MARCH 2015 THE BANK OF NEW YORK MELLON
Q1 2010 Investor Presentation Disclaimer
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Q1 2010 Investor Presentation < 1 > Table of Contents
I. Executive Summary
II. Good Franchise In A Historically Good Business
III. The World Has Changed
IV. Poor Management Through A Changing Environment
V. No New Ideas For A Better Future
VI. Case Study: JPM 2015 Investor Day
VII. Unlocking Potential: Bold Action and New Ideas
A. Common Sense Principles
B. Business Opportunities
VIII. Unlocking Potential: New Leadership
IX. Valuation
Q1 2010 Investor Presentation < 2 > I. Executive Summary
Q1 2010 Investor Presentation < 3 > Executive Summary
1. BNY Mellon has a good franchise in what has been a good business
2. But the world has changed...
i. Low rates and volatility pressuring revenues (permanent?)
ii. Regulatory environment imposing new capital charges and operating burdens (permanent)
3. Management has done a poor job creating value through this changing environment and offers no new ideas for facing current and future challenges
4. BNY Mellon will not reach its potential with small, incremental adjustments but requires bold action and new ideas
5. New leadership will be necessary to conceive and execute the strategies necessary to compete in this new world
Q1 2010 Investor Presentation < 4 > Executive Summary
New Leadership Will Have Numerous Opportunities For Improvement:
1. Reconsider Value Proposition to Core Investment Servicing Customers
2. Raise IT Effectiveness to Top Company Priority
3. Reduce Headcount Aggressively
4. Reposition Asset Management
5. Establish Culture of Effectiveness, Urgency, and Accountability
6. Upgrade Regulatory Sophistication and Outreach
7. Refresh the Bank of New York Brand
Successful execution against this plan will produce a more powerful franchise with higher growth, a more efficient expense base, higher returns on capital, and a market value that is more than double the current price
Q1 2010 Investor Presentation < 5 > II. Good Franchise In A Historically Good Business
Q1 2010 Investor Presentation < 6 > Leading Market Share in a Concentrated Industry
BK is a leading global custodian and operates in an industry dominated by three major global custodians (BNY Mellon, State Street, JP Morgan) Large client base drives high transaction volumes and economies of scale
Global Assets Under Custody Global Assets Under Administration
BNY Mellon, State Street, 19% 22% Other, 30%
Other, 37%
State Street, 14%
IFDS, 6% JP Morgan, 22%
BNP Paribas, JP Morgan, HSBC, 9% BNY Mellon, 6% 14% Citi, 10% 11%
~$150 trillion market ~$30 trillion market
Source: Company filings, Marcato estimates, Wall Street and third-party research Note: Estimated as of March 31, 2014
Q1 2010 Investor Presentation < 7 > Mission Critical, Trust-based Services To Customers Create Barriers to Entry
Economies of Scale Large providers can leverage economies of scale to deliver custody services at significantly lower costs than small competitors § Custody involves large fixed costs to build out each processing service for the first customer of that service
High Switching Costs / Sticky Client Relationships
Preference to centralize back office with a single custody bank provider to maintain centralized oversight of operations Customers build their back-office infrastructure around the custodian Significant time and resources required to establish a custodial service relationship (3 month on-boarding process) Low customer attrition with average asset servicing relationships greater than a decade Legally enforceable multiyear service contracts Mission critical services at a small price in relation to the assets of its clients (.01% of assets)
Q1 2010 Investor Presentation < 8 > Investment Servicing is a Business Process Outsourcing (“BPO”) Service
Traditional Business Process Asset Custodian Outsourcer
Specialization In Non-core Yes Yes Processes
Fixed-to-Variable Cost Yes Yes Conversion
Offshore Labor Inputs Yes Yes
Technology-Based Yes Yes Solutions
Differentiation Through Yes Yes Service Quality
Multi-year Contracts Yes Yes
Q1 2010 Investor Presentation < 9 > Attractive Fee-Based Business Model
BK primarily generates revenue from fees rather than net interest margin Counter-cyclical elements in fee revenue mitigate the impact of severe market downturns and provide earnings stability
Revenue Mix(1) Total Fee Revenue (2008 Financial Crisis)
+4% $13,000 $12,342 Net interest Other $11,897 revenue 3% Asset -8% 19% management fees 26% +62% $10,000 FX volatility
-10%
$7,000 Investment servicing fees +6% 52% Securities lending spreads and volumes $4,000 2007 2008 Securities servicing Asset and wealth management
Source: Company filings; As of FY14 FX and other trading activities Other Note: 2007 adjusted for 6 mos. of Mellon Financial (1) Adjusted for gains on sale of Wing Hang and One Wall Street building
Q1 2010 Investor Presentation < 10 > Positive Long-term Growth Dynamics
BK should benefit from the long-term global growth of financial assets, growing diversity of financial instruments, rising regulatory complexity and increasing cross-border activity
Global Financial Assets ($tn) CAGR % (’90 – ’10) (’10 – ’20) $1,000 $900 +5% +4% $900
$800 $730 +5% +3% $700 $600 $600 $494 $500 $393 $400
$300 $273 $221 $200
$100 +8% +9%
$0 1990 1995 2000 2005 2010 2015 2020
Developing Advanced
Source: Bain & Company: A World Awash in Money: Capital Trends Through 2020
Q1 2010 Investor Presentation < 11 > Conservative Balance Sheet
BK’s balance sheet is primarily comprised of low-risk, short-duration assets Loan accounts are a small and declining mix of total interest-earning assets Low-yielding cash and interbank investments have accumulated on the balance sheet
Mix of Average Interest-Earning Assets
100%
18% 17% 18% 18% 90% 23% 21% 31% 80% 37%
70% 32% 38% 37% 35% 60% 32% 34% 30% 50% 1% 32% 1% 2% 2% 2% 2% 40% 1%
30% 2% 48% 44% 44% 43% 43% 45% 20% 38% 29% 10%
0% 2007 2008 2009 2010 2011 2012 2013 2014
Cash / interbank investments Trading account securities Securities Loans
Source: Company filings
Q1 2010 Investor Presentation < 12 > Conservative Balance Sheet: High-Quality Assets
BK’s loan portfolio has consistently experienced less charge-offs through a cycle than a typical commercial bank BK’s investment securities portfolio primarily consists of high-quality AAA / AA- rated securities
Loan Portfolio: Net Charge Off Ratio %
4.0%
3.0%
2.0%
1.0%
– 2008 2009 2010 2011 2012 2013 2014 BK BAC WFC JPM
Investment Securities Portfolio: Ratings Mix
100% 6% 5% 6% 6% 8% 11% 11% 6% 4% 5% 3% 2% 5% 5% 80%
60% 90% 40% 87% 86% 87% 89% 89% 89%
20%
0% 2008 2009 2010 2011 2012 2013 2014 AAA / AA- A+ / A- Other
Source: Company filings, Wall Street research
Q1 2010 Investor Presentation < 13 > Conservative Balance Sheet: Liabilities
BK’s assets are primarily funded by low-cost custody deposits, a high-quality wholesale funding source that has proven to be stable and predictable Custody deposits are attractive funding sources because they originate from very sticky custody relationships with high switching costs Deposits
$400 90% 82% 81% 81% 79% 77% 77% $350 80% 72% 70% $300 60% 60% $250 $234 $222 50% $192 $200 $73 $70 $160 40%
Total Deposits $58 $150 $141
$132 Earning Assets%ofDeposits
$35 - 30% $36 $34 $100 $88 $92 – 20% Interest $22 $152 $161 $125 $134 $50 $92 $98 $104 10% $66
– – 2007 2008 2009 2010 2011 2012 2013 2014
Interest-bearing deposits Noninterest-bearing deposits Deposits / Interest-earning assets
Source: Company filings
Q1 2010 Investor Presentation < 14 > Conservative Balance Sheet: Safe Haven
BK has experienced deposit inflow surges during market crises because clients view BK’s balance sheet as a safe haven
September 2001 Attack Lehman Brothers Bankruptcy US Debt Ceiling 2011 US Fiscal Cliff 2012 $250 $223 $218 $207 $208 $199 $200 $192 $169
$140 $145 $150 $132 $120
$100 $61 $54 $53 $57 $50
– 1Q01 2Q01 3Q01 4Q01 3Q08 4Q08 1Q09 2Q09 2Q11 3Q11 4Q11 1Q12 3Q12 4Q12 1Q13
Source: Company filings
Q1 2010 Investor Presentation < 15 > High Capital Ratios
BK’s Tier 1 capital ratio has approached multi-year highs
Tier 1 Capital Ratio
18.5%
16.5%
14.5%
12.5%
Consolidation of 10.5% certain investment management 8.5% funds(1)
6.5%
4.5%
2.5%
0.5% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
(1) Reflects methodology revision implemented in June 30, 2014 that consolidates assets of certain investment management funds in risk-weighted assets. Basel III capital ratios are shown from 1Q14 onwards
Q1 2010 Investor Presentation < 16 > Attractive Balance Sheet: Stress Test Performance
BK’s business model performs well in government stress tests
Source: Federal Reserve March 2015 DFAST Stress Test
Q1 2010 Investor Presentation < 17 > III. The World Has Changed
Q1 2010 Investor Presentation < 18 > Net Interest Margin Pressure
BK’s earnings are cyclically pressured by decade-low net interest margins due to a prolonged period of low global interest rates and a growing mix of excess deposits on the balance sheet Low global interest rates depress net interest revenue, depress trading volatility, increase money market fee waivers, and depress securities lending spreads
Net Interest Margin (FTE) %
2.50%
2.30%
2.10%
1.90%
1.70%
1.50%
1.30%
1.10%
0.90%
0.70%
0.50% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Source: Company filings
Q1 2010 Investor Presentation < 19 > Net Interest Revenue Upside
BK can create $11 - $21 per share of incremental value by 2017 from incremental net interest revenue depending on the pace of short-term interest rate normalization
Net Interest Revenue Sensitivity
$6,000
$4,884 $5,000
$3,950 $4,000
$2,904 $3,000
Net InterestRevenue $2,000
$1,000
– LQA 2017E 2017E (1) FFER +25bps/qtr (2Q15 - 2017) "Fed Dots" Average (2)
NIM % 91 bps 138 bps 170 bps Average Fed Funds Rate % 9 bps 213 bps 302 bps Incremental EPS @ 27% tax rate $0.74 $1.40 (x) P/E 15.0x 15.0x Incremental Value Per Share $11.07 $20.95
Note: Assumes $55bn of excess deposits (midpoint of $40 - $70bn Company guidance) and 3.5% CAGR on normalized interest-earning assets (1) Assumes midpoint of 2014 Investor Day NIM guidance(125bps – 150bps) (2) September 17, 2014 FOMC projection materials. Assumes ~1.7% NIM rate at 3% FFER
Q1 2010 Investor Presentation < 20 > BNY Mellon Has Greater Rates Leverage than State Street
Net Interest Revenue Sensitivity
Impact on current net interest revenue over the next 12 months based on a quarterly 25 bps increase in global interest rates over the next four quarters (Company internal estimates)
+ 100bps rate "ramp" $149 $326 LTM Net Interest Revenue (FTE) $2,433 $2,942 % Upside 6.1% 11.1%
Source: Company filings
Q1 2010 Investor Presentation < 21 > Securities Lending and FX Volatility
Higher interest rates may also potentially drive improvements in securities lending and FX trading revenues
Indexed Ted Spread (3 Mo. LIBOR – T. Bills) FX Volatility
350 25
300 20 250
200 Averages: 15 2001 – Present: 42 150 2001 – 2007: 36 10 TED Spread 2009 – Present: 30
100 JPM G7VolatilityIndex 5 50 ~25
0 0
“The Fed Funds Rate has a big impact on the TED FX volatility now at all-time lows over the past 20 spread, which has a big impact on our securities years lending activity...when rates eventually go up and As interest rates rise and rate differentials increase, you get back to the more normalized TED spread, customers increase their use of carry trade strategies this will be a much more attractive business à higher FX volumes financially” - Bob Kelly, CEO, 3/2/10 CLSA Analyst Day
Source: Bloomberg, Company transcripts
Q1 2010 Investor Presentation < 22 > Money Market Fee Waivers
Higher interest rates will also recover significant money market fee waivers
Pre-tax Money Market Fee Waivers Fee Waiver Recovery
Source: 4/8/14 Analyst Day, 9/4/14 Barclays Global Financial Services Conference
Q1 2010 Investor Presentation < 23 > A Changing Regulatory Landscape
Key Regulations Past Present Future
Basel Capital Ratios Stress Testing (CCAR/ DFAST) Dodd-Frank Supplementary Leverage Ratio (SLR) Liquidity Coverage Ratio (LCR) European Market Infrastructure Regulation (EMIR) Volcker Rule Recovery and Resolution Plans Foreign Account Tax Compliance Act (FATCA) Markets in Financial Instruments Directive (MiFID) Target2 Securities (T2S) Alternative Investment Fund Managers Directive (AIFMD) Tri-party Repo Reforms Money Market Fund Reforms Data Management Standards Net Stable Funding Ratio (NSFR) Total Loss Absorbing Capital (TLAC) G-SIB Surcharges
Source: Company filings, Industry news, Wall Street research
Q1 2010 Investor Presentation < 24 > Key Business Model Implications
New Regulations Key Implications Supplementary Leverage Higher capital retention, “low risk” assets need to generate Ratio (SLR) higher returns, trading book contraction, deposit reduction and management, higher compliance costs, Liquidity Coverage Ratio Lower NIM yields, reallocation of balance sheet towards (LCR) HQLA, reduced appetite for non-operational deposits, liability optimization, higher compliance costs Stress-Testing (CCAR / DFAST) Regulatory scrutiny of capital return policies, higher capital ratios, tighter risk management practices, higher compliance costs Basel III Higher capital ratios, more onerous capital definitions and risk- weightings, less leverage, capital penalties for size, complexity and interconnectedness Tri-party Repo Reform Lower intraday credit risk, higher compliance costs
Resolution Plans Higher compliance costs
More Capital & Higher Compliance Lower Market, Credit Reduced Size & Reduced Leverage Expenses & Operational Risk Complexity
Source: Company filings, Industry news, Wall Street research
Q1 2010 Investor Presentation < 25 > Rising Capital and Liquidity Requirements By 2019
CET1 SLR LCR
15.0% 8.0% 150%
125% 12.0% 6.0% 6.0% 109% 9.8% 1.0% Well-Capitalized 100% Buffer 100% 9.0% 8.5% 4.4% 0.5% US G-SIB(1) B3 G-SIB Enhanced SLR 1.0% Surcharge(2) 4.0% 2.0% Buffer 75%
6.0% Capital 2.5% Cons. Buffer 50%
2.0%
3.0% SLR B3 3.0% Minimum 25% 4.5% Minimum
– – – BK @ 4Q14 Projected (3) BK @ 4Q14 Projected BK Projected Regulatory Regulatory Regulatory
Source: Wall Street research, Company filings (1) Potential US G-SIB surcharge of up to 2%. Estimated 0.5% US surcharge for BK per Citigroup 12/8/14 (2) B3 potential G-SIB surcharge of 1% - 3.5%. Estimated 1% surcharge for BK per Financial Stability Board (3) Per 10/28/14 Investor Day
Q1 2010 Investor Presentation < 26 > Key Business Model Implications
Whether or not the rate / volatility environment ever returns to historical levels, the new regulatory world requires BNY Mellon to reconsider many aspects of the Company:
Client Selection & Business Lines Geographical Mix Economics
Deposit & Liability Asset Mix Labor Mix Structure
Q1 2010 Investor Presentation < 27 > IV. Poor Management Through A Changing Environment
Q1 2010 Investor Presentation < 28 > 2007 Mellon Merger Has Failed to Deliver on Promises
Q1 2010 Investor Presentation < 29 > 2007 Mellon Merger Has Failed to Deliver on Promise
In its 12/4/2006 presentation on the merger with Mellon Financial (Mellon M&A Presentation), BK outlined a path towards $3.38 in cash EPS by 2009 BK only achieved $2.56 of cash EPS in 2014 (24% below 2009 targets, 5 years later)
12/4/06 Mellon M&A Presentation – EPS Targets
Source: Mellon M&A presentation 12/4/2006
Q1 2010 Investor Presentation < 30 > Dubious Claimed Merger Synergies
BK claims it achieved $850mm of expense synergies and $325 - $425mm of revenue synergies from the Mellon merger (claiming that it even exceeded its initial goals) Despite claimed synergies, revenue growth has been tepid and actual expenses have significantly outgrown revenues Claimed synergies are dubious, as gross expenses would have massively outgrown revenues without synergy benefits
2007 Mellon Merger Targets FY2007 – FY2014 Total Growth %
Core (1) 4% Revenues 6% ∆ Actual Results Core (2) 10% Expenses
– 4% 8% 12% 16% 20% 24%
Core (1) 2% Revenues 15% ∆ Without “Alleged” (3) Core Synergies (2) 17% Expenses
– 4% 8% 12% 16% 20% 24% Mellon merger synergies are unobservable based on post-merger results
Source: M&A presentation 12/4/2006, Company presentation 11/11/08, 10K 2014 (1) “Core revenue” adjusts for non-operating items such as securities gains (losses), FTE adjustments, discount accretion, earnings attributable to non-controlling interests of consolidated investment management funds and one-time gains / losses on asset sales (per BNY Mellon 10/28/14 Investor Day methodology) (2) Core expenses adjusted for intangible amortization, M&I, litigation and restructuring charges, support agreement charges, and charges related to investment management funds (3) Assumes $850mm of cost synergies and $375mm of revenue synergies
Q1 2010 Investor Presentation < 31 > Noninterest Expense Has Grown Unsustainably
Margins have deteriorated as noninterest expense has grown rapidly against stagnant fee revenue
Noninterest Expense % of Fee Revenue(1)
95% 93% 92% 91%
90% 89% 88% 87%
85%
80%
77%
75%
70% 2008A 2009A 2010A 2011A 2012A 2013A 2014A
Source: Company filings (1) Noninterest expense excludes amortization of intangible assets, merger & integration charges, litigation and restructuring charges, support agreement charges, charges related to investment management funds (2) Fee revenue excludes non-recurring asset-related gains
Q1 2010 Investor Presentation < 32 > Unabated Headcount Growth
Headcount has grown disproportionately versus revenues since the Mellon merger (22% total growth in headcount vs. 4% total growth in “Core” Revenue)
Total Headcount “Core” Revenue(2) ($bn)
55,000 $16.0
50,300 50,000 $15.0 $14.6
$14.0 45,000 $14.0
41,200
40,000 $13.0
35,000 $12.0
30,000 $11.0
$10.0 25,000 (1) 2007 2014 2007 2014
Source: Company filings, Marcato estimates (1) 2007 includes annualized impact of Mellon Financial (2) “Core revenue” adjusts for non-operating items such as securities gains (losses), FTE adjustments, discount accretion, earnings attributable to non-controlling interests of consolidated investment management funds and one-time gains / losses on asset sales (per BNY Mellon 10/28/14 Investor Day methodology)
Q1 2010 Investor Presentation < 33 > Technology Fragmentation Is A Key Source of Excess Costs
Major Redundancies - Back office headcount Two Custody Five Accounting - Systems maintenance Platforms Platforms - Application development - Reporting costs
“One of the things that is really setting us apart [from our competitors] post-transformation is the fact that we do have one global platform...When we spend dollars to build the future functionality, we do it once. And then we leverage it across the world. If you have six accounting platforms and you were doing a regulatory change six times, that’s 1/6 the IT efficiency” - Gunjan Kedia, State Street EVP, 2/25/15
“And I think I’ve mentioned about the challenges with the merger & acquisitions is we have so many different fragmented technology in various businesses and various products...I think the nature of the acquisitions have resulted in lots of fragmentation of technology”
- Suresh Kumar, BNY Mellon CTO, 3/13/13
“The traditional approach for any of these acquisitions is steeped in the thesis that you’ll see more synergies the more simplified your back end, and the more common systems you share, especially those that benefit from scale. That’s been time-tested in the trust banking business” - Tim Keaney, Former BNY Mellon CEO Investment Services, 2010(1)
Source: Company filings, Company transcript, HBS Case Study (1) Harvard Business School Case Study: “Merger of Equals: The Integration of Mellon Financial and The Bank of New York”
Q1 2010 Investor Presentation < 34 > Costly M&A Activity
BK’s heavy cost structure reflects the significant M&A activity the Company has undertaken over the years
2007 Global Securities Services 2008 Portsmouth 2009 Financial Systems BHF Asset 2010 Servicing
2011 Broker-Dealer 2012 2013 2014
Mellon Financial has not been fully integrated seven years after the acquisition
Source: Company filings, CapitalIQ Note: Cutwater Asset Management acquisition announced in October 2014 and closed in January 2015
Q1 2010 Investor Presentation < 35 > Gerald Hassell’s 2011 Investor Day Targets Have Failed to Materialize
Q1 2010 Investor Presentation < 36 > Missed EPS Targets: 2011 Investor Day
In BK’s 11/14/11 Investor Day, CEO Gerald Hassell provided a roadmap for 7 – 11% EPS growth between 2011 and 2014 BK fell significantly short of even the low-end of its 2014 EPS targets
2011 Investor Day Earnings Roadmap Cash EPS Bridge to 2011 Investor Day Target
$3.50 $3.31
$2.96 $3.00
$2.52 $2.49 $2.50 $2.42
$2.00
'14A '14A $2.56 $2.56
$1.50
$1.00 2011A 2012A 2013A 2014 (@7%) 2014 (@11%) Source: BNY Mellon Investor Day 11/14/11
Q1 2010 Investor Presentation < 37 > Missed ROE Targets: 2011 Investor Day
In BK’s 11/14/11 Investor Day, BK Management also targeted a 10% ROE by FY14 BK fell significantly short of this 10% ROE target in 2014 ROE has deteriorated significantly since 2011
BK Return on Equity %(1)
10.5%
10.0%
9.5%
9.0% ROE 9.0% 8.8% Gap
8.5% 8.3% 8.1% 8.0%
7.5%
7.0% 2011 2012 2013 2014
(1) Reflects Company-reported non-GAAP ROE
Q1 2010 Investor Presentation < 38 > BNY Mellon Has Underperformed State Street on Key Targets
While BK’s results have significantly deteriorated, State Street’s results have significantly improved
Indexed EPS Growth(1) Return on Equity(2)
150 12.0%
132 11.0% 125 118 10.5% 10.3% 10.0% 105 106 9.8% 104 103 10.0% 100 100 100 9.0% 9.0% 8.8%
8.3% 75 8.1% 8.0%
50 7.0% 2011 2012 2013 2014 2011 2012 2013 2014 BK STT
(1) Adjusted for amortization of intangibles, acquisition and restructuring costs and other one-time items (2) Reflects State Street ROE adjusted for extraordinary losses and BK non-GAAP ROE %
Q1 2010 Investor Presentation < 39 > Flat EPS Growth Despite Certain Beneficial Market Tailwinds
“Using the S&P 500 Index as a proxy for the global equity markets, we estimate that a 100-point change in the value of the S&P 500 Index, sustained for one year, would impact...” ─ “...fully diluted earnings per common share by $0.03 to $0.05” (BK 2011 Annual Report) ─ “...fully diluted earnings per common share by $0.03 to $0.05” (BK 2012 Annual Report) ─ “...fully diluted earnings per common share by $0.02 to $0.04” (BK 2013 Annual Report) ─ “...fully diluted earnings per common share by $0.02 to $0.04” (BK 2014 Annual Report)
Indexed Growth (FY2011 = 100): BK EPS Growth vs. Market Indices Growth
160
152 150
140 134 130
120 118
110 107 106 100
90 2011 2012 2013 2014 S&P 500 Index MSCI World Index FTSE 100 Index Barclays Capital Global Aggregate Bond Index BNY Mellon LTM EPS
Source: Company filings Note: Equity market indices represent daily averages over time series. Bond index represents period-ends over time series
Q1 2010 Investor Presentation < 40 > Unobservable “Cost Reductions”
Margins have deteriorated despite “Operational Excellence Initiatives”, where BK laid out savings targets of $650 - $700mm by 2015 BK claims that has significantly exceeded its targets through 2013 but there is no observable evidence in support of this claim
2011 Operational Excellence Targets
Source: BNY Mellon 10K 2013
Q1 2010 Investor Presentation < 41 > Expense Growth Does Not Show Evidence of Initiatives
Claimed cost savings imply gross expenses between 2011 and 2013 would have grown by $1.2bn (or ~12%) if management did not execute its “Operational Excellence” initiatives and achieve M&A synergies Revenue has barely grown over the same time period 2011 – 2014 Total Growth % 15%
12% 11% 2014) -
7% 5%
Total Growth(2011 3% 2%
(2) (3) (1%) Revenue (1) Expenses, net Expenses, gross
Source: Company filings (1) Adjusted for sale of Shareowner Services sale in 2011, gain/loss related to equity investments, and net income attributable to noncontrolling interest related to consolidated investment management funds (per BNY 10/28/14 Investor Day pg. 10) (2) Adjusted for sale of Shareowner Services sale in 2011, amortization of intangible assets, M&I, litigation and restructuring charges and charges related to investment management funds (3) Net expenses adjusted for $636 of “Operational Excellence” savings and claimed GIS acquisition expense synergies (2011 = $72mm, 2014 = $120mm)
Q1 2010 Investor Presentation < 42 > Bloated Employee Base
Headcount disproportionate to that of comparable companies ■ Combinations of similar sized investment managers and investment servicers would imply meaningfully lower headcount levels ■ Headcount discrepancy not bridgeable by BK’s Corporate Trust or Pershing business units
Total Employees
Investment 60,000 Investment Managers Servicers
50,300 Implied Headcount (Asset Manager + Asset Servicer) 50,000 Asset Managers Capital JPM Vanguard BLK BEN Group GIM (2) PIMCO 40,000 JPM (TSS)(1) 41,200 39,200 36,266 34,000 32,700 29,490
Asset STT 41,670 39,670 36,736 34,470 33,170 29,960 30,000 27,470 ~27,000 Servicers (IS) Total Employees 20,000 ~14,200 12,200 9,266 10,000 ~7,000 6,264 5,870 5,700 3,100 ~2,500 2,490 1,435 – BK STT JPM Vanguard BLK BEN Capital Group IVZ TROW JPM LM STT PIMCO FII (1) (Inv. Serv.) (TSS) (Global Inv. Mgmt.) (Inv. Mgmt.)
AUC/A ($tn) $29 $28 $21 AUM ($bn) $1,710 $3,100 $4,652 $898 $1,147 $792 $747 $1,744 $709 $2,480 $1,680 $363
Source: Company filings, Marcato estimates (1) JPM’s Treasury & Securities Services division (2) JPM’s Global Investment Management division
Q1 2010 Investor Presentation < 43 > Employee Inefficiency
BK’s ever-deepening gap of core revenues / average employee in comparison to State Street show significant increasing employee inefficiency
Core Revenue / Average Employee(1)
$0.400
$0.370
$0.340
$0.310
Core Revenue/AverageEmployee ($bn) $0.280
$0.250 2009 2010 2011 2012 2013 2014
Source: Company filings BK STT (1) “Core revenue” adjusts for non-operating items such as securities gains (losses), FTE adjustments, discount accretion, earnings attributable to non-controlling interests of consolidated investment management funds and one-time gains / losses on asset sales (per BNY Mellon 10/28/14 Investor Day methodology). BNY Mellon adjusted for sale of Shareowner Services and acquisitions of PNC GIS and BHF Asset Servicing
Q1 2010 Investor Presentation < 44 > Relative Headcount Trajectory
While macroeconomic factors and regulatory compliance have pressured headcount and costs for all G-SIB banks, BK has responded least forcefully to headcount
Indexed Headcount
110%
105% 104% 103%
100%
96% 95% 94% 93% 90% Indexed Headcount
85%
80%
78% 75% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
(1) BNY Mellon State Street JP Morgan (CIB = TSS + IB) Bank of America Goldman Sachs Citigroup
Source: Company filings (1) CIB represents JP Morgan’s Corporate and Investment Bank, which includes the results of Investment Banking and Treasury & Securities Services segments
Q1 2010 Investor Presentation < 45 > Disproportionately High Professional Fee & Outside Service Expense
While choices around insourcing vs. outsourcing impact headcount comparisons, BK also spends the greatest % of revenues on professional and outside service fees compared to other custody, asset management and G-SIB peers ■ BK’s professional, legal and outside services expense has grown by over 10% since 2011
2014 Professional & Outside Service Fees % of Revenues
10.0% 9.0% 9.0% 8.2% 8.0%
7.0%
6.0%
5.0% 4.3% 4.0% 2.9% 3.0% 2.6%
2.0% 1.1% 1.0%
– BK JPM STT BAC GS BLK
Source: Company filings
Q1 2010 Investor Presentation < 46 > BK’s Margins Have Deteriorated While State Street’s Margins Have Improved
BNY Mellon went from a 2%+ margin surplus versus State Street to a 5% margin deficit
LTM Core Pre-Tax Margin %(1)
35.0%
33.0%
31.0% +2%
-5% 29.0% -3%
27.0%
25.0% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
BK STT Source: Company filings (1) Adjusts revenue for net securities gains, accretable discount, FTE adjustments, other gains/losses on asset sales, net income attributable to noncontrolling interests in consolidated investment management funds. Adjusts expenses for amortization of intangible assets, M&I, litigation & restructuring charges, net charge related to investment management funds, and other one-time charge. BK margins also adjusted for sale of Shareowner Services and GIS / BHF acquisitions
Q1 2010 Investor Presentation < 47 > Persistent Underperformance on Key Business Metrics
Q1 2010 Investor Presentation < 48 > Key Revenue Drivers Are Decelerating Under Current Management
Investment Servicing LTM Gross New Business Wins ($bn)
$1,900 $1,700 $1,720 $1,500 $1,294 $1,479 $1,300 $1,138 $1,219 $1,226 $1,415 $1,167 $1,231 $1,284 $1,133 $1,141 $1,348$1,176 $1,273 $1,031 $1,100 $1,201 $1,118 $1,125 $1,216 $900 $1,016 $982 $639 $700 $706 $536 $595 $524 $529 $500 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 BK STT
Investment Management LTM Long-Term Net Inflows ($bn)
$120 $107 $100 $95 $89 $80 $83 $84 $76 $76
$60 $59 $58 $53 $56 $48 $40 $42
$20 $23
– 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Source: Company filings
Q1 2010 Investor Presentation < 49 > BK Has Lost Custody Market Share Under Current Management
BK tells investors to not “get overly concerned about that new business win rate because less of the business is geared to AUC”(1) and argues that there has been a “real shift in non- AUC/A types of businesses”(2) Management pronouncements may help explain inferior AUC/A growth rates but do not explain inferior asset servicing revenue growth rates
Asset Servicing Fee Growth %(1)
18% 17%
16%
14%
12% 11%
10%
8%
6%
4%
2%
– 1 2
(1) LTM 3Q11 – FY14 total growth. Reflects BK’s reported asset servicing fees less securities lending revenues within Investment Services segment. Reflects STT’s reported servicing fee revenues which excludes securities finance revenues
Q1 2010 Investor Presentation < 50 > BK Has Lost Custody Market Share Under Current Management: Total Custody Assets
BNY Mellon is about to be surpassed as the world’s largest global custodian
Indexed Custody Asset Growth (3Q11 = 100%)
150%
143% 140%
131% 130% 130%
126%
120% 115%
110%
100%
90% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
BK STT NTRS JPM C
Source: Company filings
Q1 2010 Investor Presentation < 51 > BK Has Lost Custody Market Share Under Current Management : Equity Assets
BNY Mellon is about to be surpassed as the world’s largest global custodian
Indexed Equity Custody Growth (3Q11 = 100%)
170%
160%
152% 152% 150% 148% 144% 140%
130%
120%
110%
100% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
BK STT NTRS JPM
Source: Company filings, Wall Street estimates, Marcato estimates
Q1 2010 Investor Presentation < 52 > BK Has Lost Custody Market Share Under Current Management : Fixed Income Assets
BNY Mellon is about to be surpassed as the world’s largest global custodian
Indexed Fixed Income Custody Growth (3Q11 = 100%)
150%
140% 139%
130%
120%
113%
110% 105% 103% 100%
90% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 BK STT NTRS JPM
Source: Company filings, Wall Street estimates, Marcato estimates
Q1 2010 Investor Presentation < 53 > Net Interest Revenue Is Under-earning Due to Excess Accumulation of Low-Yielding Cash / Interbank Investments (cont’d)
Net Interest Margin % (FY14)(1)
1.20% 1.16% 1.15% 1.10% 1.08% 1.05% 1.00% 0.97% 0.95% 0.90% 1 2 3
Cash / Interbank Investments % of Interest-Earning Assets (FY14)
50.0% 45.0%
40.0% 33.6% 28.4% 30.0%
20.0%
10.0%
– 1 2 3
Source: Company filings (1) Fully-taxed equivalent
Q1 2010 Investor Presentation < 54 > BNY Mellon Has Consistently Returned Less Capital to Shareholders Than State Street
Total Capital Return (% of Average Quarterly Market Capitalization)
3.50%
2.97% 3.00% 2.82% 2.88%
2.50% 2.44% 2.22% 2.20%
2.00% 1.91% 1.82% 1.79% 1.83% 1.79% 1.70% 1.69% 1.59% 1.52% 1.45% 1.42% 1.42% 1.50% 1.33% 1.26% 1.14%
1.00% 0.84%
0.50%
– 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 BK STT
Source: Company filings, CapitalIQ Note: Capital return = share repurchases + dividends
Q1 2010 Investor Presentation < 55 > V. No New Ideas For A Better Future
Q1 2010 Investor Presentation < 56 > “New” Strategy – No New Ideas
11/14/11 Investor Day 12/11/13 GS Conference 10/28/14 Investor Day (“Flat”)
CEO Gerald Hassell: “It’s part of our goals that if we get a 4%, 5% revenue growth in a range, we should be able to produce positive operating leverage” CFO Todd Gibbons: “Our core fee business has been growing at about the 3% to 5% range...on the lower end of that, to generate positive operating leverage...is going to be challenging”
Revenue CAGR 3 – 5% 3 – 5% 3.5% – 4.5%
Expense (1) CAGR 2 – 3% ~3 – 4 % ~4%
EPS CAGR 7 – 11% 7 – 9%
Despite rhetoric about “moving faster and with a greater sense of speed and urgency”, new targets imply business as usual
Source: 11/14/11 Investor Day, 12/11/13 GS Conference, 10/28/14 Investor Day (1) Per Marcato estimates, see slide 62
Q1 2010 Investor Presentation < 57 > No New Ideas
Return on Tangible Equity (non-GAAP)
30%
25% 25% 22% 20 - 22%
20% 20% 17 -19% 18% 18%
15%
10% 2011 2012 2013 9/30/142014 2017 2017 Flat Normalized
New guidance demonstrates little commitment to restoring or improving returns on tangible equity, even in a normal interest rate environment
Source: 10/28/14 Investor Day
Q1 2010 Investor Presentation < 58 > Technology “Efficiencies” Are Unobservable
Highly touted technology efficiencies (reduced infrastructure spend, reduced application development costs) are unobservable in key expense lines Software and professional service expenses have risen 10 – 18% since 2012
Stated Efficiencies Indexed Expense $
120 118
115 114
110 110
105 102 100 100 100
95
90
85
80 2012 2013 2014 Software Professional, Legal and Other Purchased Services
Source: 10/28/14 Investor Day, Company filings
Q1 2010 Investor Presentation < 59 > Lack of Accountability on “Operating Leverage”
Management claims to be focused on operating leverage but offers no consistent benchmark to be held accountable against Management has re-defined “operating leverage” three times in the past year
Operating Leverage Adjustments 2Q14 3Q14 2014 Earnings Earnings Investor Day GAAP revenue ü ü ü (-/+) Gain (loss) on assets / investments ü û ü (-) Investment and other income û ü û (-/+) Net securities gains (losses) û ü ü (-) Minority interest of cons. inv. mgmt. funds ü ü ü (-) Accretable discount û û ü (+) Fully-taxed equivalent adjustment û û ü Adj. Revenue
GAAP Expenses ü ü ü (-) M&I, restructuring ü ü ü (-) Amortization ü ü ü (-) Charge related to i-mgmt funds ü ü ü Adj. Expenses
Source: Company transcripts, 2Q14 Earnings Release, 3Q14 Earnings Release, 10/28/14 Investor Day
Q1 2010 Investor Presentation < 60 > Lack of Accountability on “Operating Leverage”
Less than 2 weeks apart, Management showed two different methodologies to showcase the best version of “operating leverage” and “margin improvement” to investors
Method 1(1): 3Q14 Earnings (10/17/14) Method 2(2): 2014 Investor Day (10/28/14)
“This is one of our real focuses, delivering positive operating leverage and improving the operating margins of our “Our operating leverage was up 245 basis Commentary company...And so you can see over the last points year-over-year...” (Todd Gibbons) 12 months, the operating margin has in fact, improved by 78 bps across the firm” (Gerald Hassell)
3Q14 vs. 3Q13 Results LTM 3Q14 vs. LTM 3Q13 Results As presented As presented 3.00% 1.20% 107 bps 245 bps 2.50% 1.00% 77 bps 78 bps 2.00% 176 bps 0.80% 58 bps 1.50% Results 0.60% 1.00% 0.40% 0.20% 0.50% 14 bps 10 bps – – Operating Leverage Margin Expansion Operating Leverage Margin Expansion Method 1 Method 2
Source: 10/28/14 Investor Day, Marcato estimates (1) Method 1: Adjusted revenue defined as GAAP revenue – investment and other income – net securities gains – minority interest. Adjusted expenses defined as GAAP expenses – M&I and restructuring charges – amortization of intangibles – charges related to investment management funds (2) Method 2: Adjusted revenue defined as GAAP revenue – gains (losses) on assets and investments – net securities gains – minority interest – accretable discount + fully-taxed equivalent. Adjusted expenses defined as GAAP expenses – M&I and restructuring charges – amortization of intangibles – charges related to investment management funds
Q1 2010 Investor Presentation < 61 > Guidance Implies Virtually No Operating Leverage on a “Core Margin” Basis
'14A - '17E 2014A 2015E 2016E 2017E CAGR Key Management Guidance Drivers Revenue $14,856 $15,450 $16,068 $16,711 4% 4% Revenue Growth % growth 4% 4% 4% 8% EPS Growth 70% Buyback Ratio (-) Accretable discount (163) (145) (120) (100) ~$600mm of share dilution per annum (-) Net securities gains (91) (91) (91) (91) (+) FTE 62 62 62 62 (-) Minority interest (84) (70) (70) (70) Core Revenue $14,580 $15,206 $15,849 $16,512 4% % growth 4% 4% 4% Where is the operating leverage? Core Expense (implied) ($10,645) ($10,991) ($11,451) ($11,924) 4% % growth 3% 4% 4%
Core Pretax Income $3,935 $4,215 $4,398 $4,588 5% (+) Accretable discount 163 145 120 100 (+) Net securities gains 91 91 91 91 (-) FTE (62) (62) (62) (62) (+) Minority interest 84 70 70 70 (+/-) Provision for credit losses 48 (10) (10) (10) (-) Intangible amortization (298) (268) (240) (216) (10%) Pretax Income $3,961 $4,181 $4,367 $4,561 5% (-) Taxes @ 27% (1,038) (1,129) (1,179) (1,231) Net Income $2,923 $3,052 $3,188 $3,329 4% (-) Minority interest (84) (70) (70) (70) (-) Preferred dividends (73) (73) (73) (73) (-) Participating securities (43) (43) (43) (43) Net Income to common $2,723 $2,866 $3,002 $3,143 5% (/) FD shares outstanding 1,137 1,109 1,075 1,042 (3%) Diluted EPS $2.39 $2.59 $2.79 $3.02 8% % growth 8% 8% 8% Source: 10/28/14 Investor Day, Marcato estimates
Q1 2010 Investor Presentation < 62 > Expense Growth Assumptions Are Unrealistic
Higher expense growth in “flat scenario” than “normalized scenario”?
Investment Services Segment: 2014A 2015E 2016E 2017E CAGR
"FLAT SCENARIO": Revenue $ 10,059 $ 10,411 $ 10,775 $ 11,153 3.5% Pretax Income (excl. intangible amort., M&I, litigation & restructuring) $ 3,063 $ 3,216 $ 3,377 $ 3,546 5.0% Implied Pretax Expenses $ 6,996 $ 7,195 $ 7,398 $ 7,607 2.8%
"NORMALIZED SCENARIO": Revenue $ 10,059 $ 10,562 $ 11,090 $ 11,645 5.0% Pretax Income (excl. intangible amort., M&I, litigation & restructuring) $ 3,063 $ 3,400 $ 3,774 $ 4,189 11.0% Implied Pretax Expenses $ 6,996 $ 7,162 $ 7,316 $ 7,455 2.1%
Source: 10/28/14 Investor Day, Marcato estimates
Q1 2010 Investor Presentation < 63 > Questionable Expense Allocation To Meet Segment Targets
Guidance implies ~$250mm of incremental excess expenses will be allocated into the “Other” segment “Other” has historically been a bucket for excess expenses Whose bonus is tied to “Other” expenses?
Illustrative Income Statement (Flat Environment) '14E - '17E 2014A 2015E 2016E 2017E CAGR PTI @ 8.0% EPS CAGR(1) $3,961 $4,167 $4,353 $4,546 5% (-) M&I, restructuring and legal (1,130) (450) (450) (450) (-) i-mgmt. fund charges (104) – – – (+) FX litigation charge 779 – – – (+) Intangible amortization 298 268 240 216 Pretax Income (ex. amort) $3,804 $3,985 $4,143 $4,312 4% (-) Investment Management PTI ($1,116) ($1,216) ($1,326) ($1,445) 9% % growth 9% 9% 9% Segment guidance (-) Investment Services PTI ($2,794) ($2,934) ($3,080) ($3,234) 5% % growth 5% 5% 5% Segment guidance Other PTI ($106) ($165) ($264) ($368) 51% % growth 55% 60% 40%
Source: 10/28/14 Investor Day, Bloomberg consensus estimates, Marcato estimates, Management guidance (1) See page 62 for implied PTI at 8% EPS CAGR
Q1 2010 Investor Presentation < 64 > Speculative Investments in “Growth” Initiatives
BK will incur hundreds of millions of dollars of expenses to pursue strategic investments that will only become accretive to earnings in 2017 and 2018
Investment Management Investment Servicing
Source: 10/28/14 Investor Day
Q1 2010 Investor Presentation < 65 > Speculative Investments in “Growth” Initiatives (cont’d)
Strategic investments are unlikely to reach breakeven until at least 2019, assuming Management does not underperform on its current plan as it has in the past
Pre-Tax Impact of “Initiatives” 2013 2014 2015 2016 2017 2018 2019 Investment Management Initiatives ($36) ($74) ($39) – $44 $94 $99 Strategic Platform Investments (120) (111) (135) (11) 145 150 155 Total Investments ($156) ($185) ($175) ($11) $189 $244 $255
Cumulative Investment in “Initiatives”
$200
$100
– 2013 2014 2015 2016 2017 2018 2019 ($100)
($200)
($300)
($400)
($500)
($600)
Source: 10/28/14 Investor Day, 1/17/14 4Q13 Earnings Day Transcript, Marcato estimates Note: 2013 total investment based on management commentary that 1 – 2% of 2013 expense growth was due to reinvestment in growth initiatives
Q1 2010 Investor Presentation < 66 > Investments in “Growth” Initiatives – Where’s the Growth?
Despite a commitment to “investments”, Management does not appear equally committed to “growth” BK’s normalized revenue growth targets are well below State Street’s Revenue growth disparity is striking because: 1. BK has greater interest rate sensitivity than State Street 2. BK derives a greater mix of revenue from faster-growing asset management business lines 3. BK has greater breadth of capabilities that should drive superior growth from cross-selling (State Street targets 4 – 5% revenue CAGR from cross-selling(1))
Long-term Guidance: Normalized Organic Revenue Growth 12% 7% - 10%
9% 6% - 8%
6%
3%
0% BK STT
Source: 10/28/14 Investor Day (1) Per State Street 2/17/14 Investor & Analyst Forum. Reflects revenue growth targets attributable to cross-selling to existing clients
Q1 2010 Investor Presentation < 67 > Deja Vu All Over Again
Natural organic growth and announced “Transformation Process”, “Initiatives” and “Strategic Platform” investments should imply higher EPS growth than guidance...... unless the collective financial impact of actions (yet again) do not drop to the bottom line, just as with Management’s “Operational Excellence” program launched in 2011
$6,000
$3,961 @ 3.5% CAGR(1) $5,500 $431 2014 PTI drag of $185mm 2017 PTI benefit of $189mm Pg. 25, 64 – 2014 Investor Day $82 $5,000 $374 At least $500mm Pg. 66 – 2014 Investor Day $4,561 $500 $4,500 ($787)
$3,961 $4,000 “Incremental regulatory costs” vs. Buffer for poor Management execution?
$3,500
$3,000 2014 PTI "Transformation "Initiatives", Incremental Organic growth @ [Gap] 2017 Implied PTI @ Process" "Strategic Platform" amortization of 3.5% CAGR, 8% EPS CAGR intangibles constant margin
Source: 10/28/14 Investor Day, Marcato estimates (1) Assumes low-end of consolidated revenue growth guidance of 3.5% - 4.5% in “flat scenario”
Q1 2010 Investor Presentation < 68 > Conclusion
1. This Management team has failed to address the chronic underperformance of the Company
2. This Management team has responded to its challenges with a victim mentality – blaming the external environment while failing to control expenses or hold market share
3. New forecasts show no evidence of promised IT or expense efficiency performance
4. Management’s business plan shows inability to identify new business growth or opportunities created by new regulatory environment
Q1 2010 Investor Presentation < 69 > VI. Case Study: JPM 2015 Investor Day
Q1 2010 Investor Presentation < 70 > Case Study: JP Morgan Chase’s 2015 Investor Day
Revenue / Expense Growth Trends (Index) JP Morgan has delivered faster revenue growth and deeper expense reductions than BNY Mellon in key investment services business lines
Treasury Services Treasury Services(1) 1 Indexed to 2012 Revenue + 5% 1 1 1 1 1 2012 2013 2014 Asset Servicing(1) 1 Indexed to 2012 Custody and Fund Services Revenue + 8% 1
1
1 2012 2013 2014 Investment Services Noninterest Expense 1 Indexed to 2012 Actual + 7% 1 Adjusted(2) + 2% 1 1 1
Source: 2/24/15 JP Morgan Investor Day, Company filings 2012 2013 2014 (1) Excludes impact of net interest revenue (not disclosed by business line. Consolidated investment Services net interest revenue is down 4% from 2012 to 2014) (2) Adjusted for M&I and restructuring charges
Q1 2010 Investor Presentation < 71 > Case Study: JP Morgan Chase’s 2015 Investor Day
BNY Mellon has allowed expenses to grow significantly faster (in both $ and %) than JP Morgan’s entire Corporate & Investment Banking segment (which comprises JP Morgan’s investment services business) ■ Control, legal expenses and regulatory fees alone do not explain or justify BNY Mellon’s dramatic increase in costs. Investors would need to believe that BNY Mellon experienced more absolute dollar headwinds than a peer that generates >2x in revenue and operates in business lines with greater regulatory and legal scrutiny
Corporate & Investment Bank – Expense Trend Noninterest Expense(1) UNLIKELY $2,573 $12,177 $2.6bn – more $ headwind (controls, legal, regulatory, etc.) than JPM CIB??
$10,379 $10,170 $385 ($123) ($120) ($176) $104 ($636)
2010 Shareowner GIS, BHF PF 2010 Amort. Cost Operational Fund charges ∆ (Implied) 2014 2010A – 2014A Services sale M&A Intangible Synergies Excellence (2) (3) (4)
(5) $ Net Expense ∆ ~$400mm ~$1.8bn (5) % Net Expense ∆ ~2% ~17% Source: 2/24/15 JP Morgan Investor Day, Company filings (1) Reflects unadjusted total noninterest expense to provide comparability with JPM expense analysis (2) Adjusts for estimated annualized costs on acquired businesses. PNC GIS and BHF Asset Servicing acquired mid-year 2010. Per 2/2/10 PNC M&A investor presentation, PNC GIS generated $910mm of revenue with 18% pretax margins. BHF expenses estimated by relative transaction value to PNC GIS acquisition (3) Per 2/20/10 PNC M&A investor presentation (4) Completed savings from initiatives as of 2013, excludes any additional initiatives achieved in 2014 (5) Change from PF 2010 expense base
Q1 2010 Investor Presentation < 72 > Case Study: JP Morgan Chase’s 2015 Investor Day
JP Morgan is targeting significant net cost reductions in its Corporate & Investment Banking division between now and 2017 (versus significant expense growth for BNY Mellon) “Every single number that is here is attached to a name and to a particular action. So this is not aspirational at all, just to be clear” (Daniel Pinto, JP Morgan CEO – Corporate & Investment Bank, 2/24/15 Analyst Day)
JP Morgan Corporate & Investment Bank – 2017 Expense Targets
(1) 2014A – 2017E
$ Net Expense ∆ -$2.8bn +$1.3bn % Net Expense ∆ -12% +12%
Source: 2/24/15 JP Morgan Investor Day, Company filings (1) Implied expense growth based on flat interest rate scenario
Q1 2010 Investor Presentation < 73 > Case Study: JP Morgan Chase’s 2015 Investor Day
All the efficiency opportunities available to JP Morgan Chase for achieving net cost reductions are equally available to BNY Mellon AVAILABLE TO BNY MELLON? Corporate & Investment Bank – Expense Initiatives ü ü ü ü ü ü ü ü ü ü
No Secret Playbook: better results come down to Management’s intent and capacity to EXECUTE
Source: 2/24/15 JP Morgan Investor Day, Company filings
Q1 2010 Investor Presentation < 74 > Case Study: JP Morgan Chase’s 2015 Investor Day
Within asset management, JP Morgan has delivered stronger historical results and laid out more ambitious 2 – 3 year financial targets
Actual Results Medium-term Targets CAGR(2)
J.P. Revenue ~12% Morgan Chase Pretax ~20% Income
CAGR(3)
2014 momentum 2009 – 2014 CAGR Revenue 8% - 10% BNY LT AUM +11% (-1%∆) +13% (-1%∆)
Mellon Revenue +1% (-4%∆) +5% (-3%∆) Pretax Pretax Income(1) -1% (-6%∆) +6% (-2%∆) 12% - 14% Income Pretax margin(1) 28% (-1%∆) 28% (-1%∆)
Source: 2/24/15 JP Morgan Investor Day, 10/28/14 BNY Mellon Investor Day, Company filings (1) Adjusted for amortization of intangibles (2) Based on 2015 Investor Day targets of $15bn of revenue and $5bn of pretax income by 2016 (3) Based on 2015-2017 financial goals under “normalized” rates
Q1 2010 Investor Presentation < 75 > Case Study: JP Morgan Chase’s 2015 Investor Day
Within asset management, JP Morgan is delivering strong actual margins for shareholders, as opposed to adjusted, “pro-forma” illustrative margins that do not ultimately create shareholder value
Presented pre-tax margins are adjusted for: ? Distribution and servicing expense (real) ? Money market fee waivers (real) ü Amortization of intangible assets
Source: 2/24/15 JP Morgan Investor Day, Company filings
Q1 2010 Investor Presentation < 76 > VII. Maximizing Value: Bold Action and New Ideas
Q1 2010 Investor Presentation < 77 > A. Common Sense Principles
Q1 2010 Investor Presentation < 78 > Common Sense Principles
The principles that will rejuvenate BNY Mellon are common sense:
Vision A vision for the business. Clearly stated and compelling
Competitive A sustainable competitive advantage that forms the foundation of Advantage the vision
Clear Metrics Metrics must be aspirational, transparent and achievable
First Class A first class management team that is unified, stable and of the Management highest ethical standard
A fervent commitment to execution. The CEO must move the Execution organization to deliver
Q1 2010 Investor Presentation < 79 > Vision
1. BNY Mellon will be the bank for the world’s asset managers ■ Custody ■ Investment Services ■ Financing ■ Risk Management 2. BNY Mellon will be a leader in Wealth Management ■ Intermediate between the best active managers in the world and high net worth clients ■ Provide the best, low cost beta investment products for clients 3. BNY Mellon will excel in managing the most efficient balance sheet in the industry ■ Balancing return, with risk, with regulatory requirements ■ Far more complex in the post-crises world 4. BNY Mellon must win the technology race in finance ■ Creativity, innovation, and production per technologist must be the best in the industry ■ Use technology to capitalize on scale 5. BNY Mellon must be the market’s safe harbor
Q1 2010 Investor Presentation < 80 > Sustainable Competitive Advantage
How BNY Mellon Will Win:
Low-Cost BNY Mellon must deliver the lowest cost platform for the Structure asset management business
BNY Mellon must provide asset managers with an Integrated integrated platform that leverages scale and breadth of Solutions product; deliver the whole offering
Global BNY Mellon must maximize its global footprint Presence
Q1 2010 Investor Presentation < 81 > Clear Metrics
Management must establish Clear Metrics that are within Management’s control
Operating Targeted operating margins of 35%+ Margins
Returns on Targeted ROE at 10%+ Equity
Target highest headcount productivity in the industry. Headcount Start with a 10% - 20% headcount reduction
Q1 2010 Investor Presentation < 82 > Execution
Goals must be clear and measurable Clear Targets
Hold people accountable to meet these goals Systematic Measurement Follow-up to measure progress and identify weakness
Continuous Complete tasks and finish projects Review
Tie completion back to metrics Rewards & Consequences
Q1 2010 Investor Presentation < 83 > B. Business Opportunities
Q1 2010 Investor Presentation < 84 > 1. Reconsider Value Proposition to Customers
Be the “Bank to the Buyside” by providing full-service outsourced functions that help buy-side clients manage new regulatory, liquidity and financing regulations Expand service potential for the “middle” and “front” offices, where new regulations and complexities are driving demand for a variety of value-added services that trust banks are uniquely positioned to provide • State Street is the market leader and BNY Mellon remains a follower in the middle and front offices Integrate “front” and “back” office offerings to drive better client solutions and stickier relationships
Asset Manager Needs
Custody Back Fund accounting & administration Office Foreign exchange Treasury & cash management
Portfolio accounting Risk management Middle
Service Performance analytics
- Office Valuation Full Trade and settlement activity
Real-time, detailed data analytics Front Risk platforms Office Clearing platforms Compliance platforms
Q1 2010 Investor Presentation < 85 > 1. Reconsider Value Proposition to Customers (cont’d)
Reconsider fee schedule and structure to earn appropriate margin for services and ROE
Investment Services Margins Investment Services ROE (Implied)(1)
35%
30% 30% Illustrative Investment Services ROE % Consolidated ROE 25% 8.6% 8.0% 8.5% 9.0% 9.5% 10.0% 15.0% 6.9% 7.4% 8.0% 8.5% 9.0% 17.5% 6.8% 7.3% 7.8% 8.3% 8.8% 20% 20.0% 6.7% 7.2% 7.6% 8.1% 8.6% 22.5% 6.6% 7.1% 7.5% 8.0% 8.5% ROE 25.0% 6.5% 7.0% 7.4% 7.9% 8.4% 15% 27.5% 6.5% 6.9% 7.4% 7.8% 8.3%
Investment Mgmt. 30.0% 6.4% 6.9% 7.3% 7.8% 8.2% 9% 10%
5%
– Adj. PBT Margin Adj. PBT Margin (Reported) (ex. Net Interest Revenue) Without the subsidy from net interest revenues, Investment Services is unlikely earnings its cost of capital BNY Mellon earns much thinner margins for the valuable services (~10% cost of equity) it provides
Source: Company filings (1) BNY Mellon does not provide segment ROE. Investment Services ROE implied by assigning Investment Management a peer-level ROE and backing in from the consolidated ROE. Ignores Other segment for illustrative purposes
Q1 2010 Investor Presentation < 86 > 1. Reconsider Value Proposition to Customers (cont’d)
Seize fast-growing, higher-margin markets within asset management, such as non-US, global ETFs and alternatives
Projected Long-Term Nominal Growth(1)
25%
Future Growth Markets
15-20% 15-20% 20%
Revenue targets of 3 – 4% CAGR in Investment Services do not reflect ability to capture the long-term growth 15% prospects of underlying markets 12%
Legacy BK Markets 10% 8-9%
5-6% 4-5% 5% 5% 5% 3-4%
0% BK 2017 Targets US Insurance US Endowments US Foundations US Retirement Global Market US Alternatives Global ETFs Asia-Pacific Market (HF / PE)
(1) Bernstein Asset Managers: Manic About Organic Blackbook 1/27/14
Q1 2010 Investor Presentation < 87 > 1. Reconsider Value Proposition to Customers (cont’d)
ETFs and Alternative Investments are key long-term growth priorities, where significant portions of the servicing functions remain insourced
Global ETF Market Global Alternative Investments Market
Source: State Street 9/9/14 Barclays Conference
Q1 2010 Investor Presentation < 88 > 1. Reconsider Value Proposition to Customers (cont’d)
Senior leadership should be hands-on and actively focus on cultivating client relationships, and the CEO needs to be active as the face of the firm to clients Lou Gerstner, CEO of IBM (1993 – 2002):
“I announced Operation Bear Hug. Each of the fifty members of the senior management team was to visit a minimum of five of our biggest customers during the next three months. The executives were to listen, to show the customer that we cared, and to implement holding action as appropriate. Each of their direct reports (a total of more than 200 executives) was to do the same. For each Bear Hug visit, I asked that a one- to two-page report be sent to me and anyone else who could solve that customer’s problems”
Source: Lou Gerstner “Who Says Elephants Can’t Dance”
Q1 2010 Investor Presentation < 89 > 2. Raise I.T. Effectiveness To Top Company Priority
Scalable systems are a critical driver of business value and yet appear antiquated and inefficient to employees, clients and competitors Platforms have yet to be integrated and have been a major source of expense growth An entire new architecture may be necessary Major Redundancies - Back office headcount Two Custody Five Accounting - Systems maintenance Platforms Platforms - Application development - Reporting costs
“Upgrade your tech and bring your business processes and products into the 21st century. The competition is selling cars while BNY is proud of the fact that it sells the cheapest and Employees fastest horse drawn buggy in town. Banking is not a labor intensive business yet BNY has managed to turn it into one via underinvestment in tech and revenue generating professionals”
“Bank of New York Mellon are letting themselves down with the continuing lack of merger in their systems” Clients “BNYM continue to struggle with service differentials driven by their multiple platforms custody and accounting”
“They’re going to get to a point when it becomes hard to catch up with us just because (1) Competitors our future functionality is just 6x faster”
Source: Glassdoor, R&M Global Custody Survey (1) Per Gunjan Kedia, EVP of State Street, 2/25/15 State Street Analyst Day
Q1 2010 Investor Presentation < 90 > 2. Raise I.T. Effectiveness To Top Company Priority (cont’d)
BNY Mellon’s current model emphasizes labor over technology and automation However, investing in automation is a long-term competitive necessity for BNY Mellon to mitigate risk and improve client services More investments in automation to reduce manual process may be useful but should take place only after legacy IT systems are re-architected
Labor Technology
Long-term Expense Growth Inflationary Deflationary
Innovation Potential & Medium High Velocity
Scalability Not Scalable Scalable
High Medium Operational Risk (Human Error) (Straight-Through Processing)
Q1 2010 Investor Presentation < 91 > 2. Raise I.T. Effectiveness To Top Company Priority (cont’d)
Invest in I.T. to drive speed, accuracy and transparency BNY Mellon’s antiquated I.T. systems and manual processes results in an unbalanced mix of spending on labor over technology and innovation
Staff Expense / Information Technology Expense (FY14)
10.0x 9.4x 9.0x 8.0x 1x reduction = ~0.40 of 7.0x potential incremental EPS(1) 6.0x 5.0x 4.2x 4.0x 3.0x 2.0x 1.0x –
Source: Company filings (1) At constant $620mm of software expense
Q1 2010 Investor Presentation < 92 > 2. Raise I.T. Effectiveness To Top Company Priority (cont’d)
I.T. TRANSFORMATION BUSINESS IMPACT
Strategy ü Compensation Expense â Applications ü Headcount â Cloud-Enabled Apps ü Software Expense ä Data Centers ü Purchased Services â Shared Services ü Returns á ERP Systems ü Speed & Transparency á Custody Platforms ü Operational Risk â Set Explicit Targets... How many systems today? How many in the future?
Q1 2010 Investor Presentation < 93 > 3. Aggressive Headcount Reduction Initiative
Headcount disproportionate to that of comparable companies ■ Combinations of similar sized investment managers and investment servicers would imply meaningfully lower headcount levels ■ Headcount discrepancy not bridgeable by BK’s Corporate Trust or Pershing business units
Total Employees
Investment 60,000 Investment Managers Servicers
50,300 Implied Headcount (Asset Manager + Asset Servicer) 50,000 Asset Managers Capital JPM Vanguard BLK BEN Group GIM (2) PIMCO 40,000 JPM (TSS) 41,200 39,200 36,266 34,000 32,700 29,490
Asset STT 41,670 39,670 36,736 34,470 33,170 29,960 30,000 27,470 ~27,000 Servicers (IS) Total Employees 20,000 ~14,200 12,200 9,266 10,000 ~7,000 6,264 5,870 5,700 3,100 ~2,500 2,490 1,435 – BK STT JPM Vanguard BLK BEN Capital Group IVZ TROW JPM LM STT PIMCO FII (1) (Inv. Serv.) (TSS) (Global Inv. Mgmt.) (Inv. Mgmt.)
AUC/A ($tn) $29 $28 $21 AUM ($bn) $1,710 $3,100 $4,652 $898 $1,147 $792 $747 $1,744 $709 $2,480 $1,680 $363
Source: Company filings, Marcato estimates (1) JPM’s Treasury & Securities Services division (2) JPM’s Global Investment Management division
Q1 2010 Investor Presentation < 94 > 3. Aggressive Headcount Reduction Initiative
Business model requires scalability, efficiency, accuracy, data capture and data security. Manual human processes are an impediment to all of these things BK needs better people, not more people
Total Headcount Trajectory Relative Headcount to Benchmark(1)
52,000 51,100 55,000 50,300 50,000 49,500 50,300 48,700 50,000 48,000 48,000 ∆ 45,000 ~10,000
46,000 ~40,000 40,000 44,000
42,500 42,200 42,000 35,000
40,000 30,000 2008 2009 2010 2011 2012 2013 2014 BK Benchmarking Target
(1) Reference page 94 for analytical support
Q1 2010 Investor Presentation < 95 > 3. Aggressive Headcount Reduction Initiative (cont’d)
Successful restructuring precedents support a strategy of targeted, impactful headcount reductions Headcount Restructuring in Historical Perspective
Starting Net Headcount % Period Company Headcount (est.) Reductions (est.) Reduction (Yrs.) Date Historical Restructurings Apple 10,896 4,238 38.9% ~ 2 1997 - 1998 Xerox 94,600 33,500 35.4% ~ 4 2000 - 2003 Credit Suisse First Boston 27,547 8,959 32.5% ~ 2 2002 - 2003 IBM 301,542 81,703 27.1% ~ 2 1993 - 1994 Merck 100,000 24,000 24.0% ~ 4 2010 - 2013 Starbucks 176,000 39,000 22.2% ~ 2 2008 - 2010 Heinz 41,000 8,000 19.5% ~ 2 2006 - 2007 Legg Mason 3,550 571 16.1% ~ 2 2011 - 2012 Lockheed Martin 140,000 17,000 12.1% ~ 2 2010 - 2011
Current Restructurings Canadian Pacific 19,500 6,000 30.8% N/A 2012 - 2016E Barclays (Investment Bank) 26,000 7,000 26.9% N/A 2014E - TBU Bank of America 284,000 46,000 16.2% N/A 2010 - TBU Microsoft 128,000 18,000 14.1% N/A 2014E - TBU UBS 62,628 8,628 13.8% ~ 3 2013 - 2015E Hewlett Packard 331,800 41,000 12.4% ~ 3 2012 - 2014E Valeant 18,000 2,250 12.5% N/A 2013 - TBU Royal Bank of Scotland 141,000 14,000 9.9% ~ 4 2015 - 2019
Source: Company filings, Company news
Q1 2010 Investor Presentation < 96 > 3. Aggressive Headcount Reduction Initiative (cont’d)
OPERATIONAL SIMPLIFICATION BUSINESS IMPACT + Reduce headcount to reach ü Deliver services to clients at a world-class levels fundamentally lower cost point and with greater service + Eliminate multiple layers of reliability management and bureaucracy ü Drive greater volumes through + Invest in world-class more highly-scaled platforms technology and automation ü Profitably compete for more + Re-engineer business business with a lower cost processes to improve costs, structure; deliver greater speed and transparency revenue growth
ü Improve returns on equity
Q1 2010 Investor Presentation < 97 > 3. Aggressive Headcount Reduction Initiative (cont’d)
Lou Gerstner, CEO of IBM (1993 – 2002):
“’If we have too many people, let’s right-size fast; let’s get it done by the end of the third quarter.’ I explained that what I meant by right-size is straightforward: ‘We have to benchmark our costs versus our competitors and then achieve best-in-class status’. I also remarked that we had to stop saying that IBM didn’t lay off people”
“I’ve had a lot of experience turning around troubled companies, and one of the first things I learned was that whatever hard or painful things you have to do, do them quickly and make sure everyone knows what you are doing and why. Whether dwelling on a problem, hiding a problem or dribbling out partial solutions to a problem while you wait for a high tide to raise your boat – dithering and delay almost always compound a negative situation. I believe in getting the problem behind me quickly and moving on”
Source: Lou Gerstner “Who Says Elephants Can’t Dance”
Q1 2010 Investor Presentation < 98 > 4. Reposition Asset Management
The Index / ETF industry represents a highly compelling long-term growth opportunity for asset management
ETFs & Index Funds Total AUM ($tn) High-Quality Growth Pathway Bernstein estimates Index & ETF AUM will grow by 4x Long runway for ETF growth supported by deepening over the next decade adoption within new and existing client segments, $15.0 financial products, and geographies $12.5 $11.1 $10.0 $10.0 $8.9 $8.0 $7.1 $6.3 $5.5 $4.3 $4.9 $5.0 $3.3 $3.8 $2.6 $3.0
– '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 Index Mutual Funds ETFs BlackRock estimates the global ETF industry will grow by 11% CAGR into 2017, expanding by $3.6tn
Source: Bernstein Asset Managers: Manic About Organic Blackbook 1/27/14, Blackrock 6/17/14 Analyst Day, WisdomTree Investments 11/20/14 Analyst Presentation
Q1 2010 Investor Presentation < 99 > 4. Reposition Asset Management (cont’d)
The ETF industry is highly concentrated due to the importance of economies of scale Index / ETF strategies have highly attractive incremental margins and can be highly profitable at scale
Top 10 ETF Providers by AUM globally ($bn)
$1,200 $993 Top 10 players control 87% of the Index / ETF market $1,000 $800 $600 $417 $389 $400 $200 $104 $54 $49 $41 $35 $27 $27 – iShares State Street Vanguard PowerShares db x-trackers Lyxor Nomura AMC Wisdom Tree ProShares First Trust Unit Economics Index / ETF products carry the highest contribution margins of nearly all investment strategy
Source: Bernstein Asset Managers: Manic About Organic Blackbook 1/27/14, Blackrock 6/17/14 Analyst Day
Q1 2010 Investor Presentation < 100 > 4. Reposition Asset Management (cont’d)
BNY Mellon is uniquely positioned to capture the HUGE opportunity in passive / index / beta products by leveraging its large infrastructure base and existing strengths in technology, distribution, human capital and branding ■ Opportunity to serve as white-label asset management solution to other asset management companies, some of whom may already be custody clients ■ Leverage existing institutional distribution channels with RIAs and broker-dealers ■ Leverage data, technology and investment insights to become a product development leader BNY Mellon can scale its existing infrastructure to create a major passive asset manager, but successful execution requires new leadership, new technology, new product design teams and new marketing plan
Back Office Functions Front Office Functions BK Competencies BK Competencies Fund Accounting & Product Development Administration
Portfolio Management Sales & Distribution
Research & Product Index Calculation Development
Broker-Dealer Functions Brand & Marketing
Leverage & scale Develop & grow
Q1 2010 Investor Presentation < 101 > 4. Reposition Asset Management (cont’d)
BNY Mellon has experienced the greatest inflows into its more beta / process / scale-driven investment strategies like Liability-Driven Investments and Index businesses High-touch, alpha-oriented boutiques make no strategic sense for this Company and are hard to sell to clients...no competitive advantage Alpha boutiques should be sold or spun and BNY Mellon should focus its resources on its competitive advantages within asset management
BNY Mellon Investment Management Inflows (2011 – 2014) ($bn)
Strong: β Orientation
$200 $186 $180 $160 $140 $120 $100 $80 $62 Weak: α Orientation $60
$40 $24 $20 $11 – LDI Index Active Alternatives
Source: Company filings
Q1 2010 Investor Presentation < 102 > 5. Culture of Effectiveness, Urgency and Accountability
Modernize the culture, with compensation to match – lean, faster, and commercially intense Employee feedback repeatedly emphasizes a culture of bureaucracy, lifetime employment, stifled creativity, out-of-touch leadership, lack of business integration and poor communication
Employee Feedback
“Almost no career opportunities, non-existent training, terrible technology infrastructure, and overly bureaucratic. The fact that there is actually a committee to oversee other committees that set internal policies kind of says it all. Unimaginative senior management that is always reacting to competition. Bloated middle management while underinvesting in products, services, and line employees that actually drive revenues.”
“Depending on your point-of-view there aren't high standards for performance. It seems people get rewarded for providing the bare minimum and it seems cultural. Working with other service groups is a nightmare as that culture seems pervasive.”
“They have an ‘if it's not broke, don't fix it’ mentality, so the creativity and energy needed to drive ideas forward can only be done if you're truly passionate about what you do...But, I will say that it's near-impossible to get fired, so job security is incredible.”
“The merger, even six years later, still shows signs of growing pains. Advancement is nearly stagnant and so are the salaries. Communication between the various departments is a struggle and they're constantly shuffling and consolidating.”
Source: Glassdoor
Q1 2010 Investor Presentation < 103 > 5. Culture of Effectiveness, Urgency and Accountability (cont’d)
Employee Feedback
“There seems to be a fairly large number of individuals who don't know what the company does beyond their own responsibilities and they are ok with that. There is little global awareness.”
“Politics, dysfunctional org structure, misalignment of systems, and the legacy of two strong financial institutions that have never ‘really’ merged.”
“Invest more in technology and training employees on topics that matter. Keep morale up in the company and take better steps to retain talented employees.”
“Main challenge is navigating the variety of corporate cultures which exist due to the lack of integration. Advice to Management: Focus on integrating, focus on the experienced employees, and consolidate the top three tiers of management.”
“Senior Executives and Senior Mgmt who have been with BONY for 15+ years are not the ones who will lead the bank to new successful strategies and profitability.”
“Very large company that can't get out of its own way. Bureaucracies are overwhelming, overly risk averse; little opportunity to make a value added contribution to the business of one's own client group...Stated initiatives by Chairman to improve on bureaucracies do not make it down to the operational level because people are fearful of losing their jobs (presumably). People are stifled of creativity and line managers are fearful to support and create change for fear of losing job. Massive culture change is needed.”
Source: Glassdoor
Q1 2010 Investor Presentation < 104 > 5. Culture of Effectiveness, Urgency and Accountability (cont’d)
FAST ORGANIZATION ALIGNED INCENTIVES
+ Zero-based budgeting + Targets-based program, reset annually + Consolidate systems and vendors + Targets should be applied as far down the organization as practical (000s of eligible + Invest in digital automation officers and executives) + Fewer layers of management & + Focus on a mix of financial, strategic and organizational bottlenecks total company performance goals + Common metrics & reporting + Key metrics: operating margins, ROE, growth, + Hands-on management; less committee risk and talent development delegation
BELIEF SYSTEMS LOW-COST OPERATIONS < 105 > + “Outcomes drive compensation” + Greater % of processes as shared services + “Clients define our success” + Greater leveraging of systems + “Deliver results in an uncertain world” + Compensation and headcount levels â + “Adapt & learn” + Purchased services costs â + “Discipline improves execution” + “Stay lean to go fast”
Q1 2010 Investor Presentation < 105 > 6. Update Regulatory Sophistication and Outreach Strategy
BNY Mellon needs to hire key leaders and talent to develop a leadership position with regulatory groups in priority geographies Sophisticated regulatory outreach requires more than just subject matter experts but also relationship managers Demonstrate safety, soundness and vision that comforts key regulatory constituents Mixed Track Record of Anticipating Mixed Track Record of Influencing Regulatory Key Regulatory Trends Changes
Todd Gibbons (4/19/11): “In terms of the leverage Rule BNY Mellon Regulatory Proposal Final ratio, I really haven’t been overly focused on it at this point. I don’t think it will be the constraining SLR Balance sheet daily averaging ratio for us...I don’t think it’s going to change ü business behavior at this point as I look at it” SLR Exclusion or caps on Central Bank deposits û SLR Exemptions to leverage requirements for Todd Gibbons (10/28/14): “We now know most of cash deposit surges û what the rules are and so far it’s been the LCR Operational services (not deposits) subject supplemental leverage ratio that is turning out to to legally binding written agreement ü be our binding constraint” LCR Exclude deposits in connection with prime brokerage services û LCR Exclude from “operational deposits” instances where bank provides services as û an “agent or administrator LCR Revise definition of “operational services” to include administration of investment assets, û collateral management services, and settlement of FX transactions
Source: Company transcripts, 1/31/14 Liquidity Coverage Ratio Memo, 6/13/14 Regulatory Capital Rules Memo
Q1 2010 Investor Presentation < 106 > 6. Update Regulatory Sophistication and Outreach Strategy (cont’d)
Position BNY Mellon as a problem solver in the global risk management matrix by forming a sovereign advisory franchise like BlackRock Solutions ■ In addition to being a $550mm+ revenue business, BlackRock Solutions helps BlackRock strengthen relationships with key regulators and official institutions, while also burnishing BlackRock’s reputation from prestige advisory assignments BNY Mellon has a unique opportunity to leverage its size, data, systems, expertise, lack of trading conflicts, and low public profile to support regulatory bodies and official institutions with similar complex assignments
Capabilities Clients & Assignments
Risk analytics platform Analyze assets of Fannie Mae and Freddie Mac; wind-down distressed debt book of Bear Stearns & Operations outsourcing AIG End-to-end investment system Advised on the creation of a bad bank for certain RBS assets Financial Valuation and risk assessment Markets Balance sheet strategy Reviewed and valued loan portfolio of 18 financial Advisory Disposition of distressed assets firms Assisted in 2012 Prudential Capital Assessment Review (PCAR)
Q1 2010 Investor Presentation < 107 > 6. Update Regulatory Sophistication and Outreach Strategy (cont’d)
“If you can’t measure it, you can’t manage it” BNY Mellon blames a significant portion of its expense growth since 2011 on regulatory and compliance costs Despite the significant increases in regulatory & compliance costs, BNY Mellon has been unwilling or unable to quantify its compliance expenses We question how the Company can manage this huge component of expense growth without detailed visibility and thoughtful analysis of its components and drivers
Compliance and Regulatory Restructuring Formulate a long-term strategy for tackling compliance and regulatory costs Immediately conduct a comprehensive review of compliance and regulatory operations to restructure and streamline the compliance chain, eliminate redundancies and reduce costs
Q1 2010 Investor Presentation < 108 > 7. Consider A New Brand Image
Q1 2010 Investor Presentation < 109 > BNY
1 BNY is a company of gigantic scale and impact. It is the oldest bank in $28.5 $1.7 100 America, having been trillion assets under trillion assets markets across founded by Alexander custody or administration under management the globe Hamilton in 1784, and over 80% of Fortune 500 companies do business with BNY.
Source: bnymellon.com 2 Yet in today’s market, the share of conversation in the news media and among the public has BNY coming in 7:1 6:1 1:1 JP Morgan Chase: BNY Mellon Citigroup: BNY Mellon State Street: BNY Mellon behind the majority of its competitors.
Source: Google trend report compiling news articles and public search of each company name in Jan 2015 3 - Bank of New York - Bank of New York Mellon Over the course of the last - BNY - BNY Mellon decade, the majority of the conversation about BNY took place at the moment the two companies came together as one.
Source: Google trend report compiling news articles and public search of each term over the last 9 years. 4 - Bank of New York - Bank of New York Mellon Over the course of the last - BNY - BNY Mellon decade, the majority of the conversation about BNY took place at the moment the two companies came together as one.
BNY went from being a relatively popular company in the public sphere, to losing its cache soon after the merger.
Source: Google trend report compiling news articles and public search of each term over the last 9 years. 5 - Bank of New York - Bank of New York Mellon Over the course of the last - BNY - BNY Mellon decade, the majority of the conversation about BNY Mellon took place at the moment the two companies came together as one.
The merger did not leave a strong BNY went from being a impression of the new brand, and today the relatively popular company in terms “Bank of New York”, “Bank of New York the public sphere, to losing its Mellon”, “BNY” and “BNY Mellon” are being cache soon after the merger. used interchangeably.
Source: Google trend report compiling news articles and public search of each term over the last 9 years. 6 What’s made this convergence of brands even more difficult is that BNY still operates with a multitude of “boutique” brands under its Investment Management wing - 14 as of today - most of which are not recognizable as a part of the parent company.
Source: bnymellon.com 7 Over the past two years, BNY has made an attempt to develop a stronger public image of its overarching brand through a global advertising campaign.
The ads focused on growing awareness and significance of BNY Investment Management and Servicing business, and coined a tagline of “Investments Company for the World.”
8 And while the advertising was well executed, it may have been developed across the wrong strategic brief.
Without a singular brand, the company was still sending the majority of investors to work with one of its 14 boutiques, none of which are covered in the ads themselves.
9 What’s more, it did not seem to jar the opinions of big individuals within the custodian category. traditional rational old We conducted an confused venerable anonymous, informal survey boring unchanging with senior stakeholders in stale Hamilton the finance sector in New York, and discovered that their opinions of BNY have not shifted.
Source: Most common words used by our sample to describe BNY Mellon today. Bigger words were mentioned more frequently. 10 BNY organic social media conversation is minimal in comparison to the competition, especially where it matters most -
BNY Mellon career interest.
And that lackluster opinion and lack of interest in the BNY brand may be influencing more than just investors and peers - it may have a significant influence Citigroup on the new talent vying to work at the company.
JP Morgan ChaseJP Source: quicksprout.com analysis of social media engagement in the past 60 days 11 ALL OF THIS DATA LEADS US TO A SINGLE CONCLUSION:
The public brand of BNY has not taken root with the press, investors, advisors, high net worth individuals nor potential employees.
12 ALL OF THIS DATA LEADS US TO A SINGLE CONCLUSION:
Instead, the BNY brand is The public brand of BNY has splintered across a multitude not taken root with the of names, entities and press, investors, advisors, preconceptions, without a high net worth individuals motivating image the public nor potential employees. can connect with.
13 ALL OF THIS DATA LEADS US TO A SINGLE CONCLUSION:
In order to succeed, Instead, the BNY brand is BNY must immediately The public brand of BNY has splintered across a multitude reconsider its not taken root with the of names, entities and press, investors, advisors, marketing and services preconceptions, without a high net worth individuals offering in order to motivating image the public nor potential employees. can connect with. build a brand for the future.
14 THE QUESTION IS:
How does BNY approach this challenge? First, we must note that the “Digital technology is Escalating competition has industry itself has become transforming the financial- created a 5.6% marketing revolutionized over the past services industry, and spend lift in the financial decade. Banks today are as banks face the challenge of services sector, raising its much technology services as fully digitizing their media expenditures beyond they are finance institutions, businesses.” $4.6 billion in 2013. and many have evolved to be massive marketing machines.
Source: McKinsey and Associates, How winning banks refocus their IT budgets for digital CMO Council Marketing Spend Factsheet 2013 16 OUR SOLUTION: BNY has remained traditional as GOING FORWARD, BNY MUST DEVELOP AN other banks embraced calculated INTEGRATED MARKETING PLAN BASED ON risks to move forward. THREE OBJECTIVES:
COMBAT CURRENT BUILD A SINGLE BRAND CONNECT WITH PRIORITY (MERGE ALL ENTITIES UNDER ONE NAME) PRECONCEPTIONS OF TARGETS THROUGH AND RAISE ITS PUBLIC THE BRAND THROUGH DIGITAL AND MOBILE. IMAGE. BRAND ACTIONS.
17 THE CAMPAIGN IDEA:
18 BUILD A SINGLE BRAND: IN ORDER TO INCREASE SCALE AND CONNECT WITH MORE INVESTORS, WE MUST START WITH A LARGE-SCALE EFFORT TO MAKE OUR BRAND MEMORABLE
We advise focusing this above- the-line effort in key financial capitals in the world: New York, London, Shanghai, Hong Kong, Magazine Televison SEO Public Relations Chicago and San Francisco.
19 PRINT EXECUTIONS:
20 DIGITAL BILLBOARDS:
21 CONNECT WITH PRIORITY TARGETS: HIGH NET WORTH INVESTORS, ADVISORS, AND TALENT IN THIS SEGMENT ARE AHEAD OF THE POPULATION IN DIGITAL, AND WE MUST MEET THEIR ON-DEMAND NEEDS THROUGH.
Magazine Televison SEO Public Relations
In coordination with a mass effort, we will tailor digital and mobile media and services directly to our most desirable target market, connecting with Responsive Brand Digital/Mobile Video and Brand Social Digital, Mobile & Tools Blog Content & CRM them when they are most receptive to our message.
22 DIGITAL TAKEOVERS:
23 MOBILE APPLICATION:
24 COMBAT PRECONCEPTIONS THROUGH BRAND ACTIONS. BNY MUST NOT JUST TALK THE TALK, BUT WALK THE WALK. COORDINATING A SERIES OF PUBLIC EVENTS AND INTERNAL ACTIONS WILL GIVE THE WORLD PROOF THE BRAND HAS TRULY EVOLVED.
Develop programs that Magazine Televison SEO Public Relations New Tools gives the press & our target audience the proof that BNY Mellon has truly evolved.
Public Events & Responsive Brand Digital/Mobile Video and Brand Social Sponsorships Digital, Mobile & Tools Blog Content & CRM
25 EXPERIENTIAL BRAND ACTION:
26 DESIRED RESULT
This integrated marketing approach will propel BNY to become a household name of significant value. What’s more, it will assist the company in retaining current customers while encouraging new prospects to experience BNY firsthand. Thank You
APPENDIX What we mean when we say “brand action”:
Develop a program that gives investors, advisors, institutions, high net worth individuals, potential employees and the press the belief that BNY Mellon is one of the few globally great institutions.
29 In order to do so, we must develop or promote our rational actions and services in order to feed a larger emotional message.
RATIONAL EMOTIONAL
Develop practices, policies, With those actions in mind, BNY behaviors and comms that make the Mellon becomes an entity whose public feel that BNY Mellon’s forward thinking create trust in ambitions match its size. the future.
30 Instead of learning from our competitors, we should learn from brands outside of our category.
RATIONAL EMOTIONAL
Employees are allowed to use up Google is a tech company that to 20% of their time on projects values humanity and innovation outside of their day to day work. over the pursuit of profit.
31 Instead of learning from our competitors, we should learn from brands outside of our category.
RATIONAL EMOTIONAL
Ritz Carlton service employees are The Ritz-Carlton is devoted allowed to spend up to $2,000 per to making sure I only have customer to improve their stay. the best experience.
32 Instead of learning from our competitors, we should learn from brands outside of our category.
RATIONAL EMOTIONAL
Every Apple store comes equipped Apple is a friendly with the Genius Bar to help buyers face in a cold deal with product challenges. technology landscape.
33 SOCIAL
WE BELIEVE actions like these, communicated to the public, will EXPERIENTIAL cause a reappraisal of BNY Mellon.
CONSUMERConsumer CORE COMMUNICATIONSAd PR ENGAGEMENTengagement DIGITAL BEHAVIOR PR CAMPAIGNCampaign FROM PLATFORMplatform One bank, many brands Stale, old fashioned and slow to advance
TO TRADITIONAL One brand, one powerful entity: BNY Mellon ADVERTISING Future thinking, with a discerning eye on the past
ADVOCACY
34 VIII. Unlocking Potential: New Leadership
Q1 2010 Investor Presentation < 110 > Reflections on Change
“And what's interesting, when you promote people into new jobs or bring in new talent from outside, how you get increasingly different insights into how we operate our business. Adding these people and promoting these people are making us a better company. They're raising the bar in terms of the excellence that we expect of ourselves and we expect of our staff. And it is in fact permeating the entire organization. As new people come in with new ideas and raise the expectations, it's helping us better perform as a company.”
- Gerald Hassell, CEO 10/28/14 Investor Day
We Believe Shareholders Should Embrace This Advice And Seek New Leadership
Q1 2010 Investor Presentation < 111 > Key Leadership Needs
KEY LEADERSHIP ROLES KEY SKILLS AND EXPERIENCES
CEO Cultivate critical relationships with key clients and regulators Team-building: identify internal and external talent that can drive organizational change Invigorate culture by elevating H.R. and implementing organizational structures that drive accountability and emphasize clients “Block-and-tackle”: critically evaluate the business portfolio, focus the strategic priorities, enforce accountability
CFO Perform continuous benchmarking of growth, costs and operating metrics against competitors Implement rigorous measurement and compensation systems Centralize business planning and budgeting to drive a unified strategy and reduce duplicate spending Critically evaluate return on investments for business initiatives Implement “zero-based budgeting” practices Optimize balance sheet against onerous regulatory constraints
CTO Consolidate “mutant” IT systems and platforms that have proliferated over time Cull unproductive projects; manage, measure and prioritize technology initiatives Drive automation initiatives that increase employee productivity
Q1 2010 Investor Presentation < 112 > Leadership Tenure
Nearly the entire Senior Management team has worked at BNY Mellon for 25+ years
@ BNY Mellon Executive Title Start Year Tenure (yrs.) Gerald Hassell CEO 1973 42 Todd Gibbons CFO 1986 29 Suresh Kumar CTO 1986 29 Karen Peetz President 1998 17 Brian Shea CEO, Investment Services 1983 32 Kurt Woetzel President, BNY Mellon Markets Group 1985 30 Curtis Arledge CEO, Investment Management 2010 5 Average 26 yrs Median 29 yrs
Is this the team to deliver fresh perspectives and organizational change?
Q1 2010 Investor Presentation < 113 > Available Executive Talent For A New BNY Mellon (Anonymized)
Executive #1 Executive #2 Executive #3
Capital markets expertise ü ü ü Proven leadership at a large global financial institution ü ü ü Operations, risk and technology experience ü ü ü Asset management expertise ü ü ü Regulatory credibility ü ü Emerging markets expertise ü ü Shareholder credibility ü ü ü
We Have Identified Compelling Executive Talent
Q1 2010 Investor Presentation < 114 > IX. Valuation Potential
Q1 2010 Investor Presentation < 115 > Expense Base and Investment Yield Opportunity
Expense Reduction Categories Enhanced Investment Yield Potential
Estimated Excess Headcount ~10,000 HQLA Assets ($bn) $164 BK Staff Expenses $5,845 LCR Runoff ($bn) $151 BK Staff Expenses per FTE $0.115 LCR Ratio % 109% Implied Excess Staff Expenses $1,148 Target LCR Ratio % 100% Excess HQLA ($bn) $13 Other Expense Opportunity: HQLA Yield 0.7% Software, furniture & equipment $942 Non-HQLA Yield 1.4% Professional, legal and other purchased services $1,339 Net Occupancy Expenses $610 Incremental Net Interest Revenue $182 "Other" $1,031 Incremental Net Income $133 SubTotal $3,922 Fully Diluted Shares Outstanding (FY15) 1,107 Illustrative Pre-Tax Impact of 5% improvement $196 EPS Benefit $0.12 Assumed P/E 15.0 x EPS Impact Value Creation Per Share $1.80 Excess Staff Expense Savings $1,148 Other OpEx Savings 196 Total Pre-Tax Savings $1,344 Incremental Net Income $981 Fully Diluted Shares Outstanding (FY15) 1,107 EPS Benefit $0.89 Assumed P/E 15.0 x Value Creation Per Share $13.30
Source: Company filings, Marcato estimates
Q1 2010 Investor Presentation < 116 > Direct Incremental Earnings Into Share Buybacks
Margin Initiatives + Share Buybacks 2015 2016 2017 SQ Cash Net Income $2,915 $3,450 $3,876 OpEx Savings Achieved(1) $736 $981 $981 Restructuring Costs (981) – – Technology reinvestment, after-tax (150) (200) (225) Enhanced Investment Portfolio 133 205 267 Incremental Net Income ($262) $986 $1,023 PF Cash Net Income $2,652 $4,437 $4,899 PF Cash Net Income (ex. Restructuring) $3,633 $4,437 $4,899 OpEx Savings as % of Run-Rate Savings 75% 100% 100% Restructuring Costs as % of Run-Rate OpEx Savings 100% – –
SQ FDSO 1,107 1,073 1,035 (-) Incremental total shares repurchased(2) – (18) (33) PF FDSO 1,107 1,055 1,002
SQ Cash EPS $2.63 $3.22 $3.75 PF Cash EPS (ex. Restructuring) $3.28 $4.21 $4.89 EPS Benefit $0.65 $0.99 $1.14 P/E Multiple 15.0x 15.0x 15.0x Total Value Creation Per Share $9.74 $14.83 $17.14 % Premium to Current 25% 38% 44% Source: Company filings, Marcato estimates (1) Assumes full opex savings run-rate by 2016 (2) Shares repurchased at a ~13%, 45% and 75% premium to the current share price in 2015, 2016 and 2017. Shares repurchased from incremental net income including restructuring costs
Q1 2010 Investor Presentation < 117 > Marcato Proposal: Total Value Creation Opportunity
By restoring BK’s earnings trajectory to its potential and eliminating the “credibility discount” created from years of stagnant earnings and missed targets, significant shareholder value can be created
2015 2016 2017 SQ Cash EPS (LTM) $2.63 $3.22 $3.75 (+) Expense efficiencies & NIM yields 0.65 0.99 1.14 (+) Improved growth profile(1) 0.10 0.25 0.45 PF Cash EPS (LTM) $3.39 $4.45 $5.34 P/E Multiple 15.0x 15.0x 15.0x Value Per Share $50.78 $66.82 $80.05 (+) Cumulative DPS $0.74 $2.08 $3.68 Adj. Value Per Share $51.52 $68.90 $83.73 % Premium to Current 32% 76% 114%
Source: Company filings, Marcato estimates (1) At 10% revenue CAGR (high-end of State Street’s long-term organic revenue goal) and PF 35% pre-tax margins under Marcato Plan. Assumes incremental net income enables 10mm of incremental cumulative share repurchases by 2017
Q1 2010 Investor Presentation < 118 >