The Bank of New York Mellon Corporation

Please stand by. We're about to begin. Good morning and welcome to the 2020 Second 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. Now I'll turn the call over to Magda Polczynska, BNY Mellon's Global Head of Investor Relations. Please go ahead.

Good morning. Today, BNY Mellon released its results for the second quarter of 2020. 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 CEO, will lead the call. Then, Mike Santomasimo, 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, July 15, 2020, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda, and good morning, everyone. Before diving into the numbers, let me share a few thoughts on how our business has been performing as we've adapted to a new normal during the second quarter. Volumes and volatility normalized somewhat across our businesses from the extreme first quarter disruption. And conversations with clients have shifted from dealing with a crisis to how we can help support their business in this new environment. But much uncertainty remains over the timing and shape of the global economic recovery. In addition, the low interest rate policy is a significant headwind for us that is unlikely to change in the near term. Operationally, we continue to navigate the repercussions of the pandemic. Around 95% of our employees continue to work remotely, doing a phenomenal job delivering excellent service to our clients. Our operating platforms and infrastructures are supporting the current market working model well, with record volumes in certain areas, all of which has put us in a good position as we discuss new business opportunities with our clients. Turning to our second quarter financial results, We reported solid pre-tax income of $1.2 billion and earnings per share of $1.01. As a reminder, we did not buy back shares in the second quarter in line with other big banks. We accreted capital and ended the quarter with a common equity Tier 1 ratio of 12.6%, up around 120 basis points from the last quarter. Our average balance sheet increased year over year to $415 billion, mainly driven by strong deposit inflows and associated growth in the securities portfolio. Revenue was up 2% despite the impact of lower interest rates and related money market fee waivers. All of our investment service businesses showed resilient performance. Asset servicing in particular is showing nice pockets of growth, and our focus on service quality is paying off. The challenges that asset managers are dealing with are driving more of them to outsource, and our unique capabilities in fund accounting and transfer agencies, as well as investments we've made in building out our digital and data capabilities, positions us well. Last month, more than 800 attendees representing over 160 client firms and 25 consulting firms and vendors that we work closely with participated in our virtual Engage20 event. Engage, which has long been the premier data and technology conference for buy-side investment managers, highlights next-generation cloud-first business applications. During the event, we announced the launch of our new data and analytics offerings and expanded relationship with Microsoft to provide these solutions on the Microsoft Azure Public Cloud. We are pleased to have clients such as Charles Schwab and Naveen share case studies on how their businesses will benefit from our newest offerings. Those include a new cloud-based data vault that supports the rapid onboarding of data, whether public markets data, private, proprietary, or unstructured data, to offer greater flexibility and accelerate client innovation and discovery. We also released our new ESG application, which supports the creation of investment portfolios, customize the individual's clients' environmental, social, and governance preferences, and provide crowdsourced guidance around the preferred ESG factors and priorities. and our distribution analytics application, which builds upon our intermediary analytics service, leveraging data from broker-dealers and RIAs to predict drivers of demand for mutual funds and ETFs so they can identify how to successfully gain market share. And across all our businesses, there are opportunities to capture greater market share within products, services, target client segments, and markets. Much of this is the outcome of consistently investing in technology and and talent. There's been an acceleration this year in the adoption of digital solutions by our clients who continue to review opportunities to automate. The progress we're making in digitizing our business positions as well on this front, and we're increasing our investment spend on technology-driven automation initiatives in 2020. In March through June alone, we migrated over 100 clients to digital solutions and are accelerating our plans to do the same across all of our asset servicing clients. We are now accepting digital signatures on many tax-related forms to support remote processing. Digitizing these processes will help thousands of clients and reduce the millions of physical documents we deal with each year. We also developed a new API-enabled FX solution jointly with Deutsche Bank that can dramatically improve confirmation times for restricted emerging market currency trades to provide front office users with faster execution and enhanced workflow transparency. So we've accelerated our progress on the digital front, and there are dozens of other examples. I'm proud that we've been working with the regulators and the industry to bring our capabilities and supporting the markets. Since last quarter, we've been administering the primary dealer credit facility, which facilitates dealers' inventory financing. Our corporate trust business has also been mandated as the term asset-backed securities loan facility administrator, and we're also servicing TAL funds and asset servicing. Additionally, we're playing an important role in the Fed's support of liquidity in the municipal markets via the municipal liquidity facility. This one's a demonstration of the power of our uniquely broad range of solutions. We're able to bring together the expertise from asset servicing, corporate trust, investment management, and capital markets to create a complex solution to support the facility. Looking ahead to the second half of 2020, we are confident that our business model, expense control, and conservative credit risk profile will serve us well. Our efforts with clients are yielding results with higher win ratios, better revenue retention, and a good pipeline in purchasing and asset servicing in particular. We are pleased with the momentum we are seeing across all of our businesses. The low interest rate environment will present a significant challenge, both through net interest revenue and money market fee waivers in Pershing and investment management, and to a lesser extent, other investment services businesses. But at the same time, we will benefit from increases in transaction volumes, FX volatility, stronger market levels, and activity in our clearance and collateral management business. The recent DFAST and CCAR results demonstrate the strength and resilience of our business model. We had the lowest peak-to-trough reduction in CET1 capital under the Fed's model relative to other U.S.-based G-SIBs at just 20 basis points. Now, that's well below the minimum SCB requirement. Looking ahead at our capital returns, we expect to maintain our quarterly common stock dividend of $0.31, and we will not buy back shares during the third quarter. We have a very strong capital position and low-risk model that should allow us to reform well under a wide range of scenarios. We will commence buybacks as soon as possible, depending on the economic and regulatory environment, our outlook for the business, and outcome of the resubmitted capital plans based on new scenarios we expect to receive later this year. In the second quarter, we opportunistically issued $1 billion in preferred stock, and we think this gives us opportunity to restack our capital down the road. Longer term, our growth is not dependent on increasing risk-weighted assets, which gives us the ability to return at least 100% of capital to shareholders, and we're confident in our ability to continue returning attractive levels of capital. And while the outlook for the economy remains uncertain for the foreseeable future, I know that we will continue to navigate this environment well by deepening our client engagement as demand for our service grows, benefiting from improving quality and improving efficiency of our operations. Last week, we announced that with the upcoming retirement of Mitchell Harris, we've elevated Hanukkah Smith to CEO of Investment Management, effective October 1st. Hanukkah has been leading Newton Investment Management since 2016 and has spearheaded Newton's business momentum and client-centric culture. Under Mitchell's leadership, we've made great progress in building a diversified investment management business, and we thank him for that. As we move forward, Hanukkah is ideally suited to build on this strong foundation to continue to drive performance and innovation across our investment products. Catherine Keating will continue in her role as CEO of BNY Mellon Wealth Management, and both Catherine and Hanukkah will report directly to me. Mitchell has cultivated a strong bench of leaders, including Hanukkah and Catherine, who will continue to drive the execution of our strategic priorities to deliver leading investment solutions to our clients, underpinned by exceptional investment performance. Now, before I hand it over to Mike, let me address how we've been responding to recent events that have drawn attention to the very real racial and societal issues in our communities. Our board and our executive committee are passionate about using our voices and being positive change agents. As a company, we take great pride in all of our differences, and our diversity of experiences and perspectives leads to better business outcomes. That starts with the diversity of our board, which is 30% African American, 40% minorities, and 30% female. We are challenging ourselves to do more. We're supporting activities that create sustainable change, including philanthropy targeted at creating opportunity, matching employee donations to nonprofits that support and strengthen the well-being of underrepresented communities, encouraging community volunteerism, doing pro bono legal work to advance minority businesses, raising cultural awareness, and strengthening our commitment to attract, develop, and retain a diverse workforce. We're holding more open forums that foster meaningful dialogue and that we hope will bring us closer together during these challenging times. We're learning from each other, building empathy, and strengthening inclusive leadership skills that will serve us well in continuing to drive a high-performance culture. We're expanding support for the well-being and emotional resilience of our people and their families with additional employee services, resources, and coaches who have cultural competence. We know these efforts, like all the other components of our corporate social responsibility strategy, are making us a stronger company. Last week, we released our 2019 CSR report, which introduces our new strategy pillars with associated goals and key performance indicators for the next five years. They include increasing senior leadership positions held by women and ethnically and racially diverse employees, While we're proud that for the sixth consecutive year we've been named to the Dow Jones Sustainable World Index, we're going to continue to challenge ourselves to do more. In the long run, we firmly believe that doing what's right for the community, our employees, and our clients is in the best interest of our shareholders. With that, I'll turn it over to Mike. Thanks, Todd, and good morning, everyone. Let me run through the details of our results for the quarter, and all comparisons will be on a year-over-year basis unless I specify otherwise. beginning on page three of the financial highlights document. In the second quarter of 2020, we reported earnings of $901 million, down 7%, while earnings per share was flat at $1.01. Total revenue was $4 billion, up 2%, even as we felt the impact of lower interest rates through money market fee waivers and in our net interest income. Fee revenue increased 2%, primarily reflecting higher fees in purging and asset servicing, Partially offset by money market fee waivers, lower investment management fees, and the unfavorable impact of a stronger U.S. dollar, fee waivers negatively impacted growth by approximately 3%. Debt interest revenue declined 3% year-over-year to $780 million and was down 4% versus the prior quarter. Our provision for credit losses was $143 million in the quarter and and this was primarily driven by ratings downgrades, particularly across our commercial world state book, and the continuation of a challenging macroeconomic outlook. We had no actual charge-offs during the quarter. Expenses were up approximately 1% as we continue to balance ongoing expense discipline with our technology investments, and we still expect full-year expenses to be flat to last year. We had a solid return on tangible equity of 19% and maintained a pre-tax margin of over 29%. Now moving to capital and liquidity on page four. Our capital and liquidity ratios remain strong and well above internal targets and regulatory minimums. In terms of shareholder capital returns, in the second quarter, we suspended share repurchases along with other financial services for our member banks and will do so again in the third quarter in line with Federal Reserve requirements. We continue to pay our quarterly cash dividend, which totaled $278 million in the second quarter, and believe we have ample capacity to continue to pay the dividend under a variety of economic scenarios. Common equity Tier 1 capital totaled $20 billion at June 30th, and our CE21 ratio was 12.6% under the advanced approach and 12.7% under the standardized approach. Under the new stress capital buffer rules that will become effective October 1st, we will need to maintain a CET1 ratio of 8.5%, including a 2.5% stress capital buffer, which is the minimum, and a 1.5% GSIB surcharge. As we think about our binding capital ratio constraint going forward, Tier 1 leverage can be more binding than CET1 due to the buffers we need to hold for potential growth in deposits, which are more volatile than RWA during times of market volatility, very much like what we've seen over the last two quarters. As always, we will continue to optimize our capital ratios across all the constraints. Our average LCR in the second quarter was 112%. Now turning to page five, my comments on interest revenue will highlight the sequential changes. That interest revenue was $780 million, down 4%. While client-driven deposit growth drove the increase in our average balance sheet, this benefit was more than offset by a full quarter impact of lower interest rates. Hedging activity added modestly to the linked quarter comparison, as you can see in the bar chart, and is primarily offset in foreign exchange and other trading fees. Average deposit balances were up $25 billion versus the first quarter averages and are up $62 billion or 28% versus last year. This growth is across all of our businesses, some increasing from the monetary reserves in the system, clients' flight to cash, and some from internal deposit initiatives that are linked to operational and fee-generating activities. As we've mentioned in the past, we generate and manage significant amounts of cash across our franchise, This is a key client differentiator for us, particularly in volatile markets. We provide cash management services that have led to good growth in deposits in our balance sheet, growth in money market funds in our open architecture money market investment platform, and through dry fish cash products. We've passed along the Fed rate cuts as interest-bearing deposit rates declined to minus three basis points in the second quarter. This was the result of a combination of very low rates paid in the U.S. plus negative rates on euro-denominated deposits. As a reminder, approximately 25% of our deposits are non-U.S. dollar. On average, the securities portfolio increased approximately $19 billion versus the first quarter and around $32 billion in the last year as we have deployed the growing deposit base. The net interest margin of 88 basis points was down 13 basis points versus the first quarter, driven by the increase in deposits and lower yielding, low-risk interest-earning assets. we continue to focus on optimizing net interest revenue rather than just net interest margin. Now moving to page six, which provides some color on our asset mix. Our average interest earning assets increased to $358 billion. Approximately 40% of these assets are held in cash or reverse repos, while 43% are in our securities portfolio and 16% in our loan portfolio. In addition to the funded loans shown on the page, we also have unfunded committed lines, the details of which can be found in the 10Q. During the quarter, we saw about $1 billion of the $3 billion of borrowings drawn down from revolving credit facilities repaid. And we're closely monitoring the portfolio, particularly the commercial real estate exposure and other sectors more acutely impacted by the current environment. The impact of credits, including commercial real estate, are performing well, but may see additional downgrades depending on the shape and speed of the recovery. Turning to the securities portfolio, we have a high-quality liquid portfolio. Much of it is in U.S. government agency securities, U.S. treasuries, and sovereign debt. The portfolio increased as we deployed more cash into securities, including the commercial paper and CDs we purchased from our affiliated and third-party money market funds. The $4 billion of CLOs are highly rated with 99% AAA or AA, 100% of the non-agency CMBS or AAA, and have solid subordination. The rest of the ratings breakdown can be found in the supplement. Page 7 provides an overview on expenses. On a consolidated basis, expenses of $2.7 billion were up around 1%, driven by higher technology expenses and pension costs. offset by lower business development expenses, namely travel and marketing, and the favorable impact of a stronger U.S. dollar. Distribution expenses were only slightly impacted by money market fee waivers and investment management, as the bulk of the impact from money market fee waivers was in Pershing and from third-party funds. Turning to page 8, total investment services revenue was up 3%. Assets under custody under administration increased 5% year-over-year to $37.3 trillion. primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. Foreign exchange and other trading revenue in the segment increased 16% year-over-year, driven primarily by higher volatility as well as organic client growth in foreign exchange, even as industry volumes were down slightly. Within asset servicing, revenue was up 5% to $1.5 billion, primarily reflecting higher FX, higher client volumes across securities lending, liquidity services, and transaction volumes. as well as a one-time fee. Securities lending revenues were higher on improved spreads and a strong demand for U.S. government bonds. In Pershing, revenue was up 1% to $578 million despite the impact of money market fee waivers, reflecting much higher money market fund balances, which were up 40%, and higher transaction volumes, though down from the exceptional volumes we experienced in the first quarter. The net impact of money market fee waivers, partially offset by higher money market fund balances, negatively impacted Pershing's revenue growth by 3%. Issuer services revenue decreased 3% to $431 million, reflecting declines in both corporate trust and depository receipts revenue. Depository receipts revenue was primarily impacted by lower corporate action volumes, while in corporate trust, new business and deposit growth was offset by lower volumes in products and interest rates. Treasury services revenue was up 7% to $340 million, driven by higher liquidity balances and related fees offset by lower payment volumes correlated to lower economic activity. Deposit balances increased year-on-year by 40% as investments in new capabilities and increased focus on deposit gathering were critical to retaining most of the growth from earlier in the year. Clearance and collateral management revenues up 4% to $295 million from higher clearance volumes, mostly from non-U.S. clients, as well as fees and deposit balances. Average tri-party collateral management balances are up 4% in the U.S. and 9% outside the U.S. Page 9 summarizes the key drivers that affected the year-over-year revenue comparisons for each of our investment services businesses. Now turning to investment and wealth management on page 10. Total investment and wealth management revenue is down 3%. Investment management revenue was roughly flat to $621 million, reflecting the unfavorable change in the mix of asset center management since the second quarter of 2019 and the impact of money market fee waivers partially offset by equity investment gains, net of hedges, including seed capital. Please note the gains from seed capital include results from unconsolidated and consolidated investment management funds, both of which can be lumpy in any given quarter depending on market conditions. Details can be found in the supplement. On the consolidated income statement, the gains are either an investment in other income or income from consolidated investment management funds, while the negative impact from their hedging or approximately $30 million is recorded in other trading. We have inflows of $20 billion in the quarter, reflecting continued cash inflows as well as long-term flows into index funds and fixed income. Overall assets under management of just under $2 trillion are up 6% year-over-year, primarily due to higher markets and cash inflows. Wealth management revenue is down 9% year-over-year to $265 million, primarily reflecting lower net interest revenue due to lower interest rates and client migration to lower fixed income and cash products. Now a few comments about the third quarter. First, I would caution you, as we did last quarter, that the environment remains fluid and variables are changing quickly. Looking ahead at net interest revenue, we will have a full quarter of lower rates in the third quarter, especially short-term LIBOR rates, which declined throughout the second quarter. We have also seen some pickup in prepayment speeds in our mortgage-backed securities portfolio, given current and expected refinancing volumes. Significant excess liquidity in the system continues to drive elevated deposit levels versus 2019, but the exit rate from Q2 is just a little lower than the average for the quarter. And as a result, we currently expect net interest revenue to decline 8% to 11% sequentially. However, based on current marketing conditions, we would expect net interest revenue to begin to stabilize in the third quarter. Now, in money market fee waivers, the pre-tax impact in the second quarter was $80 million. net of distribution expense with the biggest impact in Pershing. It's important to note that approximately 50 million of this impact has been offset by a substantial increase in money market fund balances, resulting in a net impact of approximately 30 million in the second quarter. We expect the impact from fee waivers to increase in the third quarter by about 30 to 45 million net of lower distribution expenses. This additional impact in the third quarter would also be reduced if money market fund balances continue to grow. A little over half of that impact will be in Pershing with the rest of the investment management and asset servicing. We currently expect that we will incur an incremental $25 million in the fourth quarter and we'll be at a full run rate impact from a few waivers of about $135 to $150 million, offset by the incremental money market fund balance growth that we've seen in the second quarter for a net impact of about $85 to $100 million per quarter by year end. This quarterly impact could be reduced if money market fund balances continue to grow further. Current equity market levels should be modest positive if they hold. We saw transactional activity in FX continue to normalize over the course of the second quarter. Assuming this continues, it will be modest headwinds sequentially, although we expect the related views will be higher than in the prior year. If we see some volatility in the equity markets, transactional activity could pick up. On expenses, we will expect them to be flat versus 2019, excluding notable items. This includes the 50 basis point full year over year impact from higher pension expense. Credit costs will be highly dependent upon individual credits, the future path of the health crisis, and how the economic forecast changed by the time we get to the end of third quarter. In terms of our effective tax rate, while it was a little lower this quarter, we expect it to be approximately 20% for the full year versus prior guidance of 20% to 21%. With that, operator, can we please open the lines up for questions?