Bank Of New York Mellon Corp (BK) — Q4 2022 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Welcome to our fourth 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 Robin Vince, President and Chief Executive Officer; and Emily Portney, our Chief Financial Officer. Robin will start with introductory remarks, and Emily 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, January 13, 2023, and will not be updated. With that, I will turn it over to Robin.

Thank you, Marius. Good morning, everyone, and thank you for joining us. Before Emily takes you through our quarterly results, I'd like to make a few broader comments on our performance in 2022 and on some areas of focus for 2023. As you can see on Page 2 of our financial highlights presentation, we reported earnings per share for the full year of $2.90, down 30% compared to the prior year, and a return on tangible common equity of 13%. Excluding the impact of notable items, we reported earnings per share of $4.59, which was up 8% year-over-year, and a return on tangible common equity of 21%, reflecting our solid underlying performance against the backdrop of a complex operating environment in 2022. Our results this year included several notable items; for example, those related to Russia in the first quarter and the goodwill impairment related to investment management in the third quarter. And our fourth quarter results reflect the impact of a number of decisions that we made to improve our revenue growth and efficiency trajectory moving forward. Excluding notable items, revenues grew a little faster than expenses as we continued to see strength in client activity and volumes, while continuously positioning ourselves to derive meaningful benefit from the upward move in interest rates. Together, these factors more than offset the stiff headwinds from lower market levels. On the back of organic growth in AUC/A, we continue our role as the world's largest custodian, and we saw cumulative net inflows in assets under management. Beyond the numbers, I'd like to highlight a couple of areas where I'm particularly encouraged by our performance in 2022. First, our sales momentum, which speaks to the strength of our client franchise and our capabilities. In Asset Servicing, we continued to elevate our client dialogue, while maintaining a strong focus on service quality to support our clients through a difficult environment. Sales wins increased off a strong 2021, and we're winning larger and higher-value deals, which is where the elevation of client dialogue matters. In ETFs, AUC/A reached $1.4 trillion, as we saw strong net inflows throughout the year and the total number of funds serviced rose by 12%. And in Alts, we grew AUC/A by 14% and fund launches were up by over 25%. Treasury Services delivered strong broad-based growth throughout 2022. In the fourth quarter, we announced a collaboration with Conduent to be their trusted payments infrastructure provider as they launch a digital integrated payments hub for businesses and the public sector. This hub will enable access to more secure, faster and cost-effective options to send, request and receive payments and refunds in a matter of minutes using real-time payments and other proven payment technologies. We also onboarded several new clients during the quarter as we continued to build our digital payments and related FX businesses. And finally, while 2022 was no doubt a difficult environment for the wealth market, our Wealth Management business acquired more clients with particular strength in the ultra-high-net-worth and family office segments. We continued to deepen existing relationships through our expanded banking offering where the percentage of advisory clients who also bank with us rose by about 5 percentage points. Notwithstanding the tough backdrop, Pershing, which is, in fact, our largest play as a company in the wealth space, brought in net new assets of over $120 billion, representing 5% growth. In the fourth quarter, we announced two very exciting wins, demonstrating the broad-based capabilities that Pershing is uniquely positioned to offer. The first was State Farm, which is an exciting relationship given State Farm’s size and reach with its thousands of agents across the country serving tens of millions of households. We also onboarded Arta Finance, which was founded by a team of former Google executives, who are now leading a global digital family office that uses advanced technologies to empower investors with tools to invest intelligently. This win is an important proof point of our proven set of APIs and digital capabilities and demonstrates our ability to win with tech-forward clients. The second area of performance I'll call out is that we continue to forge ahead with our longer-term growth initiatives, such as Pershing X, real-time payments, the reimagining of custody and collateral, and digital assets. These initiatives will help position the company for the next leg of growth beyond the medium term. We went live with our digital asset custody platform in the U.S. in October. This will continue to be a focus for us, not so much for crypto, but really the broader opportunity that exists across digital assets and distributed ledger technology. If anything, the recent events in the crypto market only highlight the need for trusted regulated providers in the digital asset space. We are also now live with our first release at Pershing X, just one year after launching the initiative. This release to a small number of select clients includes three core products: Portfolio Solutions, including direct indexing; Client Servicing; and Data and Reporting tools. Equally importantly, this release is about our ability to set a goal on a tight timeline and execute. Finally, the third and probably most important highlight of the year for me is our people and our systems, which once again demonstrated remarkable resilience. Across the war in Ukraine, the extraordinary moves we saw in several government debt markets and volume surges, the operational readiness of our people and systems consistently enabled successful outcomes for our clients. I cannot thank our people enough for their hard work and dedication to serving our clients. While we're proud of these accomplishments, it's also important to humbly recognize an area where we fell short this past year, acknowledging the inflationary headwinds. Expense growth for a second straight year was around 5% excluding notable items. We consider that number too high, especially considering the expense growth benefited from a stronger U.S. dollar throughout the year. On a constant currency basis, expense growth excluding notable items was approximately 8%. While I'm encouraged by the renewed sense of urgency across the organization over the last few months to better manage our expenses, we still have ways to go on this journey, which brings me to our key focus areas for 2023. First, expenses. My leadership team and I are fully committed to bending the cost curve this year. That will come from instilling further expense discipline across the firm and from focusing more on profitable new business growth, saying no to more things when the economics aren't what they should be. Efficiencies are also going to come from implementing ideas that will make BNY Mellon a simpler, more efficient place to do business with. Here, we've embarked on an enterprise-wide initiative, led by senior leaders and high-performing employees from around the world, focused on driving greater efficiency and enabling sustainable growth. No one knows the ins and outs of our products, services, and processes better than our people. All of our staff have had the opportunity to take an active role in this initiative by submitting ideas for how we can run the company better for all our stakeholders. To date, we've approved about 1,500 high-quality ideas, of which about 200 are already completed and another 500 are on track to be implemented this year, with a meaningful amount of these ideas requiring little upfront investment. Emily will cover this in more detail, but as a result of these initiatives and our renewed determination, we expect to achieve nearly double the amount of efficiency savings this year compared to what we achieved in any of the recent years. But our priorities are, of course, not just about managing expenses. We are also focused on reinvigorating profitable growth. Our project commits to achieving positive underlying growth this year across almost all of our businesses, with particularly healthy growth coming from Asset Servicing, Pershing, and Treasury Services. We will continue full speed ahead with our critical long-term growth investments with clear and specific targets that we expect the teams to hit over the course of the year. Lastly, on the top line, our priorities include goals for our ONE BNY Mellon program, which incentivizes cross-business referrals and development of innovative, multi-business solutions that only BNY Mellon's unique collection of businesses is equipped to provide. In 2022, we saw good initial momentum, surpassed our initial goal for the year, and we intend to deliver a further pickup in 2023 as we increasingly sell our platform and better connect the dots for our clients. Finally, on capital management, I'll highlight that our Board of Directors has authorized a new $5 billion share repurchase program, which provides us ample flexibility. Having ended the year comfortably above our capital management targets, we're now resuming buybacks. In summary, while none of us can predict exactly what the operating environment will look like in 2023, we are laser-focused on growing the franchise and executing against our efficiency plans with discipline and urgency to drive some positive operating leverage in 2023 while returning a healthy amount of capital to our shareholders this year. With that, let me turn it over one last time to Emily as our CFO.

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 I specify otherwise. Starting on Page 3 of our financial highlights presentation. Total revenue of $3.9 billion in the fourth quarter was down 2% on a reported basis and up 9% excluding notable items. As Robin mentioned earlier and as you can see at the bottom of the page, our reported results in the fourth quarter included a few notable items resulting from actions to improve our revenue and expense trajectory. Reported revenues included approximately $450 million of net securities losses recorded in investments and other revenue, resulting from a previously disclosed repositioning of our securities portfolio, which I will expand upon later. Fee revenue was flat, as the benefit of lower money market fee waivers and healthy organic growth across our Security Services and Market and Wealth Services segments was offset by the impact of lower market values from both equity and fixed income markets and the unfavorable impact of a stronger U.S. dollar. Firm-wide assets under custody and/or administration of $44.3 trillion declined by 5%. The headwind of lower market values and currency translation was tempered by continued growth from both new and existing clients, and assets under management of $1.8 trillion decreased by 25%. This also reflects lower market values and the unfavorable impact of the stronger U.S. dollar, and again, this headwind was partially offset by cumulative net inflows. Investment and other revenue was negative $360 million in the quarter on a reported basis. Excluding notable items, investment and other revenue was a positive $100 million, a good result reflecting another quarter of strong fixed income trading performance. Net interest revenue increased by 56%, primarily reflecting higher interest rates. Expenses were up 8%, or 2% excluding notable items. Notable items amounted to approximately $200 million in the quarter, primarily severance expenses. The provision for credit losses was $20 million, primarily reflecting changes in the macroeconomic forecast. On a reported basis, EPS was $0.62; pre-tax margin was 17%; and return on tangible common equity was 12%. Excluding the impact of notable items, EPS was $1.30, up 25% year-over-year; pre-tax margin was 31%; and return on tangible common equity was 24%. Touching on the full year on Page 4. Total revenue grew by 3% on a reported basis and by 6% excluding notable items. Fee revenue was flat. Investment and other revenue was negative $82 million, or positive $340 million excluding notable items. Net interest revenue was up 34%. Expenses were up 13% on a reported basis and up 5% excluding notable items, consistent with our goal to drive 2022 expense growth towards the bottom half of the 5% to 5.5% range that we guided to throughout the year. Excluding the benefit from the stronger U.S. dollar, expenses ex notables for the year were up 8%. The provision for credit losses was $39 million compared to a provision benefit of approximately $230 million in the prior year. On a reported basis, EPS was $2.90; pre-tax margin was 20%; and return on tangible common equity was 13%. Excluding the impact of notable items, EPS was $4.59, up 8% year-over-year; pre-tax margin was 29%; and return on tangible common equity was 21%. On to capital and liquidity on Page 5. Our consolidated Tier 1 leverage ratio was 5.8%, up approximately 35 basis points sequentially, primarily reflecting capital generated through earnings, the sale of Alcentra and an improvement in accumulated other comprehensive income, partially offset by capital returned through dividends. Our CET1 ratio was 11.2%, up approximately 120 basis points, driven by the increase in capital and lower risk-weighted assets. Finally, our LCR was 118%, up 2 percentage points sequentially. Turning to our net interest revenue and balance sheet trends on Page 6, which I will also talk about in sequential terms. Net interest revenue of $1.1 billion was up 14% sequentially. This increase primarily reflects higher yields on interest-earning assets, partially offset by higher funding costs. Once again, NIR in the quarter exceeded our expectations as noninterest-bearing deposits remain elevated. Average deposit balances decreased by 2%. Within this, interest-bearing deposits increased by 2% and noninterest-bearing deposits declined by 11%. Despite this decline in the quarter, the share of noninterest-bearing deposits as a percentage of total deposits has held up better than expected at 27%, which is higher than historical averages. We continue to actively manage our deposit footprint to optimize across NIR, liquidity value, and return on capital. Average interest-earning assets remained flat. Underneath that, cash and reverse repo increased by 4%, loan balances were down 1%, and our investment securities portfolio was down 3%. As I mentioned, in the fourth quarter, we took actions to reposition the securities portfolio to improve our NIR trajectory for the coming years. We sold roughly $3 billion of longer-dated lower-yielding municipal and corporate bonds, which we've been replacing with significantly higher-yielding securities earning roughly 5% or 250 to 300 basis points more than what we were earning on the securities that we sold. While we realized an approximately $450 million pre-tax loss with this sale, this transaction was virtually capital neutral because the unrealized loss was already recognized in AOCI. In fact, we freed up roughly $150 million of CET1 capital, as a higher credit quality replacement portfolio consumes significantly lower RWA. Moving on to expenses on Page 7. Expenses for the quarter were $3.2 billion, up 8% year-over-year. Excluding notable items, expenses were up 2% year-over-year. This year-over-year increase reflects investments, net of efficiency savings, higher revenue-related expenses, including distribution expenses, as well as the impact of inflation, partially offset by the benefit of the stronger U.S. dollar. Turning to Page 8 for a closer look at our business segment. Security Services reported total revenue of $2.2 billion, up 18% compared to the prior year. Fee revenue increased 2%, and net interest revenue was up 79%, driven by higher interest rates, partially offset by lower balances. As I discuss the performance of our Security Services and Market and Wealth Services segments, I will focus my comments on investment services fees for each line of business, which you can find in our financial supplement. In Asset Servicing, investment services fees were down 1% as the impact of lower market values and a stronger U.S. dollar were mostly offset by the abatement of money market fee waivers, higher client activity, and net new business. In Issuer Services, investment services fees were up 7%, driven by the reduction of money market fee waivers and higher depositary receipt issuance and cancellation fees. Next, Market and Wealth Services on Page 9. Market and Wealth Services reported total revenue of $1.4 billion, up 19%. Fee revenue was up 14%, and net interest revenue increased by 33%. In Pershing, investment services fees were up 22%. This increase reflects lower money market fee waivers, higher fees on sweep balances, and higher client activity, partially offset by the impact of lost business in the prior year and lower market levels. Net new assets were $42 billion, reflecting a very healthy level of growth from existing clients, while flows related to dividends and year-end capital gain distributions were naturally more muted than in the prior-year quarter. Average active clearing accounts were up 4% year-on-year. In Treasury Services, investment services fees were flat. The benefit of lower money market fee waivers and net new business was offset by the negative impact to fees from higher earnings credit on the back of higher interest rates. In Clearance and Collateral Management, investment services fees were up 6%, primarily reflecting higher U.S. government clearance volumes driven by continued demand for U.S. Treasury securities due to elevated volatility and an evolving monetary policy. Now, turning to Investment and Wealth Management on Page 10. Investment and Wealth Management reported total revenue of $825 million, down 19%. Fee revenue was down 18%, and net interest revenue was up 2%. Assets under management of $1.8 trillion declined by 25% year-over-year. This decrease largely reflects lower market values and the unfavorable impact of the stronger U.S. dollar, partially offset by cumulative net inflows. As it relates to flows in the quarter, we saw $6 billion of net outflows from long-term products and $27 billion of net inflows into cash. Among our long-term active strategies, liability-driven investments continued to be a bright spot with $19 billion of net inflows in the quarter, a real testament to our market-leading capabilities and resilient performance during the recent market dislocation. A very healthy net inflow into our cash strategies comes on the back of strong investment performance, most notably in our Dreyfus money market funds. In Investment Management, revenue was down 22% due to lower market value and mix of cumulative net inflows, a stronger U.S. dollar, and the sale of Alcentra, partially offset by lower money market fee waivers. Finally, in Wealth Management, revenue was down 12%, primarily reflecting lower market values. Client assets of $269 billion were down 16% year-over-year, primarily driven by lower market value. Page 11 shows the results of the Other segment, where investment and other revenue includes the net loss and the repositioning of the securities portfolio and expenses include severance. Now let me close with a few comments on how we're thinking about 2023. With regards to NIR, we have positioned ourselves for another year of healthy growth. We currently project an approximately 20% year-over-year increase for the full year, assuming current market-implied interest rates. The range of potential outcomes remains relatively wide, and the quarterly trajectory of NIR will be dependent on various factors, including the path of deposit levels and mix, as well as interest rates. As it relates to fees, market-driven factors like equity and fixed income market levels, currency, and interest rates dominated fee dynamics in 2022, while underlying growth across Security Services and Market and Wealth Services was offset by headwinds in Investment and Wealth Management. For 2023, we expect to return to some underlying fee growth for the firm. Robin talked about the work we've been doing over the last few months to bend the cost curve while ensuring we're continuing to invest. For 2023, this translates into expenses, excluding notable items, increasing by approximately 4%, assuming exchange rates remain flat to where they ended 2022, or by approximately 4.5% on a constant currency basis. This compares to 8% in 2022. On taxes, we expect our effective tax rate for the year to be in the 21% to 22% range, primarily due to an increase of the corporation tax rate in the UK this year. Finally, I want to close with a few remarks on capital management. As you saw, we ended 2022 comfortably above our management target. Our Board of Directors has authorized a new $5 billion share repurchase program, which provides us ample flexibility. The timing and amount of repurchases is subject to various factors, including our capital position and prevailing market conditions, among others. Based on our current expectation for continued earnings growth, combined with our estimated trajectory of AOCI pulling to par, we're now resuming buybacks and we expect to return north of 100% of earnings through dividends and buybacks in 2023. With that, operator, can you please open the line for questions?

Good morning. Thanks for taking my questions. First, congrats to Emily on your new role.

Thank you.

I'm sure you won't miss our earnings quarterly, but it was a real pleasure to work with you here these past few years. So, I'd love to drill down on the NII expectations. You indicated that it assumes current market rates, but maybe you could please walk us through some of the more specific drivers, primary assumptions, and moving pieces that underlie that 20% growth assumption.

Good morning, Brennan. And it's been great to work with all of you as well. So, if you think about the NIR outlook, the first thing I would just mention is that we use the forward curves as a basis for our projection. We don't try to get cute. As all of you know, for the Fed, that assumes another 50 basis points of hikes in the first quarter, probably followed by a pause until the end of the year. The curves outside the U.S. assume about 125 to 150 basis points worth of hikes by both the BOE and the ECB. So, as a result of these curves and rising rates, as well as, I would say, all of the actions that we've taken in the securities portfolio, and by that, I don't just mean the rebalancing that we did in December, but we, obviously, positioned the portfolio throughout the year, meaningfully shortening duration, adding floaters, et cetera. With all of that, we do continue to expect to benefit from significantly higher reinvestment yields. Now tempering that a bit, we do expect deposits to decline modestly, call it low to mid-single digit from fourth quarter average. Finally, as it relates to marginal betas, we would expect them to continue to increase, but more so for non-dollar balances. That's really what's behind the 20% guide year-on-year. I would also say there's a lot of uncertainty in the market and certainly, we're prepared for many different outcomes. It will be highly dependent upon deposit levels and there's some upside there if we retain more NIBs.

Great. That's very helpful. Thank you, Emily. Capital accretion was really encouraging this quarter. You announced a significant buyback and made some positive comments about it in your prepared remarks, Emily. How should we think about AOCI accretion if yields remain stable from here? What does that timeline look like?

Sure. So, assuming the portfolio doesn't change and forward rates are realized, our latest forecast would expect to recover probably close to 50% of the $2.5 billion of unrealized loss in the AFS portfolio over the course of, call it, 15 to 18 months.

Okay. Excellent. Thank you very much.

Hey, good morning, everybody, and Emily, congrats again. I was hoping we could start with a question around fixed income markets. There's generally a broad set of bullishness on the outlook for fixed income flows, particularly with respect to ETFs. I'm curious, as a very large servicer of fixed income assets, and you guys just kind of touched that whole ecosystem in multiple different ways, can you help us frame how BK's fees overall and servicing fees specifically could benefit from an improved outlook for fixed income flows, both mutual funds and ETFs? Is there a particular difference when it's inflows versus outflows? Just hoping to get a little more granularity as we think about the fee outlook for '23.

Sure. Just as we think about the fee outlook, our base case assumption is that there's a relatively soft landing in the U.S., so average equity markets as well as fixed income markets are not that far off from what we've seen averages in 2022. You are correct that our money market platform does benefit from that to a degree. Having said that, we do expect some modest runoff in balances as well in money market funds. And what I would also just highlight is that any strength in the fixed income market really does play to the strengths of our investment management business.

Yes, Alex, it's Robin. I want to add a couple of things to that. When you consider the breadth of our franchise, as Emily mentioned, we have numerous initiatives in fixed income. Our asset servicing business is heavily focused on fixed income, leading to a substantial security lending business in that area. We manage $1.3 trillion in cash on our investment platform, which primarily influences the short end of the market, closely aligned with fixed income as well. Our Dreyfus money market fund has performed quite well over the year regarding both performance and asset growth. Additionally, we operate a Treasury clearance business and a Treasury market repo business. We have a wide range of opportunities arising from these areas, and we are closely monitoring all of them.

Got you. Great. Thanks. And then maybe just my follow-up on operating leverage in the business broadly. You mentioned, Robin, a number of different efficiency programs that you have in place that sound like they're ramping nicely and just kind of incorporated in your expense guidance for this year. But when you take a step back and assume that short-term interest rates remain sort of range-bound or whatever the forward curve is forecasting, how are you thinking about the pre-tax margin for the firm as a whole over time? I'm not sure if you're ready to talk about those targets yet, but in the past, you guys were north of 30%. Is that ultimately the goalpost as you think about the ins and outs of your programs, but also what's going on in the top line?

You're right that we're still working on it. I'm four-and-a-half months into my tenure. We've talked about the strategy reviews. They are ongoing. We've made some good progress. It's true on the business side. It's also true on the function and the support side as well, but we are focused. To your question on margin, we are focused on driving profitable growth, which is top line, but with an eye to the bottom line and also just exuding expense discipline through doing the work. We think we've got a high-performing culture, but we continue to drive on things that relate to that. When you look across revenue growth, pre-tax margins, and ROTCE, you have the key metrics that we're using. We are considering a variety of different KPIs, and we look forward to giving you all more transparency on some of those KPIs as the year progresses. As we do the work, we're going to come talk to you about it.

Great. Thank you very much.

Great. Thanks. Good morning. It has been great working with you over the years. Could you discuss a scenario where we might not experience a soft landing, perhaps facing a recession with significant market pressure? In that case, assuming there remains a substantial allocation to fixed income, which you would benefit from, could you explain how resilient your platform would be in that situation? For example, in deposits, could deposit growth exceed your earlier expectations? Additionally, could you remind us about the sensitivity of your fee revenue to declines in the equity markets? I believe it's a 1% change for every 10% decline.

Sure. A couple of comments there, and I think Robin will add on probably. Just in terms of our sensitivity overall, our fee sensitivity to fixed income market. Remember for every 5% gradual change in fixed income markets that impacts annual fee revenue to the tune of approximately $40 million. That gives you some idea on how to size that. Certainly, as Robin pointed out earlier, we have many different businesses that ultimately would benefit from also strength in fixed income markets.

But Brian, let me just add something else. We're a trust bank; we often get compared to trust banks, and I understand why. But we have a broader portfolio that I think is quite relevant in answering your question, particularly as they happen to be higher growth, higher-margin businesses for us. Things like Pershing, things like Treasury Services, our Clearance business, and our Collateral Management business; these contribute to the underlying diversification that we have as a firm. That portfolio helps us with the stability of underlying revenues through different market conditions because they're driven by different things, so we get a balance for that. On top of that, we're thinking about how to make sure that we are increasing the mix of the types of revenues that we have as well. So, yes, we have fees, yes, we have net interest revenue, but we're also powered by transaction volumes, and we're also powered by subscription fees. The combination of these diversification of the businesses and the diversification of revenue streams helps us quite a bit in these different market conditions, and that's why you've seen us, in fact, perform in an effective and relatively stable way through some pretty significant gyrations.

That's great insight. Robin, could you elaborate on the growth initiatives you mentioned, specifically regarding Pershing X and the digital payments venture? These are certainly long-term investments, but could you provide your expectations for this year? What do you think a reasonable organic revenue growth rate might be for this year?

Look, we've talked about the fact that these are medium-term initiatives, and they are. The contribution to revenues today from real-time payments is really small. We see this as rails of the future, creating an opportunity for a connected set of services; think of fraud prevention and account validation and bill pay-related things. There's an ecosystem that builds around the actual capability. We think that that's a significant opportunity for us. You've seen some announcements that we've made. If I quickly tick through, in Pershing, we've had a strong year of net new asset growth. We think we'll have growth in the near term through onboarding the pipeline, and then we've got the medium play of Pershing X. In Asset Servicing, we've been growing sales. At the same time, we're leaning into the future with things like digital assets and focusing on the expense base as well. Again, it's something for the near term and the medium term. In Markets, we're driving with foreign exchange, liquidity, and securities lending, and then for the medium term, execution services and new products. In CCM, we expect the evolution that will come from the gradual decant of repo into tri-party, which we think we're well-positioned for. In Treasury Services, we're picking up cross-border activity in terms of U.S. dollar clearing and we're playing for the longer term that I talked about with real-time payments. Across so many of our businesses, we've got opportunities in the near term, we're focused on executing them, and we're investing for later.

That's great color. Thank you very much.

Good morning, guys. I appreciate the color on deposits for 2023. I wanted to ask a little bit more about what you saw in the quarter. Interest-bearing deposits flipped to growth. Wondering what the drivers are there. And on the noninterest-bearing side, that outflow accelerated quarter-over-quarter. So, any more color on either of those would be great. Thanks.

So, deposit balances overall for the quarter were down very modestly as you can see. Most of that was a runoff in non-operational, but NIBs are remaining at elevated levels. For what it's worth when we're talking about the trajectory for deposits in 2023, we expect average deposits to decline very modestly, low single digits from fourth quarter averages. You should expect, and we are expecting, the large majority of that to be from NIBs because they will probably revert back to about 20% to 25% of our total deposit balances, as we've really seen in historical averages.

Okay, thanks. And then, Robin, you highlighted healthy growth in Asset Servicing as a priority for this year. That's a business that's well established, sometimes can be more difficult to differentiate. So, what are the kinds of things you can do and you want to do to accelerate growth there?

I’ll start on this one, then I’ll give it over to Emily, because she is going to run that business and knows it pretty well already from her prior time. There are a variety of different opportunities for us. I mentioned in my prepared remarks that we're really elevating the conversation more into the C-suite of some of these firms because gone really are the days where we're selling a small component of a service on an isolated basis. We see more opportunities to sell bundled deals with data and digital capabilities, all wrapped up in it. We're getting traction from that. We had a very significant new client that we announced earlier last year, which is a good example of that type of package sale. That's one thing. We also have the bottom-line focus. I want to continue to point you at the comments that we've made before that the margin in that business is not acceptable, and we will continue to invest both in the top-line; we'll benefit from rates; and investing in making the cost of execution cheaper and more efficient in that business. It's really a package of all of those things. Emily, do you want to add on?

Yes, just a few things to add. In line with what Robin said, we are winning larger and higher-value deals. We're also very focused on the profitability of the mandate and the relationship overall. That also means we're being more selective even in the RFPs that we participate in. Likewise, we're leaning into higher-growth areas like Alts and ETFs. 20% of the wins that we have seen had a data component. Data is very critical, especially, in the forward trajectory to our clients. Our pipeline is very strong. The other thing, of course, as Robin mentioned, is we are focused on driving the cost down across the Securities Services segment, inclusive of Asset Servicing for those businesses that remain pretty manually intensive, so think Transfer Agency and Fund Accounting. There’s opportunity there for sure.

Thank you very much.

Hey, good morning.

Good morning, Steven.

Good morning.

So, Emily, I'm going to ask the question I had asked you 12 months ago, roughly, on the earnings call about Basel IV. We still don't have a proposal, but we know something is coming in early '23. Given its speech had hinted at capital requirements moving higher for the G-SIB cohort, recognizing there is still no proposal, I was hoping you could just speak to how you're scenario planning for the finalization of Basel III. Whether that has any influence on the potential cadence of future buybacks or just capital management more broadly. How you see that potentially evolving?

Sure. We're obviously very involved with regulators in the industry around the conversations about Basel IV. It's true, the introduction of operational risk RWA into the standardized approach would, by itself, drive an increase in our standardized RWAs. Our calculations suggest something a bit less than what you've seen for the GSIBs aggregate in the QIS. We do expect there will be some offset for us: lower credit risk RWAs, and we'll probably benefit modestly from the more risk-sensitive market framework. They'll be puts and takes. We'll have to wait until the regulators release their proposed version. We do obviously look at RWA optimization. You can see that RWAs came down in the quarter again from optimization that has been ongoing. I just remind you that the industry will have time to adjust to whatever the results end up being.

Fair enough. For my follow-up on expenses, I was hoping you could help us reconcile what the expense guidance for '23 implies for both the op margin and the dollars of expense as it relates to the Securities Services segment specifically. It feels like that's the area where there's still some of the most low-hanging fruit, if you will, to drive efficiency gains. Given the planned efficiency actions, how should we think about that second derivative for expense growth? Should we expect that to steadily improve over the course of the year, where you implement the plan, you start to realize some of the benefits and the exit rate on expenses in '23 should reflect a lower level of expense growth relative to the other quarters?

I'll answer that more focused on margin for Securities Services because that’s really what we've been talking about and a very critical KPI for us. As Robin already said, we are very committed to a 30%-plus margin over the medium term. You'll see we printed in the fourth quarter, a margin of about 27%, for the full year that was closer to 21%. In 2023, we will benefit somewhat from NIR. So, higher rates will be partially offset by a modest decline in NIBs. We're extraordinarily focused on executing against revenue growth and efficiency initiatives that we've been talking about. For Securities Services, there's some nonrecurring activity that we enjoyed in 2022 that we won't have in 2023 in Issuer Services, in particular. Net-net, when you look at the margins for Securities Services overall, they're going to be lower than the Q4 print but certainly higher than the full year level. We're making progress.

And just on the expense growth, on a firm-wide basis, whether the exit rate for '23 should reflect some of those additional efficiency benefits that you cited? I'm just trying to think about the cadence for how we should think about the expense trajectory over the course of the year.

I'm not going to give too much detail on what we expect quarter-on-quarter. The only thing I would say, as you all know, is that for the first quarter, staff expenses are typically a bit higher due to long-term incentive comp associated with retirement-eligible employees. The actions we're taking are front-loaded, and you'll see that over the course of the year. So, I would just go back to, we are absolutely bending the cost curve. We expect to deliver and are very committed to deliver year-on-year growth of about 4%, 4.5% constant currency, and that compares to 8% in 2022.

Helpful color, Emily. Thanks for taking my questions.

Hi. Can you hear me?

Hey, Mike, how are you?

Good. Robin, I think you inherited a tough hand here. I mean, BNY Mellon historically has had periods when they do a better job controlling expenses, but that typically coincides with periods of slower top-line growth. You're starting off here; fees were down 3% last year. Your guide for NII implies that's flat with the fourth quarter. So, it's not so much, okay, revenues are slow, you can control expenses so much they've already slowed or they're about to. It seems like your efficiency savings are going to be tougher. And as part of that, this predates you, Robin, but when it comes to notable items or one-time items, you had some this quarter. If you look over a decade, your notable items add up to $3.5 billion, that's almost a year's worth of earnings. The real question here is how can you improve your profit margin and your efficiency ratio and squeeze more out of BNY Mellon when the revenue environment has been tough and you have inflationary pressures? How confident are you to turn this around in terms of the positive operating leverage on a core basis?

Mike, without reflecting on the past in terms of what people have done and how they've done it, I'll just say that we acknowledge that the past decade has been disappointing in terms of our company's broad financial performance. You can look at some spots on the top line, the bottom line, expenses, pick your spot, but we're not comfortable with the broad performance of the company over the past decade. That's how we've talked to our Board about it, and we're determined to change that. You're hearing from us a determination around changing that outcome. To your question about notable items, we're very clear; we do this in our earnings release and we do it in our prepared remarks; we talk GAAP first. You can see the reported numbers, and it's clear for you to judge us on that. We want to give you transparency and, frankly, the insight into running the company under the hood. We own that 4% to 4.5% number, 4% if you use the exit rate of currency, and 4.5% on a constant currency basis, and that's essentially half of what it was in 2022. The inflation environment isn't expected to get any better. We had inflation over the course of the past few months, CPI between 6% and 9%, and we've still got that environment. We've been very deliberate in terms of staffing, choices of things that we're going to do. I talked about involving our employees in bending the cost curve because I think it’s a cultural thing for us as well. We're attacking it on all of those fronts. After we've done all that, I can’t see every angle of what we're going to do in the future, but we see opportunities. For instance, technology: we've invested a lot rightly in resiliency as a company. It's incredibly important to our products and services. It's wrapped in our brand; we want to take ourselves to a better place than we were five years ago. We've largely done that. It’s a continuous journey. We always have to do stuff. But the next leg is investing in things like applications, digitization of our footprint. We’re the world's largest custodian, but we've got more than one custody system. We’ve got multiple loan systems. We have five different call centers. We're identifying and working through these opportunities, and we can't do everything at once because otherwise, we'd spike our expense base in order to solve these problems, and we have finite bandwidth. We’re working through it and we'll continue to work through it.

It would be great if you could share more metrics over time and your targets. You mentioned you have four growth initiatives, including digital assets, particularly after the recent issues. Can you provide any concrete metrics or details about your goals, revenues, or the endgame for this initiative? It would be helpful to have a bit more information on this key growth area.

Sure. I want to make one comment about the four things that I mentioned. Those aren't the only growth initiatives in the company. I picked them out because I think they're good and representative examples, and they're different things with different timelines associated. There are other things that I haven't mentioned, at least not prominently, but could be interesting over time. Specifically for digital assets, it's the longest-term play. I expect it to be negligible revenue over the next couple of years; it might be negligible for the next five years. As the world's largest custodian, we are in the business of looking after assets. If new assets come to look after, we should be there. If the way we look after assets changes, we have to adapt. We're investing for a future that probably will come to be, but it may not. If it does, we need to be in place. It would be like being the custodian of 50 years ago and sticking with paper instead of adopting a computer. That's not going to be us. We’re investing cautiously and deliberately. R&D is being done in different parts of the company, and it’s measured. We do think it’s important to participate in the broader digital asset space.

Great. Thank you.

Hi, Emily. Hi, Robin. Emily, regarding the noninterest-bearing deposits, you noted that they are currently higher than usual at 27% of total deposits. However, you anticipate they will likely decrease to more typical levels between 20% and 25%. Can you explain what is keeping them elevated, and do you think they might stay higher for a longer period this year? Or do you observe trends indicating they will definitely return to normal levels?

Great question. There is a lot of uncertainty around that. More generally, concerning NIBs, we think they’re probably elevated due to some risk-off behavior. The other thing is that we've become more sophisticated in how we manage our deposits and the tools we use. We do expect NIBs to revert to about 20% to 25%, but you're right, if they remain elevated, that will be very helpful, and we will have upside to our NIR projections. We've seen significant growth in Asset Servicing, Corporate Trust, etc., which actually attract NIBs.

Very good. We know that your bank is fee-based, not concerned about credit quality, but I would like to get your thoughts on the small provision increase. Nobody is really concerned about Bank of New York's credit quality. But with the expectation of a soft recession or a slowdown, are you seeing any trends in the loan book that you're just watching maybe a little more closely today than 12 months ago?

The quality of our portfolio remains very high. The weighted average rating is AA minus. Investment grade is over 90%. NPLs and delinquencies are stable. The only area that we're monitoring closely is the CRE portion of the portfolio, particularly the office segment. At the moment, occupancy and rent collections remain high, but it is an area that we're paying closer attention to.

What percentage of that CRE of the loan book is that about, Emily?

It's about 9% of the funded loans.

Hi. Thanks. Good morning. Robin, I know you talked earlier just about the general view for fees to increase and some thoughts on Asset Servicing. Just wondering if you have a view on just what you think organic growth can look like? It's nice to see some of the movement in the fourth quarter specifically in Pershing and Collateral Management. Just wondering if you have a thumbnail on what the outlook for those two areas is as well. Thank you.

Sure. From an overall fees point of view, we are focused on this internal growth. Forgetting about M&A, just blocking and tackling and execution over the course of the year. We haven't given fee guidance because there are too many dynamics in play to be credible. However, we have an internal budget that we've been working through. You called out two businesses that we think are bright spots for growth. We expect these to be above the average growth of the company. They're not the only ones, but they are two that will be, and we feel quite good about the prospects for a variety of reasons we've talked about already.

Okay. Very good. One quick one regarding the balance sheet mix. Emily, is there anything changing regarding how you think about the mix of securities that you add from here in terms of as we get towards the peak of the rate cycle, whether you start thinking about putting on more fixed rate versus the floating type, and what that means for the types of yields that you're able to get on your front book investments?

Sure. We've been very nimble and continue to be nimble in managing our portfolio. Bottom line right now, we're positioned to benefit from higher rates, but I call your attention to the fact that the duration of our portfolio is the shortest it's been in recent memory, and more than 60% of the portfolio is in available-for-sale. We’ve retained flexibility; we can act swiftly should the environment change. Reinvestment yields began to exceed roll-off rates in Q2 2022. The difference has steadily expanded to about 250 basis points. About 40% of the securities portfolio are floating rate assets, and the duration of the fixed asset securities is about three years.

That's great. Thanks, Emily.

Great. Thank you for taking my questions. Most of them have been answered. But...

Hi, Mike.

Yes, hi, Robin. Hi, Emily. As we think about further out into 2023, the market is assuming some rate cuts could occur before year-end. If we get to that point, what is your view on how deposit pricing performs there? If your deposit betas were generally higher than the broader banking system on the way up, how do we think about it when we start to see some early rate cuts? It's not an expectation that we're heading back to where we were, just some modest rate cuts. How do you think about the deposit pricing in that environment?

We do expect deposit pricing to perform similarly on the way down as it did on the way up. We will get the benefit if rates start to come down of deposit costs also coming down very quickly. I’ll remind you that to the extent rates start to come down, AOCI will pull to par faster.

Okay, great. Thank you for that. For my follow-up on NII, appreciate the full-year annual guidance. Looking at the fourth quarter, it was up about 14% sequentially. Within the annual guidance, any view on how we should think about the first quarter? I know it's a moving target, but any range here just to help us think about the trajectory.

Yes. The range of outcomes is very wide. It's really hard to predict the trajectory in any given quarter. It's dependent, mostly, on the deposit trajectory. If NIBs remain elevated, there's upside there.

Thank you, operator. I'd like to close today's call by thanking Emily for her time as our CFO and to congratulate her on taking up her new role, starting February 1 as the CEO of Asset Servicing, which, as you know, is our largest business. Emily brings a set of experiences and relationships to this role that are going to be invaluable in driving the profitable growth of our client franchise. Finally, I'd like to welcome Dermot McDonough, our next CFO, to the BNY Mellon team. He joined us in November, and he's hit the ground running. I know that you are all looking forward to his first earnings call with him in April. Thank you for your interest in BNY Mellon. If you have any follow-up questions, please reach out to Marius and the IR team. Be well.

Thank you.