紐約梅隆銀行 (BK) 2005 Q3 法說會逐字稿

Welcome to The Bank of New York's third 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 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 touch-tone phone at any time during the presentation.

Now Joe Murphy, Head of investor relations for The Bank of New York Company, Inc.

Morning, everyone, and thanks for joining 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 2004 10-K and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, October 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 would like to turn the call over to Tom Renyi, Chairman and CEO of The Bank of New York Company.

Thank you, Joe.

With me is Bruce Van Saun, our Chief Financial Officer.

As you might expect and could expect looking at the numbers early this morning, I'm quite pleased with the strength of our earnings.

I think it reflects a lot of hard work and a lot of progress towards our key objectives, those being creating positive operating leverage on an annual basis and growing the top-line beyond what simply the market would give us.

This factor is the result, I think, of a lot of efforts and investments that we've made in a number of the areas around the Company, quality of our services that are reflected, I think, in the client retention level of client retention and the new business wins is quite high and growing.

Our success in bringing new products on stream and the attendant revenue flow is also evident.

And lastly, the strategic steps that we've been taking in the form of acquisitions and alliances are also kicking in.

All of these initiatives are supported by, I think, an effective, aggressive and well coordinated sales and marketing effort institutionally.

We've achieved solid performance across the board and it was especially satisfying to me that it was coming in what is clearly or seasonally our slowest period for a number of our business lines.

Additionally, I think you'll see that the favorable sequential comparisons were also quite good, especially given the fact that the second quarter was a strong one.

So what is, I think, also comforting to see, beyond our individual performance, is that there is some good momentum in the markets generally.

Good evidence of that from our own shop, I think, is in our depository receipt business.

The increased revenue in the DR business this quarter reflects increased corporate action activity.

That includes dividends, it includes capital raisings, M&A.

As you will undoubtedly recall, we have been talking about how the DR business has been a pretty good -- has shown some pretty good strength over the course of the last several quarters, but we didn't see the corporate actions kicking in.

Well, we are seeing a bit of that.

That was nice to see in the third quarter here.

I've also got to say that DR issuance was also quite good and I point that out because it does reflect what we see as a continued interest, growing interest in U.S. investors -- by U.S. investors in global equities.

We've seen that generally speaking to the investment community, that there is a -- their expectations are for greater growth in offshore equities versus U.S. and that certainly has and will continue to help the DR instrument.

So when you have issuance that's so much stronger than cancellation, it bodes, I think, well for the overall health of that business.

Now, while I'm happy to talk about the quarter's top-line growth, expense management remains the key to achieving positive operating leverage.

We're engaged in an ongoing process of what I would describe as thoughtful re-engineering of how we do things.

It's what we can control and I think the results show it.

The staff moves, the re-engineering of where we have our work force to areas such as Syracuse in New York, Manchester in the UK, and other low cost regions around the world, are proving to be rewarding, as rewarding as we had projected.

We're moving people, we're hiring people, and we're hiring them at rates that we had anticipated in our forecast.

I think another element is our data center re-configuration that I want to point out.

I think many of you know that the new out of region data center has required a significant one-time investment.

That new data center is in fact already operational and will be fully phased in, though, by the end of the year.

We are effectively absorbing that cost into our run rate and, again, we are moving ahead.

You also probably saw that our results included an additional reserve that we took that was associated with the anticipated settlement of the Russian funds transfer matter that we have disclosed previously in our Q's.

We are satisfied with the progress that we're making on that front, as well as all of our regulatory issues.

So with that overview, let me comment a little bit on some of the important metrics of the performance that I would like you to focus on.

Security servicing fees were up 18% year-over-year, sequentially up 4%.

Net interest income was up 15% year-over-year.

And we continue to benefit there from the higher value of interest-free deposits on our retail area, as well as the lower cost rates that we have on all the deposits that we're getting from our security servicing businesses.

So as the short-term rates increase, we continue to benefit.

But I must say as well, we certainly have seen a continued strength in the liquidity that is coming from our core asset servicing businesses.

Let's look a little bit, then -- let's drill down a little bit in the business lines that gave us this growth.

On the issuer services side, we were up sequentially and with strong year-over-year as well.

Two main drivers in the issuer services side was our DRs, which I've talked about, and the second one, solid growth year-over-year in our structured and global corporate trust products, again, reflecting, I think, some robustness in course in the Capital Markets and again, globally.

On the investor services front, we showed a strong year-over-year growth there with assets on the custody rising by 16%.

The majority of that growth was generated by net new business, with the biggest growth, again, coming from Europe.

Again, a source of strength for us historically.

Broker dealer services remain solid, paced by broader adoption and greater use of the collateral management product around, again, around the world.

Execution and clearing showed good year-over-year growth there as well.

I think that in large part shows the benefits of LJR, which we acquired a quarter ago.

That acquisition, the integration is on time, on target.

We're certainly pleased with the early cross-sell results, which was one of the major achievements that we wanted to make through LJR.

We've got some solid growth, organic growth at Pershing during the quarter and transition management activity also was rising sequentially.

That, as we said earlier, can be somewhat lumpy, but in this particular case in the last couple of quarters, we've seen some -- we've seen some stability there.

Other highlights, beyond the security servicing business, though, is a significant jump in foreign exchange in other trading, air revenues increased 39% against the year ago quarter.

We saw very strong FX customer flows, again, I think reflective of the overall increase in activity and certainly a little bit of a better trading environment for our institutional derivatives business.

On the private client side, asset management side, we were up 6% year-over-year and that reflects strong performance fees at Ivy Asset Management.

Lastly, credit performance remains stable, both stable in trend and in absolute terms is quite excellent.

I would have to characterize these results as strong overall, but the keys being our dual focus on generating new business momentum while managing our cost base.

But equally important to me, though, is that we continue to lay the foundation for growth in '06 by pursuing opportunities in faster growing markets around the world.

Most substantial near-term opportunity still is in Europe and the continent in particular.

Here our approach has been to align ourselves with established local players.

Some examples, of course, are ING in the Netherlands, VHF in Germany, Mid-Texas in France, and Nordea is our newest partner in this particular initiative.

They cover the Nordic and Baltic regions.

And here again, another European market that we've targeted for growth.

With Nordea up, we are jointly marketing and delivering custody and related services to their institutional clients.

The way we see it, partnering at this juncture is the fastest way for us to gain traction in these markets.

We gained, in case of Nordea, a 240 billion Euros in assets immediately.

So in fact, that deal is profitable from day one.

The alliance route is an approach that we're taking in other areas as well, though.

We announced a new marketing alliance with National Australia Bank that enables LJR to offer commission recapture to NAB's custody clients in Australia and in New Zealand.

That happens to represent just simply the latest step in our buildout of our transition management and commission recapture business.

Here at home, we formed an alliance with New York Life.

That particular transaction brings together our trust, custody and risk services and New York Life's capabilities and plan management, again, offering bundled pension plan services to our sponsor clients.

And finally, you saw this week we signed a definitive agreement to acquire an 80% ownership interest in Alcentra Limited, which is a UK-based asset manager.

Alcentra specializes in sub-investment grade debt fund management and structured credit.

This, I think, as many of us have seen, has become an accepted element of asset allocation models of our planned sponsors.

So we expect Alcentra to create opportunities for us with our principle clients around the world, insurance, pension, and endowments and foundations.

As well, it certainly puts a bigger stake in the ground for us in our asset management presence in Europe overall.

And finally, it is the next building block -- Alcentra is the next building block, on top of Ivy Asset Management, to buildout our alternative asset capabilities.

Again, this is only the latest phase in the buildout of our asset management business and we will do more.

All in all for the quarter, I think it was good performance, good progress in laying the foundation for '06 and good progress in our re-engineering efforts overall.

So with that, I'm going to ask Bruce to cover that in a little bit more detail.

Bruce?

Thanks, Tom.

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

I'd like to focus my remarks on three areas, namely, a closer look at operating leverage, our current capital management priorities, and our outlook for the fourth quarter.

First off, as Tom indicated, positive operating leverage is something we are very focused on achieving on an annual basis.

We were able to achieve it on a sequential quarter basis last quarter, but not on a year-over-year basis, given some of the corporate expense headwinds we've discussed with you.

This quarter we were about flat on a sequential quarter basis, very good performance in light of traditional seasonality, and we were positive on a year-over-year basis for the first time in a while, evidence that those corporate expense headwinds are being absorbed into our run rate, given the growth we've generated in our businesses.

On a year-over-year basis, revenues were strong across the board, with growth of 14% paced by a security servicing, foreign exchange and other trading, and net interest income.

Expenses continue to be controlled with growth at 13.6%, about 40 basis points of operating leverage.

This reflects the ongoing success of our cost containment efforts.

Clearly, our ongoing re-engineering and staff relocation programs are paying off.

They are improving the margins and enhancing the inherent leverage of our operating businesses.

It's worth taking a moment to highlight several offsetting revenue and expense items inside the third quarter numbers.

First on the expense side, we booked an additional 14 million reserve associated with an anticipated settlement of the previously disclosed Russian funds transfer matter.

And this expense is not tax deductible.

On the revenue side, we recognized a 12 million gain on the sale of certain Community Reinvestment Act mortgage investments, which netted to 5 million after related tax considerations.

We also took advantage of favorable market pricing to sell four of our 21 seats on the New York Stock Exchange, yielding a gain of 6 million, or 4 million after tax.

This sale is an example of the thoughtful re-engineering we've been alluding to.

We've looked hard at areas where we've made numerous acquisitions, like execution and clearing, to insure that the most efficient operating infrastructure exists without compromising our service capabilities.

In addition, NII benefited by 4 million, due to the recognition of interest on nonaccrual loans that were sold, which is $3 million after-tax.

Though on a net basis, these revenue and expense items were essentially a wash after tax, with no impact on reported EPS.

They also did not distort the operating leverage comparisons.

I should point out that as a result of the tax impact of the settlement cost and the CRA investment sales, our effective tax rate increased to 34.6% in the third quarter, from 33.4% last quarter.

For the fourth quarter and the full year, we expect the effective tax rate to be about 33.7%.

With regard to capital management, we continue to generate a significant amount of free cash flow, which we used to fund acquisitions that support our core activities and, when possible, return excess capital to shareholders.

As Tom noted, the acquisition of 80% ownership in Alcentra is an important addition to our asset management business.

They are a best in class operation and their position for excellent growth, which we believe that we'll be able to enhance with our distribution, as we did with Ivy Asset Management.

We expect the Alcentra deal to close by December 31st and we expect that this investment will be accretive to 2006 earnings.

We are actively looking at other acquisition opportunities that we believe position us for faster growth, both in asset management and in security servicing.

And while there's no guarantee we'll get them done, we are factoring that into our capital planning.

Net share repurchases during the quarter were 1.9 million and we were pleased that our capital ratios were all at or above their targets.

The quarter end balance sheet was slightly elevated, due to some sizable overdrafts, but still within what we would consider to be a reasonable range.

Lastly, looking ahead to the fourth quarter, we continue to feel good about how we are positioned.

Given the relatively stronger markets than expected in the third quarter, we may see less of a seasonal market bounce than usual in the fourth quarter, but still, this is traditionally a strong quarter.

As you look at your modeling for next quarter, please keep in mind the line items impacted by the offsetting items I discussed earlier, namely NII, other income, and other expenses, will be effected in Q4.

This is not really a big deal, since they offset, but I wanted to make sure that you had that.

Our balance sheet continues to be well positioned for the current rate environment.

However, we expect to see a moderation of the growth rate for NII, as we foresee less of an ability at these rate levels to lag deposit repricing.

We expect continued good performance on credit costs and we remain committed to wringing efficiencies out of our expense base and being disciplined on new business opportunities.

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

Okay, thank you, Bruce.

The true earnings power of our franchise, I think, seen in our results is becoming more apparent.

The base of that earnings power is our ability to achieve meaningful, positive operating leverage.

Our revenue generation efforts remain solid, the pipeline is robust.

The alliances that I've talked about, that we're building, are helping us target and penetrate markets quickly and more profitably.

Gains that we've made in our service quality efforts and our client focus investments in the technology are helping us win that battle in the trenches.

It also happens to be enhancing our credibility with both our clients, prospects and our alliance partners.

Our expense management efforts are showing results, helping us deliver more of our revenues to the bottom line, clearly the definition, the essence of positive operating leverage.

We have shown that it's possible to continually find ways to improve quality of our products and to take out costs.

And we'll continue to do so.

The bottom line here is that we are pleased with our results, pleased with the progress that we've made, and confident in our future prospects.

While market activity shows momentum, we're not going to rely on it.

We remain focused on creating our own growth beyond what the market could give us.

With that, I'd like to ask the operator to open up the call for some questions.

Wendi, please.

Thank you.

At this time, we are ready to begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Anthony Collins from Piper Jaffray.

You may ask your question.

Good morning, guys.

Looks like a solid quarter.

Just a couple of questions.

On LJR, just how accretive is that this quarter?

We gave guidance, Andy, last quarter that we thought the revenues would be about 15 million and it would be slightly accretive, very modestly accretive, and that's pretty much came in where we thought it would.

Okay.

So I guess that the expense base didn't seem to move much outside of that, then?

Okay.

No, I think really where the play here is on this investment is to cross-sell the product and we think there is a lot of revenue synergies.

But we've got to get around and cross-sell the product to some of our customers.

And I think the transition management activity is really something that we can do a better job at than LJR was doing on their own.

Okay, great.

Second unrelated question, just the -- you talked about the 4 million bump to net interest income on nonaccrual.

Does that hit margins or I guess it balances?

Or both?

I guess it's both.

Why isn't that permanent?

When we sold the loan, we recaptured some NII, so that was a one-timer.

Okay, and so on margins, though, you think those will generally still be going up, despite this one-timer?

Yes.

I think that -- we want to be a little cautious just because we've been pretty aggressive on how we've lagged deposit repricings.

At this point, I think we have to make sure that we're not driving any balances at the margin out of the house.

So there's probably less ability to do that, but that said, we're still slightly asset sensitive and we should still benefit as rates go up.

Great.

And one last question, just on the pipelines, both broadly speaking as well as in outsourcing, can you comment on that?

Pipeline broadly speaking is quite good.

We see -- we do see a lot of activity.

Our clients are interested in the services.

They are interested in looking at vendors.

So in terms of new business opportunities, I think that's actually quite good, better than I've seen in a number of years.

On the outsourcing side, a lot of discussion.

We are taking a very close look at these.

We're participating in the process of reviewing outsourcing possibilities, but we're also having a keen eye on terms of the inherent profitability of those.

We will do some.

We will not do all.

Great, thank you.

Okay.

Thank you, Andy.

Next question, please?

Thank you.

Ruchi Madan from Citicorp, you may ask your question.

Good morning, Ruchi.

Morning.

Tom, obviously you're very, very focused on this operating leverage.

You've mentioned it every quarter for the last several quarters.

Any thoughts to what level of normal operating leverage your franchise should produce, assuming the kind of revenue environment we have now?

Ruchi, at this juncture in our evolution, I have not targeted anything specific in terms of operating leverage.

I think it is so dependent from a quarter to quarter basis.

There is volatility in the level of positive operating leverage.

That's why we focused more on an annual basis.

We want to be as consistent as we possibly can.

I want to point out that this quarter, year-over-year, for the first time in quite a while, we had positive operating leverage.

I think that's great evidence of progress we're making and that's what I've been pointing to.

Even on sequential basis, even the fact that this was seasonally a weak quarter, we almost made positive operating leverage even this quarter.

And that, that's without any -- anything-- there's no gimmicks, no one-timers either on the revenue side or the expense side that would give you that type of operating leverage.

This was solid quarterly operating leverage that we were able to-- operating leverage improvement that we were able to deliver.

But to get back to your question, we aren't targeting anything yet, but we are looking to be absolutely consistent and having a positive trend line there.

So, for instance, last year, excluding all the headwinds that you outlined, I think you were targeting about 100 basis points of operating leverage.

Are you thinking--

On a going-forward basis, yes.

Yes, not necessarily in '05, I don't believe, but certainly on an ongoing basis, we did.

Right, so--

Once we achieve that, then we'll take a look at where we are and how we've gotten there and its sustainability and we'll make comments at that juncture.

Okay.

So you do expect to update us on that maybe next quarter or something?

Sure.

Everything is reflective of what the progress that we made on all of our initiatives.

Yes.

Okay, and then separate question for Bruce.

Just on the balance sheet, you've had good performance.

You've kind of warned about the deposit repricing lag for the last several quarters, but you've continued to have it.

And then also just as we look at your balance sheet, we wonder if it's a bit underleveraged and over time might there be an opportunity to extend durations and so therefore should we think about upside to net interest income next year, sort of beyond what is normal?

Yes, I would say there's several questions in that.

With respect to whether we're underleveraged, I think we're at 5.32 on the TCE, the targeted range is typically 5 to 5.25.

So we're a little bit above the target, but as you're aware, we've announced this Alcentra acquisition.

And as I indicated in my remarks, there's some other interesting acquisition opportunities that we're looking at.

So that's one of the reasons there that I think we're running a little above target at this point.

I do think that you're right, that we are not pushing the balance sheet.

The overall investment securities from June 30th to 9/30 was only up about 400 million.

I think at this point with the yield curve being so flat, we're not aggressively out taking money and leveraging up the balance sheet.

But I think if you get in a little more of a steeper yield curve environment, there's certainly opportunities there to take in some money and put it to good use.

And so I think, again, we'll continue to have good net interest income performance through time.

Okay, thanks.

Thank you.

Next question, please.

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

Hi, good morning.

Morning, Tom.

Great quarter.

Thanks for taking my call.

Getting back to the operating leverage question and your comments on the volatility and how difficult it is quarter to quarter to really predict or anticipate what the operating leverages will be going forward.

Could you just maybe rank for us within the security servicing line, the four major categories, execution and clearing, investment services and so on, rank them in terms of which categories do you envision to be the most volatile categories going forward and therefore the most challenging to kind of anticipate going into a quarter what the operating leverages would be.

Well, Tom, I think in terms of volatility, I think the volatility, I think, it depends on a lot of different issues here.

I think the execution and clearing line probably has, again, the narrowest of the margins and therefore probably would depict the most volatility.

I think issuer services, generally speaking, would be the wider margins in our businesses when we include the DR and institutional trust businesses.

And there I think we have experienced and would experience much more consistent positive operating leverage.

I think in between, investor services, broker dealer services are in between.

So if I had to rank where the volatility lies, probably the highest in the execution clearing business and the lowest in issuer services and everything else in between.

Yes, another cut at that, Tom, is just looking at it from an equity linked versus fixed income linked business standpoint as opposed to those four categories and probably the top-line moves around with the most volatility around the equity linked businesses.

So that reinforces what Tom said in terms of execution and clearing.

Tom, does that respond to your question?

Yes, yes, it did.

Thank you very much.

Good.

Next question, please?

Thank you.

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

To withdraw a question, press star, two.

Our next question is from Ken Usdin from Banc of American Securities.

Please ask your question.

Thanks, good morning.

Good morning, Ken.

My question is related to the occupancy at line.

I know it was down a couple million sequentially because there was a little one-timer last quarter.

But in the context of the data center coming online, you guys have talked about a second half ramp-up related to that getting fully in the run rate.

Can you tell us whether, A, that's fully reflected in the run rate, and if not, what the incremental increase would be going forward?

Yes.

Ken, as you recall, we indicated that the impact of ramping up that data center, bringing it online for the year was going to be about $27 million.

We've digested a lot of that into the run rate already.

One of the increases that you saw from Q3 versus Q2 was in the communications line, which we've now got those switched on and that's starting to hit there.

I would say there's incrementally maybe $4 or $5 million to go between Q4 over Q3, and a lot of that will come in on the occupancy line now that we have the CO as issued.

But, again, I think we're doing a good job of being able to absorb that into the run rate and finding offsets elsewhere.

So that will continue to be the game plan in Q4.

Let me re-emphasize that next year in '06, as we decommission the other data centers that's taking out of place, we should get about $0.01 benefit and then also in '07, we get a further $0.01 benefit.

So this is really just working through, bringing this one on, and then taking the other ones out.

Okay, great.

A second small question, you mentioned that the repos were net 1.9 million, so the average share count was down more like 3 million.

Could you walk us through what just the gross repurchase is and any other impact there on the share count?

I'm sorry.

What, what-- in the stock repurchases?

Yes.

Yes, I think we're on the treasury stock method and the stock price was below our expectations, so that would be the additional impact.

Okay.

Thanks a lot.

Yep.

Next question, please?

Thank you.

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

Good morning, guys.

Hi, Brian.

Hi, Brian.

Just can we drill down to or within issuer services a little bit more.

It sounds like depository receipts were the big upside in the quarter relative to what I would normally expect on a seasonal basis.

Can you talk about -- and Tom, you talked a little bit about this -- but to what degree you think that we saw much better volume in the third quarter that may not be repeated in the fourth quarter, even though the trends are good?

And then can you talk about the profitability of the ADR business in the second quarter relative to sort of the normal profitability of the DR business?

Let's say, Brian, in terms of the first point, just level of activity, volumes in the DR business issuance, as I mentioned, was quite strong.

That actually has been improving as the year unfolds, so I think we can expect to see that continuing.

I did not see anything generally in the underlying market level, market volumes and DRs that would be unusual in the third quarter.

As I said, I think we got a little bit of boost in terms of some of the corporate actions, which typically, the corporate actions in the terms of the dividend side is a second and fourth quarter event.

We saw a little bit of that in the third quarter, kind of slough off into the third quarter.

Some of that dividends were a little bit unusual, but the baseline, the corporate actions seem to be, again, improving, reflective overall of what you're seeing in the investment banking community.

It's on the strong growth there.

We're reflecting that as well.

And that's our play into the overall capital markets on the equity side.

With regard to, again, issuance, that usually is a prognosticator of continued good growth going forward, when issuance is heavily outweighing the cancellation side of the DR business.

Profitability, I think just maybe a little bit of the increase in the dividend side might show that profitability in the third quarter was certainly a little bit more than what we saw in the prior quarters.

But beyond that, it was a fairly quote, unquote, normal quarter for DRs' in a strengthening marketplace.

Okay.

So modeling going forward this is your sort of new base from the DRs to which to model going forward?

Well, as long as the capital markets and the equity markets abroad in particular are active, we should see this continue, yes.

Great.

If you just look at investor appetite for cross border investments, right now the U.S. stock market's been kind of range-bound and the overseas markets have been much stronger.

And so I think that continues to bode well as investors make reallocations towards picking up more foreign exposure.

That's going help the DR business.

Right.

Great.

In the-- on the trade execution line, can you just talk about what portion of the sequential change was due to transition management activity and then just comment on how successful you've been so far in cross-selling transition management to LJR customers.

I know it's very early, but have you seen some of that in the third quarter?

Yes.

We had, as I said, of that increase overall sequentially in execution and clearing, about 15 million or so was on the LJR acquisition coming into the numbers.

A good part of the balance was in transitions.

We had a very strong quarter of transitions, handled two large transitions very skillfully and I think we're paving the way with the LJR customer base.

Much of that was with existing customers in Q3, but I think we feel good about the pipeline and the ability to penetrate the LJR customers.

Okay, great.

And then just if you can remind me on re-engineering cost saves for 2006, where do you stand right now and what portion of that do you plan to reinvest in the business versus let fall to the bottom line?

The re-engineering effort in '04 and '05 have been delivering about 45 to 50 million of pretax benefit.

And we indicated that we, back in January, we saw a carry-through of these programs already at that point was going to deliver 30 million to '06.

We're certainly working on different programs to try and increase that back up to where we've been in '04 and '05 and I think that's achievable.

Again, what that has done, it's helped us to moderate the growth rate in expenses. 45 million is about 1% off the expense growth rate, which is one of the reasons we're able now to achieve the positive operating leverage.

Great.

And then just finally, on the-- you have taken a different approach over the last few quarters on these partnerships and you've announced several of them and I think Tommy said that you expect them to be immediately accretive.

I was just wondering what portion of the profitability, as you model these deals going forward, what portion of the profitability is due to your expectations of cross-sell of your services into these relationships and how long -- what kind of sales cycle time do you expect in cross-selling those services?

Brian, the cycle time, the sale cycle time is really similar to our own.

I mean if we were marketing indirectly here, actually it should be shorter, but let's say marketing directly to our clients here in the U.S. in our own home market, the sales cycle there will be-- is no different than what it would be in these offshore markets here, principally because our alliance partner here is so well known and entrenched in the local market.

That has been the clear benefit here, where we are marketing jointly with, say, a Nordea, and we even have one early win in a local plan sponsor that I'm sure we'll be announcing shortly.

But that-- so the sales cycle there is no different abroad than it would be here in the U.S. marketplace.

In terms of cross-sell, we're marketing our --very much of our base service line of global custody, our fund accounting, fund administration work, custody, clearance work.

That's the business that we're marketing.

And then an attendant to that is foreign exchange and SEC lending.

So those are the businesses -- it's a very much of a typical business approach, but we're doing this through a partner who has a very much of a strong local presence and strong local capabilities, local custody capabilities, which we do not have.

All right, great.

Great.

Can I ask just one more?

Tom, your quick thoughts and your outlook on credit quality going forward and provisioning.

Brian, I think that we got -- we are showing some very good credit experience here.

I think people have been looking for the turn.

I would say that the underlying business continues to be strong.

I know a number of the other banks, financial service companies have shown some increasing provisions here.

You're not -- you're going to see that as the economy continues to mature, we'll see some increase, first increases in, say, increases in [criton] class of our asset base, but it's been really quite minor.

That's why I commented that the trends are stable, but the absolute levels are excellent and I'm not sure how sustainable that is, but the trends continue to be quite stable, certainly in our shop.

Great.

Great.

Thank you so much.

Thank you, Brian.

Could we have the next question, please.

Thank you.

Robert Lee from KBW, you may ask your question.

Thank you, good morning.

Hi, Rob.

Just one quick question on SEC lending.

Is it possible to get a little bit of color on how that performed relative to your expectations sequentially, year-over-year, maybe talk a little bit about growth in that business and how you feel you're positioned to the continued rise in short-term rates in that business.

Yes, Rob, we're very pleased with performance in SEC lending this year.

I think it's one, actually, of our strongest business units.

We're getting it from two dimensions, as well.

We're getting it from both the size of the book is growing.

We're continue to gain market share, put new business on and so that's been kind of a volume driver.

And then we're also getting it on the spread.

And I think we typically have a fixed income oriented book and the treasury's have been in demand and so we've been able to garner good spreads on that.

I would say overall our spread, since our book is so short, it doesn't move around a whole lot due to changes in the yield curve and the level of interest rates.

There will be, I think, a positive effect if rates go up and if the yield curve steepens a little bit, but since it's at such a short duration, it won't have a pronounced effect.

The bigger driver, again, has been the volumes and then also the demand for the treasury collateral.

Great, thank you.

Okay.

Okay, thank you.

I don't-- I don't believe there are any other questions on the line and I think we're -- we've gone through our performance, I think, pretty thoroughly.

Before we conclude, though, I would like to remind all of you of the next analyst event here at The Bank.

It is November 1st.

Gerald Hassell, our President, will be hosting that.

It is a, I think, the first in a series of educational seminars or tutorials on our businesses to ensure that we can -- we are answering everyone's questions with regard to the intricacies of our business.

This November 1st will include presentations by both Rich Brueckner and Brian Shea from Pershing and Arthur Certosimo from our broker dealer services area.

With that, we conclude our third quarter's earnings call.

We certainly appreciate everybody joining us this morning and encourage you, again, to call Joe Murphy on investor relations for any further questions that you may have.

Thank you very much.