Letter to Shareholders
Letter to Shareholders
March 2020
For more than 235 years, BNY Mellon has been a trusted steward of our clients’ business and a respected corporate citizen. With each decade comes a new era of change and, as we enter 2020, I am excited for what the future holds for our organization.
In my 30-plus years with the company, we have undergone an incredible transformation. Not long ago, we were the largest retail bank in the greater New York suburban area, a large credit card player and an active participant in capital markets, leveraged loans and emerging markets.
Today, we are a globally significant, broad-based services company with a low-risk balance sheet – a considerable evolution from the traditional commercial bank we once were. This spirit of transformation and innovation has been part of our DNA for more than two centuries and, now more than ever, we must continue to drive an aggressive agenda. While our growth as an organization has been noteworthy, we know there is more we need to do to continuously deliver on our promise to our shareholders.
We feel good about our business model and portfolio of client services, and are confident in our ability to provide consistent returns to our shareholders. We take pride in our strong risk management culture, and in our digital- and technology-enabled capabilities – all of which have us well situated to provide scalable and efficient solutions to investors worldwide.
As we move forward, we want to accelerate our evolution and innovation as this will ensure we are well positioned for the future and able to meet the ever-changing needs of our clients.
This is the legacy we’ve built and will carry forward.
Drive Exceptional Execution, Accelerate Our Evolution
As an organization, we are determined to do more and do better, with a greater sense of urgency to drive exceptional execution and accelerate our transformation. We have a strong business model that generates significant cash and requires relatively low amounts of capital to grow. As such, we believe we are in a strong position in terms of what we do and are intently focused on how we do things to enhance our performance. With that objective, we are investing time and capital in the following:
Building a Technology-driven and Digital Culture
We’ve made large investments in our technology and digital ecosystem. The aim is simple: drive resiliency and security, enhance operational effectiveness and deliver more value for our clients across a broader set of their needs.
We firmly believe that our digital mindset and open-platform approach are competitive advantages for us in the sector.
Enhancing Our Operating Model
Under the leadership of our Head of Operations, Lester Owens, our operations function is automating our end-to-end processes, which improves quality, reduces structural costs and increases productivity. With an enhanced discipline and rigor around operational performance, we made structural changes to improve oversight and accountability across our company. Employing a digital mindset, we utilize automation, machine learning and artificial intelligence (AI) to further operational efficiency and enhance the client experience. Extending beyond our own in-house capabilities, we are collaborating with fintechs and other financial institutions to accelerate our progress.
Our investments have allowed us to upgrade our data centers and infrastructure, improving performance and creating a more resilient platform. We are now upgrading many applications and using advanced technologies to take advantage of this new environment. For example, we used AI to develop a solution to help address the hundreds of thousands of inbound client inquiries we receive each month. After a successful pilot, we are deploying that solution to facilitate client inquiries in a seamless, more timely manner. The result is a better client experience that costs less to deliver. We believe these technology investments will be a source of competitive differentiation.
Deepening Relationships, Boosting Client Value
Simply put, our clients are at the center of everything we do. Our technological advancements and operational improvements allow us to fundamentally change the nature of our client service model. However, it doesn’t stop with technology and operations. We are revamping our global client management and service functions to strengthen how we interact with, service and anticipate the needs of our clients.
In addition, our open-platform approach provides significant opportunities for us to deliver new and unique client-centric solutions by partnering with other financial institutions, big tech and fintechs.
The result of this open, platform-agnostic partnership model is the greater flexibility, quality, transparency and efficiency that our clients demand. It also enables us to grow and bolster our product portfolio while enhancing what is already industry-leading client service and retention.
Expanding Our Relevance, Driving Growth
We remain focused on growth across key geographies, as well as business and client segments, as we increase our influence and relevance across our industry.
Geographic Expansion
We must continue to deepen our presence in key international markets. We have enduring long-term investments in Northern and Western Europe; in the Middle East, where we’ve operated for more than 50 years; and in Asia, where our investments in China, Korea and Japan remain steadfast. Hani Kablawi, a leader with years of experience in our businesses, was recently named Head of International and will be focused on growth within these significant regions.
Businesses
Asset Servicing – We continue to expand our capabilities internally and through external partnerships, and over the past year we announced marketleading (and industry-first) partnerships with important institutions across the front-to-back value chain. We’re enhancing capabilities in alternatives and exchange-traded funds (ETFs), which have strong growth prospects, and feel we are well positioned to capture our share as we leverage enterprise-wide relationships and help our clients diversify their asset classes. We are also expanding our data and analytics solutions offering, which we believe will be a real differentiator over time. We have more than $30 trillion in assets on our data and analytics platform and clients are increasingly using this data to improve their investment decision making and earnings outcomes. In 2019, we continued to win new mandates across geographies and client segments, including both asset managers and asset owners, segments in which we are a recognized leader across the globe.
We take pride in our offering of tailored and comprehensive client solutions, which helps them overcome a range of issues such as liquidity, changing technologies and an increasingly volatile investment landscape. To drive change, Roman Regelman was recently named head of Asset Servicing. Roman brings a combination of digital and business skills that will accelerate the development of our already leading capabilities.
Clearance and Collateral Management – This business is a significant area of differentiation for us. We are focused on enabling market participants to more efficiently mobilize their collateral and realize funding and operational efficiencies. And our new collateral platform should significantly boost our ability to attract new market participants, support new collateral types and increase velocity across the platform.
Pershing – Our Pershing service offering provides the end-to-end solutions that broker-dealers need to transform their business and that Registered Investment Advisors (RIAs) need to help grow and serve their clients. We entered 2020 with the strongest pipeline in many years and, at a time when industry consolidation is limiting choice, we believe our transparency, flexibility and alignment with our clients’ interests will prove attractive to the market.
Treasury Services – We are refocusing on, and investing in, higher-margin and higher-growth businesses such as global payments, including real-time payments, as well as liquidity and trade finance – enabling us to grow deposits and maintain the scale needed to succeed.
Issuer Services – In Corporate Trust, we see good business momentum as we gain market share in a number of key debt products and benefit from our investments in structured products. Additionally, our Depositary Receipts business continues to be well positioned in key markets where we will benefit from market activity.
Investment Management – We are encouraged by our investment performance in some of our larger strategies, particularly in equities and multi-asset classes, the new areas of focus in our product pipeline, and believe that our multi-boutique model positions us well for the future. We are introducing new products across a number of areas where there is growing interest, including fixed income; environmental, social and governance (ESG) investing; enhanced beta; multi-asset solutions and ETFs. However, we recognize we have more work to do, especially in areas of the franchise that are facing structural headwinds.
Wealth Management – We have a great Wealth Management franchise with a strong heritage and brand, but we must invest further to unlock its full potential. We are expanding our sales force, strengthening our banking and investment product set and delivering new digital tools to empower advisors and benefit clients.
In addition, we are taking advantage of synergies across our businesses – again, the what aspect of our business is well established; we must stress how we work to bring performance to new levels. For example, our Wealth Management business provides valuable banking services to Pershing’s clients, our Clearance and Collateral Management systems provide funding tools to Pershing institutional clients, and Asset Servicing leverages our cash management products and foreign exchange, securities lending and other Markets capabilities. These are just a few opportunities that we are capitalizing on to serve our clients, grow revenue and build distinct competitive advantages.
Driving Financial Results
In 2019, reported earnings per share (EPS) increased by 12% to $4.51, though this included nonrecurring items, notably an after-tax gain of about $600 million on the sale of an equity investment.
This equity investment is a further example of our open partnership model at work. Several years ago, we invested in and built a strategic partnership with a large deposit allocation service provider. We benefited from the gain on sale but we also maintain a servicing arrangement. We are making similar strategic investments and will continue to seek new solutions-oriented investments and partnerships that, we believe, will provide growth and strong returns in the future.
On an operating basis (excluding the gain on the equity investment and other notable items), earnings at $4.02 per share1 were below our expectations. We are not satisfied with aspects of our performance and are raising the bar on what is expected of us.
Like other financial institutions, we faced a challenging interest rate environment, which impacted net interest revenue. Going forward, we must do more to mitigate similar headwinds by optimizing our client deposit strategy and generating more out of our balance sheet. Additionally, outflows in asset management adversely impacted results. We have taken some actions such as investing to consolidate activities in the U.S. into one multi-asset company, reducing costs and developing new products – however, we have more work to do.
We controlled overall expenses reasonably well, reducing them year over year while maintaining our investments in technology. We will remain intensely focused on increasing efficiency and managing our costs going forward.
Despite some challenges, our strong business model generated more than $5 billion in capital. Of this, we returned $4.4 billion to shareholders through share buybacks and dividends, for a payout ratio of more than 100%, while maintaining a strong capital level.
Our Strong Performance Benefits All Stakeholders
We run a sound and significant business that is focused on driving performance through exceptional execution. That is a non-negotiable principle.
We are dedicated to good business that creates a strong balance sheet and shareholder value while also benefiting our clients, people and the communities we serve.
As we continue to strengthen our performance culture and grow and evolve our business, we will benefit from the leadership of Jolen Anderson, who recently joined us as Global Head of Human Resources and has experience developing a high-performance culture linked to business success.
We are on an incredibly exciting journey as a company right now … one that will set the course for BNY Mellon for years to come. I have never been more optimistic about what BNY Mellon can achieve and the value we can deliver. The path forward is not without its challenges, but we must forge ahead with the greatest sense of urgency to ensure we continue to serve as the trusted steward to our clients and the global financial system.
I am honored to be part of this company, and am extremely proud of the work our nearly 50,000 employees around the world do to support our clients every day. Thank you to them and to my Executive Committee partners for their commitment to build a stronger company for all of our stakeholders.
Sincerely,
Thomas P. (Todd) Gibbons
1. For a reconciliation of this non-GAAP measure, see below.
