The Bank of New York Mellon 10-Kyear ended 2023-12-31

Executive Summary

BNY Mellon provides custody, securities processing, payments and investment management to institutions, corporations and wealthy individuals, earning fees and interest on client-funded assets. It is concentrating on organic growth, technology-enabled services and operating efficiency, including outsourcing opportunities as clients seek lower costs and help with regulatory requirements. Higher interest rates drove the year’s earnings recovery, while fee revenue weakened and investment management continued to lose higher-fee assets. Management expects net interest revenue to decline in 2024, making client wins, asset retention and cost discipline more important to sustaining earnings.

What's Happening in the Business

BNY’s custody and transaction-services businesses benefited more from higher rates than from stronger underlying activity. Assets under custody and/or administration rose 8% to $47.8 trillion, primarily because markets increased client asset values. Securities Services revenue growth slowed from 11% in 2022, while Market and Wealth Services maintained its pace through collateral management, clearing and Pershing.

Pershing’s revenue benefited from higher interest income, sweep-balance fees and the end of money-market fee waivers, but customer momentum weakened. U.S.-platform net new assets fell to $22B from $121B, reflecting the departure of a regional-bank client following its acquisition. This illustrates why rising markets and interest rates should not be mistaken for stronger customer acquisition.

Investment and Wealth Management remained the weak spot. Assets under management rose 8% to $1.97 trillion, but market appreciation and favorable currency translation masked net outflows. Revenue declined for a second year, reflecting the prior-year Alcentra divestiture, less favorable asset mix and reduced expected proceeds from that sale. Reported profit recovered because 2022 included a $680M goodwill impairment, not because the underlying business improved.

Technology investment continued: software and equipment expense increased 9.7% to $1.82B. Digital-asset custody and fund-services capabilities were still financially immaterial, so they represent development initiatives rather than established earnings drivers.

Key Financial Highlights

FY2023 results are compared with FY2022.

• Investment services: Fees rose 3.7% to $8.84B, supported by new business, waiver removal, clearing volumes and collateral balances; foreign-exchange revenue fell 23% to $631M as volatility and transaction volumes declined.
• Transaction-business drivers: Issuer Services revenue rose 16% to $1.99B; Clearance and Collateral Management rose 15% to $1.46B, supported by higher interest income, collateral balances and government-securities clearance volumes.
• Investment management: Net asset outflows were $20B vs $18B of inflows, including $25B leaving long-term strategies. Segment income before taxes excluding notable items fell 28% to $545M, against reported profit above; losing higher-fee assets weakened earnings despite recovering markets.
• Notable items and corporate costs: Noninterest expense rose 2.2% to $13.3B, including a $632M special deposit-insurance assessment, $267M severance and $94M litigation reserves. Revenue included a $144M reduction in expected contingent sale proceeds. The corporate and other pretax loss widened to $(1.06)B from $(775)M, chiefly because of the assessment, reducing consolidated profit below the principal segments’ combined contribution.
• Capital returns: Repurchases totaled $2.60B; common dividends were $1.26B, with dividends per share rising to $1.58 from $1.42. Shares outstanding fell 6.1% net of issuance. The effective common equity Tier 1 ratio rose to 11.5% from 11.2%, helped by recovering securities valuations as well as earnings.

Risk Assessment

• Rates and deposit mix: Noninterest-bearing deposits fell 25% to $58.3B, increasing funding costs; a modeled 100 bp rate decline would reduce annual net interest revenue by $343M under static-balance assumptions.
• Investment-management impairment: The reporting unit’s $6.1B of goodwill had only ≈5% valuation headroom, leaving reported earnings vulnerable to weaker flows, margins or valuation assumptions.
• Commercial real estate: Nonperforming assets rose to $237M from $109M, chiefly from property loans, raising the risk of further provisions beyond the reserves already increased.
• Processing and cyber resilience: BNY’s settlement role and reliance on interconnected providers make outages or control failures potentially costly; the required move to next-day U.S. securities settlement adds execution risk.
• Legal and regulatory exposure: Estimated reasonably possible legal losses reach $700M beyond related accruals, while proposed capital-rule changes could constrain distributions or increase required capital.

What to Watch

• Pershing retention: Net new assets have sharply weakened; renewed inflows would validate customer growth, while further departures would expose reliance on rates and markets.
• Investment-management recovery: Watch long-term asset flows and fee mix; retention of higher-fee assets would support recovery, while continued outflows could undermine margins and goodwill.
• Interest-income transition: Management expects lower net interest revenue in 2024; stabilizing deposit mix would cushion the decline, while further migration into paid deposits would intensify it.
• Expense discipline: Management expects reported expenses to decline and expenses excluding notable items to be flat in 2024; success requires preserving client-service growth rather than merely benefiting from assessment costs disappearing.