The Bank of New York Mellon Corporation

Ladies and gentlemen, good morning and welcome to the 2020 Third Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Magda Pulczynska, BNY Mellon's Global Head of Investor Relations. Please go ahead.

Good morning. Welcome to BNY Mellon's third quarter 2020 earnings conference call. Today we will reference our financial highlights presentation available on the investor relations page of our website at bnymellon.com. Todd Gibbons, BNY Mellon's CEO, will lead the call. Then Emily Portney, our CFO, will take you through our earnings presentation. Following Emily's prepared remarks, there will be a Q&A session. Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement, and financial highlights presentation, all available on the investor relations page of our website. forward-looking statements made on this call speak only as of today, October 16th, 2020, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda, and good morning, everyone. First of all, I want to welcome Emily to her first results call as CFO. Most of you are just getting to know Emily, and as you spend more time with her, I think you'll agree that having been in a number of business leadership roles, as well as having had experience in the finance function, Emily brings a perspective that positions are exceptionally well for this role, so welcome, Emily. Great to have you here. Before handing it over to her to review the financials in more detail, let me touch on some highlights in terms of our performance and other developments. For the third quarter, we reported revenue of $3.85 billion, earnings per share of $0.98, and a solid return on tangible common equity of 17%. Our operating margin was resilient at 30% despite the impact of low interest rates and the related money market fee waivers. And with our share repurchases suspended now for two consecutive quarters, we accreted significant capital, increasing our common equity tier one ratio to 13%. During the third quarter, volumes and volatilities continued to normalize. At the same time, interest rates trended a bit lower. As we look into next year, I believe the underlying strength of our franchise will become more apparent as we expect to have most of the run rate impact of lower rates and associated money market fee waivers in our earnings. At that point, we can start to more clearly demonstrate the progress we're making around our key priorities of driving organic growth, optimizing the balance sheet, and executing our efficiency priorities. And notwithstanding the challenging current environment, Our business model continues to generate significant excess capital. We look forward to recommencing share buybacks as soon as regulators and market conditions allow, which we expect to be meaningfully accretive to EPS. Now, there are many opportunities across our business to differentiate ourselves with clients while addressing a broader set of their needs. The crisis has increased the frequency and the intensity of my conversations with clients as we've helped them navigate related issues. They're adapting to a rapidly changing environment. As they're assessing what they do across their operations, they want to know how we can help them and optimize their data and how to be more efficient and effective in what they do on a day-to-day basis. In asset servicing, we are winning and retaining more deals, and our pipeline is stronger than it was at this time last year. And I think that's a reflection of the quality of our service, as well as the unique set of capabilities that we can deliver for the front, middle, and back office. This is, of course, in addition to providing more custody and securities lending. Versus a year ago, we are seeing positive trends in win and retention rates and in our pipeline. Deals are becoming more complex and cross-product and solutions-based. For example, we have recently been selected to provide a range of services by IA Financial Group. That's one of Canada's largest insurance and wealth management groups with $175 billion Canadian dollars in assets under management. The mandate encompasses fund accounting and administration, custody, foreign exchange, and a full data and analytics suite of solutions incorporating the Data Vault and Data Studio, performance measurement and reporting, and middle office services. We're continuing to invest in building out our cloud-based data and analytics offerings and have integrated this into our asset service and core business. Clients trust us with $30 trillion of data assets on our software, including trillions where asset servicing is elsewhere. And over 20% of our pipeline deals now include data and analytics products. Just one example, which I mentioned last quarter, is our new ESG app that allows portfolio managers to create investment portfolios customized to individual ESG preferences using multiple data sources with support from crowdsourced guidance around preferred ESG factors and priorities. We're seeing real momentum with this app. We have a dozen clients in active trials, and we're in discussions with over 100 more. We're also thinking about how we can integrate capabilities like this when developing holistic solutions for our clients. In Pershing, the bulk of money market fee waivers is being absorbed by this business, masking its underlying good performance as the core of long-term drivers remain intact. The pipeline is robust, and the underlying performance of the business is strong. firms are critically assessing their business model and their cost structures. This is particularly true with self-clearing capital markets firms that are increasingly looking to reduce costs and free up capital by outsourcing their trade settlement and clearing and turning it to us as a result of that. Year-to-date, new assets on an annualized basis are strong at over 4%. Our pipeline has further improved with an increase of almost 50% in newly signed business from RIAs who increasingly value our B2B platform especially as the custodian industry consolidates. We have traditionally served larger RIA practices and are now expanding our addressable market to grow this client base, and we're maintaining our leading market share in the broker-dealer segment. In clearance and collateral management, we service $3.4 trillion in tri-party assets globally. Our ongoing digital enhancements should continue to drive revenue growth from our existing client base, as well as from new clients that are entering the platform. as they accelerate their needs to automate operations, access real-time data, and focus on process optimization and digitization in this challenging operating environment. Our offerings, which include collateral optimization and advanced analytic solutions, allow clients to move from manual to automated, straight-through processes, while optimizing their global securities inventory, which has proven for them to reduce funding and operating costs and enhance their available liquidity. We also expect more clients to convert balances from the bilateral repo and securities lending markets to our tri-party platform as the demand rate remains high for global asset mobility and operational efficiencies that they get on tri-parties. Investment and wealth management had solid revenue growth, positive long-term flows, and good performance this quarter. Across the 30 top strategies by revenue, which accounts for about 60% of IAM's long-term annualized revenue, 74% of those have peer rankings that are in the top two quartiles on a three-year basis. Monica Smith has now officially started her role as CEO of Investment Management, and we also recently appointed John DeSimone as CEO of Alcentra, one of the world's largest managers of private credit. I'm excited to work with him to accelerate our growth by leveraging El Centro's strengths in Europe and increasing their market position in the U.S. There's an opportunity to grow this manager quite a bit faster. Across investment management, we're also investing in technology and in developing offerings in ETFs, ESG, and alternatives to align our investment capabilities to evolving client demands. And I think it's going to nicely complement our leading positions in, for example, LDI, active fixed income, global somatic equity, as well as private credit. In wealth management, client acquisition has started to pick up again with the resumption of socially distanced in-person meetings. We're investing in talent, initiatives such as strengthening our family office offering, and technology and digital tools to support advisors and their clients. We often speak about the importance of controlling expenses. This is especially critical in this low-rate environment. We continue to identify opportunities to improve automation through operational enhancements. Our approach in deciding between reinvesting expense savings and allowing them to fall to the bottom line is based on a rigorous analysis, including investments and prioritizing them the ones with the most attractive ROIs, as well as taking a careful look at their payback periods. We're also assessing the long-term structural opportunities from this current work environment. There's no question we're going to have a meaningful impact on how we work on the future, and we'll need to be agile. We expect it will impact our real estate footprint, our location strategy, the need for contingency sites, marketing and business development, and acceleration of our digitization efforts with our clients. Now building a scalable and resilient operating model is a core part of our strategy. It will enable us to optimize and streamline the interactions across our businesses, technology, and operations, all in the interest of serving clients and driving growth. Now to drive and advance that agenda more rapidly, we recently made the decision to bring operations and technology together under Bridget Engel's leadership. By more directly connecting operations and technology into a single operating model, we're taking a holistic approach to bring together the best of both functions. And I think it's going to give us the ability to share enterprise capabilities, prioritize investments, re-engineer and digitize processes more quickly to drive scale and agility, as well as to embed innovation and automation across end-to-end client journeys and create more agile, client-centric teams. Now let me turn it to capital returns. On September 17th, the Federal Reserve released scenarios for a second round of the PANG stress test, and that was followed by a September 30th announcement that share buyback and dividend increase restrictions have been extended for the fourth quarter. We are now working through the analysis and the modeling as we're given 45 days from the date of receipt of the scenarios to submit our plan. We continue to believe that our low-risk and highly capital-generative model positions us very well through this test. We will commence buybacks as soon as possible with the decision to be informed by the economic and regulatory environment at the time, as well as the outcome of the resubmitted capital plans based on the new scenarios. In the meantime, we continue to accrete significant amounts of capital. The stressed capital buffer, I'll just remind you, gives us flexibility in terms of capital return timing. And so it is a matter of when and not a matter of if. As a reminder, we also opportunistically issued $1 billion in preferred stock during the second quarter, and that will provide us with the opportunity to restack our capital once we can recommence buybacks. We are committed to attractive levels of shareholder returns, and we continue to aim to return at least 100% of earnings to shareholders over time. Before I conclude my comments, I want to welcome Robin Vince, who has just joined us as Vice Chairman of BMI Mellon and CEO of Global Market Infrastructure, with oversight of clearance and collateral management, treasury services, markets, and purging. Bringing these complementary businesses together under his experienced leadership will better position us to become the central facilitator in our clients' capital markets ecosystems across markets, asset classes, and geographies. I'm excited to have Robin with us. He's an accomplished and respected leader in the industry who has held a number of leadership positions at Goldman Sachs, including serving as their chief risk officer, treasurer, head of operations, head of global money markets, and CEO of the International Bank. I'm also very pleased with how the leadership team has come together. It's a highly talented, energized, and diverse group that is willing to truly challenge each other to make us all stronger. To wrap up, while uncertainty certainly lies in terms of how the pandemic evolved and its impact on the global economy, we have also a significant uncertainty about the size and form of future stimulus programs, as well as political developments. But given that, I am certain that the team we have in place will continue to navigate these challenges by executing on our strategic priorities. I am also proud that our employees across the company have worked diligently throughout this unprecedented time to provide great client service. We entered this crisis from a position of strength and have an unwavering focus on building ever greater value for our stakeholders going forward. So with that, I'll turn it over to Emily.