Great. Well, good afternoon, everybody, or good morning if you're on the webcast. Next up, I would like to introduce Dermot McDonagh, CFO of BNY Mellon. Prior to joining Bank of New York Mellon, Dermot spent over 25 years here at Goldman Sachs. Most recently as the Chief Operating Officer for the EMEA region and Chief Executive Officer for Goldman Sachs International Bank. So it's great to have you back here. Welcome for the first time to our European Financial Services Conference. It's great to be with you on this side of the pond.
Thanks, Alex. Thanks for having me.
So given the fact that, you know, this is a European financial conference and a slightly different audience probably from what, what you guys are used to, maybe it makes sense to start with a quick overview of BNY Mellon. And really, as you think about your decision to move over, what attracted you to the platform, and how's it going?
Okay, I'll start with the second answer first. It was only a year in time, looking at the CEO, and he kinda asked me what did I think about the opportunity? Explored, and I realized it was time for, a nd then people externally really understand, and so I kind of saw a lot of opportunity and a lot of potential. We've been well and very well as a client. And, you know, I had a very good feeling about the culture and the firm, but then I learned a lot more through the interview process. And I'd say in my 18 months there, I think the opportunity to the upside from what I thought when I was in that process is a lot more for us.
So I'm very excited to be there, and I feel very settled, changed job, company. I can very quick order, so to adapt to a lot of different things, notwithstanding that you're a stone's throw away from me in New York.
So it's been really good. So BNY Mellon, we kind of we spent a lot of time thinking about the business, the strategy, how we were made up, and we've come to the conclusion and how we talk about ourselves externally now and with our people internally, is that we really are a financial services platform company, where we deliver a range of services to the financial markets ecosystem. And if you kind of break it into our three big segments, first of all, you've got securities services, and that's the business that we're kind of really stereotyped as the trust bank. World's largest custodian and a very big platform there, and we offer a lot of stuff, State Street and Northern Trust, formidable competitors in that space.
But also within that segment, we have Corporate Trust, which is a nice business for us at a good margin, and we feel we have a opportunity to grow at the margin, so opportunity and depositary receipt. In our January medium-term financial targets, we committed to get that to a 30% margin, so we can—we feel we can grow revenue segment at a reduced cost to serve. The next segment is our most profitable segment, Wealth Services, high-performing business with good growth opportunities at the margin, mid-forties. So we have Clearance and Collateral Management, clear the U.S. Treasury market every day.
Next Sunday is Founders' Day for BNY Mellon. We're 240 years old. We started the bank in 1784 with $500,000 in capital, and today, the US Treasury market is $25 trillion, and so we believe we have an opportunity to grow there. World's largest triparty funding platform and an opportunity internationally. Very excited about that business. Pershing, for those of you who follow that business closely, we're a $2.5 trillion wealth tech platform, which just the team US has just come back from its annual INSITE conference. Last year, we announced Wove, which is a new innovative platform that we're rolling out to clients, which is attracting new clients to the platform and also existing clients migrating across. We've closed nine clients this year.
Healthy pipeline, and we feel that's going to contribute meaningfully to the bottom line in the medium term. And then you have treasury services, which is, you know, the business that Goldman would love to have. Forty-five percent margin, very digitally native. We've done a lot of innovation the last couple of years and, you know, big opportunities to grow there. We're top five dollar clearer, our payments mover, and so really good. And then we come to the last one, which everyone likes to give me a tough time over, which is our investment in the wealth management segment, which a couple of years ago was twenty-five percent margin. In wealth, we're a top ten wealth top ten kind of market with $300 billion.
Everybody would like to buy that business from us, but we feel we're better owners of that asset, and we're really growing and investing it, and it has a good margin. Then Asset Management's had, you know, it's had a tough couple of years. Went from 25 down to mid-teens in terms of margin, but we're on our way back, and we're kind of digging our way out of that with new products and services and integrating the boutiques in a more efficient way. So we have an ability to grow top line at a reduced cost to serve there. So all in all, that kind of feeds back into the medium-term financial targets, which we gave in January, which I think is medium-term margin of 33%. We're around 30, 31 today. Return on Tangible Common Equity of 23% and buybacks in the 100% or north thereof zip code. Financial outlook, pretty good.
Yeah. Well, that's a, that's a helpful overview. So lots to unpack there, and we'll get into the individual businesses as we kinda continue on with our, with our dialogue here. But I wanted to start with maybe some of the higher-level strategic priorities that you and Robin have for yourselves and for the firm, kind of over the next, you know, 12-18 months. You've named a number of different growth initiatives. You obviously have a lot of efficiency efforts underway as well. So how do you prioritize your time? What are kind of the top two, three kind of priorities for the firm over the more near term?
So I would say, we have a lot of stuff going on, and part of it a nd if you kind of anchor it in the three strategic pillars that we laid out in the fall of last year: run our company better, be more for clients, empower our culture. And start with be more for clients. We made our first kind of a very important hire this time last year, our first Chief Commercial Officer in corporate history, Cathinka Wahlstrom. World-class talent, and she's got the mandate to just, like, reboot our sales and distribution force, workforce. And so we've become a lot more organized, showing up in a different way for clients, functions together to get aligned to ourselves and delivering clients. I would say we're very excited about what we've seen over the last round. We feel like we're on positive.
We're talking in different ways than ever before. In some of the meetings that vary with that, which deliver a complete solution. two years ago, we wouldn't be able to do that. And so the reason why they chose us was before. So we kind of see we have a growing pipeline of clients who understand one BNY Mellon, not just component pieces of dealing with the siloed business for one, one activity or one product. So there's a lot more to do in, in the be more for client space. Run our company better. I spend a lot of time on expenses, expense management. Don't really talk about cost cutting or expenses. We just talk about, like, how can we run our company better, and how do we get more value for the dollars that we spend? We spend roughly $12.5 billion a year. That's a lot of money.
And so how do we get the most for it and get the value out of it? And we've generated, I think, over the last couple of years, a real sense of accountability with the people we give the money and give them the possession of the initiatives and the dollars to spend, and we're seeing the returns from it. It's not by chance that we went from 1% growth rate in 2022 to guiding 4% last year and ending up at 2.7, to guiding flat this year. That's real hard yards, lots of projects. While at the same time, we're investing in things like Wove, investing in growth initiatives, but at the same time save money. It's not cutting, it's getting value for dollar.
Yeah. Let's talk about the first pillar, which comes breaking down silos that you and Robin are pretty actively about and trying more of that wall from there. The benefit of being very diversified is it gives, you know, a lot of avenues to pursue. The challenge from market perspective, the outside looking in, is kind of thinking about from crosscurrents that really kind of drive your business, 'cause to your point earlier, you guys are very different than your sort of traditional custody peer. So as you look at the organic growth prospects for the fee pool as a whole, how would you frame that growth algorithm over the next one to two years? What are kind of the key drivers and contributors to that?
So I would say, if you kind of take our liquidity platform as just one example, and so we have a $1.3 trillion liquidity ecosystem. People go, "Wow, didn't realize that." Everybody looks at us as, you know, "How big is your deposit balance?" And so our deposit balance is, like, in the $270 billion-$280 billion range. But then we have Dreyfus.
Yeah, and then we have our triparty platform. And once we bring clients into the firm, if they don't want to be in deposits, we want them in Dreyfus money market funds. So within the liquidity ecosystem, we have set up a structure where we're doing a lot more internalization of showing our products on our own storefront. And we have a reasonably good strategic, well-thought-out portal, where we can show our product on our storefront as well as competitors' products. If you go over to Pershing and their clients want to look at the money market products, historically, we wouldn't have shown them Dreyfus. We would've shown them competitors. Now, we're showing them Dreyfus, and this is a top quartile performer in the money market space, and why don't we sell our own product?
We're kind of doing a lot more of that. The mandate one ago, it touched Pershing, it touched management, it touched Asset Servicing, and it touched markets.
So that's four businesses. As I said, two years ago, we just could not do that. Asset management going onto the Pershing platform and showing asset management products that we can deliver to RIAs in the U.S., never did that before. We're starting to do that. And then when you kind of take each line of business in terms of what their fee algorithm and what their growth is, it's kind of, it's made up of, you know, the absolute level of the market, organic growth, which everybody wants to know what we're doing on that, and then volume and level of activity.
In this kind of environment, when, you know, the markets are doing well and activity is strong, and people are doing a lot of business, and we're winning, I think I said on Q1 earnings call, in asset servicing for the deals that we pitched this year, we won more than 50% of our share. So I think we're winning, and we're turning away unprofitable business. So our pricing discipline has become a lot stronger, and we're not chasing a falling knife anymore. We want to be the best at what we do, not the cheapest at what, what we do. And so we're doing a lot more about upgrading our infrastructure and offer clients better product, and they'll want to pay extra over time to be with us because we will be the best at what we do.
Yeah. Let's talk about Pershing for a couple of minutes. You brought it up just now again, and we talked about it a little bit earlier on as well. But as you sort of think about the key platforms in the wealth space, people know Schwab, people know Fidelity, people kind of know Pershing, but it's not at the forefront, I think, of what investor base kind of thinks about when they think about BNY Mellon, even though it's a really powerful and a pretty fast-growing platform. So what are the competitive advantages of Pershing? And I guess, what are you guys doing to further sustain that growth?
Don't give me a tough time on my next question but I would kind of disagree with you that it's not known well. In that it's $2.5 trillion on the platform. We have about 1,500 clients. We're number one with broker-dealers, and we're top three with RIAs. So we're big, yeah. And Schwab, and Fidelity, and LPL, they're different, they're formidable, but I think we have a very good client proposition, and we've delivered it over, over, you know, multiple decades. So we feel very good about the competitive position of where we are today. But it is a competitive environment, and I would say Wove is a big change for us, and I think we really believe, the feedback that we're getting from clients is very strong, and we think that's going to be a differentiator for us over time.
This week at the INSITE conference, we offered a couple of more, we rolled out a couple of more products that we think will gain a lot of traction with clients in the near term. And so we're kind of investing in modernizing the platform. So we offer, you know, other clients may be competing with Schwab and Fidelity in other areas. We're an unconflicted. We're just a pure service provider, and so we've. It's a kind of a mid-40s margin.
So I think we, I think we feel pretty good about it. The other thing I would say, and, you know, you might add, like, the Platform Operating Model that we're driving through in terms of the strategic transformation. I think Pershing is going to really benefit from that. It's going to become a lot more integrated to BNY Mellon. A lot of the other firms that we compete with can't offer the breadth and the depth of the institution that we have to the clients, so I think we will show up in a much more different way in a couple of years from now, given what we're going for model.
Business that growing rapidly over the last years has been collateral management. Again, that's another one that you mentioned just earlier today. Growth was really strong again in the first thing, up in 13%-ish range year-over-year, building on, I think, in something in that range for all of last year as well. And while volumes have been helpful, clearly there's been a lot of treasury activity. Can you maybe talk a little bit about what are some of the other drivers in that business? And if volumes sustain, that's great, but if they don't, what does that business grow at in a more normalized environment?
So I don't know, I might have been with you at a conference. You know, people view that business as a mature, steady eddy, kind of we're the dominant player which is somewhat true, but we also innovate quite a lot, both in the clearance and collateral space and just the repo platform as well, the triparty funding platform. So clients always have new things to do on in the funding space, and we kind of, like, did something like 1,000 code drops last year in terms of innovation for existing clients.
And so the opportunity for us in the U.S. is really help regulators, you know, roll out central clearing, and that's going to allow us to do different things in that space. So initially, a lot of people thought that might be a headwind, but now just central clearing over time will allow us to grow, and so we feel we are big supporters of that space. And we see that big opportunity for us is in the international space.
International, like, it's very fragmented by country. We feel like there's a lot of stuff that we have in the US in terms of products that we can roll out internationally, and we can give clients kind of the breadth of a global platform. So I think, you know, for sure, for this year, we feel very good about the momentum and the trajectory of that business.
Great. Let's talk about maybe some of the newer areas of growth, and one of the kind of pillar, pillars that you talked about is doing more with your clients. You guys obviously have lots of capabilities, but are there other things that you could add to your toolkit to better position yourself to gain more wallet share with your customers, particularly kind of in the capital markets domain? Again, given your background, given, you know, Robin's background, whether it's in FX, or sec lending, or, you know, PB balance sheets are pretty constrained industry-wide. I don't know if that gives you guys an opportunity to do something different there. So anything new you're thinking about?
So we're definitely doing more in securities financing. We've made a couple of strategic hires, so we're definitely thinking about doing more. In markets, FX, you know, FX for the last couple of years has been a bit of a headwind, like volatility has been at all-time lows, so that's kind of been a headwind. It's come back a little bit this year, so we kind of see a little bit of a reversion to mean, and that business flows are trending quite nicely.
Look, we, we talked about it a lot this year, or last year, and that is our kind of buy-side trading strategy, where we can—people who don't want to have all that expense in-house, we can do it for them because we have a lot of, we do it for our own asset manager outsource trading. We did a nice little joined up with Goldman in the fall of last year, and we do the outsource trading for a part of the GSAM business in Europe.
So we have capabilities that we've shown we can do, and we have a couple of other deals in the pipeline, which, if they come to pass and we can execute, will show our capabilities in a real way, and then we hope that business can take off in a meaningful way and deliver. And so we're also kind of investing quite heavily, not in a kind of a monetary sense, but more kind of strategic thinking, and a little bit monetarily is in our digital asset space and blockchain technology.
You know, I kind of split the world into the hype of crypto, into digital assets and blockchain. We're big believers in that, and so we do believe we have to be at the front edge of that, given where markets might go and evolve. And so we're spending a lot of time thinking about that, and I think we've had some nice wins in that space this year, and I think more to come in that. But I would say at the moment, for us, for this year and maybe next year, it really is executing on the transformation strategy, which is the platform operating model.
For those who are listening in who are not quite familiar, it's just a different way of working. And we did a couple of pilots last year, and we were very pleased with that, and so we went live with phase one in March of this year, which was 6 platforms, 7,000 people. It's going really well, and what that does is, it takes a lot of activities, and organizes them in, in, in kind of discrete platforms. And as the CFO, I kind of give them the spend envelope, and they kind of go on and get on and do about their business, and it becomes quite transformational and entrepreneurial within the firm, and it gives a differentiated client experience. So it allows us to grow revenue and at a reduced cost to serve.
And so it's good for the culture, it's good for clients, and it's good for the bottom line. And so over the next couple of years, all 53,000 people will migrate to that kind of platform way of working.
All right, let's shift gears a little bit and spend a minute or two on expenses and margins. I n your earlier remarks, you sort of framed it as this is, again, one of the key pillars of the strategy to run the firm better, to be more efficient. You guys have done a phenomenal job with that over the last couple of years with, you know, targeting flattish expenses this year. Two questions there. I guess, one, given the fact that the environment has been probably a little bit better than we all would've thought in the beginning of the year, with markets up as much as they are and activity still remaining pretty healthy does that change at all your perspectives for, you know, on expenses for this year? And as you think about longer-term margins of that 33+ range, how much of that is gonna come from revenue growth versus sort of like additional efficiency that you're trying to extrapolate from the business?
So, there were a lot of questions there. So I kind of anchor myself in positive operating leverage, and so my goal is, over the medium term, to get credibility with the market that we, as a firm, can deliver positive operating leverage. And so whether that comes from NII fees or expenses, it's nice to have. So the—I would say, the short answer to your question is, if expenses are up from flat this year, it'll be revenue-related expenses, so revenues will be higher.
Yeah. And so that's kind of where it's at, yeah. I think we have more room to go on running the company better. Migration to the platform operating model will yield further efficiencies. Hopefully, over time, the proof points we're working hard at, our use of AI in terms of helping us do that, I think proof points are good, but a lot more work needs to happen. And so expense management is hard, and particularly hard in the current environment, 'cause it's still quite inflationary, but I just think there's more opportunity for us. And if you go internally, I don't think there is a feeling inside the firm that we're very tight on expenses, because we're funding our key growth initiatives.
So people feel that we are growing, and we are investing in people, and we're investing in the culture, and people feel like they have careers. Like, most people who work in financial services, you know, are used to the, you know, the graduate analyst program, kids joining out of college. Up until two years ago, BNY Mellon didn't have that. It just went to the lateral market. Hugely inefficient, very expensive. And so this summer, we're going to have 2,000 graduates joining so that allows us to remix the headcount.
It's great for the culture, and so I think that is really going to help pillar one and pillar two. So yeah, I think I would say a lot of upside.
Yeah. Great. Well, let's spend another minute maybe on the current operating environment. Again, we kinda sprinkled a couple of data points here and there. Obviously, markets have been generally supportive. It sounds like volumes and activity rates have also been relatively healthy in the second quarter.
Maybe help us kinda put a bow around what you're seeing in the business from both kind of the fee perspective and perhaps deposit perspective.
So, NII, let's start with that one. We're 25 minutes in, and you've only asked me about NII. It's kinda... So, like, I would say this year for us, NII, we guided down 10, Q1 was down eight. I kind of put that in the bid offer range. Deposits are at, kinda continuing where we expected them to see. And so for us, NII, this year, is a little bit more about the mix between IBs and NIBs than anything to do with rates.
In our CIO book, we have about $20 billion of 2%-3% securities rolling off and going into investments at current market rates. So all of that makes me feel like, based on what I know today and what I see, you know, very comfortable with the guidance of down 10%. And also important point, we, we committed to positive operating leverage this year with a down 10% NII, and BNY Mellon has never done that before, so that would be a notable first.
And then on the fees, I think everybody asks me why don't I guide on fees, and I think I still 18 months in, I just need more comfort about each line of business's ability to be able to deliver sustained organic growth. And there is a reasonable amount of assumptions with market levels in terms of how you calculate the fee. So the minute you give a guide, it's wrong the next day because of the way the market moves. So I think the market implied a 4%, fee growth for the year based on what I said in January, and I wouldn't say the market's miles off on that.
Yeah. Makes sense. Well, since you really wanna talk about NII, I'll ask another question related to that. Let's hit on deposits a little bit. I mean, that's always been maybe a little bit of a wild card for the whole sub-sector to really predict. You guys have done a better job with that than many other banks in the space over the last 12-18 months. But as you look at where you are today, are there any areas within your deposit base that are feeling any particular pressure from either, you know, flow perspective or incremental pricing perspective? Or do you feel like we've kinda hit the bottom, and now this is gonna be appropriate level of deposit to build off of?
So, last year, we kind of thought our deposit levels would go down, like, 8%-10%, and given all the regional bank crisis, the geopolitics, and the debt ceiling, it was kind of, t hat was a zigzag of a year.
But we kind of were roughly there, maybe a little bit better to the upside. We expected deposits to grind lower this year as well, given QT, et cetera, et cetera. But in Q1, we didn't really see that happen because it really kinda came out of the RRP, and so it's kinda held in again this quarter. And so also, I think for us, deposits, two-thirds of them are pretty sticky.
In that they're not coming to us for deposit pricing, they're coming to us because of the platform and the other things that they're doing with us. The clients with us are largely institutional and are largely getting market rates. So for our dollar book, the cumulative betas are, like, in the low 80s, so there isn't a big pricing catch-up to happen, and people are not leaving for higher yielding stuff, 'cause they're already getting a reasonable rate and are with us for other things. So our level feels pretty good to me at the moment. Now, higher for longer on the NIB side, I think that could grind a little bit lower from here as people look to optimize yield. But somebody earlier asked me the question about the composition of NIBs. NIBs is more like lots of little amounts as opposed to lumpy amounts.
So it's the accumulation of a lot of little amounts that add up to the NIB balance. So that could grind a little bit lower, but it's been, it's been steady this year.
Yeah. Great. Let's touch on the capital return framework for BNY Mellon. It's a really important part of the story. You guys have committed to returning over 100% of earnings for 2024. You have very healthy levels of capital, and hopefully, Basel III and Endgame is you know, going sort of the other way. So, maybe refresh us on your capital return framework. Is north of 100 still the right way to think about it for this year, and how do you think about it longer term?
So, definitely the same for this year. I think we're on track to do it. We got off to a good start in Q1. I think we bought, like, $1.3 billion back in Q1. Healthy dividend. So overall, shareholders should feel very good about that. And I would say that's our plan for the medium term. You know, you add in t he one thing that has a little bit surprised me this year is, like, I would've thought AOCI would've behaved a little bit differently in January than how it's actually happened. And so at the beginning of the year, like, there were six rate cuts priced in the forward curve. That's kind of changed a lot.
Right.
Yeah.
Right. Yeah.
I think it's one now. AOCI hasn't pulled to par in the way we had anticipated. So there's roughly $1.5 billion of AOCI that has to pull to par in the next couple of years.
So that's a tailwind in terms of our ability to buy back, you know, make that commitment for 100% or north thereof, notwithstanding external factors that might cause us to change that, whether, you know, shocks to the system or not.
Sure. Great. All right, we have a couple minutes left on the clock, so if there's any questions in the room, let us know. Okay, maybe I'll ask another one. So we talked about a bunch of stuff, you know, over the last half an hour or so, but when you kinda zoom out, one of the challenges that I think investors had with the custody space broadly is, what is sort of like the longer term growth algorithm that I can really underwrite to? Because the industry has generally disappointed on, you know, whether it's fees or NIIs or operating leverage. So in your seat today, if you were kinda thinking about over the next several years, how would you frame the earnings growth algorithm for the company over time?
The company, I would say, it's going to be, I can't give you a mathematical formula, but I feel very confident in our ability to outperform the market's expectations currently. If you, I said this at the RBC, RBC conference in March, if you want to get a sense of change at BNY Mellon, take the 2022 shareholder letter by Robin, where he summarized the last decade and the unfulfilled potential, and if you take the letter from 2023 and take away what, what is the key difference between the two? One is kind of backward-looking and reflective. This year's one is forward-looking in terms of momentum and energy about the things that we can do. Like, we're number one in the custody space.
Asset servicing is a very big business for us, and I think we can meaningfully change the cost to serve and deliver better solutions to clients, which will allow us to grow more revenue. And I often say internally, we're the number one in that space, but we should be behaving like we're the number 10.
'Cause we need to have more hustle, and we need to show up in a different way for clients, and we're starting to do that. And I think in... If you kinda take three years forward, and we have completed the transformation to the platform operating model company, and you kind of see us migrate into... You can see the potential to become more of a SaaS-type model, because you're providing platform services to clients at scale in a very efficient way. And I think the market will wake up one day and look at us and say, "Okay, this deserves a different multiple." But we need to do the hard work to prove that we can get there. But we, in the management team, think that that's the journey we're on, and we'll get there.
Great. Well, it's a great note to leave it on. Thank you so much for being here. Appreciate your time.
My pleasure.
Yeah.
Take care.