Yahoo Finance The Bank of New York Mellon Corporation (NYSE:BK) Q1 2024 Earnings Call Transcript
The Bank of New York Mellon Corporation (NYSE:BK) Q1 2024 Earnings Call Transcript April 16, 2024
The Bank of New York Mellon Corporation beats earnings expectations. Reported EPS is $1.29, expectations were $1.19. The Bank of New York Mellon Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the 2024 First Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or re-broadcast these materials without BNY Mellon's consent. I will now turn the call over to Marius Merz, BNY Mellon’s, Head of Investor Relations. Please go ahead.
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.
Robin Vince : Thanks Marius, and thank you everyone for joining us this morning. Dermot will talk you through the financials in a moment, but in summary, BNY Mellon is off to an encouraging start for the year. The firm delivered solid financial performance, while we continued to take important steps in the deliberate transformation of our company. And we're seeing early signs of progress that give us confidence, as we work toward the opportunity ahead. Looking beyond BNY Mellon, the first three months of the year provided a mostly constructive operating environment with global markets signaling expectations for continued growth. Equity and credit markets rallied, even as rate cut expectations partially unwound and bond yields rose.
Foreign exchange markets, on the other hand, saw a continuation of the relatively low volumes and muted volatility that we've now seen for the past several quarters. And of course, there are many tail risks, including a variety of different market scenarios, the possibility of escalation in one of the ongoing geopolitical conflicts or an unexpected result in the many elections taking place worldwide this year. As I've said many times before, being resilient matters and this represents a commercial strength for our business. We are constantly preparing and positioning for a wide range of potential scenarios to support our clients and deliver compelling outcomes for our shareholders. Now referring to page two of the financial highlights’ presentation.
BNY Mellon delivered double-digit EPS growth as well as pre-tax margin and ROTCE expansion on the back of positive operating leverage in the first quarter. We reported earnings per share of $1.25 up 11% year-over-year, and excluding notable items, earnings per share of $1.29 were up 14%. Total revenue of $4.5 billion was up 3% year-over-year. That included 8% growth in investment services fees, led by strength in asset servicing, issuer services, and clearance and collateral management, which more than offset revenue headwinds from muted volatility in FX markets and lower net interest income. Expenses of $3.2 billion were up 2% year-over-year and up 1% excluding notable items. Consistent with our goal to generate at least some operating leverage this year, in the first quarter, we did deliver positive operating leverage, both on a reported basis and excluding notable items.
Our reported pre-tax margin was 29% or 30% excluding notable items, and we generated a 21% return on tangible common equity. Our balance sheet remains strong with capital and liquidity ratios in-line with our management targets and deposit balances were up both year-over-year and sequentially. Year-to-date, we returned close to 140% of earnings to common shareholders through dividends and buybacks, and our Board of Directors has authorized a new $6 billion share repurchase program. On our last earnings call in January, we communicated medium-term financial targets and presented our plan to improve BNY Mellon's financial performance. We framed this work for our people through three strategic pillars. Be more for our clients, run our company better, and power our culture.
Throughout the first quarter, we've made progress to be more for our clients, including both product innovation and greater intensity around better delivering our platforms to the market so we can truly help clients achieve their ambitions. As a global financial services company, our unique portfolio of market-leading and complementary businesses presents a tremendous additional value for our clients and shareholders. As you know, we are maturing our ONE BNY Mellon initiative by implementing this mentality into the nuts and bolts processes across the company. For example, we recently announced that Ashton Thomas Securities, an independent broker dealer and registered investment advisor, will use clearing and custody services from Pershing and BNY Mellon precision direct indexing capabilities from investment management.
This is a great example of multiple lines of business working together to provide holistic solutions for clients. As we continue to grow our client roster, we also know that delivering more to our existing clients represents a significant opportunity. As another example, last month we expanded on a long-standing relationship with CIFC, an alternative credit specialist and existing client of ours in asset servicing and corporate trust to bring their US direct lending strategy onto our global distribution platform. This also speaks to the incremental value that asset servicing can bring to our asset manager clients, by allowing them to tap into BNY Mellon's global distribution platform to extend the reach of their capabilities. Consistent with our previously communicated intention to grow the revenue contribution of our market and wealth services segment, we're starting to see our investments to accelerate revenue growth in this high margin segment begin to bear fruit.
For example, we continue to be encouraged by the level of interest from both new and existing clients in our Wove, Wealth Advisory Platform. We have several clients live on the platform today. We closed a number of deals in the first quarter, and the sales pipeline continues to be strong. Across market and wealth services, we also continue to bring new solutions to the market. For example, Treasury Services successfully launched virtual account-based solutions, a set of cash management solutions to meet our clients' demands for more flexibility and transparency into their payment flows. Next, we are taking important steps to run our company better by simplifying processes, powering our platforms, and embracing new technologies. Over the past several months, we've been working to realign several similar products and services across our lines of business.
The largest of these changes was moving institutional solutions from Pershing to our Clearance and Collateral Management business. This is also part of making progress toward adopting a platform's operating model. By uniting related capabilities, we can do things in one place, do them well, and elevate overall execution to better serve our clients and drive growth. Last month, we went live with the first step on the transition into our new model. While it has taken and will continue to take a lot of hard work as we transform our operating model over time. We are confident this new way of working will create better outcomes for our clients and it will also create more efficiency and enhanced risk management. Around 15% of our people around the world are now working in our new operating model, allowing them to feel more connected to what we're doing and empowered to make change.
I'd like to thank our teams who are part of this exciting change for pushing us forward as we mark this important milestone. We also see meaningful opportunity over the coming years from continued digitization and re-engineering initiatives, as well as from embracing new technologies. To support this effort, we are making deliberate investments, enabling us to scale AI technologies across the organization through our enterprise AI hub. Last month, Nvidia announced that BNY Mellon became the first major bank to deploy a DGX SuperPOD, which will accelerate our processing capacity to innovate, reduce risk, and launch AI-enabled capabilities. Our people have identified hundreds of use cases across BNY Mellon, and we already have several in production today.
Across the company, it's our people who continue to power our culture. If you were to walk the halls of BNY Mellon, you'd feel the energy and sense of purpose our leadership team feels when we visit our teams around the world. To that end, we're investing in our people. Over the past several months, we launched new learning and feedback platforms powered by AI, expanded employee benefits, launched a new well-being support program, improved and accelerated our year-end feedback and compensation processes, and more. And we're delighted to welcome Shannon Hobbs, who will join us as our new Chief People Officer in June. As we continue to power our culture forward, we adopted the following five core principles to guide how our teams work and collaborate as we drive our success as a company.
The client obsessed, spark progress, own it, stay curious and thrive together. To wrap up, our performance in the first quarter provides a glimpse of BNY Mellon's potential. Running our company better, inclusive of our focus on platforms, is enabling us to improve profitability and invest in our future. While we are pleased to see early signs of progress, we remain focused on the significant work ahead of us, as we become more for our clients and deliver higher performance for our shareholders. As I have said before, the transformation of our company is a multi-year endeavor but we've started 2024, the year of our 240th anniversary, with a sense of excitement and determination around what's possible. Now over to you, Dermot.
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?
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