紐約梅隆銀行 (BK) 2003 Q4 法說會逐字稿

Welcome to The Bank of New York's fourth 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 1 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.

Sir, you may begin.

Good morning.

Thanks for joining us this morning for The Bank of New York's fourth 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 various forward-looking statements as a result of various important factors including those identified in our 2002 10-K and most recent 10-Q.

Forward-looking statements in this call speak only as of today, January 21, 2004.

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.

And with me as well is Bruce Van Saun, our CFO.

First, I would like to welcome you as well to the Bank of New York Company's conference call to review our fourth quarter and full year 2003 earnings release of this morning, January 21 and to provide additional insight into our performance and our strategy.

In a moment, I will turn it over to Bruce who will offer color on our fourth quarter and full year results and also that includes the impact of Pershing.

I will then provide a high-level perspective on our results and I'll include some updates on credit, new business wins and I'll also talk about our view of the environment as we enter into 2004.

After I'm finished, we'll open it up to questions.

Now let me turn it over to Bruce.

Good morning.

I would like to start off with some general remarks about the quarter.

The environment continued to demonstrate a positive tone overall, although the capital markets are clearly not yet firing on all cylinders.

In the equity markets, price levels were up 12% for both the S&P 500 and NASDAQ.

International equity price levels had similar or better results with the D&Y ADR composite index increasing nearly 19%.

However, combined New York Stock Exchange and NASDAQ trading volumes were flat compared to the seasonally low third quarter.

Corporate actions in the M&A pipeline began to show signs of life in the quarter, although completed transactions are still running at a fraction of even the mid to late 1990s prebubble levels.

In fixed incomes, the environment is still good with corporate issuance higher but government and agency issuance was down and aggregate fixed income trading was also lower in the fourth quarter.

October and November were relatively active months in the markets while the seasonal falloff in late December was evident again this year.

Against this backdrop, our diversified businesses performed favorably as we achieved good sequential growth in our servicing and fiduciary businesses.

Growth in the core business combined with achievement of Pershing-related expense synergy allowed us to achieve a 2 cent gain in sequential operating EPS from 42 cents to 44 cents.

Reported earnings were 40 cents with a 4 cents difference representing the final Pershing-related merger and integration cost bringing the full year total cost to 8 cents.

This is one penny higher than we originally projected, as we found additional space restructuring opportunities in London.

For the full year, our operating EPS was thus $1.67 and reported EPS factoring in the Pershing related cost and the GMAC settlement was $1.52.

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

Security servicing fees were up $27 million or 4%, sequentially, relative to the third quarter.

Pershing accounted for $11 million of this variance as the retail investor, left for dead by many pundits a year ago, continues to return to the markets.

By the way, Pershing's total revenues for the quarter of $222 million, which are adjusted for $8 million of deal financing costs annualized to $888 million, catching up to the $875 million '03 revenue scaling number we provided you when we announced the transaction.

Pershing's key metrics, like daily average billable trades, margin debits, customer accounts, money fund and mutual fund balances all trended higher during the quarter.

Beyond the strength in Pershing, there were other bright spots as core sequential growth was 3.2% or an annualized 13%.

Corporate trust showed good sequential growth as corporate fixed-income issuance remained at high levels.

Depository receipts also grew sequentially as a result of seasonal corporate actions and higher activity levels.

While we are still well off in historical monthly high revenue level activity for this business, the business has clearly stabilized and should continue to improve given the positive tone in the markets.

Our execution businesses showed modest sequential growth driven by a greater number of portfolio transitions and seasonal portfolio rebalancings.

In addition, our international execution business benefited from the rising euro and equity market price levels.

Investor services and broker dealer services have been strong all year and are both up versus a year ago; however, both largely moved sideways in the fourth quarter.

Investor services, strength and global custody was offset by a decline in securities lending revenues.

Global custody continues to perform well given higher equity prices, the stronger euro and new business momentum.

At year end, our assets under custody were $8.3 trillion, up from $7.9 trillion at September 30 and $6.8 trillion a year ago.

We now have over a third of total custody assets in equities and this percentage is increasing.

Securities lending declined in the fourth quarter as a result of some of our clients withdrawing from the market at year end and lower trading levels.

Overall, securities lending had a record year in 2003 and added many new clients.

Broker dealer services continues to be paced by the active government securities market and increased demand for our collateral management services.

Another bright spot is our private client services and asset management businesses, where fees continued to grow strongly on both a sequential and a year-over-year basis.

We currently manage for clients a well-diversified portfolio of about $89 billion, of which 34% is in equities, 22% is in fixed income, 34% is in liquid assets and 10% is in alternative investments.

ID Asset management our alternative fund-to-fund hedge fund manager started the year at $6.4 billion in assets under management.

It grew 42% to $9.1 billion by year-end, reflecting strong demand both domestically and abroad for their well-designed products.

The rise in equity prices over the quarter and year also helped the top line through these businesses, given that a third of assets under management are currently in equities.

Service charges and fees were up 8 million sequentially as our focus Capital Markets operation benefited from an active origination environment for both loans and bonds.

The remaining non-interest income revenue category that increased sequentially with other income, largely due to a $6 million lease residual gain.

However, in the quarter we had equal amount of expenses associated with our cost reengineering efforts for severance, staff relocation and consultants, which added to sequential quarter expense growth.

These items, thus, offset each other.

The weaker areas from a revenue standpoint included foreign exchange and other trading and our global payments business.

FX and other trading dropped $11 million, sequentially, from a record third quarter but still remained healthy at $81 million.

The main cause of the decrease was slightly lower FX activity reflecting the seasonal lull in the latter half of December as well as lower government agency issuance during the quarter that resulted in lower interest rate hedging revenues.

The global payments revenues dropped $4 million, sequentially, in spite of being up 6% for the full year.

The business experienced some seasonal softness and saw some clients being to increase deposits in lieu of fees providing a slight lift to net interest income.

Our net interest income which had been moving sideways for two quarters increased by $11 million versus the third quarter, and appears headed in the right direction.

During the quarter, we slightly increased our investment in securities relative to liquid assets benefiting the spread.

We also refinanced or swapped higher cost debt and we received greater than usual loan breakage fees as some clients refinanced bank loans to take advantage of good bond market conditions.

Lastly, we benefited from higher client deposit levels.

More broadly, we have seen an ebb in some of the factors pressuring that interest income earlier in the year, such as our loan reduction program, high mortgage prepayment rates and self-imposed leverage constraints.

On the expense front, we did manage to maintain positive operating leverage as operating expenses grew 3.2%, sequentially, compared to 3.9% for total revenues.

The results would have been a bit better without the aforementioned $5 million in cost reengineering expenses as well as the seasonal rise in fourth quarter expenses.

Overall operating expense growth was $30 million in the fourth quarter relative to the third.

Pershing accounted for $9 million or about 30% of this increase as variable expenses tied to revenues rose during the quarter.

Pershing achieved positive operating leverage for the quarter and its pretax operating margin increased from 19% in the third quarter to 20%.

The core growth in expenses of $21 million reflects higher incentive compensation accruals at year-end tied to revenues and overall performance as well as increases in variable expenses that are tied to revenues.

In addition, the rise in euro also resulted in higher expenses in our investor services business.

For 2003, the Company incurred 2 cents of EPS cost for the commencement of stock option expensing which is expected to double in 2004 as these costs are phased in over three years.

We continue to fund longer term investment initiatives in business continuity, technology, service quality and marketing while managing on-going environmental expense pressures from rising health and medical expenses, provide pension expense assumptions and regulatory initiatives, like (indiscernible).

To offset these expense pressures, we've been strict with discretionary spending as full-year core staff reductions were around 500.

We have also continued and even formalized our expense reengineering efforts, which you'll hear more about at our analyst meeting.

Turning now to the balance sheet.

Year-end total assets were a rather low $92.3 billion, down from $95.3 billion at September 30.

The decrease largely reflects quiet markets at year-end.

Our balance sheet generally runs $94-96 billion, but given who we are and what we do, there can be a fair amount of fluctuation based on market conditions and customer behavior.

Our capital ratios are now beginning to approach our targeted levels with tier one at 741, total capital at 1,146 and TCE at 489 as we build up these measures following the Pershing acquisition.

The TCE ratio, which is up from 465 at 930 was also impacted this quarter by the acquisition of Fifth Third Banks corporate trust business and a modest decline in our unrealized securities gain position which combined to cost us 11 basis points in the TCE ratio.

We received another insurance advance in mid-January fully covering our insurance company receivables related to the World Trade Center disaster.

We are close to resolving all remaining items in our claim including costs to move the data center in 2004.

To quickly summarize the quarter, strong sequential growth in security servicing, private client services and asset management and net interest income led to good topline growth in spite of a mixed environment.

Pershing continues to track well on financial metrics such as core performance and synergy and on business metrics like client retention and conversions.

Our expense control initiatives continue to result in positive operating leverage and our balance sheet was light at year-end permitting us to report better than projected capital ratios.

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

Thanks, Bruce.

First, let me offer a comment on our credit portfolio.

As I think all of you are aware and can recall, last year we targeted several objectives.

To reduce our corporate exposures by $9 billion, increase the granularity of the portfolio, improve return on risk, lower our absolute credit costs.

Essentially we've accomplished all of them.

Of course, the improving economy and the tightening credit spreads that we experienced through 2003 certainly helped us achieve those objectives on an – even on an accelerated basis.

The fact of the matter is that we did not lay back in the face of an improving economy but took full advantage of what the market offered us to fulfill those commitments that we made.

Our credit metrics are stronger at year-end with an allowance-to-loss -- allowance-to-loan ratio of 2.72% and 230% coverage of our nonperforming assets.

Reflecting the improved asset quality and the improved credit outlook, we did reduce provisioning in the quarter to $35 million.

We'll offer a lot more detailed comments on that portfolio and the credit outlook in next week's analyst meeting.

The next area I would like to highlight is our new business efforts.

Overall, we had quite a good year in 2003 across all the major businesses in gaining market share.

Since we last reported to you, a number of significant wins have been announced, particularly in investor services.

The Bank of New York was appointed to provide securities lending services to Clark County in Nevada, expanding our $2 billion custody relationship with them.

Other significant announcements include the city of Sacramento, who reappointed us as custodian for $1.1 billion in assets, Montpelier Reinsurance appointed us as custodian and securities lending agent for another $1.8 billion in assets.

And most significantly, last week the city of New York announced that we were appointed to provide a full range of custody services for $78 billion in assets involving five Pension Funds here at the city.

We continue to win new business in the U.K. as well.

Standard Life chose the bank to provide custody and fund accounting services for its new multimanager offering.

Lion Trust Asset Management appointed us to provide retail fund outsourcing services for $1.2 billion pounds of assets.

Continuing our momentum this year in outsourcing, we announced new relationships with AXA Investment Managers and Voyager Asset Management in the fourth quarter.

In addition to ING and ABM Amro earlier in the year.

Our successful Deutsche Banc marketing initiative resulted in 54 new mandates this year, represented about $300 billion in custody assets and far and away the most wins of the former Deutsche Banc clients.

So I believe I have a sound basis to say that we have a good new business momentum entering into the new year and that we'll get more than our fair share of business as it becomes available.

Now the final perspective I would like to offer this morning is on the current environment as we head into 2004, a topic you'll hear more about in our analyst presentation next week.

While we've increased earnings and shown good growth since the first quarter of '03, the Capital Markets recovery has been uneven, trading volumes and corporate actions have not rebounded as quickly as asset price levels.

I'm quite optimistic though that the fundamentals of the market will remain positive, yet I believe it is best to plan for a continuation of a more gradual recovery trend in 2004.

Notwithstanding the positive market environment, the outlook for 2004 has to be tempered in the near term at least by the level of discussions focused on the mutual fund industry as well as the debates surrounding market structures which impact -- both impact important client bases for us.

This creates uncertainties that may cause our clients and prospects to adjust their business practices or extend their decision-making in the short-term.

For an established service provider like ourselves so integrally involved in the markets, we know that excellent opportunities will eventually emerge.

Remember, if you will, that changing market structures are one of the long-term trends that our business model is designed to take advantage of.

Adding to this environmental backdrop is the fact that we operate in a highly competitive business with no real pricing power today and we're serving clients who are in their own demanding business climate and continually applying pressure on us to provide more for less.

Combined with rising expense pressures that corporate America faces from accounting changes, regulatory needs and ever-increasing employee-related expenses, it is imperative we continue our historical focus on our discretionary expenses and review our overall cost base and yet equally importantly, while maintaining the investment spending that is so critical for our long-term positioning.

All these issues and opportunities will be explored in much more detail on Monday when we hold our annual analyst presentation.

I believe you will find our presentation useful and informative and we look forward to your attendance either in person or through the webcast.

And with that, I would like to ask the Operator to open it up to some questions.

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

To ask a question, please press star 1.

To withdraw your question, press star 2.

You will be announced prior to asking your question.

Our first question comes from Brock Vandervliet with Lehman Brothers.

Thanks and good morning.

I was wondering if you could just delve into Pershing a little bit more in terms of progress you have made on Crossel (ph) initiatives and really the integration of the franchise at this point.

Thanks.

We continue to work very diligently with regard to finding opportunities for Crossels.

I think there are quite a few initiatives that we are engaged in.

I think the approach to the separately managed account business is going exceptionally well.

We’ve seen some great asset growth in the fourth quarter.

That, I think, given our – the integration, successful integration of Lockwood and combination of Len Reinhart and Rich Brockner (ph) and Brian Shea (ph) putting things together, I think we are beginning to see some momentum there.

We are also beginning to see some momentum with regard to the Crossels regarding trust services.

As you recall, what we had thought, we had to really put a lot of numbers to the paper on this but we thought that we would effectively be able to cross-sell our private client work through the Pershings introducing broker network because they did not have effectively a home grown trust and banking service that we can provide.

So, many of those are working, those things are developing.

We've got a project management approach to these and we'll continue to develop it.

So I think part of this momentum that you saw in the latter part of 2003 is not only the retail investor coming back but being able to leverage it as well.

The synergy numbers for the year came in about $23 million overall – again, that’s largely on the expense side.

Sequentially, that was an 11 million improvement versus the third quarter and that's pretty much what we had telegraphed in our third quarter call.

Everything that we expected to accomplish in terms of shutting down Milwaukee and consolidating the overall infrastructure went according to schedule.

Great.

Thank you.

Brian Vidal with Merrill Lynch.

You may ask your question.

Good morning.

As an add-on to the Pershing question, I guess it really depends on market volumes, but do you have a target revenue range, a run rate for Pershing in '04 and also, synergies expected in '04?

We'll be really giving guidance about things like that at our analyst meeting on Monday.

So we prefer to just hold those types questions until then.

Fair enough.

Can you talk more about the New York City pension in terms of when that will be converted, and is this a similar pricing and revenue contribution as your other business?

Actually, I don't have the actual conversion date.

But typically these would take probably a couple of quarters to be able to put into place, probably by the second quarter would be a typical conversion timetable.

The terms of the pricing, that is very similar to what we've been having reflective the portfolio at large.

Okay.

A good win for us.

I feel very good about it given the fact – it’s not only a combination of the services that we are offering but it was a great team effort.

Everybody did work exceptionally hard to present a sense of partnership to the city of New York.

We've been doing that for so long and I think the rewards are there.

Sounds like a fantastic win.

Also just speaking about Citigroup in terms of Statetree’s (ph) comments on pricing pressure, you mentioned pricing is still very competitive.

Is it Citi or are you seeing Citi come up more in this realm or is it the general environment that has more pressure?

I think it's the general environment.

You know, over the years, Brian, there have been always people out on the margin here in terms of using cost, using price as a competitive tool to win businesses.

It has come and go.

I'd rather not talk about anyone in specific -- specifically.

I think it is general but it is continuing.

Okay.

And one last question on EDR volumes in terms of what kind of momentum you are seeing into the first quarter.

Is it picking up from fourth quarter levels?

I don't have the first two weeks of the year numbers in terms of ADR volumes yet.

Clearly December was a good month and a continuation of the upward trend.

I think I said in and after the third quarter that we see an upward tilt in DR volumes generally that continued through Q4.

And there’s nothing to think that that would change in Q1.

Though, we are anxiously awaiting I think a little more of a revival in terms of corporate action.

Once we see those cross border transactions take place, then I think we'll be able to restore ADRs revenue base to its former levels.

Thanks, very much.

Betsy Gracik with Morgan Stanley.

You may ask your question.

Thanks.

Two questions.

Just one on the acquisition pricing that we were just discussing.

I'm wondering if you can just give us a little bit of color sense as to how the pricing there is going relative to what you've been seeing over the past several quarters.

You mentioned it is still competitive, but I'm just wondering, has the pace of the competition of the pricing changed at all?

Acquisition pricing.

Acquisition pricing is quite competitive as well.

Certainly we saw that in some of the corporate trust acquisitions that took place in '03.

We won a few and we lost a few, and I think, to us, it's imperative to be able to maintain some discipline there.

And has it changed at all just over the course of the past couple quarters or is it just at about the same type of level?

The levels, for example, in corporate trust, we saw when US Bancorp bought [INAUDIBLE] and then JPM bought Bank One.

Those are pretty consistent levels and they’re high levels.

Right.

Okay.

And just a different type of question on the reserve balances you have with net charge-off continuing to fall and the economy getting better and the quality of credit getting better, I'd anticipate that you at some point might be looking to bring the reserve down.

I'm wondering what areas you would be most interested in reinvesting those funds?

Well, certainly in terms of reinvestment, we are pretty clear that our reinvestment continues to be in the securities servicing area of fiduciary businesses.

We will be going in through a little bit of a wish list or laundry list with regard to our acquisitions on Monday, at least the general areas that we will be pursuing.

Any type of returns that we get in '04 with regard to lowering provisions will flow into these areas.

Right.

Look forward to Monday.

Thanks.

Andy Collins with Piper Jaffray.

Good morning, guys.

Just on the securities and other processing line came in about 3% higher link quarter at 760.

I was just wondering was there a particular line of business that showed strength there in the processing area and I have one follow-up question.

Yeah, I think the areas that we highlighted.

Corporate trust was strong, the DRs were strong and execution services were all strong on a sequential quarter basis.

So it was not any one of those in particular.

It was pretty broad-based.

And then the other question, expenses up about $30 million if you back out the non-recurring items.

I guess 7 or 8 of that was kind of non-recurring, or not non-recurring but perhaps one-time.

What was the cause of kind of the increase and is it what we might expect going forward?

I think the general increase was tied to compensation-related – either compensation-related tied to revenues or variable expenses tied to revenues.

We still achieved positive operating leverage in the quarter, notwithstanding some of the one-time or nonrecurring nature of those expenses.

We had a nice pickup in revenues and there's incentive pools tied to those revenues and then there's also variable costs like clearing and subcustody also tied to the revenues in those roads as well.

Have we seen more of an impact from that variable expense base than in the past here this quarter?

You know, there's always a little bit of squaring up at the end of the year relative to overall compensation formulas tied to the full year performance and revenue goals, so there might have been a little more in the fourth quarter that might tail off a little in the first quarter.

That would be the only thing I could point to that would be a little out of the ordinary.

Thank you.

Mike Mayo with Prudential.

It looks like Pershing is working out.

Are you at a normal level now for Pershing or do you expect more revenue synergies and expense savings?

Thanks.

Yeah.

I think we are right about where we expected to be on the deal model.

You may -- announced, you remember the guidance we announced was that we thought the transaction would be 2 cent diluted for the year.

Clearly we got off to a little lower start than expected given where the markets were back in May when we closed the transaction.

We pretty much retraced that ground.

We brought through the synergies and so we did achieve that 2 cent dilution.

Next year, we had given a 2-3 cent accretion number on the strength of the continued follow-through on the synergies and then also some improvement in the core business.

As I said earlier, we'll give more guidance on how we see that playing out in our analyst meeting on Monday.

But, we are feeling very confident about where the business is positioned and what they've accomplished this year which was quite significant, really.

The whole conversion of our B&Y clearing platform onto Pershing's platform was one of the biggest, most comprehensive conversions achieved in the industry in that short a period of time so we are quite pleased with where we are now.

And then two separate questions.

One, how much did the acquisition of fifth third's corporate trust business add to revenues and expenses this quarter and then what was the impact of the euro on revenues expenses and overall?

Thanks.

The fifth third closed on December 29 so that's a quick answer, it was zero.

And the euro overall, basically we have in Sterling, we have both revenues and expense base denominated in Sterling and we have really a net exposure on the expense side to the euro because of our large securities operations group in Brussels.

So on balance, the declining dollar and strengthening euro cost us about $2.5 million during the quarter.

So, I'd say that's really the overall number, Sterling was pretty neutral and euro was about a 2.5 net hit for the quarter.

And last question, loan breakup fees, is that normal?

How should we think about that going forward?

Those are, you know, a little bit variable.

I'd say they were maybe a little higher than usual but typically that’s an either loan up-front fees or break fees or part of the recurring stream of being in the banking business.

A little more volatility, too, on a quarter-to-quarter basis, but there's something there.

They were a little higher than we would have expected which is why we flagged them in the press release.

Thank you.

Tom McCandless with Deutsche Banc Securities.

You may ask your question.

Good morning.

Two questions and my apologies if one of these items were already covered.

Wondering if you can comment a little bit on the link quarter performance in securities lending fees.

That's the first question.

Sure, the link quarter performance, they were down modestly and the reason that we attribute that to is that spreads were down a little bit and then also some of our clients basically pulled back from the market towards the end of the year and that occurred.

Also there’s a modest impact.

Particularly on the insurance industry.

There's also a very modest impact, some of our clients did so well that the tiered pricing reached levels that worked out that split a little more favorably to the clients than to us.

Those three factors really contributed to a modest decline in (indiscernible) the sequential quarter.

Great.

And the second unrelated question has to do with the success that Bank of New York had with acquiring a new business from Statestreet's (ph) acquisition of Deutsche Banc GSS (ph).

I'm curious as to whether or not you are declaring victory, and furthermore, whether or not you anticipate additional opportunities overseas from the same two entities and whether or not that opportunity if it does exist is of comparable size?

Well, declaring Victory, the only thing I would say about that is that we certainly achieved our goals of putting a focus on that business and winning what I feel certainly is more than anyone else did with regard to any of the other non-Statestreet players, more than any of them.

We continue our focus on that book of business while certainly, I think, the large part everyone’s made their decisions, if you will, in the short-term.

We will continue to have a focus on those names going forward.

We don't intend to just simply now go away.

This is, as I said earlier, this is a very competitive environment.

We put a lot of network and effort in terms of understanding the client base, understanding their needs.

They know we are out there and we'll continue our calling effort as I'm sure everyone else will.

But Tom, do you sense that the opportunities abroad are the same magnitude as they were here domestically?

No, I guess I don't have a position whether it's more or less.

I think that there are a lot -- there is a lot of activity, a lot of movement, a lot of considerations taking place abroad, and our position in the European market both by ourselves as well as through ING, I think we will continue to do well there – we should have some announcements there in the first half of this year, maybe the first quarter.

Do you think as a final follow-up, do you think that the decision making process abroad has been negatively impacted or slowed down as much as it has here in the U.S. because of the hypersensitive regulatory environment?

When you say decision making, in terms of the decision making to move providers in the asset management world or the DR world?

In all of the custody and asset servicing-related businesses, Bank of New York as well as other providers have noted that given the heightened sensitivity surrounding late trading, some of the activity in the decision making process, IT purchasing decision-making process has slowed a little bit here in the states.

I'm wondering is that spilled over?

I think it has, Tom, to a degree it clearly has.

I think everyone has been -- there is a greater degree of uncertainty and I think the further you go away from the states, actually, people are a bit more puzzled as to what has taken place.

What do you think it takes to clear that up?

I'd say it's time.

I’d say, clearly, an understanding of what the ground rules are.

I think that, let's look at the DR business.

I'm firmly convinced that the DR business will come back very strongly.

I see signs of it already.

The fact of the matter is once everyone understands what the ground rules are, this remains the deepest and most liquid marketplace to raise capital.

So I think, once the ground rules are outlined, once there is the demand, a need for that capital surfaces once again, we'll see the depository receipt business getting back to its former levels.

I think the same thing holds true in the mutual fund industry today.

I think what we need to know is the SCC is daily coming out with new promulgations.

We are looking at studying it, understanding what the impact is, seeing how we can all live within that.

And again, I see The Bank of New York's position in the marketplace as being a very important instrument in being able to deal with the new regulations and new regulatory environments.

So, if anything, after we all can discern what is to take place, we will be working with our clients to live within those new regulations and to continue to make progress.

Thank you, Tom.

That's very helpful.

Nancy Bush with NAB Research.

You may ask your question.

Good morning.

Tom, if I may ask a question, if you could just expand a bit, I'm sure you'll be addressing this on Monday as well, but just give us a bit more color on your growth in the asset management and private client business in '03 and what kind of expansion plans you're contemplating in '04?

Well, you're right.

I think we'll probably in terms of what our '04 expectations are, I would like to leave that, quite honestly, to Monday.

I think Steve Pisarkiewicz, who was our new manager running that business for us will be making the presentation.

In '03, we saw a resumption of new business, new business development efforts.

Just got the numbers, I guess, last week and we achieved about 86% of our new business goals in '03, and I felt good about that because it got off to an extremely slow start.

You may recall first quarter everybody was sitting on their hands.

There was no one in the private client world that was going to make a decision one way or another and effectively going to the mattresses.

We see that as September rolled around, the third and into the fourth quarter we saw a resumption of people making new business decisions and in particular toward the latter part of the fourth quarter.

Clearly it was back end loaded.

The growth you saw in the revenue line, I think largely asset base level, asset price levels based and we'll see some new business kicking in.

We've got real winners on the asset management side.

I think our small cap product had some very nice wins that you'll be hearing about on Monday.

IBS (ph) head management, you can imagine, with the continued interest in hedge fund and the fund to funds product being very well received now institutionally, that was also a big focus of the growth that we saw in that line item in '03.

With the renewed interest, continued interest I should say, abroad, we would expect some good things coming out of that area also in '04.

I think you'll also, you've seen it make some good acquisitions in that space in very targeted product areas and we will continue to focus some acquisition attention there which Steve will comment on Monday.

Great.

I'll see you then.

Thank you.

Next question?

Tom McCrohan with KBW.

You may ask your question.

Hi, good morning.

Great quarter.

I had a couple quick questions.

The unrealized securities gains.

Can you reveal what they are?

They are about $170 million.

Okay.

Great.

I did point out that that was based on where the market was at 12/31.

As you've seen since then, the market has clearly rallied quite a bit, and so the securities gains which had been $220 million at September 30 were now back above that number based on where the market is today.

That moves around a fair amount.

Okay.

On the revenues side, it looked like on a combined basis, meaning (indiscernible) Pershing's security servicing fees, rose – accelerated this quarter, sequential goes like 4% in security servicing fees.

I think last quarter was 1%.

Can you give me some color on what's driving the acceleration and security servicing fee growth and if you think that growth rate is sustainable?

I think third quarter typically is a seasonably slow quarter and we saw that.

I think that sequential growth is actually a little better than that in the third quarter, I don't have the numbers right in front of me.

But, in the fourth quarter, there's a lot of portfolio rebalancing, there were some transitions, general activity levels on both the equity side and fixed income side were pretty good.

I think it was really broad-based.

Nothing really was standing out, driving that overall performance.

I do think we are overall heartened by the fact that the retail investor continues to come back to the marketplace so that really, Pershing is in a very good position relative to where we expected them to be at the end of the year.

And one question on capital management, you did a good job on obviously hitting the $9 billion reduction and reducing loan portfolio and this quarter you paid out of your net income 48% for dividends.

Given that you reached a target on reducing your lending portfolio which freed up capital going into this year, A, can we expect the dividend payout to be about 48% of this quarter's run rate and given that the loan portfolio is kind of, I believe where you want it, where is the incremental capital going to come from to possibly resume share buyback?

We'll cover that in pretty good detail, Tom, on Monday.

I think, as you've seen, we have not raised the dividend in some time as we have had to grow back, if you will, into the payout.

And so we will obviously keep our eye on our relative payout in terms of – as earnings grow and continue to grow we certainly are committed to a strong dividend and maintaining that within our targeted ranges.

Overall, the capital management will continue to have the dividend as the highest priority, and then we have a little bit of balance sheet growth as another aspect that goes into our capital management priorities.

Acquisitions probably is next and then the buyback is also something that when we achieve our capital ratios, we will certainly look to potentially add that back into the equation.

So, as I said, we'll give you more guidance on that on Monday.

Let me clarify one thing, in terms of dividends being our highest priority, certainly the highest priority in available cash flow.

In terms of using that, where I think we are going put our excess capital continues to be in reinvesting in our businesses where we can accelerate our growth which will be through acquisitions, through capital investment in our business, through acquisitions if they come about and otherwise in share buybacks.

I'm very aware of the tax efficiency that now exists with regard to dividends and well will certainly show you what our payout expectations are going forward but it's a balance here between making sure that we continue to feed the engine that will continue to grow EPS at levels that we anticipate and we expect everyone else to anticipate.

Great.

Thank you.

See you Monday.

Brian Harvey with Fox-Pitt Kelton.

You may ask your question.

Thank you.

Good morning.

Just had a couple of questions.

Bruce, can you just talk about the direction of net interest income or maybe the margin, you guys had a nice improvement this quarter, just trying to see directionally how we are moving from here and kind of the size of the balance sheet and the securities portfolio.

And then the second question, was just a follow-up to the previous question about the loan portfolio.

Have we hit a bottom here and are you comfortable where the credit metrics are and that we're likely see growth in the loan portfolio going forward from here?

Yes.

What was the first question again?

Related to directionally to net interest income.

I think, as I pointed out in the call text, I think we've certainly seen it stabilize in the middle of the year.

We started to see growth again this quarter and I think that's a trend that we can see continue.

We are cautiously optimistic there.

Some of the things that we were fighting headwinds earlier in the year have lessened to some degree.

We should see modest earning asset growth in both selective loan categories like Pershing margin loans, some of our financial institutions loans, a little bit our consumer and middle market portfolios, also a little bit more in investment securities portfolio growth, I think that will be modest.

But you will see a little more growth there.

I think that all bodes well for the impact on that.

As we move some assets out of liquid assets at Pershing into their margin loans or at the bank into investment securities, it has a positive impact on the spread, we haven't seen the level of prepayments that we saw earlier in the year which was putting some pressure on the spreads in our mortgage portfolio.

So I think, generally, we are pretty stable and have a cautiously optimistic outlook on the margin.

On the loan balances, the loan portfolio, we certainly have achieved our goals and it was just not only in absolute levels but in the granularity of the portfolio that I think is so critical to us in controlling our credit costs.

We would expect to see some growth in the loan portfolio, whatever the market will give us.

The market is still not very vibrant in terms of new opportunities, necessarily.

But again, we'll talk a little bit more in detail on this on Monday.

Thank you.

Operator, I think we have time for one more question before the hour.

Is there one more question, Tammy?

Yes, sir.

Kenneth Usdin with UBS.

You may ask your question.

Good morning.

One follow-up on the net interest margin on the securities portfolio.

I was just wondering you said the portfolios extend a little bit.

Can you just talk a little bit about the types of instruments that you are buying now, how they are kind of impacted by the current rate environment and kind of the relative yields to the portfolio you are putting them on at?

I'd say what we are putting on is roughly equivalent to what is prepaying at this point.

That had been a negative equation earlier in the year.

We are focused, really, on things like three one arms and very short front ends of CMO structures.

We are very cognizant that we don't want to be caught flat-footed when rates turn around and go up and suffer the extension risks.

I think we've been cautious but so far it has worked out reasonably well for us.

Thanks a lot.

Thank you, Ken.

And I think that concludes our fourth quarter earnings call.

It's about 10:00.

We appreciate everybody joining us this morning.

If you've got any further questions that come up after we conclude, please contact John Roy again who, as everyone knows, heads our Investor Relations area.

Thank you for your interest in us and hopefully see you, most if not all of you on Monday.

Have a good day.