The Bank of New York Mellon Corporation

Order 2019 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 will now turn the call over to Magna Polchinska, BNY Mellon's Global Head of Investor Relations. Please go ahead.

Good morning. Today, BNY Mellon released its results for the fourth quarter of 2019. The earnings press release and the financial highlights presentation to accompany this call are both available on our website at bnymellon.com. Todd Gibbons, BNY Mellon's interim CEO, will lead the call. Then, Mike Santamassimo, our CFO, will take you through our earnings presentation. Following Mike's prepared remarks, there will be a Q&A session. As a reminder, please limit yourself to two questions. 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, all available on our website. Forward-looking statements made on this call speak only as of today, January 16, 2020, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda, and good morning, everyone. I'll briefly highlight the fourth quarter and the full year financial results, and then focus most of my comments highlighting the progress we made in 2019. as well as outlining our priorities for 2020. Mike will then go through the financials in much more detail. For the fourth quarter, we reported earnings of $1.4 billion and earnings per share of $1.52. This includes a positive impact of 50 cents per share from notable items, which Mike will discuss. For the full year on an adjusted basis, EPS of $4.02 on revenues of $15.7 billion. Full-year expenses were down slightly as we identified and implemented efficiencies to more than offset the increase in technology investments. What that means is we actually delivered hundreds of millions of dollars of real productivity, and we had solid operating margins of approximately 32%. We generated over $5 billion of capital in 2019, returning more than 100% of earnings to shareholders through dividends and buybacks. while at the same time maintaining a strong capital position, investing for growth, and achieving a solid return on tangible common equity of greater than 20%. This year was not without its challenges, however, and notably those included interest rate cuts in the U.S., and while some equity markets hit new highs, client activity levels were constrained in many of our business. Despite this, fees and investment services were resilient, and we saw some modest organic revenue growth. We also delivered strong operating margins and capital returns for our shareholders. We built a solid foundation in 2019, including substantial investment in technology and talent, while operations executed a significant number of strategic programs in 2019 that will drive efficiency, reduce risk, and enhance the client experience. Looking at our progress across our business portfolio, let's start with asset servicing. We're taking action to ensure we consistently provide excellent service quality. The pipeline is growing, and we announced important new wins in 2019 across different geographies in both asset owner and asset manager segments. We created some exciting partnerships with leading front-office system providers, namely Aladdin, Bloomberg, and most recently, SimCorp. And these will provide our clients with open architecture that gives them choice and flexibility. While still early, these partnerships are strengthening our offering, and they're helping us win new business. We enhanced our capabilities and alternatives in ETFs, which have strong growth prospects, and we're expanding the range of data and analytical applications available to our clients, where our strong position in data management, accounting, performance, and distribution analytics position us to deepen our relationships. We've made good progress in monitoring and measuring client relationships and improving the quality of work and services we provide day in and day out for our clients. This is already driving improved client satisfaction and lower attrition rates. In Pershing, we are seeing fee growth coming through and are excited about the future to this business. The industry is evolving, and we are confident that our market leadership and strategy will position us well going forward. We ended the year with the strongest pipeline in many years with both institutional broker-dealers and in the RIA space. We continue to onboard these new clients each quarter and to build the future pipeline. Across the industry, consolidation is helping make Pershing's open architecture increasingly attractive to our clients. We're accelerating investments in the advisory segment, strengthening market leadership in the broker-dealer segment, and continuing the development of front-end technology, including integration with third-party providers to deliver state-of-the-art experiences and analytics to advisors and their investors. All of these are making us an even better partner to our clients. In clearance and collateral management, where we are the clear leader, we delivered strong financial performance in 2019. We saw organic fee growth over the course of the year, driven by existing clients and new business, as well as clients onboarded in 2018 who increased their business with us. We see continued growth opportunity in this business from structural and regulatory changes the provision of services to bilateral repos, and for modernizing our platform to give our clients the ability to seamlessly move their collateral globally. We're enhancing our platform to allow clients to have access to more real-time data and self-service tools. We also continue to automate manual processes to reduce risk and improve operational efficiencies, and we are improving the client experience by introducing new digitally enhanced capabilities. In insured services, we're building out capabilities, which is broadening our relationships. We gained market share and corporate trust and drove new business across a number of our key products, such as structured and muni debt, as well as insurance-linked securities. Our ongoing rollout of the new loan servicing platform is enabling us to be more responsive to our clients and deliver them more functionality. We're investing in automating capabilities and digitizing workflows tools to offer clients simplified access to services. and data to help them minimize risk, increase control, and gain efficiency. Our treasury service business has scale and a reputation for excellent service and relationship coverage, which are the result of the investments we've made in talent and our product offering. With over $2 trillion of institutional payments per day, we are a very meaningful partner to our clients. In 2019, we successfully refocused on higher margin businesses, such as liquidity and payments. Our deposit initiative grew high-quality, stable balances by around 18% in 2019. Our technology investments and treasury services have been centered on advancements in real-time solutions and operational efficiency to increase straight-through processing rates, both of which further enhance the client experience. In asset management, the financial results were negatively impacted by outflows over the last year. Performance, however, has been solid across many of the largest strategies, including equities and multi-asset classes. That, combined with the investment in new products across the platform, is helping to improve the pipeline. We have seen improved performance in Newton, Walter Scott, and Alcentra, and we continue to believe that there is an important role for active strategies, including LDI, going forward. Our wealth management business will benefit over the long term from our increased investments as well as strong leadership. We are expanding our sales force, strengthening our banking and investment product set, and delivering digital tools to benefit both our advisors and clients and create a leading experience. Now, overarching all of our businesses is our consistent investment in technology. Our technology priorities center on improving quality, developing innovative products and services, and enhancing efficiency for our clients. which in turn creates cost savings for us as well as for them. We're transforming our infrastructure and expanding our data and analytics solutions and the use of APIs to continue to create an open platform. We're deploying artificial intelligence and machine learning to simplify processes and proactively deliver additional insights to clients, such as improved analytics to increase distribution of their own products. We're embracing partnerships. In November, for example, we hosted a well-received inaugural FinTech Connect conference. We recently announced new collaborations with a number of FinTechs to expand our capabilities, including one this week that will enable us to deliver a new suite of oversight and contingent net asset value calculation solutions for clients. This is just the beginning. In operations, we have numerous initiatives in play across the businesses that are already yielding efficiencies. that we are able to reinvest to support new business initiatives and further efficiency in automation efforts. For example, in corporate action elections, increased automation has significantly reduced the number of transactions that we process manually, while offering our clients best-in-class cutoff times. In the payment space, we continue to enhance our straight-through processing rate. We reached a record 97% in the month of December. That's up from 94% a year ago. And in fund accounting, we've deployed self-service capabilities for reporting when we've automated over 2,000 client reports. One of the recently announced partnerships enabling us to launch an AI-based reconciliation and data control solution aimed at better serving our clients' complex data needs. Other partnerships are helping us do things such as reimagine the billing process and employ AI to resolve client inquiries faster. Across the company, we've been disciplined about the investments we're making and are focused on driving efficiency in our technology spend. As an example, we're simplifying our infrastructure and we're reducing the number of applications, which are now down 10% over the past 18 months or so. In the next 12 months, we'll be reduced by another 10% plus. So a total reduction of 20% plus in applications over a two- to three-year period. So to summarize 2019, while we have more work to do, we're on the right path, we're beginning to see the benefits of the investments made over recent years, and we'll continue to invest, and we've made progress on a host of initiatives while maintaining strong operating margins and capital returns. As we look to 2020, our priorities are unchanged. They are centered on one, driving sustainable revenue growth through a strong performance culture, focused on improving service quality, as well as fostering faster innovation. Two, improving every aspect that we can within our operations. Maintaining our investment in technology is key to this. Our overall technology spend for 2020 is expected to exceed the $3 billion we spent in 2019. Three, we're continuing to drive efficiency throughout the organization through automation as well as good expense discipline. And four, ensuring we continue to deliver strong capital returns to shareholders. In closing, we are confident in our plans and our ability to execute on them while always looking for opportunities to improve. We have a great team and a great foundation, and we are excited about the future prospects for the firm. With that, I'll turn it over to Mike to review the financial results in more detail. Thanks, Todd, and good morning, everyone. So let me run through the details of the results of the quarter. All comparisons will be on a year-over-year basis, unless I specify otherwise. Beginning on page four of the financial highlights document. In the final quarter of 2019, we had earnings of $1.4 billion and earnings per share of $1.52, and both the current and prior year quarters included a number of notable items. The notable items in the fourth quarter of 2018 were costs related to severance, the relocation of our corporate headquarters, and litigation expenses, partially offset by some tax adjustments, reducing our earnings by $0.16 per share. In the fourth quarter of 2018, we benefited by $0.50 per share from the gain on the sale of an equity investment, partially offset by severance, net securities losses, and litigation expenses. Total revenue was $4.8 billion. Fee revenue increased 26%, with nearly all of that from the gain on the sale of the equity investment. Underlying that, investment services fees were up, foreign exchange and other trading was down, and most other line items were relatively flat. Net interest revenue declined 8% to $815 million. Expenses were down slightly, but excluding renewable items were up 2%, with the increase driven by technology. We generated $1.4 billion in net income applicable to common shareholders, or $931 million excluding renewable items. We continue to have a strong return on tangible common equity and maintain a solid pre-tax margin. In terms of shareholder capital returns, we repurchased approximately 22 million shares for just over $1 billion and paid $286 million in dividends in the fourth quarter. We've reduced the number of shares outstanding by a little over 6% since the beginning of 2019. For the whole year of 2019, we returned $4.4 billion to common shareholders which is over 100% of earnings, through $3.3 billion of share repurchases and approximately $1.1 billion in dividends. Moving now to capital and liquidity on page six. Our capital and liquidity ratios remain strong. All of our key ratios were strengthened since the third quarter. Common equity tier one capital totaled $18.5 billion at the end of the year, and our CET1 ratio was 11.5% under the advanced approach. Our average LCR in the fourth quarter was 120%, and our SOR was 6.1%. Including the impact of the recent change to the rule, our SOR would have been approximately 120 basis points higher. Turning to page 7, my comments on the balance sheet will highlight the sequential changes. Net interest revenue was $815 million, up almost 2% versus the least adjusted net interest revenue in the third quarter. As we have mentioned previously, we have been focused on growing and optimizing our deposit base for the last 18 months or so. For example, we've been working with wealth management clients to convert their cash from off-balance sheet investments to on-balance sheet deposits. Our sales teams have been focused on attracting additional client deposits in other businesses, and we've been targeting escrow and other opportunities while being disciplined about pricing. All of these initiatives and some of the macro factors contributed to the results. The activity that drove the outperformance versus our expectations came in the last few weeks of the year, and some of it was episodic. Now, as you look at the drivers, both non-interest bearing and interest bearing deposits increased across our businesses. Some of the non-interest bearing and interest bearing deposits related to some targeted activity, including episodic corporate actions and other activities, which we do not expect to repeat in Q1. Margin and non-margin loans in our securities portfolio balance increased modestly. The loan balances were driven by increased client demand. The yield on interest-earning assets continued to decline, as expected, due to the decline in short-term rates as the Fed cut rates at the end of the third quarter and again in October. The increase in intermediate and long-term interest rates was helpful, but the overall yield on the securities portfolio, loans, and other interest-earning assets declined as short-term rates had a bigger impact sequentially. We also made minor adjustments to our securities portfolio that should modestly enhance the yield going forward. The reduction in asset yields was partially offset by lower deposit rates and other funding costs. Lastly, at the end of December, we did benefit modestly from higher spreads and activity levels in our cleared repo business and from the money we deployed in reverse repo year-end. Although repo rates over year-end ultimately normalized, we were able to lock in some trades when reverse repos were between 3% and 4%. We don't expect year-end pricing to repeat again in Q1. All of this activity resulted in our net interest margin remaining flat at 109 basis points versus the least adjusted NIM in the third quarter. As we've said in the past, we're focused on driving higher net interest revenue, and we will continue to take advantage of low-risk opportunities, even if they're not NIM accretives. AJ gives some more detail about the drivers of the net interest revenue increase versus the third quarter. You can see how the increased client deposit volumes, higher interest-earning assets, and lower funding costs benefited our net interest revenue. This more than offset the decline in interest-earning asset yields. Page 9 details our expenses. On a consolidated basis, expenses of $3 billion were down slightly. The decrease is mostly due to the impact of expenses associated with the relocation of our headquarters in the fourth quarter of 2018 and lower litigation. And excluding notable items, expenses are up 2%, primarily reflecting the continued investments in technology. Turning to page 10, total investment services revenue was down 2%. Assets under custody and administration increased 12% year-over-year to $37.1 trillion, primarily reflecting higher market values and client inflows. Although the higher market levels were a bigger driver, we did see good organic AUCA growth throughout the course of the year. Within asset servicing, revenue was down 3% to $1.4 billion, primarily reflecting lower than-interest revenue and volatility impacting foreign exchange revenue, partially offset by the impact of higher equity markets. Asset servicing fees in this business were up slightly. Barn Exchange other trading revenue is down 7% to the lower Barn Exchange volatility and volumes. The pipeline continues to remain healthy. Dialogue with clients remains active, and we're not seeing an acceleration in pricing pressure. In Pershing, total revenue was up 2% to $570 million. Clearing fees were up 6%, reflecting growth in client assets and accounts from new business onboarded and from existing clients which was partially offset by lower net interest revenue. Treasury services was down 6% to $415 million on lower depository receipt revenue, which was partially offset by higher client activity and corporate trust. The decline in depository receipts revenue was due to the timing of fees and cross-border settlement activity, as well as lower net interest revenue. Treasury services revenue was flat at $329 million, as higher client activity and payment fees were offset by lower net interest revenue. These were up 6%. Sequentially, Treasury services revenue was up 5% driven by higher net interest revenue. Clearance and collateral management revenue was up 1% to $280 million, reflecting growth in collateral management and clearance volumes, which were mostly offset by lower net interest revenue. Average tri-party collateral management balances were up 12%. Pays a lot in summarizing the key drivers that affected the year-over-year revenue comparisons for each of our investment services business. Now turning to page 12 for investment management. Total investment management revenue was up 1%. Asset management revenue was up 4% year-over-year to $688 million, primarily reflecting higher market values and the impact of hedging activities, partially offset by the cumulative AUM outflow since the fourth quarter of 2018. Performance fees of $48 million were down from the fourth quarter of 2018, which was one of our stronger quarters in a while. We had outflows of $13 billion a quarter, and overall assets under management of $1.9 trillion were up 11% year-over-year due to higher markets and the favorable impact of the weaker U.S. dollar, partially offset by net outflows. The sequential market impact is negative due to lower U.K. fixed income market values, which were more than offset the impact of the increased equity market values of managed assets. Wealth management revenue is down 5% year-over-year to $287 million, primarily reflecting lowered interest revenue partially offset by slightly higher fees that benefited from higher market values, and client assets grew 11% year-on-year. Turning to our other segment on page 13, total revenue increased reflecting the previously referenced gain on sales of the equity investment partially offset by the NAS security losses that were due to a small portfolio rebalancing. Now, before we open into questions, I'll spend just a few minutes on how we're thinking about the first quarter in 2020. As I mentioned earlier, net interest revenue in the fourth quarter was better than we expected in part due to some episodic balances. So, at this point in the quarter, both interest-bearing and non-interest-bearing deposit volumes are lower than the elevated levels in December. We expect that the yield on our securities portfolio will continue to grind down with lower reinvestment yields. And therefore, we expect net interest revenue to be down a little less than 5% sequentially in the first quarter. We expect that net interest revenue would stabilize later in the year if the fillered curves remain stable and steepen a little. The mix of deposits then change significantly, and as the impact of lower rates on the balance sheet become more fully incorporated into the results. And just a reminder that approximately 30% of the Securities Portfolio reprices each quarter. We will continue to actively focus on growing deposits, optimizing the mix between on and off balance sheet offerings, and being disciplined about pricing. The Fed actions to increase excess reserves should be helpful, as they've been historically correlated to the level of our deposits. Just keep in mind that the relationship may not hold in the short run or in any given quarter. We would expect that investment and other income would be between $25 to $35 million per quarter for the year. With regard to expenses, Todd spoke about the importance of consistently investing in technology. We expect that the level of technology investment will be up from 2019. We can calibrate the pace of that investment if we need to. This will lead our overall expenses for the full year of 2020 to increase by up to 2% year-on-year. excluding the notable items. Included is approximately 50 basis point impact from accounting related to higher pension expense. Now, keep in mind that the charge we took in the fourth quarter for severance reflects the actions that will take place over the year, so we won't see the full run rate impact until 2021. And note that in the first quarter, staff expenses will be impacted by the acceleration of long-term incentive compensation expense for the retirement eligible employees, the impact of which will be similar to last year and will affect sequential expense growth. At this point, we currently expect the full year 2020 effective tax rate will be approximately 21%. And lastly, on the regulatory front, we are quickly entering this year's CCAR process and are awaiting next steps in the capital reform proposals. We continue to be encouraged by the direction of the proposals being discussed, but we'll all see the final outcome and impact when they are complete. With that, operator, can you please open up the lines for questions?

Thank you. And if you'd like to ask your question, please press star 1 on your telephone keypad. Our first question comes from the line of Brian Bedell with Doincha Bank. Please go ahead. Great. Thanks. Good morning, guys.

Just maybe just back on the offense real quick. I didn't see it in the press release, the bifurcation between severance and litigation in the fourth quarter. And then as we think about the expense trajectory into 2020 and even 2021, you just talk about the investments in technology and how you expect that to reduce the structural cost base over the next couple of years.

Yeah, hey Brian, it's Mike. Sure, on the first piece, we didn't disclose the exact number and the split between the two. I think you can get a pretty good sense of the magnitude of the severance by looking at the staff expense and the difference versus the third quarter, so that'll probably give you a good sense of the magnitude there. The bigger piece by far was severance in the number. As you sort of think about overall expenses, as both Todd and I mentioned, we would expect to invest even more this year than we did in 2019. And really, it's across a range of items, both continuing to build out the infrastructure that is important for operating our businesses. We're building new capabilities, and you're seeing some of those get announced in the even over the last couple weeks. And then there's a large chunk that's going into sort of the efficiency agenda on the cost side, as you sort of suggested there. And I think working with Lester Owens, our head of operations, we've got a very long list of those programs that we're just clicking down the list and executing. And as you can imagine, The benefits of those continue to come into P&L over a period of time. So we'll get some of them in 2020, and we'll get some of them as we sort of exit into 21. And I'll just, you know, sort of reinforce what Todd said in his remarks. You know, you can see the benefits of those investments in efficiency agenda coming through the P&L already. You know, as we've sort of increased the technology spend significantly in 2019, and overall, you know, expenses are down. And that's a result of that focus.

Okay, that's helpful. Thanks. And then on clearing, just on the actual clearing service fees of 421, just given the way the markets have moved in DART, in the online brokerage industry at least, have been pretty strong, do you remember just – I would have expected that line to be a little bit stronger in the fourth quarter on a sequential basis. So if there's anything – that you can call out what maybe depressed that. And then maybe longer term, you talked about with encouraging in the RIA strategy, maybe what are your expectations of potentially picking up market share given the industry consolidation that's upon us here?

Okay, I'll take some of it. In terms of the – why don't I take the second piece? In terms of the industry consolidation and how we kind of look at that, I mean, we're a little different because Pershing is more B2B, and we serve broker-dealers and corporate IRAs. And we've also kind of differentiated ourselves because we've provided choice, whether that's related to the open investment platform that we've got or the ability to integrate best-in-class kind of front-office systems. So our clients have the choice as far as that goes, and I think that will in the long term be the preference. Right now, the desire for choice seems to make it more of an opportunity. What I mean by that is the consolidation. Probably, as we look at it, it makes it more of an opportunity. There's a lot of interest in alternative providers, and that just puts us in a better position. As to the revenue growth, I think we're seeing some pretty decent positives there, as we have one, some meaningful new business that we are implementing. Mike, I don't know if you have any. Yeah, and I was just, Brian, on our revenue stream, we're not a commission-based revenue stream, and so most of the revenue that we see come through the clearing services C-line is not based on the number of transactions that are getting executed. It's actually a very small piece of the puzzle there, so you won't see the same same correlation between transaction activity and our revenue stream as you might with some of the online brokers. So we've got a pretty strong pipeline there. We continue to win new business. We're differentiated on the institutional side with some of our capabilities. And we're investing on the advisor side both in the sales as well as the sales team, the branding, as well as the technology that we're deploying. So we feel pretty good about the business. Thank you very much.

Thank you. Our next question comes from the line of Brendan Hawkin with UBS. Please go ahead. Good morning.

Thanks for taking my questions. I just wanted to ask a couple first on expenses. You guys are guided to an expense growth of 2% or less. So is the expectation that you're going to be able to deliver operating leverage and therefore you expect there to be a revenue growth picture that's going to be, you know, at least 2%, maybe a little greater. And can you help us understand why there's such a big delay on the severance benefit?

Yeah. Thanks, Brent. I'll take the start of that, and then Mike can provide a little more color. You know, in terms of the environment, delivering positive operating leverage is really going to be driven by revenue mix as much as anything right now as we continue to make investments in the technology that we think will have longer-term benefits to us. So I think it would be – it's certainly not impossible, but challenged in the very near term. I don't know what things might be. Yeah, and I do think, though, Brennan, once you sort of get through the NIR stabilization, we feel very confident still sort of in sort of the model where – you know, a little bit of revenue growth drives, you know, a significant amount of earnings growth. And so we think that's still – we feel very confident that that still holds. And once NIR stabilizes, which, as I mentioned, we think is, you know, under the assumptions I sort of gave you, we think that happens later this year, then, you know, you should start to see some of that come back into the picture.

Great. That's fair. And on that point, Mike, you know, there were some encouraging – signs here on the non-interest bearing deposits. Can you talk a little bit, give us a little more color on trends there in that line this quarter and how sustainable should we, I know you, I think you said that they're down from December levels, which is probably pretty seasonally typical, but like with the interest rates coming down in the market, is that, are those trends now like more durable, some stability there, maybe even some growth? And do you have some deposit efforts specifically intended to help support growth in that line as well?

Yeah, look, I think, you know, I'll start in the last piece and try to make sure I hit all your points, but You know, we've been, as I said in my script, you know, we've been sort of, you know, focused on this for a while now. And that includes going after opportunities where there's not interest-bearing deposits. And, you know, part of the episodic, you know, activity that we saw in the fourth quarter was very targeted activity that we go after related to escrow, as an example, where there were some significant sort of transactions there. You know, it's hard to predict when they're going to come and how they're going to come, but it's an intentional act on our part to sort of go out and target, you know, those opportunities. You know, as you sort of think about the path forward, I think the macro environment certainly should be helpful, and we're encouraged by sort of the level of dialogue and the activity we're seeing. And we'll have to let it play out a little bit longer to sort of call a, you know, a sustainable trend, I think. Yeah, you guys have picked up on the correlation to the Fed's balance sheet and the impact that it's likely to have on us, so that could be somewhat of a positive. And then the rest of it is going to be also rate-driven, so if there's a change in the rate environment, it could potentially move that category as well.

Okay. Thanks for the call. Thank you. Our next question comes from the line of Betsy Grasick with Morgan Stanley. Please go ahead.

Hi. Good morning. Todd, at the beginning, you highlighted a variety of areas that should be able to deliver growth. I wondered if you could give us a sense as to what is the most important one or two areas that you're looking for to deliver growth this year. And I'm asking the question in part to understand the context for the investment spend and where it's most critical for you.

Okay, well, I think the investment spend is kind of coming across the board. So we're spending, you know, Mike talked a little bit about just building stronger and stronger infrastructure for resiliency, which just provides an increase in the quality of our services. We are investing in integrating third-party capabilities, which I think is a bit of a differentiator. We are investing in improving operations, and we're starting to see the positive feedback from that and the scorecards that our clients keep on us. The most important thing is to retain business, and by providing great service and increasingly better capabilities around that service, it's difficult for clients to leave. In terms of initiatives that might drive future revenues, there are really kind of three areas, three or four areas where I'm most focused. One is the things that we've talked about in the clearing and collateral management. So we are building an interoperable tri-party system, which we think will make our clients much more effective in managing their collateral globally. And as a result, we can pick up some of the global market share and also provide some of those services to what has traditionally been in the by-law space. That's probably another year or two before I think that really kicks in, but we're starting to see some of the benefits from that now. One of our other focus areas are on data and analytics. And I think this is going to be an increasingly competitive advantage for us. We currently, under EGLE, have approximately $24 trillion of Assets Under Management Eagles, the old brand name of our data and analytics capability. As we've built on that platform and what we call a data vault, we think we've got an exciting capability where we will see growth this year and will provide the ability for our clients to do deep analysis around the structured data that's on our platform. We're investing in our wealth management platform. That's more long-term as well. And we've already talked a little bit about the investments that we're making at Pershing. So I'd say those four in terms of business growth are where my key focus is. Got it.

Okay.

Yeah, no, I think I'd echo what Todd said on the bigger priorities. But I think the good part is we really do feel that each of the businesses still have some opportunity to grow. Some of them require bigger investments. Some require smaller investment. And so I think we're focused really on each of them to make sure we take advantage of those opportunities.

Okay, thanks. And then, Mike, for you specifically, or Todd can chime in too, but on the capital, you highlighted that the SLR under the new rule would be up, I think, to what, 7.3 or 7.2 or something like that. I know Beth has called many times about PREF and what your intentions are there. Now that we have the final rule set in, maybe you could speak to what opportunities you have, you know, to become a little bit more capital efficient there. And I'm not sure if it has to wait until, you know, the CCAR, given where the SLR came in.

Yeah, like I think, you know, SLR is, you know, sort of one piece of the puzzle in terms of the rules that are sort of being discussed and contemplated. And so, you know, I think we really do need to look at, you know, all of the the rules that are installed, a working process around stress capital buffer and all the related pieces of it, you know, before we have a complete picture on how we're going to optimize the capital stack.

And is it better to, yeah, and is it better to do, you know, a call of the prep or is it better to utilize the full capital stack you have in, you know, increasing the balance sheet size, for example, through sponsored repo?

Well, for sponsored repo, that doesn't have any impact on the size of our balance sheet. And so to take advantage of opportunities like that, you know, we don't need to, you know, we don't need capital to do that. So I think, look, I think we're going to, you know, we're going to look at all of the options to figure out what our opportunity is on the revenue side to sort of grow and keep the balance sheet where it is or grow the balance sheet. And we're going to look at sort of our opportunities given sort of the new capital rules. And, you know, I think you'll hear, you know, more from us on that as CCAR and stress capital stuff comes. into focus, hopefully, over the next few months. Yeah, it's a little bit challenging because we just don't know exactly what the rules are going to be. We hear lots of different things, and we obviously follow all the discussions. But at this point, we just don't have enough precision to say what the actual impact is going to be to us.

Okay. All right. Do you think you're going to get that at CCAR rule set, or are you going to wait for June?

Who knows? I think that's the honest answer. I think we're all going to find out when the rules come out and see how much of it's clear, and then we'll see how they finalize the notice of rules, the NPRs that they've got out there. It's a lot to get done in a pretty short period of time.

Okay. All right. Appreciate it. Thank you.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Okay, good morning, everybody. So just a couple of follow-ups. So one, I guess on expenses, you know, Mike, let me just to clarify the base of what you guys are talking about 2020 expense growth is about 10.8 billion, kind of the core number that you reported in 2019. Yep.

Yep. It's what's in the press release in page three.

Yep. And then when you talk about the tech spend, you guys had $3 billion or so in 2019. I just want to make sure, is that all running through the income statement? And again, it sounded like that was a 10% growth in 2019. How much of a growth rate do you guys expect to see there for 2020? Basically, just kind of trying to get a flavor for how much you need to re-engineer in savings to keep the overall expenses below the 2% range.

Yeah, I think most of it's running through the P&L already, Alex, for 2019. So most of it's going through the P&L. So I don't think we've given you the exact percentage increase that's going to go up, but we're continuing to deliver consistent sort of efficiency gains as we go. And as you and I and others have sort of talked about over time, we still think there's a long road ahead of efficiencies that we can generate through these investments we're making. So we feel pretty confident that we're going to be able to get at those over the next couple of years.

All right. My second question around the asset management business. So when I look at the flow dynamics, fixed income, LDI, was a little light this quarter again, despite what has been a really strong trend in the industry. And then cash management also, I think, had some outflows. Can you provide a little bit of color, kind of what's been driving that? And then the market performance, also a sizably negative number, which obviously surprised me doing what the market did not. So maybe kind of help flesh out what's driven both the flows and the market delta this quarter.

Yeah, look, I think on LDI, you know, it's not going to be a straight line, you know, sort of up as you sort of think about flows in that business. And there's been lots happening in sort of the U.K. pension market that sort of made people sort of make sure they were sort of thinking about sort of how to manage their liabilities in the right way. And we feel really good still about the pipeline and the unfunded commitments that we've got in that business in the U.K. Plus, they've been continuing to invest in bringing their capabilities outside of their core markets. So I think, you know, we still feel good about the LDI space. We feel good about what they're doing. Performance has been good. And so, you know, we don't really have any concerns in the LDI space really at all. And if you notice more broadly about our asset management business, it's largely an institutional, you know, set of clients. And so you're going to have some, you know, chunky clients. chunky flows from time to time for various reasons as you sort of look at any given quarter. And so there's nothing underneath the fixed income side that I would sort of point to that is a core issue or core trend that we're concerned about. Well, then you also had a question around market. And I think one of the things to keep in mind, we have a fairly substantial exposure to the U.K., where the currency impacts and the equity impacts are a little bit different than they would have been domestically. So that's one thing I would throw in there. In terms of the cash, I would say that's a little disappointing, and I think we need to work to do a little better there.

Got it. Great. Thank you very much.

Thank you. And ladies and gentlemen, as a reminder, that is star 1 on your telephone keypad to signal for a question. We'll next go to the line of Brian Klein, Hansel with KPW. Please go ahead. Yeah, good morning.

Quick question on the deposit optimization that you talked about, just trying to get a sense of how far along you are in that process.

It sounds like you did that over the course of 2019, or is it like there's still a long runway to deposit optimization from here? You know, look, I think, Brian, it's a – you know, we're continuing to optimize. So I think the – you know, this is a dialogue that is a very granular conversation with clients, and it's a client-by-client sort of dialogue. And so I think, you know, we've made some progress, but we've got more to go to continue to, you know, make sure that we're optimizing sort of the pricing and footprint we've got there.

Okay. And then separately, is there any way I could give an update on how the Aladdin offering – is moving forward. There's still some concern across the industry whether or not proprietary versus third-party solutions is the way it's moving. Do you have any update there? Thanks.

Sure. You know, we've been building on a number of partnerships over the past six to nine months, and I'd say they're really coming in two flavors. The first is one of the ones that you're referring to, is where we've connected with some of the leading order management systems, Aladdin, Bloomberg, and SimCorp. Many of our mutual clients already have signed up, and many are in the process of signing up. So we've got a very high success rate where we've got common clients. The other thing that it's doing for us is it's opening doors for other conversations where we see our clients able to gain efficiencies because of this. So I think right now the benefits that we're seeing is it's initiating discussions and opening doors and giving us more opportunities to bid on new business. And secondly, it's strengthening the relationships with the businesses that we've already got because it is integrated. It is single sign-on. The client is able to look down into their custody activity near real time. I think there's the real benefits to our clients that are paying off. And I mentioned that there are really, as we think through the partnerships, there are really coming in two flavors. The other type is everything that we are doing with FinTechs. And so we've announced quite a few. Just this week we announced one where we're working with the FinTech to provide independent alternative NAVs for funds. So this provides both an oversight function as well as enhances the control. In addition, it serves as a contingency if there were a problem in construction of a nav. So we've partnered with them. Some of our clients have actually looked to use them, but they found the implementation would have been too difficult. And so by partnering with them, implementing the gain scale from doing that, as well as providing it as a service rather than just as a piece of software. So we're pretty excited. That's already attracted quite a bit of attention this week.

Thank you. Our next question comes from the line of Robert Wildhack with Autonomous Research. Please go ahead. Good morning, guys. Just wanted to ask a question on the balance sheet and the impact of... You know, the Fed injecting reserves into the system. Are you seeing a significant impact there? And, you know, either way, how long until we can kind of see that play out in numbers?

Thanks. Let me tell you, I mean, it's so difficult, Robert, for us to be able to identify any single particular incident on a day-to-day basis. But if you just look back at historical trends, and you look at the balance sheet, and you look at the Fed balance sheet, and you look at our balance sheet related to deposits, you'll see that there is a correlation. But depicting why that took place, whether it was a money market fund that decided to leave a little extra cash in its account or anything like that is very, very hard to determine and distill out of it. Is there anything else? All right.

Thanks. I think that's all I had. Okay. Thanks, Robert.

Thank you. And our next question comes from the line of Vivek Jinesh with JPMorgan Chase. Please go ahead.

Hi. Hi, Tom. Hi, Mike. I have a question. Which businesses need the most tech catch-up? Talking from a business standpoint, I know you're You're spending in a lot of different areas, a lot of businesses. Where do you think you need to do so more, either from a competitive standpoint or business need? Can you give some sense of, because you've got obviously a lot of businesses.

Yeah. I actually think we are in pretty good shape. What we're trying to do with the VAC is kind of get ahead of the game. And if you think about some of the things that we're doing, I just walked through the whole list of partnerships. and kind of differentiating capabilities and this willingness to integrate with best-in-class. We're not always going to be able to deliver the best application, and we want to provide our clients flexibility. So that holds when we look at purging. It holds when we look at asset servicing. We've made some very good investments in our corporate trust business, and we're starting to gain back market share. We had lost a little market share over the years. I like where we are in wealth management. I think we can continue to do better there. So I think this is a matter of trying to break out, not cash out.

Is there room to improve the efficiency of tech spend? What we're hearing from others is they're trying to flatten it, shift the mix of what they're spending on. You're hearing that from competitors and peers of yours. Is there room for you to do that? And if not, when can we start to see that flatten out?

Todd highlighted a little bit of that in his script, where we are as focused on driving efficiency in our technology spend as we are anywhere else in the company. And we've reduced the number of apps by 10%. There's another 10% coming. So it's, you know, over a 20% reduction of our apps. And as we sort of make these investments in the underlying infrastructure and application, it makes the next set of investments we want to make that much more efficient, cheaper, faster. And so it's something you're already seeing in the spend that we're making. Okay.

So do you have a range or something on operating margin where you think you could get to with all of this tech spend as we look out a year or two?

Yeah, we haven't given you a view on go-forward operating margins with that, but as I said earlier, I think as we sort of get through the short-term and medium-term on that interest revenue, we do feel confident that the model still holds, where we'll be able to deliver, you know, for a little bit of revenue growth, a pretty significant amount of earnings growth. And I think that implies, you know, expansion and operating margin at that point. So I think, you know, I would just sort of model it that way. I think the guide we gave you, you know, a while ago now at Investor Day a couple years ago is probably a good way to think about it still.

One last one for you, Mike. Your reverse repo yields fell pretty sharply, the way you have it on Dalji. The lowest level we've seen in five quarters. How should we think about that? Is that one that dropped?

Yep. The Fed reduced rates, and the peak in reverse repo spread in September didn't happen again. Those two drivers. I know you like to do the arithmetic there, but we look at that. Since it's no weighted down, the size matters, the spread matters, and then the overall weight matters. Ultimately, we're generating a spread that's been no weighted down. That spread has been reasonably consistent, but in the third quarter, we saw the spike with an unusual activity in the repo market.

Okay. Thank you. Thank you. And our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi. You mentioned retiring apps. You've retired 10%, 10% more to go. What's the total number of apps that you have? And, you know, I don't think this is completely related, but what percent of apps on desktops are web-based apps? versus having old versions of code support them?

I'm going to turn this one over to Mike, Mike. But in terms of the – we don't disclose the total number of apps, or I don't believe we disclose the total number of apps that we've got, but we've obviously got a pretty careful inventory of those apps. And part of what we're doing in our resiliency build-out an infrastructure investment is also making itself more efficient by leaving the sunset or eliminate some of those applications. And so I'm pleased that we're down 10, probably closer to 12% now, and we've got another 10% or so that we'll probably take out over the course of the next 12 to 18 months. So I can't really get into the specifics of where those gaps are in terms of what base... Yeah, Mike, I'm not... You know, I think that... I'm not sure that's the right way to think about it. Not all modern apps are web-based apps, but I think you should assume that many of the tools that our folks are using are always getting better, and we're always investing in those. And that gets, you know, we have every weekend of the year, there's something that's being rolled out. you know, across our product suite to either internal folks or external folks, and that improves the way they work. Yeah, in terms of productivity tools, we are rolling out the cloud version of Microsoft Office 365. One of the things that we're also doing is our operations. We get over a million client email queries each year, and we are developing AI around making that much more productive and responsive in responding to it. So we continue to invest a lot in productivity, and the infrastructure build that we have that we're making I think will help us do that as well.

And then just one follow-up. So just generally speaking, you said you're spending more on technology. Was that $3 billion going up to what number? I'm not sure if you said that, if you are willing to do so. And when do you think that turns? Like if you think of it going down the J curve, when do you come up the other side with these investments? Is that like a year or three years or five years?

Let me make one comment, and I might want to get into more of the details. As we've really picked up the tech spend over the past three years, I would say the rate has come down slightly, although the total amount continues to go up because it's not a little bit of a bigger base, but the rate of growth has probably come down. I don't know, Mike, if you want us to really put the J curve in and think through how quickly we advertise infrastructure. Yeah, I mean, look, Mike, I think the way we think about the tech spend is it's not a, you know, we're shooting to spend a certain number. You know, what we're doing each year is looking at, you know, how much can we actually execute? What are the business cases? How do we think about, like, the return we're going to get on them? And most importantly, like, can we successfully sort of execute it and do we have people in place to do it? And I think that's driving and, you know, that's going to be the constraint that we've got in most years is making sure that we can execute it well. And I think right now we feel it's important to continue to make those investments because that's what's going to differentiate us going forward. And, you know, keeping in mind that we've got to deliver bottom line as well. And so we're trying to find the balance there to make sure that we're doing the right thing by all of our stakeholders. And so that's the way we sort of go about how much we're going to spend in any given year. Yeah, so the Just a really good point. So as we look out to next year, I don't want to predict this, because if there's not an ROI on the kind of spend, we'll bring it down. But right now, we believe there is.

All right. Thank you.

Thanks, Mike. All right. Looks like that's the last question. Thank you, everyone. We'll talk to you next time. Thank you.

Thank you. This concludes today's conference call webcast. A replay of this conference call webcast will be available on the BNY Mellon Investor Relations website at 2 o'clock p.m. Eastern Standard Time today. Have a good day.