Side chat. The company, obviously, Bank of New York Mellon Corporation, really doesn't need any introduction, but it's the ninth largest commercial. $410 billion in assets. It also is unique in being a fee-based bank. 75% of total revenues come from fees in the custody business. It has a market cap now of $42 billion, and in the fourth quarter they put up an ROTCE number of about. I'm very pleased to be with Dermot McDonogh, who's the Chief Financial Officer. As many of you know, he's been Chief Financial Officer since 2020. New York Mellon from Goldman Sachs, where he had many senior management roles at Goldman Sachs. Dermot, thank you for joining us.
Thanks for having me, Joe. Pleasure to be here.
To start off, when we look at what happened in 2023, your first year as CFO at Bank of New York Mellon, a complicated operating environment for many banks, yours as well. What are some of the lessons that were learned and your perspective being a CFO, and how that set you up for 2024?
Okay, great question. So I guess I joined the firm in November. People were still, kind of figuring out how to come back into the office.
Right.
So I was sitting there on my own, doing the transition with Emily, who was a great partner, a great handover. And then, all—I guess—this is the week this time a year ago it all kind of kicked off, you know?
Yes, it did.
So, a year is a long time, but one was going to be okay, doing my scripts, getting rehearsed, quarters looking good, and then boom. And so I learned a lot about the BNY Mellon space of time, you know, the coming together as a team, a lot of experience, long-tenured people who really knew how the market was functioning. The first line and the second line about how to show up for clients, because a lot of clients needed some credit, a lot of clients wanted, you know, go to a. We had to open a lot of accounts for clients, and, just kind of, you know, regulators wondering whether we were settling the U.S. Treasury market every day. So there was a lot of.
It was a real learning, a good learning for me to learn about the firm and how it came together when a tough situation was there. At the same time, we're in the outside world. What we wanted to accomplish in that year, it was kind of slowing expenses, growing NII, the Fed is going to cut rates in the middle part of last year. Remember that?
Yeah.
Here we are a year later, and we're still wondering when they're going to cut. And so it's talking to the market. We really are in the preparedness game, the resiliency game, very clean, liquid balance sheet. If there's trouble, we're the go-to. In the debt ceiling crisis over the summer, safe balance sheet. People came to us looking for solutions. And so I learned a lot about the firm, about how we were able to achieve our goals for last year, where we kind of had a good, solid set of financials. We achieved a lot, and we kind of delivered to do 12 months later. So overall, I think it was a good kind of year of transition for Robin and myself to get to know the firm, and the people that were there really came together. So yeah, I was very pleased.
So it sounds like it was baptism by fire.
Yes. Best way to do it, yeah.
In January, on the earnings call, you provided a lot of specificity about strategy, in terms of strategy and financial outcomes that you expect for Bank of New York. We start with the strategy, can you talk about the process of the clarity of getting that strategy out?
So look, on August-September 2022, I came along in November, officially took the reins this time last year as CFO, and strategic reviews, understood the business in detail, how we made our money, strengths and weaknesses, efficiencies, opportunities, and a kind of bottoms-up analysis with, you know, top-down intuition about where the opportunity was. But we, you know, and we've talked a lot on earnings calls over the last 12 months about Project Catalyst, which was kind of our efficiency project. And 2022, we asked the firm to give us ideas. We came up with 1,500 ideas. We ranked them, put investment dollars after them, work that's gone into that project, which delivered half the growth rate last year. And we communicated to the market in January that we're going after flat this year. Execution, execution, execution every single day.
That gives us the confidence that we can tell you that our targets that we gave to you in January. Realistic, and we feel we can achieve them.
Yep. On that strategy, when you talked about digging down in a granular way with Robin, were there any surprises when you got down and really were there any real surprises that you're like, "Wow, I, I didn't realize we were this good," or vice versa? We still do this function, you know, manually or something?
So, so I'll give you the yin and the yang, you know?
Okay.
The good thing is probably you only get to know so much about a firm in an interview process.
Right.
Say, we have a lot more jewels than the market fully appreciates.
Yes.
Now we say we're a trust bank, and we're very proud to be a trust element. And I think as a management team, we can and will do over time a much better job at bringing BNY Mellon to the market, because we have many businesses. We have three segments, but we have six to seven really important businesses wrapped up in those three segments. Largest custodian, but we're a lot more than just a custodian. And last year we hired our first. And it was more about how do we better, as an institution, connect the dots to deliver the enterprise of BNY Mellon to clients. But it's very siloed. So the yang of it is we're very siloed and have been a very siloed company, and we run very both in terms of people and tech.
That creates a lot of inefficiency. We say we're the world's largest custodian, but.
Right.
We're the ninth largest bank in the United States. We have more than one deposit platform. And so that's for efficiency, or as we like to call it now, we like to run our company better. So we have opportunities to optimize and just show a better for our employees, for the shareholders, and for clients at large.
Yep. You touched earlier about expenses from, you know, the comments you guys made in your fourth quarter. You bent the curve, as you pointed out, and, I think the stock has the valuation reflects some of that success. Now we're talking maybe flat expense growth. When you look at 2024, maybe a little further out, how are you going to realize or what's the focus to make sure that you can really keep your foot on keeping.
So, somebody there, there's an adjective that's used to describe me and the team, immolecular, yeah?
Yeah.
So, we do get down into the weeds. When I hand out budgets, I expect a return in either terms of revenue or efficiency or kind of delivering what was advertised. I think we've raised the bar of accountability internally, in terms of we spend roughly $12.5 billion a year. It's a lot of money. Outside of the firm, in terms of whether it's our policy around how we spend on consultants, how we do procurement and vendor management, money, and I'm very keen for us to get value for it. So we've become much more disciplined about how we spend our money externally and the value we get for it. The projects that we want to get after and really kind of say, okay, these are our priorities for this year, t his is what we're going to deliver.
And then if it's a really good thing, but maybe not for this year, we've become quite disciplined. And we run the firm in kind of, there's from a governance standpoint, we have what we call strategic business reviews, which is where opportunity to go after something. We sit in a room, we brainstorm. It's a messy meeting. It's not a budget meeting. It's not it costs too much. It's like what we. Then if we like the idea, then we kind of figure out how to cost it, and then we prioritize it. And then we have a process called MBORs, which is basically the operation out? Are we hitting our targets? Are we overspending? Are we underspending? What's going on? And we've become very disciplined and rigorous about that.
Yeah. In that thinking, how do you manage expanding the pretax margin, but at the same time understanding investments have to be made, you know, in the organization?
So, operating leverage.
Yes.
As you. Yeah.
Yes. I like that.
So, positive operating leverage net of NII is the Dalai Lama for an institution like ours, yeah?
Yes, it is.
And so that's what we're working towards. And at the same time, we're cognizant of the fact that we need to invest, and we need to allocate resources for the vision of four or five years out, where's the market going?
Right.
You know, an example, we spent a significant amount of money last year on Wove, which is our new wealth tech platform in Pershing. But we did it at the same time of, you know, 2.7% increase in expenses, down from 8% the prior year. And so we're making considerable. Our technology this year, particularly in asset servicing and other parts of the firm. We don't necessarily advertise it because you think when we're, we're not doing anything. But underneath the hood, we are investing significantly in AI. We're investing significantly in cyber resiliency. You know, we're doing some cutting-edge stuff, which will bear fruit in the years to come, at the same time keeping flat. Now, you have upset people internally. Together as a team, we decide what the priorities are, and we get behind that and ruthless.
Got it. When we talk about growth, you didn't give growth guidance on the fourth quarter earnings call for 2024. But when you look at some of the components that you gave, one could imply that there's probably 3% year-over-year growth in fees 2024 over 2023. I guess one question, why weren't you maybe more specific and just maybe give the guidance? Of the real, you know, underlying growth metrics over time that, you know, that fee growth could actually maybe be stronger in the future?
I don't give the fee guidances because I think historically, at least this is a folklore within the firm, we would give the fee guidance and then explain in subsequent quarters why we prefer if I'm going to give you guidance that you, the markets, believe that when I say something, it's something that we really feel we have a good chance of getting after.
Good.
Yeah. And guidance, a lot of it, there's some elements of it we control, and there's some elements of it, a decent amount, we don't control.
Right.
You know, market level. So it's a tricky thing, but I know everybody kind of takes the model, puts in expenses, puts in NII, backs out, and gets into the number. And so that's but there said 3%, so why didn't you hit it?
Right.
So that's the reason why I don't give the fee guidance. The true answer is your business. Like, like, if you kind of think about the three segments, right? Let's start with our most profitable segment, which is Market and Wealth Services. Person on the street probably would have said custody because that's what we're known for.
Sure.
Market and Wealth Services is our most profitable segment, and it's our highest growth business.
Right.
Yeah. You know, we clear the U.S. Treasury market every day. We're known for that. I think we do an excellent job of that, but we're humble about it, and we. Our clients.
Right.
And I think I said on the last call, we did 1,000 code releases last year on the U.S. market because of client need.
Yes.
For innovating, dealing with more difficult funding issues. We feel like we have a lot of opportunity to grow internationally and scale, and we can bring the benefit of the U.S. internationally. So we feel quite excited about the volume on the platform, our scale, our efficiency. It's a kind of it's a high-margin business that we. Treasury services run by Jennifer Barker. We're a top five player in the U.S. dollar payments market. We have a big enterprise platform. Trade corporates a lot more than we do today. We feel like we have a lot of digital solutions. We have a top-class engineering team supporting that business. So we feel. Two years ago to our board to deliver by 2026, and we're on track to do it. And so, and then the last one is Pershing, you know, and. More IAs, investing in Wove.
We're big in that market, and we feel we can continue to grow. So that's our most profitable segment. And our main goal there is to invest in the segment at the same margin that we currently have. We don't want to dilute the margin that we have, which is. Securities Services is made up of asset servicing, corporate trust, and depository receipts. Depository receipts, small. We love our market share. We love our position. We can grow as client as M&A returns, IPO market returns. We'll be there, punch. We have a strategy this year of big plays, and we feel that we're making some big bets. Not a huge amount of dollars, but we feel we have ideas to grow that business.
Corporate, t ons of opportunity to become more efficient, grow market share, more products for clients. I'm personally very excited about that business. Elephant in the room. I'd say since Emily has moved over to asset servicing, she's brought in some tremendous talent, product specialists, engineering specialists. Real kind of cream of the crop stuff, which is going to allow us to kind of develop new products in a better way to deliver for clients in an efficient way that will. The pre-tax margin we advertise in January as part of our medium-term target, which I think is 30%. And we've got the last 5% to go, which we acknowledge. By hook or by crook, we're going to do our best to get there.
In getting there, how much is reliant on inefficient efficiency improvements versus just revenue growth?
To be honest with you, if somebody comes to the enterprise, if somebody comes to me with a good idea and say, look, b ecause budgets are dynamic. It's not like you fix the budget and then say, you know, call the CFO January 2025, and we'll do it again. Every meeting I have, say, "How can we go faster?" You know, "Do you need more money? If I gave you another $5 million to invest, what would you do?" And so people. The right thing, I'll take it away from you. So everybody knows that if you have a good idea that's going to deliver a good return for the firm, we as a management team, we're going to get behind you.
It sounds like a naive question, but coming back to the treasury clearing business, which obviously you're in it, can you just. New issuance driving revenues just versus trading in treasuries? Can you frame that out?
It's just pure. So it's pennies on notional.
Yep.
We have a very scaled platform.
Right.
Last year, Treasury was issuing a lot. Happen for the next few years.
Yes.
Volatility is high. When you have a combination of risk on, risk off, that's good for BNY Mellon, and that's good for our business.
Right. Coming back to the Market and Wealth Services business, I think you mentioned the mid, which is very impressive. Do acquisitions ever figure or come into your thinking for that business? What.
So, I get asked that question a lot. And so how I answer that question, I would say it's two ways. One is a kind of. So, I was asking Marius this on the way up. I said, "Does anybody read the shareholders' letter anymore?" And he said, "Well, I wish people w ork we put into it" was his answer.
Yeah.
And so if you read the shareholders' letter this year from Robin and you read the shareholders' letter last year from Robin, you would. Different sentiments. Last year's letter was reflective, looking back, understanding what our assets were and figuring out how we were, and he signed it off onwards to opportunity. So we had a good year of execution. And this year, the sentiment, I think, in the letter is much more offensive. And even the conversation at our executive committee, we have it every Tuesday at 7:30 A.M. for an hour and a half. Today it was much more. She's serving clients. It felt high energy inside the firm. And so to the M&A specific point, it would be great in my lifetime, but not in the near term. A transformational acquisition.
But could I imagine one to make us go faster to market or a software acquisition to kind of give us a capability that we currently don't have? Yeah, I could see that.
Yep.
Yeah, because I think you learn a lot.
Sure.
By looking at clients and looking at acquisitions. We need to build the muscle memory of how to do it.
Sure.
Anchors. Yeah. So now we don't. So we have to do it a little bit of ourselves. We spend time thinking about it. I think it's where we are in terms of moving forward to be able to think about it and screen for it. But I would say nothing big on the horizon.
Right. Got it. Maybe shifting over the last year, obviously, it was a very volatile year, as we talked about. It ended up, I think, exceeding your guidance when you look at the whole year. How should we think the 2024 net interest guidance, with the various macroeconomic scenarios and client behaviors?
So I think this is a little bit of a jewel, actually, that we have, how we're set up, our ecosystem in terms of, you know, 2/3 of our deposits are operational. Now that we're at the one-year anniversary, big debate with the FDIC. We got a big, you know, we had to take it on the chin. They didn't like operational deposits. You know, they thought of it as more uninsured.
Yes.
And so, you know, our deposits are sticky because clients are doing other businesses with us, and they leave. And so the combination of our treasurer, the person who leads our deposit pricing and deposit raising efforts across our CIO, it's a very, very strong partnership.
Yes.
I think that really stood us in great stead last year. You know, year where we took a view that rates were going to go up quickly, and we kind of repositioned the book. We did the restructuring in Q4 of 2022. You know, it's kind of history. It kind of gave us muscle memory. It gave us confidence. We have a very clean balance sheet. We have a very liquid balance sheet. Our ratios are. We're very conservative. And so we kind of gave guidance, I think, in January, roughly down 10% from last year.
Yep.
At Barclays in September and, again, Goldman in December, that we hit a trough in August of last year, and we saw deposits kind of climb for us in deposits. And by and large, that trend has continued into Q1 of this year.
Got it. And speaking of deposits, obviously. By the actions of the Fed during the pandemic, you know, QE, now we're into QT. What do you think the final, final impact will. Balance sheet, you know, when we look back on this period three, four years from now?
I think we'll be fine. You know, 40 years this year.
Yeah.
I think we'll be 245. Yeah. I think we'll be in good shape. We'll weather the storm. We will. Very, very strong relationships with our regulators.
Yep.
You know, we're there to serve.
Yep.
We have a huge role in the financial markets. We're like, there's a reason why we're a G-SIB.
Yep.
We take that role very, very seriously. We plan to be. Regulation will come. We won't like some of it. We'll advocate for it. But, you know, when the dust settles and it gets implemented or rules passed.
No duels over in New Jersey, though, right?
No what?
No duels over in New Jersey. What, when you think back, of the lessons you guys picked up because of what we went through? I mean, it was an extraordinary period of time. Are there any one or two things that you say, "Wow, you know, we'll be able to use it, you know, going forward"?
So I wasn't there in the pandemic, but so I can tell you what I've learned about the culture point in terms of the coming together of the firm in March. So what I would say to you is, you know, in Q4 of last. Three strategic pillars for the firm: be more for clients, run our company better, and power our culture. And for me, the power of. I think they eat the other two for breakfast. Yeah. Because if you have the culture right, we have 53,000 people. If you can get 53,000. Then it makes one and two so much easier. And so you learn a lot in stressful situations. And so for. Of a stressful situation. And we learned how to adapt, how to innovate, how to work in different ways. But fundamentally, I think is a working together, collaborative in-office culture.
And so I really think the firms that will prevail in the long term because it's all about ideation, about networking.
Yep.
We've invested heavily in the apprenticeship culture. Hiring lists can grow and become experienced and get positioned for senior positions is by being together and learning. So we're, you know, we have a good amount of. And giving people professional development. It was something that was underinvested in. And we spend a lot of time on the culture. I think really important thing. And I kind of missed this at the start. You can't underestimate the importance of communication internally. CEO does, like, a world-class job in communicating with the firm about what's going on. And I do think it's created true followership. The ambition of people in the firm has raised significantly over the last 14-24 months.
That's great. We have time for maybe one more question here. Is there anything you want to share with us in terms of how the first quarter is shaping up?
So, I guess the short answer is, give Mellon credit for what we did last year. You should continue to give us credit for what we're going to do this year. And so I would say the short answer is no surprises. I like, I like the consensus.
Good. And with that, I see you're zero on the screen, so it's perfect timing. Please join me in a round of applause.
Thank you.
Everybody, for joining us for our final BPOP, Popular. As many of you know, it is based in Puerto Rico, of course. It's the 24th largest U.S. commercial bank with about 70. It has a market cap of around $6 billion and impressively has a Common Equity Tier 1 ratio of just over 16%. Very pleased to have Carlos Vázquez today. He joined Popular back in 1997. And as some of you may know, he has announced his retirement. He [will retire] at the end of this month. And I'm very privileged to share the podium with him on, I think, your last,
This is my last investor conference.
Yep, last investor conference. So we're very privileged to have you here. So thank you so much, Carlos. And we wish you tons of fun in retirement, at the end of the month. Keeping track of every day?
Absolutely. Keeping track every day. Yes. It is time.
Yep. And his replacement, Jorge García, is with Paul Cardillo, who heads up investor relations. If you want to introduce yourself to Jorge, you're obviously welcome to do that. Maybe to start. Banks are products of their economy. You certainly know that as well, Carlos. And can you share with us what's the progress that the Puerto Rican government is making toward. And talk about PREPA and the restructuring and how that all plays into what's going on in Puerto Rico.
Yeah, this is a very timely question because, today in the afternoon was the beginning of the court hearings.
Yes.
For the PREPA restructuring, most of the people that know. Those hearings will take a couple of weeks. I think there's a general expectation that after hearing all the parts, the PREPA plan as proposed. And if that happens, it's a sort of an important point, because PREPA is the last remaining material piece that was pending restructuring in Puerto Rico. So once we get PREPA done, you can check the box and sort of the whole chapter, the seven-year chapter, would be behind us. So I think that would be very positive for the island. It will be positive for the continued investment in the. To give you one example, PREPA, if you're setting up a new private generation plant in Puerto Rico, your off-take contract, to the extent that PREPA was a bankrupt company, those off-take contracts were very difficult to finance.
Once PREPA is out of that, of the bankruptcy, then. Financing of some of these generation projects that are all private now. So, having PREPA done is important, from the legal point of view. It's important operationally. Electric sector renewal. And it's important cyclically to get the whole phase of the bankruptcy. There will be continuous court challenges for many things, and those will take years to resolve. But basically, conceptually, the restructuring.
As you mentioned, it's been a seven-year kind of process timeline. And so psychologically, I have to believe it's going to be like a new era, you know, for in Puerto Rico. Do you think that could bring more investment dollars into Puerto Rico once this is finally resolved?
I think that's happening already.
Okay.
Because the evolution of the restructuring and how the pieces have continued to get resolved and increase the probability that the remaining pieces will be resolved. So I see it as if it's going to happen in some reasonable form, and a lot of the investment that was maybe because of the uncertainty and the government situation, I think we passed that bridge already some time ago. But you know, checking the box will still be important.
Yep. The items you and I have talked about over the years is that the outmigration from the island to the mainland has slowed, which I think is going to because I'm assuming from our conversations, most of the folks leaving was job opportunities in the mainland, not because they didn't like, obviously, where they grew up. What do you think could bring more folks back to Puerto Rico, the ones that may have left?
I'm not sure, not necessarily a reasonable target.
Okay.
Because we have the same demographics that you have in the mainland. You know, the whole population is getting old. Our long-term trends are very difficult to change. So, I think most people would probably be pretty happy if we can. Population steady. That's roughly been what has happened for the last couple of years. You're right that, you know, we lost roughly 10% of the population over. And most people left because there was no job creation program. So they needed a job and they needed to go. For the last. Net job creation in Puerto Rico. We have more nominal number of people working today in Puerto Rico than we've had since 2007.
Yeah.
Million people now is 3.2 million people. So the job creation has been significant and very real. With that job creation, you've seen population. Unfortunately, the economists can't do their own famous equations, correlating job creation with population.
Right.
Because the last time that happened in Puerto Rico was. So whatever the equations were then, they just don't work anymore.
Right.
We probably need two or three more years under our belt before the new equation can be put together that makes sense and has reliability.
Yep.
But you know, as long as there are jobs, people will stay. And we've been very lucky for the last two plus. Hopefully, we continue that trend for a while, and that will keep population steady.
Yep. I remember in our conversations, you often referenced like a 10-year recession that you worked at the bank. This growth that you're seeing now, as you just referenced, can you highlight some of the areas? Because many folks, especially in the Metro New York area, a destination point, obviously, for vacation.
Sure.
I know tourism is important.
Right.
But there are some other sectors that are maybe even more important, like manufacturing. Maybe you could give us some economic growth.
Yeah, I mean, tourism. Northeast is very important for our tourism. And please keep coming. You're welcome. It's fantastic. But.
Yeah. Okay.
There is a perception that it's a much bigger number because in most of the Caribbean, it's a much larger number.
Sure.
It's only 7%, not because, in terms, it's a pretty big sector, but because the rest of the economy is pretty big.
Yeah.
The largest sector in the economy continues to be manufacturing.
Yep.
There's a perception that after.
Yes.
In the early 2000s, all manufacturing left Puerto Rico. That's just not true. We're still very strong. The kind of thing that happened is that pharma from prescription drugs to generics.
Yes.
We have a very strong medical equipment manufacturing sector. To give you. Is wearing contact lenses.
Right.
It's a pretty good chance those were manufactured in Puerto Rico.
Okay.
If any of you have a pacemaker, I hope not, but. Pretty good chance that was manufactured in Puerto Rico. If you have used an IV bag anytime in the last few years, there's a pretty good chance those were manufactured in Puerto Rico. A few months after the hurricane, there was a very serious shortage of IV bags in the United States.
Yes.
Everybody's trying to figure out because a very large part of the supply of IV bags for the whole country is manufactured in Puerto Rico.
Oh, interesting.
So manufacturing continues to be the heart of the economy. It's about half of the size of the economy. You have services and insurance and banking and medical services start being the next few segments.
Yeah. Here, and I know there's also been other, you know, the earthquake that you had as well, the pandemic. The federal spending or the monies that have come, how much is remaining? If you had to estimate about what it was going to be, where are we on that timeline in terms of incremental spending coming?
It's hard to hit the exact numbers because there's hundreds of programs that are involved in this.
Right. Right.
Best guess, still around $50 billion of that allocated. The rate at which that money is being spent continues to increase.
Yes.
Most people are guessing that in 2023, the amount of. It's probably in the $3 billion range.
Yep.
It was somewhat lower than that the prior year. Hopefully, it'll be somewhat higher than that this year, but there's also spent.
Right.
So that if it was three next last year, it's not going to be six this year. It's unlikely, because we have a big part of this investment is in construction.
Right.
Infrastructure construction, housing construction. We have a hard time getting construction. Our construction workers have grown by about 50% in the last few years, but it's still half of what it was at its peak in the early 2000s. In construction workers and tradespeople.
Sure.
That's ongoing. There's always some involvement of illegal immigration that. It's probably helpful. There's been a lot of efforts to facilitate legal immigration for construction, but those haven't gone very. But there is a limit of how much they, of the money can be spent, and it's just the capacity of the economy to actually put it to work.
Be wearing a hard hat soon and, you know.
Only if it's a vacation hard hat.
There you go. Before we talk, some specifics on. Think the monetary policy of the Fed going from, obviously, tightening to eventually easing, what kind of impact do you think that banking system, but more specifically Popular?
Well, I mean, the Fed tightening monetary policy. World banks is the deposits are going down.
Yeah.
For the whole system.
Right.
To the extent that deposits are not going down in the top five banks, that means the rest of us are losing more deposits.
Right.
So with deposits going down in the system, we'll have to be very attentive.
Yes.
On liquidity issues. You compound that with regulatory pressure from the banking agencies on liquidity requirements and a number of things. So that's something that we have to be very careful about. The other risk is the one that everybody was terrified of 12 months ago is that the Fed might overdo it and we end up with.