Expectations were high for Charlie Scharf’s debut investor day at BNY Mellon. The former JPMorgan Chase banker, an acolyte of Jamie Dimon, had been hired as chief executive last summer from Visa, the San Francisco-based payments group, with a mandate to inject new life in to the oldest bank in America.
Mr Scharf began the triennial event brightly, saying how much he admired BNY’s main business lines of investment services and investment management, while stressing there were no “silver bullets” to transform the company’s outlook.
But as the morning wore on, senior executives painted a gloomier picture, with Mike Santomassimo, chief financial officer, disclosing for the first time that organic revenue growth over the past few years, excluding fee waivers and other external factors, had been about 0.5 per cent.
By 2019, BNY said, total top-line growth should be “slightly” better than last year’s 4 per cent, assuming a gently rising stock market and continued normalisation of interest rates. That was on the low end of estimates from Wall Street analysts such as Susan Roth Katzke of Credit Suisse, who had outlined a range of 4 to 6 per cent in a preview note.
One analyst in the room, speaking on condition of anonymity, said that by the end the mood was somewhat deflated. “Where’s the drama? This is Jamie Dimon’s right-hand guy and you’re coming in to say revenue sucked in the past and will be only ‘slightly’ better in the future?”
The shares closed down 2.1 per cent, having dipped as much as 4 per cent during the day. The rest of the big US banks moved fractionally higher, with the broader market.
Generating a sense of excitement around BNY, founded in 1784 by Alexander Hamilton, will not be easy. The bank essentially serves as a giant back office for the world’s capital markets, providing custody, clearing and other functions to help keep financial assets safe and accounted for. The core investment services division, looking after $33.3tn of assets in total, made up about three-quarters of the bank’s $15.5bn in revenues last year.
That is low-octane and mostly low-margin stuff. High barriers to entry because of tight regulation and expensive technology, combined with fierce pressure on margins, makes the custody business “the world’s worst oligopoly”, in the words of Mike Mayo, an analyst at Wells Fargo. He noted that overall revenue growth across the industry has fallen steadily over the past 30 years, slipping from a compound annual rate of about 12 per cent to 4 per cent in the decade-to-date.
Mr Scharf, striking a contrast from past chief executives by appearing tieless in a button-down shirt, said on Thursday that the backdrop is unlikely to change. Pricing pressures are “not a new phenomenon”, he said, noting that the typical contract with an asset manager runs from five to seven years. “And as you’ll hear throughout the day, nothing leads us to believe that anything is different there.”
But he stressed that BNY could drive revenue growth through its investment management business, the seventh-biggest in the world by assets under management, and particularly through its wealth arm, focused on the US.
And after years of intensive cost cuts there was still some “juice” left, Mr Scharf said, citing a probable flattening of compliance expenses and a consolidation of office space. “Getting to efficiency, getting to the core of the expense base, it is like an onion. You just peel it back and you see things that you didn’t see,” he said.
Regulatory changes could be a tailwind too, added Mr Santomassimo, if a more “open-minded” cast of characters at the Federal Reserve begins to loosen requirements on capital and liquidity.
But given the tough outlook in the core business, analysts said that it probably made sense for the new chief executive to set the bar low.
“It was reasonable for him to take a balanced and hopefully conservative stance in his first investor day,” said Ken Usdin, analyst at Jefferies.
“There’s a lot to get your arms around with this company and a lot of complex business lines which all need to move together. He did a good job of demonstrating where the building blocks can improve from here.”
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