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?