Bank of New York Mellon Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 13, 2023

Key Takeaways

  • BNY Mellon delivered full-year EPS of $4.59 excluding notable items (up 8% YoY) and a return on tangible common equity of 21%, as net interest revenue rose 56% offsetting market headwinds.
  • The firm saw strong sales momentum in Asset Servicing with ETFs AUCA reaching $1.4 trillion (+12% funds serviced) and Alternatives AUCA up 14% alongside a new Conduent partnership to expand its digital payments and FX offerings.
  • Wealth Management grew net new assets by over $120 billion (5% growth), won major mandates from State Farm and Arta Finance, and launched its first PershingX release featuring portfolio solutions, client servicing and data tools.
  • An enterprise-wide cost initiative has generated 1,500 employee ideas—200 already implemented—with the goal of bending the expense curve to about 4% growth in 2023 versus 8% in 2022.
  • The board authorized a new $5 billion share repurchase program, and BNY Mellon plans to resume buybacks and return over 100% of 2023 earnings to shareholders through dividends and repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Bank of New York Mellon Q4 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, and welcome to the 2022 4th Quarter Earnings Conference Call hosted by BNY Mellon. Will now turn the conference over to Mary Smurz, BNY Mellon Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to our Q4 2022 earnings call. As always, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website atbnymellon. I'm joined by Robin Vince, President and Chief Executive Officer and Emily Portney, our Chief Financial Officer. Robin will start with introductory remarks and Emily will then take you through the earnings presentation.

Speaker 1

Following their remarks, there will be a Q and A session. Before we begin, please note that our remarks include forward looking statements and non GAAP measures. Information about these statements and non GAAP measures available in the earnings press release, financial supplements and financial highlights presentation, all available on the Investor Relations page of our website. Forward looking statements made on this call speak only as of today, January 13, 2023 and will not be updated. With that, I will turn it over to Robin.

Speaker 2

Thank you, Marius. Good morning, everyone, and thank you for joining us. Before Emily takes you through our quarterly results, I'd like to make a few broader comments on our performance in 20 22 and on some areas of focus for 2023. As you can see on Page 2 of our financial highlights presentation. We reported earnings per share for the full year of 2 point percent compared to the prior year and a return on tangible common equity of 13%.

Speaker 2

Excluding the impact of notable items, we reported earnings per share of $4.59 which was up 8% year over year and a return on tangible common equity of 21%, reflecting our Solid underlying performance against the backdrop of a complex operating environment in 2022. The goodwill impairment related to Investment Management in the 3rd quarter. And our 4th quarter results reflect the impact Excluding notable items, revenues grew a little faster than expenses as we continued to see strength in client activity and volumes, while We are continuing to position ourselves to derive meaningful benefit from the upward move in interest rates. Together, these factors more than offset the stiff headwinds from lower market levels. On the back of organic growth In AUCA, we're continuing our role as the world's largest custodian and we saw cumulative net inflows In assets under management, beyond the numbers, I'd like to highlight a couple of areas where I'm particularly encouraged by our performance in 2022.

Speaker 2

1st, our sales momentum, which speaks to the strength of our client franchise and our capabilities. In Asset Servicing, we continue to elevate our client dialogue, while maintaining a strong focus on service quality And higher value deals, which is where the elevation of client dialogue matters. In ETFs, AUCA reached $1,400,000,000,000 as we saw strong net inflows throughout the year and the total number of funds serviced Rose by 12%. And in ALTS, we grew AUCA by 14% and fund launches were up by over 25%. Treasury Services delivered strong broad based growth throughout 2022.

Speaker 2

In the 4th quarter, We announced a collaboration with Conduent to be their trusted payments infrastructure provider as they launch a digital integrated payments hub For businesses and the public sector, this hub will enable access to more secure, faster and cost effective options to Send, request and receive payments and refunds in a matter of minutes using real time payments and other proven payment technologies. And we also onboarded several new clients during the quarter as we continued to build our digital payments and related FX businesses. And finally, while 2022 was no doubt a difficult environment for the Wealth market, our Wealth Management business acquired more clients With particular strength in the ultra high net worth and family office segments, and we continued to deepen existing through our expanded banking offering, where the percentage of advisory clients who also bank with us, rose by about 5 percentage points. Notwithstanding the tough backdrop, Peugeot, which is in fact our largest play as a company in the wealth space, Brought in net new assets of over $120,000,000,000 representing 5% growth. In the 4th quarter, We announced 2 very exciting wins demonstrating the broad based capabilities that Pershing is uniquely positioned to offer.

Speaker 2

The first was State Farm, which is an exciting relationship given State Farm's size and reach with its thousands of agents across the country Serving tens of millions of households. And we also onboarded Arta Finance, which was founded by a team of former Google executives We are now leading a global digital family office that uses advanced technologies to empower investors with tools to invest intelligently. This win is an important proof point of our proven set of APIs and digital capabilities And demonstrates our ability to win with tech forward clients. The second area of performance I'll call out Is that we continued to forge ahead with our longer term growth initiatives such as purging X, real time payments, the reimagining of custody and collateral And digital assets. These initiatives will help position the company for the next leg of growth beyond the medium term.

Speaker 2

We went live with our digital asset custody platform in the U. S. In October. And as I highlighted in my op ed in the Financial Times a month ago, This will continue to be a focus for us, not so much for crypto, but really the broader opportunity That exists across digital assets and distributed ledger technology. If anything, The recent events in the crypto market only further highlight the need for trusted regulated providers in the digital asset space.

Speaker 2

We are also now live with our first release of the Pershing X just 1 year after launching the initiative. This release to a small number of select clients includes Three core products, portfolio solutions, including direct indexing, client servicing and data and reporting tools. But equally importantly, This release is about our ability to set a goal on a tight timeline and execute. Finally, The 3rd and probably most important highlight of the year for me is our people and our systems once again demonstrated remarkable resilience. Across the war in Ukraine, the extraordinary moves we saw in several government debt markets and volume surges, The operational readiness of our people and our systems consistently enabled successful outcomes for our clients.

Speaker 2

I cannot thank our people enough for their hard work and dedication to serving our clients. While we're proud of these accomplishments, It's also important to humbly recognize an area where we fell short this past year. Acknowledging the inflationary headwinds, Expense growth for a 2nd straight year was around 5% ex notables. We consider that number too high, Especially considering the expense growth benefited from a stronger U. S.

Speaker 2

Dollar throughout the year. On a constant currency basis, Expense growth ex notables was approximately 8%. While I'm encouraged by the renewed sense of across the organization over the last few months to better manage our expenses, we still have a ways to go on this journey, Which brings me to our key focus areas for 2023. 1st, expenses. My leadership team and I are fully committed to bending the cost curve this year.

Speaker 2

That will come from Stilling further expense discipline across the firm and from focusing more on profitable new business growth, come from implementing ideas that will make BNY Mellon a simpler, more efficient place to do business with. And so here, We've embarked on an enterprise wide initiative led by senior leaders and high performing employees from around the world Focused on driving greater efficiency and enabling sustainable growth. No one knows the ins and outs of our product, Services and processes better than our people, and so all of our staff have had the opportunity to take an active role in this initiative By submitting ideas for how we can run the company in a better way for all our stakeholders. To date, We've approved about 1500 high quality ideas, of which about 200 are already completed and another 500 Are on track to be implemented this year with a meaningful amount of these ideas requiring little upfront investment. Emily will cover this in more detail.

Speaker 2

But as a result of these initiatives and our renewed determination, we expect to achieve nearly double the amount of efficiency savings This year compared to what we achieved in any of the recent years. But our priorities are of course not just about managing expenses. We are also focused on reinvigorating profitable growth. Our budget commits to achieving positive underlying growth this year Across almost all of our businesses, with particularly healthy growth coming from Asset Servicing, purging and Treasury Services, We will continue full speed ahead with our critical long term growth investments that I mentioned earlier with clear and specific targets That we expect the teams to hit over the course of the year. Lastly, on the top line, our priorities Include goals for our 1 BNY Mellon program, which incentivizes cross business referrals and development of innovative Multi business solutions that only BNY Mellon's unique collection of businesses is equipped to provide.

Speaker 2

In 2022, We saw good initial momentum and we surpassed our initial goal for the year and we intend to deliver a further pickup Finally, on Capital Management, I'll highlight that our Board of Directors has authorized a new $5,000,000,000 share repurchase program, which provides us ample flexibility and having ended the year comfortably above our capital management targets, We're now resuming buybacks. And so in summary, while none of us can predict exactly what the operating environment will look like in 2023, We are laser focused on growing the franchise and executing against our efficiency plans with discipline and urgency To drive some positive operating leverage in 2023, while returning a healthy amount of capital to our shareholders this year. With that, let me turn it over one last time to Emily as our CFO.

Speaker 3

Thank you, Robin, and good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year over year basis unless I specify otherwise. Starting on Page 3 of our financial highlights presentation, total revenue of $3,900,000 in the 4th quarter was down 2% on a reported basis and up 9% excluding notable items. As Robin mentioned earlier and as you can see at the bottom of the page, Our reported results in the Q4 included a few notable items resulting from actions to improve our revenue and expense trajectory. Reported revenues included approximately $450,000,000 of net securities losses recorded in investments and other revenue, Resulting from a previously disclosed repositioning of our securities portfolio, which I will expand upon later, fee revenue was flat As the benefit of lower money market fee waivers and healthy organic growth across our Security Services and Market and Wealth Services segments was offset By the impact of lower market values from both equity and fixed income markets and the unfavorable impact of a stronger U.

Speaker 3

S. Dollar. Firmwide assets under custody and or administration of $44,300,000,000,000 declined by 5%. The headwind of lower market values and currency translation was tempered by continued growth from both new and existing clients. And assets under management of $1,800,000,000,000 decreased by 25%.

Speaker 3

This also reflects lower market values and the unfavorable impact Investment and other revenue was negative $360,000,000 in the quarter on a reported basis. Excluding notable items, Investment and other revenue was positive $100,000,000 a good result reflecting another quarter of strong fixed income trading performance. And net interest revenue increased by 56%, primarily reflecting higher interest rates. Expenses were up 8% or 2% excluding notable items. Notable items amounted to approximately $200,000,000 in the quarter, primarily severance expenses and provision for credit losses was $20,000,000 primarily reflecting changes in the macroeconomic forecast.

Speaker 3

On a reported basis, EPS was $0.62 pretax margin was 17% and return on tangible common equity was 12%. Excluding the impact of notable items, EPS was $1.30 up 25% year over year. Pre tax margin was 31% and return on tangible common equity was 24%. Touching on the full year on Page 4. Total revenue grew by 3% on a reported basis and by 6% excluding notable items.

Speaker 3

Fee revenue was flat. Investment and other revenue was negative $82,000,000 or positive $340,000,000 excluding notable items, and net interest revenue The 5% to 5.5% range that we guided to throughout the year. Excluding the benefit from the stronger U. S. Dollar, Expenses ex notables for the year were up 8%.

Speaker 3

Provision for credit losses was $39,000,000 compared to a provision benefit $230,000,000 in the prior year. On a reported basis, EPS was $2.90 Pre tax margin was 20% and return on tangible common equity was 13%. Excluding the impact of notable items, EPS was $4.59 up 8% year over year. Pretax margin was 29% And return on tangible common equity was 21%. Onto capital and liquidity on Page 5.

Speaker 3

Our consolidated Tier 1 leverage ratio was 5.8%, up approximately 35 basis points sequentially, Primarily reflecting capital generated through earnings, the sale of Alcentra and an improvement in accumulated other Comprehensive income partially offset by capital returned through dividends. Our CET1 ratio was 11.2%, Up approximately 120 basis points, driven by the increase in capital and lower risk weighted assets. And finally, our LCR was 118%, up 2 percentage points sequentially. Turning to our net interest revenue and balance sheet trends on Page 6, which I will also talk about in sequential terms. Net interest revenue of $1,100,000,000 was up 14% sequentially.

Speaker 3

This increase primarily reflects higher yields on interest earning assets, partially offset by higher funding costs. Once again, NIR in the quarter exceeded our expectations as non interest bearing deposits remain elevated. Average deposit balances decreased by 2%. Within this, interest bearing deposits increased by 2% And non interest bearing deposits declined by 11%. Despite this decline in the quarter, the share of non interest bearing deposits as a And we continue to actively manage our deposit footprint to optimize across NIR, liquidity value and return on capital.

Speaker 3

Average interest earning assets remained flat. Underneath that, cash and reverse repo increased by 4%, Loan balances were down 1% and our investment securities portfolio was down 3%. As I mentioned, in the 4th quarter, we took To reposition the Figueroa portfolio to improve our NIR trajectory for the coming years. We sold roughly 3,000,000,000 of longer dated lower yielding municipal and corporate bonds, which we've been replacing with significantly higher yielding securities earning roughly 5% We're 250 to 300 basis points more than what we were earning on the securities that we sold. While we realized that approximately $450,000,000 Tax loss with this sale, this transaction was virtually capital neutral because the unrealized loss was already recognized in AOCI.

Speaker 3

In fact, we freed up roughly $150,000,000 of CET1 capital as the higher credit quality Replacement portfolio consumes significantly lower RWA. Moving on to expenses on Page 7. Expenses for the quarter were $3,200,000,000 up 8% year over year. Excluding notable items, expenses were up 2% year over year. This year over year increase reflects investments, net of efficiency savings, higher revenue related expenses, including Distribution expenses as well as the impact of inflation partially offset by the benefit of the stronger U.

Speaker 3

S. Dollar. Turning to Page 8 for a closer look at our business segment. Security Services reported total revenue of $2,200,000,000 up 18% compared to the prior year. Fee revenue increased 2% and net interest revenue was up 9% driven by higher interest rates, partially offset by lower balances.

Speaker 3

As I discuss the performance of our Security Services End Market and Wealth Services segment, I will focus my comments on Investment Services fees for each line of business, which you can find in our financial supplement. In Asset Servicing, Investment Services fees were down 1% as the impact of lower market values at a stronger U. S. Dollar We're mostly offset by the abatement of money market fee waivers, higher client activity and net new business. In Issuer Services, Investment Services fees were up 7%, driven by the reduction of money market fee waivers and higher depositary receipts issuance and cancellation fees.

Speaker 3

Next, Market and Wealth Services on Page 9. Market and Wealth Services reported total revenue of $1,400,000,000 Up 19%. Fee revenue was up 14% and net interest revenue increased by 33%. In Pershing, Investment services fees were up 22%. This increase reflects lower money market fee waivers, higher fees on fleet balances and higher client activity, Partially offset by the impact of lost business in the prior year and lower market level.

Speaker 3

Net new assets were 42,000,000,000 Reflecting a very healthy level of growth from existing clients, while flows related to dividends and year end capital gain distributions were naturally more muted than in the prior year quarter. And average active clearing accounts were up 4% year on year. In Treasury Services, Investment Services fees were flat. The benefit of lower money market fee waivers and net new business was offset by the negative impact to fees from higher earnings credits on the back of higher interest rates. And in Clearance and Collateral Management, Investment Services fees were up 6%, primarily reflecting higher U.

Speaker 3

S. Government Clearance volume driven by continued demand for U. S. Treasury securities due to elevated volatility amid evolving monetary policy. Now turning to Investment and Wealth Management on Page 10.

Speaker 3

Investment and Wealth Management reported total revenue of $825,000,000 Down 19%. Fee revenue was down 18% and net interest revenue was up 2%. Assets under management of 1,800,000,000,000 Declined by 25% year over year. This decrease largely reflects lower market value and the unfavorable impact The stronger U. S.

Speaker 3

Dollar partially offset by cumulative net inflows. As it relates to flows in the quarter, We saw $6,000,000,000 of net outflows from long term products and $27,000,000,000 of net inflows into cash. Among our long term Active strategies, liability driven investments continue to be a bright spot with $19,000,000,000 of net inflows in the quarter, In Investment Management, revenue was down 22% due to lower market value, the mix of cumulative net inflows to stronger U. S. Dollar Revenue was down 12%, primarily reflecting lower market value.

Speaker 3

Client assets of $269,000,000 were down 16% year over year, Primarily driven by lower market value. Page 11 shows the results of the other segment, where investment in other revenue includes the net loss, The repositioning of securities portfolio and expenses include severance. Now let me close with a few comments And how we're thinking about 2023. With regards to NIR, we have positioned ourselves for another year of healthy growth. And so, we currently project an approximately 20% year over year increase for the full year and that assumes current market implied interest rate.

Speaker 3

Having said that, the range of potential outcomes remains relatively wide And the quarterly trajectory of NIR will be dependent on various factors, including the path of deposit levels and mix as well as interest rates. As it relates to fees, as you know, market driven factors like equity and fixed income market level, currency and interest rates Dominated Speed Dynamics in 2022, while underlying growth across Security Services and Market and Wealth Services was offset by headwinds in Investment and Wealth Management. For 2023, we expect to return to some underlying fee growth for the firm. Now, Robin talked about the work we've been doing over the last few months to bend the cost curve while making sure we're continuing to invest. For 2023, this translates into expenses excluding notable items increasing by approximately 4%, Assuming exchange rates remain flat towards the end of 2022 or by approximately 4.5% on a constant Currency basis.

Speaker 3

This compares to 8% in 2022. And then on taxes, we expect our effective tax rate for the year to And finally, I want to close with a few remarks on Capital Management. As you saw, we ended 2022 comfortably above our management target, And our Board of Directors has authorized a new $5,000,000,000 share repurchase program, which provides us ample flexibility. As always, the timing and the amount of repurchases is subject to various factors, including our capital position and prevailing market conditions, among others. Based on our current expectation for continued earnings growth in combination with our estimated trajectory of AOCI pulling to par, We're now resuming buybacks and we expect to return north of 100% of earnings through dividends and buybacks in 2023.

Speaker 3

With that operator, can you please open the line for questions? Thank you.

Operator

Our first question comes from Brennan Hawken. Your line is open. Please go ahead.

Speaker 4

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

Speaker 3

Thank you.

Speaker 4

I'm sure you won't miss our earnings in

Speaker 5

our quarter.

Speaker 4

It was a real pleasure to work with you here these past few years. So I'd love to drill down on the NII expectations. You indicated that it assumes current market rates, but maybe you could please walk us through some of the more specific drivers, primary assumptions and moving pieces that underlie that

Speaker 3

Good morning, Brennan. And it's been great to work with all of you as well. So As you think about the NIR outlook, the first thing I would just mention is that, we use the forward curves to as a basis Our projections, so we don't try to get cute. And as all of you know, for the Fed that assumes another 50 basis points Hikes in the Q1, probably followed by a pause till the end of the year. The curves So as a result of these curves and rising rates as well as I would say all of the actions that we've taken in the securities portfolio and by that I don't just mean the re Balancing that we did in December, but we obviously positioned the portfolio throughout the year meaningfully shortening duration, adding floaters, etcetera.

Speaker 3

So with all of that, we do continue to expect to benefit from significantly higher reinvestment yields. Now tempering that a bit, we do expect to decline modestly, call it low to mid single digits from 4th quarter average. And finally, As it relates to marginal betas, we would expect them to continue to increase, but of course more so for non dollar balances. So that's really what's behind the 20% guide year on year. But I would also say there is a lot of uncertainty in the market and certainly we're prepared for many different outcomes.

Speaker 3

It will be highly dependent upon Deposit levels and there's some upside there if we retain more NIBs.

Speaker 6

Great.

Speaker 4

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

Speaker 3

Sure. So assuming the portfolio doesn't change and forward rates are realized, Our latest forecast would expect to recover probably close to 50% of the $2,500,000,000 of unrealized loss in the AFS portfolio over the course of call it 15 to 18 months.

Speaker 4

Okay, excellent. Thank you very much.

Operator

Our next question comes from Alex Blostein. Your line is open. Please go ahead.

Speaker 7

Hi, good morning everybody and Emily congrats again. I was hoping we could start with a question around fixed income markets. There's generally a broad set of bullishness on the outlook for Fixed income flows, particularly with respect to ETFs. I'm curious as a very large servicer of fixed income assets And you guys just kind of touched that whole ecosystem in multiple different ways. Can you help us frame how BK's fees Overall and servicing fee specifically could benefit from an improved outlook for our from fixed income flows, both mutual funds and ETFs.

Speaker 7

Is there a particular difference when it's like inflows versus outflows? Just hoping to get a little more granularity as we think about the fee outlook for 2023.

Speaker 3

Sure. So, just as we think about the fee outlook, what I would say is just our base case assumption is that there's a relatively soft landing in the U. S. So that would be average equity markets as well as fixed income markets are not that far off from what we've In averages in 2022, you are correct that our money market Platform does benefit to a degree. Having said that, we do expect some modest runoff in balances as well in money market funds.

Speaker 3

What I would also just highlight is that, any strength in the fixed income markets really does play to the strength of our Investment Management business.

Speaker 2

Yes, Alex, it's Robin. I would just add a couple of things to that. Just as you think across the breadth of our franchise, and Emily mentioned a couple of them, We have a lot of oars in the water on fixed income generally. So our asset servicing business fixed income heavy, that gives rise to a fixed income heavy securities lending business. We have our $1,300,000,000,000 worth of cash On our investment platform, so that plays in the short end of the market, which obviously has an overlap with fixed income as well.

Speaker 2

We have our Dreyfus Money Market fund, which has performed really quite well over the course of the year in terms of performance and asset gathering. We have our Treasury business in terms of our clearance business, we have our treasury market repo business. So we've got a lot of different opportunities That come from all of this, and we're obviously paying attention to all of them.

Speaker 7

Got you. Great. And then maybe just my follow-up On operating leverage in the business broadly, you mentioned, Robin, a number of different efficiency programs you have in place that sound like they're ramping nicely and Incorporated in your expense guidance for this year. But when you sort of take a step back and assuming that short term interest rates remain sort of range bound or whatever the forward How are you thinking about the pretax margin for the firm as a whole over time? I'm not sure if you're ready to talk about those targets yet, but in the past, We're north of 30%.

Speaker 7

Is that ultimately the goalpost as you think about the ins and outs of your programs, but also what's going on in the top line?

Speaker 2

So you're right in that we're still working on it. I'm 4.5 months into my tenure. We've talked about the strategy reviews. They are ongoing. It's true on the business side.

Speaker 2

It's also true on the function and the support side as well. But we are focused To your question on margin, we are focused on driving profitable growth, which is top line, but with an eye to the bottom line and also just Exuding expense discipline through doing the work. We think we've got a high performing culture, but we continue to Drive on things that relate to that. And I think when you look across revenue growth, pre tax margins and ROTCE, you have the key metrics that we're really using. Now we are considering a variety of different KPIs and we look forward to giving you all more transparency On some of those KPIs as the year progresses.

Speaker 2

So as we do the work, we're going to come talk to you about it.

Speaker 7

Great. Thanks very much.

Operator

Our next question comes from Brian Bedell. Your line is open, sir. Please go ahead.

Speaker 8

Great. Thanks. Good morning. And I hope you're having great working with you over the years. Maybe just can we talk a little bit, Shifting gears a bit to a scenario in which we don't have a soft landing, let's say, we do have a recession and a lot of pressure on markets.

Speaker 8

In that scenario, if we assume that there still is actually pretty good allocation to fixed income, which of course you would benefit from, Can you just talk about throughout your platform to what extent you would expect to be resilient against that? And some of the areas I'm thinking of Or even in deposits, where the deposit growth could outperform the expectation that you described, Emily? And then if you could also just remind us on the fee revenue sensitivity to equity market declines, I think it's 1% plus for every 10

Speaker 3

Sure. So a couple of comments there and I think Robin will add on probably. So just in terms of Overall, our fee sensitivity to fixed income markets, just remember for every 5% or so gradual change in fixed income markets that impact Annual fee revenue to the tune of about $40,000,000 so that gives you some idea on how to size that. And then certainly as Robin pointed out earlier, we have many different businesses that ultimately would benefit From also strength in fixed income markets.

Speaker 2

But Brian, let me just add something else. One of Things that we're a trust bank. We often get obviously compared to trust banks and I understand why. But we have a broader portfolio that as a firm, that portfolio helps us with the stability of underlying revenues through different market conditions because They're essentially driven by different things and so we get a balance for that. Now on top of that, we're of course thinking about how to make Sure that we are increasing the mix of the types of revenues that we have as well.

Speaker 2

So yes, We have fees. Yes, we have net NIR, but we're also powered by transaction volumes and we're also powered by subscription fees. So the combination of the diversification of the businesses and the diversification of the types of revenue streams, we think helps us relatively stable way through some pretty significant gyrations.

Speaker 8

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

Speaker 2

So, look, we've talked about the fact that these are medium term initiatives and they are. The contribution to revenues today from real time payments is Really small, but we do see this as rails of the future and we see it as creating An opportunity for a connected set of services, think fraud prevention and account validation and bill pay related So there's an ecosystem that builds around the actual capability and we think that that's a significant opportunity for us. You've Seeing some announcements that we've made. But if I tick through very briefly and I will try to be quick about it, but through each of our businesses, Look, in Pershing, we've had a strong year of net new asset growth. We talked about it in my prepared remarks and we think that we'll have growth the near term, through on boarding the pipeline and then we've got the medium play of purging X.

Speaker 2

In asset servicing, we've been growing sales And at the same time, we're leaning into the future with things like digital assets and we're focusing on the expense base as well. So again, it's Something for the near term and for the medium term. In markets, we're driving with foreign exchange and liquidity and securities lending and then for the medium term, Execution services and new products. In CCM, we expect the evolution that will come from the gradual decant of repo into Tri Party, which we We're well positioned for in treasury services, we're picking up cross border activity in terms of U. S.

Speaker 2

Dollar clearing and we're playing for the longer term that I talked about with Real time payments. So across so many of our businesses, we've got opportunities in the near term. We're focused on executing them and we're investing for later.

Speaker 8

That's great color. Thank you very much.

Operator

Our next question comes from Rob Wildhack.

Speaker 6

I appreciate the color on deposits for 2023. I wanted to ask a little bit more about what you saw In the quarter, interest bearing deposits flipped to growth, wondering what the drivers are there. And on the non interest bearing side, that outflow accelerated quarter over quarter. So, any more color on either of those would be great. Thanks.

Speaker 3

So, deposit balances overall for the quarter were down very, very modestly as And most of that was a runoff in non operational, but NIDs Did and still are remaining at elevated levels. So just for what it's worth when we're talking about the trajectory for deposits in 2023, As I said before, we would expect average deposits to decline very modestly, call it low single digits From 4th quarter averages and you should expect and we are expecting some the large majority of that to be from NIBs Because they will probably revert back to about 20% to 25% of our total deposit balances as we've really seen in historical average.

Speaker 6

Okay, thanks. And then Robin, you highlighted healthy growth in asset servicing as a priority Kinds of things you can do and you want to do to accelerate growth there?

Speaker 2

Well, I'm going to start off on this one, but then I'm going to give it over to Emily, because she's going in to run that business and knows it pretty well already from her prior time. But I think there are a variety of different opportunities for us. I mentioned in my prepared remarks that we're really elevating the conversation more into the C suite of some of these firms Because gone really are the days where we're selling a small component of a service on an isolated basis. We see more opportunities To sell bundled deals with data and digital capabilities, all wrapped up in it. And that we see we are getting traction from We had a very significant new client that we announced earlier on in the year last year.

Speaker 2

That is a good example of that type of package sale. So that's one thing. We also have the bottom line focus. I want to continue to point you at The comments that we've made before that the margin in that business is not acceptable and that we will continue to invest Both in the top line will benefit some from rates and investing in making the cost of execution cheaper and more efficient In that business, so it's really a package of all of the things. I don't know, Emily, if you want to add.

Speaker 3

Yes, just a few things to add. So as Robin alluded to in his prepared remarks, I mean, we are winning larger and higher value deals, but we're also very focused The profitability of the mandate and the relationship overall and so that also means we're being more selective even in the RFPs that we participate in. Likewise, we're leaning into higher growth areas like Alt and ETF. In the forward trajectory to our clients. And I would say our pipeline is very strong.

Speaker 3

And the other thing of course as Robin mentioned is we are very, very focused on driving the cost down Across the Security Services segment inclusive of Asset Servicing for those businesses which remain pretty manually intensive. So think transfer agency, think fund

Operator

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

Speaker 9

Hi, good morning. So Emily, I'm going to ask a question I had asked you 12 months ago roughly on the earnings call about Basel IV. We still don't have a proposal, but we know something is coming in early 'twenty three. And given his speech had hinted at Capital requirements moving higher for the G SIB cohort, recognizing there is still no proposal, but I was hoping you could just speak to How your scenario planning for the finalization of Basel III, whether that has any influence on the potential cadence of future buybacks Or just capital management more broadly, how you see that potentially evolving?

Speaker 3

Sure. So, Look, we're obviously very involved with regulators and the industry around the conversation around Valvol 4. It's true, of course, the introduction of operating or operational risk RWA into the standardized approach would Drive an increase in our standardized RWAs. When we crunch the numbers, our calc That's something a bit less than probably what you've seen for the G SIBs aggregate in the QIF. And there are also we do also expect there are going to be some offsets for us.

Speaker 3

So lower credit risk RWAs And also we'll probably benefit modestly from more risk sensitive market the market the more risk sensitive, excuse me, market framework. So So be puts and takes, we'll have to wait really until the regulators release their proposed version. And we already we do obviously for us, we're always looking at RWA optimization. You can actually see that RWA You can actually see that RWAs came down in the quarter again from optimization that we have been ongoing that's ongoing and we've been doing. I would just remind you too that the industry will have time to lag into whatever the results end up being.

Speaker 9

Fair enough. And just for my follow-up on expenses, I was hoping you can help us reconcile what the expense guidance For 'twenty three implies for both the op margin and dollars of expense as it relates to the Security Services segment It feels like that's the area where there's still some of the most low hanging fruit, if you will, to drive efficiency gains. And just given the planned efficiency actions, how should we think about that second derivative for expense growth? Should we expect that to steadily improve over the course of the year Where you implement the plan, you start to realize some of the benefits and the exit rate on expenses therefore in

Speaker 3

kind of answered that more focused on margin for security services because that's really what we've been talking about and it's a very critical KPI for us. So And I think Robin already said we are very committed to a 30 plus percent margin over the medium term. You'll see we printed in the 4th quarter a margin of about 27% for the full year that was closer to 21%. In 2023, we will benefit somewhat from NIR, so higher rates will partially offset perhaps by a modest Also, we are absolutely extraordinarily focused on executing against The revenue growth as well as the efficiency initiatives that we have been talking about. When you think about security services though, I'd also just mention there's Some non recurring activity that we enjoyed in 2022 that we won't have in 20 in Issuer Services in particular.

Speaker 3

So kind of net net putting it all together, when you look at The margins for security services overall, they're going to be lower than what we printed in Q4, but certainly higher than the full

Speaker 10

And just the expense growth on

Speaker 9

a firm wide basis, whether the exit rate for 23 should reflect some of those additional efficiency benefits that you had cited. I'm just trying to think Cadence for how we should think about the expense trajectory over the course of the year?

Speaker 3

Yes. So I'm not going to I don't give too much detail on just what we expect quarter on quarter. I mean the only thing I would say just all of you guys know this is that for the Q1 staff They're typically a bit higher due to long term incentive comp associated with retirement eligible employees. And of course, the actions We're taking they're front loaded, but you'll see that over the course of the year. So I think I would just go back 2, we are absolutely bending the cost curve.

Speaker 3

We are expecting to deliver and are very committed To deliver year on year growth of about 4%, 4.5% constant currency and again that compares to 8% in 2022.

Operator

Our next question comes from Mike Mayo. Your line is open. Please go ahead.

Speaker 11

Good. Robin, I think you inherited a tough hand here. So I mean, bank BNY Mellon historically has had periods When they do a better job controlling expenses, but that typically coincides with periods of slower top line growth. But you're starting off here, Fees were down 3% last year. It looks like your guide for NII implies that's flat with the Q4.

Speaker 11

So it's not so much, Okay. Revenues are slow. You can control expenses so much. They've already slowed or they're about to. So it just seems like your Efficiency savings are going to be tougher.

Speaker 11

And as part of that, this predates you, Robin, but when it comes to notable items or one time items, You had some this quarter, but if you look over a decade, your notable items add up to $3,500,000,000 that's almost a year's worth of earnings. So The real question here is how can you improve your Profit margin and your efficiency ratio and squeeze more out of BNY Mellon when the revenue environment has been tough and You have inflationary pressures. I guess, how confident are you, you can turn this around in terms of the positive operating leverage on a core basis?

Speaker 2

So Mike, without reflecting on the past in terms of what people have done and how they've done it, I'll just say that we acknowledge The past decade has been disappointing in terms of our company's broad financial performance. You can look Some spots on the top line, the bottom line expenses, we pick your spot, but we're not comfortable with the broad performance of the company over the past decade. And that's how we've talked to our Board about it, Determination around changing that outcome. Now to your question, let me take the 2 parts of the things that you've really talked about. 1st of all, the notable items.

Speaker 2

And so we are very, very clear and we do this in our earnings release and we do it in our prepared remarks, We talk GAAP first. So you can see the reported numbers and it's very clear and you can judge us on that. But we also want to give you the transparency and frankly the insight The way that we're running the company under the hood and we think that's why that additional element of disclosure is helpful, but you'll make your judgment based on that transparency and the insights We're trying to provide. Now I own that 4% to 4.5% number, 4% if you use the exit rate of currency 4.5% on currency basis and that's essentially half of what it was in 2022 and the environment from an inflation point of view isn't expected to get any better. We had inflation Over the course of the past few months, CPI between 6% and change and 9% change, we've still got that environment.

Speaker 2

But we've been very deliberate in terms of staffing, Choices of things that we're going to do, choices of how we're going to do it. I talked to my prepared remarks about a variety of involving our employees Inventing the cost curve, because I think it's a cultural thing for us as well. We're attacking it on all of those fronts. Now once we've done all of those things, So the implied question of what do we think the future holds, well, we don't want to stop there. We don't have line of sight All of the things that we're going to do in the future, but we see opportunities.

Speaker 2

For instance, I'm just going to pick 1 and then I'll finish, which is on technology. We've invested a ton, rightly so, in resiliency as a company. Resiliency is incredibly important to our products and services. It's wrapped up in our brand and we wanted to make sure that we really took ourselves to a better place than where we were 5 years ago. But now we've largely done that.

Speaker 2

It's a continuous journey. We always have to do stuff. But the next leg for us is investing in things like the applications, The digitization of our footprint. We're the world's largest custodian, but we've got more than one custody system. We've got multiple loan systems.

Speaker 2

We've got 5 different call centers and so we're going in and seeing all of these opportunities and then over time We'll do the work to resolve the issues, but we can't do it all at once because otherwise we'd spike on the expense base in order to solve the problems and we only have finite bandwidth. So we're working through it and we'll continue to work through it.

Speaker 11

That'd be great if you can share more of those metrics over time and what your targets are. The other part of that is your you said you have 4 growth initiatives. You did mention digital assets And post the recent debacle, can you put any concrete metrics to put more meat on the bones as far as Where you'd like to eventually get to or revenues or what's the end game? Just something more on this old it's one of your 4 key growth Just a little bit more color.

Speaker 2

Sure. So I just want to make one comment about the 4 things Thanks. And they have different timelines associated with them as well. But there are other things that I haven't mentioned, at least haven't given great as much prominence to, but that could be very interesting to us But specifically for digital assets, it's the longest term play out of any of the things that we talked about. I expect It to be negligible from a revenue point of view over the course of the next couple of years, it might be negligible for the next 5 years.

Speaker 2

But as the world's largest Custodian. We are in the business of looking after stuff. We look after $44,000,000,000,000 worth of stuff. And if there's going to be new stuff to look after, we should be in the business of looking after it. If the way in which we look Which is the point about the technology changes, we have to adapt to that.

Speaker 2

And so we're investing for a future that Probably will come to be, but it may not. But if it does come to be, we have to be there. It would be like being the custodian of 50 years ago and sticking with paper and not adopting a computer. That's not going to be us. So we're investing, We're not adopting a computer.

Speaker 2

That's not going to be us. So we're investing. We're being cautious. We're being deliberate. And we've got R and D in different parts of the company and it's measured.

Speaker 2

But we do think it's important for us to participate in the broader digital asset space.

Speaker 11

Great. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 12

Hi, Emily. Hi, Robin. Emily, on the non interest bearing deposits, you mentioned how they were a little higher than normal. I think you said 27% of total deposits, but you do expect them, I think you said to drop to more normal levels, 20 to 25. What's keeping them up so high?

Speaker 12

And second, could they remain maybe higher for longer This year or do you see some real trends that no, they're definitely going to get back to normal?

Speaker 3

Great question. And frankly, there is A lot of uncertainty around that. So look more generally as it relates to NIDs, I think We think it's their highs are probably elevated because of certainly some risk off behavior. The other thing though I really mentioned is We've gotten a lot more sophisticated to just how we manage our deposits and the tools with which we manage our deposits. So I think there's something to that also as well.

Speaker 3

We do expect the NIBs to revert to about 20% to 25%. But you're right, I mean to the And look, the only other thing I'd mention is that we've seen significant growth in, for example, asset servicing, corporate trust, etcetera, which Those businesses attract NIBs.

Speaker 12

Very good. We all know that obviously Your bank as a fee based bank is not a bank that any of us are concerned about credit quality. But I would just like to get your guys' thoughts. You had a small provision increase, again, nothing material. And again, I emphasize nobody is really concerned about Bank of New York's credit quality.

Speaker 12

With the expectation of a soft recession or a slowdown, whatever you want to call it, are you guys seeing any Trends in the loan book, that you're just watching maybe a little more closely today than 12 months ago?

Speaker 3

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

Speaker 12

And what percentage of that the CRE of the loan book is that about, Emily?

Speaker 3

It's about 9% of the funded loans.

Operator

Our next question comes from Ken Usdin. Your line is open. Please go ahead.

Speaker 10

Hi, thanks. Good morning. Robin, I know you talked earlier just about the general view for fees to increase and Some thoughts on asset servicing. Just wondering if you have a view on just what you think organic growth can look like? And also, It's nice to also see some of the movement in the Q4, specifically in Pershing and Collateral Management.

Speaker 10

Just wondering if you had A thumbnail on what the outlook for those two areas is as well. Thank you.

Speaker 2

Sure. So From an overall fees point of view, we are focused on this internal growth, Forgetting about M and A or any of those other ways to grow, just the blocking and tackling and execution of what we think we can In the company over the course of the year, we haven't given fee guidance because of the reasons that Emily alluded There are just so many things going on in the market. There are just too many puts and takes for that to be credible for us. So that we are but we of course have our internal budget and that's We've been working through over the course of time. Look, you called out 2 businesses and those businesses where we both where we think those are bright spots for growth.

Speaker 2

And so we expect those to be above the average growth of the company. They're not the only ones that would be above the average, but they are And we feel quite good about the prospects for a variety of the different underlying reasons that we've talked about already.

Speaker 10

Okay, very good. And then just one quick one in terms of that follow-up on the balance sheet mix. Emily, is there anything changing with regards to how you think about the mix of securities that you add from here in terms of as we get towards The peak of the rate cycle, whether you start thinking about putting on more fixed rate versus the floating type and what that means for the types of yields that you're able to get on Kind of front book investments.

Speaker 3

Sure. There is a lot in there. So, look, we've been very nimble and Continue to be very nimble in terms of managing our portfolio. Bottom line right now, we're positioned to benefit from higher rates, But I'd just call everyone's attention to the fact that the duration of our portfolio is the shortest it's been in recent memory And more than 60% of the portfolio is available for sale. So we've really retained a lot of flexibility and we can act very swiftly Should the environment ultimately change.

Speaker 3

And as it relates to reinvestment yields, I guess it was in Q2, I believe in 2022 that the investment rate began to exceed roll off rates. The difference between the two has steadily expanded to about 2 50 basis points in the 2nd quarter. And when you just think about how much of the portfolio reset at any moment in time, that 40% as I said of the Asset securities is about 3 years, so you can kind of do the math there.

Speaker 10

That's great. Thanks, Emily.

Operator

And our final question will come from Michael Brown. Your line is open. Please go ahead.

Speaker 5

Great. Thank you for taking my questions.

Speaker 2

Most of the

Speaker 5

Hey Mike. I guess My question was kind of as we think about further out into 2023 and so the market is assuming some rate cuts Could occur before year end. If you get to that point, what is your view on how deposit pricing performs there, right? Because if your Deposit betas were generally higher than the broader banking system on the way up. How do we think about it to the point where we start to see some early rate cuts?

Speaker 5

Because I guess in that backdrop, it's not an expectation that we're heading back to where we were, just some modest rate So how do you think about the deposit pricing in that environment?

Speaker 3

Sure. I'll take that. So we do expect Deposit pricing can perform similarly on the way down as it did on the way up. So we'll get the benefit of course because our We will get the benefit should rates suddenly start to come down of deposit cost also coming down very quickly. And likewise, I'll just remind you that to the extent that rates start to come down, then AOCI will pull the part faster.

Speaker 5

Okay, great. Thank you for that. And then just one more on NII. Appreciate the full year annual Guidance, as you look at the Q4, it was up about 14% sequentially. Within the annual guidance, any view on how we should think about the Q1, I know it's a moving target, but any range here just to help us think about the trajectory?

Speaker 3

In any given quarter, it really is very dependent probably most specifically on the deposit trajectory. And like I said, if NIBs remain elevated, there's upside there.

Operator

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

Speaker 2

Thank you, operator. I'd like to close today's call by thanking Emily for her time as our CFO and congratulate her on taking up her new role starting February 1 as the CEO of Asset Servicing, which as you know is our largest business. Brings a set of experiences and relationships to this role that are going to be invaluable in driving profitable growth of our client franchise. And finally, I'd like to welcome Dermot McDonough, our next CFO to the BNY Mellon team. He joined us in November, and he's hit the ground running.

Speaker 2

I know that you are all looking forward to his first earnings call with him in April. So with that, I'd like to thank you for your interest in BNY Mellon. And

Speaker 3

Thank you.

Operator

This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website

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