Good morning, and welcome to the 2020 Fourth Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon’s consent. I will now turn the call over to Magda Palczynska, BNY Mellon Investor Relations. Please go ahead.

Good morning. Welcome to BNY Mellon’s Fourth Quarter 2020 Earnings Conference Call. Today, we will reference our financial highlights presentation available on the Investor Relations page of our website at bnymellon.com. Todd Gibbons, BNY Mellon’s CEO will lead the call. Then, Emily Portney, our CFO, will take you through our earnings presentation. Following Emily's prepared remarks, there will be a Q&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 are available in the earnings press release, financial supplement 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 20, 2021, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda. Good morning, everyone. Let me start with a brief summary of the fourth quarter financial results, which Emily will then review in more detail, and then I’ll come back with some thoughts on our franchise and our outlook for 2021. Starting on Slide 2, in terms of the fourth quarter, we reported revenue of $3.8 billion and earnings per share of $0.79 or $0.96 after excluding notable items, which Emily will cover in a few minutes. Turning to the full year 2020 financial results on Slide 3, and I’m referring to them on an adjusted basis. Earnings per share of $4.01 were flat to the prior year on revenues of $15.9 billion. Fee revenue increased over 5%, excluding notable items and almost $370 million impact of fee waivers in 2020. Expenses were flat as our cost discipline and productivity gains essentially offset incremental investment, and the operating margin was solid at 30%. Now, we have a lower risk fee-based business model that positioned us well for this environment. We had no net charge-offs. We also delivered strong results from the two rounds of Federal Reserve stress tests announced in June and December. Our model is highly capital-generative, and our Common Equity Tier-1 ratio increased to 13.1% from 11.5%. When I shared my 2020 priorities with you a year ago, of course, no one expected that the world would change so rapidly and dramatically. Throughout the pandemic, we have supported employees, clients and our communities and we are proud to provide the infrastructure for several critical government programs for COVID relief, including the term asset-backed securities loan facility, the municipal liquidity facility, the primary dealer credit facility and the payment protection program. Now, while navigating the extraordinary environment, we continue to advance our long-term growth initiatives across all of our businesses.

Thank you, Todd, and good morning, everyone. I will walk you through the details of our results for the quarter and briefly review the full year as well. All comparisons will be on a year-over-year basis, unless I specify otherwise. Beginning on Page 4 of the financial highlights document, in the fourth quarter of 2020, we reported revenue of $3.8 billion and EPS of $0.79. Both the current and prior year quarters included a number of notable items. The fourth quarter 2020 results included an unfavorable $0.18 per share impact from charges related to litigation, severance expenses, losses on two non-core business sales and lease exits and real estate sales.

Thank you, Emily. Before opening up for questions, let me share some final observations, speaking to Slide 17 and 18, our franchise is powered by a wide breadth of services and capabilities. This differentiates us and certainly makes us unique among our closest peers. We are a top three provider across asset servicing, issuer service, clearance and collateral management as well as Pershing, and we rank among the leading players in more fragmented businesses, such as Wealth Management, Investment Management and Treasury Services. This gives us a strong platform and scale, both of which are crucial for success. We are responding to the evolving needs of our clients and actively connecting different parts of the company to drive growth. While significant pandemic-related challenges remain, we are entering 2021 with confidence and momentum in our core franchise; at the same time, overall revenues year-over-year will be impacted by the full effect of low interest rates, money market fee waivers and the absence of COVID-related transaction activity. For the full year, we expect to deliver modest organic fee growth similar to 2020, which we expect to accelerate beyond 2021 as our growth initiatives gain traction. As we look out to 2021, I have three overarching priorities for the company. One, execute our growth initiatives; two, scale and digitize our operating model; and three, foster a high-performance culture that is focused on delivering excellent client service in new and innovative ways. While focusing on these priorities, we will continue to vigilantly manage operating expenses, which we expect to be flat for 2021 on a constant currency basis. Between 2018 and 2021, we’ve funded approximately $1.1 billion in new investments by generating internal efficiencies with no increase in expense. We will continue to invest in technology, although with profiles that are more focused on initiatives to grow and make the business more efficient. Turning to capital returns, we are pleased that we can resume share repurchases in the first quarter. We remain committed to returning at least 100% of our earnings to shareholders over time, including the excess capital we have built since the second quarter of 2020. We have the capacity to drive meaningful EPS growth through buybacks. In conclusion, we have navigated an extremely challenging year. Our capital-generative and low-risk models delivered what it was supposed to do in terms of stability and capital generation. I am proud of the leadership team and the dedication and hard work of our employees during unprecedented and challenging times. And with that, operator, can you please open the line for questions?

And we’ll take our first question from Brennan Hawken from UBS. Please go ahead.

Todd, good morning. Thanks for taking my questions. Emily, there was a lot of walkthrough there on the revenue guide. So I just wanted to make sure I heard that correctly and understand where I should index. You guys provide a lot of disclosure on Slide 22. Is the right starting point that we use, the fee revenue ex fee waivers and notable items for 2020 which is the 13.1? And then we layer in the difference in various impacts that you laid out and then take the new run rate for fee waivers expected in 1Q and then kind of annualize that. Is that the right way to think about it? And how does the strengthening of the dollar play into that? Sorry.

Sure. So, just – I guess, just to break that down piece by piece, but ultimately if you look at our full year 2020, if you actually take into account and try to spell it out as best as possible the impact of waivers, likewise, we are expecting an increase in our market appreciation, as well as we are going to have some favorability in terms of the weakening dollar. If you put all of that together, year-on-year revenues will be essentially flat and up 3% ex fee waivers.

Got it. Okay.

That’s fee revenue, Brennan.

That’s fee, yes – alright. That’s fee revenue, yes.

And that is assuming – who knows where the dollar is going to be? But we’ve used spot dollar at year end. Fair enough. So, that 12.77 is the number we should focus on to be flat basically, ex all those puts and takes?

Yes.

Excellent. And then, expenses flat, which is in line with what you gave in December on a constant currency, but we’ve seen the weakening dollar. And so, when we think about the expense line, if the dollar remains unchanged from where we are now and of course we can calibrate that through the year depending on the different trackers, we’ll see a roughly 1.5% uplift on the operating expense line from the 2020 level. Is that fair?

Correct. Correct.

Okay. Great. Thanks very much for clarifying.

And we’ll go ahead and take our next question from Ken Usdin from Jefferies. Please go ahead.

Hi. Thanks. Good morning. Emily, just a follow-up on the organic growth outlook. Just wondering if you could help us put in context what that measures, right? Is it’s not necessarily a stock measure, just a revenue growth. So like you say, it’s taking the core building blocks of the segments and just kind of measuring the unit growth and how do you put that 1.5 into context with the overall fee guide, right? Can you – I don’t know if you can maybe just walk us through that. Thanks.

Sure. So, when we think about organic growth, we define it as growth excluding market appreciation or depreciation, excluding currency impact and excluding waivers. I mean, that’s generally how we think about it. I think Todd had mentioned that we – in – over the course of 2020, it was around between 1% and 2%. We are expecting it to remain pretty much stable at those levels so that’s embedded into the fee forecast that I’ve just given.

Right. Okay. And that’s helpful. And then, just a specific question on Asset Servicing fees that on the income statement side, seeing that there was a little bit of a – there was an increase in fee waivers in that 11.38 number, but even if you exclude that, Asset Servicing was down. The press release mentioned something about some repricing. I am just wondering if you can walk through just what happened pushes and pulls there? Why the core was down sequentially? Whether it be organic growth, repricing activity, et cetera? Thank you.

Sure. So, we had – in Asset Servicing in the fourth quarter, we had higher market levels and other trading and higher liquidity balances. But that was offset by waivers. Sec lending was down a bit. And yes, you are correct. There was a bit of some lumpy repricing in the quarter. Ultimately, we don’t control the timing obviously of repricing. We happened to have had two or three large relationships repriced on the back of renewal. So we ultimately retained the business, but that was a modest headwind as well.

Okay. And then, I guess, just as a quick follow-up to that, is that probably rebates? Does it kind of build off of here? Or how do you think about those repricing versus renewals as you think forward? Thanks.

Sure. Sure. So, as you all know, repricing is very lumpy. You will see the full impact of those repricings throughout the year. But it’s not like we’ve seen anything structural or underlying – an underlying change in the trend of repricing. It’s always been a modest headwind that we’ve offset with greater efficiency and net new business.

Thank you.

And we’ll take our next question from Betsy Graseck from Morgan Stanley. Please go ahead.

Hi, can you hear me?

Yes. Morning, Betsy.

Hi. Okay. So, first question just on I think the deposit commentary. Wanted to get a better understanding as to why you think deposits aren’t going to be continuing to increase as much as they have been? I mean, I think the Fed is still increasing the size of the balance sheet; I expect that you would get some benefits from that?

Yes. I think, I can start and I am sure Emily will join in on this. I would expect that the Fed is going to continue to buy securities which kind of adds to the deposit base and there is still some question exactly how the very large balances that sit at the U.S. Treasury at the Fed are going to align those down. So the two of them could increase the overall reserves and deposits in the system. That being said, we can manage some of that, and now that we are back – and we did that a number of years ago. So, we targeted some of the less valuable balances, and once we are able to use our capital, that’s not how we are going to use it, because it’s not lumpy – it won’t be particularly efficient. So, we’ve demonstrated that we can do that and of course, any valuable deposits we will take on. But if they are just short-term with very little benefit to them, we’ll discourage that.

Okay. That three-year pricing, or what have you? I guess, the other question, Todd, is you mentioned one of the strategies here that you are going to be executing on this year is to increase the efficiency and the delivery of the products and services. I wanted to understand how you are thinking about that with regard to some of the OCC rules that have been out there recently regarding stable coin? I am just wondering, how much does the blockchain initiatives that you’ve got underway drive that efficiency improvement? Or is that more of a hobby and does it matter that the OCC has approved banks for stable coin? Does that factor into your strategy? Thanks.

Yes. I think it clarifies things a bit. And there is a fair amount of activity and by the way, we have appointed somebody in front of – what I would call the token invasion efforts. They are really across three fronts and they are seeing some acceleration around tokenized assets, tokenized currencies and ultimately also cryptocurrencies. So we are seeing a lot more interest in cryptocurrencies and customizing in other services associated with it. We’ve done a little bit there. We have a custodian for a futures contract, and it’s kind of getting a start. In terms of tokenized currency, I believe that a number of utilities sell and there is an optionality from this and investor and a persistent development from the beginning, and we do see that having meaningful applications. And we are also involved in tokenizing assets and we are looking at what we might be able to do to tokenize into Tri-party repo committed to make it more – even more efficient. So, I think it’s going to be an important element here and we are investing. Not hugely right now. It’s not – I don’t see a lot of independent revenues but it’s something that we will definitely be on that before we got time. Betsy, are you still there?

Thank you. Yes, appreciate that.

And we’ll move to our next question from Brian Bedell from Deutsche Bank. Please go ahead.

Hi. Great. Thanks. Good morning, folks. Emily, just a quick one on the net interest revenue outlook. I think you were trying it after a 3% drop in 1Q versus 4Q would be the guidance would be stable for 2Q, 3Q, 4Q. Just wondering what the headwinds are if we are – if we get out the steeper yield curve, I guess, what you ensure is the forward curve your assumption was that? And then, what would be the headwinds that would keep that stable if we were to see a steepening yield curve and lower prepaid fees doesn’t happen here?

Sure. Hi, Brian. So, you got that spot on. Our guidance is, take the fourth quarter run rate. This came about, call it about 3%, and that’s a good proxy not only for the first quarter but when you think through the average run rate for the rest – for the year. Based on what we know now, we don’t try to get queued; we just use the forward curve. And despite a steepening of the curve, we are still very sensitive to short end rates which have actually come down. Also, when you think about where we play the duration of our investments, that part of the curve is actually not up as much as the longer end. And I guess, the last thing I would just point out about prepayments fees that you’ve mentioned is that despite a steepening of the curve, we really haven’t seen mortgage rates increase that much. So we are not expecting those at the moment anyway to really decline much. So, that’s really all of this of course is subject to change based on the rate environment. But that’s how we are projecting.

Okay. That’s clear. And then, I think...

Hey, Brian, I'll just add to make sure it’s perfectly clear. I mean, when you think about the steepness of the yield curve, we’ve seen that. But we’ve also seen short-term rates come down a little bit and that’s meaningful. So, if we do continue to see it and we continue to – and that starts to slow down prepayments fees or even more, than we would expect prepayments fees. But all we do is we use the current markets expected future rates, really the forward curve. So that’s what you saw. It’s actually in that estimate.

Yes. Okay. That really makes sense. And then – and maybe, Todd, just going back to some of the initiatives you mentioned in the early part of the call, and trying to just triangulate that with the organic growth rate. So the 1.5% organic growth rate, I think that implies 10%, sort of $15 million organic revenue expectations for 2021, and then you mentioned five different initiatives: the front to back mandates, the Data Vault, ESG investment analytics, the collateral management, money market on track, how do you repo solutions and the commercial payments of your current payment, that’s something as well. Are those more – just to get a flavor, are those contributing more to – I guess, you know what? If we could sort of frame what portion of the organic revenue growth in 2021 may be attributable to that? Or is it really more for in 2022 continue potentially the organic growth rate improving in 2022, that’s the result of these initiatives?

Yes. I mean, a little bit of both. So, part of the – with very strong sales in the fourth quarter, but most of those won’t be implemented right until the end of the year. So we can have de minimis impact on the revenues for this year, but they’ll go into next year. Some of those are because of what we’ve done around the Data Analytics, the Data Vault and with Janus Henderson, they are the early adopters. So, that will take some time to implement. And then, we think we are gaining some additional traction. When we look at some of the applications, we’ve had many, many demonstrations and many users on a trial basis, for example on our ESG. So that’s starting to build some momentum. The Collateral Management program that we are investing in, we don’t expect to start seeing some of the benefits of that towards the end of the year. So, there is a little benefit in the organic growth rate this year. And we would expect that to accelerate a bit next year.

Okay. Fair enough. Thank you.

And we’ll take our next question from Mike Mayo from Wells Fargo. Please go ahead.

Hi.

Good morning, Mike.

Hello.

Hello.

A question on positive trend and one maybe negative trend. But on the negative trend, you said you had elevated transaction volumes in Pershing and they should moderate. Have they moderated already? And we’ll kind of see through the – how the market situation if those transaction volumes are moderating and on the positive side, you said Asset Servicing had the best sales in ten quarters in the fourth quarter and that should help that in about a year. How you will close these deals in the pandemic environment?

Yes. We – one of the big transactions that we are closing was entirely virtual, that was with a very large – and a lot of these have been entirely virtual. And we’ve built a very good relationship with that particular organization, a large European asset manager, in fact. We were right before the pandemic, right at the time, I was going to travel to see them and unfortunately wasn’t able to do it. So, there have been from soup to nuts, things slowed down for a while. But it’s getting a little more normalized on the institutional front. I’d say, on the wealth front, within the digital, that’s a little bit more challenging, Mike. But on the institutional front, it’s certainly not on a deal. But we’ve had many instances where we’ve been able to handle that. In terms of your question around Pershing, I mean, we are only a couple of weeks into the New Year and volumes generally have stayed pretty strong relative to the fourth quarter. I just think it’s a little bit too early to call. Our estimate is certainly – we’ve normalized a bit. Maybe they won’t, maybe we’ll stay up here. But that’s our best guess at this point. You had a third question in there, and I don’t recall what it was, Mike. But I’ll try to take it.

We’ll just really read through the capital markets when you think things settle down. But it sounds like they haven’t settled down yet based on what you are saying with Pershing?

Yes. I think that’s right. I mean, you are seeing more retail activity than you’ve historically seen.

Great. Alright. Thank you.

Thanks, Mike.

We’ll take our next question from Alex Blostein from Goldman Sachs. Please go ahead.

Great. Good morning, Todd. Good morning, Emily. Just a follow-up around the organic growth target that you guys put out there of 1.5%. Can you talk a little bit about what you are assuming for pricing dynamics within that across sort of your various businesses? Obviously it sounds like Q4 maybe was a bit of an anomaly of several large accounts just going to happen to reprice at the same time, but maybe give us a sense kind of what that unit repricing looks like? Is it 1%, 2%, kind of what that is? And how did you incorporate that into your guidance? Thanks.

Yes. Emily, why don’t you take that? Do you want to take it?

Sure, I’ll start and we’d see that. So, I mean, repricing pressure is just the norm in our businesses. So, it’s always a headwind, but a very modest headwind. And we routinely and always offset that more than offset that with greater efficiency and net new business. So, look, there has been some lumpy repricing, but we don’t see any underlying structural change or trend. So, from that perspective, it’s not hugely material.

And part of our pricing schedules too are graduated. So the value of the assets increases, the pricing does reflect that volume. So, but this is specific to repricing for existing clients, and they benefit from some of the operating efficiencies and the growth in their own business. And typically, it’s been fairly stable for a number of years. The down draft on that and it’s just a little lumpy this year. We see it going back to normal. But that lumpiness will have a little bit of an impact on 2021.

Got it. Understood. And then, just a clarification around NIR. It sounds like you guys are assuming MBS prepayments will remain at current levels for 2021. Can you just remind us what premium amortization was in the fourth quarter? And any sort of sensitivity you guys can provide around that with respect to prepayment fees?

Sure.

As you have it.

I am afraid of getting this close. But I think, let’s follow-up with IRS on it.

Okay. Sounds great. Thanks.

Thanks, Alex.

We’ll take our next question from Rajiv Bhatia from Morningstar. Please go ahead.

Hey. Good morning. Just a quick question on the Pershing LOB. Within Pershing, how does your revenue growth compare independent broker/dealer clearing channel versus RA subsidy? And how big of a headwind the consolidation within the independent broker/dealer space has helped clearing firms with LPO?

Yes. So, we are growing faster in the registered advisory firms than in the broker/dealer side of business. But the broker/dealer side of business is still meaningful and it’s a large component of it. And so, as we look into next year, some of the consolidations, the self-clearing decisions at last had very strong growth that we’ve seen. So, that’s going to be a little bit of a drag for Pershing for this year. But it’s basically offsetting that the pipeline continues to be very strong especially in the advisory space.

Got it. Thanks.

Just, Todd, just going back about, it’s still on the causes – just I didn’t have it on my fingertips. MBS prepayment fees or MBS prepayments were about a headwind of $173 million in the quarter. And yes, you are correct, we just are expecting despite a steepening yield curve at the moment for that to remain stable.

Rajiv, do you have a follow-up question?

No. Thank you.

Okay. Thank you.

We’ll take our next question from Brian Bedell from Deutsche Bank. Please go ahead.

Great. Thanks for taking the follow-up. Just – Todd, just want to circle back on the front to back mandate that you are going to – the largest ones that you’ve been servicing. But just wanted to get a flavor of how many others that you are dealing given that you are integrated with virtually all of the providers? Is that a sizable set of mandates for you if we consider other contracts and maybe then just if they are with some joint uses there?

Okay. Sure. So, I mean, we’ve integrated now with six platforms, partnerships with Bloomberg, Aladdin and so forth, and through that, we are offering custodian size information around liquidity, and it’s kind of a unique capability that we are able to do transactions, holdings and so forth. And I think what it does is very much enriches the experience of doing business with us. So I think it’s helped us to retain relationships. I think it’s helped us to grow a couple of relationships that I just indicated. So we are starting to get some traction with it. Moving on to the data business, which we’ve been in for some time. But now we’ve cloud enabled it and made it much richer capability. We’ve had a number of large data clients that have been operating it – we are now starting to convert some of them. So, I think it’s not just what they can do with us, but for the first time now, we are starting to see some meaningful wins that I would attribute, maybe not entirely to it, but certainly that was a helpful driver.

Okay. That’s helpful. And just as – can consolidation in the RA space, can you have some benefit from that or do you’ve seen this sort of providers going to the self-clearing option?

Yes. As we look back historically, more often, we’re winners in that. But there can be different locks. And so, the acquirer may have a – I think it was self-clearing or had some other approach – and so, or some other provider. So, typically, we’ve found that we’ve won more recently. We had a couple losses.

Thank you. Fair. That’s all.

Thanks, Brian.

And we’ll take our next question from Brian Kleinhanzl from KBW. Please go ahead.

Great. Thanks. One of you just kind of walk through again the Tier-1 leverage comments that you made. I guess, this quarter where it was at 6.3%, but then you gave that your target was 5.5% to 6%, but then you said, you felt you are well above where you needed to be. It seems like you are just above what you are targets are. How does that impact your aspirations of capital returns?

Sure. And so, Tier-1 leverage is 6.3%. I think we’ve been pretty clear that we are comfortable running more the rate between 5.5% to 6%. So that does imply that we have significant excess capital. And you can assume that we are going to look to return that to shareholders over the course of the year. We are committed to do so.

Brian, the other thing that I would add to that, Brian, is that we have excess deposits right now. And so, since we are not able to do anything with our capital, we did – we are not really pushing them away or managing this as carefully as we could. Once we get back into a normal capital management cycle, deposits that aren’t worth anything we are not going to keep them here.

And so, when you talk about the deposits, how does that play into the money market fee waiver that you are anticipating pushing those off into the money market funds, which has been the driver of the fee waivers? Or if that were to happen, that could be an incremental negative to the fee waiver guidance?

Sure. I can take that. So, I mean, the fee waiver guidance and the increase in that is really tied to what we are seeing in the short end and repo rates have actually come down since we originally projected, and that’s really what the 175 now that I mentioned. You are correct. There is a lot of excess reserves, if that all ends up in money markets, that could ultimately put more pressure. So, that is a potential risk. The one thing also just what were on waivers that I would just like to highlight is that Pershing did hit its full run rate in terms of waivers in the fourth quarter. So, you will start to see those waivers increasing in other lines of business. So, Asset Servicing, Issuer Services, high-end Treasury Services, for example.

But Brian, if money market mutual funds increase as the balances increase, we will certainly waive more fees. But net-net, we have more fees. And so, it’s just that we wouldn’t get the 100% of the component that we get. So they’ve basically been relatively stable. So when we do these comparisons, the lines have been relatively flat. So that has increased any noise. So if money is moved into money market funds, there probably will be even much less fees than they typically would have been, but there are probably still some dips on fees.

Got it. Thank you.

Thanks, Brian. Okay that was our last question operator?

That concludes our question and answer session. I would now like to turn the call back over to Todd for any additional or closing remarks.

No. Thanks for your interest and obviously if you can – you can call IR to follow-up on any clarifications. Have a good day.

Thank you. This concludes today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2 o'clock P.M. Eastern Time today. Have a great day.