紐約梅隆銀行 (BK) 2003 Q3 法說會逐字稿

Welcome to the Bank of New York third quarter earnings 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.

If you would like to ask a question at the conclusion of today's presentation, you may do so by pressing star one on your touchtone phone at any time during the presentation.

Now, John Roy, Head of Investor Relations for the Bank of New York Company Inc..

Good morning, and thanks for joining us this morning for the Bank of New York's third quarter earnings call.

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

The 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 2002 10-K and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, October 22, 2003.

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

Now, I would like to turn the call over to Tom Renyi, Chairman and CEO of the Bank of New York Company.

Thank you, John.

With me today as well is Bruce Van Saun our Chief Financial Officer.

I would like to welcome all of you to the Bank of New York Company's conference call to review our third quarter earnings release of this morning, October 22, and to provide additional insight into our performance and of course our strategy.

Before Bruce provides some detail on our third quarter results, including Pershing and an update on our credit exposure reduction efforts, let me give you a little bit of perspective on the current environment as I see it and the overall performance of our business.

Our third quarter results I think demonstrated top line growth, particularly solid growth in our investor and our broker dealer services.

That, combined with a stable core expenses, resulted in positive operating leverage and of course improved earnings.

As a quick aside, our business model continues to have again significant leverage to an improving environment and I see a more positive tone developing in the marketplace.

However, that recovery is uneven, indicating that the process is slower and more gradual than one might believe reading the headlines.

The past quarter represented somewhat of a mixed bag with some markets performing well, others still lagging a bit, and clearly a divergence that has been developed between asset price levels and volumes, and capital markets activity.

As I think we've seen, all of us have seen, equity price levels have risen, reflecting increased investor confidence and more optimism for the future.

This creates higher revenues for us in certain areas, like private client services, asset management, certainly has positive impact on Pershing's asset gathering activities, our global custody business, mutual fund and our hedge fund servicing.

All of these are reflected in the upward trend in asset price levels.

But as all of you know, a hallmark of our business model is the breadth of our products and services and its diversification within.

More so than any of the other processors, and meaning that higher equity prices are not the only factor that are impacting our revenue base.

Of even greater importance to our business model are trading volumes and corporate actions, normal outgrowths of this investor and corporate confidence that we are beginning to see.

These factors not only provide further upside for both investor and broker dealer services that did show strong growth in the third quarter but also drives our execution and our clearing services, and our issuer services businesses.

Two key components of our security servicing business.

So while investor interests in the markets are clearly returning, lower trading volumes this quarter, much of it seasonal, and a continued lower levels of corporate action, indicate that the capital markets recovery, while clearly apparent to us all, is not necessarily robust.

That, in my view, makes our third quarter performance even more satisfying than it may seem at face.

Corporate M&A securities issuance, new capital raising, dividends, stock splits, all create significant leverage in our business model.

In our depository receipt business, for example, fewer cross border M&A actions and light capital raising activity have depressed our depository receipt revenues to probably about half the level that we saw several years ago, yet revenues do show an upward tilt now.

And we continue to add new programs that give us substantial leverage to improve conditions in the business.

Given our diversified businesses, some of you may wonder whether a rebound in the equity markets will have a negative impact on our fixed income link businesses and offset some of the positive operating leverage that we would enjoy in our equity link businesses.

Well, our primary fixed income link businesses that have been performing well, like corporate trusts, government securities clearance, collateral management, are not necessarily and simply interest rate or price sensitive.

Debt issuance, trading volumes are important and these have shown steady growth and in corporate trusts in particular and the municipal area, and while interest rates may rise, I think that the fiscal condition of the municipalities will continue to cause them to issue more securities.

We also have the ability to service and grow the growing needs of our major broker dealer customers and develop innovative financing solutions.

As example of this that we've talked about in the past is global collateral management and that's a service line that grew out of our tri-party repo experience.

That today is now being utilized in all major international markets where as a few years ago, it didn't exist at all and we went from financing $385 billion of dealer positions in '99 to almost $800 billion today.

And the financing of those dealer positions remain one of their top priorities so I should expect to see considerably new, more volume in the future.

It is this marketing position that gives me confidence that we can continue to grow revenues in our fixed income businesses, whatever the market environment.

Likewise, in our cash link businesses, such as global liquidity services, and components of our custody and mutual fund servicing, they have also shown steady growth as clients grow and demand better returns on those cash assets.

I think this will have a compounding effect as interest rates inevitably rise.

So to summarize, while we are seeing a more positive tone in the market, convergence will occur between asset prices, volumes, and capital markets activities, causing our business model to benefit and resulting in further operating leverage.

So with that as a backdrop, let me turn the call over to Bruce to go over the third quarter.

Bruce?

Thanks, Tom.

Third quarter market activity levels tend to be seasonally slower given August vacations and this year was no exception.

Equity trading volumes which are an important driver for several of our businesses particularly our execution and clearing services were down 5% in the third quarter compared to the second quarter.

Asset price levels were mixed, with some indices performing well, particularly NASDAQ, but overall the S&P 500 was up just 2% for the quarter.

Meanwhile, fixed income asset price levels declined in the quarter, as a result of rising long-term interest rates.

And the Lehman long term bond index ended down 2.6% for the quarter.

Despite this mixed environment, our diversified businesses responded favorably and as Tom mentioned we generated positive operating leverage in the quarter, increasing operating earnings to 42 cents, up a penny from the second quarter.

This was consistent with the guidance we gave you several weeks ago.

Reported earnings were 34 cents.

And the 8 cents of nonoperating charges, include two cents related to the Pershing merger and integration costs and 6 cents related to the G Max settlement.

Now let me provide some detail on our third quarter results.

Security servicing fees were up 1% sequentially, sorry 10% on a reported basis, to a record $657 million, primarily reflecting a full quarter's results for Pershing which closed on May 1.

Excluding Pershing, core security servicing fees were up 1.2%, or 5% annualized despite the seasonal slowdown in equity trading volumes.

The primary growth drivers were our investor services and broker/dealer services businesses, which combined were up a healthy 5% sequentially.

Within these segments, custody and mutual fund services both grew from new business and the benefit of higher equity prices.

Assets under custody increased modestly in the quarter to 7.9 trillion as nearly two thirds of our custody assets are in fixed income assets which were negatively impacted by higher interest rates and this mitigated the impact of net new business wins and higher equity prices.

Government securities clearance and global collateral management continue to generate good growth due to strength and fixed income trading volumes and new business wins in the broker/dealer community.

Two areas that limited core security servicing growth this quarter where issuer services and execution and clearing services.

Issuer services were roughly flat this quarter as a pickup in corporate trust fees was offset by lower activity and depository receipts, evidenced by light capital raising activity in the quarter.

However, we continue to win approximately two-thirds of new and successor DR programs, which positions us well when this market picks up.

Execution and clearing services increased overall due to the addition of Pershing for the full quarter but our execution services businesses in particular were negatively impacted by the decrease in equity trading volumes in the quarter.

Notwithstanding the environment, we are encouraged by the continued expansion of our product offerings.

For example, we now offer clients execution management for OTC issues across multiple liquidity points.

In addition to core security servicing fees, our other primary businesses were also up sequentially.

Foreign exchange and other trading revenues were up 5% sequentially, with most of this reflecting the full quarter impact of Pershing.

Client driven foreign exchange remained robust as September was one of our strongest months ever due to exchange rate movements and increased activity from equity fund managers, offsetting the seasonally slow August.

By the clients services and asset management fees were also up sequentially, benefiting from the increase in equity prices the past several months, as well as continued good performance from ID Asset Management whose assets under management are now up to $8 billion from 2.4 billion when we acquired ID in the year 2000.

Total assets under management increased to $85 billion at the end of the quarter, a 20% increase from a year ago reflecting both higher equity prices, as well as organic growth.

On the expense front, core operating expenses increased less than half a percent in the third quarter, resulting in the positive operating leverage Tom spoke about earlier.

This is evidence of our ability to control discretionary spending and to manage to lower stopping levels as our core head count decreased by another 180 during the quarter bringing the year to date core head count reductions to 385.

The business process reviews we've been conducting are also producing results, enabling us to absorb the cost of investments important to our future growth, such as technology spending, business continuity planning, quality programs, and marketing and branding initiatives within the overall expense base.

With respect to Pershing's results this quarter, total revenues were $207 million for the quarter after adjusting net interest income for $8 million of financing costs.

This is a run rate of about $830 million.

Fairly close to the anticipated run rate of $875 million that we talked about when we announced the transaction.

Pershing has done a good job of protecting the bottom line, as the operating margin excluding financing costs and amortization of intangibles was 19% in the third quarter, which is flat with last quarter.

Importantly, several key metrics related to Pershing's business are trending more positive and are indicative of improving retail investor confidence and activity.

Daily average billable trades are well above the 2002 average and exceeded the 2001 average for the past four months, as September was the highest month since the beginning of 2002.

Large debits have trended up each month since hitting a low point in January of 4 billion, an average 7 billion in September, moving ahead of the 2001 average of 6 billion, and well ahead of the 2002 average of 4.7 billion.

This is still well below 2000 levels, which hit a peak of 10 billion.

In addition, other metrics such as customer accounts and balances are moving steadily higher each month.

Now, a key to making the Pershing acquisition successful is a smooth integration of our existing clearing clients and we completed domestic client conversions in September, and international conversions are scheduled for completion by year end.

With conversions in line, our original targets for projected cost synergies are also on track.

And we anticipate a reduction in expenses in the fourth quarter of about 12 million on a sequential basis related to these synergies.

Shifting gears now, let's look at the balance sheet.

The period end total assets were down to a more normal level of 95.2 billion from a high of 99.6 billion last quarter, reflecting lower client deposit levels, as well as a more orderly security settlement process across the industry at September 30, relatively to June 30.

Within the asset composition of the balance sheet, while loans continue to be reduced, average investment securities, largely short duration mortgage-backed securities, were up 2.3 billion, continuing a strategic shift to enhance the liquidity and risk profile of our balance sheet.

Unrealized security gains were $219 million at September 30, while the duration of the investment securities portfolio was approximately 2.3 years, as our interest rate positioning has not shifted appreciably over the quarter.

Capital ratios improved during the quarter, both tier one and total capital ratios increased and the tangible common equity ratio increased to 4.66% from 4.33% at June 30, moving toward our targeted levels of 5.25 by mid year '04.

The improvement in the ratio reflects both the retention of equity during the quarter and a smaller balance sheet.

Turning to one last bright spot, we have reduced corporate exposures by 6.8 billion this year, including 1.5 billion this quarter, putting us 75% of the way to our target of 9 billion in reductions by the end of '04.

Reductions have come from taking advantage of improved liquidity in the secondary loan market with about half of the reduction coming from loan sales, while the remainder has been achieved through loan runoffs and reduced rollover commitments.

As we did last quarter, we used some additional charge off dollars to accelerate our reduction efforts but our reserve position remains strong and NPA decreased by 11% this quarter.

We are increasingly confident that the improving economy will ease pressures on borrowers, which bodes well for future credit quality.

So to summarize the quarter, core security servicing fees grew sequentially during the quarter led by investor and broker dealer businesses which more than offset a seasonal slowdown and lower equity trading volumes that impacted DRs and execution services.

Our other primary businesses such as related FX and product client services and asset management also showed good sequential growth.

Core expenses were flat with last quarter, reflecting our ability to control discretionary expenses and lower head count while maintaining important long-term investments and restoring positive operating leverage.

Pershing continues on track for all milestones.

Several key metrics are trending more positive.

And lastly, NPAs were down 11% for the quarter.

And we are successfully executing our credit exposure reduction program with 6.8 billion of our 9 billion target achieved after only three quarters.

Now, let me turn it back to Tom for some additional comments.

Okay, thanks, Bruce.

What I would like to do is add some additional color to the results that Bruce just reviewed to you by highlighting some of the very specific examples of how we see ourselves driving that top line growth.

And that includes new business wins, some new business opportunities, and also in my mind a very important element, that's continued industry recognition for our enhanced service quality programs.

We generated a number of very, I think, impressive notable wins in the third quarter across a range of our business specialties.

Let me start by highlighting some of the recent wins from Deutsche Bank, our Deutsche Bank marketing initiative, which to date totals 50 mandates for close to 300 billion in custody assets.

Let's hear a few example of those.

First AIG, for which we announced today that we are providing a suite of global custody services for 90 billion in assets.

PSE&G, the New Jersey utility, which selected us to provide master custody, sec lending, foreign exchange, cash management for over $3 billion in assets.

The State of New Jersey, which appointed us to provide global custody, sec lending and a foreign exchange and compliance monitoring, for 9 billion of assets in their program.

In addition, we have a large global insurance company that selected us to again provide custody and sec lending for 11 billion dollars in assets.

Wins also included in this area, in the Deutsche Bank initiative, plan sponsor wins for customers such as Sutter Health, Health Tenneco, Arch Coal and Cincinnati Bell.

In other recent business wins outside of this particular initiative, we have examples such as ABN AMRO, they selected us to provide a full spectrum of investment management outsourcing services for their new managed account offering.

Varaya College selected us to provide master custody, performance measurement, related services for about $700 million in assets.

Our success in business wins extends to the U.K. as well.

We were appointed global custodian for $4.3 billion in assets by the Cooperative Insurance Society.

And we were selected by a major U.K. bank to provide security, rather custody services for $5 billion in their assets.

So in the U.K. pension market we've had three recent appointments to provide services, custody, investment accounting, performance measurement, securities lending for another additional assets in total of about $9 billion.

Even in asset management, in the area that as many of you know we've had increasing focus on, there are several notable new wins.

We were selected by Tenneco Automotive to manage 120 million in asset, Goodrich 250 million in asset, the teacher's retirement system in Louisiana for 200 million and Mizuho Trust in Tokyo to provide alternative investment advisory services through our Ivy Asset Management activity.

And finally, in global payment services, we won business recently with Comcast, and in addition to being reappointed by the U.S.

Postal Service, after a competitive bidding process to provide services for 1200 metropolitan locations.

Looking ahead, this quarter we announced several new strategic business initiatives to better leverage our platform and create future revenue.

We expanded our hedge fund services in Dublin, providing administrative and operational solutions to European-based hedge fund managers.

That compliments the U.S. offshore administration that we currently provide.

We also completed integration of our managed account platforms at Lockwood and Pershing, creating one of the largest providers of managed account programs with client assets totaling nearly $18 billion.

This combination of Lockwood and Pershing leverages the strength of both, results in a more powerful set of solutions for the Pershing's broker dealer clients and the RIA market.

Also related to managed accounts, our appointment by AB AMRO to outsource its managed account offering followings our selection by ING earlier in the year to outsource their 7 billion dollar managed account offering.

I see this area as a growing opportunity to provide outsourcing services, that is the managed account market.

And combined with Pershing's outsourcing capabilities for broker dealers, and a pickup in discussions regarding investment manager, mid and backoffice outsourcing opportunities, we expect to have more announcements over the next several months.

But finally, and one that I find most gratifying, is our service quality programs continued to generate impressive industry recognition.

We announced today that we received top rankings in Global Custodian's 2003 Global Custody Survey.

And we're named best custody bank by Global Finance.

Also today you will see that we will have announced that we were named top transfer agent for the second consecutive year by Group Five, the Group Five Study.

So in closing I'm pleased with the pace of new business wins, the potential for new opportunities that we see to expand our business, we see these industry awards, recognition by our clients really supporting our new business efforts.

And that is reflecting the success in our quality programs internally.

While there is a better tone developing in the markets, I think the full dimension of a complete recovery in the capital markets clearly has not arrived.

But we will build on these past two quarters.

We will remain focused on successfully integrating Pershing, improving our credit risk profile, re-engineering our cost base and expanding our positive operating leverage.

This will, of course, position ourselves for an even stronger future.

That concludes our prepared remarks and now I'd like to ask the Operator to open it up for questions.

Please.

Thank you.

At this time, we are ready to begin the formal question and answer session.

To ask a question, please press star one.

To withdraw a question, press star two.

You will be announced prior to asking your question.

Our first question comes from Tom McCandless of Deutsche Bank Securities.

Good morning, gentlemen.

Hi, Tom.

A couple of questions.

The comments about expense savings in the fourth quarter down 12 million in absolute terms, will that all be reflected in Pershing's expense base?

I think the way we're breaking out the core and Pershing, we'd probably take that out of core at this point because it's coming from the shutdown of BNY Clearing and we're trying to give you a feel for what Pershing is doing on it's own.

Okay.

A couple other business volume type questions, is it possible that you all could sort of disaggregate and quantify growth, organic growth a little bit more in both FX and securities lending during the quarter?

How much is just sort of organic demand?

How much is just growing your customer base?

Is there some component that you can quantify that relates to cross-selling?

I think that's pretty hard to do, Tom.

I would say that a number of factors have contributed to the stronger FX performance this year relative to last year and the continuing sequential quarter improvement and you have really hit on the hot button, the cross selling continues to be good, the environment clearly is favorable.

There has been a lot of volatility in the marketplace, I think as equity fund managers regain their confidence in the market, they're putting more money to work, which is creating more FX transactions, so I would say it is both environmental as well as market share gains.

And two other smaller questions.

Could you just give us some commentary about what your stock transfer business within the global issuer segment did quarter to quarter, and then lastly, what should we be thinking about on a tax rate on a go forward basis?

Okay.

The stock transfer business was probably slightly down on a quarter to quarter basis.

But it is really not that perceptible, it is not one of our bigger business lines.

It has some of the characteristics of ADRs in that corporate actions that do generate some incremental revenues and we haven't seen much of that lately.

With respect to the tax rate, we've had the tax rate fairly consistently around 34 and change.

I think probably for next year, that might go up a bit, to 35, would be the early indications.

Thank you.

Sure.

Our next question comes from Ruchi Madan with Smith Barney.

Hi.

Hi, Ruchi.

A couple of questions, first, yesterday, Mellon mentioned that their pension expenses would be up a lot next year.

Any issues at your company?

Well I think, Ruchi, you may recall, I'm sure you do, earlier in this year, we mentioned that pension costs would increase, that our pension credit would decline, because of the adjustment on the rate of return on assets.

The discount rate, and just the general market environment.

So we think we've certainly dealt with the lion share of any adjustments there.

We're clearly going to look at it again, but I certainly don't expect a material decrease in our pension costs.

Okay.

I think we generally try to deal with this earlier in the year and I think we have successfully.

Okay.

Great.

And different topic, you talked about the leverage from the DR business returning and I know it is hard to say when corporate actions come back but can you help us understand what potential issuers are thinking about considering that the equity market tone is better, and are you still hearing a lot of concern about Sarbanes-Oxley issues?

I think that is a good point, especially the latter one because there has been a lot of discussion surrounding the negative impact, the negative psychology surrounding the equity markets here in the U.S. coming out of Sarbanes-Oxley.

I routinely see both our clients and our prospects in the DR business, and the constant question I ask is what is your frame of mind with regard to the U.S. markets, regarding Sarbanes-Oxley, and the disclosure requirements, and I would say the vast, vast majority of the responses I received are that this is a market that is simply too important, too deep, too liquid for them to avoid, if you will, any requirements on Sarbanes-Oxley.

So ultimately, I do not see the Sarbanes-Oxley legislation having any material impact, negative impact on the DR business.

What we're seeing currently is a, as I think I said in my remarks earlier, that we do see a bit of an upward tilt in the revenue base.

It is not based on corporate action.

It is based on issuer cancellation fees.

Which tells us that there is greater, more of an interest in cross-border activity.

You see the improvement in asset price levels in the markets abroad.

I think reflecting that, and this is the harbinger of a more powerful recovery.

Once we see asset price levels, we see demand for securities, I'm quite sure that we will see our clients issuing securities and creating corporate actions to take advantage of that demand.

Okay.

Great, thanks.

Our next question comes from Andy Collins of Piper Jaffray.

Good morning, guys.

Good morning, Andy.

A couple of quick questions.

I was wondering about the new business wins when that might cause an acceleration in revenue, the revenue stream going forward and what particular transactions might be the biggest revenue drivers if there are any.

Well, I think we're - from the time we announced to the time the conversions are taken, you're talking usually probably a couple of quarters.

And then compounding that of course is just the level of activity.

You know, these asset levels that we're describing to you current asset levels.

So at 9 billion today, it could hopefully be 10 billion by the time the assets converge, if we have a stronger market, asset price levels improve, so the acceleration as you describe it, really won't be seen until '04 largely.

It is really going to be dependent upon the level of activity and further price increases.

Asset what price level increases.

In terms of the individual wins, was there anything that really stuck out?

Or is it just they all work together?

Yeah, I can't say that there is a particular emphasis on any particular product lines, clearly the ones that we feel keen about are those where we have a bundled or integrated services, because that's really the solutions that we're trying to offer to our clients, so the ABN AMROs and the AIG's, the ING relationships we're keen about because we're providing at fully integrated service level, especially on the managed account side.

So those things I think are ones that we really do drive for.

Okay, great.

One other unrelated question, on the net interest margin, came in a bit here this quarter, I'm wondering if we can expect a rebound next quarter with a steepening in the yield curve?

I think our position has been to keep it stable and grow it modestly and that would still be our target for the fourth quarter.

Okay.

Great, thank you.

Our next question comes from Brock Vandervliet with Lehman Brothers.

Thanks.

Good morning.

Hi, Brock.

I was wondering if you could just update us on your European sales efforts and particularly give us a report card on the joint venture that you have?

Thanks.

Well, I think, Brock, you saw some of the results in some of the names that I commented on, in terms of ING and ABN AMRO so I think we are seeing some good activity, in the U.K., the Cooperative Insurance Society, I think is also a good name for us, we're very pleased about.

The joint venture with ING or the joint alliance, if you will, that's hopefully it will evolve into something a little bit more formal, that's certainly our intention, our collective intentions.

It's still a little bit too early in terms of announcing any specific new business wins, there is an awful lot of momentum developing, I think Germany in particular is probably more advanced that any other countries that we've got activities going on but we should see some results in the early part of next year.

Okay.

And as a follow-up, any guidance on securities gains for the fourth quarter?

I would anticipate, we said for the year, the budget was probably 7-9 million per quarter.

It was interesting, we had a little shift, they had been principally coming from fixed income side in the first two quarters.

We actually had a bigger proportion coming from some of our LDL sponsor investments that achieved realization events in the quarter so I think we're positioned to continue to hit the targets.

Great.

Thank you.

Our next question comes from Ken Usdin with UBS Warburg.

Thanks, good morning.

Good morning, Ken.

A couple of quick questions.

First of all, can you talk about the underlying trends in securities lending within the security servicing fees?

I think the overall lending market share continues to increase.

The size of our book is expanding.

And so we've had good growth in terms of volumes lent.

And the overall spread that we're making continues to be fairly modest.

But I would say it's stable at this point.

I think the increased interest in the U.S. treasuries, especially, as helped us out and especially from certain of our Central Bank clients, interestingly enough.

So I think, we historical have been a major lender of U.S. treasuries rather than the equity side.

And the increased activity overall in the dealer positioning has helped us.

What about just on a core revenue basis, how did that segment act sequentially?

Was it kind of -- did it trend --

It was flattish.

Quarter to quarter, it was flattish.

Flattish?

Yeah.

Okay.

And just to get back to the margin and net interest income question for a second, just to be clear, are you talking about the margin balancing out, trending slightly higher or are you talking about net interest income dollars?

I was talking about net interest income dollars.

Okay.

So then that could imply that you might still have some margin compression but the size of the balance sheet should still offset that?

Or do you think --

We're actually not seeing -- I mean I think that last full effect of the Fed rate cut has been baked into the numbers at this point and on mortgage prepayments that we're receiving, we're basically achieving a similar reinvestment yield with our current reinvestment posture.

So I think compression has abated.

Okay.

And then on the balance sheet, obviously the corporate book is continuing to shrink and will continue to do so.

And you have the size of the balance sheet come off, as you mentioned, off of the third quarter.

Is this the kind of size of the balance sheet that we should expect coming forward?

I would say that we are getting much closer to a steady state.

The '99 number was a bit of an anomaly because of some of the difficulties in the broader market and in settlements at June 30.

That has cleared itself up to a large degree so I think 95 billion is closer to where we should be.

I would say, though, that given who we are, and what we do for a living, there can be quite a bit of volatility around that targeted size.

So you can see plus or minus 2 billion dollars to that, I would say, based on just how the settlement goes and what happens with some of our customers in terms of their ability to invest their cash or complete their trades.

The average balance sheet is probably in that 94 to 99 range.

Yeah, I think that's about right.

Okay.

Great.

Thanks a lot.

Our next question comes from Brian Bedell with Merrill Lynch.

Good morning, guys.

Hello.

Just on Pershing now that you've got a lot of this integrated and you have a clearer look, can you just clarify or elaborate on some of the revenue synergies that you're most excited about, and when you think you will be able to realize them?

And I guess this would span from managed accounts and I think you talked in the past about the wholesale mutual fund supermarket type of platform.

That, plus any cross-sell of traditional stuff like securities lending and FX.

Well, I think with regard to Pershing, you mentioned, Brian, I think the managed account area, that has just come together with between Lockwood and Pershing, as I think we mentioned in our prepared remarks.

That, I see as a real opportunity for us, in terms of the cross-sell.

The other elements are really providing -- interestingly, taking advantage of what Pershing offers to one major client segment of theirs is the broker/dealer environment within the commercial banking market.

The Bank of New York historical has been very successful in penetrating the correspondent banking markets in the U.S., and we see being able to really open a lot of more doors for a Pershing than they would have themselves.

We're also interestingly using the Pershing platform for our own broker/dealer in our own brand system.

And that is something that we are working very, very heavily on right now.

To be able to convey to our own investment center clients what the Pershing product line has, which is far, far more sophisticated than what we've been able to do ourselves.

Right.

Those are a couple of examples of what we're seeing today, Brian.

And are you expecting say in 2004, a type of revenue opportunity in which you are able to convince, you say third tier brokers and it sounds like maybe some of the commercial banking correspondents to outsource their self clearing to Pershing as a result of your larger scale.

We see, certainly, that in not only in the U.S., Brian, but as well in the U.K..

Again, I think the Pershing name had the lion share, in fact 85% of the market share of those that outsourced, so we think again with the Bank of New York behind it we have great opportunity there, but we are also going to expand it not only within the broker dealer community but asset managers in the U.K. as well.

So that I think are the elements of what we see.

And we're going to be portraying that obviously much, much more prominently in our January analyst meeting.

Okay.

So you have more clarification on sort of the momentum there.

Sure.

And looking at the run rate of 830 million at Pershing versus the 875 million goal, what is the biggest cause of that Delta?

That Delta is a 4 to 5% Delta.

I think we assumed a little stronger snap back in the second half of the year so I would just put it as just environmental.

It has nothing to do with the new business pipeline, new business conversions, attrition from the conversions from BNY Clearing, all those are tracking, so I would just say it is environmental.

And I think as I indicated, Pershing has done a good job of protecting the bottom line even though they're running at slightly behind.

All right.

Okay.

And just thinking about -- you were talking earlier about fixed income asset levels not being as important as fixed income volumes.

If we're trying to model out your fixed income asset levels going forward are they more correlated toward the longer end of the curve or towards the shorter end of the curve?

I'm sure there is a mix in there but in trying to tie it to one benchmark trying to get a better picture of that.

I don't think we can be that precise, Brian?

Okay.

All right.

That's hard to do.

Just one last question, oh, just to elaborate on the cross-sells and securities lending and FX services to Pershing clients, that's one thing I missed.

I think we're seeing some traction on the FX front.

And I think we haven't seen much yet on the sec lending side.

The FX side.

Okay.

Thanks a lot, guys.

Thank you, Brian.

Next question?

Our next question comes from Mike Mayo with Prudential group.

Prudential Equity Group.

Did you just mention an analyst meeting, do you have a date for that?

That's not my question but --

Mike, we're literally in the midst of coordinating calendars now.

It will be towards the end of January.

The end of January, okay.

And deposit service charges and fees have been down for two quarters in a row.

What's going on there?

What should we expect?

Thanks.

You've seen a little bit of reduction on the capital market side.

The syndicated loan fees and high yield or investment-grade bond offerings that we're co-manager on, that's typically a seasonal business, and that was stronger in the first half of the year.

It has come off a little bit here.

But I think it is not that noticeable.

So that's what you're seeing inside that revenue category.

I guess the syndication fees, maybe you don't expect those to come back, or that's what we're hearing from the other banks at least.

Yeah, I think in general, if you looked at the pattern on those, that there's more financing activity typically in the first half of the year, and it is a little softener in the second half.

Okay.

And then I guess Northern Trust has an issue with being a trustee for Enron or something like that.

Do you have any of that sort of issue and even if you don't, do you have to change your business practices or pay more attention to that?

Well, we don't have any issues that Northern has today, with regard to the Enron pension plan.

We clearly are trustees on pension plans, as Northern and as the other major processors are, so to that extent, we're certainly paying a lot of attention to what is going on there.

And what some of the judicial pronouncements will be.

We will study that to ensure that whatever comes out in terms of the obligations or expectations of responsibilities of a trustee in that situation, it is something that we can safely and accurately deliver.

So it is something we're looking at but I have to say, just as one editorial comment, is I think the Enron pension plan had some very specific elements to it that are not typical, at least that we see.

Or I think anyone would see.

Okay.

And lastly, you talked about the competitive dynamics with Deutsche Bank.

How are you faring against other competitors such as Mellon?

Are you winning, losing, breaking even?

You mean with regard to the Deutsche Bank opportunities?

Yeah, you signaled that very well, sounds like you're doing well in certain areas.

Well, we are tracking -- with regard to what we describe here as the Deutsche Bank initiative, we do in fact track again a finite number of clients of Deutsche Bank targets, and we track who wins it, whether it is ourselves, whether it is State Street or Mellon, or Northern, or Chase or anybody else, we track that, and we do in fact, signed today that we have more wins than anybody else, yes.

Okay.

You want to share who is second and third on that list?

No, I think -- let the others speak for themselves.

Okay.

Thanks.

Next question, please?

Our next question comes from Lloyd Zeitman with Bernstein Investment Research.

Good morning, folks.

To follow-up on the last question, could you tell us how, let's say, your attrition is in terms of accounts and just I know you said that given the conversion, Bruce mentioned earlier, that it is tracking within your expectations, but how about just in general, and could you tell us how the pricing environment is, as far as new business?

Lloyd, you're referring to attrition with regard to the Pershing conversions?

Well, with regard to Pershing and also let's say beyond Pershing as to what you might have expected under let's say more quote-unquote normal circumstances.

Well, as it relates to Pershing itself, and the broker dealer clientele that Pershing and BNY clearing had, our attrition rates are minimal.

Certainly on the Pershing side, given their base of business, it is a small percentage point.

With regard to BNY Clearing, I think we were shooting for in the 85-90% range.

And we're about there, about 85.

With regard to attrition generally, lost business across all business lines, is that a question?

Yes.

Well, we certainly track that.

We win some, we lose a few, but on balance, we continue to win much more than we lose.

I'm not sure I can be more specific to that, though, Lloyd.

And is this also within your expectations?

Oh, yes.

Absolutely.

I think one of the things, Lloyd, that Tom talked about, the service quality initiatives that we've invested in, and which is manifesting itself in both improved customer satisfaction surveys and some of these poll rankings, that's clearly designed to keep the business in the house that's in the house, and so we've probably not seen perceptible improvement because we have such a low level to begin with, but we would expect that to also result in either lower attrition and/or improved cross-sell to those customers who see their satisfaction going up with Bank of New York.

And when would you expect to see the results of these quality --

I think it is additive over time but I think it could contribute to the '04 growth rate.

Okay, great.

Thanks very much.

Sure, Lloyd.

Our next question comes from Brian Harvey with Fox-Pitt, Kelton.

Thank you, good morning.

I just had two questions here.

First, can we expect any relief on the investment spending or business continuity spending in the fourth quarter?

Was there any I guess front loading of investment spend this year?

No, I think it is a pretty continual process and a lot of those expenditures are cap ex.

They go into the run rate as depreciation, as you spend the money.

So I don't see any big step functions that are in the near term going to affect the run rate.

So I think the run rate, most of the spending that has occurred this year has been baked into the run rate at this point.

Okay.

Second question is this.

On credit.

We saw a significant improvement in nonperformers and you seem to be ahead of track in reduction of corporate exposures.

When can we expect or what should we be looking for to see any sort of leverage on provision costs coming down?

Is that more kind of an '04 event as opposed to next quarter?

Well, it is under a lot of discussion here, within our own shop.

I can't say at this juncture when we might see that.

Clearly, we're focusing a lot of our attention on '04 right now.

I think Bruce's comments about the improvement overall in the credit profile, you saw that we again charged off more than we provided for, we continue to clean up, and then we feel very comfortable with our overall level of reserves, given the situation.

Much beyond that, I don't think I can say at this point.

Okay.

Thank you.

Next question, please?

Our next question comes from Tom McCrohan with KBW.

Hi, good morning.

A quick question on Pershing and a follow-up question.

On Pershing, the other category in the supplemental income statement, on non-interest expense was up meaningfully sequentially.

It was like 28 million this quarter up from 6 million last quarter.

What is that other category for Pershing, the non-interest expense?

I'm just looking at the sheets, and it is 28 million in the quarter, versus 47 for the nine-month period.

So I don't quite see it at 28 versus 6.

I mean the increment, you have to remember, the second quarter had two months in the quarter, and we had three months in the third quarter.

Those expenses would be things ranging from communication, and the like, that we categorize as other, T&E, things like that, other expense generally.

Okay.

Thanks.

Nothing really unusual going on there.

Okay.

The margins, I thought you said were flat, 19% quarter to quarter and I was wondering if cost savings had slowed down or, I know there was, what, 80 some odd million --

The revenues quarter to quarter were flat, if you take the two month to three month and extrapolate it and the expenses were pretty flat.

So things pretty much moved sideways.

You have to remember the second quarter was very robust coming out of the Iraqi situation, in the first quarter, it was a strong quarter, third quarter you hold your breath a little bit because August is seasonally slow, but they certainly went sideways in the quarter, but the signs in September, as I indicated in terms of the metrics were September the business was building again.

So that's good.

Excellent.

How long would it take to ramp up to the 875 expected run rate for the Pershing business?

And that 875 does not include revenue synergies, correct?

Yes, that's correct.

The 875 was really a marker we laid down in January when we looked at their budget, and what we thought was achievable based on our view of the market environment.

If you look at 207 today, that they reported, if you take out the financing costs of the revenues we're at 828.

It is not that much growth on a sequential quarter basis, to move up to the 875 level.

It is maybe 10 million dollars in the quarter.

That could easily occur, if you see improved market conditions and the retail investor come back and do a lot of tax selling, et cetera, and just a continuation of the new business pipeline.

So you know, I think I wouldn't get too -- we're not that concerned that 830 versus 875.

I think it is in the ballpark.

And easily with a little boost in the markets, we could get to that level.

Okay.

Great.

And shifting to the balance sheet, I had a question, how should we think about the growth in your securities portfolio going forward?

Assuming that in the last couple of years the growth we saw there was kind of a dollar for dollar swap given the reduction in loan portfolio.

Yeah.

Is that kind of the philosophy going forward as you reduce the loan portfolio, are you going to swap out earning assets and loans to earning assets in securities?

I think we're getting to the level of the loan target that we set out.

So you will probably see that slow down a little bit.

We've certainly run ahead of pace in getting to that $9 billion exposure reduction target.

So I think you've correspondingly, we're not in the business of growing the investment securities portfolio outside of the context that we have it for.

So I think if the loan reduction slows down a bit, you won't see the investment securities growing for the sake of growing.

Okay.

Great.

And one last question on credit.

I believe it was Comerica earlier this week had some increased MPAs in connection with the shared national credit exam I think particularly with their automotive segment.

Could you share with us if possible how you fare through the share national credit and maybe make some comments on the automotive portfolio?

Well, I think, Tom, the fact that we were down 11% in our NPAs probably speaks to the point that we do not have any surprises whatsoever and it was a rather benign shared national credit exercise for us.

And that includes the automotive.

Clearly, we have some exposure there.

But that did not cause us any hiccups.

Great.

Thanks very much.

I think given the time if we can have one more question, please?

Our next question comes from Ron Mandel with GIC.

Hi, Ron.

Good morning.

I was wondering when you referred to the Deutsche Bank initiative, you said you had 150 mandates and 300 billion in assets and I was wondering is that cumulative?

I am assuming it is cumulative?

It is cumulative, Ron

And my question was, what is the amount of revenue that is associated with that?

Yeah, we have not commented about the specific revenues associated with that, what we have said, and I can continue to say, given the 50 mandates is that the revenue base, coming out of that, is remarkably similar to the overall portfolio.

So if we related 300 billion to 7.9 billion, we would get a good estimate of what the revenue would be, 7.9 trillion of --

No, unfortunately, it is not that easy, Ron, because of the business mix within the 7.8 trillion, 7.9 trillion.

So there's not the same business mix, asset mix from the 300 billion to the 7-odd trillion.

And is that 300 trillion a richer mix then or a leaner mix?

Revenue wise.

Depends upon, are you talking equities versus fixed income?

If the more the involvement of equities in that 300 billion, the richer it would be.

And we've not commented about that.

Okay.

So I'm not sure where you're leaving me then in terms of guidance on that amount.

Yeah, we're not providing guidance on the revenue amount.

But I think we are trying to tell you that overall, it is a nice cross-section of business, different size accounts and different types of products and services we're offering, so it is very representative of the regular business pipeline that we have at the bank.

Okay.

We haven't, Ron, I'm not trying to be evasive whatsoever here, I've not looked at it in terms of what that $300 billion will bring in terms of revenue versus the 7.8, 7.9 trillion.

But that business is no less lucrative than the similar types of business that we have.

That I can say categorically.

You know, what that number is, I can't say, but this is not the --

And it varies with market condition, too.

Right.

Okay.

Thank you.

Okay.

Ron.

Thank you.

That again, given the time here, I think that needs to conclude our third quarter earnings call.

I do very much appreciate everybody joining us this morning.

I hope it has been informative.

It is certainly our intention to offer more information as to the drivers of our business so that you can more accurately estimate what the market conditions and how those market conditions will impact us.

Certainly, with insuring that we remain competitive in terms of the information that we do offer.

If you do have any further questions, that has not arisen here, please contact John Roy, again head of our Investor Relations area and we thank you for your attention.

Have a great morning.

Bye-bye :