The Bank of New York Mellon Corporation

Good morning and welcome to the 2023 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 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.

Thank you, Operator, and good morning, everyone. Welcome to our second 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 Vince, 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 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, July 18, 2023, and will not be updated. With that, I will turn it over to Robin.

Thanks, Marius, and thank you, everyone, for joining us this morning. Dermot will walk you through the financials for the quarter shortly, but in summary, the company delivered good financial performance amid a very dynamic operating environment. And we've continued taking actions to position the firm for higher underlying growth and enhanced operational efficiency over time. Referring to slide two of our financial highlights presentation, BNY Mellon reported second quarter earnings per share of $1.30, which was up 26% year over year on $4.5 billion of revenue, an increase of 5% year over year. Consistent with our focus on driving pre-tax margin expansion in 2023 and beyond, we drove meaningful, positive operating leverage as we maintained strong expense discipline while continuing to make significant investments to improve our growth trajectory and transform our operating models. As a result, our pre-tax margin improved to 30%, and we generated a return on tangible common equity of 23% in the quarter. As I've said many times before, disciplined execution and consistent progress from milestone to milestone is the key to unlocking the financial opportunity inherent in our high-quality franchise. While we're conscious of the work ahead of us, we're pleased to see the momentum building across the company. First, we're getting an increasingly firm grip on our expense base. I'm proud of our people who are embracing the task of making BNY Mellon a more efficient and scalable company, which gives me confidence in our ability to deliver tangible results in 2023 and beyond. Remember, in January, we committed to essentially cut expense growth in half this year, roughly 4% growth excluding notable items in 2023 compared to roughly 8% ex-currency in 2022. Halfway through the year, I'm pleased to report that we're on track, even a little ahead of our plans. Second, the strength of our balance sheet, the resiliency of our business model, and our proactive balance sheet management continue to differentiate us with clients and create value for our shareholders. Net interest revenue and deposits were both bright spots in the quarter, and the Federal Reserve's 2023 bank stress test demonstrated our capacity to withstand an extreme stress scenario. As a result of the test, our preliminary stress capital buffer requirement remains at the regulatory floor of 2.5%. And while our overall approach to returning capital to shareholders remains unchanged, we increased our quarterly common dividend by 14% to 42 cents starting this quarter. Third, we remain laser focused on driving sustainably higher underlying growth across the firm. We've talked before about the advantages of our business model. Businesses such as clearance and collateral management, purging, depository receipts, corporate trust, and treasury services offer us a breadth and diversification in comparison to traditional trust banks. We saw strength in some of these differentiated businesses in the second quarter, and new business pipelines are healthy across the board. And importantly, we continued pushing ahead with new, innovative client solutions that we expect to become growth accelerators for the medium and long term. Less than two years after hiring employee number one, PershingX is now live with Wove, our open architecture wealth management platform that addresses a major pain point in the advisory market by better integrating advisors' core applications. Wove allows us to integrate some of the best solutions from around BNY Mellon, including from our investment management business, as well as from leading third-party fintechs. Our launch at Pershing's Insight Conference in June has garnered significant early enthusiasm from clients and industry influencers who see Wove as a promising solution. The client pipeline is growing nicely, which we will report on more in the quarters ahead. More broadly, Wove is a proof point of our ability to execute at speed. We can deliver leading solutions quickly when we empower our people, surround them with the expertise and tools that they need, and drive forward with a product mindset, leveraging our great platforms. It's also a reflection of the change in mindset we are cultivating here, more commercially oriented with a greater sense of ownership, and a greater focus on execution. I'll also call out Treasury Services, which continues to innovate in areas like faster payments and banking as a service. This quarter, the business announced a strategic alliance with Mobility Capital Finance, or MOCAFI, a black-founded fintech whose mission is to enable underserved communities to access banking services. This is just the latest example of how we are deploying our capabilities to advance financial inclusion in an innovative way. Now, I've spoken in the past about the opportunity to do more things for our clients by connecting the dots for them through our One BNY Mellon initiative and how we're going to operationalize that. To help us realize this potential and more broadly to sharpen our commercial focus and elevate the client experience across the firm, in May, we welcomed Katinka Wahlstrom, as our first chief commercial officer and member of our executive committee. In addition to taking on oversight responsibilities for global client management, I've tasked Katinka to embed 1BNY Mellon into the operations of our company. It's important that we commercialize this opportunity through training, by properly incentivizing our people to collaborate across the firm, and by developing deliberate approaches to multi-product solutions. Stepping back for a moment, let me provide a few thoughts on the macro environment. We acknowledge that the path of interest rates, continued QT, and elevated U.S. Treasury issuance activity carry meaningful uncertainties for the environment in the months ahead. From our vantage point as the primary clearer of U.S. Treasuries and through touching roughly 20% of the world's investable assets, our data tells us that More than half of recent T-bill issuance has been absorbed by funds flowing out of the Fed's RRP, but a good chunk of the balance has come from the banking system. Most of the money market fund demand for T-bills has been concentrated at the very front end, as funds have been less comfortable extending duration past the end of July, ahead of an expected rate hike later this month, and continued uncertainty on the path of rates thereafter. We're also not seeing much foreign demand as cross-border flows into U.S. Treasuries of all maturities are negative and have been for some time. Together, this is likely going to put some incremental pressure on domestic funding sources, funds, banks, and corporates, as well as state and local governments to absorb upcoming supply and less T-bill prices cheap and materially from current levels. For this reason, we do expect some further pressure on deposit balances across the industry in the months ahead. As you would expect, we are positioning ourselves prudently given these uncertainties, but see these flows as benefiting our broader cash ecosystem. We manage over $1.3 trillion worth of cash on behalf of clients across deposits, money market funds, repos, and securities lending. And we're the biggest provider of collateral services globally as well, with about $6 trillion of tri-party balances on our platform. This $7 trillion of relevance to money market flows allows us to retain a connection to the money when it moves around various short-term investment alternatives and allows us to help our clients find the right solutions for their investment needs. Let me conclude my comments on a reflective note. As I've acknowledged before, strategy matters, but execution and culture matter even more. As we close the books on the second quarter, we're entering the back half of the year with good momentum and confidence in our ability to drive change by executing consistently and at pace. Over the past couple of years, we've been able to attract high caliber talents to upgrade multiple important roles across the company. Our existing team, together with these new leaders, are rising to the challenge of unlocking our potential. And it's clear to me that we have a tremendous opportunity in front of us by leveraging our unique combination of businesses, our preeminent client franchise, and the power of our culture and people. I'm encouraged by the initial progress over the past couple of quarters and excited about what lies ahead.