First Republic losses nearly over for Pershing after $23B outflow

Giant custodian BNY Pershing faces just one more period of massive deconversions of client assets stemming from the collapse of First Republic last year.

In remarks on a July 12 earnings call with analysts after Pershing's megabank parent disclosed its second-quarter results, BNY Chief Financial Officer Dermot McDonough acknowledged some weariness at the firm stemming from an outflow of $23 billion in client assets under custody or administration but cited 21 incoming new wealth management clients using the firm's technology. 

That influx is keeping the firm on track with its previously announced target of $30 million to $40 million in additional tech revenue, McDonough noted. With that business plus a renewal of its agreement with Osaic, the "momentum is building, the clients like us," he said.

"I would say nobody is happier to see the ongoing deconversion of the clients come to an end. So we expect that to be fully out of the portfolio by Q3. As I've said on previous calls, we believe in our ability to earn our way through that deconversion. It happens in life. And so I think the team has been very resilient in terms of earning their way through it and growing," McDonough said, according to a transcript by investing news website Seeking Alpha. "We believe we're in good shape, and there is good momentum in what is a very, very large market, and in which we're a very big player."

To see the main takeaways for financial advisors from the second quarter for Pershing and BNY's Investment and Wealth Management segment, scroll down the story. For coverage of Pershing's first-quarter earnings, click here. For that of the fourth quarter of 2023, click here. And, for a look at the bottom line at its megabank parent by Financial Planning's sister publication, American Banker, follow this link. 

Pershing custody and technology recruiting

The same day its parent company disclosed its results for the second quarter, Pershing unveiled the announcement that independent wealth management giant Osaic renewed its clearing and custody contract with the firm, and midsize firm Arete Wealth expanded its clearing, custody, and technology agreements to get access to Pershing X's Wove platform. Pershing services around $200 billion worth of Osaic's client assets and $6 billion of Arete's customer holdings. After rebranding from its previous name, Advisor Group, last year, Osaic is currently in the process of consolidating its eight independent subsidiaries into one.

"Osaic is committed to collaborations with best-in-class companies that have depth of stability and continuously invest in their products," Osaic CEO Jamie Price said in a statement. "Backed by BNY, the world's largest custody bank, BNY Pershing, which serves more than 60 global markets, is a leading platform provider we are proud to work with."

Pershing assets under custody or administration

Pershing's large outflow of assets due to JPMorgan Chase's rescue of First Republic's client accounts last year continued to leave an ugly mark. Stock and bond yields offset some of those losses, however. The firm's assets under custody or administration rose 8%, or $200 billion, year over year to $2.6 trillion, while its average active clearing accounts ticked up 1% to 8.06 million. 

Investment and Wealth Management client assets

In contrast, inflows into BNY's direct wealth management business and rising asset values helped push up its client assets 8% year over year, or $22 billion, to $308 billion in the second quarter. 

Pershing revenue

Elevated asset values and client activity surpassed the impact of the lost business on Pershing's top line. Revenue increased 3% from the year-ago period to $663 million in the second quarter after a slight boost from Pershing's investment services fees going up by 2% to $474 million. 

The segment of BNY's business that includes Pershing, BNY's Market and Wealth Services unit, generated pretax income of $704 million on revenue of $1.54 billion for a profit margin of 46%. Profit jumped 8%, revenue grew 6% and pretax margin came up by a percentage point.

Investment and Wealth Management profits

BNY's direct wealth and asset management business produced pretax income of $149 million on revenue of $821 million for a margin of 18%. Profit surged 15% year over year, while revenue ascended 1% and profit margin went upward by 2 percentage points. The inflow and asset performance fueled the jump in net income. 

Remark

The Wove technology platform is turning into "a bit more of a delivery vehicle for the various capabilities of the firm, and it's also opening the aperture of how clients of Pershing think about us in terms of our ability to solve other problems for them," BNY CEO Robin Vince said in response to an analyst's question about it.

"Now we have the opportunity to link all of these other BNY capabilities to be able to deliver to our Pershing and Wove clients," Vince said, according to the Seeking Alpha transcript. "So you can be a clearing and custody client of Pershing, you can be an adviser taking advantage of that initial set of tooling from Wove, but what you can now also do is you can have that ability to manage and aggregate data, including across multiple custodians."