紐約梅隆銀行 (BK) 2002 Q4 法說會逐字稿

Welcome to The Bank of New York's conference call.

Today's conference is being recorded.

The information and materials contained in this conference call and webcast and any related materials are owned or licensed by The Bank of New York Company, Inc. and may not be copied, displayed, retransmitted, published, broadcast, modified or otherwise used for public or commercial purposes without the express written consent of The Bank of New York Company, Inc., and the relevant information providers.

Now, The Bank of New York.

Thank you, and good morning.

This is Tom Renyi, Chairman and Chief Executive Officer of The Bank of New York, and with me this morning is Bruce Van Saun, our Chief Financial Officer, and John Roy, the head of our investor relations area.

We welcome you to The Bank of New York Company's fourth quarter earnings call.

Beginning today and going forward, we will utilize a live format for our quarterly earnings calls.

Bruce will start off by offering some comments regarding our fourth quarter earnings, which we released this morning, January 22nd, in order to provide additional insight into our performance and strategy.

I'll then come back and offer some additional perspective on our credit portfolio and our recently announced agreement to acquire Pershing.

Bruce?

First, some necessary housekeeping.

Let me remind you that our remarks may include statements about future expectations, plans, and prospects which are forward-looking statements.

Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various important factors, including those identified in our 2001 10K and our third quarter 10Q.

Forward-looking statements in this call speak only as of January 22nd, 2003.

We will not update forward-looking statements to reflect facts, assumptions, circumstances, or events, which have changed after they were made.

Now, let me start off by making some general remarks about the quarter.

As we indicated at our December 18th analysts' meeting, the fourth quarter capital markets environment did not improve much over the third.

Average trading volumes were down 3.6% for the New York Stock Exchange, and 2.9% for NASDAQ.

Although the S&P 500 was up 8% from the depressed 930 level to 1,231, average daily price levels were down 1% from the third quarter to the fourth.

Global M&A activity was slightly stronger than the weak third quarter but well below the 2001 levels let alone 2000.

Global equity issuances showed no improvement in the quarter and is off by over 30% from the first-half levels.

As a result, our core business was in the range of our recent guidance of 14 to 15 cents reported EPS and 46 to 47 cents using a baseline provision of 40 million for the quarter.

We did achieve sequential quarter revenue growth in all of our major revenue categories, including securities servicing, global payments, private client and asset management, and foreign exchange and other trading.

While securities gains decreased as expected from 22 million in the third quarter to 13 million in the fourth, costing us about a penny in earnings per share.

Our sequential quarter expenses were down about 1%, although factoring out a 22 million lease termination expense in the third quarter, they rose by 16 million or 2%.

Staff expenses were tightly controlled, including a reduction in year-end incentive compensation accruals, while other expenses were higher, given seasonal year-end factors, the impact of the Lockwood acquisition, as well as continued technology and business continuity investments.

We continue to anticipate only a gradual recovery in the capital markets during 2003, and, accordingly, will carefully control expense levels until we see tangible improvement.

We continue to do well in our new business marketing efforts and expect excellent upside to an improved environment.

Getting back to the fourth quarter, and looking at the P&L categories in more detail, our net interest income was down 6 million on a sequential quarter basis, or about 1%.

Corporate loans were down for the quarter, reflecting our ongoing intensive efforts to reduce corporate exposures.

In addition, the cut in fed funds rate continued the compression on our deposit spreads.

Nonetheless, our positioning continues to be relatively neutral P&L-wise to changes in rate in either direction.

Overall, non-interest income, excluding securities gains and the 22 million of nonrecurring items and other income in the third quarter rose by 18 million, or 2.2%, from 802 million to 820 million.

While this annualized growth of 9% is less than what we expect in better markets, it is a testimony to the strength of our diversified business model.

All of our major revenue categories, again excluding securities gains, showed sequential quarter growth.

Security servicing was paced by our fixed income and cash-related businesses, such as corporate trusts, securities lending and global liquidity services.

Our clearing businesses had a good start to the quarter, as the markets rebounded a bit and investor interest picked up, and we converted several new business wins.

Strength in these areas was offset by weaker results in some of our equity-linked businesses, like ADRs, global custody, and mutual funds.

Overall, however, we did achieve the fifth-straight sequential quarter increase in revenues, in spite of a very challenging market environment, reflective of the balance in our business model and the benefits of our acquisition program.

Private-client services and asset management revenues improved by 3 million over the third quarter, primarily reflecting the Lockwood acquisition which closed in early October.

Our asset under management increased over the quarter by 5 billion to 76 billion.

Again, reflecting both the addition of Lockwood and our diversified investment products.

Foreign exchange and other trading remained at soft levels given the subdued environment.

We had hoped the third-quarter results of 49 million, which were the lowest in three years, were an aberration, but revenue growth in the quarter was only 2 million.

Foreign exchange volumes, volatility, and spreads are all down, although a weakening dollar trend could bode well for some improvement in '03 revenue levels.

Client interest rate hedging increased modestly given the fed's cut in rates during the quarter.

Turning to the balance sheet, total assets came in lower than we had projected at 77 billion, as client activity levels were down at the year end.

We had been projecting a balance sheet of 79 billion, but this can swing up or down $2 billion, largely on events and actions outside our control.

The net result was very satisfactory capital ratios.

Even after taking the sizable credit charges during the quarter.

Our tier one ratio was 7.6%, total capital was 11.98%, and the TCE ratio was 5.51%.

We clearly intend to stay very disciplined with respect to the balance sheet, given the 9 billion balance sheet coming over with Pershing.

In 2003, we will continue to shift our asset profile into investment securities and liquid assets and away from loans, thereby increasing both credit quality and liquidity.

As we indicated in our Pershing call, we have substantially completed last year's buy-back program but have suspended all buy-back activity in 2003 and possibly into 2004, until we've restored our capital ratios to our targeted levels.

To briefly update you on the impact of the World Trade Center disaster, we have completed our review of all expenditures and squared that with what we can claim from our insurance carriers.

As a result, we recognize 60 million in fourth quarter expenses for repairs, business interruption, and interest.

In 2003, the remaining expense tale should be approximately 40 million.

We also increased our estimate of the loss on sub-leasing our interim midtown space by 75 million, which reflects a very soft market for space and our inability to date to shed the space in spite of aggressive marketing efforts.

We have now reserved about 51% of the future expenses associated with our lease obligations and are hopeful of completing a few sublease transactions soon.

These fourth quarter expenses were offset by insurance recoveries.

The overall picture on a life to date basis is 644 million of recoveries and 400 million of advances from the insurance companies.

We remain confident that the net receivable is recoverable under the terms of our policies.

Looking beyond the quarter, we gave guidance of $1.78 to $1.92 for 2003 at our December analysts' meeting, prior to the Pershing transaction.

The Pershing transaction is estimated to have a six-cent restructuring charge impact in 2003 and to be 2 to 3 cents dilutive to 2003 and 2 to 3 cents accretive to 2004.

On an operating basis, therefore, the new EPS range for 2003 would be $1.75 to $1.90, and the reported EPS range would be $1.69 to $1.84.

Our head of investor relations, John Roy, will be working with the sales side and first call to ensure there is no confusion on this.

To sum up, we continue to be highly confident in our business strategy, and we're building a franchise of great value.

We are holding our own on the near-term financials and believe that there is excellent upside to an improved operating environment.

With that, I'd like to turn it over to Tom.

Thank you, Bruce.

Our principal concern, I believe, for investors has been the credit events of the last several quarters, so let me take a little bit more time and more broadly address these concerns, and we'll respond to any questions if there are any afterwards.

We have been modifying and improving our risk profile for several years now.

In '99, our nonfinancial company portfolio was $47 billion in terms of exposure and $14 billion in funded loans.

At our recent analysts' meeting, we showed $34 billion of exposures and $9 billion of funded loans, and we indicated that we have a new target of $9 billion in further exposure reductions that we will achieve by year end '04.

While these actions certainly cost us some interest income, they do improve our return on capital and lower our volatility of earnings, a very clear objective for us.

And that, we believe, will positively impact our share price.

While we will continue to offer the credit product to our most important client segments, we will continue to eliminate exposures to higher-risk segments, and will ensure that our individual loan positions are more granular.

As we enter 2003, we have taken action to address our credit hot spots, such as emerging telecom, airlines, and we have increased our reserve ratios to strong levels.

To wit:our allowance to MPAs is now at 189% coverage, and our allowance is 2.65% of total loans.

These actions, taken to deal with our problem credits in the second half of 2002, have created further flexibility for our ongoing risk reduction efforts.

Now, let's shift gears a little bit to the Pershing transaction.

As we said at the announcement, and we continue to believe even more strongly, that Pershing is a great strategic fit.

It is an excellent opportunity to further leverage the potential of our global franchise.

As I think we all know, Pershing is the premiere global clearing organization, but even more importantly, it has evolved into a potent distribution network.

We gain another growth engine through this transaction, with meaningful upside given the potential cross-sale opportunities.

While the cost synergies are clearly tangible and achievable in the short term, they help justify the purchase price.

But over the longer term, we are most excited by the revenue growth possibilities for both Pershing and as that relates to our existing product lines.

As opposed to other sizeability acquisition opportunities that we've reviewed recently, we believe that the Pershing transaction has modest integration risk.

We will maintain the Pershing technology and infrastructure and build around the Pershing management team.

Now, some of you have remarked that we've agreed to pay a full price, and I think it is the full price we certainly did not steal it, but I believe it is clearly a fair price.

But I think we all understand that we were in a highly competitive bidding process, there were a number of bidders there for what we feel is a one of the kind franchise.

Nonetheless, the transaction is structured and is modeled as financially attractive, in terms of both EPS and IRR.

And should enhance our long-term growth rates.

Further more, we believe that we are in reinvesting in one of our highest-growth businesses at an attractive point in the capital markets cycle, with much more upside than downside from here.

We've also received some questions about what our plans are for our retail bank and whether we would have -- we would ever reconsider substituting a sale of the retail branches as a financing mechanism here rather than selling stock.

The fact is that this deal works in a very straightforward fashion using the equity financing.

Timing is an important element here, but clearly we would -- had we waited for a transaction, one franchise may not have been available, and, two, at a higher point in the economic cycle, we would have been paying even more.

We have achieved satisfactory returns here.

We are able to execute in the seller's time frame with this equity financing, and we avoid the complexity and the near-term dilution of any retail sale.

To sum up, I feel that our fourth quarter operating results on an absolute basis were both understandable and acceptable given the environment.

On a relative basis, I feel quite good about our operating performance.

We have addressed our credit issues in the quarter.

We know precisely what we must do, what we will do, and are not distracted.

I am very excited about our Pershing acquisition and its positive impact on our franchise, and I believe the transaction further evidences that this management team remains focused with unmistakable intent and clarity of objectives.

Now, that concludes our prepared remarks, and we'd now like to open it up to take some questions.

May I have the first question, please?

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 star 1.

You will be announced prior to asking your question.

If you would like to withdraw your question, press star 2.

Once again, to ask a question, please press star 1.

One moment for the first question.

Our first question is from Judah Crushour with Merrill Lynch.

Sir, you may ask your question.

Hi, Tom, hi, Bruce.

Good morning, Judah.

A couple of things.

Can you give us a sense of the nonperforming assets, inflows and outflows this quarter, specifically, I'm curious, if you had excluded a write-off on Kmart and Adelphia, on those undisclosed credits, what the underlying trend in nonperformers would have been third to fourth quarter?

What the underlying trend in MPA, notwithstanding the write-offs?

The write-offs on those two large credits you mentioned that were nonperformer, one was a write-off and one was a sale.

MPA, the underlying MPA trend in the fourth quarter would have been slightly up.

Yeah, the credit to a major insurance provider was really the only notable MPA in the quarter.

The rest was the normal ebbs and flows.

Okay.

But if you looked at the ins and outs, was there any change in recent patterns?

No.

Okay.

Secondly, I'm curious, and you mentioned seasonal fourth quarter expenses.

I'm just curious, when you think about a run rate on expenses going into the first quarter, how you're thinking about that, and just refresh our memory, if you would, in terms of options and pension costs step-up fourth to first quarter?

Yeah, the numbers that we gave you at the December analysts' meeting, the impact of the pension credit was about six cents for the full year.

The option expensing was three cents, so that is nine cents' impact on expenses for the full year.

So you'd see slightly more -- call it two cents in terms of impact, sequential quarter, fourth quarter to first quarter.

Right.

Historically, you've often had a high fourth quarter expense number, and I'm curious whether that was true again this time, particularly a noncomp costs?

Yeah, I think that's -- you know, it's just a fact of life that you get a lot of true-ups at the end of the year and expenses tend to come in a little higher.

Okay.

Just lastly, in the Pershing discussion, you mentioned that, you know, you considered the -- you know, the notion of selling the retail bank, but it was too complex, and you thought to avoid dilution it was advisable.

Can you just share your thoughts, to the extent you feel comfortable, in terms of thinking through the dilution issue for the retail bank, if you were to consider a range on that, in terms of thinking how your thought process has evolved on that issue?

Well, I think the -- as it relates to the retail, the perspective that I've got on its role here within the company is that in this environment, when we still have, you know, a sizable credit portfolio, when we are clearly in a process of reducing that, but it is still, you know, sizable portfolio, when we see that the uncertainty in the economy, having that retail base of deposits, I think, offers some pretty good comfort to us.

So that's really the backdrop we have here that I have in this kind of environment.

I think, again, we've always seen it as a storer value.

It continues to work.

We continue to invest appropriately to make sure that it continues to do so.

We've got some very motivated people running that area and they feel very good about themselves and they should.

So we continue to hold that there is great value in this franchise, certainly scarcity value continues to enhance its -- enhance its value to us, and we continue to pursue other alternatives, I might add, as well.

Okay.

And just out of curiosity, what would be the loan balances you would sort of ascribe?

You always talk about deposits, but what sort of loans would you ascribe to the retail business?

I think if you included the middle market, you're looking at 6 to 7 billion, and the rest would be net funding through to treasury to finance the rest of the balance sheet.

Okay, good, thank you.

Sure.

Thank you, Judah.

Next question.

Our next question comes from Brock Vandervleet of Lehman Brothers.

Sir, you may ask your question.

Thank you very much.

Two separate questions.

Following on Judah's credit quality question, could you give us an update on new trends, what you're seeing in the telecom and media portfolios?

Very benign, certainly the secondary markets in these -- in these areas have strengthened in the early part of the year, which were we're very pleased about and have worked, but certainly no -- nothing untoward with regard to these businesses, I think, as we said, the aside from the emerging telecom side, the more established telecoms tend to be running their businesses for cash, as we would have hoped, and as a result, provide a stable perspective on it.

Okay.

And separately, with the Deutsche Banc business going to State Street, how aggressive have you been in courting that business and some of those clients with fees and whatnot?

We are exceptionally aggressive.

I see that as one of our principal opportunities for 2003.

We think that there's -- there's clearly a -- an opportunity for us all, not just certainly The Bank of New York but the other providers to make some inroads here.

We know that this business, the contracts have to be renewed.

We know the businesses are up for renewal, reconsideration, and we're -- we're in everybody's face here.

Have there been any business wins yet?

Yes, there has.

There has.

Okay.

Yeah.

Next question, please.

Our next question comes from David Hilder with Bear Stearns.

You may ask your question.

Good morning, gentlemen.

Just to get at the reduction of nonperforming assets at a different way.

Of the 106 million reduction in commercial nonperforming loans, could you tell us more specifically how much of that was the result of the sale of the cable operator loan or the sale of other nonperforming loans?

I don't think -- we haven't broken that out, David, in the past, in terms of the composition of it, but we'll -- you know, I think what we've said is that the underlying trends relatively stable, maybe slightly up, principally one credit, but otherwise, a relatively benign quarter and, again, in Q4.

Okay, thanks very much.

Next question, please.

If anyone would like to ask a question, please press star 1.

One moment.

Our next question comes from Catherine Murray with Newberger Burman.

You may ask your question.

Yes, good morning.

I was wondering if you could just review for us what adjustments we should be making if we're trying to derive both the linked quarter and year-over-year growth in revenue and expenses, excluding the acquisition effects during the year?

For the full year?

It would be helpful, I think, for both linked quarter and year over year.

Yeah, well -- you want to start with, did you say revenue or expenses?

Revenues.

How about the servicing fees?

Yeah, the servicing fees, we indicated, were up on a link quarter basis by 4 million, an that's largely the portion of the Lockwood acquisition, that is -- that we deem to be security-servicing in nature.

Mm-hmm.

So the core growth was essentially flat on a sequential quarter basis.

Right.

On the PCSAM, there's a similar story there.

We also, the asset management component of Lockwood accounted for basically that sequential quarter increase of $3 million, so, again, we're looking at essentially flat.

All of the other revenue growth in things like global payments, foreign exchange, other trading, there's no acquisition effect on those numbers, so those were all just core derived.

Okay.

And on a year-over-year basis, those two numbers you gave us, are those the only adjustments we should make, or are there others?

I think we went through this a little bit at the December analysts' meeting.

The reported growth for security servicing was 7%, and then the core growth there was a 3% contraction, largely focused on the ADR area.

In the PCSAM, there was actually core growth of about 2%, the reported growth, with acquisitions was 9%.

Okay, that's great.

And on the expenses?

The expenses is a little more difficult with the World Trade Center numbers in there to go through on a year-over-year basis.

I would say I walked through, in my prepared remarks, the sequential quarter increase.

The sequential quarter increase was effectively 2%, when you look at -- in the third quarter, we had reflected the lease termination cost at 100 Church Street in the expense base, and, again, on the positive note, we were very tight on the staff expenses, and there were some reductions to the incentive compensation accruals in the fourth quarter.

That was offset by growth in other expenses, you know, the Lockwood acquisition was a component there.

Some of the true-ups that we see at the end of the year, seasonal factors, and then lastly, spending that we continue in business continuity planning and technology, also, drove up the other expenses.

Okay, thank you.

Sure.

Next question, please.

Our next question comes from Ken Houston with UBS.

You may ask your question.

Thanks, good morning.

Hi, Ken.

Two quick questions regarding some of the portfolio disposals.

Was there any income statement effect from either the remainder of the disposition loan portfolios as well as the bank stock investment portfolio?

On the loan portfolio, it would be no.

If there's any impact in terms of those loan sales, we run it through charge-offs.

So where we would sell a piece of Kmart or a piece of Adelphia, those deviations from where we have those loans marked runs through charge-offs.

The bank stock portfolio, we liquidated that portfolio fairly aggressively.

We did achieve some positive impact that partly explains why the sec gains were at 13 million versus the 10 million we had projected, so we had a little pickup there.

We also had some additional gains, which offset some fourth quarter write-downs in the private equity portfolio, so there was no net P&L impact beyond that.

And then, going forward, would you expect, then, the securities gains to be around that 10 million level that you had indicated previously?

Yeah, that -- the guidance that we gave was kind of 8 to 10 million at the December analysts' meeting, but I think just from repositioning actions it will take in the fixed-income portfolio, we have a very sizable, unrealized gain in the fixed income portfolio, probably in the ballpark of 300 million at the end of the year, so I think we'll probably end up with about 10% or 12% of that flow and through P&L as we reposition.

Okay, thank you.

Okay.

Next question.

Our next question comes from Tim Willie with AG Edwards.

You may ask your question.

Hi, good morning.

I apologize if you addressed this earlier, I missed some of the preliminary comments.

I was wondering if you could talk about net interest margins, maybe more specifically at the retail bank, and just your thoughts on the current rate environment and how the balance sheet is structured and if there's been any material change maybe since your outlook back in December, I think you did address it a bit at the analysts' meeting.

Yeah, I think, you know, what we're seeing on the retail bank clearly is, as the fed continues to reduce rates, our ability to lower those deposit rates of the full effect of the fed's cut is somewhat limited, which is why we've described that there's continued compression on our deposit spreads.

Nonetheless, we do -- we've taken steps to increase the investment securities portfolio, and I think we have that paired off, so we're effectively picking up income on the asset side as those rates are reduced.

So, in balance, we're pretty neutral in terms of our positioning and what tends to affect things, you know, will be the loan reduction program and then the level of MPA.

So I think you've seen a net interest income that's held in there pretty flat.

It might be declining slightly, but that's -- that's the situation that we would expect to continue for the foreseeable future.

Great, thank you very much.

Sure.

Next call.

Our next question comes from Brock Vandervleet with Lehman Brothers.

Sir, you may ask your question.

Mine is on the margin as well, just covered it.

Thanks.

Okay, thank you, Brock.

Operator, are there any other calls?

At this time, sir, there are no other questions.

Okay.

Thank you very much.

Appreciate your interest, and I'm sure we'll have opportunities to chat in the coming weeks and months.

Thank you.