紐約梅隆銀行 (BK) 2005 Q2 法說會逐字稿

Welcome to The Bank of New York second quarter 2005 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 expressed 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 touch-tone phone at any time during the presentation.

Now, Joe Murphy, head of Investor Relations for The Bank of New York Company, Inc..

Good morning everyone and thanks for joining The Bank of New York's second 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 2004 10-K and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, July 20, 2005.

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

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

Thank you, Joe.

And with me this morning is Bruce Van Saun our Chief Financial Officer.

As all of you saw from our release earlier this morning, we achieved solid results this quarter.

We generated meaningful positive operating leverage which I think all of you know is a primary objective if not the primary objective that we have.

We achieved it through continued top-line growth, focus on head count, and enhanced productivity.

So with that, let me cover some of our highlights.

As it relates to net interest income it grew by 12%.

I feel very good about that versus the second quarter of '04, 3% sequentially.

We continue to benefit from properly positioning our balance sheet for the rising rate environment that we're in, and we are capitalizing on the strong liquidity that is consistently being generated by our core servicing activities.

Securities servicing fees were up 8% versus a year ago, 3% sequentially.

Lets look at the different buckets that gave us this growth.

On the issue of services side we generated very solid quarterly growth, primarily from the seasonal increase in DR dividend activity but also growth in our corporate trust fees.

Investors services showed robust year-over-year growth once again and here primarily driven by new business wins.

Broker dealer services which has been a consistently strong performer continued to do so, and in that area collateral management continues to be adopted even more broadly by more customers and those customers that are using it are utilizing it even more.

On the execution and clearing side, Pershing, as you know, has been focused on the growth of value-added fee-based businesses, and the success of this strategy is becoming more apparent as it is offsetting any pressures we've got on the commission side, but we're also being supported by a nice pickup in the transition management activity.

So overall, offsetting the impact of lower equity trading volumes during the quarter.

Some other notable areas that I want to highlight, foreign exchange and other trading, their revenues increased to near record levels driven by strong customer flows as well as a trending currency market.

By decline services asset management increased 8% year-over-year, again the stand-out continuing to be Ivy Asset Management our hedge funds to funds manager.

Credit performance remained excellent and again better than we thought that we would be able to achieve earlier this year.

And, lastly, we're winning the battle in the trenches, continuing to bring in significant new business in a very competitive environment.

I think one of the good best evidences of this fact can be seen in investor services where during the quarter we added $365 billion in assets from new and existing clients.

Asia, though I want to highlight a bit as well, Asia I think this quarter offers some interesting examples of some business wins which I believe will be a harbinger of good things to come in the future.

In Korea, for example, we're seeing significant developments that really play to our strengths.

We received this quarter a mandate from the Korea Securities Depository for both -- for securities lending and that gives evidence, I think, to the evolution of that market with regard to pension and asset management.

Now, as many of you know, we've been in Seoul for quite some time with a full branch and we have recently recruited a new manager with experience in asset management servicing and I think it is coming together very, very nicely.

We're making progress in penetrating the China marketplace as well, and latest mandate there was from ICBC, or Industrial and Commercial Bank of China, the largest commercial bank in China which awarded us custody and securities lending business.

Here I think it is important to note that a driver of our growth in China, and our future growth is really comes from a historically solid position that we've had in this market.

We've been in the market a long time with both branches, a branch in Shanghai as well as a rep office in Beijing.

We have got strong, longstanding client relationships there principally amongst the banks and government agencies, that gives us great credibility and a basis for substantive discussions on their capital markets and asset -- as their capital markets and asset management sectors emerge.

We have seen this in the DR business, we continue to see it in the DR business and increasingly more even in asset servicing.

But in addition to those wins in Asia, another important mandate in the second quarter were the 13 UK building societies that selected us as global custodian as well as issuing and paying agent on their issuances.

This win reflects our principle role in the -- supporting the infrastructure of the UK financial markets where we continue to have a dominant share.

Now, our increase investment in service quality, I think, is also being recognized as seen by these business wins and it is clearly an independent validation of the superior job that we do.

We won a variety of awards in the quarter, in custody, tri-party, transition management, global trade, I think this recognition in and of itself is the mark of any successful franchise including our own and it really supports our sales efforts.

Again, driving future revenue flow.

We've also taken this past quarter, and announced a number of steps to lay the groundwork for future growth by partnering with local providers in certain select markets.

As I think you know, we've had a pretty good history here, particular in Ireland as well as in Europe in the Benelux, and joint ventures can be a very effective way to extend market leadership into markets that might be smaller but still quite lucrative.

I think an example of that is in Australia, where we entered into a corporate trust joint venture with The Trust Company of Australia.

Joint ventures though can be also very effective in helping us enter into large markets such as Germany which demands a local perspective, a local presence.

I think the most efficient way here has been through this partnership that we announced with BHF to provide global custody and depo bank services.

But another new business partnership we announced in the quarter is in Japan where we extended our longstanding commercial relationship with Mizuho Trust to target corporate pension funds, Ivy -- leverage Ivy's products and distribute our own proprietary mutual funds.

But, of course, we also continue to make acquisitions that enhance our strategic positioning.

And on July 1, we announced the acquisition of Lynch, Jones and Ryan, LJR, is a market leader in commission recapture.

Again broadens our value added services in our brokerage area.

But more importantly it gives us 1400 pension fund clients which offers a natural cross-sell ability in particular for our transition management services.

So all in all, we achieved, I believe, a strong, well-balanced performance this quarter.

We have got some notable business wins and the continued deployment of a strategic partnerships laying the groundwork for future and further revenue momentum.

As I said at the beginning of our call this morning, positive operating leverage is a primary goal.

I'm pleased we achieved it through both broad-based revenue growth and as well carefully managing our costs.

Simply said, we're following through on what we said we would do for 2005 and now I'd like to turn it over to Bruce to comment on how we're doing what we said we would do.

Bruce?

Thanks, Tom.

It was a solid quarter with both top-line growth and good expense management.

There are four main areas related to our performance that I want to touch upon.

Operating leverage, expense management, capital management, and our outlook for the second half of '05.

First off, as Tom indicated, positive operating leverage is something that we're very focused on achieving on an annual basis and we achieved it this quarter.

Revenues were strong across the board with total sequential quarter growth of 5.7%.

Expenses were well-controlled growing by 4.3% for positive operating leverage of about 1.4%.

There were some favorable items this quarter on the revenue front which balanced some expense items that we absorbed.

If we back both sides out of the sequential quarter comparison it would actually improve the operating leverage calculation by 20 basis points.

Let me elaborate.

On the revenue front we achieved securities gains of 23 million, largely all in our sponsor equity portfolio, with year to date now at 35 million.

You may recall that our January guidance anticipated 25 to 30 million for the full year, roughly a 10% return on investment.

Given strong returns in private equity this year, results are clearly higher.

However, we still believe that 6 to 10 million per quarter on average is a more sustainable range.

In addition, we sold a 20% stake we held in Financial Models Company, a Toronto based software developer whose products we utilize.

This generated a gain of 17 million which increased other income above trend levels.

You may recall, though, that other income was light in the first quarter as some of the transaction-based revenue and other income can be lumpy.

Offsetting the favorable developments were several high or non-recurring costs absorbed in the quarter.

We had a sequential increase in severance of 5 million associated with moving staff to low-cost locations.

We had lease-hold and software write-offs of 5 million combined and legal and regulatory reserves of 12 million.

These three items totaled 22 million.

We are making progress on several previously-disclosed legal and regulatory matters which is why it was appropriate to take the reserves.

Though as I said the positive operating leverage for the quarter was driven by our strong business performance and it improves upon closer inspection.

Next I'd like to focus on the expense front where we are continuing to carefully manage our costs, demonstrating the same tight expense control that we are known for.

During the quarter we further reduced head count through our successful re-engineering initiatives.

That decreased by 167 people or 1% over the quarter, even with strong new business momentum and the expansion of staff in key sales area and support functions.

We also began the migration of 220 positions to lower-cost locations during the quarter, keeping us on target to meet our annual objective of 500 positions.

Our project management office also has launched additional projects intended to further drive efficiency.

With regard to capital management we continue to generate a significant amount of free cash flow, which we use to support our core activities and where possible return any excess to our shareholders.

During the quarter we purchased 7.7 million shares and last week we announced a new buy-back program of 20 million shares and we increased the dividend by 5%.

We were negatively impacted by an elevated balance sheet at quarter end due to heightened market liquidity which cost us about 25 basis points on the TCE ratio.

However, there was limited acquisition activity during the quarter as LJR closed on July 1.

Buyback activity during the remainder of the year will depend on a variety of factors, including acquisitions and other balance sheet demands.

And, lastly, looking ahead, we are pleased about our prospects for the second half of the year.

But as I'm sure you've come to recognize, there's a distinct seasonality to our business.

The third quarter is generally lower as market volumes lighten considerably between second quarter earnings season and Labor Day and our fourth quarter tends to be much stronger.

The special items I highlighted for the second quarter on both the revenue and expense side should return closer to trend levels for the third quarter.

And that would cost us more or less a penny of EPS net.

On the positive side, we expect continued growth in net interest income as well as continued good performance on credit costs and progress on managing our expense base.

In addition, we will have a full quarter benefit of the LJR acquisition which should contribute roughly 15 million to third quarter revenue and a modest earnings contribution as we work through the integration process.

Although it is early with some of the growth initiatives that Tom mentioned earlier, and generally strong seasonality in the fourth quarter, our current outlook for the last quarter is quite positive.

With that, let me turn it over to Tom for some additional comments.

Okay.

Well, thank you Bruce.

So overall our solid performance this quarter is something that we are quite pleased about, but that's not to say that we're satisfied at all.

And I believe it is only begins to reflect the full potential of our franchise.

While we took advantage of what the markets offer this past quarter we're certainly not waiting around.

Our focus is, and will continue to be, on creating our own revenue growth beyond what we get from the market.

We're doing that today.

We're capturing more than our share of new business, market share gains add to our momentum.

We're creating revenue opportunities by making gains in service quality, we're being recognized as the quality provider that we are, and that helps us to win new clients and achieve better cross-selling results.

There are even more opportunities for improvement.

New markets, new products.

We re-create our business model each and every day.

Now, there is still plenty of work to be done to ensure that our financial performance for the remainder of '05 is as strong as it can be, but it is not too soon to be concentrating on maximizing our opportunities for '06 and beyond.

We're looking very closely at additional actions that we can take above and beyond our existing programs that we outlined in '05 and are executing on.

These actions will enhance our ability to generate revenue growth, they'll enhance the inherent operating leverage of our business model as we saw today, and sharpen our focus.

While it is a little too early to highlight specific opportunities, this is an essential priority for us and we're going to keep you apprised of our progress as the months ensue.

In the meantime, we remain focused on what we can control.

And that is gaining market share by generating new business, maintaining the business we've got, while also operating at maximum efficiency.

Those are the keys to achieving the operating leverage that is so positive and that is sustainable on an annual basis year in and year out.

With that, let me ask the operator to open the call now for questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Brian Harvey with Fox-Pitt Kelton.

You may ask your question.

Thank you, good morning.

Just had a couple of questions, first, Bruce, maybe can you comment about the size of the balance sheet.

We saw a pretty nice growth in the securities portfolio this quarter.

Just trying to get a better sense of how you're trying to position the balance sheet and some of the actions you took this quarter.

Yes, I think, Brian, that the spot balance sheet was up quite a bit and that really reflects some end of quarter blip in terms of liquidity.

Average balance sheet was up modestly, we continue to see strong inflows into deposits and securities servicing.

We've deployed that kind of across liquidity, investment securities, and loans.

In the investment securities portfolio we're staying very short.

We have a duration of about 1.7 years.

We're buying more floating-rate paper and continue to buy the short paper.

As you know, there is not much steepness in the yield curve at this point so we think that's the best place to stay invested.

We do remain slightly asset-sensitive, and so we feel good about how we're positioned going forward.

Okay.

Just in terms of -- have you changed any positioning or anything else related to just the flattening curve or sort of the outlook?

You've been showing some pretty nice improvement in the margin.

There was a little bit of diminution this quarter.

Yes, it is pretty flat, I would say, Brian.

I don't think there is any real substantive change.

I think one of the things that we benefited from as rates were going up was clearly our ability to lag the repricing on deposits.

A lot of that's baked into the run rate and I don't think we'll be able to get the same lag going forward.

That's one of the reasons that I think the asset sensitivity is less than it was 6 months ago or 12 months ago.

Okay.

Great.

Certainly I think, just to add, Brian, I think the liquidity, the end of period balance sheet also reflects just the strong liquidity that is being generated by the core businesses really across the board.

Okay.

Thank you.

Andy Collins with Piper Jaffray, you may ask your question.

Good morning.

I think I'm going to ask the age-old question about the retail branch network.

We've seen some deals recently in the market that have brought some fairly healthy premiums.

I was just wondering, the way I do the math, it certainly would look to be close to accretive.

And you've always said if it is right for shareholders you would do the right thing.

I'm just wondering what your thoughts are now on the retail branch network.

Well, as it relates to our strategy overall, Andy, it has not changed.

I certainly stand by the comments I've made in the past.

Retail clearly in this environment continues to be a pretty good, in fact, a solid performer.

We've talked about the liquidity that it does generate, the very attractive pricing and in a rising rate environment it has done very well.

The returns are attractive.

It is a very stable client base.

But having said that, of course, each and every business that we've got must meet our objectives with regard to profitability, the returns on that business, and I have to stress that it is every business, not just simply retail.

So I really can't speculate at all with regard to any future decisions we make on it.

Retail or any businesses.

But we certainly stand by the comments that I've made in the past.

Okay.

What about securities lending?

Just wondering, what the numbers were within the specific line of business and what was going to be offsetting weakness, if there was some linked quarter from first quarter to second quarter.

Andy, the securities lending business performed quite well during the quarter on a sequential basis.

It really came from two aspects.

One is we had some spread widening.

There was active interest in treasury collateral.

We have a big fixed-income lending orientation to our program.

So that was helpful.

The other encouraging development, though, in sec lending is that the -- we won a lot of new business and so the size of the book continues to expand.

If you look at the sequential numbers in investor services, it was up modestly.

I would say the offset to the strong performance in sec lending was largely in global custody where we had a little bit of a lull in European transaction activity.

We still feel good about the investor services pipeline, and the new business we're putting on the books, so I would ascribe it more just to market conditions.

Okay.

So how much of the first to second quarter increase was the seasonal pickup and how much do you think was due to the new business wins and kind of based on that what might be your outlook for that area going forward?

I think it's difficult to categorize it the seasonal versus new business.

I think, if you look at that business on a year to date basis, it is up 16%.

We've had strong growth there and I think we continue to feel good about how that business is positioned.

I would say, Andy, that we continue to look at certainly the investor's services sector as being a -- very much of a double-digit grower year-over-year.

I think the sequential changes that you noted, again, business -- business activity in Europe, took a slight dip.

Certainly it did not accelerate as much as it did in the first quarter, but also conversion of new business wins took a little bit of a lull in the second quarter versus the first quarter, but it's lumpy, and we've, as Bruce indicated, we've got a good pipeline of new business and I expect it to continue through the rest of the year.

Great, thanks.

Congratulations on a solid quarter.

Ken Usdin with Banc of America Securities, you may ask your question.

A couple of quick questions, first of all on the expense side, if you exclude the legal charge, the other expense line was still up sequentially a good 9 or 10 million.

Can you give us any more color on that -- I'll start there.

Okay.

I'd say it's really two-fold beyond the legal expenses.

One is T&E, which tends to be seasonal.

Second quarter and fourth quarter tend to be relatively higher based on going after the new business.

I'm not sure exactly why, but that tends to be kind of historically the bigger quarters for T&E.

And then also the just general higher business levels drives some other expenses that are tied to the revenues.

So that would be the two main reasons there.

And, secondly, on expenses, can you give us the update on what you're expecting for the higher incremental data center costs in the second half that you had talked about earlier in the year?

Yes, I think we said overall that $26 million was going to to be the full impact which would be about a $0.02 cost incrementally.

We've probably absorbed 7 or 8 million of that already in the first half.

That would leave 18 or 19 million for the second half which is incremental 11 or 12 million.

That would step up potentially ratably over the quarters.

So it's not that significant in the scheme of things.

I think it is manageable.

We've been absorbing it.

It will increase expenses a little bit in occupancy, communications, some categories like that, in the third quarter and the fourth quarter, but I think it is eminently manageable.

It's certainly, I guess, really on budget on time in terms of the project and how we're accommodating and absorbing it through the P&L.

Okay.

Great.

My second question was just on the foreign exchange line.

Can you just give us a big -- little bit of a split between where the FX or the derivatives business that led that growth?

Foreign exchange was very strong, and I think we certainly continue to put a lot of new business on the books, so that's the underpinning.

Also, in spite of the fact that the intraday volatility was down a little bit we were in a trending market.

There is the European dividend season that creates more flows and so generally, foreign exchange was the leader there.

Interest rate derivatives continues to see good customer flow.

The one spot that was a little weak was in the Pershing area where the retail investor flow was a little off, but when you look at the big picture it was our second strongest quarter in history and it was really led by foreign exchange.

Okay.

Great.

Last thing, Bruce, was just on the execution business which you mentioned is still down due to revenues.

What's the outlook for that business in the broader context of the execution and clearing picture overall?

Maybe, Ken, I can take that.

I think that the execution business continues to follow its strategy of being more and more value-added to its clients through offering the -- a complete and thorough variety of ways and means in which our clients can trade through us.

I think LJR is is the latest addition to that.

We are -- the basic strategy is to make us as attractive as we possibly can for trading.

No question that the underlying market is a weaker one but we're attacking that through providing value-added services to include research, investment research, and that is our goal.

So with that in mind, and, of course, I cannot talk about it unless I also say that we are watching the expense base, and we are monitoring that and making sure that our expenses are in line with the revenue flow that we do see.

But that has been very much our approach overall, Ken.

Okay.

Thanks very much.

Operator may I have the next question.

Brian Bedell with Merrill Lynch, you may ask your question.

Bruce, can you elaborate a little bit more on your statement about, I think you said a penny in the third quarter of lower seasonal activity.

Were you including basically all types of securities lending, trading volumes, all of that net of expenses in that?

No, actually I was -- my comments were much more pointed than that, Brian.

What I was referring to was some of the items that occurred that drove up securities gains and other operating income in the second quarter and then also some of the expense items that we absorbed in the quarter, such as the legal reserves and some of those write-offs in severance.

So if you net those out, and assume that those revenue categories and expense categories move back more towards trend levels, that's more or less a penny, a little less than a penny.

Right.

So that's what I was referring to specifically there.

Beyond that, we were just commenting, as well, that market activity levels generally between now at the end of second-quarter earnings season and Labor Day, tend to be soft, which can affect the revenue outlook for the third quarter.

Right.

You can just go back and look historically and you can see that pattern.

The good news is that offsetting that, if you look at the whole second half of the year, we tend to have a nice pop.

So October to December tends to be a very active period in the markets and that gives us confidence in the overall second-half outlook.

Right.

And then just in three specific areas, ADRs, and in the transition management activity, can you just comment on those two areas as they relate to the second-quarter activity?

So in other words, DRs clearly flipped back in the third quarter somewhat, I guess if you can give some color on what you think the seasonal reversion will be relative to your general progress in ADRs, and I think, Tom, you talked about a lot of activity in China.

Yes.

Well, generally we certainly will not see the dividend activity in the third quarter.

But the underlying activity of trading in DRs we think will continue to be quite good.

Certainly that -- even the trading side is subject to some seasonality, but nonetheless the underlying activity of DR trading is quite good.

And we see that -- a continuation of that trend through the rest of this year, and then again in the fourth quarter we'll again be benefited by the seasonal dividend activity.

Andy -- Brian, in the -- underlying what Tom said, the net issuance and cancellations continues to be strong.

So we tend to see more DRs being created which bodes well for future revenue streams, and also there is more use of the DRs for raising capital than we've seen in a while, so that also bodes well for future revenue streams.

So we like the foundation of that business, but the one thing in the third quarter is there will be fewer kind of dividend-related processing revenues, but that, I think, rests on a firm foundation, nonetheless.

Right.

And then in the transition management activity, you said that picked up in the second quarter.

Do you expect that to revert back?

I mean it sounds like you will be able to potentially get some cross sell through the LJR relationships but that probably will take some time?

That's right.

It will take a little bit of time.

But -- the transition management business can be a bit lumpy.

We saw that -- we saw not a lot of strength in our shop in the first quarter, but some very nice ones in the second.

We've got some in the pipeline today that we're working on in the third quarter, so I -- our intention here is to broaden our marketing effort of our transition management services.

I think LJR clearly will broaden the universe.

Is going to broaden the universe and we're going to see if we can't make that a much more consistent part of our revenue flow.

All right.

Great.

Then just one last one on the investor services, the 365 billion, these are assets that you converted during the quarter or mandates that you've won?

Some were mandates and some were existing -- growth in existing clients.

And so it is a combination of both.

We had some very nice new business wins as well that part of that 365.

The 365 is embedded in your custody number as of the end of 2Q, right?

That's right.

So it's a part of that 10.3 tril.

Right.

And then just for the Nation's Fund contract does that come out in the third quarter?

It will come out through the course of the year, kind of on a glide path for the rest of the year.

We estimate that it will probably be maybe about a $5 million reduction in revenues through the course of the year which we're absorbing and within our run rates.

Great.

Thanks very much.

Thank you Brian, may I have the next question operator.

Tom McCrohan, with Janney Montgomery Scott, you may ask your question.

Just quick question on operating leverage.

Do you manage operating leverage going forward on a sequential basis, year-over-year, this quarter you talked about sequential operating leverage being positive.

So what's the philosophy internally as far how you manage operating leverage?

Well, I think one of the reasons we point to sequential right now is that really is best evidence of the momentum in the business and what you're achieving.

The year-over-year numbers, as you're aware, Tom, have some of the distortions from the higher pension expense and option expense but they're, at this point that's in our run rate so the pension -- higher pension expenses in the run rate with the expensing of the last option grant, as we phase in option expensing we're now fully phased in and that's fully in the run rate.

So I think the year-over-year comparisons will also start to become more valid as we bake some of those top of of the house items into our run rate.

All right.

Great.

On the credit side, can you just give us an update on where in your portfolio you're seeing improvements in credit quality of certain, particular industries that are improving, the credit division certainly continues to be the run rate well below the guidance you provided in January.

So any color on that would be great.

Well, Tom, I think the -- at this stage of the cycle there really is no one particular area that's been showing any signs of significant improvement.

I think they're all in extraordinarily good shape.

Last quarter we had a reversal of provision, had a debit to the provision, and that was due to certain names that really turned around, and we were able to generate some nice recoveries.

Second quarter we had some, but not as much, and I see us kind of continuing on in this range.

I don't see any kind of blip upward here.

I think we're on a nice glide path here at this level.

Certainly there is some strains in the automotive sector, but as we have indicated in the past we've conscientiously over the course of the last several years reduced our exposures there, made it much more granular.

The decline in our commitments overall included the automotive sector so here again we feel pretty comfortable how we're positioned there as well.

Great.

Thank you.

Next question please.

[OPERATOR INSTRUCTIONS] Our next question comes from Betsy Graseck with Morgan Stanley.

Good morning, thanks.

Couple of quick questions.

One on the pipeline in investor services you had mentioned that your pipeline looked strong.

Could you just give us a sense as to how you feel it is relative to the pipeline that you've had over the past couple of quarters, just so we understand growth rate trends here.

Sure.

Betsy, I think the pipeline is as good as it's been.

I continue to feel quite good about it.

In particular Europe, interestingly we've not had any major outsourcing -- so-called outsourcing wins over the last three months or so.

On the other hand, part of that $365 billion is coming there, so it's been really much in the European custody and some of the what I call the nickels and dimes which are very, very good for us.

That's not to say that we won't have some outsourcing wins in the coming quarters, because we've got some in the pipeline there as well.

But essentially it's been European custody, it's been our hedge fund administration has done quite well.

We have got a great pipeline in our hedge fund servicing businesses.

And then, again, securities lending has been a strong point for us.

In this particular case I think success breeds success and we've been able to show and demonstrate some very nice performance and therefore the wins are coming.

Okay.

And then on the outsourcing side of your business, I would think that you're in the process of trying to migrate the current client set onto your platform?

That's right.

Could you just give us a sense as to the timeline that you have in your mind for integrating all of your current clients on to your platform?

Well, I think the one that's really in the midst right now is RCM, and that's going to continue through the rest of this year.

We're going to begin -- the third quarter will be, I think, a busy one there.

Third and fourth quarters.

And then we should be pretty well done.

But then again, as I said just a second ago, we've got some -- we've got some new ones in a separately managed account world, as well, and then some of the more what I would -- I don't know if you call it traditional, but certainly a traditional custody mid-office global custody outsourcing, that's also we hope to announce some things there in the next quarter.

On the execution business, is there anything that you're doing on the investment side given that the NYSC is going to be obviously changing its corporate orientation and that we're likely to see a lot more in the way of ECN-type of activity, in NYC traded names I would expect over the course of the next couple of years here.

Can you give us a sense as to whether or not you feel you're fully prepared for that at this stage or if you have some incremental investment spending that you're doing to ramp your capabilities?

Well, Betsy, the Sonic acquisition that we made a year or so ago, I think has given us a very, very competitive platform in the ECN world and we've seen that, we've seen that in the new business wins and people migrating to our system, utilizing the Sonic platform.

So I believe we do have a competitive system there.

There is no question though that is where the market is moving to.

And I think you can see us be -- attempt to be active in that marketplace and expanding our servicing capabilities there.

A major investment?

No.

I don't see the need to do anything like another Sonic.

On the other hand, we'll be investing in a product line because that is where the market is going.

Lastly you talked about the data center and the incremental expenses that you'll be having -- you'll be seeing coming on over the course of the rest of this year.

Could you just remind us about the benefit from the data center decommissioning that you will be having in '06, I would expect? .

Yes, Betsy.

As I said, there is probably $0.02 cents of a drag this year in terms of those higher costs, $26 million that we absorbed this year, but then we gain that back as we decommission.

We will be commissioning a couple of data center centers, once we're complete with this new out of region data center in the fourth quarter, that will take place over the first half of next year.

We will get probably a penny of that back in '06 and then the run rate benefit of another penny in '07.

So effectively this is really a timing issue, and we'll benefit in both '06 and in '07.

Okay.

Thanks.

Thank you, Betsy.

Another question, please?

Steve Kapske with Smith Barney, you may ask your question.

Hi, it's Ruchi Madan.

I also have a question about your second half guidance.

So tell me if we're thinking about this properly.

The special items are less than a penny, and so what you're saying is the seasonality could shave a couple of pennies and then that gets partly offset by gross and other fees and net interest income.

Is that a fair way to think about third--?

Well, Ruchi, one, we don't give guidance.

We give it once a year.

And I think Bruce explained well that there is a -- some seasonality to the business.

We're kind of reminding people that that is the case.

But that seasonality, as well, holds true in the fourth quarter.

So overall we feel comfortable and very good about where we are for the second half.

I think it's also important to note, though, Ruchi, take a look at what we did last year in terms of the seasonality and also I don't want anyone to forget to look at what the year-over-year gains have been, and I think we're still very comfortable with that year-over-year progress that we've been making.

Okay.

And then also on net interest income, would it be -- should we not expect such a large increase going forward?

Well, I think some of that is dependent on the balance sheet growth.

We did see some nice growth from the balance sheet and so of that 15 million sequential increase this quarter, a good part of that was from just the growth in earning assets and we also had a positive day variance which helped a little bit as well.

So that's a little harder to project, but generally the way our businesses are positioned, we should continue to see some nice liquidity coming from those businesses.

Okay.

And then as we think about operating leverage, because of seasonality, it seems like we shouldn't really expect it in the third quarter, but then based on your comments we should expect it in the fourth quarter?

Well, again, we don't want to give guidance, and that's kind of in an indirect way offering guidance, but I can say that we continue to have operating -- operating leverage is a primary objective and we're focusing in on an annual basis where we see strength in both -- in our top line.

Certainly, Ruchi, it makes it a lot easier to generate operating leverage in a stronger top-line environment.

Having said that, we're focusing on managing our costs throughout the cycle and we will not wait for the market to simply give us growth.

Okay.

And then lastly, Tom, you mentioned a few things about '06 in terms of revenue and expense initiatives.

Any initial thoughts about what a reasonable level of operating leverage should be?

I think it's still premature.

We're going through -- we've got an annual planning cycle here.

We're well in the midst of that.

We are reviewing every single business that we've got to be able to support that objective of consistent operating leverage.

We're looking at it in terms of the underlying potential revenue growth, what is our ability to control our expenses, the necessary investment level we've got to make.

The result in profitability.

You know our goals, our corporate goals, and we're reviewing every single business in that light.

Once we get a little bit more color and a little more firmness to that, we will be in touch with all of you.

Okay.

Thanks.

Thank you.

Last question?

I think we've got time for one more question.

Any more questions, operator.

Robert Lee with KBW, you may ask your question.

Quick question just on the hedge fund admin business.

Some of the prime brokers seem to be edging their way into the administrative businesses as well.

Just can you give us your thoughts on how that may be shifting the competitive environment and if you think that to sustain the growth in that business it may become necessary to provide a financing to a more -- more of your clients?

Well, Rob, I'd say that the large prime brokers are still not really focused as much in the administration and servicing side.

I think those that you may be seeing are doing it on maybe somewhat a defensive basis, but I do not see a proactive effort by the prime brokers to do so.

Their primary function is in the financing side and taking on that kind of risk.

That is where they make their money, that's where they get their flow, and I think that's their focus.

We continue to be very strong in that middle level area and also to be able to identify with certain hedge funds that are growing, growing well, growing rapidly.

That is really the strategy, the tactics, that we're using within our strategy for the asset servicing of hedge fund administration.

I have to say, though, that we are looking at our ability to expand our product offering there, not to necessarily compete against the major prime brokers, but I think that there is some room, there is some space for us to be able to expand our revenue flow coming out of asset servicing.

Great.

Thank you very much.

Okay, Rob.

Thanks, very much, for your attention here.

That concludes our second quarter earnings call.

We certainly appreciate all of you joining, and encourage you, of course, to contact Joe Murphy in Investor Relations with any further questions you have.

Again, thank you for your interest, and have a good day.

Thank you.

That does conclude today's conference.

You may disconnect at this time.