Bank Of New York Mellon Corp (BK) — Q2 2022 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to our second quarter 2022 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 Todd Gibbons, our Chief Executive Officer; Robin Vince, President and CEO Elect; and Emily Portney, our Chief Financial Officer. Today, Robin will lead the call and make introductory remarks, followed by Emily, who will then take you through the earnings presentation. Following their 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, July 15, 2022, and will not be updated. With that, I will turn it over to Robin.

Thank you, Marius, and thank you, everyone, for joining us this morning. Before we talk about our results for the quarter, I'd like to take a moment to recognize that today is Todd's last earnings call. Todd, on behalf of all of us here at BNY Mellon, I'd like to thank you for your leadership and for your many years of service to the firm and our clients. For nearly four decades, you made a tremendous impact on BNY Mellon and its evolution from the rather traditional commercial bank that we once were, to the globally significant financial services firm that we are today. When the Board asked you to take the helm at a very challenging time and during a worldwide pandemic, you not only navigated the firm through this unprecedented environment with a steady hand, but you also continued to drive our client and growth agenda forward. On a more personal note, I want to thank you for working so closely with me during this transition. I know it was always important to you to ensure a seamless transition before you retire, and I couldn't have had a better partner on this journey. Having spent a meaningful part of the last four months meeting and listening to our employees, clients and many other stakeholders, I'm even more optimistic about the next chapter for BNY Mellon. At the very heart of our firm lies an exceptional client franchise. Our clients truly view us as a trusted partner and a resounding message that I have heard is that our clients want to do more with us. We have a growth opportunity by making that easier for them. We have to do a better job connecting the dots, both internally and externally, and we will. And while our investments over the last couple of years have paid off in the form of the remarkably resilient platform that we have today, I'm also of the view that the efficiency opportunity available in driving our operating model transformation has more runway. I look forward to formally taking on my new role at the end of August and will continue to share my views on our strategy and plans over the coming months. Moving on to the quarter, I'll start with some broader perspectives before I run through a few financial highlights and then I'll turn it over to Emily to review our results for the quarter in more detail. During the quarter, we continued to see high levels of volatility across both global equity and fixed income markets, persistently high inflation, rapidly evolving monetary policy around the world, and all this against an increasingly complicated geopolitical landscape. You've all seen those charts. The S&P 500 had its worst first-half performance in over 50 years; the 10-year Treasury had the worst start to the year since the beginning of the Index in the early 1970s. And with 150 basis points in rate hikes, this is the fastest tightening cycle over six months since the Volcker era at the end of the 1970s. Underneath these headlines, what we're seeing across our platforms is that investors are clearly rebalancing and de-risking. We're seeing asset reallocation from growth to value, higher than expected cash balances, and relatively shallow market liquidity, making it harder for investors to move risk. That said, in our role as a critical infrastructure provider touching so much of the core financial system, we do see today that markets continue to function in an orderly fashion; trades are settling and failed and overdrafts are at fairly normal levels. Turning to our performance in the quarter and referring to page two of our financial highlights presentation, we reported EPS of $1.03 on $4.3 billion of revenue and a return on tangible common equity of 19%. Excluding the impact of notable items, EPS was $1.15 and return on tangible common equity was 21%. Our second quarter results reflect the benefit of higher interest rates, the strength of our diversified platform, and our unwavering commitment to our clients. Those clients clearly value our resilience, the quality of our services and insights, and the trusted relationship that they have with BNY Mellon. While lower market values adversely impacted asset-based fees, elevated volatility, wider spreads, and higher transaction activity across new and existing clients hampered the impact. Asset Servicing continued to see healthy client volumes and our sales momentum and pipelines continue to be strong. Wins and mandates are up year-on-year, and that's broad-based across products and geographies, producing a strong pipeline of AUC/A to be installed over time. And our retention rates continue to be exceptionally high, north of 90%. In our ETF servicing business, total funds serviced are up 5% year-to-date, enabling ETF AUC/A to hold steady despite the impact from lower market values. And in alts, wins year-to-date have already exceeded all of 2021. It's also worth noting that more than 20% of our multiproduct deals have a data and analytics component as our DNA capabilities become more meaningful to our overall Asset Servicing deal pipeline. In our markets franchise, FX revenue was up nicely year-over-year and the business continued its steady climb in the Euromoney FX survey, landing at number eight overall this year, our highest ranking ever, up from number 13 a year ago and number 32 in 2018, while also maintaining its top three real money ranking. Issuer Services, and in particular Depository Receipts, had a solid quarter on the back of growth in dividend annuity fees and cancellation activity. In Pershing, year-over-year revenue was also up, and we're seeing encouraging signs in terms of sales momentum. We continue to gather net new assets this quarter, albeit at a slightly slower pace given the market backdrop, but the pipeline for the second half and beyond remains strong as we continue to grow the core business and see renewed client interest in digital wealth solutions as well as the advisory tools we will offer for our Pershing X initiative. In a great One BNY Mellon example, this quarter, Pershing and Asset Servicing combined their capabilities to roll out what is essentially a self-directed vehicle for a large government agency, offering choice of roughly 5,000 funds to a total addressable population of about six million eligible participants for the benefit of their retirement plans. Last month, Pershing hosted its Insight Conference with 1,600 business leaders, industry advocates and next-generation talent. This conference is a flagship event for Pershing and we were pleased to announce some next-generation tech solutions for advisors and wealth management professionals with the introduction of the latest generation of our Pershing platform and enhancements to our API suite. Turning to Clearance and Collateral Management, the business delivered another strong quarter of growth on the back of higher securities clearance volumes, where market volatility continues to drive activity levels in US treasuries. And we also saw average collateral management balances reach another record of $5.2 trillion in the quarter, driven by money market fund demand for the RRP facility. Treasury Services also delivered solid growth, driven by higher rates and higher payment volumes as well as broad-based growth across multiple products, including US dollar wire, debit card processing and immediate payments from both new and existing clients. Our Investment Management business was significantly impacted by lower market values, the unfavorable impact of the stronger US dollar and clients de-risking amid an increasingly uncertain environment. Having said that, our investment performance remained strong, with over 70% of our top 30 strategies by revenue in the top two quartiles on a three-year basis. Insight was ranked first by Greenwich Associates for overall quality in LDI for the 12th year in a row and was ranked first for fixed income overall quality with UK consultants. And BOLD, which is the new cash management fund share class launched to help investors make a positive direct social impact, raised another $2 billion in the quarter, bringing total AUM to over $3 billion in just four months. As most of you saw, we also announced the sale of Alcentra to Franklin Templeton at the end of May. This transaction, which is expected to close in the first quarter of 2023, builds upon our strategic relationship with Franklin Templeton as we will continue to offer Alcentra’s capabilities in BNY Mellon’s sub-advised funds and in select regions via our global distribution platform. We will also provide Alcentra with ongoing Asset Servicing support. At closing, we expect that this sale will increase the firm's CET1 capital by about $0.5 billion and it will free up seed capital to help accelerate our strategy of developing new, differentiated solutions from our specialist investment firms that meet the evolving needs of our clients. And finally, Wealth management continued to execute against its three-pronged strategy: acquiring more client relationships in the ultra high net worth and family office segments, deepening banking relationships and investing in technology and driving efficiency. As we engage with our clients in this space, we continue to lead with some of the most innovative digital capabilities in the industry. For a second consecutive year, the Financial Times named BNY Mellon the Best Private Bank for Digital Wealth Planning in North America, recognizing our wealth online client portal and our proprietary goals-based planning tool, Advice Path. And the Family Wealth Report recognized our active wealth accelerator as the best customer-facing digital platform. Turning to capital. Despite the significant headwind from rapidly rising interest rates, we remain well capitalized, with healthy capital buffers to support our clients with a strong balance sheet in this volatile market environment. The recently announced results of the Fed's 2022 stress test demonstrated once again that BNY Mellon has one of the most resilient business models and balance sheets in the industry. Our preliminary stress capital buffer, as calculated in the test, remains at Fed's 2.5% floor. Earlier this morning, we announced that our Board approved an increase in our quarterly cash dividend by 9% to $0.37 per share in the third quarter. Now before I turn it over to Emily, I'd be remiss not to also touch on our announcement last week that Dermot McDonogh will join us in November and become our next CFO, effective February 1, 2023. I've known Dermot for over 20 years, and I'm really looking forward to his addition to our team. In the meantime, I certainly like reminding Emily that she still has a few more earnings calls to go. And so with that, over to you, Emily.

Thank you, Robin, and good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year-over-year basis unless specified otherwise. Total revenue for the second quarter of $4.3 billion grew by 7%. Fee revenue was up 4%. This increase primarily reflects the abatement of money market fee waivers as well as continued underlying momentum across security services and market and wealth services, partially offset by the unfavorable impact of a stronger US dollar and lower market values across both equity and fixed income markets. Money market fee waivers, net of distribution and servicing expense, were $66 million in the quarter, an improvement of $133 million compared to the prior quarter, driven primarily by higher average short-term interest rates. Firm-wide AUC/A of $43 trillion decreased by 4% as continued growth from new and existing clients was more than offset by the impact of lower market values and currency headwinds. AUM of $1.9 trillion decreased by 17%, reflecting lower market values and the unfavorable impact of the stronger US dollar. Investment and other revenue was $91 million, reflecting a quarter with strong trading performance as well as the benefit of a strategic equity investment gain which was partially offset by seed capital losses. Net interest revenue increased by 28%, primarily reflecting higher rates and a change in asset mix. Expenses were up 12%, including the impact of higher litigation reserves, a notable item this quarter. Excluding the notable item, expenses were flat quarter-over-quarter, as expected, which translates to an increase of 8% year-over-year. The year-over-year growth includes, among other items, the impact of pulling forward our annual merit increase to the second quarter from the third quarter. Provision for credit losses was $47 million versus the provision benefit of $86 million in the second quarter of last year and primarily reflects changes in the macroeconomic forecast. Our effective tax rate was 21.1%. The notable item increased our effective tax rate for the quarter by approximately 150 basis points. Reported EPS was $1.03, pre-tax margin was 26% and return on tangible common equity was 19%. Excluding the impact of notable item, EPS was $1.15, pre-tax margin was 28% and return on tangible common equity was 21%. Now on to capital and liquidity on Page 4. Our consolidated Tier 1 leverage ratio was 5.2%, down 10 basis points sequentially. The continued sharp rise in interest rates in the quarter resulted in an approximately $900 million after-tax unrealized loss on our available-for-sale securities portfolio. We distributed 33% of earnings to our shareholders through approximately $280 million in common stock dividends. Our CET1 ratio was 10%, down slightly versus the prior quarter. Our LCR was 111%, up 2 percentage points sequentially. Turning to our net interest revenue and balance sheet trends on Page 5, net interest revenue was $824 million, up 18% sequentially. This increase was driven by the impact of higher interest rates on interest-earning assets, partially offset by higher funding expense. Average deposit balances and average interest earning assets both declined by 1% sequentially. Loan balances grew by 3% sequentially, primarily driven by collateralized loans in wealth management and growth in capital call finance and trade finance. Our securities portfolio balances were down 3%. Moving on to expenses on Page 6. Expenses for the quarter were $3.1 billion on a reported basis and $3 billion, excluding the impact of higher litigation reserves. Excluding notable item, expenses were flat quarter-over-quarter, as expected, and up 8% year-on-year. This year-over-year increase reflects investments net of efficiency savings, the pull forward of our merit program as well as higher revenue-related expenses. The benefit of the stronger US dollar was largely offset by persistently higher inflation. A few additional details regarding noteworthy year-over-year expense variances: Staff expense was up 7%, driven by investments in the annual employee merit increase, which in the prior year was effective in the third quarter. Distribution and servicing expense was up 23%, reflecting higher distribution costs associated with money market funds. Business development expense was up, reflecting some normalization of travel and entertainment off a low base from last year. And lastly, the change in other expense was largely driven by the increase in the litigation reserves. Turning to Page 7 for a closer look at our business segments. Securities Services reported total revenue of $2 billion, up 12% compared to the prior year. Fee revenue increased 8% and net interest revenue was up 29%, reflecting higher interest rates, partially offset by lower deposit balances. In Asset Servicing, investment services fees grew by 4%. This increase reflects lower money market fee waivers and higher client activity, partially offset by the unfavorable impact of the stronger US dollar and lower market values. Asset Servicing continued to deliver healthy organic growth from both existing and new clients and our pipeline continued to grow across client segments and with particular strength in EMEA. In Issuer Services, investment service fees were up 10%, reflecting higher depository receipts revenue and lower money market fee waivers, partially offset by the impact of the previously disclosed lost business in the prior year in Corporate Trust. Next, Market and Wealth Services on Page 8. Market and Wealth Services reported total revenue of $1.3 billion, an increase of 10% compared to the prior year. Fee revenue was up 9% and net interest revenue was up 18%, reflecting higher interest rates and higher loan balances partially offset by lower deposit balances. Encouragingly, investment services fees were up 9%. The positive impact of lower money market fee waivers and higher transaction activity was partially offset by the impact of lost business in the prior year, as previously disclosed. Net new assets were $16 billion in the quarter. In Treasury Services, investment services fees were up 10%, reflecting the benefit of lower money market fee waivers as well as higher payment volumes on the back of growth from both new and existing clients. In clearance and collateral management, investment services fees were up 5%, primarily reflecting higher US clearance volumes amid elevated market volatility and continued geopolitical uncertainty, all driving strong demand for US Treasury securities. Now turning to Investment and Wealth Management on Page 9. Investment and Wealth Management reported total revenue of $899 million, down 10%. Fee revenue was down 9%. Investment and other revenue was a negative $13 million, which included seed capital losses as opposed to gains in the prior year. Net interest revenue was up 32%, reflecting higher interest rates as well as higher deposit balances. As mentioned earlier, we ended the quarter with assets under management of $1.9 trillion, down 17% year-over-year. This decrease primarily reflects lower market values and the unfavorable impact of the stronger US dollar; approximately 45% of our AUM are denominated in foreign currency. As it relates to flows in the quarter, we saw $14 billion of net inflows into long-term products and $26 billion of net outflows from cash. LDI continued to be a bright spot among our active strategies with $12 billion of net inflows. Our index strategies gathered $12 billion of net inflows as well. In Investment Management, revenue was down 14%, reflecting the unfavorable impact of the stronger US dollar, lower seed capital results and lower market values, partially offset by the benefit of lower fee waivers. Further to Robin's comments on our positive investment performance, just this past weekend, Barron's recognized our Dynamic Value Fund and Income Stock Fund as two top-performing active funds based on year-to-date results as well as longer-term track record. Wealth Management revenue was down 1%, as growth from higher net interest revenue resulting from higher interest rates and healthy deposit growth was offset by a decline in fee revenue resulting from lower market value. The business has continued to increase the number of clients who use our banking services, which is now at 60%, up significantly from a couple of years ago. Client assets of $264 billion were down 13% year-over-year, primarily driven by lower market values. Page 10 shows the results of the Other segment. I will close with a few comments on our outlook for the second half of the year. As we all know, the intersection of significant market volatility, rapidly evolving monetary policy from central banks around the world, continued geopolitical tension and increasing uncertainty about the macroeconomic environment has made forecasting difficult. Based on current market-implied interest rates for the second half of the year, we now expect the percentage growth in net interest revenue for the full year to be in the low 20s compared to the prior year. This improved outlook continues to assume modest deposit runoff in the second half of the year. It also assumes slightly lower deposit betas than previously expected, which has been informed by our repricing experience to date. Since we last provided you our fee revenue outlook for the year on our first-quarter earnings call, both equity and fixed income market values have declined further and the US dollar has continued to strengthen significantly against most major currencies. Assuming equity and fixed income values as well as currencies stay at the level where they ended the second quarter, we would project fee revenue for the full year to be flat to slightly up year-over-year. As it relates to expenses, excluding notable items for the year, we continue to manage towards a year-over-year increase in the 5% to 5.5% range. Continuously strong inflationary headwinds are expected to largely offset the favorable impact of the stronger US dollar. Revenue-related expenses are increasing as fee waivers abate and we're onboarding our strong sales pipeline. We continue to invest in the targeted growth and efficiency initiatives that we've highlighted before. Due to the impact of the notable item in the second quarter, we now expect our effective tax rate for the year to be closer to 19.5%. Taken together with our 16.7% tax rate in the first quarter, our expectation for a 19.5% to 20% tax rate in the second half of this year remains unchanged. Last but not least, we continue to be cautious on buybacks in this volatile environment. Based on current projections, we expect to end the third quarter at or above our internal capital ratio target. With that, operator, can you please open the line for questions?

Good morning. Emily, your thoughts on betas, the decline in deposits, and the increase in NII were quite interesting. Could you elaborate on what's changed in the past few weeks? How are you assessing the situation following the latest rate hike and your outlook for NII going forward?

Sure. Good morning, Jim. So, as you rightly point out, we've increased our NIR guide. We now expect NIR to grow in the low 20% range year-on-year. And really, the main things which have changed from a couple of weeks ago is that deposits haven't run off as fast as we had expected. Also, betas are coming in a bit lower than we had anticipated. And also now baked into that, our expectation is that, of course, we'll get some higher yields from cash held at central banks just given the pace of monetary policy. So, those are the main drivers that are in the outlook for the full year. And I would just obviously kind of caveat everything that there's a tremendous amount of uncertainty, and it's pretty impressive at the time.

Okay, that's helpful. And then just your comment of getting to where you want to be in the third quarter on capital if all else equal, does that mean you would be thinking about getting back into the buyback game in the fourth quarter, or is it still a little too early to be calling for that?

We've always indicated that our capital returns, particularly buybacks, would rely on the trends in AOCI and deposit levels. AOCI declined this quarter while deposits increased slightly, as I mentioned. The environment remains highly uncertain, so we will proceed with caution. We anticipate a decline in deposits, but we expect to surpass our internal targets, aiming for over 5.5% for Tier 1 leverage and over 10% for CET1 sustainably. At that point, we will begin to consider buyback activity. However, as you all know, this is entirely dependent on the future outlook.

Hi, good morning.

Good morning.

Hi Robin, I had a question for you. It's been quite a while, possibly more than five years, even up to a decade, since we’ve been asked about the impact of technology and blockchain on your industry. These questions seem to emerge in waves. Recently, I've received another influx of inquiries regarding this. So, as you take on your new role as CEO, could you share your thoughts on the timeline and pace at which you believe the organization needs to evolve?

Sure. If you take a step back, this is a fascinating area in our industry. Once there was paper everywhere, with runners and market closures, and then computing emerged along with traditional ledgers over the past 50 years. Now we have blockchain technology, which opens up new possibilities. We're looking forward to this and believe it will create great opportunities for our business. While there is some risk of disruption that we need to stay ahead of, we also see numerous opportunities arising from it. The interest from our clients in receiving assistance to navigate this landscape is impressive, particularly from institutional clients interested in cryptocurrencies, which we consider intriguing but not the central focus of digital assets. We're building various capabilities across the digital asset life cycle, including coins and tokenized assets, and we've established ourselves as a leader in this area. We've been supporting our clients with traditional assets as part of their stable coin portfolios, integrating ourselves into the ecosystem and positioning ourselves advantageously. There's much work to be done, and I believe it will take years and potentially decades to fully understand the impact, but we're engaged in it and enthusiastic about the journey ahead.

And the operating leverage as you go through this journey, how do you think about managing that?

This is a super long-term journey, Betsy. I think it's hard to have a point of view. But if I zoom out, would I say that it’s probably helpful longer term? Sure, it probably should be, because I think some of the inefficiency of post-trade processes can be squeezed out with some of these new technologies. This is going to be a while in the making. We are going to have to invest to get from A to B on this.

Okay. Thank you.

You're welcome.

Good morning. Emily, when you look at your fee revenue, you gave us some guidance on if the markets don't change materially from where we are today and gave us that guidance. Can you remind us what percentage of fee revenues would you say are tied to values with their variable rate price for your customers versus a fixed price?

It really depends by line of business. For example, when you think about Asset Servicing, it’s about 50%.

Very good. And then — yeah, go ahead. I’m sorry. Go ahead.

So I was going to say, just to give a bit more color just in terms of unpacking that fee guidance because I think it's probably helpful. So when about now the year-on-year change of flat to slightly up, about 5% of that is coming from the abatement of waivers. That is more than offset, call it 5% to 6% from what I would call market factors; market levels, currency as well as the impact of geopolitical factors. So for us, obviously, some of the impact made the loss that we took on Russia, and in Ukraine are just some CC business in that region. But then that is offset by organic growth, but still 50 odd is expected to be between 50 basis points to 100 basis points. We have very strong fundamentals across Asset Servicing, Treasury Services, CCM, and even in Pershing and Corporate Trust, which are lapping some lost business from last year, the fundamentals, and the pipelines are strong.

Very good. And maybe for Robin, obviously, disruption is going to create opportunities for some companies over the next 6 to 12 months to make acquisitions. Can you give us your thoughts on what you think you can add if you need something to the product set that Bank of New York has?

Sure. I think about this pretty similarly to the way that Todd and Emily have described before. It is largely for us, at least as we sit here today, Gerard, an opportunity to acquire capabilities. A large and transformational transaction is not very high on my list of priorities right now. I'm much more focused on the organic growth, the opportunities that we have across the franchise, and also just driving the operating effectiveness of the company. But as you saw last year, we made an acquisition in the form of Optimal Asset Management, which set us a bit along on our journey in Pershing X. We made an acquisition in the form of Milestone, which was helpful and accretive to our business broadly in Asset Servicing. We will continue to be on the lookout for those types of things. But as with anything in the M&A space, there's a high bar.

Very good. And Todd, good luck in the next run. Great job being at Bank of New York.

All right. Thank you so much. Appreciate that.

Hi. Thanks. Good morning, and best of luck again, both of you, Robin and Todd.

Thanks, Ken.

Emily, on the deposit side, can you talk a little bit more about your slightly different expectations for beta? So I'm just wondering, can you flesh that out for us in terms of how you think that projects? And also can you help us understand the difference between how you might expect deposits in the US deposit side to act versus when we start to see the impact of the non-US deposit base move? Thank you.

Sure. What we're seeing there, there's a couple of things in there. So about the betas in particular. Betas have been coming in a little bit better than we had anticipated, call it, 5% or 10%. Why that is? Our thinking is it’s probably due to a couple of factors: the sheer amount of liquidity that's in the system, the risk-off behavior that you're seeing based on the uncertainty. Proactive management by us in terms of our deposit base and targeting operational deposits that we do want to retain. We still think that ultimately betas will retrace what we saw in the last cycle, although like I said, they are currently lagging what was actually anticipated. We’re seeing pretty much similar themes in both the US as well as Europe. What I would say is as the ECB gets to zero, that's probably the toughest place to be for us. As soon as they get negative, we expect betas to also kind of largely retrace what we saw in the last cycle. But that's basically what we're seeing and thinking.

Okay. Understood. Do you have any updated thoughts on where you expect deposits to be this year? Also, can you provide any insight on how total deposits might behave through this cycle compared to the last, in terms of either mix shift or total? Thank you.

Yes, sure. Just a couple of things. The first thing I would just say is I just would step back for just a moment and remind folks about the central role we play in terms of liquidity across the financial ecosystem. We manage on any given day $1.2 trillion in liquidity across our sophisticated clients. Some of that, of course, is on balance sheet as we're talking about, but there's also a significant chunk of that off balance sheet. We offer a lot of off-balance sheet options, whether it's our own money market funds, third party market funds, or repo. The reason I say all that is just that as deposits move, we will also get some benefit and see some of that moving around the system based upon where we are in what I would call each hold the fact. So we can benefit from that and see all of that as cash moves around the system. But getting very specifically into your question on deposits and deposit balances, what I would say, for this year, and then I'll talk about the landing point, for this year, assuming currently implied rates are realized, we would expect average deposit balances to probably decline another 5% to 10% from where they were in the second quarter, and that was $311 billion. Just to give you some color, in June, they were at $305 billion. And on a spot basis, they're already below that. Some of that, of course, expected because of seasonality. Likewise, just a reminder, when you think about the components of our deposit base, we would expect most of that runoff to be in NIBs. So we'd expect NIB to revert to about, call it, 20% to 25% of our total deposit base. They're currently about 30%. When you think about the entirety of the cycle, when we’re fully through the cycle and just putting it in perspective, so between the fourth quarter of 2019 and the fourth quarter of 2021, deposits increased by about $100 million. About 50% of that was NIBs. They are, of course, as we've always talked about, more rate-sensitive. We would expect, given the change in the mix of our business, Treasury Services is a much bigger business; Asset Servicing likewise is a bigger business, so we think we'll be able to retain roughly two-thirds of that when it's all said and done.

Great color. Thanks, Emily.

Hi. Can you hear me?

Yes, Mike. Good morning.

Okay. Great. Just the big picture question back to Robin. Start of the call saying customers would like to do more business with BNY Mellon, and that would be by connecting the dots. Connecting the dots is a simple and powerful statement, but also extremely difficult to execute, because these dots are in different business lines, different geographies, managed by different people. How are you able to connect the dots and really focus around the customer and so many of these businesses are in just parts of the firm? Conceptually, how do you attack a problem like that?

Yes, it's a great question, Mike. It's something that I'm really very enthusiastic about as a firm. One of the benefits of having spent a lot of time talking to clients over the course of the past four months and working across all levels of the company, has really been to be able to get into this opportunity that I highlighted that you just referenced. We feel we've got a few things going for us. Number one, we have this real differentiated trust from our clients. So there's a will to do more business with us. I get questions from clients who ask me that they want to do more business with us and they're unsure how to do it. That's a pretty differentiated situation to be in, and I view that as a real advantage. Second, we have a large set of related and interconnected businesses. So it's not like we're trying to sell completely different products to people where it's a real reach. These are adjacent business lines. It's collateral talking about margin, collateral talking about Treasury Services, Treasury Services for wealth clients, foreign exchange for Treasury Services clients. There's that opportunity due to the nature of the businesses we're in. Third, it's the culture of the people. We have people at BNY Mellon who are client first, firm second, self third. That is a very powerful cultural attribute. I'll give you one example; this quarter, Pershing and Asset Servicing came together over the past few months to provide this new capability for a large government client that I referred to which has a significant addressable market for us. Although the revenue will hopefully be interesting, the interesting factor there is how they came together. I think it is different than the way it would have been a few years ago. I'm optimistic about this and we'll keep talking to you about it. We call it ONE BNY Mellon and I’ll be pleased to give you updates along the way.

I have a follow-up question. Regarding your clients, your firm, and individual contributors, how do you view compensation for those who connect the firm in the way you envision? If individuals receive higher payments for this, do you believe it increases their motivation, or do you have a different perspective?

I'm not naive. Of course, financial compensation comes into it, but on that hierarchy of client first, firm second, self third, the compensation bit, while important was, in fact, third on that list; people take a lot of pride associated with these sales and rallying around to deliver the firm for clients. We will do all of the above: leverage the pride of our institution, America's oldest bank, the fact that we have this incredible connectivity within our franchise; and, of course, we'll align appropriate compensation to achieve those objectives.

All right. Thank you.

Thank you.

Hi. Good morning. Thanks for taking my questions. I guess I'm curious about the relationship with fee revenue and expenses. It seems, of course, we've got a challenging market environment, not surprising to see the fee revenue pressure. If you could update us on the rigidity of the operating expenses and whether or not there's an ability to ease some of that pressure a bit. I think you usually guide to core expenses, so we'd back out the charge this quarter, but just to housekeeping-wise confirm that.

Sure. There's a lot in there, Brennan, and let me take a step back. When you think about the 5% to 5.5% upside for the year, it’s in line with what we've been talking about since the beginning of the year. Any benefit we are getting from currency tailwinds is being more than offset by much persistent inflation pressure. If you just take that out of the equation, the 5% to 5.5% is about 2% driven by higher revenue-related expenses like distribution expenses associated with the abatement of money market fee waivers, think clearing fees associated with higher volumes. Also in that number is higher onboarding costs associated with the strong pipeline that we’re onboarding across various businesses. The remainder really relates to investment net of efficiencies, as well as, what I would call normalizing costs as we return to the office, like T&E and occupancy, etc. In terms of how we think about managing the cost base, we think of three main categories. One is revenue-related. The other is structural around the bank, which is difficult to move in the near term. The third is change the bank or investments, the discretionary category. As Rob, Todd, and I have mentioned before, we see compelling opportunities, and we've been extraordinarily targeted in those opportunities. We’ll stay the course on those investments; you don't just stop and start them based on the macroeconomic backdrop and they are important to the future of the firm. There are areas, of course, that we are pushing on, and that we can hopefully accelerate from an efficiency perspective, things like eliminating bureaucracy, automating manual processes, optimizing our real estate and geographic footprint, better scaling our vendor usage to get more buying power, reducing unnecessary temps and consultants; all those sorts of things could be meaningful in totality.

Thank you for all of that. Just to clarify the main part of the question, you provide guidance on core expenses, correct?

Yes, I'm sorry. Yes, it was core excluding notables, correct.

I understand. I had several points I wanted to clarify. I appreciate all the information. When considering the components of the expenses related to revenue and the pipeline, does this imply that, since our revenue trends have been down this year compared to our initial expectations, we should anticipate that some of the benefits from the expenses incurred this year might manifest in 2023? Is that the case, or is the notion that the revenue associated with the expenses is being countered by some of the external challenges we've encountered?

The environmental headwinds mean market levels and currency have been an enormous headwind. Yes, it’s fair to say that some of the cost base is normal upfront costs we have for onboarding clients that you will actually see the fee revenue realized over 2023, 2024 and beyond.

Hey good morning. You called out a nice to be installed pipeline AUC/A. Can you just remind us how long that takes to get installed and start generating revenue? Is there any notable difference in the profitability of some of the new wins like that ETF business that you called out, any more or less profitable? Anything like that worth noting?

When we think about how the timing of the onboarding is really dependent on the business unit you're talking about. Generally speaking, it's about a six to 12-month onboarding timeframe. In terms of the profitability and fees generated from the pipeline and in terms of ETF, Robin, if you want to—

Yes, I would say that we are very focused on the net margin contribution of the new business that we're bringing on. We have a rigorous process to look at that. As you look at the overall margin of the business, we may have been a bit victim to choices at the time, a business that was onboarded that wasn't always at the appropriate margin. We're being very scrupulous about this as we look at the business coming in today.

Okay. Thanks. And a quick one, Emily. Could you just quantify or did you quantify what the effect of that merit increase that was pulled into 2Q?

It was about 1% in terms of the quarter-on-quarter variance.

Okay. Thanks a lot, and congrats to you and to Todd and Robin.

Thank you.

Thanks Rob.

Thank you very much. I want to extend my congratulations and best wishes to Todd, welcome Robin, and also to Emily. I have a couple of small modeling questions for Emily and then a strategic revenue growth question for Robin. First, Emily, are your net interest revenue assumptions based solely on the forward curve for the Central Bank's rate hikes? Additionally, can you quantify the strategic investment equity gain for the quarter? Lastly, regarding Issuer Services, that $300 million was impressive; is that a sustainable run rate for the second half?

Okay. Got three questions there. So, first, in terms of deposits, yes, we use the forward curve for all major countries and regions, so it is global. Two, what was your second question?

Just the strategic investment gain that you called out, the size of…?

Yes, we're not disclosing that specifically, but it was a driver behind our investment and other income of $90 million. There were also some seed capital losses net of hedges in that line this quarter that did not exist in the prior year, so all of that is playing through the investment and other income line. Your last question?

The Issuer Services was really good this quarter; didn’t know if that’s a good run rate?

Yes, in Issuer Services, we had better performance in DRs than we had originally anticipated; strong dividend activity is often seasonal that you see from first quarter to second quarter, so that's really the driver.

Thank you very much, operator. Thank you, everyone, for your interest in BNY Mellon. I know it's a very crowded morning today, so we appreciate you dialing in. If you have any follow-up questions, please do reach out to Marius and the IR team. Let me say be well and enjoy your summer as we finish up. Thank you.