The Bank of New York Mellon Corporation

Good morning and welcome to the 2023 first 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 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 Marius Mertz, BNY Mellon Head of Investor Relations. Please go ahead.

Marius Mertz Thank you, operator, and good morning, everyone. Welcome to our first quarter 2023 earnings call. As always, we will reference our financial highlights presentation which can be found on the investor relations page of our website at bnymellon.com. I'm joined by Robin Vins, President and Chief Executive Officer, and Dermot McDonough, our Chief Financial Officer. Robin will start with introductory remarks, and Dermot will then take you through the earnings presentation. Following their 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 supplements, 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, April 18, 2023, and will not be updated. With that, I will turn it over to Robin.

Thank you, Marius, and good morning, everyone. Before I turn the call over to Dermot to review our financial results, I want to provide some broader perspective and an update on how we're serving our clients and stepping up as a firm in this complex environment. Following a relatively benign start to the year, markets were quite unsettled in March when we saw two prominent bank failures in the United States and a government-brokered distressed bank takeover in Europe. While things have calmed down somewhat over the past couple of weeks, after over a decade of zero interest rate monetary policy, the risks and uncertainty associated with the fights against inflation, higher interest rates, and quantitative tightening, together with geopolitical tensions, remain elevated. And domestically, we continue to march closer to another debt ceiling standoff. Against this backdrop, it's a healthy reminder that the strength of BNY Mellon's highly liquid, lower credit risk, and well-capitalized balance sheet in combination with the resilience of our platforms, is the bedrock that supports our client franchise. For nearly 240 years, we've built up a legacy of client and industry trust rooted in our resiliency through good times and bad. We've been a port in the storm for our clients in periods of stress over that time, and recent weeks have been no different as we've helped our clients to navigate the volatility in markets, with our strong balance sheet and broader liquidity solutions. After seeing deposit balances increase following recent market events, we ended the quarter slightly higher than where we started it. And our broader liquidity platform, which manages over $1.3 trillion worth of cash and other short-term investment options on behalf of our clients, has seen growth across most channels. But more broadly, the recent events have led to concern around the health and stability of some banks as they've highlighted the critical importance of robust asset and liability management for all financial services participants. As one of the largest banks in the United States and as a G-SIB, we are held and we hold ourselves to a high standard, including stringent capital, liquidity, and stress testing requirements. On capital, Unrealized losses related to our available for sale investment securities portfolio are already reflected in our capital ratios. We have consistently maintained the majority of our investment securities portfolio as available for sale. And as you will recall, we've had a view for a while now that rates would be a little higher in their terminal rate than the market has been pricing in. And so over the last year and a half, we've meaningfully reduced the duration and enhance the risk and liquidity profile of the portfolio. Together, these actions provide us with ample flexibility to adjust to changing market conditions as we move through the year. And on liquidity, our robust liquidity management framework includes risk metrics, such as concentration limits and daily liquidity stress testing protocols that go beyond regulatory requirements. It is these periods of stress that also showcase our characteristic resilience and the power of our diversified and lower-risk business model. We primarily serve large institutional clients who collectively maintain substantial deposit balances with us as part of the services we provide to support their business activities, whether that's custody, cash management, clearing, and corporate trust services. As a result, roughly two-thirds of our deposit base is operational and sticky in nature and derives from a diverse set of business lines. And as I mentioned earlier, we manage over a trillion dollars of cash on behalf of our clients across deposits, money market funds, repos, and securities lending, which allows us to retain a connection to the money when it moves around various short-term investment alternatives. We're also the largest provider of collateral services globally. Our average tripartite balances increased to $5.6 trillion this quarter, which is another example of just how comprehensive our role is in the broader liquidity ecosystem. Now, turning to our financial performance in the quarter. As you can see on page two of our financial highlights presentation, we delivered solid results. We reported earnings per share of $1.12, up 30% year over year, or up 20%, excluding notable items, primarily in the first quarter of last year. Revenue was up 11% year over year. We closely managed expenses, up 3% year over year. And we generated a healthy return on tangible common equity of 20%. And given how in focus capital and liquidity are at the moment, I'll note that our Tier 1 leverage ratio, as well as our liquidity coverage ratio, remain strong and unchanged compared to the prior quarter, well above regulatory requirements and our own management buffers. Stepping back for a moment, I'm encouraged by the early progress that we are seeing around the company to deliver on the commitments that we made to you back in January. First, we are bending the cost curve. Our first quarter expense growth came in marginally better than our initial internal plan, and we remain firmly committed to cutting our core expense growth by roughly half this year compared to 2022 on a constant currency basis. Second, in line with our outlook for the year, we continued to derive healthy growth in net interest revenue. Third, we delivered positive operating leverage on a year-over-year basis, And fourth, we returned a meaningful amount of capital to our shareholders, including $1.3 billion of common share repurchases. We've made good initial progress on our plan to return more than 100% of earnings to shareholders in 2023. And we currently expect to continue buying back stock, albeit at a slower pace, given the uncertain environment. At the same time, I've made a promise to you to call it as it is. when we fall short of our expectations. And so, to be candid, our fees being flat year over year was somewhat lackluster. Having said that, there were a number of business highlights this quarter that are designed to help us change this trajectory and drive underlying fee growth over time, and so I'll call out a few. In asset servicing, the pipeline remains strong and the margin on new deals is improving as we're increasingly holding the line on price to drive more profitable growth in the business. ETF activity is up across all measures, with healthy increases in AUCA, orders, and flows. And wins with alts and in our data platform service business were pleasing to see this quarter. In January, we announced the launch of our outsource training business, powered by a platform that already executes more than $1 trillion in volumes annually for our investment management business. This global multi-asset trading service can help clients to reduce their costs and focus on alpha generation. While still early days, we think there is significant opportunity here to offer front office trading capabilities in a trusted, unconflicted way to the market. Pershing, brought in a healthy $37 billion of net new assets during the quarter, representing mid-single-digit organic growth on an annualized basis. And total revenue was a quarterly record. As part of BNY Mellon, clients recognize Pershing as a source of strength and stability in the marketplace. In the current environment, clients also appreciate the flexibility and choice of our product offerings. Meanwhile, our Pershing X team continues to make great progress as we aim for a broader rollout this summer. Just last week, we announced a collaboration with Snowflake to provide our prospective Pershing X clients with more powerful analytics and faster data management, improving their digital experience so they can operate more efficiently. Clearance and collateral management activity remained elevated given the volatility in the market and as dealers increasingly finance larger inventories via TriParty. We continue to see growth from the investments that we've made to increase market connectivity by expanding our TriParty platform into new markets across Asia and EMEA, and into new trade types and collateral pools, reinforcing our role as the only truly global provider of collateral management. Treasury services delivered broad-based client wins across U.S. dollar, digital, and FX payments, liquidity, and trade finance products, and also saw a nice pickup in account and operational deposit growth towards the end of the quarter. In investment and wealth management, although our investment performance remained solid, AUM flows were mixed with strength in fixed income and LDI strategies, partly offset by outflows in other long-term strategies. During the quarter, our UK investment manager, Newton, launched five future legacy funds, its first range of risk-rated sustainable multi-asset funds to support growth in the UK retirement market. And back in the US, the Dreyfus Bold share class, which we introduced last year, has now raised over $4 billion in AUM. In summary, over the past few months, I've spoken about our combination of client trust, at-scale platforms, client-focused culture and resilience as a powerful foundation on which we can build. I'm also proud that our culture has been front and center in recent weeks as our people have risen to the occasion, responding commercially and working tirelessly to enable successful outcomes for our clients in these uncertain times. I view this client-first culture as the key to make more out of our diversified portfolio of adjacent businesses. While we are the world's largest custodian and a trust bank, the contributions from clearance and collateral management, purging, treasury services, and issuer services are differentiating in our client value proposition. With that, let me officially welcome Dermot to his first earnings call.