Bank of New York Mellon Earnings Call Nuggets: NII Guidance, Servicing Fees

On Wednesday, Bank of New York Mellon Corp (NYSE:BK) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

NII Guidance

Cynthia Mayer – Bank of America Merrill Lynch: I guess just to expand on your guidance on the NII I think you said something between 2Q and 3Q is that right?

Thomas P. (Todd) Gibbons – VC and CFO: That’s correct, Cynthia.

Cynthia Mayer – Bank of America Merrill Lynch: I guess as part of that, what would be your outlook for NIM. I think last quarter you predicted it would fall a few basis points and I guess it’s up 5, what is your outlook there?\

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Thomas P. (Todd) Gibbons – VC and CFO: As we said in the past Cynthia, we’re not really managing to NIM, we’re managing to NIR. So, we’re willing to take on deposits and place them at the Fed, even though that generates a very low NIM because you can only get 25 basis points on that. So, our focus again and has been to drive NIR up or keep it stable in this kind of an environment. All that being said I think if you were to hold the balance sheet constant and the interest environment stayed depressed at this level, you would see some continued contraction over the course of the next 12 months in the NIM.

Cynthia Mayer – Bank of America Merrill Lynch: Then on the asset management side, you guys had $9 billion in long-term inflows, which is great. Can you talk a little about where you are seeing those coming from and are you seeing any particular strategies as you look ahead which are really driving the flows?

Curtis Y. Arledge – VC and CEO, Investment Management: Cynthia it’s, Curtis Arledge. The flows that we saw in the third quarter; first of all the third quarter isn’t typically an extremely strong quarter in terms of new mandates, having said that, it was sustainably better than a year ago. The $9 billion definitely had an index component to it, about $5 billion of the $9 billion came from index strategies, active strategies in both fixed income and equities did get some inflows. I would tell you that our dialogue with clients in terms of where they’re going with money is, I described the following way, we’ve had good discussions and good investments by clients and strategies that are volatility and risk dampening. So we see clients that have equity strategies looking to do things like long, short, and absolute return strategies have absolutely been an area where clients have been moving. There also has been a movement among equities to move and diversify away from the U.S., as the U.S. markets have done better, we’ve seen clients that have moved some of their portfolio and diversified to be more global. The emerging market debt story has been a place where people have gone looking for yield, that’s been a pretty consistent story for the past several quarters. I would tell you that, I think this – we have a lot of clients, this isn’t probably true across the board and lot of businesses or lot of our clients are definitely watching and watching and waiting to see how both the election and fiscal cliff ticked out with. So our pipelines are pretty constant, but I think the dialogue is going to be very much driven by sort of how the next several months play out. I think a lot of clients actually want to do things, but there is just so much uncertainty, they are waiting to see how things go.

Cynthia Mayer – Bank of America Merrill Lynch: And maybe last question is, it looks like your headcount ticked up, which seems maybe it odds with some of the rationalization you have – you highlight and the expense controls. I am wondering, what accounts for that?

Curtis Y. Arledge – VC and CEO, Investment Management: Cynthia, it’s two main things, one is, as we migrate some of our jobs to some of our global centers around the world, there is a little bit of bubble headcount associated with. But most of it’s associated with insourcing contractors particularly on the software application side. We have been using third party contractors. So, we’ve decided it’s much more efficient and frankly we retain the intellectual property and intellectual capacity of the talent by insourcing it rather than using third-party contractors. So, there is a benefit both on the cost side, as well as retaining the talent.

Gerald L. Hassell – Chairman, President and CEO: That’s why you don’t see – even though you see that number go up you’re not seeing an increase in salaries.

Servicing Fees

Mike Mayo – CLSA: I’m asking about the blood bath on the servicing fee side and this is not a new question it just keeps getting worse and worse so if I look at your servicing fees including foreign exchange securities lending this is the lowest percentage of those fees to assets under custody and you’re also seeing that at the other processing banks too. So, we always ask this question what are you doing, what can you do to stem the margin pressure in the core servicing business?

Gerald L. Hassell – Chairman, President and CEO: So, I’ll make the couple of comments Mike and then perhaps turn it over to Tim. So, a couple of things that we’re doing, we’re seeing a better recovery on securities lending and we’re being more active there and I think the numbers speak for that both in terms of securities on loan as well as the year-over-year improvement in that category. So, we’re seeing securities lending being reactivated in the marketplace and we’re being more active on that front. Tim will talk in a moment on what he’s trying to do on the core asset servicing side, where you’re seeing certain kinds of fees even move and the core fees have actually moved up, but you’re correct they haven’t moved up totally in line with assets under custody and Tim will talk to that perhaps in a moment. On the trading and foreign exchange side, we are investing in our trading activities and various electronic platforms in order to capture more flows that go through our fingertips, and so we’re not going to rely on foreign exchange coming back to the degree that it did, but we are investing in the businesses to capture more of the other instruments that are traded naturally by our clients. And we think and opportunity to gain some of that traction and some of the revenues around that will improve the overall returns on the business. So with that maybe I’ll turn it over to Tim.

Timothy F. Keaney – VC and CEO, BNY Mellon Asset Servicing: A couple of things, first of all, you know we’re going back to repricing as I’ve said on previous few calls. We started off broadly with the smaller clients, which is now done. That’s not a needle mover but it’s a step in the right direction. We’re moving up the chain to larger clients as their contracts come up for review. We’ve had 29 of our larger clients out of 29 successfully re-priced with about a 20% uptick in core fees, and we’re just going to stay at that. That’s probably going to take us about three years to go through the whole cycle as contracts come up for review, but more to your question of the disaggregation between growth in AUC, I might just comment on that for a second. Year-over-year we saw a huge amount of derisking. We see about a third gearing for us to market, and as Todd mentioned, a significant portion of the year-on-year uptick in AUC was market. We also have a little bit of a mix issue where about 60% plus of our assets under custody are geared towards fixed income. But I will make one other point. We have maintained pricing discipline. We do have some (large) clients and year-on-year particularly in Europe that are coming through, because we are maintaining absolutely strict pricing discipline. So I think you do see that pulling through and also the mix of new business that we are winning. We do see a significant portion of new business coming from outsourcing and transfer agency that are key pillars for us and that really isn’t geared to AUC. Last point, we still have half of what we won yet to convert.

Gerald L. Hassell – Chairman, President and CEO: I’d say one other final comment Mike in terms of what are we doing. The effort that we are putting into the resources around collateral services, Global Collateral Services is for real and we do see that as a real opportunity to capture revenues around assets that are within our custody base. So I think that’s going to be an opportunity for us to gain fee revenues off of the current client base.

Mike Mayo – CLSA: Just one follow-up, so more products I understand that, whether it’s trading or more securities lending. You reprised off Broadway I understand that, but I’m sorry, what was 29 out of 29?

Timothy F. Keaney – VC and CEO, BNY Mellon Asset Servicing: Yes, 29 out of 29 of our larger clients as their contracts come up for review Mike, we renegotiate higher fees.

Mike Mayo – CLSA: But I thought you said on a recent presentation that you don’t have pricing power with strategic clients?

Timothy F. Keaney – VC and CEO, BNY Mellon Asset Servicing: Yes, Mike. Let me – it’s a good question. Our largest 100 clients, roughly 100 clients are super large, multiproduct users of our services. That is much more about cross-selling and share wallet and introducing some of the new things like Gerald mentioned, collateral would be a great example, some of the things that are building into that client base. We have no pricing power with those names, but all the clients below those names, we have plenty of opportunity to up price.

Mike Mayo – CLSA: I’m sorry, I’m just reconciling the largest 100 clients where you don’t have pricing power but you are looking to cross-sell with 29 of 29 of your larger clients. Which larger clients are those if they are not 100 largest.

Thomas P. (Todd) Gibbons – VC and CFO: Think of those clients as kind of 3 million and below – mid-sized clients and that’s the best way I would describe it, Mike.

Mike Mayo – CLSA: That’s clear but to what percentage of your revenues come from your largest strategic client? Wouldn’t that be – I am just guessing two thirds?

Thomas P. (Todd) Gibbons – VC and CFO: I don’t have that stat handy. I would just say it’s a very large percentage of our fees.

Mike Mayo – CLSA: So we really talk about re-pricing for that last one fourth to one third and then cross-selling for the other two thirds to three fourth, is that a fair characterization?

Thomas P. (Todd) Gibbons – VC and CFO: More or less Mike. That’s right.

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