Dermot McDonogh
Chief Financial Officer at Bank of New York Mellon
Thank you, Robin, and good morning, everyone. I will start on Page 3 of the presentation with our consolidated financial results for the third quarter. Total revenue of $4.4 billion was up 2% year-over-year. Net interest revenue was up 10% year-over-year, primarily driven by higher interest rates, partially offset by changes in balance sheet size and mix. Fee revenue was flat. Growth on the back of higher market values, net new business, and the favorable impact of a weaker dollar was offset by the Alcentra divestiture in the fourth quarter of last year, lower foreign-exchange revenue, and the mix of AUM flows.
Firmwide assets under custody/administration of $45.7 trillion were up 8% year-over-year reflecting higher market values, client inflows, the weaker dollar, and net new business. Assets under management of $1.8 trillion were up 3% year-over-year, reflecting the weaker dollar and higher market values, partially offset by the Alcentra divestiture. Investment and other revenue was $113 million in the quarter, reflecting continued strength in fixed-income trading.
Expenses were down 16% year-over-year on a reported basis, primarily reflecting the goodwill impairment associated with our investment management reporting units in the third quarter of last year. Excluding notable items, expenses were up 3% year-over-year. Provision for credit losses remained low at $3 million in the quarter, as the impact of reserve builds to reflect continued uncertainty on the outlook for commercial real estate was largely offset by reserve releases related to financial institutions. As Robin noted earlier, reported earnings per share were $1.22, excluding notable items, earnings per share were $1.27, representing 5% growth year-over-year. We delivered positive operating leverage. Our pre-tax margin was 29% and we generated a return on tangible common equity of 20%.
Turning to capital and liquidity on Page 4. Consistent with the prior quarter, we returned $450 million of capital to our shareholders through common share repurchases and we paid approximately $330 million of dividends to our common stockholders reflecting our previously announced 14% dividend increase, which became effective in the third quarter. Taken together, we returned 82% of earnings to shareholders in the quarter, our 107% on a year-to-date basis.
Our Tier 1 leverage ratio improved sequentially by approximately 40 basis points to 6.1% reflecting a decrease in average assets and an increase in Tier 1 capital driven by capital generated through earnings, net of capital returns through buybacks and dividends. Unrealized losses related to available-for-sale securities remained roughly unchanged in the quarter.
The CET1 ratio was 11.4%, representing an approximately 30 basis points improvement compared with the prior quarter reflecting lower-risk weighted assets and an increase in CET1 capital. Just like our regulatory capital ratios, our liquidity ratios further strengthened in the quarter. The consolidated liquidity coverage ratio was 121%, a one percentage point improvement compared with the prior quarter, and our consolidated net stable funding ratio was 136%, well in excess of the regulatory requirement.
Next on Page 5. Net interest revenue and further details on the underlying balance sheet trends, which I will describe in sequential terms. Net interest revenue of $1 billion was down 8% quarter-over-quarter driven by changes in balance sheet size and mix, partially offset by higher interest rates. As we expected, temporary deposits related to the debt ceiling impasse in the second quarter left in July, and along with seasonally low balances in August, average deposits for the quarter decreased by 5% sequentially. In line with our expectations, interest-bearing deposits were down 3% and non-interest-bearing deposits were down 16%. You will remember from prior earnings calls that we expected non-interest-bearing deposits to moderate to approximately 20% of total deposits in the second half of this year, which is consistent with our deposit mix in the third quarter. Following the seasonal trough in August, we saw the anticipated pickup in monthly average balances in September, and again, some modest growth in the first two weeks of October. Average interest-earning assets were down by 6% quarter-over-quarter. This reflects a reduction in cash and reverse repo by 11%. While we actively reduced wholesale funding. Our investment securities portfolio was down 4% and loan balances were up 1%.
Moving to expenses on Page 6. Expenses for the quarter were down 16% year-over-year on a reported basis and up 3% excluding notable items. This year-over-year increase was driven by higher investments and revenue-related expenses, the unfavorable impact of the weaker dollar, as well as inflation, partially offset by efficiency savings and the Alcentra divestiture. I'll talk more about our outlook for expenses in a moment but as Robin mentioned earlier, it is worth highlighting that for 2023, we're expecting to fully self-fund over $0.5 billion of incremental investments through efficiency savings.
Turning to our business segments starting with Security Services on Page 7. As I discuss the performance of our Securities Services and Market and Wealth Services segment, I will comment on the Investment Services fees for each line of business described in our earnings press release and financial supplement. Security Services reported total revenue of $2.1 billion, up 1% year-over-year. The revenue was flat, a 2% growth in investment services fees was offset by a 19% decline in foreign exchange revenue on the back of lower volatility and volumes. Net interest revenue was up 12%.
In Asset Servicing, investment services fees were up 3%, driven by higher market values, healthy net-new business, and a weaker dollar, partially offset by lower client transaction activity. The strength of our balance sheet as well as the stability, breadth, and depth of our solutions remain clear differentiators that position us well with clients confronted with a persistently challenging market environment and an evolving competitive landscape. For example, ETF assets under custody/administration were up over 20% year-over-year and the number of funds serviced on our platform continued to grow at a healthy clip. In all assets under custody/administration and related Investment services fees, both grew in the mid-single-digit percentage range despite the number of fund launches having slowed significantly over the past year. With initial risk services investment services fees were down 2%. Growth from net new business and corporate trust was more than offset by the absence of fees from elevated depositary receipt cancellation activity in the third quarter of last year.
Next Market and Wealth Services on Page 8. Market and Wealth Services reported a total revenue of $1.4 billion, up 6% year-over-year. Fee revenue was up 5% and net interest revenue increased by 6%.
In Pershing, Investment Services fees were up 2% reflecting higher fees on sweep balances partially offset by the impact of loss business and lower transaction volumes consistent with the decline in US equity exchange volumes. Despite the continued headwind from the ongoing deconversion of the regional bank highlights in the second quarter, Pershing saw $23 billion of net new assets under the platform this quarter reflecting positive momentum in the underlying business. As Robin mentioned earlier the momentum around the world is building with both new and existing clients. While at the same time, ongoing investments in the core Pershing platform to enhance advisor experience and lead with innovative solutions have positioned us well to capitalize on the heightened pace of change in the OIA community.
In Treasury Services, Investment Services fees decreased by 1% as growth from higher client activity was offset by higher earnings credits for non-interest-bearing deposit balances.
In Clearance and Collateral Management Investment Services fees were up 16% reflecting broad-based growth across US and international clearance and Collateral Management. In particular, we saw strength in domestic clearance volumes reflecting elevated volatility and US Treasury issuance activity and the continued migration from the Fed reverse repo facility to traditional tri-party collateral management balances.
Recent macro trends, including heightened volatility, uncertainty associated with monetary policy and bank's regulatory capital requirements, as well as the recent consolidation in the banking sector further reinforce the value of our tri-party collateral management services. In addition to expanding our platform both in the US and internationally, we continue to innovate new solutions for our clients to better utilize their philosophy.
Turning to Investment and Wealth Management on Page 9. Investments in Wealth Management reported a total revenue of $827 million, down 4% year-over-year. The revenue was down 2%, and net interest revenue declined 33% year-over-year. Assets under management of $1.8 trillion increased by 3% year-over-year. As I mentioned earlier, this increase reflects the weaker dollar and higher market values, partially offset by the Alcentra divestiture. In the quarter, we saw $15 billion of net outflows from long-term strategies, driven by client derisking and rebalancing, and $7 billion of net inflows into short-term strategies, led by our drivers' money market fund complex.
In Investment Management, revenue was down 4% year-over-year, primarily reflecting the Alcentra divestiture and the mix of AUM flows partially offset by higher performance fees as well as the impact of higher market values and the weaker dollar.
In our Wealth Management business, revenue decreased by 5%, driven by lower net interest revenue and changes in product mix, partially offset by higher market values. Client assets of $292 billion increased by 14% year-over-year, reflecting higher equity market values and cumulative net inflows.
Page 10 shows the results of the other segment.
I will close with our current outlook for the rest of the year. Based on market-implied forward interest rates at the end of last month, our net interest revenue outlook for the full year '23 remains unchanged for 20% growth year-over-year.
Moving to expenses. We are making good progress on bending the cost curve by protecting our important investments to accelerate growth and deliver superior client experiences. From where we sit today, I am confident that we will outperform the target of 4% expense growth, excluding notable items that we communicated in January and we remain determined to drive that growth rate down to 3% for the full-year '23. This reflects our expectation for a sequential step-up in expenses, excluding notable items in the fourth quarter with seasonally higher business development expenses as well as discrete increases for professional services and occupancy.
And finally, we expect to continue stock buybacks at a pace consistent with the second quarter and third quarter. This is in line with our full-year outlook to return 100% of earnings or more to shareholders over the course of '23 while maintaining our strong capital ratios, mindful of the significant uncertainties relating to the operating environment.
In conclusion, our financial results this quarter highlight the effectiveness of our balance sheet management and tangible progress on our journey towards higher operational efficiency and scalability. While we have more work to do, our teams around the world are embracing change and our pace of bringing innovative new client solutions to the markets gives us confidence that revenue growth will follow over time.
With that, operator, can you please open the line for Q&A?
