Pershing sustains $22B outflow — but drives a healthy profit anyway

The loss of the former First Republic business dealt another blow to Pershing's assets in the third quarter, but the BNY-owned custodian and clearing firm added 14 new clients.

Pershing sustained an outflow of $22 billion in the last three months based on "the ongoing deconversion of lost business in the prior year, which is now largely behind us," BNY Chief Financial Officer Dermot McDonogh said in prepared remarks on the company's Oct. 11 earnings call after the megabank disclosed its results. Stock gains drove substantial profit for the BNY unit that houses Pershing and the bank's wealth and asset management units. And McDonogh expressed confidence that new technologies coming to Pershing's financial advisor desktops will attract more wealth management clients to the custodian over time.

Excluding First Republic and other lost business from recruiting and M&A deals that are part of the deconversions in the past year, Pershing netted an annualized 4% net new asset growth in the third quarter, McDonogh noted. In particular, he credited Pershing's Wove operating system with helping to keep the clearing and custody giant on track to tack on $30 million to $40 million in recurring annual revenue through incoming wealth management clients.

"Wove is helping us attract new clients and deepen relationships with existing ones," McDonogh said, according to a transcript by the investing website Seeking Alpha. "For example, Pershing provides custody and clearing solutions for Sanctuary, a large and fast-growing wealth manager servicing the high net worth and ultrahigh net worth segments. Sanctuary will also leverage Wove portfolio solutions, trading and rebalancing and reporting for teams that custody with Pershing as well as those that use another custodian.

To see the main takeaways for financial advisors from the third quarter for Pershing and BNY's Investment and Wealth Management segment, scroll down the story. Follow these links for analysis of its second-quarter and first-quarter earnings from earlier in the year. And click here for a look at Pershing's clearing and custody agreement with Arax Investment Partners.

Archer deal and other tech announcements

Last month, BNY unveiled its agreement to purchase the parent company of Archer, a technology firm that provides actively managed portfolios. The transaction is expected to close by the end of the year, BNY CEO Robin Vince noted in prepared remarks on the earnings call.

"Archer provides comprehensive technology and operational solutions that allow asset and wealth managers to access one of the fastest-growing investment vehicles in the industry, managed accounts, at scale, expanding distribution, streamlining operations, launching new investment products and delivering personalized outcomes for their clients," Vince said. "The integration of Archer should produce a positive impact across several of our lines of business. In addition to augmenting our asset servicing capabilities for managed accounts, Archer will provide our investments business as well as our Wove wealth advisor platform in Pershing with expanded distribution of model portfolios and access to Archer's multicustodial network. Buy it once, use it many, if you will."

In addition during September, BNY rolled out what the firm calls "Alts Bridge." The solution offers financial advisors access to "comprehensive data, software and services" that "make investing in alternatives easier" through integrations with Pershing's desktop platforms, Vince said.

Pershing assets under custody or administration

Despite the outflow in net new assets for the quarter, Pershing's total assets under custody or administration jumped 13% from the year-ago period to $2.7 trillion in the third quarter due to rising stock values over the past 12 months. Average active clearing accounts ticked up 1% to 8.09 million, and the mean level of revenue-producing trades on a daily basis climbed 13% to 251,000.

Investment and Wealth Management client assets

Market appreciation fueled higher client assets at BNY's direct wealth and asset management unit as well. Customer holdings rose 14% to $333 billion in the third quarter.

Pershing revenue

Higher asset values failed to offset the impact of the client outflows and falling net interest income for Pershing in the last three months. The unit's revenue slipped 1% year over year to $649 million. The firm doesn't break out Pershing's profit, but BNY's overall Market and Wealth Services segment generated $704 million in pretax income on $1.55 billion in revenue — a healthy margin of 46%. The segment's revenue grew 7%, and its profit surged 8%.

Investment and Wealth Management profit

Buoyed by the bigger asset values, BNY's wealth and investment management unit produced pretax income of $176 million on revenue of $849 million in revenue for a margin of 21%. The segment's profit increased 7% from the same period a year ago, while its revenue expanded 2%.

Remark

During the Q&A section of the call, one analyst asked McDonogh and Vince about the possibility of reaching and surpassing BNY's stated target of 33% profit margins for all its segments. In response, Vince called out the unit that houses Pershing as an example of one that is doing so already.

"You can see us prosecuting the operating leverage journey differently in our three segments, Vince said. "Maybe to allay your concerns in terms of growth and investment, if you look at Market and Wealth Services, we aren't trying to grow the margin there. We're very happy with the margin. We just wanted to grow the total size of the business, which is exactly what we've been doing. The other segments where we said we actually do want to grow the margin toward our medium-term targets for those segments — there, we are really growing the margin."