This is good. Moving right along, very pleased to have BNY Mellon with us. Like we've done with the other companies, we kind of just put up the first AOS question. From the company, we have Dermot McDonogh, Chief Financial Officer. Welcome back. Appreciate you participating. Maybe the best place to start, as I kind of get this asked a lot, is, since Robin came over, it's the second best-performing large-cap bank stock. Since you joined, it's like the third or fourth best-performing large-cap bank stock. What do you think the market finally caught on to, and what do you attribute the success to?
Okay, so I guess this time, three years ago, I was in New York on a house hunting trip. I'm there nearly three years now. I would say first point is, I think Robin had a really good run-in. He worked at the firm about 18 months before he became the CEO. I knew BNY Mellon really, really well before he joined. I think he's the perfect leader, the perfect skill set to be the CEO of BNY Mellon. When he started pretty much three years ago, 1st of September, I came along a few weeks after that. We set about doing a number of strategic business reviews. Some people say inside the firm that the firm has good bones, or another person says the great assets at the firm never really left the building, but they just weren't managed that well for a long period of time.
I would say first and foremost, Robin has given the firm back belief in itself and is really evolving the culture to be what we describe as high-performing and human. I think at the beginning, we didn't have the best credibility with the market. We didn't have control of our expenses. We didn't really have a coherent strategy. We were being run as a series of siloed businesses. Over the last couple of years, I think we've really kind of tried to do a good job of telling the one BNY Mellon story, dismantling the silos within the firm, getting credibility with the market, and folks like you for, you know, control over our expenses, saying what we're going to do and doing what we said. I think that consistency of execution and delivery over the last 12 quarters has got us to the place where we are today.
I guess, kind of reading up on what you've done over the last few years, we keep on seeing terms like new commercial model, platform operating model. For maybe those not as familiar with the story, just expand on what that means and how that differs from the prior structure and your peers, and where are you in this process?
Okay, so let's start with the commercial model first. It's probably the one that's a little bit easier to explain. The commercial model is, you know, we have three segments, several businesses. Five years ago, each of those businesses would have had their own sales force. As a sales organization representing BNY Mellon to the client base writ large, I think we weren't unified, we weren't consistent, we didn't have a consistent way of going to market, we didn't have a joined-up strategy. Robin brought in Katinka Wollstrom a little over two years ago as the firm's first Chief Commercial Officer in its history to kind of bring that unified approach to how we deliver BNY Mellon to the marketplace. I think, you know, I would say again, still early days, but this year, our first two quarters were our first two record quarters in sales in the firm's history.
That is a kind of a testament to the work that the sales organization under Katinka's leadership has done. A little over a year ago, we launched, you know, the commercial model. A lot of it is just kind of general hygiene about how you show up in a more professional way with clients, cross-selling new products, delivering existing products that we have at the firm to existing clients that didn't know we had those products. Easy stuff. We had our first commercial liftoff in July of 2024. There were people who had been at the firm a little over 20 years who'd said we'd never had anything like that at BNY Mellon before. This year was version two of that. We thought version one was brilliant and version two was 2x brilliant. It really was a very special day for the firm.
I think that has really kind of continued to evolve the culture and show up. I think people walk into BNY Mellon every day feeling pride in the brand and what we're doing. That really helps clients notice it. As a consequence of success and the fact that we're doing well, clients want to know our story. We have really good client interactions now that then feed further business. It's a little bit of a flywheel of momentum that's feeding on itself. That's the commercial side. I think things are going very well there. On the platform operating model, some people think it's a technology, it's an app. It's not really. We're just working in a different way. At the core, we're a financial markets platform infrastructure company. We provide a lot of goods and services to the ecosystem. We settle the U.S. Treasury market every day.
Every time you think Treasury, think BNY Mellon. We're a top five dollar clearer in the world. 20% of the world's investable assets go through our pipes every day. Volume is our friend. We kind of go, we're a platform company. We should run ourselves like a platform company. For a lot of tech companies, this is one-on-one stuff. We've been working at this for about three years. We did pilots, we did lighthouses, and we went live a little over a year ago. We've organized ourselves into platforms. Loans, banks make loans, that's a platform. We service the loans on our balance sheets. We service loans in corporate trust. We service loans in asset servicing. Three years ago, that would have been three different siloed platforms with its own tech stack and all the inefficiencies that go in with silos. We've rationalized all of that.
As a consequence, we've been able to do things in a more strategic way while at the same time reducing our cost to serve. KYC onboarding, not a very glitzy thing, but three years ago, we had several different ways of doing that. Now we have one. Better tech, better use of AI, showing up to clients in a consistent way. If you want to do business with three different parts of the firm, you only have to take your passport once. Three years ago, we were just taking your passport three times. All of those little things add up to good financial discipline, showing up in a better way for clients, and that gives a better client experience, better client service, and as a consequence, they want to do more business with us.
Makes sense. I guess in early 2024, you and Robin laid out your kind of strategy and action plan for BNY Mellon, including kind of financial targets for the medium term. In the near term, maybe what are two or three of your top priorities and kind of where you're focusing your attention on currently?
I would say consistency of execution is really, really important. I would say showing up every day, just executing the hell out of the opportunity that we have and doing more with existing clients is priority number one. Number two, I think absolutely AI is an important strategic objective for us. I think we, under the leadership of Robin Vince, decided strategically we were going to embrace it wholeheartedly as a firm. Robin is the evangelist on AI and I'm the skeptic. We kind of play off each other. I want value for money. We don't spend a lot of money on it, but I think our return on investment over the last couple of years has been phenomenal. Internally, we're demystifying AI for everybody. We want everybody to have it as a skill. 97% of our employees globally have been trained on AI. They know how to use it.
We have AI bootcamps. You get badges, you get certified, you get trained. It's a real skill. As a consequence, our people internally want to embrace it, want to use it, and people aren't worried about it in the same way. Am I going to lose my job? That's not really how we talk about it internally. It's how can we use AI to create capacity so we can do more projects with the same resources as opposed to reduce the number of resources that we have. We're taking a different approach to AI than what's been typically talked about externally. I think over the next couple of years, we have the right strategy in place. We have the right tech infrastructure in place.
I think as a platform company, as we de-silo the firm and build scale in our platforms for large repetitive tasks, BNY Mellon will see a lot of benefit from the use of AI.
Interesting. Maybe putting aside external factors like the industry environment and market performance, what opportunities are there to drive sustainable underlying growth at BNY Mellon over time? Maybe just what are some of the areas of the greatest potential?
I would say every business that we have has potential. If you kind of take, you know, let's quickly run through the segments. Security services, three businesses, depository receipts, corporate trust, asset servicing. Depository receipts, very pleased with this. Phenomenal second quarter, having a great year, high margin, great market share. Chris Kearns is our leader, you know, hats off to him and the team, done a spectacular job. Keep at it. Corporate trust, when I came on board, corporate trust was a high-margin business, underinvested in, full of legacy architecture, and we were just sweating the assets. We've invested in the business, we're deploying it, we're building out strategic architecture.
We've got 12,000 clients, we're growing our share in CLOs, we're number one in a lot of different spaces, but we kind of feel like we have a lot more upside in corporate trust and we have 12,000 clients there. For me, it's free marketing. You keep your corporate trust clients happy, they're going to want to do more with you in other parts of the firm. We see that in a lot of cases with private markets clients, using corporate trust as an entry point to do more with them. Asset servicing, I think Emily Portney and the team over the last couple of years have really turned the ship around there, reduced the cost to serve, brought on better talent, winning our share. You never hear me talk about lost business, negative repricing, woe is me, the world's worst oligopoly. You just don't, we're not talking about that.
It's a different, you know, we've hit our medium-term target and we feel like there's more upside. Overall, feel very good about that segment. Markets and Wealth services, mid-40s margin, pretty good. Very happy with that. Keep at it, guys at home. It's probably the segment that's most analogous to a platform at scale. Three different businesses, Clearance and Collateral Management, Treasury Services, and Pershing, all with opportunities for growth. All have done well this year. Volume, markets, the trend has been our friend. We kind of globally, we've executed like what we've said we're going to do on earnings calls over the last couple of years and continue to see opportunity there. The one that folks like you always continue to challenge on, and it's fair that you do, is like, what are we doing with IWM?
You know, it's not really where it needs to be in terms of margin. We've guided over the next couple of years, we will get to the mid-20s. We feel like we've got good conviction around that. Jose's just celebrated a year in seat. I would say the first couple of quarters has been right-sizing, kind of doing his own analysis, creating his own vision, taking costs where he could out of the business in order to generate capacity to make some hires. Now he's started to make some strategic hires, and we're beginning to see some green shoots. We feel pretty good about the forward for that business as well. When you take it all together, you kind of get back to a mid-30s margin for the firm, mid-20s ROTCE, as one bank analyst said on the last earnings call. I didn't think bank ROTCE could be that high.
We're kind of happy with where we're at, and we can continue to execute with tremendous ambition.
I guess, good returns, good margins, but you know, I kind of look at the first half result, organic growth was like close to 3%. Is that the right number, or you know, is there an organic growth target that you'd want to achieve to kind of match those returns?
I would say, for some reason, you guys really love that organic growth. You want us to guide.
Yeah, organic growth.
Yeah, I think, you know, last three years, I think we've done a reasonably good job of growing. I do, I will go back to, you know, positive operating leverage being the North Star. That's what we've said consistently over the last couple of years. I think for the first half of the year, you know, positive operating leverage has been north of kind of 400 basis points. Last year was, you know, pretty healthy. The year before was pretty healthy. The two best financial stocks in the mid part of the decade, the 2010 to 2020, were JP and Morgan Stanley at 150. That's kind of how I, as CFO, think about it. Organic growth is a contributor to that. 3% has been the trend for that, for us. That's kind of roughly where we are.
We're looking to outperform it, but that's the zip code of where we're in. If you kind of look at it, and we showed like a picture, a little like graph with light blue, dark blue at the earnings call for the second quarter to kind of show the components without actually disclosing the number. If you kind of look at the firm, ex IWM is probably north of 3%. Knowing that IWM, Investment and Wealth Management, has room to improve. That's a little sub-performing. I kind of see for the next few years, if IWM returns to where we think it should be, you know, there's room for upside from 3% in terms of organic growth.
We could put up the next ARS question, but I'll ask you, in terms of we spent some time on organic growth, maybe shift gears to inorganic growth. What should we expect from BNY Mellon with respect to M&A? There was an interesting Wall Street Journal article on June 22nd or 23rd that some of us in the room may read, and just your thoughts on consolidation within this space or what may or may not you be interested in.
Okay, I think when we started as a team, another important thing I'll bring out is the team has changed quite a lot under Robin's leadership. If you look at the executive committee today versus three years ago, it's a very different lineup. This is our kind of first real year as a team working together, and that's beginning to yield results as well. When we started three years ago, we kind of said, we have a lot of work to do. Let's focus on the home first. The bar is very high. Culture is very important. We worked away for a couple of years. We screened some stuff. It came more, we were looking for capabilities. That resulted in the acquisition of Archer towards the end of last year, which really was a capability in the managed account space that we were lacking. Very happy with that. It's contributing.
Brian Doherty, who's the CEO who came along with that, has really joined, first-class guy, really contributing to the culture. We continue to screen. The bar is high. Again, we continue to look for capabilities. Marius, who's here today with me, who runs our corporate developments, the worst thing that's happened to him as a result of that article is he's become a lot busier because he's getting a lot more inbounds with opportunities for us to look at. It's always good to look at opportunities because you learn from the market. We don't really have anything on the horizon at the moment that we're really looking out for, but we're always trying to learn and look for opportunity and see where our gaps are and how we can grow organically or inorganically.
The audience seems pretty split on whether it's an Archer-like deal, an asset manager, or a trust bank. I'm not sure what anything you're leaning towards.
I think I'm going to keep you guessing.
Fair enough. We're kind of halfway through, so maybe switch to the financial part of the story. You know, we've certainly seen a lot of market activity year to date, whether it's volumes, volatility, macro events. Maybe just share your thought on the operating environment in general.
Look, you know, I've been in the industry my whole career. Financial services, it's a fascinating place to be. It's a fascinating place to work. Love what I do. Love the operating environment. No two days are the same. I think when I was preparing for second quarter results, we were kind of tracking all the different events that had happened that were impacting the markets. We counted north of 20 different events that each one in themselves was like, wow, did that happen this quarter? You know, 20 years ago, that would have been the event of the quarter. I think as an industry, we've become attuned to just dealing with a lot of, we're managing a state of constant change and churn, which I think as a leader in the company is fascinating. I like the operating environment.
I think the firm really performs well in Q2, which is typically our strongest quarter. After April 2, volumes, balances, client engagement, people wanting to know in a non-biased way what we were seeing in the market. I think we showed up in a first-class way. Q3 is typically a quieter quarter for us because of the typical seasonal slowdown, and then we ramp back up again in Q4. Overall, I feel very pleased with the environment. It wasn't what we necessarily thought the year was going to be like. January was very different to today, and so there have been different ebbs and flows to the year. Overall, I think as a firm, we've been very satisfied with how we've managed to deliver for clients.
Got it. Let me open up the next ARS question. As one of the audience votes on this, I guess maybe just kind of talk to just an interesting come-out look. You know, first half of the year was up 14%. You kind of raised the guide in the second quarter call to kind of up high single digits for the year. Even if it's at, you know, call it 9%, that's kind of a lower 5% growth in the back half of the year. I mean, just maybe that's still kind of your expectations, you know, what's driving the slowdown. Maybe kind of update us on how the third quarter is playing out. Presumably the Fed's going to cut next week. How does that impact your overall thinking?
Okay, so three questions there. I think we're neutral on the Fed next week cutting. I think we've managed to cut the tails of NII outcomes for this year pretty well. A lot of hard work towards the back end of last year, and we're kind of doing the same for 2026 right now. Balanced for next week. I think I said on the Q2 earnings call, we updated our guidance to be high single digits. We expected Q3 to be, you know, deposits usually dip a little bit in Q3. They didn't dip as much as we thought they would. That's been a little bit shallower. Higher levels of volatility coming into September on deposit balances generally, as the TGA is getting rebuilt. We're seeing a little bit more volatility than expected. I would say NII feel pretty good about the high single digit forecast.
Look, activity levels have been quite high for us. A little expense is probably smidging higher due to revenue related. Yeah.
Right. I guess, as you know, how does everything you've seen now kind of inform your view for next year's NII trajectory? I don't know if they want to put up the audience's response to that. The audience seems to think that mid-single digit maybe plus.
What’s this one saying for this next year or this year?
Next year.
Oh, wow. That's a bit early for me for next year, isn't it? All right, that's a January one.
We'll let it slide.
I'd like number eight, though. Yeah, I'd take that one.
On the fee side, your guidance has been higher, but that's it. I think we saw 5% growth in the first half of the year. I don't know if you want to give us a number, but maybe talk to the second half of the year. You alluded to maybe expenses being a bit higher. I assume there's revenues associated with that. Anything you want to highlight on the fee side?
Overall, I think I feel good about fees for the year. It really comes back to your first question, second question around the commercial model and what we're doing on sales and all the leadership that Katinka is bringing to the firm. Generally speaking, I think our biggest opportunity is doing more with our existing clients. We have some of the world's best clients, lots of them, and we're spending a lot of time with them. Generally speaking, I feel over the next period of time, notwithstanding kind of weird market stuff, that we'll be in good shape on fees.
Okay.
Diversified business model, three segments, lots of volume, lots of ways to generate fees, not just off balances, it's off transactions, lots of different ways to do it. I think the one thing that I would leave the audience with is it's a diversified business model that is kind of a nice way to express an interest in financials with a kind of a low-risk approach given where we are in the ecosystem.
Okay. Let me go up to the next ARS question. I guess coming back to expenses, on the second quarter call, you kind of tweaked the expense guide from up 1% to 2% to up 3% for full year 2025. You know, as you know, revenue showed through. Do you want to update that figure and maybe just talk to the cost outlook for the back half?
I think no real need to update the outlook. Like in individual meetings with investors, it's kind of some of the questions I guess is, are you investing enough? Are you missing opportunities? I've spent the last two days, if I just switch back to the QPOs for a sec or to platform operating model, every quarter we have something, quarterly planning reviews. They're over the course of Monday, Tuesday, Wednesday this week, a little bit like your conference. Five hours each day where each platform comes in and talks about the opportunities, the stresses, where they need more funding. We're kind of moving towards more of a dynamic budget. I think on balance, I think we're in good shape. We're entering into the fall and the busy part of the year in terms of planning for next year.
I would say, when I spoke with the Executive Committee this morning, I kind of laid out the principles in terms of positive operating leverage, how we need to set up for it based on what I see, what the targets are and the guidance are. I think we're going to continue to look for efficiency in the firm. I think we're going to be kind of, if you kind of go back to our three strategic pillars of power our culture, run our company better, and be more for clients. I think we're really beginning to learn a lot about ourselves as running our company better and demanding more for our dollar in terms of how we spend it, our expectations of vendors, et cetera, et cetera. I'm pretty proud of how the team has shown up and responded to the financial discipline I've put on the firm.
I continue to believe that we'll deliver positive operating leverage next year. Expenses and how we manage that will play an important part. Medium-term target is 33%. I think we outperformed that in Q2. I think we'll be there or thereabouts for the full year. I think we can continue to improve that margin.
It looks like the room seems upside into next year.
Yeah.
If you look at the first half of the year, you did like 400 basis points plus of operating leverage. You've made a comment historically, it's been kind of closer to 150.
The external guys have been closer to 150.
Yeah. I guess when you kind of think about the 2026 budgeting process or looking out, how do you think about what that number should or should be?
It's a team sport. It's full contact. I kind of set the guide, and then everybody else pushes back on me. Then we agree on what the right balance is. Robin, you know, we discuss it with the board, and this is where we want to invest, and these are the priorities that we're not going to invest in because we feel we need to deliver this to the market. It's a balanced discussion. There is no right or wrong answer. I think it's a good discipline because it's something that everybody can understand and focus on. Yeah. Revenue minus expenses. As one investor said to me, you know, pre-tax income, Dermot, keep growing pre-tax income, and I will be forever your investor. Yeah. He was with us three years ago. He had a very big position.
Three years later, he's still with it, and he's our biggest critic, and he's our biggest friend. We keep it simple. We focus on that. If we can continue to grow, investors will still want to be in the stock.
Sounds fair. That also strategy generates a lot of capital, you know, as you grow pre-tax earnings. Maybe just talk to how you think about maybe returning that capital to effect the buyback. I think you've talked about it kind of a 100% payout ratio, give or take. I think you're kind of 92% year to date. I'm not sure if that's within that plus or minus, but just, you know, what are your kind of capital priorities around that?
I think at the beginning of the year, we went plus or minus 100%. We slowed it down at the start, given the environment. Robin and I are both conservative risk managers by nature. We like to sleep well at night. We're always going to have a conservative tilt to us. We'll always run a little bit above the, you know, we're always in that 590 to 6% of tier one leverage ratio. We're always in that zip code. I would say, full year, we're probably at 95% to 100%. We're going to be, we'll hit the guide.
Got it. You talked about that mid-30s or that, I guess, pre-tax margin target of 33%, greater than or equal to 33% ROTCE mid-20s. Is that, I guess, how do we think those were kind of medium-term targets? I mean, is that something you kind of revisit beginning of next year, beginning of the year after that? How do you just think about that? Or is that just kind of where the company should be?
I think it's a great question. I think it's something that we're going to spend a lot of time discussing internally over the next three months. When we announced that, like January of 2026, it'll be three years since we gave the targets. When we gave the targets, the market liked it. Stock was up 4% on the day. I think we will reflect on that over the next three months. In January, we tend to do an extended earnings update. We're kind of, hey, look, we'll reflect on Robin's shareholder letter that we put out at the beginning of the year, how we've performed for the year, and whether we should change our view. If we're going to change our view and give new guidance, we'll probably more likely than not do it in January.
If we decide to stick with the current targets, we'll say why and give an explanation first. I think that's only fair. I think the market has given us as a firm a lot of credit for transparency and executing to what we say. I think we're going to continue to do that.
Got it. We have about five minutes remaining. There's some kind of topical stuff I'd love to run through.
Sure.
Maybe just start with digital assets. Stablecoins have gotten a lot of discussion. You've probably had a unique role, you know, given where you are in the ecosystem. Just kind of where do you see BNY Mellon filling in and kind of what areas of banking do you think it could disrupt?
It's a great question. One thing I didn't mention is that we also, in the way that Katinka Wollstrom was from joining as Chief Commercial Officer, Carolyn Weinberg has recently, at the beginning of this year, joined as Chief Product and Innovation Officer. A really, really high-quality individual who has a lot of capital market financial services experience. Very excited to have her on the team. As part of her portfolio of responsibilities, she's also responsible for digital assets. One of the things that attracted her to BNY Mellon was the fact that she can see opportunities to stitch different things together and create new solutions for clients. The way she talks about it, if she were sitting here, she said, we have products, we have services, and we have capabilities.
When you stitch them all together, we can have unique solutions for clients because there isn't any other firm really that has the same set of product offerings that we have. When you can put them together in a customized way for clients at scale, you can generate some nice alpha in that space. I would say, with the change in administration, there's a lot more kind of chatter in the space. As it relates to stablecoins, we're doing stuff with Circle, we're doing stuff with Société Générale, we're doing stuff with Ripple. Now, is it moving the needle for us on revenues at the moment? No, but are we getting a lot of credit from clients and the market generally on thought leadership? Absolutely. Do we have the technology? Yes. Do we have the thought leadership? Yes.
Will we be able to take advantage of it when the market ultimately moves there and begins to deploy that? Yes. I would say it's not a needle mover currently in terms of revenue for the firm, but with opportunity for the upside as the market moves and begins to do more stuff in that space.
Interesting. Another topic that comes up, and you touched on it earlier, just kind of what's going on in private credit or private markets. You've seen a tremendous amount of growth in that space, particularly private credit over the last several years. Maybe just discuss BNY Mellon's role in that, how you serve that market, and that's probably contributing to growth now.
We hired somebody this year to just kind of be the private markets segment head, for the want of a better term, and deliver BNY Mellon to that private markets client segment. Each business, whether it's corporate trust, asset servicing, doing custody, whether it's classic stuff, ETF stuff, LiquidityDirect, liquidity solutions, each business has clients who are private markets clients, but we haven't historically done a very good job of bringing it all together and being able to show the firm to private markets clients holistically. I would say that is something that Robin has spent a lot of personal time in, meeting with the CEOs of the major private markets clients and saying, this is how BNY Mellon can service you in a different way. At the end of the day, those clients just want to invest and run funds.
They don't want to have the infrastructure behind that on their own books. I think going forward, we're going to have much better partnerships with those firms so that we can service them in a much more differentiated way than we have done historically. There is more opportunity, and that was one of the big themes of Robin's shareholder letter this year.
Good to see that. Just maybe lastly, you kind of talked on AI. I read somewhere that you now have digital employees working at BNY Mellon with like email addresses. How big of an opportunity is that? It sounds a little scary to me, but we just talked to them.
No, I think, yeah, I would say plus or minus, we have about 100 different AI activities in production at the moment. I'll just give you two minor examples, but they will scale up over time. We process a huge amount of payments every day. Some of them, let's say kind of 95%, 96% of that would be STP, but 2% that maybe falls through the cracks for whatever reason, that's a lot. That's manual stuff that humans have to go in to fix. Digital employees are now starting to do that work. That's work that humans don't want to have to do because it's quite messy. It's quite manual, looking up zip codes for JSON so we can, you know, you forgot to put it in and payment didn't go through. That all can be done by AI now in digital employees.
KYC onboarding, you have to go out and search for documents in the public domain. Humans have to spend a few hours searching through the internet, looking for facts and figures and stuff about you. AI can do that in a couple of minutes. More and more stuff can do that. In the platform operating model, we use an application called Jira to manage projects and do things. You can put in a spec in Jira now and say, okay, give me the requirements. AI will give you the requirements, and then you click another button and AI will write the code for you. You don't have to be a software engineer now to be able to write code. I can just see live coding in the future becoming more of a thing. People are excited about that.
As Robin said in a different setting, it's like, you know, 150 years ago, you were going from A to B on a horse and carriage, and then all of a sudden the plane came and the car came, and you embraced it. AI is just another thing to embrace on the journey. I think five years from now, we won't really be talking about it the way we are. It'll be just so BAU.
They'll write the questions for next year.
There you go.
On that note, please join me in thanking Dermot for his time today.