Marius Merz:

Thank you, Operator. Good morning, everyone, and thank you for joining us. I'm here with Robin Vince, President and Chief Executive Officer, and Dermot McDonogh, our Chief Financial Officer. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bny.com. And I'll note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. 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 12, 2024, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh:

Thank you, Robin, and good morning, everyone. Picking up on Page 3 of the presentation, I'll start with our consolidated financial results for the quarter. Total revenue of $4.6 billion was up 2% year-over-year. Fee revenue was up 4%. This includes 5% growth in investment services fees on the back of higher market values, net new business, and higher client activity. Investment management and performance fees were flat. Firm-wide AUC/A of $49.5 trillion were up 6% year-over-year and assets under management of $2 trillion were up 7% year-over-year, primarily reflecting higher market values. Foreign exchange revenue increased by 16%, driven by higher volumes. Investment and other revenue was $169 million in the quarter on the back of strong client activity in our fixed income and equity trading business. And net interest income decreased by 6% year-over-year, primarily reflecting changes in balance sheet mix, partially offset by higher interest rates. Expenses were down 1% year-over-year on a reported basis and up 1% excluding notable items, primarily in the prior year. The increase from higher investments, employee merit increases, and higher revenue related expenses was partially offset by efficiency savings from running our company better. Notable items in the second quarter of this year primarily included an expense benefit from a reduction in the FDIC's special assessment, which was largely offset by severance expense. There was no provision for credit losses in the quarter. As Robin highlighted earlier, we reported earnings per share of $1.52, up 16% year-over-year, a pre-tax margin of 33% and a return on tangible common equity of 25%. Excluding notable items, earnings per share were $1.51, up 9% year-over-year, pre-tax margin was 33% and our return on tangible common equity was 24%. Turning to capital and liquidity on Page 4. Our Tier 1 leverage ratio for the quarter was 5.8%. Average assets increased by 2% sequentially on the back of deposit growth. And Tier 1 capital increased by 1% sequentially, primarily reflecting capital generated through earnings, partially offset by capital returns to common shareholders. Our CET1 ratio at the end of the quarter was 11.4%. The quarter-over-quarter improvement reflects lower risk-weighted assets coming off the temporary increase in risk-weighted assets at the end of the previous quarter, and CET1 capital increased by 2% sequentially. Over the course of the second quarter, we returned over $900 million of capital to our common shareholders, representing a total payout ratio of 81%. Year to date, we returned 107% of earnings to our common shareholders through dividends and buybacks. Turning to liquidity. The consolidated liquidity coverage ratio was 115%, and our consolidated net stable funding ratio was 132%. Next, net interest income and the underlying balance sheet trends on Page 5. Net interest income of over $1 billion was down 6% year-over-year and down 1% quarter-over-quarter. The sequential decrease was primarily driven by changes in balance sheet mix, partially offset by the benefit of reinvesting maturing fixed rate securities in higher yielding alternatives. Average deposit balances increased by 2% sequentially. Interest bearing deposits grew by 3%, and non-interest bearing deposits declined by 2% in the quarter. Average interest-earning assets were up 2% quarter-over-quarter. Our average investment securities portfolio balances increased by 3%, and our cash and reverse repo balances increased by 1%. Average loan balances were up 4%. Turning to our business segments starting on Page 6. Security Services reported total revenue of $2.2 billion, flat year-over-year. Total investment services fees were up 3% year-over-year. In Asset Servicing, investment services fees grew by 4%, primarily reflecting higher market values and net new business. We continue to see strong momentum in ETF servicing with AUC/A of over $2 trillion, up more than 50% year-on-year, and the number of funds serviced up over 20% year-on-year. This growth reflects both higher market values as well as client inflows, which included a large ETF mandate in Ireland from a leading global asset manager. In alternatives, fund launches for the quarter continued their recent activity in private markets. Investment services fees for alternatives were up mid-single-digits, reflecting growth from both new and existing clients. And in Issuer Services, investment services fees were up 1%, reflecting net new business across both Corporate Trust and Depositary Receipts, partially offset by the normalization of elevated fees associated with corporate actions in Depositary Receipts in the second quarter of last year. We're particularly pleased to see the investments and new leaders in our Corporate Trust platform beginning to bear fruit. Against the backdrop of a significant pickup in CLO issuance in recent months, we've been moving up the ranks and improved our market share as trustee for CLOs by about 4 percentage points over the past 12 months to 20% in the second quarter. In the segment, foreign exchange revenue was up 16% year-over-year, and net interest income was down 11%. Expenses of $1.6 billion were down 1% year-over-year, reflecting efficiency savings, partially offset by higher investments, employee merit increases, and higher revenue-related expenses. Pre-tax income was $688 million, a 7% increase year-over-year, and pre-tax margin expanded to 31%. Next, Market and Wealth Services on Page 7. Market and Wealth Services reported total revenue of $1.5 billion, up 6% year-over-year. Total investment services fees were up 7% year-over-year. In Pershing, investment services fees were up 2%, reflecting higher market values and client activity, partially offset by the impact of business lost in the prior year. Net new assets were negative $23 billion for the quarter, reflecting the ongoing deconversion of the before-mentioned lost business. Excluding the deconversion, we saw approximately 2% annualized net new asset growth in the second quarter, and we renewed a multi-year agreement with Osaic, one of the nation's largest providers of wealth management solutions. Pershing has supported Osaic since its founding in 1988, and we are proud to help the company drive its growth strategy for years to come. Client demand for Wove continues to be strong. In the quarter, we signed 12 additional client agreements. The pipeline continues to grow, and we are on track to meet our goal of $30 million to $40 million realized revenue in 2024. In Clearance and Collateral Management, investment services fees were up 15%, primarily reflecting higher collateral management fees and higher clearance volumes. US securities clearance and settlement volumes have remained strong throughout the quarter, supported by a grown market and active trading. And we are excited about the opportunity to do even more for clients. Having realigned Pershing's institutional solutions business to Clearance and Collateral Management, we can offer clients a choice across a continuum of clearance, settlement, and financing solutions for those that sell clear as well as those seeking capital and operational efficiency through outsourcing. This allows us to not only deepen our relationships with clients, but also drive continued revenue growth. And in Treasury Services, investment services fees increased by 10%, primarily reflecting net new business and higher client activity. Net interest income for the segment overall was down 1% year-over-year. Expenses of $833 million were up 5% year-over-year, reflecting higher investments, employee merit increases, and higher revenue related expenses, partially offset by efficiency savings. Pre-tax income was up 8% year-over-year at $704 million, representing a 46% pre-tax margin. Moving on to Investment and Wealth Management on Page 8. Investment and Wealth Management reported total revenue of $821 million, up 1% year-over-year. In our investment management business, revenue was down 1%, reflecting the mix of AUM flows and lower equity investment income and seed capital gains partially offset by higher market values. And in wealth management, revenue increased by 3%, reflecting higher market values, partially offset by changes in product mix. Expenses of $668 million were down 2% year-over-year, primarily reflecting our work to drive efficiency savings and lower revenue related expenses, partially offset by employee merit increases and higher investments. Pre-tax income was $149 million, up 15% year-over-year, representing a pre-tax margin of 18%. As I mentioned earlier, assets under management of $2 trillion increased by 7% year-over-year. In the quarter, while we saw $2 billion of net inflows into long-term active strategies with continued strength in fixed income and LDI, partially offset by net outflows in active equity and multi-asset strategies, we saw $4 billion of net outflows from index strategies and $7 billion of net outflows from short-term strategies. Wealth management client assets of $308 billion increased by 8% year-over-year, reflecting higher market values and cumulative net inflows. Page 9 shows the results of the Other Segment. I'll close with a couple of comments on our outlook for the full year 2024. Starting with NII, I'm pleased to report that the first half of the year came in slightly better than we had expected, as we saw the decline in non-interest-bearing deposits decelerate, and we continue to grow interest-bearing deposits. While we are cautiously optimistic, we remain humble as we head into the seasonally low summer months, and for now we will therefore keep our NII outlook for the full year 2024 unchanged, down 10% year-over-year. Regarding expenses, our goal remains to keep expenses excluding notable items for the full year 2024 roughly flat. As Robin put it earlier, BNY is in execution mode and we're embracing the hard work ahead of us. We continue to expect our effective tax rate for the full year 2024 to be between 23% and 24%. And lastly, we continue to expect to return 100% or more of 2024 earnings to our shareholders through dividends and buybacks. Our Board of Directors declared a 12% increased common dividend for the third quarter, and we plan to continue repurchasing common shares under our existing share repurchase program. As always, we are calibrating the pace of our buybacks, considering various factors such as our capital management targets, the macroeconomic and interest rate environment, as well as the size of our balance sheet. To wrap up, we enter the second half of the year on the back of solid fee growth, a better than expected NII performance to date, and continued expense discipline, which gives us incremental confidence in our ability to drive positive operating leverage in 2024. With that, Operator, can you please open the line for Q&A?

Ken Usdin:

Thank you. Good morning.

Ken Usdin:

Good morning. Just like to go -- just ask Dermot about that NII humbleness for the second half. Can you just walk us through what the moving pieces would be, including the seasonality that you mentioned and any other things that might have been over-earning in the NII in the first quarter so that you would seemingly in your maintain guide still expect a meaningful ramp down in NII, which I don't think is what seems to be the base case given how well the balance sheet has held up so far, as you pointed out, relative to your expectations? Thanks.

Ken Usdin:

Okay, and then just can you -- that follow up, just on the size of the deposit, so you're just expecting the size of the deposit base to decline or is it the mix or just trying to understand what pieces of it would revert given that seasonality?

Ken Usdin:

Right. Okay. Thank you.

Glenn Schorr:

Hi. Thanks very much.

Glenn Schorr:

You alluded to the -- hello. You alluded to the higher Clearance and Collateral Management, higher clearance volumes. I'm just curious if you can parse out how much of that is just clients being more active during a more active second quarter versus winning new business and organic growth. It just might help for the thoughts on the go forward and how to model? Thanks.

Glenn Schorr:

Thanks, Dermot. You piqued my interest. In the opening remarks, you all talked about T+1 coming in into the market and that helping -- you helping -- help clients. I'm curious now that it's built, now that it's in the run rate, just a couple of quickies of, is there a cost runoff now or is that not big enough? Does T+1 come with lower spread for you, but does it free up capital with more frequent settlement? I'm just curious what the net impact of it all is.

Glenn Schorr:

Okay, great. Thank you.

Ebrahim Poonawala:

[Technical Difficulty]

Ebrahim Poonawala:

Maybe just one follow-up, Dermot, for you on NII. I guess in response to Ken's question, you talked about Fed policy and that having an impact. Remind us the positioning of the balance sheet if the Fed does decide to cut rates come September and we get 100, 150 bps of cuts? Remind us how the balance sheet will behave, how we should think about NII in that backdrop?

Ebrahim Poonawala:

Understood. And separately, I guess, maybe Robin, for you just in terms of the fee revenue momentum that you talked about at Pershing and elsewhere, just give us a sense around what the drivers we should be thinking as we think about sort of the medium-term outlook on fee revenue outside of just pure markets activity that could drive fees in a world where NII might be stable to lower as we think about sort of momentum on the positive outlook.

Ebrahim Poonawala:

Got it. Thank you.

Operator:

Our next question is coming from Steven Chubak with Wolfe Research. Please go ahead.

Robin Vince:

Good morning, Steven.

Dermot McDonogh:

Thanks for the question, Steven. So I would say in terms of year-on-year activity, it's not a kind of a -- cleared repo is not a game changer for us in terms of the overall year-on-year NII story. It's about -- overall in its totality, it makes up about 5% of our NII today. I think I would just echo our follow-on from Robin's answer to the last question in terms of it's a product. Clients want us we're meeting them where they want to be, we're innovating. This come under the $1.4 trillion liquidity ecosystem. Laide runs that business, does a terrific job for us in the clear repo business specifically, we're a top three provider. And so we have a large installed client base who are looking for products and we can meet them with our cleared repo product. And so it's just another tool in our toolbox. And I would say, again, we're positioned, we're investing, we're a scale player and we can provide automated solutions for our clients. So I do expect that business to continue to grow, but in terms of the year-over-year to your specific question, it's not a material driver of the year-over-year change.

Steven Chubak:

Thanks for all that color. And just for my follow-up on the Pershing business. I know that the core underlying strength has been obscure to some degree by some large client departures. I was hoping you can give some perspective on what some of the core organic growth trends look like in that business? What the pipeline looks like in that business given some of the recent excitement of our Wove platform and the offering? And have we lapped those headwinds at this point, or is there still some remaining pressure on the come?

Steven Chubak:

Very helpful color. Thanks so much for taking my questions.

Operator:

Our next question is coming from Brennan Hawken with UBS. Your line is open. Please go ahead.

Dermot McDonogh:

So I would say, overall, euros is roughly 10% of the total portfolio. To -- in answer to the earlier question, I think where we feel very well positioned for the range of outcomes that the forward curve is implying in euros, sterling and dollars, we prepare for it. We talk about it a lot. And so I kind of feel like the way the CIO book is currently set up, where we still have a reasonable amount of securities rolling off into higher-yielding assets. So I just feel like the combination of where our deposit book is in terms of our betas to reiterate again for dollars, low 80s sterling and euros high 60s. And the CIO book kind of still room to grow. And so on rate cuts in terms of how we kind of position the book, we're broadly symmetric in terms of -- on the rate cut side. So I think Chairman Powell has done a job of telegraphing to the market how he wants to do it. So I don't think it's going to be a volatile move in rates when it happens. So he's allowed us time to position and manage and get into the right place. So I think overall, I feel very good about where we're at.

Dermot McDonogh:

So specifically, yes, we did experience that, and it held up. It behaved as expected.

Dermot McDonogh:

For sure. Look, Corporate Trust, I think, is, for us, a good opportunity, a very good opportunity. I actually talked about it at some length at the RBC Conference in March when I was chatting with Gerard Cassidy. And I think over the last number of years, Corporate Trust for BNY is a business that's been underinvested in both technology and leadership. And in both Robin and I’s prepared remarks, we did emphasize leadership has been a continuous change for us. And we've made a very -- couple of very important hires over the last 12 months in Corporate Trust, and we have new leadership overseeing the business. And it's that investment and in technology, products, leadership that is showing up. And specifically, we've doubled our activity in CLOs over the last 12 months. We've improved our market share. And as Robin said, a couple -- in an answer to another question, we really want to position Corporate Trust as a business that really can take the advantage of scale, a lot of manual processes, a lot of room for AI, a lot of room for digitization and we can improve the operating leverage of that business. We can improve how we show up for clients, client service. So we feel like in Corporate Trust specifically, we have a lot to play for. Depositary Receipts, we have good market share. We punch above us and we expect that to continue.

Robin Vince:

Thanks, Brennan.

Betsy Graseck:

Hi, good morning.

Betsy Graseck:

Two quick questions. One, just to wrap up a little bit on the T+1 discussion earlier. Could you give us a sense of how much did T+1 drive sequential revenue growth this quarter? And can you give us a sense as to if there's enough revenue growth you're expecting from this to impact the expense ratio since you've already made the investment? And then I have a follow-up on Wove. Thanks.

Betsy Graseck:

Okay. Yeah, I just think if you're in a better spot than others, you could pick up some incremental share on the back of that, but that's maybe a couple of conference calls from here. All right. Then separately on Wove, I know you mentioned that you added new clients to Wove. I just wanted to understand, is this new clients of the firm or this is clients who had been yours for a while and they moved to Wove?

Robin Vince:

Betsy, let me double-click on it for one second as well because when we started on the Wove journey, and we announced it, as Dermot said, last year, it was initially really focused on that singular KPI of making advisors' lives easier. And so it was a technology front end that went from wealth planning and help clients with wealth planning all the way through to portfolio construction and then getting into market. Now what's evolved since then and what we talked a lot about this year, one year later in the Wove journey was the fact that now we have the opportunity to link all of these other BNY capabilities to be able to deliver to our Pershing and Wove clients. So you can be a clearing and custody client of Pershing, you can be an adviser taking advantage of that initial set of tooling from Wove, but what you can now also do is you can have that ability to manage and aggregate data, including across multiple custodians. We can connect you to models in the investment management space. By the way, we can fulfill those models because we've got active equity and indexing and all these capabilities that come from BNY investments. And so Wove is becoming a bit more of a delivery vehicle for the various capabilities of the firm and it's also opening the aperture of how clients of Pershing think about us in terms of our ability to solve other problems for them, banking-as-a-service which is a Treasury Services business. But we stimulate the conversation for that because people see us as being more than what we used to be in Pershing. We also, to your question, are attracting people who don't necessarily need the clearing and custody service, but who want to take advantage of these other components, which is why Dermot said both because it's both and delivering the breadth of ONE BNY.

Robin Vince:

Thank you, Betsy.

Mike Mayo:

Hi. Could you put a little more meat on the bones for the ONE BNY initiative in terms of products for customers where you're talking about more bundled solutions. Thematically, I understand it. And I guess you're having higher core servicing fees, but connecting from the higher core servicing fees from the high level, let's bundle, let's have everyone work together. I'm just trying to connect the dots a little more.

Mike Mayo:

And so when you wrap it all up, I mean, what wallet share do you have per customer today? Where was it a few years ago? Where do you hope that to go just in terms of a ZIP code of expectations?

Dermot McDonogh:

Mike, just to put a metric on us, it's just to give an indication because we need to mature the metrics as we proceduralize all the strategic comments that Robin has just outlined. Year-over-year, the amount of business that we've won that touches more than one line of business has increased by a third of albeit a very low base. So I wouldn't draw too much into the metric, but just the fact that we are showing up in a different way and clients are buying products and services from more than one line of business because we can deliver integrated solutions. And that's the key that over time, we'll be able to track that and communicate that in a more objective way as that strategy takes root.

Robin Vince:

My answer to that, which I recognize is a little bit unsatisfying, is we're going to keep pointing you back to the positive operating leverage, which is really how we're focusing for our own growth. We think that each quarter, each year has a different composition to it, but higher fee growth over time is a very important part of that combination of solutions. But any individual quarter or a year is going to have a different composition. We're controlling the things that we can control, albeit we're stoking the engine for growth of organic fees over time.

Robin Vince:

Thank you.

Alex Blostein:

Hi, good morning. Thanks for squeezing me in on this. I wanted to touch on expenses and operating leverage. So, expenses up a little bit year-to-date year-over-year. It sounds like you guys are still targeting flat expenses for the year despite the fact that revenues are obviously shaking out a little bit better than you hoped. So maybe kind of walk us through where you see the flex in the expense base to keep it kind of at that flattish run rate. But I guess more importantly, you guys had a target for pre-tax margin to be at 33% plus recently. You're doing 33% this quarter and obviously you don't want to get too carried away with a single quarter, but it feels like you have an ability to reset the bar. So maybe talk a little bit about what that plus within the 33% could look like a couple of years out?

Alex Blostein:

Excellent. Great. Well, my second quick question around the balance sheet. There's a lot of discussion around deposits, but I wanted to zone in on the asset side of the balance sheet for a second. We've seen pretty nice growth from you guys in both the securities portfolio and loans sequentially. So could you just spend a minute on sort of the sources where you're investing and then your outlook in maybe deploying some of the liquidity that seems to be perhaps a bit more sticky into both loan growth and securities?

Alex Blostein:

Awesome. Thanks very much.

Gerard Cassidy:

Good morning, Dermot. Good morning, Robin.

Gerard Cassidy:

Dermot, can you share with us, now that we're entering into a phase with monetary policy of quantitative tightening easing up a bit, you guys obviously have been through QE, you've seen the initial stages of QT, do you have any thoughts on how this could affect your balance sheet over the next 12 to 18 months? Have you guys done any type of modeling to see what kind of effect the QT as it shrinks could have on your balance sheet?

Robin Vince:

And, Gerard, I'm just going to add that it's easy to think that just because at this very moment in time, we're looking out, there seems to be some greater consensus than we've had for a little while around what might happen with the Fed in the fall across September and the balance of the year. It's easy to think somehow that the range of risks has somehow narrowed as a result of that. But there's still a lot of uncertainty in the world. We've got all bunch of other types of geopolitical risks out in the world. We're sort of continuing to grind through elections that we've talked about through the course of the year. There are all sorts of other things happening. We've still got wars going on. And so our approach to all of these questions, and Dermot really made the point, is to be prepared for all the different types of outcomes that are possible. And so you can see us, we run conservative on liquidity, we run conservative on capital. You can see it in our ratios that we talked about and that Dermot outlined in his prepared remarks. And that's a very important anchor point for us so that we can be agile according to however things play out because the one thing we can be absolutely sure of is they won't play out exactly the way anybody expects.

Robin Vince:

Well, the company’s been around for 240 years, and we've acquired a lot of different businesses and companies over time. And so these things do build up over a period of time. But the short answer to your question is, we passionately believe as a whole leadership team that the answer to the question is culture. And so I've said before in a slightly pithy way and quoting other people or sort of paraphrasing them, if you will, that culture eats strategy for breakfast, as it was once famously said by Peter Drucker. And we add to that, execution eats strategy for lunch. That's just a long way of saying that the power our culture pillar, which is one of our three pillars, is the thing that's enabling us to run our company better. And that, in turn, is allowing us to be more for our clients. And so the trick to this for us has been investing in our people. It's been creating the benefits, the experiences, the employee experience, the pride, association with the company, the feedback loop that shows that when we do these things, we get better outcomes for our clients, and that translates into better outcomes in the bottom line. And so there's a flywheel effect here that actually builds on itself. And the spring in the step of our employees is now powering that forward, and that's what gives us confidence that we've really turned the corner on it. People want to throw in with the whole because they see that it's not only better for the company, it's actually better for their business because joining their products with other products around the company is allowing us to be more for clients. And it actually feels good to see the benefits in the ultimate results. So that's, for us, the North Star of how we're doing it. And while we've certainly got a distance to go, the early results have been pretty encouraging.

Robin Vince:

Thank you.

Brian Bedell:

Great. Thanks. Good morning, guys. Great. Maybe if I could just come back to the -- sticking with the NII guide of down 10%. I'm having trouble getting there. The -- just to confirm, it sounds, Dermot, like what you're saying is it's really almost totally a deposit-driven guide on a seasonal basis. And I just wanted to sort of confirm that given how you've outlined the balance sheet sensitivity to different rate scenarios is pretty strong. And of course, you have the benefit of securities portfolio reinvestment. So is it really simply just the seasonal deposit dynamic? And then if you can just talk about how NIB is factored into that seasonal deposit dynamic. And then, of course, as you move into next year, in 1Q seasonally, of course, that we should be back positive again. I just want to confirm that.

Brian Bedell:

Right. Okay. Yeah. Fair enough there. And then maybe just back to the operating leverage dynamic, and this can be for both Dermot and Robin. Obviously, you're starting off really well with, like, 100 basis points plus of positive operating leverage as we move into the second half, notwithstanding market movements, that would obviously influence the fee revenue dynamic. But given the traction that you're showing sequentially in your core business growth and core business sales and, I guess, the fact that you've made these investments already, so I just wanted to get a sense of whether you feel like you're able to scale those investments in the second half. And obviously, with your flat operating expense guidance, it would seem that's the case. If the revenue does turn out to be better than expected from an organic growth perspective, would we see the expense base creep up a little bit notwithstanding, of course, you'd still generate positive leverage?

Robin Vince:

And I just want to draw out one additional thing that Dermot said as well, Brian, which is we have a lot of work to do. There's no question about it. He used the term skew and slightly optimistic, but staying humble when it related to NII. This one is just about a lot of hard work and really focusing on this point about running the company better. But as a double-click into the way that we're thinking about it, if you look at the second quarter, I mean, we've talked a lot about the fact that it's been a seasonally strong quarter. But if you double-click into it, and the Market and Wealth Services point that Dermot just mentioned, that's an investment story because, as we've said, we're in a good spot on the pre-tax margin of that segment. So we just want more that's growth. We don't want to dilute the margin, but we're not trying to save expense dollars there. But in Securities Services and in Investment and Wealth, where we said there is, in fact, a margin journey that we have ahead of us, that's where you can actually see negative expenses in both of those segments for the quarter, which is a sign of the fact that we're both investing but we're doing even more discipline in those businesses. And so that's how the whole thing comes together for the company.

Operator:

And our final question is coming from Rajiv Bhatia with Morningstar. Please go ahead.

Dermot McDonogh:

So I don't think we kind of get into the detail of the split between the two. And so the segment overall, I guess, we've said over the last several quarters, we believe we can go back to the 25% margin over a period of a few years. And, like, just to follow on from Robin's answer to the last question, we've shown, I think, good expense discipline over the last 12 months in terms of, okay, revenues have been a little bit challenged in the segment due to a variety of reasons, and we've taken tough decisions. And so that's allowed us to grow the margin by 200 basis points over the last year, which really is kind of the financial discipline [about it] (ph). And we do believe where we are now with distribution as a platform, very, very strong performance in fixed income and LDI and Insight, that the momentum is there within the segment to grow. And as Robin said, the addition of Jose to the leadership team joining in September, giving his fresh perspective, gives us confidence about what we can do in the future.

Robin Vince:

Thanks, Rajiv.

Robin Vince:

Thank you, operator, and thanks, everyone, for your time today. We certainly appreciate your interest in BNY. If you have any follow-up questions, please reach out to Marius and the IR team. Be well and enjoy the balance of the summer.

Marius Merz :

Thank you, operator. Good morning everyone, and thanks for joining us. I'm here with Robin Vince, President and Chief Executive Officer, and Dermot McDonogh, our Chief Financial Officer. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. And I'll note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. 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, April 16, 2024, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh :

Thank you, Robin, and good morning everyone. Referring to Page 3 of the presentation, I'll start with our consolidated financial results for the quarter. Total revenue of $4.5 billion was up 3% year-over-year. Fee revenue was up 5%. This reflects 8% growth in investment services fees on the back of higher market values, increased client activity and net new business, partially offset by a 14% decline in foreign exchange revenue, as a result of lower market volatility. Firm-wide assets under custody and our administration of $48.8 trillion were up 5% year-over-year, and assets under management of $2 trillion were up 6% year-over-year, both largely reflecting higher market values. Investment and other revenue was $182 million in the quarter. Effective January 1, we adopted new accounting guidance for our investments in renewable energy projects resulting in an approximately $50 million increase to investment and other revenue. We have restated prior periods in our earnings materials to provide you with like-for-like, year-over-year and sequential comparisons. The adoption of this new accounting guidance is largely neutral to net income and earnings per share, as the increase in provision for income taxes roughly equals the increase in investment and other revenue. Net interest income decreased by 8% year-over-year, primarily reflecting changes in the composition of deposits, partially offset by the impact of higher interest rates. Expenses were up 2% year-over-year on a reported basis and up 1% excluding notable items, primarily severance expense. Growth was from incremental investments and employee merit increases offset by efficiency savings. Provision for credit losses was $27 million in the quarter, primarily driven by reserve increases related to commercial real estate exposure. As Robin mentioned earlier, we reported earnings per share of a $1.25 up 11% year-over-year, a pre-tax margin of 29% and a return on tangible common equity of 20.7%. Excluding notable items, earnings per share were $1.29, up 14% year-over-year. Pre-tax margin was 30%, and our return on tangible common equity was 21.3%. Turning to capital and liquidity on Page 4. Our tier 1 leverage ratio for the quarter was 5.9%. Average assets increased by 1% sequentially, as deposit balances grew. And tier 1 capital decreased by 1% sequentially, primarily reflecting capital return to common shareholders partially offset by capital generated through earnings. Our CET1 ratio at the end of the quarter was 10.8%. The quarter-over-quarter decline reflects a temporary increase in risk-weighted assets at the end of the quarter, which was driven by discrete overdrafts in our custody and securities clearing businesses, as well as strong demand for our agency securities lending program. Consistent with tier 1 capital, CET1 capital decreased by 1% sequentially. Over the course of the quarter, we returned $1.3 billion of capital to our shareholders, representing a total payout ratio of 138%. Turning to liquidity. Our regulatory ratios remained strong. The consolidated liquidity coverage ratio was 117% flat sequentially. And our consolidated net stable funding ratio was 136% up 1 percentage point sequentially. Moving on to net interest income and the underlying balance sheet trends on Page 5. Net interest income of over $1 billion was down 8% year-over-year and down 6% quarter-over-quarter. The sequential decrease was primarily driven by changes in the composition of deposits, partially offset by the benefit of reinvesting maturing fixed rate securities [and] (ph) higher yielding alternatives. Against typical seasonal patterns, average deposit balances increased by 2% sequentially. Solid 4% growth in interest bearing deposits was partially offset by a 5% decline in non-interest bearing deposits which was in-line with our expectations. Average interest earning assets were up 1% quarter-over-quarter. We reduced our cash and reverse repo balances by 2% and increased our investment securities portfolio by 5%. Average loan balances remained flat. Turning to our business segments starting on Page 6, please remember that in the first quarter we made certain realignments of similar products and services across our lines of business, consistent with our work to operate as a more unified company. As Robin mentioned earlier, the largest change was the movement of institutional solutions from Pershing to Clearance and Collateral Management both in the Market and Wealth Services segment. And we made other smaller changes across our business segments. We have restated prior periods for consistency. Please refer to the revised financial supplement that we filed on March 26th for detailed reconciliations to previous disclosures. Now, starting with Security Services on Page 6. Security services reported total revenue of $2.1 billion, up 1% year-over-year. Investment services fees were up 8% year-over-year. In asset servicing, investment services fees were up 8%, driven by higher market values, net new business and higher client activity. We've remained focused on deal margins, and as a result the year-over-year impact of repricing on fee growth was de-minimis. Consistent with past quarters, we continue to see particular success with our ETF offering. ETF assets under custody and/or administration surpassed $2 trillion this quarter up over 40% year-over-year on the back of higher market values, net new business and client flows, and the number of funds serviced was up 16% year-over-year. While the pace of alternative fund launches was slower than in the prior year quarter, investment services fees for alternatives were up over 10% on a year-over-year basis. Throughout the quarter, we saw broad-based strength across client segments, products and regions. In issuer services, investment services fees were up 11% reflecting net new business across both depository receipts and corporate trust, as well as higher cancellation fees in depository receipts. Foreign exchange revenue was down 11% year-over-year and net interest income was down 12%. Expenses of $1.5 billion were flat year-over-year, reflecting incremental investments, as well as the impact of employee merit increases offset by efficiency savings. Pre-tax income was $591 million, a 4% increase year-over-year, and pre-tax margin expanded to 28%. Next, Market and Wealth Services on Page 7. Market and Wealth Services reported total revenue of $1.5 billion, up 3% year-over-year. Total investment services fees were up 7% year-over-year. In Pershing, investment services fees were up 3%, reflecting higher market values and client activity, partially offset by the impact of business lost in the prior year. Net new assets were negative $2 billion for the quarter, reflecting the ongoing deconversion of the before-mentioned lost business. Client demand for our Wealth Advisor platform, Wove, continues to be strong. In the first quarter, we signed nine additional client agreements, including our first direct indexing clients, and we onboarded four clients onto the platform. In treasury services, investment services fees increased by 5%, driven by net new business. We continue to invest in our sales and service teams, new products and technology. And so we are pleased with this solid growth and momentum continues to build. Last but not least, strength in clearance and collateral management continued with investment services fees of 13% on the back of broad-based growth both in the US and internationally. Net interest income for the segment overall was down 7% year-over-year. Expenses of $834 million were up 7% year-over-year, reflecting incremental investments, revenue-related expenses, and employee merit increases, partially offset by efficiency savings. Pre-tax income was down 2% year-over-year at $678 million, representing a 45% pre-tax margin. Moving on to Investment and Wealth Management on Page 8. Investment and Wealth Management reported total revenue of $846 million, up 2% year-over-year. In Investment Management, revenue was up 2% driven by higher market values partially offset by the mix of AUM flows and lower performance fees. In our wealth management business, revenue also increased by 2%, driven by higher market values, partially offset by changes in product mix and lower net interest income. Expenses of $740 million were flat year-over-year, primarily reflecting the impact of incremental investments and employee merit increases, which was offset by efficiency savings. Pre-tax income was $107 million, up 15% year-over-year, representing a pre-tax margin of 13%. As I mentioned earlier, assets under management of $2 trillion increased by 6% year-over-year. In the quarter, we saw $16 billion of net inflows into our long-term active strategies with strength in LDI and fixed income. And we saw $15 billion of net outflows from index strategies. Strength in our short-term cash strategies continued with $16 billion of net inflows on the back of differentiated investment performance in our [drivers] (ph) money market fund complex. Wealth management client assets of $309 billion increased by 11% year-over-year, reflecting higher equity market values and cumulative net inflows. Page 9 shows the results of the other segments. I will close by reiterating our existing outlook for the full year 2024. As I've said before, we have positioned our balance sheet for a range of interest rate scenarios and we're managing both sides of it proactively. And so, despite the repricing of the curve since the beginning of the year, we continue to expect net interest income for the full year to be down 10% year-over-year, assuming current market implied interest rates for the remainder of 2024. Similarly, on expenses, our goal continues to be for full year 2024 expenses excluding notable items to be flat year-over-year. We are off to a good start, but we have more work ahead of us to realize further efficiency savings and drive year-over-year expense growth rates lower over the coming quarters, while we continue to make room for additional investments across our businesses. Overall, we remain determined to deliver some positive operating leverage this year. While we don't manage the firm to operating leverage on a quarterly basis, our performance in the first quarter with positive operating leverage on both a reported and an operating basis gives us confidence that we're on track. In light of the adoption of the new accounting guidance for our investments in renewable energy projects, which, as I discussed earlier, increases both our investment and other revenue, and the provision for income taxes. I'll note that we expect our effective tax rate for the full year 2024 to be between 23% and 24%. And finally, we continue to expect returning 100% or more of 2024 earnings to our shareholders through dividends and buybacks over the course of the year. As always, we will manage share repurchases cognizant of the macroeconomic environment, balance sheet size and many other factors. And so for the foreseeable future, we will calibrate the pace of buybacks to maintain our tier 1 leverage ratio close to the top end of our 5.5% to 6% medium-term target range. To wrap up, over the past three months, we've made good progress towards achieving our target for 2024. And we're encouraged by the drive we're seeing in all corners of the firm, as our people embrace being more for our clients, running our company better and powering our culture. With that operator, can you please open the line for Q&A?

Alex Blostein:

Hi, good morning. Thanks for the question. So Robin, really nice progress I guess on organic growth initiatives across a handful of businesses underneath BNY Mellon, as some of the things you talked about are starting to kind of take hold. Can you maybe frame what the firm's organic growth rate aspirations are for the next couple of years? How are you thinking about that for 2024 as well? And then as a side question I guess to that, we've seen quite significant amount of activity in sort of Clearance and Collateral Management. Can -- you maybe help size what is sort of transitory versus more of a recurrent baseline to think about from here. Thanks.

Alex Blostein:

Yeah, sure. Really nice results out of Clearance to Collateral Management for the firm and it's been a pretty active market in Q1, related to treasury issuance and activity there broadly. I'm just trying to get a sense for a better baseline to think about from here. Was there anything kind of transitory in the first quarter that helped the numbers or this is a good baseline to think about going forward.

Alex Blostein:

Great. Thanks so much. I'll hop back in the queue.

Operator:

And our next question comes from the line of Steven Chubak from Wolfe Research. Please go ahead.

Robin Vince :

Good morning, Steven.

Dermot McDonogh:

Okay, I'll take that one. Steven, good morning. So some of the capital increase, there are two parts to the RWA increase, one was a kind of temporary increase around quarter end, as it relates to discrete overdrafts in custody and securities clearing businesses. So that kind of come and gone. And then there was also -- there was strong demand for our agency securities lending program throughout the quarter and particularly leading up to quarter end and that's continued into this quarter. So I would say, half of it was that and half of it was temporary. As it relates to the buyback, I guess there's a little bit of a Groundhog Day here in terms of how we thought about a Q1 of last year versus how we're thinking about a Q1 of this year. Both quarters, we got off to a strong start. But look at there -- there's a lot of rate volatility out there in the market. You've seen the backup in rates last week with the hot inflation report. Last year it was the war in Ukraine, this year it's the geopolitics in the Middle East. And so we kind of gave a guidance in January where we said we were going to be 100% more of earnings throughout the year. We don't give quarter-by-quarter guidance. I would reiterate the guidance of 100% or more, notwithstanding the fact Q1 was very good at 138%. I wouldn't expect that pace to continue, but we'll take it quarter-by-quarter.

Dermot McDonogh:

Okay, so the first point would be pre-tax margin for the Q1 there was around 13%. If you normalize that for typical seasonal volatility in terms of retirement eligible stock and such, like, if you back that out and adjust it, the margin would have been somewhere in the 16% zip code. So we feel pretty good about that. Still a ton of work to do. And I would say, it's not one thing over the other, it depends on which part of the business you're talking about. In some of our asset managers, we're investing, we're launching new products. Clients, in some places, continue to de-risk and move from more risk on equity to passive fixed income. But in other cases, we see clients coming in and AUM growing. We saw -- we were very pleased with the performance of our drive with cash management business in Q1, where we saw strong inflows and the performance of the business in terms of returns was -- first quarter, so we feel very good about that. So we are investing the business to give our clients good products to invest in. The flip side is, we still believe as it relates to running the company better and desiloing the firm and connecting asset management to the broader enterprise, there's a lot of opportunity there. And at the same time as the opportunity, it allows us to take costs out and become a lot more efficient. So I would say we're working both sides of us. We see more opportunity on the revenue side, and we're working the problem on the efficiency side.

Operator:

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Robin Vince :

Sure, hi Betsy. First of all, it's great to have you on the call. Really glad to have you back and to know that you're doing well.

Robin Vince :

So on the AI, I'll start with the sort of the latter part of your question, which is I really don't think this is a 2024 story. Of course, we're doing things in 2024. But if you ask me to try to put a pin in where the real benefits and sort of tailwinds kick in, I'm actually going to say it's not even necessarily a 2025 story, although maybe we'll see a little bit in ‘25. I think this is a ‘26 and on out benefit on the expense line. But let me go back to the sort of the premise of your question and just sort of briefly mention how we're embracing it, so I'll put it actually through the three pillars that we've laid out in terms of -- the guiding so much of what we're doing in the company. So first, being more for our clients, we think there are solutions out there for clients that are going to help them make better decisions, see risks, be able to be more efficient themselves. We've got software in market today doing that with predictive trade analytics around fails and settlements, allowing clients to be able to look out and to see and take evasive action essentially on potential fails. And by the way, some of those actions involve using other parts of the BNY Mellon platforms in order to be able to improve their businesses. And so that's an interesting example and there are going to be a lot more of those. Under the heading of running our company better this is going to be about streamlining business processes, productivity, figuring out and seeing anomalies that we can see, code assistant, as so many people talk about for our developers. I was walking around one of our buildings the other day, talking to one of our developers. They've been out of school for a year and change and already they think that 25% more productive as a developer and that's in the very early days of using GitHub Copilot. So that's going to be -- there's going to be more there -- and that ultimately is going to create efficiencies for us. And then under the culture heading, which is very important, we want AI to empower our people to be able to go out and be able to be more efficient in terms of what they're doing. And there are any number of different examples of things over time that we think AI is going to be able to help with us. Now importantly in this -- is the way in which we're doing it. Both Dermot and I talked about platforms and another concept in our platform strategy is to create these hubs, these centers of excellence. And in AI that's particularly important. We do not want to repeat the problems we've had in the past of having everyone go off in their own direction. And actually in AI, it's particularly important because problem statements that sound different can in fact have very common root causes. So you might want to be able to respond to an RFP. You might want to generate summaries of documents. You might want to be able to get a head start on a research report. But actually, when you look under the heading, those three things sound different. But the AI that's actually powering them, some of the -- sort of mini platforms that are required are very, very similar. So we're using our AI hub to collect these different use cases and then be able to sort of deliver solutions and many AI platforms that can then be used in multiple places around the company. So we're excited about this. We think it's going to be very significant over time, but it's not a 2024 story.

Robin Vince :

Sorry, I missed the last part of it, Betsy. Where are the --.

Robin Vince :

Yeah, so it's economically it's net neutral for the firm. It's just a gross up in revenue which will show up in the interest and other revenue line and then the offset to that is in the tax line. And we filed an 8-K, a couple of weeks ago where we restated all the prior periods for comparison so that people will see it on a consistent basis going forward.

Robin Vince :

Yeah.

Ebrahim Poonawala:

Thank you good morning.

Ebrahim Poonawala:

Yes, I guess, not sure Dermot if this was addressed here but in terms of your outlook on deposits, I think the period ends, so a pretty big uptick to $309 billion. Just give us a sense of, within your NII guidance, one what are you assuming in terms of deposit balances? And secondly, if the forward curve holds, is the next inflection on NII and margin higher or lower? Yeah, thank you.

Ebrahim Poonawala:

Got it. And I guess one just follow up in terms of some of the actions you took in moving businesses in Pershing. As we think about the strategic review, I guess Robin, maybe it began a year ago or longer than that, give us a sense of in terms of the franchise positioning, how the businesses are talking to each other and if they are in the right place within the enterprise. Is all of that done? How close are you to getting the franchise synced up in terms of what is coming along with regards to what you want to achieve in terms of client synergies? Thank you.

Ebrahim Poonawala:

Got it. Thank you both.

Brennan Hawken:

Good morning. Thanks for taking my questions. I'd like to start, Dermot, when you were walking through Pershing, I believe you talked about the offboarding and the impact of how that was weighing on the net new assets. Could you give us a update on how far we are along in that off-boarding process and how much we should continue to expect for the rest of the year? And then also LPL recently announced the acquisition of Atria, which I understand was a Pershing client, and they're planning to consolidate those operations in 2025. So is that going to extend maybe some of the headwinds that we're seeing from some of these idiosyncratic off-boardings?

Robin Vince :

And Brennan, I just add on the business front to that, which is remember that when we look at a deconversion, for sure those happen, and the one that you're referring to, the original one was a larger one. But we're also growing with our clients. Our clients are growing with us and we also are on the receiving end of roll-ups as well. Our clients are quite acquisitive and we have a couple of clients who've been doing acquisitions and we have some of our largest clients who are growing very significantly and very healthily. So it's always unfortunate when there's a roll-up that goes against us, but when there are roll-ups that go with our clients, those things balance out to some extent which is why Dermot makes the point about overall, we still feel quite enthusiastic about the net new assets growth over time.

Dermot McDonogh:

If I'm honest with you, I would say it's a little bit of both, but I would expect, like everybody expected deposits to decline this year, and it hasn't necessarily happened yet, And I kind of think -- I make that statement in the context of QT. And so if you look at the [RRP] (ph) in Q1, the drain largely came from there. And if QT continues and rates stay higher for longer, on balance I would expect deposits to decline from here. And so I don't see anything that tells me that I should update the guidance from down 10% NII year-over-year. And then underneath the hood, in terms of the composition of the deposits themselves, you have the mix between interest bearing and non-interest bearing. And as rates stay higher for longer, I would expect NIBs to grind a little bit lower. So the overall balance may be higher, but you have to mix underneath, which will kind of feed into that overall NII guidance. So it's not just the absolute level, it's also the composition of it.

Operator:

Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Robin Vince :

Hi, Mike.

Dermot McDonogh:

Thanks for the question, Mike. So let's go with the fee component first. Q1 is kind of one of those quarters where we came into the year I guess both in deposits and in pipeline and sales activity in very good shape. As it relates to kind of asset servicing in particular, the pipeline was strong, we felt good coming into the year, markets rallied nicely. And so clients were in risk on mode, doing more with us. Flows were stronger. Balances are higher. And we're winning our share of mandates. Little factoids for like, of all the deals that we competed for in Q1, we won north of 50%. So we're competitive, we're pricing well, we're very focused on client profitability and deal margin and it goes back to the point that we made in several quarters prior to this where we're very focused on the cost to serve. And so by improving margin, focusing on cost to serve, being more for clients, we can be more competitive in the pricing point. And I made that remark, I made the point in my prepared remarks that we saw repricing being de-minimis. So it was a good quarter all around and we feel very good about the backlog and the pipeline going forward. As it relates to the mix between fees and deposits, you know, we don't lead with deposits as an institution. Clients do multiple things with us across the enterprise and as a consequence of that they leave deposits with us. You know, it's an important point but two-thirds of our deposits are operational in nature and therefore very sticky. But with a higher for longer rate environment, it's only natural to expect that people with NIBs are going to over time move out of that and look for a higher yield. It's inevitable and it's a fact of life and we're ready to deal with that but I'm very proud of what our global liquidity solutions team is doing in terms of winning their share of the business in terms of the deposits and how we price them and so sequentially, we've seen the balances go up because of that competitive pricing. So all-in-all, when you take the ecosystem together we feel very good about where we're at.

Mike Mayo:

Okay. And so for -- a separate question, for all the growth and servicing fees, asset management, what can you do to reverse the trend for sustainable growth? I mean, would it ever be an option to consider selling that? The synergies, when you think about One BNY Mellon, I kind of get the rest of the firm being all one cohesive unit over time, but how does asset management fit into that?

Mike Mayo:

All right. Thank you.

Glenn Schorr:

Hi, thanks very much. [Robin] (ph) mentioned it, so maybe it wasn't that big of a deal, but T+1 starts at the end of May. I'm curious if it was a big expense lift that we get some relief on going forward? And then related to that, are there any headwinds on NII and any benefits on capital that we have to think about as a result of moving towards a more T+1 world? Thank you.

Dermot McDonogh:

And Glenn on this specific point about headwinds as it relates to NII, I kind of look at the last two quarters together in terms of the strength of what we've done on NII and I feel overall we're in a good place. The balance sheet is very clean. Our CIO book is well positioned and kind of short duration and the CIO is doing a really good job at optimizing yield. And so when you see our securities that are maturing at the moment, they're rolling off at a 2% to 3% rate and then are being deployed at current market yields. So based on what I see today with the back-up in rates that happened last week as a result of the hot inflation report, we feel pretty good about where things are for the balance of the year just using that forward curve. As I said earlier, rates up a little, down a little, don't materially impact us. And so we feel like our base case is, we feel pretty good about it.

Operator:

Our next question is come from Gerard Cassidy with RBC. Please go ahead.

Robin Vince :

Hey, Gerard.

Dermot McDonogh:

Thanks, Gerard. Again, it was a little bit of what I call the Good Friday effect, where clients use our overdraft facility mechanisms going into that weekend. And so that really caused the spot balances to go up and that's kind of largely cleaned out so has reverted more to the average numbers that you're familiar with.

Dermot McDonogh:

So I would say, look, we're prudently marked in the commercial real estate portfolio. Overall, our CRE portfolio in the context of our overall balance sheet is quite small. 3% of total loans, $2 billion. And the reserve builds that we took in Q1 was really just kind of being prudent on a couple of specific situations that are coming up for restructuring. But I would let you know that they're all still paying and everything is working, and their class A office buildings. And we feel good about the occupancy. So I would say overall very, very clean and nothing that really has me unduly concerned. And look, there has been a lot of chatter in the market, in the press over the last quarter about what's going to happen. I'm sure the back-up in rates, hasn't really helped that chatter but like surveying other banks results so far this quarter I haven't really noticed any specific CRE bills on the back of what's been going on over the last couple of quarters, so it does feel like as a sentiment matter to be quite muted at the moment on the back of others earnings release, at least what I've observed.

Gerard Cassidy:

Thank you. Appreciate those insights. Thank you.

David Smith:

Good afternoon. Could you please help us think a little bit more about how far along you are in the efficiency opportunity journey? I know, it's really never ending in some ways, but can you help us think about when the pace of improvement might start to decline, as you get through more of the low-hanging fruit?

David Smith:

Thank you. And lastly, just to confirm, you know, $1 billion or so of buyback in 1Q, does that come out of the $6 billion new re-purchase authorization or is the $6 billion incremental to what you did in 1Q?

David Smith:

Got it. Thank you.

Operator:

Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Robin Vince :

Okay. Let me just start with the platforms operating model. So ultimately, if you just go back to why are we doing -- what it is that we're doing, we've been pretty siloed as a company as we've talked about before. We think that's a bad artifact, at least it's a bad artifact for a company like us, which is inherently a scale platforms provider. It's kind of the nature of our business, diversified many different platforms but largely at scale. And so to have the separation of all of these pieces that are in support of that and in some cases, duplication, it just -- in our opinion wasn't the right way to run the company. So what is platform’s Operating Model going to do? It's going to simplify how we work, it's going to improve the client experience, and it's going to create more empowerment for our employees. It's an opportunity to do things in one place, do them well and elevate the quality of overall execution. And so with that said, it sort of hits on the expense line, as a benefit and it hits on the revenue line as well. And we've done, remember we did a bunch of studies for this before we embarked on it because pretty significant change. We also did some pilots and to some extent we've even built new businesses using this operating rhythm because we built Wove in that way and that wasn't entirely by accident. So we've had some experience associated with all of that and we feel pretty good therefore that we are going to get expense savings and revenue opportunities associated with it. We also think that from a cultural point of view, it's just an opportunity for our people because we think our people, and this is certainly what the data so far has shown, they just feel more empowered working in the model. They can see a problem, they can get on it more quickly, they're more empowered to pull the levers to create change, and they no longer feel that maybe that they're part of a long chain of a bureaucracy to make change. On the efficiency opportunity thing, the thing I would add in answer to your question from what Dermot said earlier on, is just to reinforce that there are short, medium and long-term opportunities for efficiencies and we've talked about it this way for a while now. As Dermot said, we had to bend the cost curve last year. We thought it was very important, so we took a bunch of slightly tactical but nonetheless important and decisive changes. We also laid the groundwork for some medium-term saves. We talked about project catalysts, 1500 ideas, sourced from our employees, essentially delivering savings in ’23, in ‘24, and ‘25. And then we've got things that are longer-term, like the platform's operating model, which are fundamentally changing the ways that people actually work. That's a longer term opportunity. Probably get a little bit of benefit from that from ‘24, but ‘25 and ‘26 are places where we'll probably see a bit more of that. And then in answer to Betsy's question from earlier on, we've been investing in AI. Now that's definitely not a ‘24 story for benefits, maybe not even ‘25, but a ‘26 and beyond story. So we're layering in these different opportunities, recognizing that we wanted to take swift action, but then we also feel that we're laying the seeds for future efficiencies over time.

Brian Bedell:

That's fantastic, color. And maybe just one -- last one on the speaking of initiatives, the buy side trading solutions initiative. I know we've had a lot of other initiatives to talk about, so just maybe to get an update on how that's tracking.

Brian Bedell:

Great. Thanks for all the color. Thanks so much.

Operator:

Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Robin Vince :

Thanks, Ken. I would say very much the latter. And when you look at the overall portfolio, you think of cash and securities together. And it was really the CIO team just optimizing yield and deploying cash where they see the opportunities.

Dermot McDonogh:

I think it's in the 200 zip code.

Dermot McDonogh:

Roughly, two years, give or take, yeah, but yeah, two years is the best number to give you on that one.

Dermot McDonogh:

Correct, yeah.

Operator:

And our final question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Robin Vince :

Well, the question, Mike, was more general in nature. It wasn't really applying to us. Dermot talked a little bit about us in particular on commercial real estate, but I think the question that was being asked was just using our vantage point, I think it was from Gerard, just using our vantage point in the world because we're not particularly invested in the space. What do we see in the world, maybe as a slightly less conflicted observer? And so I was just giving my perspective on it.

Robin Vince :

Sure, so at the end of the day, as you look at the various different owners of commercial real estate who have refinancings and they're looking at their own occupancy level, they're looking at their own maturity of their own debt stack, and they need to go out and they need to find refinancing, of course, as you know better than anybody, when their debt stack starts to come due. That isn't a Fed funds type of refinancing because they're not for funding of very short dates. And most of them, for understandable reasons, like to lock in funding as well. So they're looking further out the curve, it's not precisely at the 10 year point but my point really is the risk to refinancing in the commercial real estate space is very correlated to the shape of the treasury curve overall. Clearly credit spreads matter as well, but it's a different proposition when you have the longer, call it 10 years, but it's probably a little inside of that, part of the curve at 4% versus 5% versus 6%. That was the purpose of my observation.

Robin Vince :

You're welcome.

Robin Vince:

Thank you, operator. I'd just like to wrap up by thanking our employees for their hard work to unlock the tremendous opportunity inside of BNY Mellon. We started the year with great momentum, delivered very solid results in the first quarter, and the pace of change continues to pick up. And I want to thank our investors for their continued support. We appreciate your interest in BNY Mellon and thank you for your time today. If you have any follow-up questions, please reach out to Marius and the IR team. Be well.

Marius Merz:

Thank you, operator. Good afternoon, and thank you all for joining us. I'm here with Robin Vince, President and Chief Executive Officer; and Dermot McDonogh, our Chief Financial Officer. As usual, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. I'd like to note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. 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 12, 2024, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh:

Thank you, Robin, and good afternoon, everyone. I'm picking up on Page 6 of the presentation with our consolidated financials for the fourth quarter, and as Robin noted, I'm also going to speak to our 2024 outlook and medium-term targets, including how we are going to execute on our goals. For the fourth quarter, our reported results reflect several notable items. Approximately $750 million of non-interest expense is related to the FDIC special assessment severance and litigation reserves. And we had $150 million reduction in investment and other revenue, primarily related to a fair-value adjustment of a contingent consideration receivable. Total revenue of $4.3 billion was up 10% year-over-year, or up 2% excluding notable items. Total fee revenue was flat, reflecting 3% growth in investment services fees, which was offset by a 5% decline in investment management and performance fees, and 25% decline in foreign-exchange revenue. Investment and other revenue was a negative $4 million in the quarter, reflecting the fair-value adjustments as I mentioned before. Net interest revenue was up 4% year-over-year, primarily reflecting higher interest rates, partially offset by changes in balance sheet size and mix. Expenses were up 20% year-over-year on a reported basis, primarily reflecting the FDIC special assessment. Excluding notable items, expenses were up 4%, reflecting higher investments and the impact of a weaker dollar, as well as inflation, partially offset by efficiency savings. Provision for credit losses was $84 million, primarily driven by reserve builds for commercial real-estate exposure. Reported earnings per share for the fourth quarter were $0.33. Pre-tax margin was 8% and return on tangible common equity was 6%. Excluding notable items, earnings per share were $1.28, pre-tax margin was 28%, and return on tangible common equity was 21%. Turning to capital and liquidity on Page 7. Our Tier 1 leverage ratio of 6% remained largely unchanged, down 8 basis points to be precise compared to the prior quarter. Tier 1 capital remained essentially flat at $23.1 billion as the impacts of capital distributions to common shareholders and our redemption of $500 million preferred stock were offset by an improvement in AOCI and capital generated through earnings. Average assets increased by 1% sequentially, primarily reflecting deposit inflows in the fourth quarter. Our CET1 ratio was 11.6% which represents a 20 basis points improvement compared with the prior quarter. CET1 capital was up 3% sequentially, primarily reflecting capital generated through earnings and the improvement in AOCI, partially offset by the impact of capital distributions to common shareholders. Risk-weighted assets increased by 1%. Consistent with the prior quarter, we returned $450 million of capital to our common shareholders through share repurchases, and we paid approximately $330 million of common stock dividends in the fourth quarter. The consolidated liquidity coverage ratio was 117%, a 4 percentage points sequential decrease, primarily reflecting deposit inflows in the quarter, which are considered non-operational until they are seasoned under our operational deposit model, and our consolidated net stable funding ratio remained roughly unchanged at 135%. Next, on Page 8, net interest revenue and additional details on the underlying balance sheet trends. Net interest revenue was $1.1 billion. It was up 4% year-over-year and up 8% quarter-over-quarter. The sequential increase was primarily driven by balance sheet growth and changes in balance sheet mix. Total deposits averaged $273 billion in the fourth quarter, up 4% sequentially, a strong finish to the year. Interest-bearing deposits were up 5%, and non-interest-bearing deposits remained flat. Interestingly, since August, we've seen four consecutive months of growth in average total deposit balances. Our team is highly engaged with our clients and we're encouraged by the demand we've been seeing for our on-balance sheet liquidity solutions, and we are pleased with the stabilization. We remain vigilant, preparing for a variety of different outcomes and financial conditions in 2024. On the asset side, average interest-earning assets increased by 2% quarter-over-quarter. This includes cash and reverse repo up 5%, and loan balances up 3%. The size of our investment securities portfolio decreased by 3% sequentially. Moving to our business segments starting with Securities Services on Page 9. Securities Services reported a total revenue of $2.2 billion, flat year-over-year. Investment services fees were up 1% year-over-year. In asset servicing, investment services fees were flat as the positive impact of higher market levels, net new business, and a weaker dollar was offset by lower client activity. We ended the year on a high note, with our strongest sales quarter of 2023, including wins in the Middle East, new mandates from several mid-sized investment managers, and expanded mandates from some of our largest existing clients. And we saw continued strength in our ETF servicing business with another quarter of strong net inflows capped a year of above-market growth. Within Issuer Services, investment services fees were up 5%, reflecting healthy new business and higher client activity. Foreign exchange revenue was down 21% year-over-year on the back of lower volatility and lower volumes. And net interest revenue was down 3% year-over-year. Expenses of $1.7 billion were up 5% year-over-year, reflecting higher investments and higher revenue-related expenses, as well as inflation, partially offset by efficiency savings. Pre-tax income was approximately $460 million, representing a 21% pre-tax margin. Next, Market and Wealth Services on Page 10. This segment reported a total revenue of $1.5 billion, up 7% year-over-year. Total investment services fees were up 6% year-over-year. In Pershing investment services fees were up 1%, reflecting higher equity market values and higher client activity, partially offset by the impact of expected lost business. Net-new assets were negative $4 billion for the quarter, also reflecting this expected loss business. In Treasury Services, investment services fees increased by 5%, primarily reflecting higher client activity, partially offset by higher earnings credits for non-interest-bearing deposit balances. In Clearance and Collateral Management, investment services fees were up 16%, reflecting broad-based strength across Clearance and Collateral Management, both in the US and internationally. Net interest revenue increased by 10% year-over-year. Expenses of approximately $840 million were up 7% year-over-year, reflecting higher investments and inflation, partially offset by efficiency savings. Pre-tax income was approximately $630 million, representing a 42% pre-tax margin. Turning to Investment and Wealth Management on Page 11. Investment and Wealth Management reported total revenue of $676 million, down 18% year-over-year. In investment management, revenue was down 26%, reflecting the fair-value adjustment of the receivable and the impact of the prior year divestiture, as well as the mix of AUM flows, partially offset by higher market values, seed capital gains and the weaker dollar. In our wealth management business, revenue decreased by 3%, driven by changes in product mix, partially offset by higher market values. Expenses of approximately $680 million were down 2% year-over-year, primarily reflecting efficiency savings and the impact of the divestiture in 2022, partially offset by higher investments, inflation and the unfavorable impact of the weaker dollar. Pre-tax income was a loss of $5 million. Excluding the impact of notable items, pre-tax income of $151 million increased 1% year-over-year and represents an 18% pre-tax margin. Assets under management of $2 trillion increased by 8% year-over-year, reflecting higher market values and the weaker dollar, partially offset by cumulative net outflows. In the quarter, we saw $7 billion of net inflows into short-term strategies and $4 billion of net inflows into long-term active strategies, while we saw $10 billion of net outflows from index strategies. Wealth management client assets of $312 billion increased by 16% year-over-year, reflecting higher equity market values and cumulative net inflows. Page 12 shows the results of the other segments. Total revenue improved year-over-year, primarily reflecting the absence of a net loss from repositioning the securities portfolio recorded in the fourth quarter of 2022, and expenses of $693 million included $505 million related to the FDIC special assessment. Having reviewed our results, I will now turn to Page 14, and our current outlook for 2024. We're entering the year on a strong footing and we set ourselves up determined to at least break even from an operating leverage perspective. Considering our healthy pipeline across the businesses, we expect fee revenue growth to turn positive in 2024. With regards to net interest revenue, our expectation for an approximately 10% decrease year-over-year is based on the assumption of market-implied forward interest rates and we assume ongoing quantitative tightening puts further downward pressure on deposit balances. We intend to keep expenses excluding notable items, roughly flat in 2024. And finally, with regard to capital management, we expect to return north of 100% of 2024 earnings to common shareholders through dividends and buybacks. As Robin discussed earlier, 2023 was a foundational year for us. We took decisive actions to demonstrate some early evidence of our ability to deliver stronger financial performance, and importantly, we've developed a clear roadmap for our multi-year transformation. Over the next couple of slides, we'll provide you our medium-term financial targets for the firm and some of the most impactful actions we're taking to keep delivering on our goals. Page 15 summarizes our consolidated targets. It is our goal to improve the firm's pre-tax margin to 33% and our ROTCE to 23% over the medium-term, while maintaining a strong balance sheet. I'll double-click on our business segments in a moment, but along our three strategic pillars, there are a number of teams that transcend our lines of business and segments. Robin mentioned several updates when he talks about our progress in 2023, so I'll highlight just a few with them. The first is our enhanced commercial model. We're driving a new culture of commerciality to deliver all of BNY Mellon in a unified front to facilitate deeper client relationships with solutions from across the firm. With our clients at the center, our module is led by client coverage teams with clear accountability to retain business, expand revenue into new areas and drive client satisfaction. Our new sales operations and enablement organization, the client coverage practice, will make it easier for our clients to do more business with BNY Mellon and create consistent commercial roles, tools and support internally for an enhanced and more efficient sales experience. And what we call integrated solutions represents a new more focused approach to assembling components from multiple client platforms into a piece will go-to-market capabilities that span across our lines of business, driving better value for our clients and higher profitable growth. The second one I'd like to highlight is our transition to a platform's operating model. By grouping similar activities together into logical platforms and uniting related capabilities, we are enabling the streamlining of internal processes to drive higher efficiency and further enhance resiliency and risk management. Our model is based on two types of platforms. Client platforms will own the delivery of a commercial solution to our external clients, while enterprise platforms will own the delivery of internal services. Over the past few months, we've developed a detailed implementation approach and our transition into this new model will be gradual and deliberate, starting with the first implementation wave this spring. And the third is our culture. People come to BNY Mellon to make an impact on global financial markets. While we focus on driving growth and running our company better, none of it can happen without our people. That's why we're making meaningful investments, including in enhanced learning, development and feedback to foster exciting careers. Moving to our segments, starting with Securities Services on Page 16. Here, we are reiterating our existing 30% pre-tax margin target. Over the past 24 months, we've improved the margin from 21% in 2021 to 25% in 2023. We are pleased with the performance of the business over the past two years, but we appreciate that the path from 25% to 30% will be the harder yards. First of all, we are firmly focused on driving down the cost-to-serve. We have and we continue to make significant investments in uplifting several platforms that support core services, including fund accounting, tax services, corporate actions and loan administration. Additionally, we continue going after inefficient processes. Over the past couple of years, we cataloged all of these processes and we've made some good progress in our digitization efforts, but there is more work to do. We're also taking a more strategic approach to deepening client relationships going forward. Using enhanced tools to better understand client behavior, quality of service, economics and revenue opportunities, we are expanding wallet share and improving client profitability. Last but not least, we're pursuing several opportunities to drive an acceleration of underlying growth. On the back of our investments over the years, we have become a premier provider of ETF servicing globally, and we expect to maintain our strong momentum through continued innovation. Similarly, in private markets, another one of the fastest-growing market segments, we've established a strong market position with more room to expand our capability set. Moving on to Market and Wealth Services on Page 17. As you can see on the left side of the page, this segment has a good track record of solid growth and attractive margins. Our focus here is to accelerate growth through deliberate investments without compromising profitability. I'll start with Pershing, our company's second-largest line of business. As the number-one clearing firm for broker-dealers and a top three RIA custodian, Pershing benefits from a strong position in one of the fastest-growing segments in financial services, i.e., the US wealth market. Notwithstanding near-term headwinds from the events of 2023, we are confident that our investments in the core platforms and client experience will drive further market-share gains in the attractive market segments after growing $1 billion-plus RIAs and hybrid broker-dealers. And our Wove platform continues to gain momentum. As we're capturing business from existing clients and new opportunities to deliver the platform, data and investment solutions, we're currently projecting $30 million to $40 million of incremental revenue from Wove in 2024. In Treasury Services, we're benefiting from a strong position with financial institutions and we're one of the top-five US dollar payment clearers in the world. Leveraging the strong position, we are selectively expanding our reach by targeting new client geographic and product segments. For example, we've been adding bankers to drive growth with e-commerce and NBFI clients and the completion of a multi-year uplift of our payments platform is expected to drive an increase to our swift market share through growth in several geographies. Additionally, by joining forces with our markets business, which provides FX solutions in over 100 currencies, Treasury Services will enhance the FX capabilities that it can provide its clients. Rounding out the segment, Clearance and Collateral Management. As the primary provider assessment for all US government securities trades and the largest global collateral manager in the world, we have a special role in financial markets and we're taking this role very seriously. No doubt, this business grows as markets grow, but we're not resting on our position. Our Clearance and Collateral Management business is one of the most innovative in the company. And so we're confident that this business can maintain its healthy growth trajectory by continuously launching new flexible collateral management solutions that position our clients to meet their growing liquidity needs and by continuing to increase collateral mobility and optimization across global client venues. Next, Investment and Wealth Management on Page 18. Investment and Wealth Management reported a pre-tax margin of 12% for the full year 2023, or 17% excluding notable items. Our plan is to improve the segment margin to 25% or higher over the medium term on the back of a combination of growth and efficiency initiatives. First, we're unlocking BNY Mellon's distribution power for the benefit of our investment firms and our clients. Most importantly, we're in the process of creating a firmwide distribution platform that combines enhanced products with offerings from select third-party managers to provide best-in-class solutions. Additionally, we're making enhancements to how we're offering Dreyfus Cash products across our enterprise-wide open architecture liquidity ecosystem to improve visibility and enhance platform share. Second, we're expanding our products and solutions with a focus on scaling our investment capabilities across Investment Management, Wealth Management and Pershing. And heard, we're driving efficiency and scale by realizing the benefits as multi-year infrastructure investment programs are nearing completion, and by better leveraging the enterprise to transform fragmented and sub-scale support activities into scaled enterprise platforms. Moving onto our capital management philosophy on Page 19. BNY Mellon benefits from a capital-light business model that allows us to drive organic growth while typically returning nearly 100% of earnings to our common shareholders over time. Over the past 10 years, the firm grew dividends per share at an 11% CAGR and returned almost 100% of earnings to shareholders through a combination of dividends and buybacks. Our philosophy for capital deployment and capital distribution remains unchanged. We've entered the year with strong capital ratios at or above our management target of approximately 5.5% to 6% Tier 1 leverage and approximately 11% CET1. And assuming interest rates follow marks implied forwards, we expect to generate additional excess capital from the unrealized loss related to AFS securities pulling to par over time. Wrapping up on Page 20. Over the past year, we conducted thorough strategic reviews, we developed detailed business and financial plans, and we've taken the first steps on what would be a multi-year transformation of our company. Our business plans drive as achieving what we laid out across our three strategic pillars, be more for our clients, run our company better and power our culture. And our financial plans aim to improve the firm's pre-tax margin to 33% and our ROTCE to 23% over the medium-term, while maintaining a strong balance sheet. In publishing our medium-term financial targets together with our most important strategic priorities and the actions that will help us achieve them, we are providing transparency to allow you all to track our progress, and we are confident that we will deliver. We are excited about the work ahead of us and today is an important milestone for our team. Now for those of you who are still with us, we promise to let you start your long weekend soon. With that, operator, can you please open the line?

Brennan Hawken:

Good afternoon. Thanks for taking my question, and thanks for all the detail that you provided in the deck on the targets really very, very helpful and very, very thoughtful. I'd love to start there. So it seems as though you guys see a really strong pre-tax margin enhancement opportunity. Where do you expect that you're going to see the results of that opportunity come through first? And while I appreciate that the targets are over a three to five-year period, is the profile of the improvement that you expect likely to look straight-line? Or is there going to be sort of a more parabolic curve, resulting in more of a back-end weighting? Thanks.

Brennan Hawken:

Okay. Thank you very much for that color. I appreciate it. The environment rather different from the last time we spoke. We've seen an indication of the Fed pivot. Everyone is now expecting a far more short-order rate -- policy rates to be declining. And so we saw an uplift, even though there was only a little bit of averaging in of policy rate a little higher this quarter, we did see an uptick in -- on the deposit cost side. So what drove that? And then how should we be thinking about the mechanics of the lower policy rate and how that might flow through on the deposit side? And what's captured in your NII outlook for 2024? A few questions in there. Sorry, Dermot.

Brennan Hawken:

[Multiple Speakers]

Brennan Hawken:

Okay. Thanks for taking my questions and thanks for the patience with multiparter.

Robin Vince:

Mike, we can't hear you. So we'll come back to you. Maybe we have an issue connecting.

Robin Vince:

Yeah. Just in the nick of time

Robin Vince:

So, Mike, it's Robin. And we're not going to quibble with your math or with your English comprehension either from our commentary. You've gotten right what we said. We've intentionally not guided on fees because of the nature of the year and we recognize that there were a lot of different inputs to that. So we recognize that a year can in fact turn out in various different ways. We feel committed to the flat to plus on the operating leverage that we've committed to, and we've guided to how we think the other things are going to play out. And so that was quite deliberate and we're focusing you on the things that we've talked about. But obviously, from a math point-of-view, we understand how the math works.

Dermot McDonogh:

So the way I would think about it, Mike, is, you know not to give you a kind of a weak answer really is all-of-the-above. And if you think about fee revenue, we're very focused on higher organic growth, and we said about that and we've made a lot of mention about the Chief Commercial Officer, one BNY Mellon and kind of just generally de-siloing the organization. And we really feel optimistic about being able to deliver over time higher organic growth. Also in 2023, you know FX volumes around the world and volatility was lower and so we expect FX revenue that to normalize, which give us a boost. And look, we kind of -- we're optimistic about where equity markets are going to go. And so in our plans, we have mid-single-digit equity market appreciation to support that fee revenue growth. On expenses, look, I think 2023 was a year where we got 50 plus thousand employees on the same page as how Robin and I think about and the management team think about running our company better. We don't talk about cost-cutting or you know headcount layoffs. We talk about what are the things that we need to do to run this company better. And I think we have 50,000 people aligned with us now and I feel very optimistic through all the projects that we have underway to digitize the firm, automate processes, deliver more for our clients so everything we'll feel together and will do a lot at the same time. And with all of that, be able to buy back more stock, which will drive us to that higher ROTCE and pre-tax margin that you talked about.

Mike Mayo:

Thank you.

Operator:

Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Dermot McDonogh:

Okay. So here's how I would answer that, Brian. So we've -- and I said in my prepared remarks, we've made a loss of through last year and this year in the budget process. We have made a lot of investments in our foundational infrastructure that supports the asset servicing business. And so that's going to result in greater automation and a better client experience. We hired a new Head of Operations last year, and he's made a tremendous impact and we're spending a lot of time with our clients through understanding client behaviors where they're able to explain to us what they need and we can then figure out how to change our processes to be more to be automated to deliver their solutions. So we've made a lot of good progress there. So through driving down the cost-to-serve, we're going to give better client experience, which will then ultimately lead to enhanced revenue and enhanced client experience because the clients will be happy with us. The other thing I would say is for asset serving specifically. We had our strongest sales quarter in 2023. We come into 2024 with a very healthy uninstalled book of business and we feel very good about the mandates we won in Q4, and we feel very good about the pipeline coming into 2024. So I feel very, very good about all the leadership changes that we've made in asset servicing over the last 12 months, the hires we've made and the impact that they've made since they've joined. And then within the other part of Securities Services, corporate trust and depositary receipts. We're making significant investments in corporate trust this year to do a lot more digitization and a lot more automation so we can scale the business and drive that margin higher.

Dermot McDonogh:

So just to kind of give you a general framework. Nothing really has much changed quarter-over-quarter. The dollar bulk, which is roughly 75% of the overall portfolio has an 80% beta. As I've said many times, we have sophisticated clients. They're with us for not just deposits but for a variety of goods and services which feeds the stickiness of our overall deposits being two-thirds operational. So that's a good story. We passed on the prices. As I've said, we -- it will grind a little bit higher from here, but I think I feel pretty good about the dollar book on where that's at. And then euros and sterling, which make up the balance into 55 to 65 base range. And so as the Fed kind of ultimately will pivot and rates will come down, we do expect that to follow symmetrically and so go downward the same way it came up. So that's how I would view that.

Robin Vince:

Thanks, Brian.

Ebrahim Poonawala:

Hey, good afternoon.

Ebrahim Poonawala:

I had a favorable question just around looking at your medium-term targets, and I heard what you said in response to Mike's question on the fee revenue guide for this year. But when I looked at the strategic targets, I guess it's deliberate that we don't have a revenue growth number in there or a revenue growth target. And I'm just wondering, is that due to the macro or your view on the business where you don't have the line-of-sight around being able to sustain a certain level of revenue growth? And I ask this because I think that's probably the toughest part of the BK investment story is what's the sustainable level of revenue growth. You gave a lot of details around products and businesses, but would love to hear in terms of how you think one should think about baseline revenue growth in a more or less normal macro-environment over the coming years.

Robin Vince:

Ebrahim, I'll just add to that. And we debated this a lot about the fact that you don't have the dollar output guidance on fees. And so as a result, what we've been trying to do is really make sure that we're communicating to you on all of the inputs to that. But as Dermot said, there is both a market impact potential. We'll have to see how the markets evolve, and there's a bit of a portfolio effect, which is we've really invested in a lot of different places. We have good confidence around the fact that several of those are going to yield something in 2024 and then hopefully continue to yield more in 2025. But it's hard for us to be able to know exactly what's going to hit and exactly when it's going to hit. So we've got a confidence on a portfolio basis around those investments, but we don't have the absolute line of sight that makes us comfortable to tell you the exact number in the exact quarter that it's actually going to hit. And so all we can do is show you the inputs and now point to a year of track record in 2023 around the fact that we have, in fact, made progress on the things that we said we were committed to make progress on.

Robin Vince:

So you're right that we have an implied waterfall of how we think about our capital. And the first is to be able to invest it profitably well in the business, and then towards the bottom of that waterfall is if we have surplus capital after we've taken those things into account, we want to return it to our shareholders, and that's what we've been doing. And so that waterfall hasn't changed in how we think about it. Now in terms of M&A, right now, we're focused on what we have and how we think that we can improve it. That's really been the story. Dermot really made the point around running our company better and we think that there's so much opportunity in the franchise to be able to run ourselves better and have the growth that we haven't wanted to distract ourselves with M&A. Now we have a high bar. We've had a high bar. We continue to have a high bar, but we are keeping our eyes open. And I think that's the right thing to do, particularly for things that would help us to accelerate our delivery. We're not looking at transformation. We're not looking at big pivots, but we are always interested in things that can, in their own way, speed us on the journey that we've laid out to you.

Operator:

Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Dermot McDonogh:

New yearly guidance, I'm not too sure I really want to commit to quarterly guidance and deposit levels. We finished the year strong. That was a variety of factors. As I said in my prepared remarks, we had four months of consecutive growth. I talked at Barclays in September. I talked at Goldman in December. We feel very good about the deposit franchise. We feel very good about what clients are doing with us. And so, you know, we bank it as it comes. But when I sit back and I look out at the macro and this is what we said this time last year, we expected deposits to go down by mid to high single digits, and ultimately it was down 4% for us. That's the trajectory I expect to happen this year. And so I don't have a particular magic ball on what's going to happen quarter-by-quarter. So I would just take the down 10% and divide it by 4 for your model and just see where that gets you.

Robin Vince:

So, Ken, it's Robin. I'll start off. Dermot might want to add something. Look, I think about this at a fairly high level of us being focused on positive operating leverage, at least until the point that we get to the sort of margin targets that we're talking about, and there's a little bit of work between here and there. And we also recognize that each year is going to have unique factors. And so the year in which we have a fairly significant NII jump of the 24% is going to create different conditions. That allowed us to have a fee year, which was fine but not growing in a meaningful way, and that allowed for some headroom on expenses, which is something that we've used in order to be able to make investments. Now, 2024 is a different year. It's got a different composition, but every one of the years that we faced has each of these inputs. It has fees, it has NII and it has expenses. And we're trying to be very purposeful around solving for operating leverage in the context of the year that we actually are faced with. And we think that that's the right thing to do, recognizing that markets move around and each year brings -- serves us something different. We manage what's in our control.

Ken Usdin:

Yeah, got it. Thank you guys. Appreciate it.

Glenn Schorr:

Thanks very much. So just one big question, if I could. So I think you've been talking about getting clients to do more business with The Bank of New York Mellon, which -- and you're executing on getting them better and you invested a lot. I did hear you today talk about improve the service and then clients will consolidate business. So my question is high level, it feels -- it's natural and it feels like it's working, but you're putting a lot of effort and expense at improving and modernizing and digitizing your businesses that actually haven't been growing as much and/or need to modernize more and have lower margins to improve them. But is there any thought towards maybe you're supposed to put capital towards actually your highest profitable business and ones that grow? It's a question on do you need the whole portfolio, basically?

Dermot McDonogh:

And what I would add there, Glenn, is it's in my remarks, but we invested $0.5 billion last year in things that we wanted to do that was going to grow the company while keeping our expense growth rate at 2.7%. So we're very disciplined about what we want to do, getting value for money, while at the same time manage the expense base of the firm.

Operator:

Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Dermot McDonogh:

So our NII guidance is based on market-implied forward rates at the end of the year with QT continuing. And so with QT continuing, we expect deposits to roll off. If QT were to change, then obviously, we would revisit and see what the benefit of that would be and run our models again, and then we will come and talk to you. But that is not our base case, QT ending anytime soon.

Dermot McDonogh:

It should help, yeah, but I couldn't give you a sensitivity to it here today, and it's not our base case.

Dermot McDonogh:

So Q4 -- I'll start with Q4. As you will see in the financial supplement, the securities book rolled down by about $4 billion, largely deployed into cash and some mortgages, et cetera. And we had a yield pickup there of about 300 basis points in 2024. We expect the yield pickup from the roll-down to be about 150 basis points to 200 basis points. So rolling off at about 3% into current market rates. It's very liquid, quite like short in duration. So overall, we feel good about the outlook for the book in 2024.

Robin Vince:

Thanks, Manan.

Gerard Cassidy:

Goof afternoon, Robin and Dermott.

Gerard Cassidy:

Dermot, I know you touched on this with the net interest revenue already in terms of your expectations for 2024 being down 10% following, I think, the forward curve, correct me if I'm wrong there. If the forward curve is incorrect, currently six rate cuts and it comes in closer to two or three for the year, how does that affect that 10% guidance?

Gerard Cassidy:

Sure. No, understood. Okay. Thank you. And maybe Robin, and I apologize if you guys already talked about this or it's in the deck. Your new business wins this quarter, what was the dollar amount of that, and what's the installed base that you have for next year?

Gerard Cassidy:

Good. Okay, I appreciate it. Thank you.

Rob Wildhack:

Hi, guys. A couple more on deposits. Dermot, you mentioned a couple of times that you've had four straight months of deposit growth to close 2023. It seems that a lot of the things that would weigh on deposits in 2024 were or already are headwinds in 2023, and yet despite that, you've been able to grow deposits. So I'm curious if there's anything else that you think might change or become more of a headwind from the last third of 2023 and into 2024? And if there's a possibility or an environment where deposits actually do come in better than what's in the guide?

Robin Vince:

And, Rob, I'll just add. It's easy to forget. We've still got a lot of complexity in the world. As Dermot said earlier on, if QT continues, that's one thing. If QT ends, maybe that's to the plus. You've also had a massive run-up in liquidity over the course of the -- in money market funds and other places. We have to see how that gets put to work, or not, as the case may be. Stock market therefore becomes a little bit of a wild card as we see the flow of funds. So we've still got the complexity of we talk about the fact that the Fed might cut in March. The Fed talks about the fact that they might not cut in March. And so there's enough variation in the exact way that this is going to play out. And that's why Dermot answered one of the earlier questions in the way that he did, around our 10% and the path of it because we just don't have that type of visibility, but we do have the sense that we can kind of work the problem to our current guidance.

Dermot McDonogh:

So that's -- there is a very long answer to that, which we can take you through offline. But the general sense of, to be operational, you have to be doing stuff with us in another line of business, and you have to be making payments and you have to be sticky to us as the firm. And over time, then we classify you as operational in nature, and that helps us on the liquidity ratio standpoint. So if you're a relatively new client and you haven't established that track record, then you're considered nonoperational until such time as you meet those criteria. But as I said earlier, two-thirds of our deposits overall are sticky, and that's a good fact.

Robin Vince:

Thanks, Rob.

Rajiv Bhatia:

Great. Can you comment on the pricing environment within your Securities Services segment? I guess [ACA] (ph) was up 9% against flat fee revenue. So is pricing pressure would you say it's stable, or would you say it's intensifying? Thanks.

Rajiv Bhatia:

Great. Thanks.

Mike Mayo:

Hi. Thanks for the follow-up. At the Boston bank conference in November, Emily Portney, the Head of your asset servicing business seemed very excited about AI and the implications and the implementation of that in the asset servicing business. And I'm just wondering if that excitement is shared throughout BNY Mellon, and what you see as potential use cases and the ability to go from pilots to production. Is it beyond the hype, where is the reality of AI and any specific numbers of what it might be able to do?

Mike Mayo:

All right. Thank you.

Operator:

And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Robin with any additional or closing remarks.

Operator:

Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 5:00 PM Eastern Standard Time today. Have a great day.

Marius Merz:

Thank you, operator. Good morning and thank you all for joining our third quarter earnings call. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. I'm joined by Robin Vince, President and Chief Executive Officer; and Dermot McDonogh, our Chief Financial Officer. Robin will start with introductory remarks before Dermot 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, October 17, 2023, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh:

Thank you, Robin, and good morning, everyone. I will start on Page 3 of the presentation with our consolidated financial results for the third quarter. Total revenue of $4.4 billion was up 2% year-over-year. Net interest revenue was up 10% year-over-year, primarily driven by higher interest rates, partially offset by changes in balance sheet size and mix. Fee revenue was flat. Growth on the back of higher market values, net new business, and the favorable impact of a weaker dollar was offset by the Alcentra divestiture in the fourth quarter last year, lower foreign exchange revenue and the mix of AUM flows. Firm-wide assets under custody/administration of $45.7 trillion were up 8% year-over-year, reflecting higher market values, client inflows, the weaker dollar, and net new business. Assets under management of $1.8 trillion were up 3% year-over-year, reflecting the weaker dollar and higher market values, partially offset by the Alcentra divestiture. Investment and other revenue was $113 million in the quarter, reflecting continued strength in fixed income trading. Expenses were down 16% year-over-year on a reported basis, primarily reflecting the goodwill impairment associated with our investment management reporting unit in the third quarter last year. Excluding notable items, expenses were up 3% year-over-year. Provision for credit losses remained low at $3 million in the quarter, as the impact of reserve bills to reflect continued uncertainty on the outlook for commercial real estate was largely offset by reserve releases related to financial institutions. As Robin noted earlier, reported earnings per share were $1.22. Excluding notable items, earnings per share were $1.27, representing 5% growth year-over-year. We delivered positive operating leverage. Our pre-tax margin was 29% and we generated a return on tangible common equity of 20%. Turning to capital and liquidity on Page 4. Consistent with the prior quarter, we returned $450 million of capital to our shareholders through common share repurchases and we paid approximately $330 million of dividends to our common stockholders, reflecting our previously announced 14% dividend increase, which became effective in the third quarter. Taken together, we returned 82% of earnings to shareholders in the quarter, or 107% on a year-to-date basis. Our Tier 1 leverage ratio improved sequentially by approximately 40 basis points to 6.1% reflecting a decrease in average assets and an increase in Tier 1 capital driven by capital generated through earnings, net of capital returns through buybacks and dividends. Unrealized losses related to available for sale securities remained roughly unchanged in the quarter. The CET1 ratio was 11.4%, representing an approximately 30 basis points improvement compared with the prior quarter, reflecting lower risk weighted assets and an increase in CET1 capital. Just like our regulatory capital ratios, our liquidity ratios further strengthened in the quarter. The consolidated liquidity coverage ratio was 121%, a 1 percentage point improvement compared with the prior quarter. And our consolidated net stable funding ratio was 136%, well in excess of the regulatory requirement. Next, on Page 5, net interest revenue and further details on the underlying balance sheet trends, which I will describe in sequential terms. Net interest revenue of $1 billion was down 8% quarter-over-quarter, driven by changes in balance sheet size and mix, partially offset by higher interest rates. As we expected, temporary deposits related to the debt ceiling impasse in the second quarter left in July and along with seasonally low balances in August, average deposits for the quarter decreased by 5% sequentially. In line with our expectations interest-bearing deposits were down 3% and non-interest bearing deposits were down 16%. You will remember from prior earnings calls that we expected non-interest bearing deposits to moderate to approximately 20% of total deposits in the second half of this year, which is consistent with our deposit mix in the third quarter. Following seasonal troughs in August, we saw the anticipated pickup in monthly average balances in September, and again, some modest growth in the first two weeks of October. Average interest earning assets were down by 6% quarter-over-quarter. This reflects a reduction in cash and reverse repo by 11%, while we actively reduced wholesale funding. Our investment securities portfolio was down 4% and loan balances were up 1%. Moving to expenses on Page 6. Expenses for the quarter were down 16% year-over-year on a reported basis and up 3% excluding notable items. This year-over-year increase was driven by higher investment and revenue related expenses, the unfavourable impact of the weaker dollar as well as inflation, partially offset by efficiency savings and the Alcentra divestiture. I'll talk more about our outlook for expenses in a moment, but as Robin mentioned earlier, it is worth highlighting that for 2023, we are expecting to fully self-fund over $0.5 billion of incremental investments through efficiency savings. Turning to our business segments, starting with security services on Page 7. As I discuss the performance of our Security Services and Market and Wealth Service segments, I will comment on the investment services fees for each line of business described in our earnings press release and the financial supplement. Security services reported total revenue of $2.1 billion, up 1% year-over-year. Fee revenue was flat. 2% growth in investment services fees was offset by a 19% decline in foreign exchange revenue on the back of lower volatility and volumes. Net interest revenue was up 12%. In asset servicing, investment services fees were up 3%, driven by higher market values, healthy net new business, and a weaker dollar, partially offset by lower client transaction activity. The strength of our balance sheet, as well as the stability, breadth, and depth of our solutions remain clear differentiators that position us well with clients, confronted with a persistently challenging market environment and an evolving competitive landscape. For example, ETFs, Assets Under Custody/Administration, were up over 20% year-over-year and the number of funds serviced on our platform continued to grow at a healthy clip. In all, assets under custody/administration and related investment services fees, both grew in the mid-single digit percentage range despite the number of fund launches having slowed significantly over the past year. With Issuer Services, investment services fees were down 2%. Growth from net new business and corporate trust was more than offset by the absence of fees from elevated depository receipt cancellation activity in the third quarter of last year. Next, Market and Wealth Services on Page 8. Market and Wealth Services reported total revenue of $1.4 billion, up 6% year-over-year. Fee revenue was up 5%, and net interest revenue increased by 6%. In Pershing, investment services fees were up 2%, reflecting higher fees on sweep balances, partially upset by the impact of lost business and lower transaction volumes consistent with the decline in US equity exchange volumes. Despite the continued headwind from the ongoing deconversion of the regional bank client highlighted in the second quarter, Pershing saw $23 billion of net new assets on the platform this quarter, reflecting positive momentum in the underlying business. As Robin mentioned earlier, the momentum around Wove is building with both new and existing clients. While at the same time, ongoing investments in the core Pershing platform to enhance advisor experience and lead with innovative solutions have positioned us well to capitalize on the heightened pace of change in the RIA community. In Treasury services, investment services fees decreased by 1% as growth from higher client activity was offset by higher earnings credits for non-interest bearing deposit balances. In clearance and collateral management, investment services fees were up 16%, reflecting broad base growth across US and international clearance and collateral management. In particular, we saw strength in domestic clearance volumes reflecting elevated volatility and US treasury issuance activity and continued migration from the Fed's reverse repo facility to traditional tri-party collateral management balances. Recent macro trends, including heightened volatility, uncertainty associated with monetary policy and banks regulatory capsule requirements, as well as the recent consolidation in the banking sector, further reinforce the value of our tri-party collateral management service. In addition to expanding our platform both in the U.S. and internationally, we continue to innovate new solutions for our clients to better utilize their collateral. Turning to investment and wealth management on Page 9. Investment and wealth management reported total revenue of $827 million, down 4% year-over-year. Fee revenue was down 2%, and net interest revenue declined 33% year-over-year. Assets under management of $1.8 trillion increased by 3% year-over-year. As I mentioned earlier, this increase reflects the weaker dollar and higher market values, partially offset by the Alcentra divestiture. In the quarter, we saw $15 billion of net outflows from long-term strategies driven by client de-risking and rebalancing, and $7 billion of net inflows into short-term strategies led by our [DRIFAS] (ph) money market fund complex. In investment management, revenue was down 4% year-over-year, primarily reflecting the Alcentra divestiture and the mix of AUM flows, partially offset by higher performance fees, as well as the impact of higher market values and the weaker dollar. In our wealth management business, revenue decreased by 5%, driven by lower net interest revenue and changes in product mix, partially offset by higher market values. Client assets of $292 billion increased by 14% year-over-year, reflecting higher equity market values and cumulative net inflows. Page 10 shows the results of the other segments. I will close with our current outlook for the rest of the year. Based on market implied forward interest rates at the end of last month, our net interest revenue outlook for the full year 2023 remains unchanged for 20% growth year-over-year. Moving to expenses. We are making good progress on bending the cost curve by protecting our important investments to accelerate growth and deliver superior client experiences. Where we sit today, I am confident that we will outperform the target of 4% expense growth, excluding notable items that we communicated in January, and we remain determined to drive that growth rate down to 3% for the full year 2023. This reflects our expectation for a sequential step up in expenses, excluding notable items in the fourth quarter, with seasonally higher business development expenses, as well as discrete increases for professional services and occupancy. And finally, we expect continued stock buybacks at a pace consistent with the second and third quarter. This is inline with our full year outlook to return 100% of earnings or more to shareholders over the course of 2023, while maintaining our strong capital ratios, mindful of the significant uncertainties relating to the operating environment. In conclusion, our financial results this quarter highlight the effectiveness of our balance sheet management and tangible progress on our journey towards higher operational efficiency and scalability. While we have more work to do, our teams around the world are embracing change and our pace of bringing innovative new client solutions to the market gives us confidence that revenue growth will follow over time. With that, operator, can you please open the line for Q&A.

Steven Chubak:

Hey, good morning.

Steven Chubak:

I wanted to start off with a question on the NII outlook. I was hoping you could just give some thoughts on the deposit trajectory if rates are higher for longer and the Fed continues to engage in QT? And given we're at that 20% lower bound for NIBs, where do you expect that to ultimately settle out as a percentage of deposits?

Steven Chubak:

Very helpful. And just for my follow-up on the expense outlook, you've spoken about the commitment to improve operating margins. You've cited a number of efforts, Robin, to deliver efficiencies across the platform. As we look out to next year, given a lower NII exit rate relative to the first half for you and for some of your industry peers, I want to get a sense of how much flexibility is embedded in your expense plans and your ability to drive expenses lower potentially in a more challenging revenue backdrop.

Steven Chubak:

Very helpful, Dermot. Thanks so much for taking my questions.

Ebrahim Poonawala:

Good morning. Just maybe following up on the discussion around deposits. I think Dermot, you used the word trough multiple times. Just give us a sense of it. Obviously, you called it right this year in terms of how things have played out. But just give us a sense of, is it about the mix or the granularity of your deposits or the client behavior that you've seen that gives you confidence that this 20% of what you saw in August was a trough? And if we are in a period through next year where there are no rate cuts, it's higher for longer, like, where does the negative surprise come from, if any?

Ebrahim Poonawala:

That's helpful. Thank you. And I guess maybe if I heard you correctly, I think you mentioned $0.5 billion of investments are self-funded. That's about 4% of your expense base. Is that $0.5 billion -- I'm just wondering the relevance of that number, is that something that we should think about as a go forward sort of incremental investment spend that you need to self-fund to efficiencies as we from the outside try to figure out what expense growth could look like next year? Just if you could contextualize that $0.5 billion in investments and what that means going forward?

Robin Vince:

Ebrahim, I'd add just a couple of things to that. One, we've been very deliberate about not cutting our way to glory, but rather working the problem at a pretty fundamental level so that we can both manage our expenses for the necessary operating leverage, which we want to achieve, but also sowing the seeds for future efficiencies and future fee growth. And so, that's really the way in which we're thinking about it.

Operator:

Our next question comes from the line of Ken Usdin with Jefferies. Please Go ahead.

Dermot McDonogh:

So I don't really want to give guidance for next year today, Ken. We will do that in January. I got a lot of questions about that at Barclays as well. So I kind of feel good about the 20%. I feel good about the deposit pipeline that we have. We've talked on previous earning calls about our strategic pivot a couple of years ago where we centralized all our deposit businesses in one area. And so I feel very good about how we're managing the deposits, how we're pricing the deposits. You know, we're a little bit different to other institutions in that. We have -- our clients are sophisticated. So, cumulative betas are not materially changed from last quarter, they're in the 80% zip code and we've passed on the rates. So, I think it's important to note that there's no material pricing lag to catch up here. And so, we kind of feel the absolute level of deposits is pretty good. We feel very good about our outlook for the rest of the year, but look the world is very uncertain and who knows what comes tomorrow and for 2024 like we'll give you more detailed guidance in January, but I feel pretty good about where we are today.

Kenneth Usdin:

Okay. Got it. Thank you. And just one question on Pershing, it's great to see the wave start and the good commentary you have about the momentum. Just wondering, we know that there was going to be a client deconversion coming out of that as well. Did we see that in the third quarter result or is that still a pending yet to happen?

Kenneth Usdin:

Yes, and that's what I'm hoping for that you can offset that with the organic growth. That's what I'm getting at.

Kenneth Usdin:

Okay, got it. Thank you.

Mike Mayo:

Hi. I think you guys have been pushing for stronger fee growth, and that's a slog, but in the meantime, you're certainly bending the calls curve, as you say. I guess, Robin, to your opening comment about a conglomerate with a bunch of silos and breaking those down, certainly is a key to growing revenues faster. How can you actually implement horizontal integration among these disparate businesses and by breaking down those silos. Like, do you have any proof points or evidence now, or is this more like a three to five year plan?

Mike Mayo:

So when you add it all together you said next year you expect to have positive operating leverage, is that in aggregate or positive fee operating leverage and how can you have such confidence at this stage?

Mike Mayo:

Okay, thank you.

Alex Blostein:

Good morning, guys. Thanks for the question. Maybe shift gears a little bit. I was hoping to spend a minute on capital. Nice to see the capital ratios build over the course of the quarter. So I guess as you're thinking on the buyback on the forward basis, given that it's been a little bit lighter over the last couple of quarters, how are you thinking about that over the next 12 months? And maybe just a reminder, in terms of how much capital do you expect to accrete back to your capital ratios from securities maturing over the next, call it, six quarters or so?

Alex Blostein:

Great. Thanks for that. And then there's one business that I was hoping to kind of double-click into, which is clearance and collateral management. We've seen really good growth there for the last several quarters now. I think it's up 11% year to date versus last year. Can you maybe help us unpack some of the sources of that growth between sort of what's been really market and maybe somewhat elevated volumes given everything that's been going on in treasuries versus more kind of baseline growth in those businesses, we're sort of thinking about the building off of this baseline. Thanks.

Alex Blostein:

Thanks very much.

Operator:

Our next question comes from the line of Brennan Hawken with UBS. Please go ahead.

Dermot McDonogh:

So on the last question first, we don't really give specific guidance on the deconversions, but as I said on an earlier question, we feel the underlying strength of the business, you're always going to take your lumps and things that happened that you wouldn't expect to happen. And we feel we have the ability and the confidence and the people and the strategy and the products to earn our way out of that. So Pershing is a very strong business for us. It's in our most profitable segment, markets and wealth solutions, and we feel very good about the margin of that segment and of Pershing in particular. Just kind of double-clicking on your original question, there are many things that make up the fees that are coming into Pershing. They're transactional, which is kind of correlated to U.S. Exchange volumes, asset-based, based on equity market levels, and balance-based. And so, again, when you take the kind of portfolio approach that we have with our business and the different composition of the fees and then the amount of clients that were onboarding that kind of -- that leads you to a nice good fee outcome for the business overall. And so, look, Pershing is market leading, we're number one with broker dealers, we're very important to the RIA community, we have a lot of excitement in the marketplace around our Wove product. And so we have -- that's attracting new clients to our system as well as existing clients who are excited about that product. And that gives us belief that by adding to our existing platform new products, we'll be able to be a more meaningful player than we are today.

Brennan Hawken:

Yep. That's all very helpful color. Thank you for that. And then I'd like to ask a follow-up question on the noninterest bearing. So you flagged that there was some growth quarter to date. Is it possible to quantify or give us a rough idea about what kind of growth we'd be talking about? And are you also seeing corresponding growth in the overall deposit base along with the trend in the NIBs? Thanks.

Brennan Hawken:

Okay. And are those trends applying to both the broad deposit base as well as the NIBs? Just...

Brennan Hawken:

Great. Excellent. Thank you.

Rob Wildhack:

Good morning, guys. I appreciate the update on the strategic priorities. I'm curious on the do more for clients front, how is the progress you've made and are making there manifested itself so far? Are you seeing an uptick in organic growth, new business wins, anything like that? And then the obvious follow on from there is, when do you think that we could expect to see that progress manifest itself and whether it's fee revenue growth or operating leverage more broadly? Thanks.

Rob Wildhack:

Thank you.

Operator:

Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Robin Vince:

So immediate payments are one of those disruption opportunities that don't come along that often in the overall ecosystem. And you have to remember that the US is actually less advanced in some respects in terms of the speed and the efficiency of payments versus some other large countries around the world. And so, we look at this as saying, well, we have a large installed client base that's pretty rooted in some of the classic payment methods. We are a large check clearer, we're a large payments provider. And we also have a pretty un-conflicted approach because we're not really in the credit card business which creates a little bit of fee disruption risk if you are in that business to embracing instant payments. And so, we identified this some years ago that this would be an opportunity that we would want to participate more in and that's exactly what we've been doing. So we've been live on the clearinghouse rails for a while. We're now live on the FedNow service. Those are essentially competitor instant payment services to each other. But now we are going to be focused, as I think the rest of the industry will be, on the network effect that's going to be required to really adopt these instant payment rails. And so, we're a provider to small and mid-sized banks, helping them to access the rails. We think there are a bunch of things that you can do with these new rails that you couldn't do with some of the old rails. Request for payment is a great example. The opportunity to really deliver e-billing, instant requests for payments that can be met with instant, perfectly timed payments. There's a lot of control there. There's also some security opportunities. Who wants to give their bank account and ABA number out and their credit card number out when you're dealing with various billing-based solutions. And so, operationalizing all of that with our clients is important. We just launched Bankify, as I mentioned in my prepared remarks, that allows consumers to be able to use these rails a little bit more efficiently. And so, look, it's early days in this disruption, and I don't want to call exactly how and when it's going to occur, but we feel over time, this is a good new technology, and as we do see more network effect, and these use cases start to go live, it provides a lot of client value. And so at the end of the day, I think that client value is going to win out and we want to help them to do that.

Dermot McDonogh:

So I think it's a bit too early for me, Gerard, to kind of give you guidance for 2024 on that. But like I said earlier, we kind of feel we've reached a more kind of normalized level given what happened in March and then the debt ceiling and who kind of knows what's going to happen from here. But our balance sheet is positioned for higher, for longer. We have a lot of the balance sheet in cash. Our fixed income securities are going to roll off a quarter a year over the next few years, and the pick-up and yield from that is about 200 basis points to 300 basis points. So when we look at the balance sheet together, we kind of feel very good about our NII for the next while. January will be when we give you more detailed guidance for how we think about it for 2024, but our deposit base and how our clients are in the ecosystem. And look, if they're not with us for deposits, we want them to be in our DRIFAS money market fund complex and be kind of using our products and services. So we don't want to lose the cash, we can put the cash into other products. So I think we feel very good about where the deposit franchise is now. We feel very good about the pipeline of activity that's coming our way, but who knows? And we are prepared and risk managed to a higher for longer continued QT, et cetera, et cetera, et cetera.

Gerard Cassidy:

Great. Thank you very much.

Brian Bedell:

Great. Thanks. Good morning, guys. Thanks for taking my question. Let me just add a nuance on the net interest revenue by segment. So just the security services versus the market and wealth segment, it looked like there was more pressure on the security service business, NII, versus the second quarter. I was wondering if that is more of the low in NIBs that you referenced, Dermot, in August, and if you think that might just normalize as we move into the fourth quarter. And I guess, and/or are you doing things internally in terms of the growth initiatives that you just talked about, Rob, in a couple answers ago that might accelerate the NIA in that segment much more rapidly over time?

Brian Bedell:

Okay, great. And then just maybe just to follow up on the, actually in the other investment and other revenue, there's one area there that's been growing quite nicely sequentially for now three straight quarters, that's the other trading revenue line and the size of that is now -- if it continue with this type of growth the next two or three quarters you'll be approaching your FX trading revenues. Just wonder if you talk about the drivers of that and whether you see that type of growth path continuing.

Brian Bedell:

Great. Thanks very much.

Operator:

Our next question comes from the line of Glenn Schorr with Evercore ISI. Please go ahead.

Dermot McDonogh:

So, I will give you two dimensions to that answer, Glenn. One is, we have a portfolio of businesses that attract both interest-bearing and non-interest-bearing deposits. Corporate Trusts, Treasury Services, Asset Servicing, Clearance and Collateral management being the primary ones. They all have different characteristics about them and they do things in slightly different ways so it kind of gives you a portfolio effect so that you feel like you have a diversified deposit platform. I think that's important point number one. Important point number two is, how we manage and price the deposits. If you came to BNY Mellon three years ago, you would have all of those deposits in different lines of business. They would have all handled their clients separately, they would have all priced their deposits separately, and you would have ended up with suboptimal outcomes when you aggregate that up from the BNY Mellon’s standpoint. Now we've got global liquidity solutions, it's one team, interfaces with each of the line of the businesses, but we price consistently, we manage consistently, and we have a pipeline that we think of as one firm. I think you add all that together, you get the one BNY Mellon effect, you get the strategy effect, and you get the line of business effect. And that gives us confidence that we have a good handle on our deposit franchise and where we want to be from here.

Operator:

Our next question comes from the line of Rajiv Bhatia with Morningstar. Please go ahead.

Dermot McDonogh:

So thanks for the question. I guess 75% of our book is dollars, roughly 10% euro, roughly 10% sterling, and the rest other. As it relates to betas, I kind of think about it in cumulative beta terms. The cumulative beta of our dollar book is around 80%, which I think I said earlier, and that hasn't materially changed quarter-over-quarter. Sterling and Euros are about 50%, 60% respectively, give or take a little bit. And so, we kind of feel as it relates to passing on the pricing, the clients that we have are sophisticated, largely passed on the prices as they come through. And it may grind a little bit higher from here, but overall we feel pretty good about where the book is, where it's priced. You may see some modest catch-ups and lags here or there, but overall we think it's where it should be given what's happened in the market.

Dermot McDonogh:

I don't have that level of detail with me, so we can follow up with you offline.

Operator:

Our next question comes from the line of Jim Mitchell with Seaport Global. Please go ahead.

Robin Vince:

Thanks for the question, Jim. Look, we said on a couple of calls ago that, where the margin of that business is at the moment, we feel we have work to do, we're not happy with it. There are a bunch of things that have happened last year that are feeding into this year that have caused a kind of remixing by our clients out of active strategies into passive, which are lower fee paying, out of equities into fixed income. So there's rebalancing going on under the hood and we're kind of attacking it in a number of different ways. One being kind of getting after structural expense inefficiencies, and we've talked a lot about that today, and this segment is no different to that, so we're attacking it there. We're rolling out new products, and that's going to take time to build AUM, but do that in a first-class way. We kind of think organic growth will come on the back of that. Inside of BNY Mellon, we have a very kind of powerful distribution platform, So we're very focused on kind of really energizing the distribution platform to support our kind of boutique asset managers. And we've made some leadership changes there this year, and we're going to begin to see the fruits of that in the coming quarters. So we're kind of going after it in a number of different ways. And some of the asset management boutiques are performing very well and we're very happy with them and some of them have work to do and we're very focused on it and we're not sitting idle wishing it to happen. We're active in trying to make it happen.

Operator:

And our final question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Robin Vince:

So I'll just start Mike with the way that you set up the initial part of the question. You're right, we are optimistic about the potential that we have in the company and the opportunities that our franchise and our businesses afford us. Now we haven't lived up to that potential, but the reason why you detect the optimism, I think, in the way that we talk about it is because we do have an inherent optimism that this is absolutely a doable proposition to unlock that potential. Now It's a ton of work as Dermot just said in answer to a different question, we're not going to wish our way there and maybe that's one of the things that we've really doubled down on now as a leadership team is that, we have to work the problem and we have to work the problem through all of these different angles in order to really be able to unlock the potential. And as I said in my prepared remarks, there's a cultural change that we need to creating the company to take what is otherwise been a great culture but take it to the next level, power it forward the really allows us to de-silo and operate more broadly across the board and you and I just talked about that a few minutes ago. We have to execute to get it done so of course that it follows from that really evolving the culture to de-silo and to move toward this platform mindset and getting things done in execution are critical to us unlocking our potential, then the biggest risks in the company in some respects from an internal point of view become not doing those things. So we are laser focused on doing those things, tracking those things, and as a leadership team really coming together to make sure that we're holding each other to account for the respective parts that everybody in the leadership team of the company plays in moving that forward. So that's the reason for the optimism, but also the reason for the constant humility associated with the fact that it's execution that's going to get the job done. Now in terms of the outside world, there's clearly a ton going on in the world. We've got geopolitical tensions through a continuum all the way to war in many regions of the world right now. We have all of the uncertainties still of rates and inflation in the economy here in the U.S. that creates uncertainties. There's the ever-present cyber risk, which we always take very seriously, and those things are always collectively on our minds. We don't pretend to predict exactly how things are going to occur. We try to prepare for them as best we possibly can, recognizing that that's what our clients need from us as we help them to adapt to this environment and that we manage through it. So that's sort of the way that I think about both the internal and external answer to your question.

Robin Vince:

Thank you, Mike.

Robin Vince:

Thank you, operator, and thank you everyone for your interest in BNY Mellon today. If you have any follow-up questions, please reach out to Marius and the IR team. Be well.

Marius Merz:

Thank you, operator, and good morning, everyone. Welcome to our second quarter 2023 earnings call. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. I'm joined by Robin Vince, President and Chief Executive Officer; and Dermot McDonogh, our Chief Financial Officer. Robin will start with introductory remarks and Dermot will then take you through the earnings presentation. Following their remarks, there will be a Q&A session. Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement and financial highlights presentation, all available on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, July 18, 2023, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh:

Thank you, Robin, and good morning, everyone. Let me start on Page 3 of the presentation with some additional details on our consolidated financial results in the second quarter. Total revenue of $4.5 billion was up 5% year-over-year. Net interest revenue was up 33% year-over-year primarily driven by higher interest rates, partially offset by changes in balance sheet size and mix. Fee revenue was down 2% driven by the sale of Alcentra in the fourth quarter, the mix of cumulative AUM net inflows and lower FX revenue on the back of lower volumes and volatility, partially offset by the abatement of money market fee waivers. Firm-wide AUC/A of $46.9 trillion increased by 9% year-over-year. This increase reflects the impact of higher market values, client inflows and net new business. Assets under management of $1.9 trillion decreased by 2% year-over-year. The impact of lower market values driven by a year-over-year decrease in the U.K. fixed income markets and the sale of Alcentra was partially offset by cumulative net inflows over the last year and the favorable impact of a weaker U.S. dollar. Investment and other revenue was $97 million. We continue to see strength in fixed income trading and positive seed capital results. Expenses were flat on a reported basis and up 1% excluding notable items. This was driven by higher investments and revenue-related expenses and the impact of inflation, partially offset by efficiency savings in the Alcentra divestiture. Provision for credit losses was $5 million in the quarter, reflecting changes in the macroeconomic forecast, resulting in higher reserves relating to commercial real estate, largely offset by reserve releases related to financial institutions. As Robin mentioned earlier, earnings per share were $1.30, up 26% year-over-year or up 20% excluding notable items. Pre-tax margin continued to improve to 30%. Our return on tangible common equity improved to 23%. Turning to capital and liquidity on Page 4. Our regulatory capital ratios remained roughly unchanged. The Tier 1 leverage ratio was 5.7%, down 14 basis points quarter-over-quarter, primarily driven by an increase in average assets. Tier 1 capital increased slightly driven by capital generated through earnings net of capital returns through buybacks and dividends. The CET1 ratio was 11.1%, up 10 basis points quarter-over-quarter primarily reflecting higher CET1 capital. As we said on our earnings call in April, we tapered buybacks in the second quarter to maintain conservative buffers above our management targets being mindful of the uncertain environment. Overall, we returned 72% of earnings, including approximately $300 million of common dividends and approximately $450 million of buybacks in the second quarter. On a year-to-date basis, we have returned 119% of earnings. The consolidated liquidity coverage ratio was 120%, an increase of 2 percentage points compared with the prior quarter. Our consolidated net stable funding ratio, which we are reporting publicly for the first time this quarter, was 136%, well in excess of the regulatory requirements. Moving on to net interest revenue and further details on the underlying balance sheet trends on Page 5, which I will describe in sequential terms. Net interest revenue of $1.1 billion was down 2% quarter-over-quarter driven by deposit mix shift, partially offset by higher interest rates. Overall, deposit balances have remained elevated relative to our expectations as they increased 1% sequentially on an average basis. Interest-bearing deposits were up 5%. Noninterest-bearing deposits were down 11%, in line with our expectations. Average interest-earning assets increased by 4% quarter-over-quarter. Underneath that, cash and reverse repo was up 15%. Loan balances were flat. Our investment securities portfolio was down 5%. Turning to expenses on Page 6. Expenses for the quarter were flat year-over-year on a reported basis and up 1% excluding notable items relating to litigation and severance. As I mentioned earlier, this reflects higher investments and revenue-related expenses and the impact of inflation, partially offset by efficiency savings and the Alcentra divestiture. To summarize, we continue pushing forward with our multiyear investments to increase the growth trajectory of the firm and transform our operating model for greater scalability over time. Importantly, we remain focused on driving positive operating leverage and delivering continued pre-tax margin expansion. As an example of the expense discipline that Robin mentioned, for the second quarter, we self funded the entirety of our incremental investment spend and importantly, are on course to do the same for the full year. Turning to our business segments, starting with Securities Services on Page 7. As I discuss the performance of our Securities Services and Market and Wealth Services segment, I will comment on the investment services themes for each line of business described in our earnings press release and the financial supplement. Securities Services reported total revenue of $2.2 billion, up 12% year-over-year. Fee revenue was down 2%. Within this, investment services fees were flat. FX revenue was down 20% on the back of lower volatility and volume. Net interest revenue was up 46%. In Asset Servicing, investment services fees were flat with healthy underlying growth from new and existing clients, offset by lower client transaction activity, reflecting the current market environment. Importantly, strength in attractive market segments continued. Despite an industry slowdown for private markets and hedge fund launches, we saw strong growth in our old [ph] servicing business. High single-digit growth, both ETF AUC/A and number of funds serviced continued. Within Issuer Services, investment service fees were up 3% driven by our Depository Receipts. Here, the impact of a large client corporate action in the current quarter was tempered by the absence of Russia-related client activity in the second quarter of last year. Next, Market and Wealth Services on Page 8. Market and Wealth Services reported total revenue of $1.4 billion, up 10% year-over-year. Fee revenue was up 5%. Net interest revenue increased by 24%. In Pershing, investment services fees were up 4%. The increase reflects the abatement of money market fee waivers and higher fees on sweep balance, partially offset by lower transaction volumes, consistent with the decline in U.S. equity exchange volumes and the impact of lost business. The net new assets number was a negative $34 billion in the quarter, reflecting the deconversion of a regional bank client that was acquired in May. Excluding the impact of this ongoing deconversion, which we expect to weigh on our reported net new assets for several quarters, net new assets grew at a mid single-digit annualized growth rate. We remain confident in Pershing's underlying momentum and prospects. Importantly, our continued investments to enhance Pershing's core platform as well as the business' access to the strength and breadth of the whole company is being recognized by clients as a differentiator, especially in the current market environment. Also, as Robin mentioned earlier, Wove is off to an excellent start. In Treasury Services, investment services fees decreased by 2%, reflecting higher earnings credits for noninterest-bearing deposit balances and lower payment volumes, partially offset by continued momentum across payment and liquidity solutions. In Clearance and Collateral Management, investment services fees were up 10% driven by U.S. government clearance volumes reflecting elevated volatility and U.S. treasury issuance following resolution of the debt ceiling. We also saw healthy growth in collateral management fees. As the largest truly global collateral manager, we continue to increase market connectivity by expanding our triparty platform to include new markets, trade types and collateral pools. Our average triparty collateral management balances increased by 16% year-over-year to $6 trillion. Turning to Investment and Wealth Management on Page 9. Investment and Wealth Management reported total revenue of $813 million, down 10% year-over-year. Fee revenue was down 10%. Investment and other revenue was $12 million in the quarter, primarily reflecting seed capital gains, and net interest revenue declined 37% year-over-year. Assets under management of $1.9 trillion decreased by 2% year-over-year. As I mentioned earlier, this decrease largely reflects lower market values driven by the year-over-year decrease in U.K. fixed income markets and the Alcentra divestiture, partially offset by cumulative net inflows and the favorable impact of the weaker dollar. In the quarter, we saw $9 billion of net outflows from long-term products as clients continue to derisk and rebalance their portfolios. And despite competitive investment performance, we saw $9 billion of net outflows from cash. In Investment Management, revenue was down 9% year-over-year primarily reflecting the sale of Alcentra and the mix of cumulative net inflows, partially offset by improved seed capital results and lower money market fee waivers, while Wealth Management revenue decreased 10% driven by lower net interest revenue and changes in product mix. Client assets of $286 billion increased by 8% year-over-year, reflecting higher market values and cumulative net inflows. Page 10 shows the results of the Other segment. I will close with a few comments on our current financial outlook for the second half of the year. Number one, our net interest revenue outlook for the full year '23 remains unchanged for 20% growth year-over-year. This is based on market-implied forward interest rates towards the end of the quarter. We are pleased with our net interest revenue trajectory and balance sheet management year-to-date, but mindful that we are operating in a very uncertain environment with continued rate volatility and higher for longer rate market backdrop and uncertainty surrounding meaningful U.S. treasury issuance in the coming months. Number two, we are ahead of plan when it comes to executing on our efficiency efforts. We remain focused on outperforming our target of 4% expense growth excluding notable items for the full year '23 and will work hard to drive this closer to 3% in the coming months. While we expect the operating environment to continue to weigh on fee growth relative to what we expected at the beginning of the year, our progress on the expense side continues to give us confidence in our ability to deliver positive operating leverage this year. Number three, we still expect to return 100% of our earnings or more to our shareholders over the full year while continuing to position ourselves conservatively with respect to our capital levels, considering the amount of operating uncertainty. In conclusion, I am pleased to report that the company continues to perform well against the backdrop of complex operating environment. And we continue to execute with a great sense of urgency against our growth and efficiency initiatives. With that, operator, can you please open the line for Q&A?

Brennan Hawken:

Good morning. Thanks for taking my question. Dermot, I'd love to …

Brennan Hawken:

Good morning. Dermot, I would like to start with which you just touched on the unchanged NII outlook. Curious what you're seeing as far as deposit cost pressure, we've begun to see that emerge. There are peer firms of Bank of New York that have flagged some upward pressure in the back book. How is it that you are able to avoid these pressures and keep on your NII outlook that you had provided earlier?

Brennan Hawken:

That's very helpful. Thanks, Dermot. I appreciate that. And so switching gears a little bit on the fee revenue side. This was a pretty good outcome for you guys here this quarter. How should we be thinking about jumping off into the next quarter? Is there anywhere in particular where you would flag some adjustments that we should be making to the baseline? Or is this a fair way to think about it?

Brennan Hawken:

Excellent. Thanks for that color.

Alex Blostein:

Hey, guys, good morning. Thanks for the question. Just a quick follow-up first maybe around the deposit discussion. So Dermot, if I hear you correctly, no kind of catch up from the back book that you expect to see in your deposit pricing for the rest of the year. But I guess if we look at the deposit beta over the course of this quarter, it looks like it was pretty close to 100% on a currency adjusted basis. Maybe help us break down the deposit cost in the U.S. and non-U.S. and maybe the type of -- what kind of deposit pressure and client conversations are you seeing in the kind of different regions.

Alex Blostein:

Makes sense. Thank you. And then, Robin, a question for you, maybe a little bit more on the strategic side. When we look at the Investment Management business at BNY Mellon, there are some areas that one could maybe characterize as sort of subscale. The organic growth has been muted, and obviously, margins is something you guys as previously said need to sort of work on. So are there any strategic areas where you feel like you could address some of these issues by either divesting or adding scale to businesses that are subscale? So just kind of thinking more holistically about that business in the context of BNY Mellon.

Alex Blostein:

Great. Thank you both.

Operator:

And we will take a question from Betsy Graseck with Morgan Stanley.

Dermot McDonogh:

Good morning, Betsy.

Dermot McDonogh:

When you say life of deposit, Betsy, do you mean like tenor and duration of the deposit that stays [ph]? Just to clarify the question.

Dermot McDonogh:

Okay. So let me start like talking about the $277 billion of average balance sheet that we have. Important point number one, two-thirds of those deposits are operational or what we call sticky. Here at BNY Mellon, we don't classify between insured and uninsured. We call it sticky and non-sticky. So the vast majority of our deposits are with us because the clients are in our ecosystem for the long-term and need to have cash with us to execute their business. So that's why we think about it in that way. On the asset side of the balance sheet, like I would like to go back 18 months when we kind of made some strategic decisions about positioning for this rise in interest rates. We took a view in terms of how we wanted to set up the balance sheet with a rapid increase in interest rates. And so we've done a lot of work last year in terms of repositioning the portfolio in terms of higher for longer. 60% of our portfolio is in AFS, and a big part of that is 60% of the portfolio is also fixed. That has a weighted average maturity of about 4 years. So think of about rolling off a quarter every year. So if you take on the asset side, the amount of money that we have in cash plus the amount that's rolling off from fixed to floating, and the investment yield pickup of that is about 300 basis points. We feel when you look at both assets and liability together combined, we are really well-positioned over the next 12 to 18 months to manage through this rate environment.

Dermot McDonogh:

Largely, yes, absolutely, which is why cumulative basis are in the mid to high 70s. And we expect them to grind a little bit higher from here. But we -- as I've said, we pay our clients a competitive rate, and they are sophisticated, and they know what they're doing.

Dermot McDonogh:

So again, look, we've talked about this pretty much for the last 12 months. So just to kind of recap what we've said before, based on what we know, we expect operational risk RWAs to be in the standardized approach, and that will drive an increase in our standardized RWAs. Based on our internal analysis, we think that will have a smaller increase than what the QIS has shown in the past. And so we kind of feel like capital levels will be a little bit higher. But we feel we will have the ability to adapt and live with whatever the outcome is. But again, it's been delayed a couple of times. So I think for us, we are just waiting to see and we'll return it around quickly, and we'll communicate to you when we have something tangible to say.

Robin Vince:

Thanks, Betsy.

Steven Chubak:

Hi. Good morning, Robin and good morning, Dermot.

Steven Chubak:

So wanted to dig into noninterest-bearing deposits. They're now firmly within your 20% to 25% guidance or target range. Your peers have offered more conservative guidance on NIB deposit trends. I know some of your businesses in your mix is pretty unique or idiosyncratic, but I wanted to just better understand what's driving the resiliency in NIB trends and your confidence level at that 20% to 25% range is still appropriate.

Steven Chubak:

That's really helpful. And just for my follow-up, encouraging to see the 30% margin for Securities Services this quarter. That said, the IWM margin remains subdued, running in the low teens year-to-date. I know, Robin, you had talked about distribution being a big focus, but what do you see as an achievable target versus that low teens level you're running at today? And how much of that margin improvement is contingent on the revenue opportunities like improved distribution versus efficiency gains?

Steven Chubak:

That’s great color. Thanks for taking my questions.

Glenn Schorr:

Hello. How are you? So the FedNow platform has -- hi. So the FedNow platform has started for instant interbank payments. I'm assuming you're going to be playing a big role in this, but I'm curious what you think the expected impact for the industry and for BK is. Like these things are usually good for expenses, good for capital efficiency, but bad for revenue. But I'm just curious if you can tell us what you think.

Glenn Schorr:

Very interesting. Thank you for that. Separate but related, I think you guys have done a very good job of taking that 20% net interest income growth you expect this year, offsetting a couple of percent expense growth and bringing that operating leverage. I'm trying to think out loud. The mid to high single-digit expected deposit decline in the back half makes for a tougher full year '24. So even with good expense control, I guess my question is, how much do you need more of those -- get clients to do more with Bank of New York cross selling mentality to kick in to produce that operating leverage next year?

Robin Vince:

Glenn, I'll add one thing to that, which is as you look across our strategy, we were very clear at the beginning of the year about what we wanted to achieve this year. We set out these three points of our outlook, our guidance for 2023. And of course, the year is always going to evolve a little differently than you imagine it will right at the beginning of the year. And we've certainly had a year like that this year, where we've had unexpected things happening in all quarters of financial markets. And so what we have done is we stuck very deliberately to our medium-term plan. And we've not allowed ourselves -- well, we manage every quarter, of course, deliberately every individual thing that we are doing every day, generating more fees, focused on NII, focused on expenses. What we are really doing is preparing our company for this medium and longer term journey of delivery and achieving our objectives. And so there are always going to be a little bit of pluses and minuses in the quarter. But we really think that, that sort of broader strategy is what we are about, just deliberately executing and bringing the culture to bear. So I hear you on the next couple of quarters, but I would just continually remind you and put you back to that guidance that Dermot mentioned about what we're trying to do this year.

Operator:

And we have a question from Ebrahim Poonawala with Bank of America.

Dermot McDonogh:

Good morning, Ebrahim.

Dermot McDonogh:

So look, the path of -- it's a difficult question. The path of interest rate matters, yes -- rate -- level of rates, timing. If you look at the last 8 months, the market, broadly speaking, hasn't got it right relative to Fed docs [ph] and has now come into line over the last several weeks. I think the two things that I'm looking at are -- it's pretty baked in that the Fed will hike in July. Then you have Jackson Hole. That's going to be a very important meeting. And then what happens in November because of its one hike every two meetings, between July and November is a long time, and there will be a lot of data in that period. And so if they pass on November, it's going to be very hard for them to restart again. So I think when we look at our balance sheet, we positioned it higher for longer. And that kind of has informed our guidance of 20% for this year. And the book over the next 12 months, 12 to 18 months, we are broadly neutral on the outcome for rates up a little bit or rates down a little bit, and that's kind of how we think about it.

Robin Vince:

It's an important question, Ebrahim, and I'm going to frame it slightly differently to you, which is we are focused on things that are going to be relatively quick wins associated with cleaning things up that we thought were inefficient. And we've also laid out for ourselves a series of medium-term things and a series of long-term things. And so we have a variety of initiatives in each of those buckets. Of course, we've been executing on them in parallel, but you only see the benefits of some of the shorter-term things right now. So Dermot gave you the example of the ideas that our people generated, and we're going after those. And we said those were sort of a 3-year or so implementation to get after that. We talked about the fact that we did some work, some delayering in the organization at the end of last year into the beginning of this year, which has been quite helpful. That's also been a slightly shorter-term thing. At the same time, we are looking very deliberately and remembering that we are essentially a diversified financial services company because all of these different businesses that we have, and we have a lot of embedded platforms within that, platforms that have been operated in sort of non-platform ways as a result of our sort of slightly siloed past. So now we are getting after organizing those things a little bit differently. And as we organize that, there'll be some expense benefit from that. But also then having organized them in that way, we get to really deliberately go after the duplication of systems and processes that are inside the company. And that's also when we really get to go after the digitization. So it's harvesting a little bit for the short-term, focused on the things that we think make the company a well-run company, organizing ourselves to be able to structurally operate ourselves as we think of the company and then harvesting the benefit of that. So there's a 1-year story, a 2, 3, 4, 5-year story associated with doing all of those things. But as with everything, we have to execute it really well. And we want our people to come along with us on that journey because a lot of this is change of behavior from how people have worked in the past, which is why we have a strategy. We are laser focused on the execution, and culture really matters.

Operator:

And we have a question from Ken Usdin with Jefferies.

Dermot McDonogh:

Okay. So I'll take that on the expense side. So like the guidance was 4%, okay? So -- and that's kind of down from 8% ex notables, ex currency, important point to kind of stress there. And so then it's like it really comes down to executing an operational excellence in everything that we do on all the points that Robin made. And I think the Executive Committee and the firm and the team coming together and seeing that it can be done in a different way and then executing on that. If you double-click into different businesses, and let's take the Market and Wealth Services segment for a second, that's a segment that has a mid-40% margin. We are growing that segment. We are investing in that segment. We are putting big budget dollars to work there, and that's evidenced by our launch of Wove. If you go to our Securities Services segment, that is about increasing our margin through the cycle to 30%. And within that, we are insanely focused on our cost to serve, automation, digitization, serving our clients in a more differentiated way that brings down our cost to serve. So it does mean different things to different businesses at different points in the cycle. Plus in the first instance, it's all about how we show up and how we execute. On the fees, I think generally, we feel very good about our backlog. We feel very good about the pipeline. We are winning our share of what the market has to offer, and our clients like what we have to offer. So on the forward, we feel we have excellent momentum, and we're executing well with our clients.

Robin Vince:

Thanks, Ken.

Brian Bedell:

Great. Thanks. Most of my questions have been asked and answered. But maybe just a follow-on on the ONE BNY Mellon initiative. Maybe on the revenue side of that, it sounds like, obviously, there's a lot of low-hanging fruit on the cost side that will run well over the next 1 to 2 years. But on the revenue side of that, I guess, how would you -- just in a comparison perspective relative to expenses, how would you cite the revenue potential for ONE BNY over the next couple of years? And if you can point to any one early example of cross-sell traction?

Brian Bedell:

Yes. That's fantastic color. Maybe if I could just finish up on the deposit, one more on the deposit side for you, Dermot. You mentioned that your pricing is already very good. You're not seeing a great deal of pressure on deposit costs other than the grind higher that you cited. Within the Asset Servicing segment specifically, so the Asset Servicing part of Securities Services, are you seeing a different dynamic there whereby clients are looking to either shift out of NIBs or look for better deposit pricing? And then in those contracts that you have, servicing contracts that you have, do you have provisions for embedding sort of a level of revenue type of outcome depending on whether they pay VFC or compensating balance?

Brian Bedell:

Fair enough. Thank you.

Operator:

And we have a question from Gerard Cassidy with RBC.

Dermot McDonogh:

Hi, Gerard.

Robin Vince:

Well, I'll take that actually, Gerard. So look, when you look across all of our businesses, we recognize that growth comes in lots of different forms, and our clients growing their wallet share with us. We can have market appreciation. We can have transaction balances, the total addressable market can go -- there are different ways in which we see opportunity. And in the treasury market, given the role that we play in the treasury market, at the end of the day, more treasuries is a benefit for us because there are more treasuries that get traded in the market. There are more treasury that need to get funded in the market. There are more treasuries that get issued in the market. So there's a broader set of benefits there. And you've seen that as we've reported some of our results in Clearance and Collateral Management, which obviously has been a growing business. Now that business isn't only about treasury. It's also about international clearance. It's about global triparty outside of the U.S. So I don't want you to zero in and only think about that being driven by treasuries. But clearly, treasuries is a market we serve. And so when there are more of them and more activity, we regard that on average as good.

Dermot McDonogh:

So, the kind of the quick answer is a large part of our portfolio is cash, so reprices very quickly up or down. So we kind of think of our balance sheet as broadly neutral. So if they cut by 25 basis points or 50 basis points, we are okay. I think also our CIO has taken a couple of a little bit of protection on NII for '24 in terms of locking some of the gains in. So I would say, again, to the question a little while ago, we are broadly neutral up or down over the next 12 to 18 months.

Dermot McDonogh:

Symmetrical. 100% accurate. Yes.

Dermot McDonogh:

[Multiple speakers] way down, it [indiscernible] all the way up, yes.

Operator:

And we have a question from Rob Wildhack with Autonomous Research.

Dermot McDonogh:

So I'm not too sure I would like to give guidance at that granular level of detail. But what I would say is Emily and Roman are intensely focused on delivering a better cost-to-serve model than what we've done in the past. And we want to give clients a better experience with respect to automation, digitization and how we deliver our products to them. And so that is an intent focus of the team. Also, we feel we have -- we are the world's largest custodian. We are #1 in a lot of different things in the Securities Services space. And so we like our hands. We are winning our share. As I said earlier, our backlog is very strong, and we have a good medium-term opportunity set in front us that we are looking to win and execute on. Our yet to be installed book of business is very healthy. So I think we're going after the two legs with equal intensity, and both will deliver that margin of 30% through the cycle, very important. This quarter we had a nice healthy pickup from the rate back up. But as Robin has said in an answer to another question, we are just not relying on that. We know we have a lot of work to do, and we are getting about it.

Dermot McDonogh:

So I don't want to do revenue outlook based on the deconversion because I don't think it's right to talk about any single particular client. But what I would say ex the deconversion over the quarter, we had like 4% growth. Pershing is a business that's grown really well over the last number of years. We are very competitive. We are #1, top 3 in different things. And so I would say the feedback from our conference in Florida Insight, where we launched Wove, was really, really good. And Robin spoke about this at length in terms of the appetite about Wove. So we kind of think over the next several quarters, we like the business momentum. We have a lot of stuff in the pipeline. I think come October, we are going to have a couple of deals that we are going to be able to talk to you about that are quite exciting and will make you feel pretty good.

Operator:

And our final question comes from the line of Rajiv Bhatia with Morningstar.

Robin Vince:

Sure, Rajiv. Look, we don't split out the RIA versus the broker dealer. As you know, we are #1 in broker dealer, and we are in the top 3 in RIA. So we are clearly a market leader. It's interesting the names that you picked because none of them are in the top 3 on either of those measures. So having said that, we are obviously not complacent about newer entrants into the market or other people who want to sort of get into this. This is a business that we've been in for a long time. We understand it, and we have scale. I'm just going to repoint you to the $2.3 trillion of assets on that platform that we think is -- it gives us a tremendous starting point with clients and then the innovation that we've got in it. So we've gone multi-custody, which is very important in that business. We are innovating -- a lot of our services traditionally have been focused on the investor, but now we are delivering to the adviser as well with the Wove platform. We've innovated into direct indexing capabilities, financial planning capabilities, tax-aware investing capabilities. We are deploying BNY Mellon advisers and the capabilities from Investment Management because we have a $1.9 trillion investment manager. We have existing technology from our Wealth Management franchise, which is market-leading. And we are adopting a ONE BNY Mellon mindset to that. So we are taking that technology and delivering it through Wove to other adviser clients. So we've got this whole breadth to how we are actually approaching this opportunity. And while we, of course, welcome the competition from some of these other folks, I don't think any of them can deliver that breadth of capability to our clients. And so for advisers and investors, we feel very good about our direction of travel in this business.

Operator:

Thank you. And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Robin with any additional or closing remarks.

Operator:

Thank you. This concludes today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2 p.m. Eastern Standard Time today. Have a great day. Thank you.

Marius Merz:

Thank you, operator, and good morning, everyone. Welcome to our first quarter 2023 earnings call. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. I'm joined by Robin Vince, President and Chief Executive Officer; and Dermot McDonogh, our Chief Financial Officer. Robin will start with introductory remarks and Dermot will then take you through the earnings presentation. Following their remarks, there will be a Q&A session. Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement and financial highlights presentation, all available on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, April 18, 2023, and will not be updated. With that, I will turn it over to Robin.

Dermot McDonogh:

Thank you, Robin, for the introduction, and good morning, everyone. It's a privilege to be here, and I look forward to working with you all. I'll start on Page 3 of the presentation with some additional details on our consolidated financial results in the first quarter. Total revenue was $4.4 billion, up 11% year-over-year. This reflects fee revenue being flat as headwinds from lower market value, a stronger dollar and the sale of Alcentra, which closed in November last year, were offset by significant improvement in fee waivers and the absence of a notable item last year related to Russia. Firm-wide assets under custody and/or administration of $46.6 trillion increased by 2% year-over-year. Growth from new and existing clients more than offset the stiff headwinds from lower market values and currency translation, a real testament to the strength and diversification of our franchise. Quarter-over-quarter, assets under custody and/or administration increased by 5%. Assets under management of $1.9 trillion decreased by 16% year-over-year. Here, the impact of lower market values and the stronger dollar was tempered by cumulative net inflows over the 12 months. Quarter-over-quarter, assets under management increased by 4%. Investment and other revenue was $79 million, and included another strong quarter of fixed income trading on the back of elevated volatility and greater demand for U.S. treasuries. And net interest revenue increased by 62% year-over-year, primarily reflecting higher interest rates. Expenses were up 3%, driven by higher investments and revenue-related expenses, partially offset by efficiency savings and the impact of the sale of Alcentra. The impact of inflation and merit increases were largely offset by the favorable impact of the stronger dollar. And the provision for credit losses was $27 million in the quarter, reflecting changes in the macroeconomic forecast. As Robin mentioned earlier, earnings per share were $1.12, up 30% year-over-year or up 20% excluding notable items, largely in the first quarter of last year. Our reported pre-tax margin was 28% and our return on tangible common equity was 20%, the highest in three years. Turning to capital and liquidity on Page 4. Our Tier 1 leverage ratio, which continues to be our binding capital constraint, was 5.8%, essentially flat quarter-over-quarter, and our CET1 ratio was 11%. The strength of our balance sheet and our healthy earnings generation in the quarter allowed us to return $1.6 billion of capital to our common shareholders, including $1.3 billion of common share repurchases while maintaining our capital ratios well above regulatory minimum and above our more stringent management target. Similarly, on liquidity coverage ratio was 118% and also unchanged compared with the prior quarter. The strength of our highly liquid, lower credit risk and well-capitalized balance sheet is one of the cornerstones of our franchise. Starting in late '21 and throughout '22, we proactively reduced the duration and enhanced the risk and liquidity profile of our investment securities portfolio, while consistently keeping over 60% of the book available for sale to position ourselves with at flexibility for changing market and interest rate conditions. Between the beginning of this year and early March, we saw deposit balances declined in line with typical seasonal patterns and in line with our expectations, considering continued Central Bank tightening via both rate hikes and quantitative tightening. This was followed by a swift increase in deposit balances as clients of the strength of our balance sheet during the recent turmoil in the banking sector. We ended the quarter with deposit balances up 1% sequentially on a period-end basis, but we expect continued moderation of deposit levels in the months ahead. Now moving on to net interest revenue and further details on the underlying balance sheet trends on Page 5, which I will describe in sequential terms. Net interest revenue of $1.1 billion was up 7% quarter-over-quarter. This sequential increase reflects higher yields on interest-earning assets, partially offset by higher funding costs and the impact of balance sheet size and mix. Our just clearly a very volatile quarter in rates markets, it is worth noting that, on average, realized rates were in line with our projections for the quarter. Our outperformance compared to our prior expectations was primarily driven by slightly lower-than-expected deposit basis. On a quarterly average basis, deposit balances decreased by 3% sequentially. Noninterest-bearing deposits represented 26% of total deposit balances, which continues to be above our long-term range of 20% to 25% based on historical averages in normal interest rate environment. Average interest-earning assets decreased by 1% quarter-over-quarter. Underneath that, cash and reverse repo was flat, loan balances were down 6%, and our investment securities portfolio was flat. Moving on to expenses on Page 6. Expenses for the quarter were $3.1 billion, up 3% year-over-year. As mentioned earlier, this reflects investments in higher revenue-related expenses, partially offset by efficiency savings and the impact of the sale of Alcentra. The impact of inflation and merit increases was largely offset by the favorable impact of the stronger dollar. Robin has been clear about our determination to bend the cost curve. We're executing with discipline and urgency, as you can see signs of our delivery in our professional, legal and other purchase services, net occupancy and business development line. We feel good about our progress in the first quarter and how it positions us for efficiency savings in the coming quarters to help us meet our goals for the year. Turning to our business segments. Let's start with Security Services on Page 7. As I discussed the performance of our Securities Services and Market & Wealth Services segment, I will comment on the investment services fees for each line of business described in our earnings press release and the financial supplement. Security Services reported total revenue of $2.1 billion, up 19% year-over-year. Fee revenue was up 4%. Within this FX revenue was down 6% as the benefit of higher volatility was more than offset by a decline in emerging market volume and net interest revenue was up 77%. In Asset Servicing, investment services fees decreased by fee waivers and net new business was more than offset by the impact of lower market values, lower client activity and the stronger dollar. In Issuer Services, investment services fees increased by 67%. This increase largely reflects the absence of the notable item last year related to Russia as well as lower money market fee waivers in Corporate Trust. Next, Market and Wealth Services on Page 8. Markets & Wealth Services reported total revenue of $1.5 billion, up 22% year-over-year. Fee revenue was up 10% and net interest revenue increased by 53%. In Pershing, investment services fees were up 15%, primarily driven by the abatement of money market fee waivers, partially offset by lower client activity. Net new assets were a healthy $37 billion in the quarter, and average active clearing accounts were up 6% year-on-year. In Treasury Services, Investment Services fees decreased slightly by 1% driven by higher earnings credit on noninterest-bearing deposit balances on the back of higher interest rates, partially offset by lower money market fee waivers and net new business. And in Clearance and Collateral Management, Investment Services fees were up 7%, largely reflecting higher used government clearance volumes and make continued demand for U.S. treasuries. Moving on to Investment and Wealth Management on Page 9. Investment and Wealth Management reported total revenue of $827 million, down 14% year-over-year. Fee revenue was down 15%. Investment and other revenue was $6 million in the quarter primarily reflecting free capital gains as opposed to losses in the first quarter of last year, and net interest revenue was down 21% year-over-year. Assets under management of $1.9 trillion decreased by 16% year-over-year. As I mentioned earlier, this decrease largely reflects lower the unfavorable impact of the stronger dollar, partially offset by cumulative net inflows. In the quarter, we saw $5 billion of net inflows into long-term products. We continue to see healthy net inflows into our LDI strategies of $10 billion, and we also saw $4 billion of net inflows into our fixed income strategy. In cash, where we expected outflows from a small number of clients, this was offset by healthy inflows on the back of our continued strong investment performance. In Investment Management, revenue was down 15% year-over-year. This decrease reflects the impact of the sale of Alcentra, the mix of cumulative net inflows, lower market values and the stronger dollar and was partially offset by lower money market fee waivers. In Wealth Management, revenue was down 12%, driven by lower market values and changes in product mix. Client assets of $279 million was down 9% year-over-year, primarily driven by lower market values. Page 10 shows the results of the other segments. I'll close with a few comments on how we're currently thinking about our financial outlook for the year, which in short remains basically unchanged. From our earnings call in January, you will recall that based on March implied forward interest rates at the end of last year, we projected an approximately 20% year-over-year increase in net interest revenue for the full year '23. As you all know, we continue to see significant volatility in rates, markets and market implied forward interest rates currently suggest some meaningful fed easing relative to the dock plots. We have positioned ourselves for continued interest rate volatility and retain ample flexibility and liquidity to respond to a wide range of outcomes as the ultimate impact of continued tightening remains uncertain. We're off to a good start in the first quarter. And based on March implied forward interest rates at the end of March, we still believe our outlook for 20% year-over-year growth in net interest revenue is realistic with some skew to the upside. We also still expect expenses, excluding notable items to be up 4% year-over-year, assuming foreign exchange rates at the end of last year or by approximately 4.5% on a constant currency basis. As we said on our earnings call in January, we are determined to deliver some positive operating leverage this year. We still expect an effective tax rate in the 21% to 22% range and finally, as we calibrate the amount and pace of our continuing share repurchases in the weeks and months ahead, we will be mindful of the continued uncertainty in the operating environment, especially as it relates to the uncertain path of interest rates and so we're planning to maintain our current more conservative capital buffers for the time being. So to wrap up, we're pleased with the Company's solid financial performance in the first quarter which have made a challenging operating environment once again showcased the strength and resilience of our business model. As we look forward, we are continuing to manage our balance sheet conservatively and we are confident that we are well positioned to help our clients navigate the elevated uncertainty in global markets. With that, operator, can you please open the line for Q&A.

Ken Usdin:

Welcome, Dermot. To follow up on your NII, you reiterated 20%, perhaps a little upside. Obviously, with a good start to the year that implies a sequential slide as the year goes through. Can you just kind of help us understand how that works through in terms of what you're expecting for deposit trends and liability costs as you look through to that.

Ken Usdin:

Got it. Great. And just as a follow-up then, can you maybe just flesh out a little bit how you're thinking about how the deposit trends go from here, both in an absolute sense? And then perhaps what that mix of DDAs to total looks like from, I think, the 26% that you posted this quarter?

Operator:

And our next question will come from Steven Chubak with Wolfe Research.

Robin Vince:

Thanks for the question, Steven. I wouldn't use the word retrench. I would just go back to January and kind of just reaffirm what we said we'd do, which is return north of 100% of earnings to our shareholders this year. In Q1, it was a total of $1.6 billion, of which $300 million was dividends, $1.3 billion in share repurchases. So a good start, March came along, and maybe some of it is me being a freshman CFO and wanting to just slow down the pace a bit to see how the macro environment plays out. There's a lot of uncertainty out there. I would reiterate, we are going to continue to buy back but we're just going to take it easy now and watch the situation day by day, week by week. If the situation clarifies itself. If we get debt ceiling resolution, there are a lot of things that play into the next couple of months, and we'll watch and see and adjust accordingly.

Dermot McDonogh:

That's correct, Steven.

Dermot McDonogh:

Okay. So, there were a few questions there. So I'll try and deal with them as best I can. So, if we kind of zoom out for a second and look at the firm, yes, a 28% margin with a 20% ROTCE, the highest in three years, okay? So margin good, always want to improve. And then you double click into that and you go Security Services, 26% going to 30%. The positive in there is Emily was the CFO for a number of years, and now I get to partner with her figuring out how to drive that margin higher. And so we have a plan, you will have noted that we committed to half the expense growth year-over-year. We're off to a good start and that will have -- that will -- that segment will be a beneficiary of that. Then you double click into the next segment, which is Market & Wealth Services, which is a 48% margin, which I have no problems as CFO with that long may it continue. And then we go into Investment and Wealth Management, which 11% margin is a bit -- to be honest, it's probably a bit disappointing. But 18 months ago, that was a 30% margin business. And we don't see any reason why we can't get back there with a lot of hard work. There were quite a number of headwinds going into that last year, lower market values, a significant strengthening of the dollar. And some of our clients wanted to do a bit of a mix shift from equities to fixed income, and that was going from higher fee to lower fee, but the important point that I would draw to you there is the clients stayed in our ecosystem and that's the key message. Clients are in our ecosystem and just mix shifting, and we're working with our clients to deliver good outcomes for them.

Alex Blostein:

I was hoping we can zone in on fees in Investment Services, particularly within Asset Servicing and Pershing. At a macro level, it feels like a lot of things have gone your way, markets were up. Activity rates were very strong, particularly in treasuries, money market funds, retail, et cetera. So all sort of things in your wheelhouse, yet the revenues in both businesses were down sequentially. So you just unpack a little bit what were some of the offsets that drove to disappointment on fees? And as you look out, I guess, for the rest of the year, I think on the Q4 call, you guys made comments around just the overall firm-wide fee growth for 2023. Just wondering to get your latest thoughts on that?

Alex Blostein:

Got you. Maybe as a former colleague, is an easier question on the follow-up. I guess as you sort of think about the dynamics in the banking space over the last month, 1.5 months, sort of the disruption that, that's created and some of the opportunities that you guys might see on the back of that, whether it's retaining some of the deposits that came over or some new areas within the fee side of the equation. Where do you think you could lean into most to gain extra share?

Operator:

Our next question will come from Brennan Hawken with UBS.

Dermot McDonogh:

Thanks for the question, Brennan. So like the way I kind of think about it again is like I know I've said it a couple of times, it really is NIBs and BNY Mellon is really is an ecosystem point that I will start with. Clients leave and we don't leave with the deposit product. Clients come to our ecosystem for a range of products, and they leave their cash with us to prosecute that business. So, I'll pick out three examples like Corporate Trust, NIB stay with us because they have to make coupon payments. Treasury Services clients leave balances with us to offset fees. Asset Servicing balances stay with us because of underlying client activity. And then our Clearance and Collateral Management business, I mentioned another one, we have decent NIBs there. So our businesses are bigger than a few years ago. Balances are bigger and clients are doing more with us. So NIBs are just attractive to the ecosystem. So then you kind of take a look at history and you do the bottoms-up analysis. And through the last cycle, NIBs did bottom out at the 20% range. Currently, we're at -- we're still at around the 26% range. It stayed sticky. And I think our reason that you could ascribe to that is clients left cash with us in March because they just wanted to leave and use the safety and resilience of our balance sheet and just it stays there. And so, in our forward outlook in terms of why we reiterate the 20% guidance with the skew to the upside is, we expect that to moderate, not meaningfully, but in line with our projection and the work that we did at the beginning of the year. So we feel good about where it is at the moment. We feel good about the forecast. And it's been stickier in the past than we projected it to be is how I would answer it.

Brennan Hawken:

That's very, very clear, all that color. Robin, you spoke to -- you actually said it very eloquently resiliency as a commercial attribute. In the past, you've spoken to the embedded position that Bank of New York has a counterparty. How are you thinking about utilizing that position and that commercial attribute of resiliency in order to drive revenue? Do you have any additional color or commentary that you can provide on how you've been thinking about that?

Operator:

And our next question will come from Mike Mayo with Wells Fargo Securities.

Dermot McDonogh:

Okay. So it's kind of interesting, you asked the question, Mike. When Robin and I talked about the opportunity and when I decided to join, I listened to the first earnings call after I've made the decision to join. And Robin, and he's first as kind of CEO apparent, he talked about connecting the dots across the enterprise, and he's just answered in the question that he just answered there, he talked about that, too. And so, in my prior life, connecting the dots across the enterprise was a thing that I majored on. I also grew up in the financial world, and I intend, hope and plan to bring financial discipline across the firm. We have a great finance team here at BNY Mellon. I couldn't be prouder of what they do. And so I kind of think about the role in three ways. One is working with all of you. clients, regulators, external stakeholders, really kind of delivering the message of what we're about at BNY Mellon over the next several years. So I see that as very important. And then internally, working with the executive committee and the rest of the leadership of the firm and the finance team to develop really good financial analysis in which we can make good strategic decisions about the way we want to take the firm. And that's a lot of work. But the team has already done a good job. And look, you're beginning to see the fruits of this come out in the expense area and other parts. In terms of our top three priority for this year is really is about slowing the expense growth of the firm. We've made a commitment, one quarter in, we're delivering on us. And this is not about -- I don't think about it in some ways as expense cutting, it's like -- it's attacking structural expense basis in the firm where we can think -- we really fundamentally believe we can do the same thing in just a better way and more efficiently and we want to invest and grow the firm. So it's kind of -- I think about my expense priority is like how do I think about run the bank? And how do I think about grow the bank because we really want to take those dollars that we get from efficiency and invest in things like Pershing X and other really key growth initiatives. So it's all about financial discipline and giving the team the financial resources they need to grow the firm and just managing the balance sheet, which is kind of a thing that we've had to do in the last couple of months quite aggressively.

Robin Vince:

So if your question is, does it take a lot of work? And is it a big task to run a company differently than it's been run before? The answer is absolutely yes. And we have got a leadership team who are very focused on approaching the next decade differently than the last decade. And this point of connecting the dots is a very important one. Let me give you one example. So Dermot was talking about in our Investment Management business. And he also mentioned Pershing. And so Mike, when you look at those two businesses, just interestingly, they couldn't have been run more separately within the ecosystem of BNY Mellon. Investment Management was run as essentially almost a separate company off to the site. Pershing was run essentially as a different separate company off to a different side and we never really explored the opportunities to be able to think about the manufacturing of investment management with the fact that we have across Pershing and Wealth Management, a $2.5 trillion distribution base. Now we're an open architecture firm. And so we aren't distributing all of our manufactured product into our distribution arms, but we have opportunity to explore that which frankly hasn't been fully explored up until now. Take the adjacency between margin where we've seen a significant growth for our Collateral Management business associated with new margin rules of un-cleared margin, exchanges need more efficient margin delivery. Those products are very adjacent to the rest of our Collateral Management business in tri-party. They're also quite adjacent to our foreign exchange business. They're quite adjacent to our cash management ecosystem. So we have both diversification in the firm, but we also have a lot of natural adjacencies that people haven't explored before. So that's the way I think strategically about it. And then your question is one of the several pillars of execution, which is what are the things that we have to do to actually get after that. Some of those things are structural, some of them are incentive based, some people based, some of them are organizational based. And so we're going to approach all of those different pillars so that we ultimately attack that strategy effectively, and we're very committed to doing it.

Gerard Cassidy:

Good morning, gentlemen. Can you -- Robin, around the debt ceiling that's coming up for this country, what type of risks there are for your business if a debt ceiling isn't negotiated effectively by Congress and the President. Can you -- what kind of risk do you see in just that situation developing as point on the operating of the treasury market. We don't have a crystal ball though, obviously, in terms of how debt ceiling is going to get resolved. And we do think of the Fed and the treasury as clients of ours as well, and we want a seamless experience as much as possible for them and also, of course, for a broader client franchise. And so we're really doing a couple of things. number one, we think it's our responsibility to the system to lean into the dialogue that's going on in D.C. in a way that can be helpful. And so doing our bit for raising awareness, sort of educating on various things, debt ceiling breach is not the same thing as a government shutdown and making sure that that folks really understand what would happen and some of those consequences. And so we're spending time there. We obviously spend time with the Fed and the treasury on the topic, as you would imagine. And then internally, really for the benefit of our clients, we're using all of the lessons learned from the past to update our playbooks. We're putting in automation on various different things, and we are organized around being very ready to be able to execute come what may. Now of course, we're going to take a lot of guidance from the Fed and the Treasury on that as well as we go through it. So there are a whole bunch of different things that we are doing. I will also note that in the background, our own iFlow data, which, as you know, we have quite good insights into market liquidity. It shows that once again, treasury market liquidity isn't great. The market is a little bit less supported from foreign buyers. We can see that from our iFlow data and all have access to the information on sort of off the run versus on the run it offers, et cetera. And so it's not great from a starting point, which I think is a cautionary tale to the official sector that we really do want to try to get good outcome on this thing.

Dermot McDonogh:

Gerard, I think that's kind of largely kind of a gross-up netting issue, but I will get Marius to follow up with you after the call and kind of give you a more detailed explanation.

Operator:

We'll take a question from Brian Bedell with Deutsche Bank.

Robin Vince:

You're breaking up for a second, Brian. I think you've come back.

Dermot McDonogh:

Okay. So Brian, let me start with Pershing. So I would say in both businesses that you asked a question on Q1 was -- it was predominantly a risk-off environment, but notwithstanding the risk-off environment for Pershing, we attracted $37 billion of new assets onto our system. And so we're growing organically at a nice clip, which we're very pleased about. So I would say Pershing feels good. The outlook feels good and we're going to do the launch -- official launch of Pershing X in June. And so, the clients that are beta testing that feel good about what they're seeing. We've got the partnership with Snowflake. So, I would say the outlook for that business overall in terms of our continued growth in assets -- and as a consequence of that, notwithstanding the risk off sentiment in Q1, we believe being the number one in the market with broker-dealers and several million active clearing accounts that we have on the system. We feel pretty good about the future for that one. Asset Servicing, I think the way I would kind of think about asset Servicing is more steady as she goes, yes. It's a big business. We kind of have a mixtures like, in the past, people have talked about as of as being a fixed income house. And so I would characterize it, we're both a fixed income house and an equity house. And so 2/3 of what comes in is kind of largely fixed income related, 1/3 equities. And we continue to grow our AUC and our AUM and so over time, that mix shift between fixed income and equities, where they either play to our strengths or kind of it will slow us down a bit. So overall, we feel like it's a steady as she goes environment for Asset Servicing.

Robin Vince:

So I'll start with Pershing X. That is a longer-term build. We've talked about the fact that it wasn't going to meaningfully contribute over the course of couple of years since we first talked about that. And so, that's really a '22, '23 thing. You should expect essentially nothing from it in that period of time, but we'll update as we go past launch, we'll give you some updated view on that. But I view that as being a '24, '25, '26 story overall in terms of its ramp. And again, we're still in beta testing. We feel quite enthusiastic about the client response to the product, but I'm going to reserve judgment until we start signing contracts and we launched live in the market on that. In terms of outsourced trading, so this is something that we've launched and we made the public launch during the quarter, hence, we've made the comment, but this is a very medium, long-term opportunity. We talked before about the fact that as a firm, we are very interested in up the value chain of the various different businesses that we do in Asset Servicing. Once upon a time it was custody and then middle office got added and now data solutions get added an integration and these various different components that create a broader solution set for investment management and asset owner clients. And now we're adding to that and saying, "Hey, there's not actually a ton of alpha for an asset owner or investment manager, particularly one that is managing in the tens or hundreds of billions of dollars of AUM. There's not a lot of alpha associated with execution. The alpha is in portfolio construction, asset selection, but the actual buy-sell action isn't. And in fact, it's not great scale because clients often need desks in multiple locations. If they're a multi-asset asset manager, they need lots of different specializations when it comes to the execution. So we have all of that. We've executed $1 trillion or so a year of exactly that type of broad-based asset management execution for our own investment management firm. And so now we've turned that into a platform that can operate not only for ourselves, but also operate for clients. We're externalizing an existing at-scale platform, which is fully capable across products and we're externalizing that now for clients and saying, "Hey, there's no real alpha for you associated with your own trade execution. Let us take it off hands. And I view this in also in a way as an extension of what we already do in foreign exchange, where we do exactly that on a range of different execution basis for our clients in foreign exchange. And so this is something that we know how to do and something that we already do, now we're externalizing it, and I view it as quite an exciting evolution, but it's a very medium long-term thing as part of our overall journey on fee growth over time.

Operator:

And our next question will come from Robert Wildhack with Autonomous Research.

Robin Vince:

So, this is part of our overall March to 30% margin in the Security Services business, Rob. And so when we look at that, Dermot talked a little bit about the focus on the expense line. That's important. And it goes a little bit hand-in-hand here. If you look at our margin last year of 20%, now 26%, depending on last year or this year's stat, but if you just take this year stat, we should be putting 4x as much energy into the expense line as the revenue line in order to be able to get the same net effect at the bottom line. And so we're doing that. But on the revenue line as well as driving new activities, this discipline point pricing pressure is a normal part of this business, but as we look back and we review certain deals that have been struck over the course of the past few years, going back, in some cases, going back several years, I think we did win in some cases, on price. And we look at and we now have new capabilities about reviewing the margin on a deal-by-deal level. And when we look at some of those deals, we're pretty disappointed. So that's causing us to engage with those clients and talk to them about the other things that we would like to do for them that help us to be able to broadly improve the margin at a client level. And then in some cases, there have been deals and I'm thinking of one example in my mind of a client who came and they had a real expectation about pricing at a certain level. And we were like, we're just not going to do the business at that level and we negotiated and we substantially increased the price to a level which we thought was appropriate for the actual business involved. And look, I don't know about the past, how that would have happened. But if I look at the history of deals that we've actually got on the platform, my guess is that, that behavior is not something that would have occurred before and therefore, it's yielded a different outcome. So this focus on the true cost to serve and then the standardization that needs to be done across the platforms that will improve and in fact, reduce over time the cost to serve. So even the same piece of business can be more profitable, not only because we're pressuring on price, but also because we're making it cheaper to actually execute that business and the trick will be doing both.

Operator:

And we'll take a question from Vivek Juneja with JPMorgan.

Dermot McDonogh:

So I would say, broadly speaking, we saw it across the ecosystem. The point-to-point was up 1%. We finished the quarter on a period-end basis at $281 billion. our average for the quarter was, I think, roughly $277 billion. But there was no one business. It really was broadly spread. And I guess the important point that I would call out here is, we made a strategic decision about 15 months ago to kind of centralize how we think about deposits into one platform. So we kind of think of deposits as a platform as well as a product. And we have very, very good client connectivity and engagement. So when we talk about deposits, we talk about it across the system, and that will echo Robin's point about connecting the firm, dissolving different businesses, so we think of deposits as an enterprise effort. And that's how it came together for us in the quarter.

Dermot McDonogh:

So yes, like I think -- and historically, I would say, and continue to be a very big player in that. our performance in our Dreyfus cash business has been excellent and continues to be excellent this year. The simple answer to that question is, we had some -- we knew in January, we were going to have some known outflows. So we were projecting to be slightly down in Q1. And with the inflows as a result of what happened in March, that got us back to flat. So overall, I think the average balances were higher, but on a period-to-period basis, we're flat, but we continue to feel very good about the business and more importantly, performance. And then this business performance matters, so we expect that will -- you'll see better balances going forward.

Dermot McDonogh:

It was clients wanting to do something else with their cash. They told us that they were doing it. It was in our forecast time we knew what was going to happen. There was no specific reason.

Operator:

And we will take a question from Rajiv Bhatia with Morningstar.

Robin Vince:

So we don't disclose the exact rates on the different components, but let me just sort of broadly talk to you about the deposits, Rajiv, because I think this is quite important. So first of all, to me, the decision tree is not insured versus uninsured that's a convenience. It's sort of a retail expression. It's a short hand that gets used in the market. The ultimate decision tree is whether deposits are stable and sticky or whether they're not. And in short, it's just one lens of that, and that lens is a bit more relevant to retail than institutional. And by the way, even within insured, not all deposits are equally sticky, right? Because you've got checking, you've got high-yield savings, you're going to have different outcomes for these, whether they're true operational accounts, even on the retail side, but there are other types of sticky and stable. And so for us, 2/3 of our deposits in the first quarter are operational across our portfolio of businesses. And those are, as Dermot said earlier on, those are required in order to be able to provide clients with those operational services. And it's diversified across our portfolio and you are custody, cash management, clearing, Corporate Trust, there are a bunch of different sort of business cylinders that give rise in that operational cash engine. And we obviously spend a lot of time and effort modeling all of these types of things and sort of -- and we've seen that has really proven to be stable over multiple cycles. And so that's sort of why we focus so much on operational. And then for nonoperational deposits, look, there's a little bit there associated with which we don't expect them to leave, but we plan for them to be able to leave and obviously at a much, much higher rate than we would think about that on the operational side because we just think that's good asset liability management.

Dermot McDonogh:

So I think that just goes back to the point of the risk off sentiment in -- that we saw in Q1 and people just wanting to, a, not do activity and move from fixed income products to equity products, normal behavior, nothing out of the ordinary that I would call out, totally expected just us working with the clients to deliver the risk appetite that they wanted to have for that quarter. The turmoil of March is kind of, you would say, for now, may have a basis and we may see a change in client behavior, but back when they took these actions in March, we didn't know how long we're going to be in this situation for us. So, it's behavior that we expected to see and is kind of I would view it as normal BAU.

Betsy Graseck:

Just a couple of things. One, on the MMF discussion that you just had with WIC, you also benefited from MMF through your custody platform as well, right, because your custody a lot of MMF, is that fair?

Betsy Graseck:

Right. Okay. And that helped the deposits, I'm guessing. So, my question really has to do with your role as a global payment provider, one of the top, obviously. And I think you're involved in the FedNow pilot. I just wanted to get a sense as to how you're thinking about how FedNow is integrated within your Global Payments platform get an update on the BNY Mellon digital asset platform? And is there anything that's going on within crypto that would have you lean in or out? So kind of three legs of that question.

Betsy Graseck:

I'm sorry, you broke up at the end. On crypto, you mentioned.

Betsy Graseck:

Yes. And just because of all of the opportunity -- of all the infrastructure that you have I would think you would be an attractive place for crypto deposits. I'm wondering if that's something that you would agree with or not?

Betsy Graseck:

Okay. And then just lastly, on FedNow, it launches in the next quarter or so. Is that accurate? And is there a meaningful impact? Or is this, as you mentioned, a really long runway to have an impact on your revenues?

Operator:

With that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Robin with any additional or closing remarks.

Operator:

Well, thank you. And this does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2:00 p.m. Eastern Standard Time today. Have a great day.

Marius Merz:

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.

Emily Portney:

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. And 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. And 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. And 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%. 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. And 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. And 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 basis points 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 segment, 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. And 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. And in Clearance and Collateral Management, investment services fees were up 6%, primarily reflecting higher US 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 strategy, 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 inflows into our cash strategies come 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. And 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. And so, we currently project an approximately 20% year-over-year increase for the full year and that assumes current market-implied interest rates. Having said that, 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, as you know, 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. Now, Robin talked about the work we've been doing over the last few months to bend the cost curve, while making sure 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. And then, 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. And finally, I want to close with a few remarks on capital management. As you saw, we ended 2022 comfortably above our management target. And our Board of Directors has authorized a new $5 billion share repurchase program, which provides us ample flexibility. As always, the timing and the 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 in combination with our estimated trajectory of AOCI pulling to par, we're now resuming buybacks and we’d 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?

Brennan Hawken:

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

Brennan Hawken:

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.

Brennan Hawken:

Great. That's very helpful. Thank you, Emily. Capital accretion was really encouraging this quarter. You guys have the rather large buyback announced and you made some positive comments on it in your prepared remarks, Emily. So, how should we -- AOCI was really, I think, the source of the big surprise from my perspective. How should we be thinking about AOCI accretion if yields remain stable from here? What does that timeline look like?

Brennan Hawken :

Okay. Excellent. Thank you very much.

Alex Blostein:

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 our -- from fixed income flows, both mutual funds and ETFs? Is there a particular difference, when it's like inflows versus outflows? Just hoping to get a little more granularity as we think about the fee outlook for '23.

Robin Vince:

Yes, Alex, I -- it's Robin. I would just add a couple of things to that. Just as you think across the breadth of our franchise, and Emily mentioned a couple of them, we have a lot of oars in the water on fixed income generally. So, our asset servicing business is fixed income heavy, that gives rise to a fixed income heavy, security lending business. We have a $1.3 trillion worth of cash on our investment platform. So that plays in the short end of the market, which obviously has an overlap with fixed income as well. We have our Dreyfus money market fund, which has done -- which has performed really quite well over the course of the year in terms of performance and asset gathering. We have our treasury business in terms of our clearance business. We have our treasury market repo business. So, we've got a lot of different opportunities that come from all of this, and we're obviously paying attention to all of them.

Robin Vince:

So, you're right in 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. And I think when you look across revenue growth, pre-tax margins and ROTCE, you have the key metrics that we're really using. Now, 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. And so as we do the work, we're going to come talk to you about it.

Operator:

Our next question comes from Brian Bedell. Your line is open. Sir, please go ahead.

Emily Portney:

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

Brian Bedell:

That's great color. And then, maybe, Robin, if you just want to continue on the growth initiatives that you've outlined, Pershing X, the payments venture with digital payments, especially in terms of -- these are definitely long-term investments and trajectories. But maybe if you can sort of think -- or sort of telegraph what you think might be the contribution this year or just outline what you think might be a reasonable organic growth rate -- revenue growth rate for this year?

Brian Bedell:

That's great color. Thank you very much.

Rob Wildhack:

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.

Rob Wildhack:

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?

Emily Portney:

Yes, just a few things to add. So, as Robin alluded to in his prepared remarks, I mean, we are winning larger and higher-value deals, but we're also very focused on the profitability of the mandate and the relationship overall. And so 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 or -- had a data component, and data is very critical, especially, in the forward trajectory to our clients. And I would say our pipeline is very strong. And the other thing, of course, as Robin mentioned, is we are very, very focused on driving the cost down across the Securities Services segment, inclusive of Asset Servicing for those businesses, which remain pretty manually intensive, so think Transfer Agency, think Fund Accounting. So, there's opportunity there for sure.

Operator:

Our next question comes from Steven Chubak. Your line is open. Please go ahead.

Robin Vince:

Good morning, Steven.

Steven Chubak:

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. And given his speech had hinted at capital requirements moving higher for the G-SIB cohort, recognizing there is still no proposal, but 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?

Steven Chubak:

Fair enough. And just for my follow-up on expenses. I was hoping you can help us reconcile what the expense guidance for '23 implies for both the op margin and 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. And just 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, therefore, in '23 should reflect a lower level of expense growth relative to the other quarters?

Steven Chubak:

And just the expense growth, on a firm wide basis, whether the exit rate for '23 should reflect some of those additional efficiency benefits that you had 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.

Steven Chubak :

Helpful color, Emily. Thanks for taking my questions.

Mike Mayo:

Hi. Can you hear me?

Mike Mayo:

Good. Robin, I think you inherited a tough hand here. So, 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, but you're starting off here, fees were down 3% last year. Looks like 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. So, it just 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, but if you look over a decade, your notable items add up to $3.5 billion. That's almost a year's worth of earnings. So, 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? I guess, how confident are you to turn this around in terms of the positive operating leverage on a core basis?

Mike Mayo:

Yes, that would be great if you can share more of those metrics over time and how -- what your targets are. The other part of that is your -- you said you have four growth initiatives. You did mention digital assets and -- post the recent debacle. Can you put any concrete metrics or put more meat on the bones as far as where you'd like to eventually get to, or revenues, or what's the endgame, just something more on this whole? It's one of your four key growth initiatives. Just a little bit more color?

Mike Mayo:

Great. Thank you.

Operator:

Our next question comes from Gerard Cassidy. Your line is open. Please, go ahead.

Emily Portney:

Great question. And frankly, there is a lot of uncertainty around that. So, look, more generally, as it relates to NIBs, I think -- we think it's -- they're high. They're probably elevated because of certainly some risk-off behavior. The other thing though that I'd really mention is that we've gotten a lot more sophisticated too in just how we manage our deposits and the tools with which we manage our deposits. So, I think there's something to that also as well. We do expect the NIBs to revert to about 20% to 25%, but you're right, I mean, to the extent they remain elevated, that is going to be very helpful and we will have upside to our NIR projection. And look, the only other thing I'd mention is that we've seen significant growth in, for example, Asset Servicing, Corporate Trust, et cetera, which actually those businesses attract NIBs.

Emily Portney:

So, just as a reminder, and I think you've already alluded to it, the quality of our portfolio remains very high. So, weighted average rating is AA minus. Investment grade is over 90%. NPLs and delinquencies are stable. The only area that, of course, we're monitoring very closely is the CRE portion of the portfolio and the office segment, in particular. At the moment, occupancy and rent collections remain high, but it is an area that we're paying closer attention to.