First Republic takeover causes Pershing's Q2 outflow

First Republic sale dealt $34B hit to Pershing asset flows

July 19, 2023 4:14 PM

JPMorgan Chase's takeover of First Republic will weigh down the net new assets of custodial giant Pershing as the regional bank's new parent absorbs its holdings.

The "deconversion of a regional bank that was acquired in May" could send Pershing's net new assets tumbling lower for "several quarters," or, as in the case of the last three months, into a significant outflow, according to Dermot McDonogh, the chief financial officer of Pershing's parent company, Bank of New York Mellon.

In an earnings call with analysts after the New York-based megabank disclosed its second-quarter results on July 18, McDonogh and BNY CEO Robin Vince talked about Pershing's future prospects with new technology through its Pershing X software platform and a continuing program to remove duplicative frictions across the company. For example, Pershing and the bank's Clearance and Collateral Management unit are combining their separate trade-clearing businesses for institutional clients, since the separation "didn't make any sense" and often confuses the outside firms working with one or both of the divisions, Vince said.

Neither expressly said that the lost business of the regional bank came specifically from First Republic, which changed hands May 1 and had listed Pershing as its clearing and custody firm in filings on FINRA BrokerCheck. Representatives for the firm didn't immediately respond to a request for confirmation that McDonogh's remarks referred to First Republic.

"We remain confident in Pershing's underlying momentum and prospects," McDonogh said, according to a transcript by Thomson Reuters. "Importantly, our continued investments to enhance Pershing's core platform as well as the business' access to the strength and breadth of the whole company is being recognized by clients as a differentiator, especially in the current market environment."

Industry News

Pershing rakes in $37 billion in assets, reaps record revenue

April 20, 2023 10:28 AM

To see the most interesting takeaways for financial advisors from Pershing and parent company BNY Mellon's earnings in the second quarter, scroll down the slideshow. For coverage of the firms' first-quarter earnings, click here. To see where the companies stood at the end of 2022, follow this link. Plus, for analysis of the bank's earnings in the second quarter from FP sister publication American Banker, check out this story.

Note: The quarterly results include BNY Mellon-owned Pershing, which is the largest part of the firm's Market and Wealth Services segment, and those of the megabank's Investment and Wealth Management unit.

Pershing assets under custody or administration

The assets serviced through the clearing and custodial giant surged 9% year over year to $2.4 trillion in the second quarter, while Pershing's average number of active clearing accounts jumped 7% to 7,946.

On the negative side, the regional bank deconversion led to an outflow of $34 billion in client assets for the quarter. Asked by an analyst to provide the revenue impact of the outgoing client, McDonogh said he doesn't "think it's right to talk about any single particular client" but net new assets increased 4% excluding the deconversion.

"Over the next several quarters, we like the business momentum," McDonogh said. "We have a lot of stuff in the pipeline. I think come October, we're going to have a couple of deals that we're going to be able to talk to you about that are quite exciting and will make you feel pretty good."

Investment and Wealth Management client assets

Assets under management for BNY Mellon's wealth and fund unit ticked down 2% from the year-ago period to $1.91 trillion in the second quarter, but the specific wealth holdings rose 8% to $286 billion. Just as in the previous six months, a spinoff of part of the megabank's European business in a deal last year with Franklin Templeton pushed asset management holdings lower.

Pershing revenue

The clearing and custody firm's revenue climbed 8% year over year to $686 million in the second quarter. The impact of higher interest rates and rising earnings from client cash sweep accounts easily offset lower levels of client transactions in the period.

As a whole, the Market and Wealth Services unit earned net income of $657 million on revenue of $1.45 billion for a pretax operating margin of 46%. The margin was the same as the second quarter of 2022, while profit expanded 8% and revenue grew 10%.

Investment and Wealth Management profits

BNY's asset and wealth business took a hit from its divestiture of the unit sold to Franklin Templeton, falling net interest revenue and client movement to products with lower fees. In the quarter, the division earned a profit of $129 million on revenue of $813 million for a pretax margin of 16%.

In 2021, the segment of BNY's business was generating a pretax margin of 30%, Vince noted in response to an analyst's question. To get back to that level, Vince's team plans "some of the de-siloing and expense management" that comes from combining the "landlocked" parts of BNY's fund business, as well as focusing on improving revenue by meeting client needs and achieving strong performance, he said.

"There's no reason to think we couldn't get back there over time," he said. "But there are a series of different things that we have set out to do ourselves. And so the execution of all of that is going to be really important."

Remark

An analyst who noted recent moves by Goldman Sachs and Envestnet deeper into the custodian marketplace for registered investment advisory firms asked Vince how he views the competitive landscape for the business. Vince noted the firm's position as the No. 1 brokerage custodian and No. 3 among RIAs, along with the ongoing "One BNY Mellon" program to remove barriers between business units, the development of Pershing X's Wove technology and solutions like the firm's new direct indexing service for financial advisors.

"We've got this whole breadth to how we're actually approaching this opportunity," Vince said, according to the Thomson Reuters transcript. "And while we, of course, welcome the competition from some of these other folks, I don't think any of them can deliver that breadth of capability to our clients. And so for advisors and investors, we feel very good about our direction of travel in this business."