美國銀行 (BAC) 2001 Q1 法說會逐字稿

1 FLEETBOSTON FINANCIAL CORPORATION CONFERENCE CALL

Good morning and thank you for holding. All participants will be able to listen only until the question and answer session of the call. The conference is being recorded today at the request of Fleet Services. If anyone has any objections, you may disconnect at this time. I would like to introduce your host for today's call Mr. Eugene M. McQuade, Vice Chairman and Chief Financial Officer. Sir, you may begin.

Good morning everyone and welcome to the first quarter of FleetBoston conference call, and thanks for getting up so early to join us. We are going to discuss, for the most part, the first quarter performance, little bit on some of the strategic moves we made, and then lastly I'll give you a little bit of outlook for the remainder of the year. I think, in terms, of the first quarter performance, we obviously found it a very tough operating environment. That's not surprising in terms of what was going on in the capital markets and in the economy in general. My view was, we put together a pretty gritty performance to kind of, grind through, as I said, a tough environment 2 for our mix of businesses. There are a lot of moving parts, I'll try and touch those, there is a lot going on in the company, we did have a focus towards trying to calm things in order to make sure we did our best to meet expectations for the quarter, and I think that we will, in a tough environment, be able to bring a lot of things together to demonstrate the strength, the breadth, and the diversity of the company. This is really what we have been talking about since the early part of the merger; that we thought that this broad franchise with the diversified revenue streams was a bit stronger than either of the individual franchises by themselves, and I think that really came through very strongly this quarter in terms of our, we reliance this quarter more on the traditional banking earnings than the capital markets earning which really had driven the company in its first year of operation.

On top of that, I would like to start by reminding everyone that we did close on the Summit on March 1st, those are the numbers that I will speak about, and that you have seen, have now been restated for acquisition of Summit, which I will touch on later, but has done very well so far. Coming to the highlights of the 3 quarter, we earned 79 cents on what we'll call an operating basis, I know there is a lot of views about this. I think the real comparisons though are against 84 cents in the prior year, and 82 cents in the prior quarter. The differential is almost entirely made up of two events. One, the natural decline from the immediate dilution from issuing 180 million shares for the Summit acquisition, as we said, when we announced the Summit acquisition, we'd expect that to be the accreted for the year. I'd expect that dilution to be offset later in the year, as the cost savings come through from the Summit acquisition. The second pressure on earnings, this quarter from technical factors, is the lost earnings from the Sovereign divestitures. We now have the full run rate of the $13 billion divestiture to Sovereign and that as well put some pressure in terms of the quarterly comparisons on EPS. I think, absent that, the operating numbers were probably of slimmer, similar to, up slightly quarter-over-quarter, but obviously from reading our release, there was a dramatic difference in terms of the context of the earnings.

I think, the major area to point out was, we saw a very dramatic decline in our capital markets businesses this quarter, in order to find 4 capital markets as principally investing in Robbie Stevens and Quick & Reilly. I don't think that is a surprise to anyone. I think anybody who picks up the newspapers understands with Nasdaq down 50%, the S&P down over 20% during the quarter, retail trading volumes down significantly that there was going to be pressures in those businesses, and clearly we saw them. On comparison, on a year-over-year basis, our EPS was down 36 cents, or would have been down 36 cents is probably a better way to phrase it, it would have been down 36 cents because of those businesses, and just from the fourth quarter, where this climb was a little bit more modest, but it still would have been down a dime from the difference in the earnings of those businesses. But clearly we felt the affect there, and I think, this is where the strength of the franchise, the broader strength of the franchise did come in. We did have two channels that offset that. One, we saw some very solid growth in a number of our traditional businesses. Commercial Finance had a very strong quarter. Latin America was strong. The specialist business done in the exchange also did very well, and cash management had a great quarter and 5 credit card was up versus a year ago. So a number of our traditional businesses had superb quarters. Most of our businesses, absent capital markets, had very good quarters. We are very satisfied with the franchise in general, and thought they performed well in what we think is clearly a slowing market.

We also had some gains in the quarter that funded a lot of the pressures in the capital markets businesses. We aggressively took principal investing, write-downs, and venture capital write-downs. That's really reflective of a changed market, a changed pricing, and changed opportunity to get out of some of these investments. Write-downs were about $132 million in that portfolio during the quarter. Then, we also used some of the gains to build long lost reserve again. We provided $45 million more than charge-offs for the quarter, and the thought there was to try and bring the reserves to loans in the pre-Summit levels, which we did. We got the reserves to loans back to about 2.1%. But obviously, it reflects our thinking that there is continued pressure on the economic front ahead of us over the course of next year, and we want to continue to be very strongly reserved. In terms

Margin was up 14 basis 6 points to 423 basis points in the quarter. We had positioned ourselves well for declining rates. We certainly got a boost when Sherman Greens Band moved early in January; that accelerated our position there. But we're positioned for a lot lower rates, we continue to be positioned for lower rates, not quite as strongly as we were, but we still think that there is at least a 150 basis point cut in front of us. Returns were very solid. Return in equity slightly over 18%, return in assets 164 basis points in a very tough economy now. We continue to have a very strong capital position as we come into the middle part of the year.

Our tangible common equity ratio is over 7%, our Tier-1 ratio was over 8% and we have talked about our very strong internal generation of capital in the company. At this point, I continue to see that going on through the remainder of the year. On the loan growth side, in terms of trends domestically, I'd factorize the growth as really tepid. What we are seeing is a slowing demand generally throughout the economy. We, from a technical standpoint, continue to securitize pretty aggressively, but there just isn't a lot going on the demand side 7 in our franchise right now. On the international side, we did see some strong growth, particularly in Brazil, as they are bouncing back from their recession a couple of years ago, we are seeing very good origination in the Brazilian economy. Our Latin American units also performed very well, despite the Argentina crisis. Brazil was substantially up over 20%, year-over-year, and Argentina, year-over-year, despite all that's going on down there in the first quarter was basically flat for the first quarter of last year at just over $30 million of earnings. Both those franchises performed well, and I think, we are particularly encouraged by Argentina being able to perform as well as it did in what was this chaotic an environment as we have seen down there in the last 10 years. On the credit quality side, non-performers were up about 10% in the fourth quarter, and our ratio is now 95 basis points of non-performing assets to loans, and net charge also were down 15% from the fourth quarter, that is a charge-off rate of about 82 basis points.

Essentially, we continue to see a lot pressure on the C&I portfolio, and we saw that in the NPA inflow again. Charge-offs were down more as an effect of the one-time loan sale we did in 8 the fourth quarter where we did release some pressure at least for the other part of this year and that was very much behind our thinking in moving those assets out quickly. Consumer portfolio seems to be holding up well. Net charge-offs in the credit card were up a bit, that's a result of delinquencies [________________] up towards the end of last year as well as a seasonal rise that we typically see in the first quarter. All of our delinquencies are now down in the credit card portfolio, and our expectation is that charge-offs in that portfolio, in terms of an absolute basis, will be coming down through the remainder of the year. In terms of outlook it fits to the broader general portfolio, I think we remained cautious in terms of trying to predict where the peaking may be here. There continues to be some amount of economic uncertainty, and certainly the wholesale, the manufacturing, and the industrial side is probably in recession right now. Our view is that we will continue to see pressure on non-performers through the remainder of this year. I don't want to say whether there is a peak in the third or fourth quarter, I think it's too soon to try and say that. I think that the 9 trend now will be continued increase on the C&I side. I do think though that the charge-offs, while they will be up from where they were this quarter, probably doesn't track as aggressively the NPA kind of growth that we expect.

I think the charge-off number for us will ultimately settle back to the range we were in the last year which was roughly 315 to 325 give or take some millions around there, and I think clearly within our financial capacity to deal with whatever happens on the charge-off side. My thinking is that the provision at a minimum will probably match charge-offs for the full year, so I don't see any decremental loan-loss reserve year-over-year, and we will continue to move on credits aggressively as we see them. Moving to the charges in the first quarter, we did have three, one time charges, and I think the really thing of the quarter was trying to strategically reposition some of our business portfolio. The Summit charge was 450 million, you're all aware of, we discussed that last year when we announced that Summit acquisition, we continue to believe that Summit is just an excellent market extension with a terrific customer base, and we should be able to do very good things with that franchise. We did announce a charge of $225 million in terms 10 of write-downs and in our mortgage servicing business. As you know, we announced the sale of that a couple of weeks ago to Washington Mutual. Our review on this is that this is a better business in their hands than it is in our hands. We clearly think that they will be able to do more with it because of their willingness to use their balance sheet to offer products that we were just uncomfortable offering and putting on our balance sheet, for us it is an exit of a low-growth, low-return business, with clearly added accounting volatility and a business that we just had not been successful at, in the last few years.

It gives us an opportunity to free of some management here, it also give us an opportunity to retake some capital coming out of this and to use it to build our cash flow position, and either invest in other businesses or take other capital options with that over the course of the year. Thirdly, we took a $50 million restructuring charge that we identified as primarily aimed towards the capital markets principally, Quick & Reilly and Robbie Stevens. We are doing a couple of things there. We're revamping our Quick & Reilly's brokers for us 11 around a very new business generation as opposed to being order takers and that obviously requires a change of personnel. Both companies we're downsizing staff levels to respond to clearly significantly lower market activities with a thought that we really will need to have an expense base which is more reflective of current run rate and the expected run rate of the revenue levels in those businesses. You will be seeing some layoffs in those businesses. As part of that money, there is also money put aside for what may be some very modest layoffs in the free corporate side, and I will talk about our expense management initiatives in a second, but we do have a view of just taking $5 to $700 million of expense out of, we mostly on the non-personnel side, but we will need to adjust the headcount size in certain businesses. On the Summit side, I think we have hit the ground running on both the business and operational side here. Organizationally, we are completely set. I think you have seen those announcements in the American Bank or over the course of past few months. The conversion schedule is in place. We expect to begin notifying customers in mid-May.

We expect all our major system conversions to be done certainly by the late 12 summer, likely by the middle of summer. We have already begun the conversion, and have successfully converted the financial systems in March, and that has allowed us to link in the general ledger to our management reporting focus, so those of you who get the extended financial disclosures, I think we call it the selected financial disclosures or FSD from John Flair, you will know that Summit is completely integrated into a line of business reporting and forecasting that we do, so from an analysis standpoint, we have tried to make this absolutely as scene less as possible in terms of even in the line of business restating all the past numbers and reporting them a month after we closed in terms of a fully functionalzed and integrated line of business basis. The branch closings are set, we announced that, interestingly, over 50% of them will come from the Fleet side. I think we gave a pretty good evaluation to both branches and then took the ones where we thought we had the greatest revenue potential. We also announced, and I don't think this has gotten much play at this point that we are upping our cost saving targets on the integration from the originally announced $275 million to $300 million now based 13 on what we're seeing. In the quarter, there were a lot of good things going on behind the scenes and some of these are the things you have heard us again talking about. We are focusing very heavily on trying to derive some growth from the existing franchise, and I think that will be our focus in the continuation of the year.

We have been pretty outspoken about that there was nothing going on with First Union. Many didn't believe us. I hope you believe us now. There was nothing going on with First Union. I don't believe you will see us do a large bank merger in the course of this year; that is just not a priority for us. Our priority is really taking what we have now, which we think is a terrific franchise and [________________] get this on a higher growth trajectory than we traditionally have done with all the acquisitions that we have been mixing in. The new customer-centric organization that we announced in the fourth quarter has worked out very effectively. Right now, both Bob Higgins and [_______________] are really driving the consumer in the corporate businesses very effectively. We have been making major strides on our customer experience front, particularly in the retail businesses. We have seen good growth in our 14 online banking usage. We now have 1.4 to 1.5 million online banking customers; that is our home-link product and it is about 40% penetration of the eligible customers. We continue to see good signs of increased customer penetration between our home-link product and our Q&R products and that continues to expand and we are very enthusiastic about that, and e-catalyst initiatives continue to be funded and rolled out in the company. Turning to the economic outlook or to the corporate outlook, in front of us, I guess I'd qualify this by saying my crystal ball on the macro front, it's probably no more accurate than anybody else on the call, and we need to keep that in context that the pressure we are seeing in the franchise, is really, what I believe, is more macroeconomic pressure than it is for many particular business unit not doing well.

I think we really are subject to the movements of the economy, my view is that there is clearly a fair amount of uncertainty in the economy still in front of us, despite what the Fed has tried to do, I think it's uncertainty at whether we miss a recession, I think its uncertain in terms of the timing of the 15 turnaround, and clearly uncertain in terms of how the markets will react to all this. So as I sit here today, I continue to look at what I think is a troubled economy with the Fed doing everything it can to try and revive it, but quite honestly we're not seeing great signs of revival at this point. In terms of our particular situation, as I mentioned before, a number of our businesses are performing quite well, and our expectation is that those businesses will continue to perform quite well, a number of them are counter cyclical to the economy, commercial finance business, Latin America is obviously in a different economy. Our specialist business, credit card business, will do well. We've been in a number of businesses that are counter cyclical or just positioned well for the economy. We see a number of businesses that are doing fine are concerned that in a slowing economy they may begin to bear signs of those slowing economy and those that we worry about here are middle market and small businesses, I think if consumer spending were to slow substantially here, those businesses would feel a bit of pressure because much of what they either manufacture or provide as a part is clearly focused in terms of the consumer markets.

And the good news is, so far, that the 16 consumer spending has continued at a pretty good clip. There isn't great pressure in that segment of the market but that's one that bears watching as you go through the year. And in terms of the capital markets businesses, clearly we're in the weakest environment in at least 10 years, and I have to admit that I don't see any imminent signs of a speedy turnaround in those businesses. I do think we are aggressive in terms of trying to view what the principal investing issues in terms of trying to recognize as early as possible the weakness in the Nasdaq, and other takeout [________________] there and recognize that pricing clearly won't be as strong this year as in future years. Robbie Stevens is clearly going to depend on somewhat of a rebound in the technology sector, and then a rebound in the IPO markets. We don't see that happening right now, so I can't give a lot of enthusiasm there. Quick & Reilly needs to see a little bit higher retail trading volumes, and I think they'll do fine, but we're not seeing that right now. I think all of that adds up to clearly that there is some pressure in terms of the near term, in terms of the company at this point. In the first quarter, we opportunistically tried to address some of 17 these problems as quickly as we could, and as well as try and match them off with some nonrecurring gains. We continue to have some of that ability, but I think the outlook in the range of that will depend heavily on how quickly the capital markets recovers, and my anticipation is that it won't be any worse than it is right now, and I look at the company and the earnings here as one that is somewhat dependent on the market getting a bit stronger but not a lot of reliance on that in terms of that's going to drive the company for the rest of the year.

We do have a lot of good solid activities going on, lot of growth in our business, Summit cost saves a number of other things that will help us in terms of a drive in the earnings. I think, in the meantime, with the uncertainty in the markets, I continue to be very grounded in terms of the assumptions that we use in terms of the outlook. I do continue to be struck by the wide varying views among analysts and how quickly things will snap back. This clearly, at least in the consensus numbers, we see a thought that, I think capital markets, will snap back quicker than we see it at this point. I clearly don't see a snap back here in the second quarter, and the longer we go, I think its going to be more 18 difficult in terms of seeing that snap back in the third quarter right now. In recognizing that, as I said, a number of our businesses are doing well. We've also announced a program to [________________] manage our biggest controllable expense, which is how we spend our money. Our intent is to take $5 to $700 million out of the run rate of our expense base between now and the end of the year. I think that will give us a little bit of wind here to help ride out the capital market. I think we comfortably can do that, that's about 5% to 7% of our disposable dollars, and I think we've got a program in place and commitments prior to business units and numbers assigned at this point. So I don't anticipate that to be an issue in the company. I think, our focus here is trying to take dollars out that are discretionary spends, we're trying to avoid reducing headcount, and we're certainly going to avoid anything that affects our customers or our customer service.

Our thinking here is that there will be a snap back at some point in the latter half of the year in terms of the revenue side of the business, and we certainly want to be positioned to fully participate as the economy snaps back. 19 So I don't think you'll see anything [_______________] in the company, but we have got some spending habits that has been developed over the past couple of years. I think we can just change and just spend your money more wisely. We also have, as I mentioned before, significant amounts of excess capital at our disposal, and it'll be particularly visible sometime in the third quarter, and I think we won't hesitate to act aggressively on the capital side in terms of maintaining the EPS number. It's bit of a mixed view here, as I said, we've had large parts of the franchise that are performing very well. I do like to stay grounded in terms of the market realities that are in front of us. I can tell you that the near term uncertainty that I've just expressed really doesn't diminish my enthusiasm at all for the franchise just one bit. I think the diversity of our earnings base and the strong positioning of our businesses are going to produce excellent earnings growth over a longer term cycle, and I think we're in one of the tough capital market cycle here, and, quite honestly, I think, we are very well positioned right now for when the environment begins to improve, we've got number of customer initiatives that are really taking hold in the company now; we'll have Summit 20 fully integrated; we'll have a significant amount of excess capital at our disposal, as the markets turn around. So, as I look at the company, we're under a little bit of pressure here in the short term, and I think that's economic driven, but the more and more we look at the franchise, we are very well positioned to go forward. With that, I'll end my remarks operator and then turn it over to you to do some Q&A.

Thank you sir. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press * 1, you will be announced prior to asking your question. To withdraw your question you may press * 2. Again to ask a question, please press * 1. Our first question is from Lori Applebaum with Goldman Sachs.

Hi! Eugene.

Hi! Lori, how are you?

Good. My question relates to the Summit acquisition, and if you could talk about anymore rigorous customer 21 retention strategies in the market, given that there is fairly strong competition catering to small businesses and consumers in markets such as Commerce?

Yeah. Commerce has made a big splash about what they're going to do and then certainly there are our competitor, but you know, they don't compete on the scale that we compete on, in terms of the breadth of product and service; they compete on pricing and we're certainly very aware of them that they're in a very limited part of the market we compete against. But more importantly, we clearly have spent a lot of time in terms of the Summit integration. In fact, one of the things that people probably are aware of is that from a customer and from a branch standpoint and from a systems standpoint, this is actually an integration that's larger in a scale than the integration of the BankBoston and Retail Franchise. From the technical standpoint, we'll have no problem doing this, we're very experienced, we've got number of pros who do this, we just took our team that had finished the Bank Bostons' conversions, and technically this won't be an issue. I will say though that I 22 think we learned a lesson here in the BankBoston conversion, and one that we are paying a lot of attention to, in terms of listening to the customer, and this is a broader dream of ours right now, but we spent an extensive amount of time, now, in terms of trying to understand what works for the Summit customer and making sure we build that functionality into our system so that what the Summit customer has had will be absolutely transparent to it, and we have got a steering committee with Joe Semrod and Jack Collins, who were the two senior people in Summit and someone had to stay to run that franchise for us, and have been very, very attentive to what they think is necessary to be successful in that market.

As I said earlier, in terms of the branch closings, over 50% of them are Fleet branches as opposed to Summit branches that's different from we've done in the past. We've also done a lot of things to stage this differently for example in the past, when we do a conversion, we come in over the weekend before the conversion and put all the new Fleet equipment in. We have now put all new Fleet equipment in the Summit branches. Summit now operates on the Fleet systems and what it does is going to our Fleet data center every 23 night now, and we convert it back to the Summit applications. What that does is allow us to train the tellers upon the technology and on the products. That's when we make that switch in the middle of the summer, we won't have the customer lines, the unfamiliarity by the branch personnel in terms of how the products work, how the system works, and things like that, and Lori, I can go through a laundry list, but I can assure you that we have been much more attentive on this conversion to the customer than we have been on any other.

Thank you. Our next question is from Chris Mutascia from Legg Mason.

Hi Eugene, how are you?

Good Chris. How are you?

Pretty good. Given the balance sheet restructuring at Summit that occurred late in the quarter, and factoring in another interest rate cut that's likely, what type of margin expansion can we expect? Any further margin expansion can we expect from here? 24

Yeah, you characterized that well. We did take about $8 billion of assets offerings towards the end of the quarter at Summit. Chris, I think in the short term, we probably won't see any more margin expansion. I think we'll see net interest income growth, and the reason for that is in the next 6 months or so under the accounting rules, we're really hamstrung in terms of what we can do with the capital. So rather than let these capital ratios run out to enormous levels, I think what we will do is put on some very safe money market kind of assets to utilize that capital. It wouldn't be the way you utilize it long term, but it clearly in the short term will provide a boost in that interest, but likely put a little bit of pressure in the margin. My sense is that the margin will be down 5 to 10 basis points in the next quarter, but really a result of choosing to put on some, what I'd call, low-margin, low?risk assets to get us through the next 6 months.

All right, thank you.

Thank you. Our next question is from [_______________] from Alliance. 25

Good morning Eugene.

Hi [________________].

Couple of unrelated, if I could, you took a charge in the quarter for capital markets, should we assume that that also covers the 5 to 700 million of expense savings you want to take out for the rest of the year or there are some incremental charge?

No, that's a good assumption. There will not be another charge for that.

Okay, and this 5 to 700 is above and beyond the summit expenses?

Yes, it is, so Summit is 300 and there is 5 to 700 on top of that.

Okay, and then the second question relates to credit quality. You alluded to the to the fact that net charge also were down because of the sale in the 4th quarter. The additions in the quarter were also down relative to the run rate of last year, should we expect that to come back up to, sort of 500 plus 26 level in the fourth quarter.

Yeah, I think, we did get a benefit by moving out some sub marginal assets in the 4th quarter in that net bulk sale, and I would expect that they would come up later in the year.

Okay, great, thanks a lot.

Okay [________________].

Our next question is from Nancy A. Bush from Ryan Beck & Company.

Good morning Eugene.

Hi Nancy.

Could you just characterize the rise in non?performers, sort of, as precise, you know, type of credit industry whatever is there some kind of overriding theme here or is just a lot of small stuff?

Well, that's the overriding theme, lot of small stuff, there was no one big credit in the quarter, although there 27 was some pressure in some large names at this point, I'd characterized it as generally C&I, a high-end middle markets, low-end of the 14,000 kinds of credits, very few familiar names that people would have seen in magazine or in newspaper, general size quick credit somewhere between $15, $25, to $30 million, generally in the manufacturing and industrial environments and we continue to see pressure in that sector of the economy right now, Nancy. We were not in the California utility, so we didn't have that as some of the other main credits that we had previously recognized I think either in the 3rd or 4th quarter last year, and I don't have any real big ones right now on the precipice of going on performing, but I think the real hotspot, right now, is that C&I area of medium-to-bear size companies that produce a good service in the manufacturing chain, I think they are under significant amount of pressure.

Okay, second question the loss that you took on Fleet mortgage, this doesn't close for several months, is there a possibility that we will see additional loss there or is this sort of locked in at this point? 28

That's a good point, we do run the market risk on this company for the next 2 months between now and June 1st, obviously we have done a lot to try and protect ourselves from that, but you can, as we've spoken about, you can never isolate yourself in that mortgage market that's why we're trying to get out of it. We can do a better job, typically, because we do have a date certain here and we have had a pricing matrix with Washington Mutual that we're working from, but yes, there is a possibility that as things go against us and our hedges don't work, and I can't guarantee they will, but we potentially could have another hit here before we close it out.

Okay, thank you.

Our next question is from Andy Collins from ING Barings.

Good morning Eugene. I was just wondering if you can elaborate a little bit more on your strategic plans for Robbie Stevens, given kind of the weakness we're seeing in the high-tech IPO pipeline. So we're you repositioned, integrate, cut costs, what are your plans there? 29

We're clearly going to cut cost there and we've already taken a little bit over 100 people out of that company which is about 7% of the workforce, already. My expectations is that we'll continue through the second quarter, so clearly a recognition in that we don't expect revenue levels there to bounce back strongly in the next quarter or two at best. We are going to work with them in terms of number of their businesses. Actually, the company, you know, even though the market is very dead, the company is not doing as poorly as one might expect in this kind of market. [________________] 4 or 5 business alliance out there as sales and trading, equity derivatives that are a high net worth, investment banking, all but investment banking are doing pretty well at this point. Their revenues are about 160 million which would, as you should say gee, this a terrible quarter that would pencil out to somewhere around 700 million of revenues for the quarter. If you think back to that company when we bought in 1998, then we had $350 million of revenues, which included an investment banking practice at that point. From a revenue standpoint, many aspects of the business are 30 doing pretty well. Really is the investment banking business, which are the IPO and M&A sides that there just is no activity. I don't see us doing any kind of strategic overhaul, and I don't see us trying to move the assets away. We still like the business. We clearly knew it was cyclical and had a bit of loyalty to it when we bought it. We are able to take expenses out mentally in terms of headcounts, but in terms of incentive levels very aggressively, in terms of change for revenue levels, so I would say, at least based on the current outlook, Andy, we're going to play the hand we have and just try and bring the expense pitch down, and be as prepared as we can for once when those markets come back.

Okay. Thank you.

Thank you. Our next question is from Judah Kraushaar from Merrill Lynch.

Hi, Eugene. How are you.

Good, Judah. How are you.

Good. Just a couple of 31 questions. One is a followup on the last one. I was under the impression that Robbie might have had some trading losses this quarter. I wonder if that was a correct assumption and if you could explain that? And, secondly, I just wonder what your priorities are for the 2001 to further reposition the asset management business? Thanks.

Robbie had some, what I would call, and I know John [________________] is on the line, if he has got a number, my recollection was that if they had trading losses they were very modest. The number that I struggling to pull up, so it certainly wasn't anything that had any kind of headline within the company, so if they had direct trading losses, surely they were relatively modest in terms of the operation. The number that's coming to mind is perhaps $25 million or something, so, you know, certainly an operation that size nothing like their trading losses and gains quarter-by-quarter. So, I think it was nothing that would jump out at you, particularly in this kind of market. Moving to the asset management question, we have got two priorities there. One, we have committed to spend an additional $50 32 million in that business this year, and that commitment is unchanged, and we will spend that money, and won't be subject to the cost reduction efforts that the rest of corporation will be in. The money is going to be spent in two areas; first is in the investment advisory area, as you remember we brought in Keith Banks from JP Morgan this year, we have committed to him substantial powers in terms of personnel and technology to built out a stronger set of investment management products, as well as try and do a better job of integrating those that we have, as you aware, we have got Columbia out in the west coast, we have got Quick & Reilly to some extent, we have got Fleet investment advisors, and Keith's job is to build that into a contemporary asset manager where the business of $130 or $140 billion right now in terms of asset management.

We clearly need to make that a more contemporary set of products. The second spend will be in, where I would call, the private banking part of the company with a high net worth. We need to spend money there, both on technology and on sales personnel, and you have probably seen me just announced the [________________] sales person and we will continue to make heavy investment there, in terms 33 of trying to have a stronger, better prepared, and also from a product standpoint and technology standpoint sales force.

Since you're just talking about trading, one more thing, if you look at the regular trading line, not the market making, it seems like it very well number this quarter, and I thought may be this Robbie Stevens [________________] was more than the press outlined, but you know, in the quarter where fixed income trading [the account has been] stronger than it appears.

You know what Judah, what put pressure on that line was not as much Robbie, but Argentina. What we did have as you can imagine, had some pressure in the trading numbers down in Argentina this quarter, and I think that probably was responsible for that line as anything else for the company.

Was that net pressure or did they run that hedge focus, did we get some revenues?

No, it was net pressure. 34

Okay, thank you.

Thank you, our next question is from Ron Mandel of Sanford C. Bernstein & Company.

Eugene hi, how are you.

Good Ron, how are you doing.

I have a couple of the expense questions with the $15 million charge. It would seem that that would not be enough to out flow the capital markets to put the capital markets businesses at least at breakeven, maybe in the second quarter even in the current environment, so, I was wondering if you could comment on that? My broader question is on the timing of the realization of the $500 to $700 million company program, you know, how much of that would we see this year? So in concrete terms, you know, just to make it concrete, if I was working previously for [________________] for the years I had 9 billion would that be now, you know, 8.7 or 8.5 or how should I think about it those terms?

Okay, I think your 35 premise on the capital market's business is good one. I think with this action, clearly Robbie and Quick & Reilly should have a minimum breakeven going forward, and if any kind of market revival, I think we will see some positive numbers out of those businesses, and I think we can get the expenses out there very quickly in both those businesses. In terms of the timing of the broader cost save program, my sense is that we can probably take $250 to $300 million of expense out of the expense numbers this year. I think we can get to the full run rate by the end of the year, but I think we'll look more like 250 to 300, so if you were at a $9 billion number I would not be uncomfortable at 8.7.

Okay. Thanks.

Okay.

Your next question is from Gerard Cassidy of Tucker Anthony.

Good morning Eugene.

Gerard, how are you.

Very well, thanks. 36 North America has been a source of strength recently, and I noticed that commercial lending down there has been very good. Do you guys foresee that continuing, and the growth there being pretty strong in the remainder of the year.

Yeah. Thanks for pointing that out. What we're seeing is great strength in Brazil right now, and obviously we have got our antenna up as to whether there is any effect from Argentina into Brazil so far. There has been a very minimal amount in the Brazilian economy. There has been a little bit in terms of pressure on rates and conversion factors in terms of currencies, but the economy in Brazil has held out very well, seeing terrific growth in the economy down there, and right now I do not see anything to hold that back. You know, we could see growth in the 15% to 20% range in Brazil year-over-year. Argentina on the other hand is, I think, doing a great job at least our franchise is holding its own right now, and I think they have finally gotten some confidence in the government down there to at least stabilize the situation, so my anticipation is one, is that there would not be a lot of balance sheet growth in Argentina as I mentioned earlier to Judah's 37 question. We did have some trading losses down there, we should be able to reverse that and get back to a more normal position in Argentina in the next couple of quarters. So we could see earnings growth perhaps outstripping the balance sheet growth down there. In the remainder of Latin America, there are two other countries that we have fair sized operations in down there, Chile and Uruguay, both of those countries continue to do well. We have got bit of an expansion program going on in Chile. We will continue with that, so I expect to see good growth out of there, and Uruguay, probably more a mirror of what is going on in Argentina.

Thank you.

Thank you. Our next question is from Jim [________________] from [________________] capital.

Good morning Eugene.

Hi! Jim.

I had a couple of question. First, you gave a little bit of hint towards credit card, if I understood you 38 correctly, that credit card delinquencies have in fact been tapered off?

Yes they have.

And are going lower. Is that on a month?to-month progression during the quarter?

Yes it was.

Okay, and then you outlined your expectations for charge-offs and the loans loss provision, I was wondering if you could give us a little bit of color or guidance on the outlook for non-performing loans?

Yeah, in terms of non-performance, we're up about 10% this quarter. I would say, in the next couple of quarters, can't absolutely predict timing, but I would expect us to be up at least 10% in each of the next two quarters, in terms of non-performers, and you know, the timing may vary a little bit there, but that's the kinds of pressures we are seeing at this point, and if anything, there is probably more pressure than less pressure, and until the economy starts to bounce back, so we are probably talking increases of $125 to $150 39 million, maybe a little bit higher in the next couple of quarters, but, you know, clearly, numbers with a loan portfolio of $115 billion or so that is clearly manageable, and nothing that we see that worries us from a financial statement perspective at this point, its clearly numbers that are very digestible in terms of the earnings of the company.

Thanks a lot.

Thank you. Our next question is from Mike Mayo of Prudential Securities.

Hi! Eugene.

Welcome back.

Thanks. You said the problem loans for a lot of small stuff. If you are to characterize the problem loans you saw were before, kind of, like the large syndicated loans, and what you are seeing now, what would be the percent distribution, in other words, if syndicated loans were two thirds of the problem before, are they one-third of the problems now?

Yeah, I'd say that's 40 probably, rather than syndicated loans, I'd probably call them, there were two things we saw in the second half of last year, one were the, syndicated I'll call the large corporate names, the Xerox's, the Lucent's, some of those companies, the Federal Mobil's, companies that there was some kind of issue around, and we saw some pressure there. But those were big household names, people recognize them, they were in the papers,[________________]. Did we see any of that in the first quarter really to speak off? What we did see last year, though, was a lot of these indications where the regulators were calling in these leveraged enterprise loans where there was a lot of consolidation of businesses. They were called, at that time, rollups, we now call them rollups and blowups, and we saw a lot of pressure from that in the second half of last year. Clearly, the pressure from those two areas has decreased here, in the early part of this year, for what we are seeing are, I'd say the more traditional manufacturing kind of company's, names that you and I probably are not aware of on a day-to-day basis. They have moderate-sized credits. They are either working capital or expansion kinds of outstanding's, and you know, I think, they've seen a real slow down in terms of 41 [________________] there and beginning to feel some pressure in that segment of the economy. So, I think the pressure, that the manufacturers have seen over the last six months is now translating into the bankbooks, so its not large syndicated credit, its not credits that have been financially engineered. It really is kind of the core economy credits at this point Mike.

And are you able to offload some of these smaller credits the way you've made the loan sale in the fourth quarter or is that different?

Well, we could if we chose too, I don't see us doing a large bulk sale this year. The market for that is a little bit less liquid than it is for the large names, and a lot of the large names, as you are aware there is quotes that are readily available. And there's people who are looking to consolidate positions for different reasons and some of these smaller credits, there's probably only 2 or 3 banks in it, and the names are clearly less well known, and there is just more work to get to the liquidation values on these things so while you can do it, the liquidity is just less. 42

You seem to say the consumer is still okay in your markets?

Yeah. The consumer is handled very well in our market, and as I said, delinquencies are down in the first part of the year, we continue to see the trend in early April, and charge-offs will be down. My sense is, through the remainder of this year on the card portfolio.

Okay. Thanks a lot.

Okay Mike.

Thank you. Our final question is from Tom [________________] of [________________].

Hi! Eugene.

You've commented on the strength of Latin America, and as others have said, congratulations on that. The overall level, however, of loans on both on balance sheet and on a managed basis were rather anemic in the quarter down, I guess sequentially. But given your economic unease, at least here in the near-to-immediate term, I assume for modeling 43 purposes that the on-balance sheet loans will do little if any growth, or experience little if any growth, over the next few quarters. Is that your baseline assumption?

Yes. Certainly as you look at it right now, and if I don't see much of, I think we'll have, I think the consumer side will actually pickup a bit here as we get into the middle part of the second half of the year, but as you know that is a relatively modest part of our company, and particularly on the card side we securitize most of that anyway. On the C&I side, we are seeing very little on the origination side, right now, I'd say for the majority of the businesses it's relatively slow. Commercial finance actually is an outlier there. They are seeing some very good activity. International is seeing some very good activity. But, the traditional P&I, domestic lending portfolio at this point, there is very little going on. So, I'd say all of that, when you kind of mix that stew together, its probably your characterization is probably pretty good, is that you it will be kind of flat to up slightly, in the next couple of quarters.

Thanks. 44

Okay. Well thank you all for spending the time with us this morning, and as I said, I don't want to leave you too pessimistic, you know its a tough economy, and you all work in that economy so you now as well as I, we like the franchise, we have got big segments of the franchise that are doing well, and we'd expect to continue to do well. We are going to keep our eyes on the capital markets. In the meantime, we are not going to fall asleep here. We are going to take expenses out aggressively, and we will move aggressively on capital to try and fill any holes that may develop during the year. With that thanks very much and we look forward to talking to you in the course of the quarter. Bye.