Bank of New York Mellon Earnings Call Insights: Deposits Outlook and Net Interest Income

Bank of New York Mellon Corp (NYSE:BK) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Deposits Outlook

Elizabeth (Betsy) Graseck – Morgan Stanley: A couple of questions. One on – Todd, what you were going through with regard to actions that you could take to manage the denominator. I was intrigued by your comments on your view that you could lower the deposits without impacting business, lower your commitments without impacting your business, could you give a little more color on how you are thinking about doing that?

Thomas P. (Todd) Gibbons – VC and CFO: Some of it’s going to happen naturally if we go back to a normal rate environment, and we’d expect that to take place, Betsy, over the next five years. But if we had to take more direct actions, we have for example encourage some deposits to come on rather than be out in money market funds, so we could redirect some of that activity for example, to reduce the deposit base.

Elizabeth (Betsy) Graseck – Morgan Stanley: Do you think that you can raise awareness with your customer set as to the potential impact if this rule was required by the market to get there sooner rather than the end of 2018 as it’s currently described? In other words, are you going to have any help on the common letter process from client base?

Thomas P. (Todd) Gibbons – VC and CFO: I really haven’t — I don’t know, Gerald, whether we are going to reach out to clients…

Gerald L. Hassell – Chairman and CEO: Yes, I think the client impact Betsy, which I think relates to your unfunded commitment issue, is I think many of the institutions are going to look at unfunded commitments in terms of their capital treatment or their leverage treatment. So perversely, it may cause the industry to lower some of those commitments or let them fall-off so they don’t pay a whole lot and they have capital traction, particularly in the leverage ratio. So, some clients may want to way into the authorities that they may see some negative impact on availability of credit as a result we have not anticipated that in our discussions with the supervisors, the main point that we are going to talk to the supervisors and through the comment period is the treatment of cash at Central Banks. It’s kind of perverse to think that we have to hold capital against cash that we hold at Central Banks. So, the bulk of our discussion or comments are going to be in that category, which is a meaningful impact to us as it relates to the leverage ratio.

Net Interest Income

Alexander Blostein – Goldman Sachs: I am going to dissect the NII picture a little bit. I guess looking out for the next couple of quarters; A, wanted to see if you guys got any benefit from lower premium amortization this quarter, and if you didn’t how we should think about on a go-forward basis and maybe some sensitivity around that?

Thomas P. (Todd) Gibbons – VC and CFO: Alex, we did get a modest benefit in this quarter, and we expect it to pick up a little bit going forward as the number of the securities extended and therefore amortize the purchase premium over a longer time period. It was a little bit of the reason for the benefit – for the increase in the second quarter and we expect that to continue unless or until rates were to come down.

Alexander Blostein – Goldman Sachs: But no way to size it I think you guys – last quarter it was fairly sizable number, I think, (140). Any sense of where that stood, I guess, this quarter?

Thomas P. (Todd) Gibbons – VC and CFO: I know what the number is, Alex. But it’s a little bit misleading for me just to give you the number. The actual number is larger, but it’s because of the mix of assets. So, the way to think about it as the existing assets as they’ve got extent to the amortization of that premium is going to be extended. Net benefit was about $5 million or so for the quarter and we would think it would be more than that in the future quarters.

Alexander Blostein – Goldman Sachs: And then second question on issuer services, I guess, A, I wanted to clarify the expense reimbursement comment. I am not sure whether (indiscernible) size that and how we should think about that one-time in nature or maybe more recurring event? And then, just maybe the broader backdrop of higher interest rates on the issuer services business because it does look like the debt issuance activity around the world is likely to slow?

Gerald L. Hassell – Chairman and CEO: Why don’t I take the first part of that question, I can turn it over to Tim for the second part. What was the first part of the question was?

Andy Clark – IR: It was about the reimbursement…

Gerald L. Hassell – Chairman and CEO: The reimbursement was about half of the increase in the issuers serve in the – the corporate trust component of the issuer services lines, Alex and that’s kind of an episodic thing for us from time to time we see it. So, we agree to take on whatever expenses are to meet the clients’ needs, that gets paid to us on the revenue side. So, you see it typically matches up. It doesn’t always match up in the same quarter but typically it matches up in the same quarter. We called it out this quarter because it was uniquely large and we wouldn’t expect it to be that large every single quarter. As regard to the impact of higher rates and issuance Tim or maybe even Curtis could add to that?

Timothy F. Keaney – VC and CEO, Investment Services: Maybe I’ll look at the new business pipeline. We’ve been encouraged I think particularly in the U.S. CLOs remain pretty strong. We’ve seen very good growth, particularly this quarter outside the U.S. and the pipeline is surprisingly strong in corporate trust, although as we said before, I’d certainly characterize new business that’s coming in being priced a little bit lower and thinner than what we see rolling off. I know you didn’t ask — but I’d also say the pipeline in the DR business has picked up nicely. So, I’m encouraged by the outlook on the issuer services side. Curtis, I don’t know if you have a point of view on interest…

Curtis Y. Arledge – VC and CEO, Investment Management: Yes, our pipeline going into the third quarter is as attractive as it’s been in a very long time. I would tell you that we actually had a pretty decent pipeline in the second quarter that we’re working through. I think in mid-June when the said tapering dynamics played a role and people thinking about where the world might be going next, we did see people hesitate a little bit. But it doesn’t seem like that, the pipeline — the discussions we’re having with clients are pretty promising. I will tell you that I think the other dynamic that’s happening is that, as you know, we have a very large LDI business. With higher rates, we actually have seen many people who were thinking about LDI being more interested in actually coming into it. So I know everybody is looking for a great rotation, but I would actually tell you that there are absolutely flows both ways from clients as rates have risen.

A Closer Look: Bank of New York Mellon Earnings Cheat Sheet>>