Chief Financial Officer at Bank of New York Mellon
Thank you, Robin, and good afternoon, everyone.
I'm picking up on Page 6 of the presentation with our consolidated financials for the fourth quarter. And as Robin noted, I'm also going to speak to our 2024 outlook and medium-term targets, including how we are going to execute on our goals. For the fourth quarter, our reported results reflect several notable items. Approximately $750 million of noninterest expense is related to the FDIC special assessment, severance and litigation reserves. And we had $150 million reduction in investment and other revenue primarily related to a fair value adjustment of a contingent consideration receivable.
Total revenue of $4.3 billion was up 10% year-over-year or up 2% excluding notable items. Total fee revenue was flat, reflecting 3% growth in investment services fees, which was offset by a 5% decline in Investment Management and performance fees and a 25% decline in foreign exchange revenue. Investment and other revenue was a negative $4 million in the quarter, reflecting the fair value adjustment that I mentioned before. Net interest revenue was up 4% year-over-year primarily reflecting higher interest rates, partially offset by changes in balance sheet size and mix.
Expenses were up 20% year-over-year on a reported basis, primarily reflecting the FDIC special assessment. Excluding notable items, expenses were up 4%, reflecting higher investments and the impact of a weaker dollar as well as inflation, partially offset by savings. Provision for credit losses was $84 million primarily driven by reserve builds for commercial real estate exposure.
Reported earnings per share for the fourth quarter were $0.33, pretax margin was 8%, and return on tangible common equity was 6%. Excluding notable items, earnings per share were $1.28, pretax margin was 28%, and return on tangible common equity was 21%.
Turning to capital and liquidity on Page 7. Our Tier 1 leverage ratio of 6% remained largely unchanged, down 8 basis points to be precise compared to the prior quarter. Tier 1 capital remained essentially flat at $23.1 billion as the impacts of capital distributions to common shareholders and our redemption of $500 million preferred stock were offset by an improvement in AOCI and capital generation through earnings. Average assets increased by 1% sequentially, primarily reflecting deposit inflows in the fourth quarter. Our CET1 ratio was 11.6%, which represents a 20 basis point improvement compared with the prior quarter.
CET1 capital was up 3% sequentially, primarily reflecting capital generation through earnings and the improvement in AOCI, partially offset by the impact of capital distributions to common shareholders. Risk-weighted assets increased by 1%. Consistent with the prior quarter, we returned $450 million of capital to our common shareholders through share repurchases, and we paid approximately $330 million of common stock dividends in the fourth quarter. The consolidated liquidity coverage ratio was 117%, a 4 percentage point sequential decrease, primarily reflecting deposit inflows in the quarter, which are considered nonoperational until they are seasoned under our operational deposit model. And our consolidated net stable funding ratio remained roughly unchanged at 135%.
Next, on Page 8, net interest revenue and additional details on the underlying balance sheet trends. Net interest revenue was $1.1 billion was up 4% year-over-year and up 8% quarter-over-quarter. The sequential increase was primarily driven by balance sheet growth and changes in balance sheet mix. Total deposits averaged $273 billion in the fourth quarter, up 4% sequentially, a strong finish to the year. Interest-bearing deposits were up 5%, and noninterest-bearing deposits remained flat. Interestingly, since August, we've seen 4 consecutive months of growth in average total deposit balances.
Our team is highly engaged with our clients, and we're encouraged by the demand we've been seeing for our on-balance sheet liquidity solutions. While we are pleased with this stabilization, we remain vigilant preparing for a variety of different outcomes and financial conditions in 2024. On the asset side, average interest-earning assets increased by 2% quarter-over-quarter. This includes cash and reverse repo up 5% and loan balances up 3%. The size of our investment securities portfolio decreased by 3% sequentially.
Moving to our business segments, starting with Securities Services on Page 9. Securities Services reported total revenue of $2.2 billion, flat year-over-year. Investment services fees were up 1% year-over-year. In Asset Servicing, investment services fees were flat as the positive impact of higher market levels, net new business and the weaker dollar was offset by lower client activity. We ended the year on a high note with our strongest sales quarter of 2023, including wins in the Middle East, new mandates from several midsized investment managers and expanded mandates from some of our largest existing clients. And we saw continued strength in our ETF servicing business, where another quarter of strong net inflows capped a year of above-market growth.
Within Issuer Services, investment services fees were up 5%, reflecting healthy new business and higher client activity. Foreign exchange revenue was down 21% year-over-year on the back of lower volatility and lower volumes. And net interest revenue was down 3% year-over-year. Expenses of $1.7 billion were up 5% year-over-year, reflecting higher investments and higher revenue-related expenses as well as inflation, partially offset by efficiency savings. Pretax income was approximately $460 million, representing a 21% pretax margin.
Next, Market and Wealth Services on Page 10. This segment reported total revenue of $1.5 billion, up 7% year-over-year. Total investment services fees were up 6% year-over-year. In Pershing, investment services fees were up 1%, reflecting higher equity market values and higher client activity, partially offset by the impact of expected lost business. Net new assets were negative $4 billion for the quarter, also reflecting this expected loss business. In Treasury Services, investment services fees increased by 5%, primarily reflecting higher client activity, partially offset by higher earnings credits for noninterest-bearing deposit balances.
In Clearance and Collateral Management, investment services fees were up 16%, reflecting broad-based strength across Clearance and Collateral Management both in the US and internationally. Net interest revenue increased by 10% year-over-year. Expenses of approximately $840 million were up 7% year-over-year, reflecting higher investments and inflation, partially offset by efficiency savings. Pretax income was approximately $630 million, representing a 42% pretax margin.
Turning to Investment and Wealth Management on Page 11. Investment and Wealth Management reported total revenue of $676 million, down 18% year-over-year. In Investment Management, revenue was down 26%, reflecting the fair value adjustment of the receivable and the impact of the prior year divestiture as well as the mix of AUM flows, partially offset by higher market values, seed capital gains and the weaker dollar. In our Wealth Management business, revenue decreased by 3% driven by changes in product mix, partially offset by higher market values. Expenses of approximately $680 million were down 2% year-over-year, primarily reflecting efficiency savings and the impact of the divestiture in 2022, partially offset by higher investments, inflation and the unfavorable impact of the weaker dollar.
Pretax income was a loss of $5 million. Excluding the impact of notable items, pretax income of $151 million increased 1% year-over-year and represented an 18% pretax margin. Assets under management of $2 trillion increased by 8% year-over-year, reflecting higher market values and the weaker dollar, partially offset by cumulative net outflows. In the quarter, we saw $7 billion of net inflows into short-term strategies and $4 billion of net inflows into long-term active strategies, while we saw $10 billion of net outflows for index strategies. Wealth Management client assets of $312 billion increased by 16% year-over-year, reflecting higher equity market values and cumulative net inflows.
Page 12 shows the results of the Other segment. Total revenue improved year-over-year, primarily reflecting the absence of a net loss from repositioning the securities portfolio recorded in fourth quarter of 2022 and expenses of $693 million included $505 million related to the FDIC special assessment.
Having reviewed our results, I will now turn to Page 14 and our current outlook for 2024. We're entering the year on a strong footing, and we set ourselves up determined to at least break even from an operating leverage perspective. Considering our healthy pipeline across the businesses, we expect fee revenue growth to turn positive in 2024. With regards to net interest revenue, our expectation for an approximately 10% decrease year-over-year is based on the assumption of market-implied forward interest rates, and we assume ongoing quantitative tightening puts further downward pressure on deposit balances.
We intend to keep expenses excluding multiple items roughly flat in 2024. And finally, with regard to capital management, we expect to return north of 100% of 2024 earnings to common shareholders through dividends and buybacks. As Robin discussed earlier, 2023 was a foundational year for us. We took decisive actions to demonstrate some early evidence of our ability to deliver stronger financial performance. And importantly, we've developed a clear road map for our multiyear transformation. Over the next couple of slides, we'll provide you our medium-term financial targets for the firm and some of the most impactful actions we're taking to keep delivering on our goals.
Page 15 summarizes our consolidated targets. It is our goal to improve the firm's pretax margin to 33% and our ROTCE to 23% over the medium term while maintaining a strong balance sheet. I'll double-click on our business segments in a moment, but along our 3 strategic pillars, there are a number of teams that transcend our lines of business and segments. Robin mentioned several of these when he talked about our progress in '23. So I'll highlight just a few of them. The first is our enhanced commercial model. We're driving a new culture of commerciality to deliver all of BNY Mellon in a unified front to facilitate deeper client relationships with solutions from across the firm.
With our clients at the center, our model is led by client coverage teams with clear accountability to retain business, expand revenue into new areas and drive client satisfaction. Our new sales operations and enablement organization, the client coverage practice, will make it easier for our clients to do more business with BNY Mellon and create consistent commercial roles, tools and support internally for an enhanced and more efficient sales experience. And what we call integrated solutions represent a new, more focused approach to assembling components from multiple client platforms into repeatable go-to-market capabilities that span across our lines of business, driving better value for our clients and higher profitable growth.
The second one I'd like to highlight is our transition to our platform's operating model. By grouping similar activities together into logical platforms and uniting related capabilities, we are enabling the streamlining of internal processes to drive higher efficiency and further enhance resiliency and risk management. Our model is based on 2 types of platforms: client platforms will own the delivery of a commercial solution to our external clients, while enterprise platforms will own the delivery of internal services.
Over the past few months, we've developed a detailed implementation approach, and our transition into this new model will be gradual and deliberate, starting with the first implementation wave this spring. And the third is our culture. People come to BNY Mellon to make an impact on global financial markets. While we focus on driving growth and running our company better, none of it can happen without our people. That's why we're making meaningful investments, including an enhanced learning, development and feedback to foster exciting careers.
Moving to our segments, starting with Securities Services on Page 16. Here, we are reiterating our existing 30% pretax margin target. Over the past 24 months, we've improved the margin from 21% in 2021 to 25% in 2023. We're pleased with the performance of the business over the past 2 years, but we appreciate that the path from 25% to 30% will be the harder yards. First of all, we're firmly focused on driving down the cost to serve. We have and we continue to make significant investments in uplifting several platforms that support core services, including fund accounting, tax services, corporate actions and loan administration.
Additionally, we continue going after inefficient processes. Over the past couple of years, we cataloged all of these processes and we've made some good progress in our digitization efforts, but there's more work to do. We're also taking a more strategic approach to deepening client relationships going forward. Using enhanced tools to better understand client behavior, quality of service, economics and revenue opportunities, we are expanding wallet share and improving client profitability. Last but not least, we're pursuing several opportunities to drive an acceleration of underlying growth.
On the back of our investments over the years, we have become a premier provider of ETF servicing globally, and we expect to maintain our strong momentum through continued innovation. Similarly, in private markets, another one of the fastest-growing market segments, we've established a strong market position with more room to expand our capability set.
Moving on to MarkETF and Wealth Services on Page 17. As you can see on the left side of the page, this segment has a good track record of solid growth and attractive margins. Our focus here is to accelerate growth through deliberate investments without compromising profitability. I'll start with Pershing, our company's second largest line of business. As the number 1 clearing firm for broker-dealers and a top 3 RIA custodian, Pershing benefits from a strong position in one of the fastest-growing segments in financial services, i.e. the US wealth market. Notwithstanding near-term headwinds from the events of 2023, we are confident that our investments in the core platforms and client experience will drive further market share gains in the attractive market segment of the growing $1 billion-plus RIAs and hybrid broker-dealers.
And our Wove platform continues to gain momentum. As we're capturing business from existing clients and new opportunities to deliver the platform, data and investment solutions, we're currently projecting $30 million to $40 million of incremental revenue from Wove in 2024. In Treasury Services, we're benefiting from a strong position with financial institutions, and we're one of the top 5 US dollar payments tiers in the world. Leveraging this strong position, we're selectively expanding our reach by targeting new clients, geographic and product segments. For example, we've been adding bankers to drive growth with e-commerce and NBFI clients, and the completion of multiyear uplift of our payments platform is expected to drive an increase to our Swift market share through growth in several geographies.
Additionally, by joining forces with our markets business, which provides FX solutions in over 100 currencies, Treasury Services will enhance the FX capabilities that it can provide its clients. Rounding out the segment, Clearance and Collateral Management. As a primary provider of settlement for all US government securities trades and the largest global collateral manager in the world, we have a special role in financial markets and we're taking this role very seriously. No doubt this business grows as markets grow, but we're not resting on our position. Our Clearance and Collateral Management business is one of the most innovative in the company. And so we're confident that this business can maintain its healthy growth trajectory by continuously launching new flexible collateral management solutions that position our clients to meet their growing liquidity needs and by continuing to increase collateral mobility and optimization across global client venues.
Next, Investment and Wealth Management on Page 18. The Investment and Wealth Management reported a pretax margin of 12% for the full year 2023 or 17% excluding notable items. Our plan is to improve the segment margin to 25% or higher over the medium term on the back of a combination of growth and efficiency initiatives. First, we're unlocking BNY Mellon's distribution power for the benefit of our investment firms and our clients. Most importantly, we're in the process of creating a firm-wide distribution platform that combines in-house products with offerings from select third-party managers to provide best-in-class solutions.
Additionally, we're making enhancements to how we're offering Dreyfus cash products across our enterprise-wide open architecture liquidity ecosystem to improve visibility, and hence, platform share. Second, we're expanding our products and solutions with a focus on scaling our investment capabilities across Investment Management, Wealth Management and Pershing. And third, we're driving efficiency and scale by realizing the benefits as multiyear infrastructure investment programs are nearing completion and by better leveraging the enterprise to transform fragmented and subscale support activities into scaled enterprise platforms.
Moving on to our capital management philosophy on Page 19. BNY Mellon benefits from a capital-light business model that allows us to drive organic growth while typically returning nearly 100% of earnings to our common shareholders over time. Over the past 10 years, the firm grew dividends per share at an 11% CAGR and returned almost 100% of earnings to shareholders through a combination of dividends and buybacks. Our philosophy for capital deployment and capital distribution remains unchanged. We've entered the year with strong capital ratios at or above our management target of approximately 5.5% to 6% Tier 1 leverage and approximately 11% CET1. And assuming interest rates follow market-implied forwards, we expect to generate additional excess capital from the unrealized loss related to AFS securities pulling to par over time.
Wrapping up on Page 20. Over the past year, we conducted thorough strategic reviews, we developed detailed business and financial plans, and we've taken the first steps on what will be a multiyear transformation of our company. Our business plans drive as achieving what we laid out across our 3 strategic pillars: being more for our clients, run our company better and power our culture. And our financial plans aim to improve the firm's pretax margin to 33% and our ROTCE to 23% over the medium term while maintaining a strong balance sheet. In publishing our medium-term financial targets, together with our most important strategic priorities and the actions that will help us achieve them, we are providing transparency to allow you all to track our progress, and we are confident that we will deliver. We are excited about the work ahead of us, and today is an important milestone for our team. Now for those of you who are still with us, we promised to let you start your long weekend soon.
With that, operator, can you please open the line for questions?