Good morning and welcome to the 26 Second Quarter Earnings Conference Call hosted by BNY. 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's consent. I will now turn the call over to Marius Merz, BNY Head of Investor Relations.
Please go ahead.
Thank you, operator. Good morning, everyone. Welcome to our second quarter earnings call.
I am here with Robin Vince, our CEO and Dermot William McDonogh, our CFO. As always, we will reference the quarterly update presentation, which can be found on the Investor Relations page of our website at bny.com. And I will note that our remarks will contain forward looking statements and non GAAP measures.
Actual results may differ materially from those projected in the forward looking statements. Information about these statements and non GAAP measures is available in the earnings press release financial supplement, quarterly update presentation, all of which can be found on the Investor Relations page of our website. Forward looking statements made on this call speak only as of today July 15, 2026, and will not be updated.
With that, I will turn it over to Robin.
Thanks, Marius. Good morning, everyone. And thank you for joining us.
I will begin with a few comments on our performance in the second quarter. And our progress over the first half of the year before Dermot takes you through our financials in greater detail and provides you with our updated financial outlook. Referring to Page 2 of the quarterly update presentation, BNY delivered another strong performance in the second quarter.
Earnings per share of $2.45 increased by 27% year over year. We grew total revenue by 13% year over year to a record $5.7 billion reflecting broad based growth across our businesses. And we generated approximately 600 basis points of positive operating leverage.
Taken together, we expanded pre tax margin to 40% and return on tangible common equity to 31%. Reflecting on the operating environment, the second quarter presented a dynamic backdrop for global markets. Amid geopolitical tensions, elevated energy prices, and continued uncertainty around inflation, interest rates and fiscal policy, the fundamental drivers of capital markets remained broadly constructive.
Corporate earnings were resilient Investment in AI infrastructure continued at a significant pace, and labor markets held up despite some signs of moderation. BNY is built for this type of environment. Our diversified set of businesses operate across the breadth of capital markets, benefiting from the higher levels of market activity and strong client engagement.
Taking a step back our work over the past several years was about laying the foundation for the multi year reimagination of our company. To create a more diverse durable and growthier set of businesses that serve our clients in more innovative ways. At the beginning of our transformation, we set out to do 3 things which I will briefly recap.
Starting with the most important, culture. Revitalizing our leadership team, breaking down silos, and encouraging our people to act as owners has resulted in our teams working more effectively together with a common purpose of making BNY better every day. Second, we fundamentally reimagined how we operate inside the company.
No more silos and islands of isolation, but a re architecting that realigns BNY across client and enterprise platforms. This led to our new operating model, which is now fully activated. And lastly, we said we had to go to market in a new way.
To make it easier for our clients to do more with us, a powerful value proposition for them and a meaningful revenue opportunity for us. This led to our new commercial model, now in place for 2 years and driving good momentum. As we get properly underway in phase 2 of our work, we have clear signals that our strategy is working.
Now we need to capitalize on this foundational work increasing our focus on innovation, both in new technologies like artificial intelligence and digital assets, and in continued product innovation, across our businesses. In short, we have a lot to do. But as I visit our teams around the world and hear from our clients, I am energized by the feedback and the opportunity.
With this in mind, we wanted to share some more specifics on our progress in our mid year business update. On page 3. First, on the commercial side, momentum matters.
Deepening relationships and partnering more closely with our clients remains 1 of our greatest opportunities. With our commercial model in place, we now have a clearer view of the white space opportunity ahead of us. As we sharpen our go to market strategy, we are starting to see the benefits broader relationships, larger mandates and more integrated solutions built on capabilities that BNY is uniquely positioned to deliver as a seamless package.
The second quarter was our 14th consecutive quarter of year over year sales growth. So far this year, we have had 2 consecutive record sales quarters. The average deal size is up by more than 20% year over year.
And approximately 10% of deals are with clients that are entirely new to BNY. Our wins in the second quarter demonstrate, for example, how BNY is helping market participants prepare for expanded clearing for U. S. Treasuries. Supporting growth of ETFs in Europe.
Delivering integrated solutions for asset owners, and enabling digital asset capabilities for asset managers. The common thread is not any 1 product or solution. It is that by bringing together BNY's platforms, we can more effectively solve challenges for our clients and drive higher and more durable growth for our company.
Next, on our platform operating model. This was more than a reorganization. It is a better way of working, 1 that allows us to move faster, collaborate better, innovate more consistently, and ultimately, deliver more for our clients.
In the second quarter, we completed the transition and have now shifted our focus from implementation to realizing the benefits of this new operating model over the next several years. We are already seeing some early progress. We are now able to move more nimbly bringing product, technology, operations, and commercial teams together to build more integrated solutions and respond more quickly and comprehensively as client needs evolve.
Given the breadth of our businesses, and supported by our operating and commercial models, BNY has an incredible advantage in innovating new ways to solve emerging client needs from across our platforms. A good example of this from the second quarter is our work with the US Treasury Department. As the financial agent for TRU-M accounts.
Which we are supporting with capabilities from across BNY. We can also see that several innovative products launched over the past few years for example, buy side trading solutions. Collateral 1, Borrow+ have become compelling contributors to revenue today.
Another component of innovation is linked to the shift toward an always on financial ecosystem. Payments, liquidity, collateral, digital assets, and securities markets are becoming more interconnected creating demand for infrastructure that operates with greater speed, certainty, and resilience. We believe this represents 1 of the defining opportunities for services over the next decade, and it is an area where BNY is well positioned to lead.
In the second quarter, we announced our expanded relationship with Circle, bringing together institutional digital asset custody with mint-and-burn capabilities for USDC within a single operating model. This builds on our role as custodian of USDC reserves and enables clients to move more seamlessly between traditional cash and blockchain based networks through infrastructure that combines institutional grade governance operational resilience, and scale. We expect this will be a recurring theme as we continue to invest in the infrastructure that we believe will support the future of financial markets.
Whether through real time payments, tokenized assets, collateral mobility or digital cash, our objective is the same. To help clients connect traditional and digital financial ecosystems in ways that improve efficiency, expand optionality, and support growth through trust and resiliency. Which brings me to AI.
Over the past 6 months, the conversation around AI has reflected a wide range of sentiment. Excitement about what the technology can unlock, urgency as companies move to deploy it. And skepticism about whether the level of investment will translate into real outcomes.
Business leaders are looking at how to measure returns manage risk, and turn AI from experimentation into durable value. At BNY, we continue to view AI as 1 of the most important long term opportunities for our company. And for society more broadly.
Over the past few years, we have invested in the enterprise capabilities governance, and talent to allow us to embed AI across the company in ways that strengthen how we innovate, how we operate, and ultimately, how we deliver for clients. We are now starting to see AI create value across 3 dimensions. First, AI is helping us to run the company better, by embedding new capabilities into our end to end workflows and enabling our people to work more productively.
This creates capacity. It would be a mistake to think about this as just an efficiency creator. We also see it as an enabler for growth and for our broader strategy.
Second, AI is helping us build better products and deliver better experiences for our clients. And third, we believe AI can expand the perimeter for BNY. By allowing us to bring new capabilities to market.
Through our platforms, our data, and our expertise. It is early days across all 3 dimensions, but we are starting to see AI create a tangible, and measurable impact across the entire client life cycle. Some examples of which we shared with you in our presentation last quarter.
As these capabilities continue to evolve, we believe AI can become an increasingly important source of differentiation and long term value creation for our clients, our people, and our shareholders. Looking back on the first half of the year, we are encouraged by our progress. Across the company, we are seeing the capabilities we are building translate into better outcomes for our clients and stronger performance for our shareholders, with our people at the heart of this progress.
The way BNY works today is fundamentally different than it was just a few years ago. And our stronger culture of collaboration, ownership, and innovation is helping us to deliver faster and more consistently for our clients and more effectively as 1 company. To conclude, we are entering the second half of the year with strong momentum.
The trends that are reshaping financial markets greater activity, increasing complexity new technologies and demand for trusted partners play to BNY's strengths. And give us confidence that our strategy is the right 1. With that, over to you, Dermot.
Thank you, Robin, and good morning, everyone. I am starting with our consolidated financials for the second quarter on Page 4 of the presentation. Total revenue of $5.7 billion was up 13% year over year.
Fee revenue was up 11%. That included 13% growth in investment services fees reflecting net new business, higher client activity and higher market values. Investment management and performance fees were up 5%, primarily driven by higher market values partially offset by the mix of AUM flows.
Firm wide AUC/A of $62.6 trillion up 12% year over year. This increase was primarily driven by higher market values and net client inflows, partially offset by the unfavorable impact of a stronger U. S. Dollar. Assets under management of $2.2 trillion were up 6% year over year, primarily driven by higher market values, partially offset by the impact of the stronger dollar and cumulative net outflows.
Foreign exchange revenue was up 8% year over year on the back of higher client volumes, partially offset by the impact of corporate treasury activity. Investment and other revenue was $216 million in the quarter. And net interest income was up 20% year over year primarily driven by reinvestment of investment securities at higher yields and balance sheet growth.
Partially offset by deposit margin compression. Provision for credit losses was a benefit of $8 million in the quarter, reflecting improvements in commercial real estate exposure where we now have 0 non-performing assets. Expenses of $3.4 billion were up 7% year over year, both on a reported basis and excluding notable items. 3-quarters of the increase represents revenue-related expenses.
The remaining 1-quarter reflects higher investments and employee salary increases, partially offset by efficiency savings. Taken together, reported earnings per share of $2.45, up 27% year over year. Excluding the impact of notable items, earnings per share were essentially the same at $2.46, also up 27%.
And on the back of approximately 600 basis points of positive operating leverage, we reported a pretax margin of 40% and a return on tangible common equity of 31%. Turning to capital and liquidity on Page 5. We continue to operate from a position of strong capital and liquidity supporting our clients with a resilient balance sheet.
Our Tier 1 leverage ratio was 5.9% down 7 basis points sequentially. Tier 1 capital decreased by $133 million primarily driven by a redemption of preferred stock partially offset by capital generated through earnings net of capital returned to our common shareholders. Average assets increased by 1% sequentially.
Our CET1 ratio at the end of the quarter was 11%, essentially unchanged from the prior quarter. CET1 capital increased by $447 million primarily driven by capital generated through earnings partially offset by capital returns through common stock repurchases and dividends. Risk weighted assets increased by 2% sequentially.
Over the course of the second quarter, we returned approximately $1.5 billion of capital to our common shareholders, which brings us to $2.8 billion of capital return for the first half of the year. Representing an 87% total payout ratio year to date. And as previously announced, we increased our quarterly common stock dividend by 19% to $0.63 per share effective this quarter.
Our balance sheet remains high quality and highly liquid. The consolidated liquidity coverage ratio was 111%, and the net stable funding ratio was 130%. Next, net interest income and balance sheet trends on Page 6.
Net interest income of $1.4 billion was up 20% year over year and up 6% quarter over quarter. I talked about the drivers for the year over year increase earlier. Sequentially, growth primarily reflects the reinvestment of investment at higher yields and changes in balance sheet size and mix.
Average deposit balances moderated by 1% sequentially. Non interest bearing deposits remained flat and interest bearing deposits decreased by 2%. Average interest earning assets were flat sequentially.
Underneath cash and reverse repo balances decreased by 3% Investment securities balances increased by 2% and loans increased by 6%, primarily driven by growth in securities finance. Turning to our business segments starting on Page 7. Security Services reported total revenue of $2.8 billion, up 15% year over year.
Total investment services fees were also up 15%. In asset servicing, investment services fees grew by 12% reflecting higher client activity and market values. ETF AUC/A reached $4.4 trillion up 35% year over year.
And in alternatives, AUC/A grew by 17% year over year. The number of fund launches accelerated in the quarter, and we saw an uptick in new business wins. In Asset Servicing overall, once again, more than half of the clients that awarded asset servicing new business in the quarter also awarded new business to at least 1 of our other lines of business demonstrating the efficacy of our commercial model in action.
In issuer services, investment services fees were up 23% primarily driven by higher corporate trust fees. This reflects the public sector mandate Robin mentioned earlier as well as broad based growth. Amid active CLO markets, we maintained our No. 2 position while growing our market share by 200 basis-points year over year.
And in conventional debt servicing, we maintained our No. 1 position growing our market share by 400 basis-points year over year. It is worth noting that the sequential increase in issuer services investment services fees reflects seasonal depository receipts client activity as well as net new business across corporate trust and depository receipts. For the segment overall, foreign exchange revenue was up 16% year over year, reflecting higher client volumes.
And net interest income was up 16% year over year. Segment expenses of $1.7 billion were up 7% year over year, primarily driven by higher revenue related expenses and investments as well as salary increases, partially offset by efficiency savings. Security Services reported pretax income of $1.1 billion up 28% year over year and a pretax margin of 39%.
Onto Market and Wealth Services on Page 8. In our Market and Wealth Services segment, we reported total revenue of $2 billion, up 12% year over year. Total investment services fees were up 10%.
In wealth solutions, investment services fees were up 5% reflecting higher market values and client activity. Net new assets were $25 billion in the quarter, representing an annualized growth rate of 4%. In the second quarter, Wealth Solutions signed a multiyear contract renewal with Cetera, 1 of the largest wealth management firms in The US.
And a long standing partner. We are pleased to continue supporting them as they innovate, grow, and capitalize on evolving market opportunities. In Clearance and Collateral Management, investment services fees were up 18%, reflecting broad based growth in collateral balances and clearance volumes.
In this business, we continue to see very strong momentum with our average collateral balances of $8.2 trillion up 16% year over year, and double digit year over year growth in average daily clearing volumes. Amid a supportive market backdrop, including strong money market fund flows, growing dealer balance sheets and higher equity market values, we have been successful in developing innovative solutions that bring together capabilities from across BNY to support our clients' growth. And in payments and trade, investment services fees were up 7%, reflecting net new business.
We are seeing solid growth in international payments and continue innovating new capabilities for our clients. For example, last month, we introduced 24/7 US dollar book transfers, which allow clients to access US dollar payments on weekends and US holidays. And over the last 3 months, we tripled the number of currencies available for same day FX wire settlement coverage.
In Market and Wealth Services overall, net interest income was up 21% year over year. Segment expenses of $948 million were up 4% year over year, primarily driven by higher investments in revenue related expenses as well as salary increases, partially offset by efficiency savings and the absence of prior year litigation reserves. Taken together, our Market and Wealth Services segment reported pretax income of $1 billion up 21% year over year and a pretax margin of 52%.
Turning to investment and wealth management on Page 9. Our Investment and Wealth Management segment reported total revenue of $863 million up 8% year over year. Investment management fees were up 6% primarily driven by higher market values partially offset by the mix of AUM flows.
Segment expenses of $686 million were up 5% year over year, primarily driven by higher revenue related expenses and investments as well as salary increases partially offset by efficiency savings. Investment and Wealth Management reported pretax income of $182 million up 23% year over year and a pretax margin of 21%. As I described earlier, assets under management of $2.2 trillion were up 6% year over year.
In the second quarter, we saw $3 billion of net inflows, primarily driven by cash and fixed income strategies, partially offset by net outflows in LDI index and equity strategies. Wealth management client assets of $348 billion increased by 3% year over year, primarily driven by higher market values, partially offset by cumulative net outflows. Page 10 shows the results of the other segment.
Turning to Page 11, I will close with a midyear update of the financial outlook for 2026 that we first provided on our earnings call in January. Our strong performance over the past 6 months and the underlying momentum with which we entered the second half of the year gives us confidence to significantly increase our outlook for growth and operating leverage in 2026. While we remain mindful of the environment and constantly prepare for a wide range of scenarios, our central case for the balance of the year assumes current market implied forward interest rates and that the operating environment remains broadly constructive while we anticipate historically observed seasonal patterns in client activity.
With that, we are increasing our outlook for total revenue excluding notable items in 2026 to up 10% to 11% year over year, of course, market dependent. And that includes our current expectation for full year 2026 net interest income to be up 12% to 13% year over year. Accordingly, we now expect expenses excluding notable items for the year to be up 6% to 7% year over year primarily reflecting higher revenue related expenses.
Taken together, that means we now expect to deliver approximately 400 basis-points of positive operating leverage in 2026. And for the sake of completeness, we continue to expect a quarterly tax rate of approximately 23% for the remaining 2 quarters this year. To wrap up, BNY delivered strong financial results in the second quarter, but more importantly, our underlying business flywheel is gathering momentum.
Our investments and execution are yielding increasingly scalable platforms better client experiences, and more innovative solutions that are allowing us to deepen existing relationships and attract more new clients to BNY. With that, operator, can you please open the line for questions?
Thank you. Our first question comes from Ken Usdin with Autonomous Research.
Hi, good morning guys. Thanks. Hey, just a question about the outlook.
You mentioned continuing to expect a constructive backdrop, but some of the first half results are already decently above growth rates that you are even giving us in our updated second half. So I just wanted to ask like are there any pieces that you think have tougher comps as we look forward from the second quarter sequentially? Whether it is deposit levels or issuer services that would not just continue an ongoing growth path from here.
Thanks.
Hi, good morning, Ken. Thanks for the question. Look, the first I will make a few points.
First thing is typically, the second quarter is our strongest quarter. And this particular quarter had a unique set of circumstances around it in terms of the constructed backdrop, the flows in the markets, etcetera. And Q3 is seasonally the slowest quarter.
So you have got the best, followed by the seasonally adjusted slowest. We feel like going into the quarter within the firm, the momentum is strong. The words I use internally is the firm is humming.
And so we feel very good about the client dialogue, the engagement, the backlog. But in my comments and how I talked about it, we assume the rate curve stays where it is as of June 30. We know that will change for whatever reason.
We assume market levels stay where they were at June 30. We know that will change. And so in our updated guides, we have given a range and we have kind of taken a conservative bias to it because that is how we set up and run the company for through the year, through the cycle, durable revenues.
I think Q3 specifically, it relates to NII and deposits, year over year will be a tough comp because we expect a seasonally slow quarter due to the seasonal slowdown. Last year, that did not happen due to several idiosyncratic events. So I think that the setup for the quarter, quarter '3 will be pretty good in terms of NII, but last year's quarter is tough to beat.
Right. Okay. Got it.
And was there just a quick 1 on issuer as a follow-up. You did mention that, that was strong, especially in Corporate Trust. Was there was that just due to the super amount of issuance that we saw?
And is that business just collectively that in ADR is just on a better trajectory than you would have thought given the strength of the environment. Thanks.
I would say there are 3 things at play there, Ken. 1 is corporate trust. You see in my prepared remarks that we have expanded market share, which is basically the result of multi year investments that are beginning to bear fruit which also have helped contribute to the margin, you know, going through 50% And so, we are very, very pleased about that. Deposit receipts, second quarter is seasonally the strongest quarter, and we saw new client activity come into the platform.
So, outperformance there in what is a strong quarter. And then last but not least, you know, the public mandate that we secured and went live on July 4, otherwise known as TRU-M accounts, also shows up in, in that segment as it relates to top line revenue and expenses. Okay.
Thanks a lot, We will move next to Alex Blostein with Goldman Sachs.
Hey, Robin and Dermot. Good morning, guys. So, lots to like on multiple fronts here.
I wanted to talk about operating leverage for a minute. I think not too long ago, you guys provided an updated targets, I think calling for about 38% pretax margin. You are already above that, not just for the first half, but even just kind of taking your full year guide.
So, as you sort of think about what the destination for profitability could be, in the business as a whole over the next couple years, What that what could that look like, especially considering that AI initiatives is still probably on the kind of earlier day side? So appreciate you not want to put the exact number on that, but as we sort of think about the jumping off point and the trajectory for operating leverage across the business, guess, acknowledging that you are already at your target would be helpful to understand. Thanks.
Okay. there is lots to unpick in that question, Alex. So when I go back to January when we initially laid out the targets, we believe we improved them meaningfully pretax margin and ROTCE by 500 basis points from where they were. So it was a big step change for us as a management team to put that guidance out there.
Also, we kind of view these medium term targets as 3 to 5 years through the cycle and as miles and not endpoints, and it is not really the limit of our ambition Internally, as a management team, we are always looking to outperform, and we believe the way as Robin said in his prepared remarks, we are built we build the company for a wide range of scenarios and to be durable through that and Q2 was a point in time in that. But you want to be through them sustainably for a period of time to feel like before you would revisit them again. But just remember, it is not the limit of our ambition.
And the level of client engagement and all the things around client activity in Q2 give us optimism that through the cycle we will get to those medium term targets. Okay. that is helpful. Well, you are you are at them, so you guys are there.
So on the a bit of a nuance question on the rates trajectory, and I understand that you guys are assuming, rates will stay, at current levels, at across central banks. But as you think about the probability of rate hikes, whether it is in US or outside the U.S., how do you think deposit betas will perform both in the U.S. and outside the U.S. given this is kind of a bit of a delayed potential kind of rate hiking cycle. So I just wanna get a better understanding of the kind of NII and NIM sensitivity in case we get some rate hikes here.
Thanks.
So, look at the start of the year, the environment was calling for rate cuts. Now, it is calling for rate hikes, 1 in the U.S. at the end of 36, 2 in Europe, and 2 in the U.K. And as we have consistently said, in terms of our risk management philosophy as it relates to rates itself, very focused on narrowing the cone of outcomes, and so we are willing to give up upside so that we limit downside, and we can give you kind of reasonably accurate predictions as it relates to interest rate sensitivity to the overall book. As it relates to deposits, as we consistently say, we do not lead with deposit or deposit pricing.
Deposits come as a result of all the client activity. And that is why we feel like deposits have held in and particularly non interest bearing deposits as have held in well, and that is as a result of all the franchise activity that is happening around the firm across many of our platform businesses. And as it relates to betas, we think it will be largely in line with the last cycle, and that was 80% for dollars and 60% 60% to 70% for euros and sterling.
And just remember that we are predominantly a dollar book, so it is roughly 75% dollars and the rest split between euros and sterling and then some yen in there as well, but small. I gotcha. Great.
Thank you so much for all the detail.
Appreciate it. We will go next to Ebrahim Poonawala with Bank of America.
Hey, good morning. I wanted to first start with something, I guess Robin said in his prepared remarks tied to investments, tied to increasing fees, AI digital assets, If you do not mind just revisiting both the AI piece and digital assets, in terms of how we should think about it with regards to moving the needle on the bottom line, either productivity wise or what you are doing in terms of new opportunities, maybe tied to digital assets, And also, maybe it often comes up in terms of the risks to the custody business model. Because of on chain migration and tokenization.
Jay, can you address that in terms of how you think about it. And is that truly a risk when we think about some of the revenue streams? Thank you.
Sure, Ebrahim. I will take that. So let's start with digital assets, which is the second part of your question.
And I first of all, I would just say the evolution is actually a click above digital assets. it is really the transformation of financial market infrastructure gradually towards an always on operating model. And digital assets are certainly 1 tool, a very good 1 for being able to enable that, but real time payments and various other innovations are also true. So I would take the macro view around the always on operating model.
And then within that, where are digital assets the best way of actually achieving that? And then within the context of all of that, it is about a transition and the transition will take a while. It will not be complete.
And so for a long period of time, we expect to be in this coexistence world of having these new capabilities with traditional capabilities. And so for us, as a bridge between the old and the new and collectively, globally, and across these different types of activity like payments, moving, storing, managing, all of that we view ourselves as incredibly well positioned to help our clients manage through all of those types of transitions. And so for us, it is about being right around the hoop on all of these types of things, helping clients whether they be the new, quote, new economy participants who want a bunch of services that we are the leaders in, some of our traditional clients who want us to frankly help them hold their hands in some cases, around some of that evolution.
So I would say it is all of that. And the way 1 gets disintermediated is when you do not invest, when you do not participate in the new thing. But we are leaning into the new thing and participating in that fully So we think that is kind of how we think about the whole thing.
In terms of AI, so I talked about this in terms of being a capacity creator for us. there is no question that it can create additional positive operating leverage over time, but that can come in different forms. And so it can come from doing new things with clients from improving the way that we serve our clients, and then winning more business. From making our products even better as a result of having AI in them.
And also just in terms of freeing up capacity in some parts of the firm in order to be able to deploy into other parts. I would like to think there will be less of some things that we have to do, using manual tooling and traditional tooling and where AI can take the place of that. And that will allow us to be able to have the capacity to, frankly, be able to spend more bandwidth, on serving clients in new and innovative ways.
And that is how we view it. We see the world, as I mentioned in my prepared remarks, with a ton of white space. And so having more capacity is super valuable for us because it actually allows us to put more people and more investment against that white space without having to grow expenses significantly to do it.
And just tied to that as a follow-up. Is it fair to then assume and what you talked about the commercial models in place the operating model is fully implemented that we should expect a pickup in organic growth as you capture more of that white space beyond any market driven growth? So, should we have an expectation of just pretty decent acceleration from where we have already been.
On the on the top line growth.
Hey, Ebrahim. it is Dermot. Well, I guess the first thing is we do not expect it to be a lull on day 3 of a cricket match. If you look at the slide where we talk about our mid year business update, and where organic fee growth has come relative to 2022, we have gone from flat to the first half of 26 at 4.5% We are just about to celebrate 2 years of our commercial model, And as Robin said in his prepared remarks that we are now fully active as a whole company, in the platform operating model You have seen 14 consecutive quarters of sales growth and 10% of new logos, which is consistent with last year.
So more people like what they are seeing at BNY and want to come to our firm and do more with us. So I would say the momentum is strong within the firm, and the momentum is strong with new logos coming to hear how we can serve them in a differentiated way. And I think as a consequence of that, our ambition is for higher organic growth When it happens, we do not know, but we believe ultimately it will come.
Got it. No lull. I am expecting a post-the-fifth-day win.
Thank you for that. for that.
We will go next to Mike Mayo with Wells Fargo Securities.
Hi. I guess you talk about AI for everyone everywhere, and everything. And I know that is a thematic approach for you know, the 5 year horizon or so.
And we do hear a lot of companies putting an AI wrap around things that have nothing to do with AI. So with that as a big wind up, your headcount is down 7% year over year while your revenues are up. I am just wondering how much AI has played a role in your increase in revenues per employee maybe it is more process oriented or other technology.
And if you can give any financial benefits to what you are seeing from AI, whether it is the capacity or product or new capabilities? Thank you.
Hi, Mike. it is Dermot here. The first thing I would start with saying is that BNY, I think, is operating in a fundamentally different way than it was just a few short years ago. that is just x AI. that is just the commercial model, the platform operating model, everybody being a shareholder, and everybody feeling like owners in the firm and wanting the firm to do better for its clients and for shareholders. So a fundamental shift under Robin's leadership over the last few years.
Specifically, as it relates to AI, I would say in the context of our overall engineering budget, which is approximately $4 billion just remember, we have been on this AI journey and AI strategy since 3.5 years ago when ChatGPT was first launched. So culturally, AI as an individual productivity level is embedded or becoming more embedded in our firm. We are all using Eliza copilot.
We are all becoming more productive. There are lots of things that we are doing day in, day out that makes us more productive and able to do higher value work. And so within the context of $4 billion our AI spend quite de minimis and quite modest and appropriate for the strategy that we have in place.
And if you kind of go back and reflect on our disclosure in Q1, you see the captions of innovating, prospecting, onboarding, streamlining, and the fact that our engineers at BNY, roughly 40% of the software written is now written using AI, you can see it is coming it is going broad, and it is also going deep into the enterprise. And the last point is really reflecting on your question, Mike, headcount. The headcount is just an output. it is down 7% over the year, but that is as a result of everything. it is not necessarily a headcount target that we deploy. it is more like what is our business plan, what is our operating leverage, how do we want to reach that, and what are the investments that we need to make in order to do it.
So a headcount is more the output. As opposed to the input. The last thing I would say is really we continue to invest heavily in talent As Robin has said many times, our early careers class is 3 times bigger today than it was 3 years ago.
So we are fundamentally investing in the future of BNY through early careers, and we are AI optimists, and we believe we can use AI to power that growth.
Mike, the fundamental premise of your question around are we getting a return on the investment?
The answer to the question is yes. And we feel quite comfortable with that. We do not break out the very specific economic numbers.
I recognize folks would like it if we do. But the but the rigor that we are applying to this is consistent with the rigor that you see elsewhere from us in terms of how we are operating the company. Now for us, we have had a point of view, and you can go back and listen to our transcript and press interviews, etcetera, for several years that ultimately adoption and embedding in a company is gonna be the differentiator for many firms on whether or not they are successful with AI.
Their technology is already at a level where it can do just incredible things. But the reason why folks have some angst about traditional companies as opposed to brand new start ups is because there is this lingering question around whether or not you can adapt a large enterprise by truly embedding AI throughout? And that is a cultural question.
Is also an operational and organizational question. And so we are quite fortunate and some of this is pure coincidence, but we will take it. That the investment that we have made in our platform operating model the investment that we have made in our commercial model, and critically, the investment that we have made in our culture means that we believe we actually have an advantage in terms of embedding, and integration of AI into and throughout the firm.
And that is what we would expect you to be able to see the outcome over the coming years.
And do you have and look, it is like you say, the results are what you are managing toward, not the specific AI use case in isolation. But can you put any numbers on the expense savings or revenue gains? And I think only 2 of the largest banks globally have done so, so far.
Or is there a point when you might be able to or is this kind of like 1 big stew where the AI is part of the stew and you cannot really completely isolate the benefits?
I think we think about it as a package and so it is not that we cannot identify benefits, we certainly can. it is that we recognize that all of these things coming together are ultimately to success. I will use capacity as an example because I talked about capacity. When we use AI, to create capacity, so we take some function, some process which previously was heavily people intensive, and we make it significantly more automated. that is creating capacity.
Now then the question is, are the is that capacity going towards serving an individual client? Is it going to making a product specifically better? Is it going to improving the client experience?
Is it going to doing something else or is it creating an efficiency on the expense line? And so that we deliberately want to be very that because it is consistent with our strategy for positive operating leverage. You regularly collectively ask us about, well, is focused more on revenue or is it focused more on expense?
And our answer to the question is always, it is focused on increasing positive operating leverage that is our north star. And we are agile in any 1 quarter or a year around whether we whether we are leaning more on 1 lever or the other. And so what our strategy for AI is kind of similar to that.
Now having said that, we gave a bunch of specific numbers in our first quarter earnings when we talked about those in April. And you can see some of these stats, which we view as the inputs to ultimately the fundamental bottom line impact of AI. And we will from time to time talk more about those, but actually across all of them, they are actually increasing up into the right versus what we showed you in the first quarter.
Alright. Thank you.
We will go next to Brennan Hawken with BMO Capital.
Hi, Robin Dermot. Thank you for taking my questions. I would actually love to follow-up on Mike's question right there.
So I was looking at similar trend with head count you know, as he said, down 7% year over year. Interestingly, when you calculate comp expense as a percentage of headcount, or sorry, comp expense per head, you know, that is up 8. Over that same period.
You know, if you go back to the point in time when headcount peaked, you know, down 13, but comp expense per employee up 17. Right? So there is a really interesting dynamic happening here.
Obviously, there is inflation, which is a factor. But can you talk about incentives and how you have changed compensation structures and incentives within the, organization. It kinda gets Robin, to what you spoke to with culture and how you are changing the commercial biases of the organization?
And if you have any stats on incentive and how that breaks down as a percentage of comp across the organization for people now versus previous? Sure.
Well, I might I might skip that last little bit given that we have tens of thousands of our employees listening on the call. I break out comp by levels, you know, in that way. But let me let me address the heart of your question because it is it is an important 1, Brennan.
And actually, we showed some of this again in the first quarter earnings release. When we talked about revenue per employee, and pretax income per employee. And if you if you remember back to those charts, which showed our progression on those 2 metrics, essentially tracking the growth in pretax margin and the growth in return on tangible common equity, you can see that we are getting more out of our platform and we are generating more revenue.
Our clients are coming to us and all of that is showing up in those, outcomes per employee. Now we have been very deliberate about workforce management. We have been repositioning the company, the repositioning the talent, and everything.
And I talked about this in my prepared remarks with our leadership team as we have refreshed the leadership team over the past few years. The same thing's been true through the ranks of the company. We have got more dynamic leaders.
We have got more dynamic folks who are investing in innovation. Who are really covering our clients in a fundamentally different way. We are we are invested in career growth.
We are invested in skills. We are leaning into AI, for everybody in terms of how our people can actually use it and the skills that they have, to be able to operate whether it is here or elsewhere. So all of that is actually allowing us to drive up compensation per employee, and we are very happy to do it because our people are such an important part of the contribution.
But we can afford to do it because collectively, we are managing the workforce better. And so that is sort of the recipe of the whole thing for us. Great.
Thanks for that, Robin. I appreciate it.
And 1 other question I have a little bit on a high level. So the results have been really impressive. it is been very thematic throughout the call today. 1 thing that a lot of investors come back to, which is more about really the history of this, you know, sub sort of sub industry within the custody banks is around pricing pressure. Which has been pretty consistent.
Historically, when there is been efficiencies generated, they have been sort of shared with customers via pricing and then shareholders via profit margin. What are you seeing in the market today as these tools increase the efficiency and allow for firms to deliver more effective results Are you seeing still pricing pressure? Or is there wider divergences in between the different offerings that can allow for you to hold on to that pricing better than historically?
You know, Dermot is just gonna make a couple of comments and I wanna just come back with a broader comment about the about the weight space and the value that we are actually offering to clients because I think these 2 things should really be seen in concert.
Mike, when I when I joined, the firm first, that was more a common theme than it is today. Mike, price pricing pressure is going to exist all the time because all our businesses are in competitive markets They have got big competitors. And so, you would expect, and we welcome competition, and we welcome that pressure, but I think clients are willing to pay for differentiated service.
So relative to, like, 2, 3 years ago, we do not see the same pricing pressure. And as we have reduced our cost to serve, can be more competitive in our pricing model because of all the things that Robin said in his last comment. And when there is pricing pressure, it shows up in the organic fee growth because as you know, organic fee growth is new business minus lost or re repriced business plus flows.
So that growth over the last 3 years from flat to 4.5% in some ways reflects what you have just question has just asked. And so we have dealt with it by more clients, more sales, more client engagement, more products, more innovation. So we believe our strategy is working in our ability to deal with that in a competitive and environment.
And if you we step back from the question, and this sounds a bit self serving say it. I recognize when I say it, but what our clients are recognizing from us is our ability to add real value to their businesses and their operating models. And price is always important.
We have to be competitive on price. But our clients are starting to come to us because they are actually seeing our ability to bring different things together across the firm and actually deliver solutions for them that are actually different and unique. And so if we were just a widget manufacturer with 1 line or 2 lines of business and we were just making very commodity widgets, then price is always the grounds on which 1 competes.
But our ability to be able to take the product innovation that we have talked about, the features, the fact that we have this dozen different business platforms, which actually clients want to see in unique and novel combinations operating together. Our ability to combine those different ingredients together, that is actually allowing us to add more value to clients. it is allowing us to have a different kind of conversation with them that we might have had in the past And of course, that is also contributing to our growth. And so collectively, it does feel inside the firm that the conversation with clients has changed in that respect.
Clients buying from 3 or more lines of business over the last 3 years is up greater than 60%. That is the stat to support that. And by the way, that same fact is true with clients that is to say more versus the past, for clients who buy 2 or more things from us, 3 or more things for us, 4 or more things for us, 5 or more things from us. it is it is kind of a remarkable thing to see inside the commercial organization, how there is growth across the board.
And I think that goes to that value point. Great for all that color.
We will go next to David Smith with Truist Securities.
Hey, good morning. Good morning, David. Can you give us an update on your capital philosophy?
You have got a pretty capital light business model, but BNY's payout ratio is at 87% year to date, and that is just been a bit lower than we have been accustomed to thinking about for you. And was consistent for both 1Q and 2Q. Is it a function of needing to retain more capital for growth given the opportunities that you see today, organic or inorganic?
Is it a reflection of price sensitivity or discipline on buybacks? Or is it just a timing thing as there was a pref redemption? This quarter and maybe earnings came in stronger than expected later in the quarter?
Because just big picture, is 100% or so still the payout ratio for BNY today and over the medium term?
Thanks for the question. Look, as you will have noticed, we stopped guiding on the buyback last year because it is not something that we wake up every day and saying, is 100% the guide for this year or not. it is a function. it is an output, not an input. You know, again, you will have noticed we have had strong ROTCE Our balance sheet grew in the quarter, 6% growth in loans, We are using our balance sheet to support clients, which contributed to the net interest income growth as well.
We raised our dividend 19% In total, we returned $1.5 billion of capital this quarter. And as you rightly point out, 87 billion for the half year. Look, at the beginning of the year, we were kind of in the 90%, 95% range for the full year, but, you know, it is dynamic.
We look at it as we see it as we evaluate the opportunities. As you say, capital-light business model, but no fundamental change in the strategy, where we see opportunities to support clients with our balance sheet, we will do it. And we want to maintain healthy capital ratios and liquidity ratios given the geopolitical environment, etcetera, etcetera.
So all in all, we feel like we are in a very good place on capital. And our outlook kind of remains the same.
And then a small 1. On the issuer services corporate trust contribution from a new public sector mandate. Is this something you expect to be fairly consistent on a quarterly basis?
Or were there any 1 timers ahead of the launch or any seasonality that we should be thinking about for this?
So look, so there is both revenues and expenses in there as a result of the launch We expected not to we expect not to grow with the program, but to kind of go sideways tail off. But the revenue and expenses are durable and will be there for the first near-foreseeable future, albeit at a slightly lower level. Alright.
Thank you.
We will go next to Glenn Schorr with Evercore ISI.
Thanks. Hi. A quick follow-up on that whole capital conversation.
Your average loans were up 20% year on year. I think if you look at the last 3 quarters, it is been solid double digits. I think that is a good thing, but I am curious what you are seeing in client demand, like with what types of loans are you putting on and how that fits into, capital consumption, RWA growth, things like that?
Thanks.
So look, I guess, 1 important point that I said in my prepared remarks is that we do not have any nonperforming assets on the balance sheet, and we feel very good about the liquidity and the strength of the balance sheet and etcetera. So loans is mainly in the secured financing space. So short term in nature, collateralized low risk, and so we are seeing demand for clients in that space with that product.
And so that is really where we have where we have been leaning in.
Okay. that is cool. A good answer. And if we go back to Slide 3, and we are not going to re-go through it, I think you spelled out a lot of what you have done on the sales front.
And the clients are using multiple products. But I would not mind if you could go back the beginning. And for organic fee growth, what the maybe the 2 or 3 biggest drivers of this acceleration have been and how you define what goes into the category of organic fee growth?
Appreciate it.
Well, let me just talk about organic fee growth overall. Dermot can give you the exact formula on how we define them. it is pretty standard. But when we think about the opportunity and this goes to the whole white space conversation, We have been laser focused on driving our organic growth higher.
Dermot went through the numbers. You can see them on the page. And we are pleased with the success.
And so 1 of the questions that we get asked and you sort of implied in your question as have others, is, okay. Well, how much higher can it go? What other opportunities are there?
And so let me just briefly just tick through the way we think about white space because it is it is critical to this essence of where can this whole thing go. So new clients, Dermot mentioned it, 10% of clients generating sales are new to the company, that is obviously a vector. Deepening the relationships with existing clients We just talked about that in terms of the metrics that are generally going up into the right with clients who are who are finding more products and services from us than they have traditionally consumed.
So there is clearly white space, on both of those fronts. New product innovation, we talked about it and in the prepared remarks. Enhancing features and capabilities.
And we have got the scale as Dermot mentioned, on $4 billion of technology each year we have got the scale to be able to make those types of investments. And then new solutions, which are also important. And again, the, the Trump accounts is an example of a business that we probably could not have done 2 years ago, not because we did not have the parts, but we had not operationalized the ability to pull those parts together.
And as we get better and better at that, we have got the ability to provide more novel solutions to clients from a across the various different capabilities that we have. Again, culture, commercial model, platform model, all big enablers of all of those things. Then we are positioned to be able to benefit from market trends.
We have talked about those trends before scaling with trusted providers, wealth markets growing, private markets, capital markets transformation, and we are well positioned in global markets across fixed income, equity, trading, settlement, collateral, liquidity, to be able to do that. Then we have digital ecosystems, the always on thing that we have already just talked about. And then when you look at the actual elements of what we can attach to, at its very heart, we attach to the size of the economy, and the size of capital markets.
And so we are to some extent a bet on whether we think those things over time are going to grow. And we certainly see that growth and we are excited about it. And then within it, it is values of equity and fixed income cash balances, again, the ecosystem of cash that we have talked about before.
The shape of the curve and interest rates, yes. But issuance volume, capital markets activity, transaction volumes, volatility. So while our business model is certainly built for the type of environment we have in the second quarter and that we have and that Dermot and I have both talked about, we deliberately have tried to diversify ourselves to position the firm to be able to be good in more types of environments and attach to these underlying growth factors, which we believe over time will allow us to capture more of the opportunity.
And that is ultimately what we think will feed organic growth. Thanks, Ron.
We will go next to Manan Gosalia with Morgan Stanley.
Hey, good afternoon. Jay, just 1 for me. You know, as we have got the results from the money center banks over the past, couple of days, it is become clear that it is a very strong market for issuance both equity and debt capital market issuance.
We have just had a record quarter for M&A announcements. As you think about the impacts to your businesses, how do you size the opportunity for say, the issuer services business overall? And if that you know, also translates to some of the other businesses as well?
Yes. The activity good activity levels in capital markets there is no question that those are good for us. You know, as we think about this inside the company, there is a little bit of a parallel with the way that we think about NII.
Where we are deliberately wanting to be able to benefit from what is going on in the market, But our businesses are not positioned to be the play for when the market is at peak frothiness or peak activity. But as a result of that, with this sort of durability, even when because of the diversification of the different businesses, even when activity levels come off. So did we benefit?
Absolutely. it is true across our clearing platform, our issuer services platforms, both depository receipts and across corporate trust. it is true in capital markets. So it is up and down. The income statement.
You can see some benefit from all of that. But the thing that we think is a little bit different is that we are not getting the amplitude on the wave, and that is kind of by design because we do not want and do not expect the amplitude on the downside either.
And I think the important stat that I would give you, Manon, for that is, like, 75% of our fees are recurring. So, it is durable. The durable recurring revenue stream of our platform operating model can weather many storms.
Got it. Thank you.
Thank you. Go next to Gerard Cassidy with RBC.
Hi, Robin. Hi, Dermot. Robin, in your prepared remarks, you talked about the 14th consecutive quarter of year-over-year sales With this quarter's numbers And then you also touched on that I think you said the approximately 10% of the deals are with clients that are entirely new to Bank of New York Can you share with us what products are they did they buy?
And where are you having success in winning new clients and are they self custody type clients or you are actually taking them away from competitors? Well, it is really across the breadth of the franchise Gerard.
And so, you know, this is 1 of the things that is been very pleasing for us to see. There are certain products which can be a little bit more, if you wanna call them that, starter products. And I think if you would gone back and asked us 3 years ago, did we think that there was a more common pathway into the company through 1 and then graduating into others, we probably would have said yes to that.
I think today, we would not say the same thing because actually we are attracted different types of clients, in different ways. And so it is quite broad based. And then once 1 of the other statistics we have is the more that clients do with us, and this is what our client satisfaction surveys very clearly point out The more clients do with us, the better they know us.
The better they know us, the more they like us, The more they like us, the more they do with us. And we are not that flywheel is not lost on us.
And when it comes to winning these clients, is it more that you have the product capability or is it a cost decision for the client or a combination of the both?
it is not cost. it is a it is a capability and it does depend on the client, right? So when you are winning and we talked quite a bit in our prior earnings call around AGI, a landmark win for us in the German market, a very important opportunity. Why did they choose us We would have to ask them, but they have said publicly that they chose us for the breadth of our capabilities and for the modernity of our of our solutions and the fact that we could create integration, and they were choosing a partner for their own reimagination of their operating model.
And they took a very deep dive into what we have done with our operating model with our AI, and other things. And they were like, they picked us because they thought we were the best partner for them to be able to help them through that innovation. So that was a capability.
It was about connectivity. It was a technology. All of those features were there.
And in many other cases, again, it goes back to the scale of technology, which is we can invest in these features, these new products Borrow plus, great example. We called it out. Collateral 1, same thing.
Buy side trading, same thing. So it is new products new solutions, which are these combinations from amongst the breadth of the capabilities that we have, and then leaning in incredible client service, covering clients, remembering that it we do not win business. Clients give us business.
Because of what we are doing and the fact that we are earning it. Very good.
And then as a follow-up, you guys mentioned obviously, the TRU-M accounts. You had the public announcement on the July 4 as well. Is there a second derivative here, meaning are there other businesses or other opportunities to grow revenues because you won this business?
I would I would frame it in the following way. I think there are 2 vectors on this. So 1 of the questions that we get asked by our people and by other public sectors around the world is, that is actually a very cool piece of public policy And as you as you know, The US had looked to Australia as 1 of the models for this. it is a bipartisan piece of public policy that is really been championed by the current administration, but Australia has incredibly successful sort of parallel. it is been going for a long time and has built incredible wealth for individuals in Australia.
We are getting asked that question by other governments across the world who are who are interested in what is going on, and we are happy to share with them because creating more attachment to capital more prosperity for more people, more engagement, with the stock market, more ownership, and a capitalist society. We view those things as good for society and, frankly, good for BNY as well. Then the other vector is just this concept of solutions.
We have all of these capabilities inside the company in each 1 of our platforms. And what we learned to do over the past couple of years, but it was a proof point with the TRU-M accounts, was our ability to bring these pieces together and deliver a solution that 1 could not previously have ever found on the product shelf of BNY and say, can do that because of the fact that we have got the culture, the platform model, and the commercial model to knit them together and deliver a great outcome and actually have it go live short period of time, great outcome, happy client. And that is a very, very powerful vector for us for the future.
Very good. Appreciate the insights. Thank you.
Thank you. That was our final question, and we will conclude our question and answer session for today. I would now like to hand the call back over to Robin for any additional or closing remarks.
Thank you, operator, and thanks, everyone, for your time today. Appreciate your interest in BNY. Please reach out to Marius and the IR team if you have any follow-up questions.
Be well.
Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Investor Relations site.
At 3PM Eastern Time today. Have a great day.
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