conditions and investor behavior. The decline, combined with a little lower foreign exchange and securities lending volumes, as well as the negative impact of a stronger U.S. dollar, drove the lower revenue year over year. The declines were offset by higher net interest revenue due to higher rates. We are continuing to invest across this business to improve our core custody and accounting service, extend our servicing capabilities for alternative managers, including credit managers, middle office, and data management. We turn to Persian. While revenue is down year over year due to the two previously disclosed client losses, revenue was flat sequentially. Excluding the impact of the lost clients, the revenues grew about 4%. In addition, the business has grown in a number of other fronts. The impact of the lost clients has been fully in our run rate since the second quarter of this year, and the impact on the year-over-year growth rate for Pershing will abate after the first quarter of 2019. We continue to have a sizable pipeline of new business that we are onboarding now, which will begin to go live in the second half of 2019 and have a more meaningful impact in 2020. So we expect Pershing will return to revenue growth as the negative impact of the two client losses abate and we onboard the sign business. We are as confident as ever in our ability to continue building Pershing over the longer term. In issuer services, revenue growth of 25% was driven primarily by depository receipts, corporate action activity, and higher volumes, although corporate trust also generated a little bit of revenue growth. As we discussed previously, depository receipts revenue is seasonal, and volatility in the market drives cross-border settlement activity. The timing of corporate action events during the quarter drove significant year-over-year growth, and volatility levels were particularly high in Latin America. Corporate trust also had some revenue growth this quarter, albeit small. Our efforts to reposition our corporate trust sales and service teams has helped us to drive incremental growth in insurance-to-link securities and CLOs. Our pipeline remains healthy. While market share statistics in this business are imperfect, as I've mentioned before, we're gaining share, particularly in the structured finance space. In treasury services, we're continuing to see modest growth in this business. Payment volume, which is the key driver of our fee revenue growth, was up 5% year over year and sequentially, driven by the volume... growth from both new and existing clients. Our focus on growing liability balances from our treasury services clients has been paying off as we experience growth in attracting competitively priced interest-bearing operational client deposits to support our client payment activities. In clearance and collateral management, we reported 10% revenue growth. We again saw strong revenue growth from our historical clients, newly converted government clearing broker-dealer clients, higher clearance volumes related to record issuance levels and strong demand for U.S. government and treasury issuances, and growth in collateral management activity from new business and increased client activity. Our clearance and collateral management capabilities are among the best in the business, and our collateral optimization and segregation services go beyond what others can provide. As collateral management becomes an increasingly important part of the investment process, we are a major beneficiary. We're seeing interest from new entrants to the collateral market, such as alternative asset managers investing their cash in repo. Turning to investment management, asset management had a difficult quarter with revenues down 11%. The cumulative impact of outflows year-to-date, particularly in our active equity strategies as well as lower equity markets, the unfavorable impact of a stronger U.S. dollar, and some small divestitures drove the results. We saw strong flows into our liability-driven investment strategies as that business has continued to consistently perform well over a number of years. Performance across some key strategies has been good, evidenced by solid performance fees in the quarter and for the full year. Wealth management revenues were down 2%, primarily driven by the impact of lower equity markets and lower net interest revenue. We continue to believe that we should be able to drive more growth in this business over time. Shifting to talent, we continue to attract terrific people. During the quarter, we announced that Lester Owens will be joining our executive committee next month as head of operations. Lester is an experienced operations executive who has occupied key roles in large, complex financial services organizations. He also has a reputation as a great leader with a passion for efficiency, transformation, controls, and working with clients. Lester will join us next month and help us and our clients rethink how we process securities and cash with the goal of gaining material efficiencies and improved quality. On the capital front, we continue to be keenly focused on intelligently deploying our capital, including returning excess capital to shareholders. Last month, we announced that we received approval to increase our repurchase program of common stock by an additional $830 million, and we completed it in the fourth quarter. In the past, our ability to return additional capital to shareholders had been constrained by our internal CCAR models, and we've refined those models. We are pleased to now be in a position to return additional capital to our shareholders. and we are confident that we will continue to maintain strong capital ratios and be able to invest in our business going forward with this higher level of capital return. In terms of 2019, while we cannot predict market levels and interest rates, the environment is clearly more difficult today than one quarter ago. And to state the obvious, at these levels, the markets will not be a significant contributor to our results in 2019. Therefore, we remain focused on building the underlying franchise to drive higher levels of organic growth and will continue to remain disciplined on expenses. And even if the market constrains our short-term growth, our goal is to ensure we drive DPS growth as we benefit from our strong expense disciplines and capital actions. With that, let me turn it over to Mike.