Good morning, and welcome to the 2021 First 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 First Quarter 2021 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, April 16, 2021, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda, and good morning, everyone. I will touch on a few financial performance highlights and some other business developments and hand it over to Emily to review the results in more detail. But first, I wanted to spend a minute discussing the environment in which we're all operating. As I reflect on the past year, the word that keeps coming to mind for me is resilience. Resilience of our business model, our global financial infrastructure, and of course, our clients and our employees. Indeed, we saw the resilience of the financial system itself. These are the lessons learned from the previous financial crisis and to the quick and decisive action of governments and regulators. And now we're moving from a period of resilience to a period that we're all optimistic will be one of recovery and growth. While we all remain clear-eyed about the challenges that still exist, I'm one of many business leaders who see many reasons to be positive in the period ahead when we move past the COVID cloud. The optimism stems from the confluence of several factors, including the deployment of the vaccine, potential strength from consumers. Now in the U.S., households have been saving at extraordinary levels. Currently, the savings rate is running about 14% and that's more than twice the 30-year average. The amount held in cash in households and available for spending is around 15% of GDP, which is way above normal. In addition, monetary stimulus and further U.S. government spending plans are likely to accelerate GDP growth. So we expect significant GDP growth going forward assuming the pandemic is managed as expected, a strong economy is likely to keep activity and asset levels high and expectations for stronger growth is beginning to be reflected in the steepening yield curve.

Thank you, Todd. And good morning, everyone. I will 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. Beginning on Page 3 of the financial highlights document. In the first quarter of 2021, we reported revenue of $3.9 billion and EPS of $0.97. This includes the impact of the reserve release of about $0.08 per share, partially offset by $39 million renewable energy investment impairments of about $0.04 per share. Revenue was down 5% and EPS was down 8%. As expected, results were negatively impacted by continued low interest rates and associated money market fee waivers and the absence of share repurchase activities for most of 2020. Fee revenue excluding fee waivers grew 6%, driven by market levels, good organic growth and the positive impact of the weaker U.S. dollar. While client activity was down slightly versus the exceptional COVID-driven volumes and balances experienced a year ago, it was stronger than we had anticipated. As a reminder, last quarter, we guided to about 1.5% organic growth for the year and this quarter organic growth of greater than 2%.

Of course, thank you. And our first question comes from the line of Brennan Hawken with UBS. Please go ahead.

Good morning. Thanks for taking my question. I was hoping to ask actually, Emily, about some of those comments on capital and the Fed returning to the SCB approach in the capital returns. The Tier 1 leverage ratio is now inside your guided band, with the buffer of 5.5 to 6 I believe. You all have referenced that you have levers to pull which might help on that front. So could you maybe walk us through some of those dynamics? And then also, how rigid is that buffer that you've applied? It seems to be a bit above peers. And so, would you — are you in a position where you could allow yourself to go underneath that buffer for a period of time given the unusual growth in the past?

Sure. Thanks for the question. We are managing our deposits very closely. Having said that, we will absolutely continue to support our clients with our balance sheet. And we're comfortable with where deposits are now. But of course, it goes without saying that, over the course of the last 12 months, there has been a lot of additional reserves in the system, liquidity in the system. And so, we've seen a surge in those deposits. A large portion of that surge is excess, so it's non-operational. We've been very successful working with our clients to explore and move some of those non-operational deposits to off-balance sheet vehicles. Thankfully, we have a good platform and liquidity direct that has lots of alternatives. It's an open platform. So that has been very effective. You are correct in pointing out, as I did mention in my prepared remarks, that given the unprecedented liquidity in the system, we would feel comfortable dipping into our leverage buffer. We do hold a very significant buffer in excess of 150 basis points over regulatory minimums. We size that very carefully. It's basically to both absorb any impact to OCI given rate changes, as well as to absorb any surge in balances. Given that's really what we've seen, the buffer is there for this particular kind of unprecedented environment. Ultimately, we would feel comfortable dipping below the 5.5% for a period of time, of course, running certainly above the regulatory minimum.

Right. Okay. That helps. That's great to hear. And then one other question on the balance sheet. It seemed as though the interest-bearing asset growth lagged deposit growth this quarter on an average basis just looking at the off-balance sheet. Was that because some of those deposits may be temporary? Maybe you all were in the process of encouraging some folks to consider off-balance sheet options that you referenced? And therefore, when we gauge balance sheet growth here this quarter, which one should we pay attention to more? Which one is more effective? Is it the interest-bearing asset growth or is it deposit growth? Or is it just that you'll be putting more money to work and therefore the interest-bearing asset growth will catch up? I just wondered, it seemed a big gap. So I wasn't sure about that. Thank you.

Sure. So certainly — and I think I just mentioned, a significant portion of the deposit growth that we've seen we do think is excess and so non-operational. So it's very hard to really redeploy that into the securities portfolio or the loan portfolio for any meaningful duration. As a result, a lot of that is just sitting at the Fed earning 10 basis points, which obviously is dilutive to NIM, but of course it is overall accretive to NIR just marginally so. So when we think about NIR in general, we really just use the forward curve to project. And despite, of course, the steepening of the long end of the curve, we did see the short end grind lower. Also the duration of the curve where we invest is more in the two to five-year mark and that didn't go up as much as the long end. But of course, to the extent the curve does continue to steepen and/or shift upwards, that will be extraordinarily helpful.

Thanks for the color.

And we'll take our next question from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. Can you hear me?

Yes, Brian. We can hear you.

Great to hear you. Thanks. Just one more on the rate sensitivity and net interest revenue and fee waivers. Is the cadence as we move through the year really into the second quarter? And back a little bit to that deposit strategy with the excess deposits, is there an ability to put a little bit more in the securities portfolio, as we move into the second quarter? So what I'm trying to get at is, given your full-year guidance, are we at sort of stability as you see it coming into the second quarter on NIR, or might it depend before we go up? And then similar to that on the fee waivers, I think you said $220 million for the second quarter, but then I'm not sure if I got this correct, that you thought that would include the back half and that was based on balances. Can you clarify that?

Sure. So in terms of NIR, we don't really give quarter-by-quarter projections and so much of it is dependent upon the rate curve, deposit levels, prepayment and other factors, all of which are baked into our projections. What I would say is that our full-year projection for NIR is still the same as the original guidance given which is 11% to 12% down year-on-year. So that hasn't changed. In terms of waivers — waivers are a function of two things: short-term rates, specifically three months and six months as well as repo rates, and also a function of money market fund balances. Actually, what we saw this quarter is rates ground lower and balances go higher. As a result, waivers overall were a bit higher than originally anticipated at $188 million. The total impact, however, was slightly positive to revenues. Using the forward curve to also project waivers, and the historical relationship between rates and money market balances, we think that waivers will peak in the second quarter at about $220 million. By the way, that would be probably slightly negative to revenues for the businesses we're talking about. But then we would expect the second half of the year to be more in line with the first quarter. I always like to remind people that when the Fed eventually moves, we will recover in excess of 50% of those waivers over time, and a significant portion thereafter.

Definitely. That's good color. And then the second question is on organic growth, you said it could pick up to greater than 2% this quarter. Maybe could you just talk about the drivers of that? Todd, you mentioned you have very good demand for data analytics with the Data Vault. Sounds like a contract not yet in run-rate. But could you talk about that momentum in the organic growth rate and drivers of that?

Sure. So the first quarter, we got the benefit obviously of a lot of activity. Hard to project exactly where that activity is going to go. But the guidance that Emily provided is probably not sustainable at this elevated level, but we did get some nice movement which is reflected in that. Pershing volumes were particularly high, very good flows into a number of their accounts. So we're seeing a lot of good growth with existing clients as well as new clients. We do expect that to moderate somewhat. I also did point out on the previous call that we had some lost business in purging that will impact us later this year. Purging has strong underlying organic growth, but it's going to be masked a bit by both the interest rate impact as well as that lost business that will impact in the second half. But we are seeing sustained momentum across just about all of our businesses, strong pipelines. As we convert the pipeline to sales, we continue to build the pipeline. We have another pretty big quarter for sales, our win-loss ratios are improving, and retention has continued to be good. I mentioned the Data Vault and we have a number of clients in Data. We've now signed a very significant one and are building deeper relationships with that client. There's a lot of interest in our analytics and applications that we've described before. We're actually seeing recovery in payment flows, so Treasury Services, which is largely commercial payments, a lot of it is global. We're seeing good recovery tied to economic recovery. We're also picking up some market share. We've got some interesting opportunities in real-time payments. Asset and Wealth Management had positive flows. We're seeing meaningful improvement in wealth. We've been making investments across the businesses, even in core custody, our middle office functions, payment systems, clearing and collateral management. We continue to pick up global assets. The fact that we built up Bond Connect capability in China is an exciting, innovative service that we're providing to clients and we're confident that that's going to continue to grow. So good underlying momentum helped by very strong activity in the first quarter.

That's great. All right. Thank you.

Thanks, Brian.

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good morning.

Hi, Betsy.

Good morning.

Okay. A couple of questions, a little bit on the technical side on the build out that you're doing around digital assets, cryptocurrencies and that kind of thing. Could you remind us the pace that you're anticipating being able to roll this out? And are you going to be custodying the physicals? I just wanted to understand how wide the aperture is on this opportunity side.

Okay. Sure, Betsy. When we talk about our digital asset efforts, what we're talking about is digitizing traditional securities so that they're more easily mobilized. Things like digitizing money market funds and making them eligible assets to put into repo, which we couldn't do in the past, and we can make it much more efficient. We think there will be quite a bit of that activity, as well as smart contracts and what that might do for corporate trust and other businesses. The other thing is the digitization of currencies. We're already involved in a consortium with central bank digital currency initiatives, which could trade 24/7 in digital form, and is really just developing regulatory approvals now. There are already existing digital fiat currencies. Around cryptocurrencies, we will be digitizing them as well. We have been working on a prototype and we expect to be offering capabilities across all three of those by the end of the year, as we're building things out with clients that have shown institutional interest. So yes, we would actually have the wallet, if you will, or be the custodian for the underlying cryptocurrency or any one of those particular digitized assets.

Okay. So you would actually be custodying the physicals, you're not going to be sub-custodying that out to somebody else?

That is not our intent at this point.

And then, what's the timeframe for getting to market? Is that 2021 or 2022 timeframe?

We expect that you'll be hearing some things toward the end of 2021. But it may be a little bit earlier for some elements of it.

Okay. And then the other thing I wanted to touch base on was around the climate comment that you had in your prepared remarks, Todd. Is this about your own footprint or is this also about working with your clients? If it's working with your clients, how do you anticipate you will help them get more climate-friendly?

There's really two elements to it, Betsy. One is what we're doing as an enterprise — our own carbon footprint, for example. We've been very active. In February, we published a Considerations on Climate at BNY Mellon report, which gave specific examples of what we've done around carbon, waste and other environmental activities. We are carbon-neutral and have been for an extended period of time. We've been named by CDP with an A-rating on climate; we're one of a small number of financial institutions to receive that rating and we've been recognized over multiple years. That addresses what we're doing as a firm. In terms of what we're doing for clients, we're providing services. For example, we're the largest trustee on green bonds and can certainly help clients establish trustee functions that go along with that. In the asset servicing space, our data and analytics capability has produced an application on ESG allowing clients to customize reviews of their portfolios. We use cloud-based techniques and are connected to many data providers. We have millions of securities in that application and there's a constant feedback loop to the data providers to enhance information on securities. We have quite a few clients on it and are contracting them for permanent usage. In Investment Management, we're building ESG products, and in the servicing space we've won an ETF based on ESG. So it takes two forms: the commercial element of helping clients and doing the right thing for our own company.

Okay, thank you. Appreciate that color.

Thanks, Betsy.

Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Hey, good morning, Todd and Emily. Hope you guys are doing well. Maybe another question around capital. You mentioned targeting over 100% payout, that's something you've targeted for a while. Can you help us calibrate that against the significant buyback you have authorized currently? Obviously, there'll be some technical restrictions that you could ultimately get done in the third quarter given just the volume threshold. But maybe help us think through that relative to your comments and willingness to go below the 5.5% Tier 1 leverage. So just trying to think through how much you could ultimately get done.

Sure. Ultimately, the Board approval given in the fourth quarter of last year authorized buybacks up to $4.4 billion through the third quarter of this year. Given the Fed's limitations on buybacks through the second quarter, it's unlikely that we could execute the entirety of the $4.4 billion just in terms of average daily buys and other technical limitations. But we will do as much as we are allowed. Assuming that the Fed returns to or implements the SCB framework, which allows for more flexibility, we would tend to execute in excess of 100% of earnings in the third quarter as much as we could do. Anything we couldn't do we would hope to catch up in the fourth quarter under that program.

Got it. That's helpful. Then maybe we can unpack some of the NIR dynamics a little more. Two questions: deposit costs — is there room for those to grind a little lower as you're trying to optimize the balance sheet, or is there not much you can do in terms of pushing pricing on deposits to clients? And I wanted to clarify your comments around premium amortization. What was it in the quarter and what does your NIR guidance assume for premium amortization for the rest of the year?

On deposits, you're right that deposit rates are relatively flat. Remember that's an average across non-U.S. dollar as well as U.S. dollar. We are charging for euros and for Japanese yen, but not in the U.S. I don't know if this is the trough, but this is probably close to the rate we get to. Of course, if rates went negative in the U.S., theoretically we could start charging for deposits, which would increase NIR, but that's not our intention. In terms of MBS prepayments, in our NIR projections we've already taken into account a trajectory of MBS prepayment slowing down based upon rising rates. We would expect MBS prepayment speeds to slow down by about 15% to 20% by year-end.

I would just add that the Fed has spoken about limiting the possibility of negative rates for any sustained time. We've seen repo rates go slightly negative in the past, so policy actions could address that. As we scrub through the nature of the deposits we've gotten, a lot of it is low value to the franchise and we are winding them down, but there's not a whole lot more to grind down.

Great. Thank you very much.

Thanks, Alex.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi. You had some good fee growth in servicing that you talked about through the volumes that should moderate. Is that expectation around purging? What are you seeing in purging or retail behavior? You have a window into that world like that?

Yeah, Mike. It's a combination of things. We've seen a lot of activity in the trading space and very high retail activity. Purging sees some of that, but it's been in the institutional side as well as the retail side. We would expect that to subside somewhat from the elevated levels seen in the first quarter. The institutional business was probably a little more active in March, and the retail business was probably more active in January and February.

Okay. So you're seeing a slowdown in retail trading as the quarter went on? As people return to work, do you think they trade less or anything related to that?

It's hard to say definitively. There's a massive amount of cash sloshing around the system and it's got to go somewhere. The savings rate has doubled, households are holding about 15% of GDP in cash. They will either spend it, invest it, or let it sit. Our guess is that we will see lower activity relative to the elevated levels, but it's uncertain.

Okay. And then, just one last question on the fee waivers. Your customers must love you. I mean, this is $220 million fee waivers in the second quarter coming up. Hopefully, you're building long-term goodwill, but shareholders don't benefit from that. Are there options other than absorbing it and hoping for long-term goodwill?

A lot of the excess balances are ending up in cash or money market funds. Even though it's $220 million of fee waivers, much of that is driven by excess balances that we don't expect to be there when interest rates recover. We think there's upside when the market turns, which we've reflected from prior cycles. We still ran a 29% operating margin even in this environment. Between NIR and fee waivers, we think we are now at or very close to the trough. It could worsen if rates get a little bit lower, but we think we're close to the trough and the business model will grow off this level.

Mike, the only thing I would add is that a large portion of those waivers are really just funds that we distribute — it's more about lower fees versus competitive waivers that we're offering in Asset Management.

Great, thank you.

Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Thanks. Good morning. Just a follow up on the Asset Services fee line. It was nice to see the 5% improvement sequentially. Last quarter you mentioned some bulkier repricing and onetime things. This quarter you mentioned elevated activity. From an outlook perspective, anything we should know about the trajectory of onboarding new wins and do you have a clear line of sight on meaningful repricing this year?

We did see a nice uptick in asset servicing fees, up 5% sequentially. About 50% of that is due to asset levels and the remaining 50% is based on transaction volumes. Transaction volumes across asset servicing were up significantly, double digits in some cases quarter-on-quarter. We expect volumes to moderate a bit in the second half. That said, fundamentals across the business are very strong: the pipeline is strong, average deal sizes in the pipeline are bigger, retention statistics are very strong, and our investments are resonating with clients. Regarding repricing, there's nothing structural; the repricing we experienced last quarter was lumpy and tied to a few large clients that happened to be going to RFP at the same time. It’s usually a modest headwind we've been able to offset with new business, retention and efficiency.

Got it. And then one more on the balance sheet. Regarding Fed accommodation and the incremental deposits that flowed in, how are you anticipating changes as we go forward with potential end to QE? How do you think your balance sheet would act versus more traditional regional banks in terms of retention of deposits that have flowed in?

Ultimately, as the Fed increases reserves we think roughly about 2% or so ends up on our balance sheet. It depends on the economic backdrop. A large portion of the deposit growth in the last two quarters is excess, non-operational, and we think that would recede pretty quickly when interest rates normalize and monetary policy normalizes.

If you go back to the initial COVID event, which led to a spike, we've seen close to $100 billion of balance increases. Some of that was intentional as we built relationships, but a significant amount was excess. We would imagine somewhere between $25 billion to $50 billion of that $100 billion increase would roll off.

Got it. Thank you.

Thanks Ken.

Our next question comes from the line of Jim Mitchell from Seaport Global Securities. Please go ahead.

Hey, good morning. If I think about your guidance on NII, it seems the implication is NII is stabilizing here and that implies securities yields will hold at current levels. If we assumed a static balance sheet going forward, what level of rates in the middle of the curve would we need to see for yields to start to move the other way? You indicated two to five years is important and that you won't go further out than that. With the five-year now at 83 basis points and moving higher, do we need to see that translate into the two to three year to really help you?

Two key elements: the short end of the curve matters because many assets price off short-term indices. This quarter one-month LIBOR was down three basis points from its average in the fourth quarter and three-month was down two basis points. That offset the benefit of the move on the longer part of the curve. The steepening up to five years helps because we keep the duration around two-and-a-half years so assets that roll off and get reinvested at higher yields are helpful. The benefit has been offset by what we saw on the short end.

That makes sense. I was just trying to get through assuming short rates are pretty stable, what in the middle of the curve starts to help you.

Five- and 10-year moves are helpful because they extend the duration of mortgage-backed securities; their yields pick up as amortization of premium declines, and reinvestment to maintain portfolio duration will go to higher levels, which helps.

Jim, we also disclosed in the quarter some sensitivities that might be helpful for you to review.

Got it. Thanks.

Thanks, Jim.

Our next question comes from the line of Steven Chubak with Wolfe Research. Please go ahead.

Hey, good morning. This is Michael Anagnostakis on for Steven. Following up on the NII guide, you gave detail around where you're deploying some of that excess liquidity from here. I appreciate the color on premium amortization as well. Could you provide color around how much of that deployment is contemplated in the NII guide for the securities portfolio?

Our securities portfolio is basically flat to last quarter. We are marginally increasing our non-HQLA within the quarter. The NIR guidance for the full year being down about 11% to 12% is based on the forward curve, deposits remaining pretty much where they are or coming down a bit, and MBS prepayment speeds going down. Those are the key assumptions.

Thank you for taking my questions.

Thanks, Steven.

Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Good morning, Todd. Good morning, Emily. When you think about new initiatives over the years, custody of non-traditional assets is one example. When you think about opportunities for digitalization and cryptocurrencies you're working on, how big can this be compared to other new ventures you've been involved in over the years at Bank of New York?

It's early to tell. Bitcoin has gotten a lot of hype; it's still only about 10% of gold's market size and gold is a custodial asset, so it's not that large yet. I do think decentralized finance is coming, fintechs will be important players, and we can position ourselves well to work with them. You'll see it in payments and custody. The important part is giving investors choice and helping them mobilize assets faster, hold non-traditional assets while eliminating counterparty risk, and provide consolidated reporting and valuations. There are ETFs and other products coming out that are crypto-related and we're seeing underlying growth on a small base. It's an important part of our product capability but it's a bit early to speculate on ultimate scale.

Okay. The second question: you've said the leverage ratio is the binding constraint, not CET1. You pointed out you may dip down below 5.5% but remain above regulatory minimums. At what point would the leverage ratio require you to back away from buybacks? And is the leverage ratio linked to QE and deposit growth — if tapering occurs should we expect relief on balance sheet growth that could help the leverage ratio?

We've put a buffer on the leverage ratio for business as usual. The buffer reflects potential spikes in deposits or impacts to OCI from mark-to-market in the securities portfolio. We've already seen a spike in deposits and part of the reason for the buffer was to accommodate that. Given our estimate that about $25 billion to $50 billion could run off as conditions normalize, that supports going into our buffer. Dipping toward 5% in this environment isn't unreasonable. If we were in a different environment a year ago, I might think differently.

Even approaching 5% would require a considerable increase in deposits from where we are today. We believe we have plenty of room.

Very good. Thank you.

Thanks Gerard.

Our next question comes from the line of Robert Wildhack with Autonomous Research. Please go ahead.

Good morning, guys. If we could go back to the cryptocurrency and digital asset space for a second. You're clearly taking a few steps forward there with the announcements you made this quarter. Is that because we think we've hit some kind of inflection point in that part of the market or is it just more of a natural evolution of your service?

I'd say it's more of a natural evolution. We're having deep discussions and working with institutional clients. Toward the end of last year and the beginning of this year institutional interest increased and we started working with them for solutions across a broad part of our business.

Okay, thanks.

Okay Rob, thank you.

And our final question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.

Thanks. Two questions. One on the assets held security exhibit — how the underlying pricing is with 50% asset levels and 50% transaction volume. Where do you want to take those percentages? Is that steady state or are you trying to get more transaction volume as pricing turns?

The 50/50 split is just the nature of the business. It's not something we're trying to move in any particular direction. For years that has been the dynamic: about 50% of the revenue stream is based on asset levels and about 50% on transaction volumes. It's pretty much the norm.

Okay. Second question: issuer services and clearing services revenue drivers have been impacted by rates and money market fee waivers. Is there any way to allocate what part of those revenues are driven by interest rates as we think about asset sensitivity going forward?

Both businesses are significant deposit-taking businesses either on balance sheet or through sweeps. The interest rate impact is a meaningful contribution to both, but we don't break out a specific split. In Treasury Services we've intentionally built deposits over the past year as we build relationships; those are tied to account activity because cash is needed for payments and frictional cash tends to come with that. For money market fee waivers, corporate trust issuers will often put cash in advance of payments and sweep it into money market funds; that's a meaningful contributor and that's why issuer services revenue was down sequentially and year-over-year. We don't provide very specific numbers on the split.

Thanks.

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

No. Thanks for all of your interest. Of course, if you have any follow up questions you may reach out to Magda and our Investor Relations team. We look forward to talking to you all soon. Take care.

Thank you.

Thank you. 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 at 2:00 PM Eastern Time today. Have a great day.