紐約梅隆銀行 (BK) 2005 Q4 法說會逐字稿

Welcome to the Bank of New York's fourth 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 other 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. [OPERATOR INSTRUCTIONS] Now, Joe Murphy, head of Investor Relations for the Bank of New York Company, Inc., thank you, sir, you may begin.

Good morning, everyone.

And thank you for joining the Bank of New York's fourth quarter earnings call.

Before we begin let me remind that you 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, January 18, 2006.

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.

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

As you see from our results for the fourth quarter, as well as the full year, we're continuing to realize on the earnings power of our franchise, we're showing material progress towards achieving our principal goals.

Let me take a second to review them for you.

At the beginning of '05, we said we would accelerate revenue momentum, and we've done so.

In fact, we achieved double digit revenue growth in many of our key business lines.

We also said we focus on generating positive operating leverage, and we're delivering on that objective as well.

We achieved year-over-year positive operating leverage in the third and fourth quarters, and our capacity to do so is becoming increasingly apparent.

At the beginning of the year in '05 we were determined to conclude any outstanding regulatory matters.

Today, many of those have been resolved and are behind us.

We also set out to strengthen our brands to make selling and cross-selling more effective, driving market share gains.

We launched our branding initiative last January, expanding it throughout the year.

And the goal here was to closely and clearly identify ourselves with a global securities markets.

And we've achieved that.

Our last goal, but of course not the least, was meeting our earnings target of $2.03 at the midpoint of the $2.01 to $2.06 range that we provided earlier in the year.

To put this in a context, overall the operating environment in '05 proved to be somewhat more mixed relative to our assumptions at the beginning of the year.

The equity markets showed lower price appreciation and volumes than we assumed, but the fixed income markets, I think, proved to be more robust.

Cross border investment and trading was also a positive surprise to us.

Volatility in the FX markets was in line with our expectations, and short interest rates were increased by the fed more than we anticipated.

So with these variables as a backdrop, our diversified business model performed quite well.

Let's drill down and let me offer some color on the fee income growth in our core business lines.

Execution and clearing was lower than expected given the weaker equity markets, but we achieved solid growth in ADR's, corporate trusts, investor and broker dealer services, and that all resulted in securities servicing fee growth of 10% right in line with our expectations.

Private client services and asset management, as well as foreign exchange and other trading, also had solid results and that had the effect of offsetting some weaker performance in our global payments business, corporate lending activities and the retail bank.

And that resulted in an 8% growth in total noninterest income.

Net interest income turned out to be much stronger than we anticipated at 12%.

A key driver in this increase was of course the 200 basis points increase in fed rate hikes, although we were able to capitalize on these increases by generating strong liquidity from our security servicing business, through new business wins, we were able to successfully lag our repricing on our deposits to regain some margin, and by sound and intelligent balance sheet positioning.

As a result, total revenue growth ended up right in the middle of our range at 9%, again in line with our expectations.

Total expenses also came within our projected range.

Overall expense control was good, salaries and expenses came in at the low end of our range, and we continue to make good progress on staff relocations and reengineering efforts and actually we're on target in that initiative.

Lastly, we put behind us substantial legal costs that were associated with settling those certain regulatory matters.

All of these items are critical to our goal of achieving positive operating leverage.

On the credit front, though, our portfolio remained exceptionally clean.

So the provision remained below our original expectation for '05.

On the capital management front, we had net buy backs of five million shares, right in line with our projection, and we have announced three strategically and financially attractive transactions.

LJR, which closed last July, and that complements our execution business.

As we mentioned when we acquired it, it is the market leader in commission recapture, but even more importantly, it gives us 1,400 pension fund clients that offer natural cross-sell abilities for our transition management services.

And in that regard, the cross-sells are in fact being realized through the latter part of '05.

Alcentra, which closed this month, added structured credit to our asset management offering and importantly $6 billion to our assets under management.

And yesterday, we announced plans to acquire Urdang Capital Management.

Urdang expands our alternative investment platform by adding real estate investment management.

They manage more than $2.7 billion in private equity investments, as well as portfolios of REIT securities.

Both these management asset acquisitions bring asset classes that are in demand by our core customer segments in the pension fund arena, endowments foundations, international investors, and certainly our private clients.

Going forward, you can expect that we plan to continue building out our asset management capabilities, taking advantage of our inherent distribution strengths, and giving us a great opportunity to create our own growth.

That theme, creating our own growth, has been a focus of ours through '05, and by introducing new products and winning new businesses.

We had great success on the new business front in '05, particularly in the regions that we've been targeting for expansion.

We won Hermes and Abbey National in the U.K., Nordea in the Nordic and Baltic regions, Natexis in France, BHF in Germany, and in Asia, Prudential Asset Management, and the Industrial and Commercial Bank of China.

So we're winning the battle in the trenches, and certainly quality has been a key to that.

This quarter alone, we received key industry awards in custody and our technology, brokerage execution, transfer agency, and yesterday, our foreign exchange research products.

By maintaining that quality focus, we will sustain our success in winning more than our fair share of new business.

So all in all, a solid performance, significant progress in strengthening the foundation for the long term, and solid momentum coming into 2006.

So with that, let me ask Bruce to share more details regarding the fourth quarter.

Our solid fourth quarter performance included good top line growth versus a year ago, and continued progress on expense management.

The result was core operating leverage of 130 basis points on a year-over-year basis, up nicely from Q3's year-over-year leverage of 40 basis points, as well as positive results sequentially.

Revenue growth was led by security servicing fees, which were up 10% versus the prior year quarter, and the full year.

Execution and clearing is still being impacted by weaker equity markets, but showed some good momentum, both sequentially and year-over-year, due to strength in value added fees at Pershing and higher transition management fees in execution.

Investor services continued to achieve strong results year-over-year in nearly all product lines driven by new wins as well as organic growth from existing clients.

Issuer services had a particularly strong quarter relative to 2004, reflecting consistent improvement throughout the year and cross-border investing and capital raising NDR's and good growth in corporate trust, particularly structured and global products where activity is outpacing the overall market and we are increasing our share.

Broker dealer services revenue was also quite strong, fueled by good trading activity in the clearance business, and continued expansion in collateral management.

As you may have noticed we topped one trillion in U.S. assets serviced this quarter.

Beyond security servicing, private client and asset management had solid sequential and year-over-year growth.

Ivy Asset Management was a key as it posted another strong year, and we also saw strength in our private bank in the fourth quarter.

And foreign exchange and other trading achieved solid growth sequentially and year-over-year compared to a very strong performance in 2004.

We saw good customer flow and price volatility in the quarter, and we continue to do well on the new business front.

Net interest income was roughly flat on a sequential basis.

An increase in income associated with servicing deposits and related earning assets was offset by two items I would like to highlight.

First, we made a cumulative adjustment in our reserve position with the Federal Reserve Bank, and, second, we made a cash deposit with the IRS in anticipation of the settlement of the LILO matter, which we now see being finalized this quarter.

These two items lowered NII by a combined 14 million and reduced the yield by roughly 7 basis points.

I would also point out that NII in the third quarter included 4 million related to the recovery on nonperforming loans.

But overall, the NII performance in the quarter was better than it looks on the surface.

Other income also had a couple of note worthy items which drove the improvement in that category, essentially offsetting the two NII items I referenced.

We had gains of $6 million on the sale of four seats on the New York stock exchange, and 10 million on the sale of a small building here in New York.

Now, on the other side of the ledger, expense control was good this quarter, and we're pleased with the progress on positive operating leverage versus the prior year and sequentially.

Of course, this all starts with control of staff count, where we ended the year at 23,451, which is up less than 100 positions even after factoring in the LJR acquisition, which is quite impressive relative to our 9% revenue growth.

Beyond that, two sequential expense increases merit further comment.

First, occupancy expense rose by 6%, which reflects the full phase-in of the out-of-region data center that became operational this quarter.

And second, other expenses which was roughly flat at first glance.

However, if we exclude from the third quarter the 14 million in settlement costs, these expenses increased sequentially by 15 million.

Some of this increase reflects typical fourth quarter seasonality in categories like travel, with the balance a combination of legal costs tied to implementing legal settlements and compliance programs, as well as higher recruiting expenses associated with both our legal area and our relocation programs.

So overall, the revenue items in NII, the uptick in seasonal expenses, and the above trend other income combined to offset each other, with minimal impact on reported EPS.

In terms of capital management, the year-end balance sheet was quite strong, with a TCE ratio coming in at 5.57%.

However, I do want to point out that the Alcentra and Urdang acquisitions will both close in the first quarter and on a pro forma basis will reduce the TCE ratio by 33 basis points to within our targeted range of 5% to 5.25%.

This accounts for the limited buyback activity in the fourth quarter.

The tax rate came in at 33.3%, a little better than the 33.7 we had expected, due to slightly better performance on our section 29 syn fuel energy credits.

That wraps up our comments on the quarter.

And now I would like to turn it back to Tom for comments on our outlook for 2006.

First, let me say that I feel very pleased about the sound and sustainable progress that we've made in '05 and how it positions us for the future.

In terms of our outlook now, the approach that we're taking this year, I think, is reflective of what is happening in the market overall.

We will offer to you better information on our strategy and tactics, which will in turn achieve superior long term performance and enhancement of shareholder value.

And we will provide the context in which we will take those actions.

We will not be offering specific EPS guidance.

Now, let me begin by offering our views on the environment and how we're positioned in that context.

We foresee moderate economic growth and continued growth in the capital markets.

We expect equity markets to strengthen slightly versus '05 and looking at some of the key metrics, we assume U.S. equity prices will be up 5 to 7%.

U.S. non-program equity volumes we expect to be up roughly 4% to 6%.

And we see equity capital raising holding steady pretty much throughout the year.

Fixed income markets should moderate somewhat and short interest rates will level off soon.

We expect to see moderate growth in M&A volumes.

And we assume the fed funds rate will top out at roughly 4.5% with only a slight steepening of the yield curve.

GDP growth overall should be slightly over 3%.

All in all, I think it is a backdrop that is comparable to '05, with a somewhat different composition to it, though, and a little less tail wind for NII.

In the aggregate, we expect to grow revenues faster than our markets by continuing what we've been doing, and that is focusing on our efforts on faster growing market segments such as hedge funds, collateral asset management, winning more than our share of business as we demonstrated in '05, and doing a first rate job of servicing the clients that we've got.

In terms of our cost base, we do expect upward pressure on some expenses that are associated with our pension plans, compliance and regulatory requirements, as well as accelerating our migration of jobs to those lower cost locations.

However, we do expect to temper expense growth through continued cost discipline and our reengineering efforts, so that the overall expense environment will continue to improve.

As a result, we expect to generate positive operating leverage of 100-plus basis points.

So the bottom line is this.

We see a clear path to taking market share, and achieving improved operating leverage and that will deliver attractive performance to our shareholders.

Bruce?

Let me wrap up the 2006 discussion by highlighting a few key line items.

With respect to NII, we expect it to moderate somewhat from the 12% growth we saw in 2005.

Earning assets should grow in line with the balance sheet at 4% to 6%, but there will be less opportunity for yield expansion since our ability to lag repricing on deposits is more limited going forward.

As we've discussed throughout 2005, pension expense will be higher in 2006, but we've changed the plan framework for calculating benefits going forward which will lessen the overall impact.

We fully phased in options expensing and we expect it will be comparatively less expensive in 2006 since we're issuing fewer options than we have in the past.

And as we said earlier in the call, the out-of-region data center is now fully operational so we will get some benefit this year as we shut down redundant locations.

We will continue to incur costs related to completing our program for staff relocations, accelerating them in some instances.

Nonetheless, with all of these positives and negatives factored in, as well as incorporating the impact of the acquisitions referred to earlier, we expect that our continued focus on our reengineering and cost control will enable us to achieve the 100-plus basis points target for operating leverage this year.

Our outlook for credit remains favorable and we expect the provision for 2006 to ramp up modestly off the current quarterly base.

The tax rate for the year is expected to increase only marginally to 33.70%.

And on the capital management front, we will balance our acquisition initiatives with continued buyback activity.

We also are factoring in the use of capital for completion of the Alcentra and Urdang acquisitions, growth in the balance sheet, and the proposed change in lease accounting.

At this point, we see a net share reduction in a comparable range to the 5 million in 2005.

To sum up, we feel confident with our positioning as we enter 2006.

With that, I will turn it back over to Tom.

Okay.

Well, to recap, we are pleased to be reporting results today that reflect our success, again, in creating our own growth, and generating positive operating leverage, our two principal themes.

The operating trends that you see are moving in the right direction.

The earnings power inherent in our businesses is becoming more apparent to us, and ultimately to the benefit of our shareholders.

We feel good about where our business is today, and we've got good momentum going into '06.

And with that, now I'd like to ask the operator to open up the call to some questions.

Thank you.

At this time, we are ready to begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Mike Mayo of Prudential.

Your line is open.

Good morning.

Hi, Mike.

It is kind an inflection point, you think, for the operating leverage, and that's all in, that's not excluding corporate or anything like the way you presented it at the conference in January?

That's right.

That's correct, Mike.

And if you can give us some more detailed numbers, pension expense, options expense, you said would be less expensive, could you just tell us how much that is?

I think we're not going to get that specific on those types.

Suffice it to say that pension expense will be higher and we will get a small reduction on the options expense.

And again, it is something that we're coping with and we factored into that 100 basis points operating target.

And then you also said out-of-region data center, that is done, so you can shut down other centers, so you will save there, but then you need to spend more money on the acceleration of the migration of jobs, is that correct?

Yes I think that is really an opportunity.

That is elective on our part because we've had such good experience in moving those jobs to lower cost locations so there is some friction costs incurred in doing that but I think it sets us up well for '07 and '08, clearly.

And what is the reason for not giving EPS targets which you've done the last several years?

Well, I think that, Mike, we clearly see the trends overall in the industry, but from our perspective, I think we are really focusing on the broader themes of creating our own growth, being able to regenerate positive operating leverage, and the EPS goals will take care of themselves.

We will focus our attention on those broader themes here.

And then lastly, I get core expenses up 39 million in the fourth quarter, and you outline some of the reasons for that, but anything that you would really consider one time in those expenses?

You've mentioned legal costs.

How much were those or travel?

I think the real increase there in the fourth quarter was in those other expenses, and we detailed some of those causes, the legal costs, the seasonal travel, some recruiting costs associated with the relocation program, and hiring in the legal and compliance areas.

Some of that will fall off in the first quarter, and there will be some creep in those expenses, but I think in general, it was a pretty good quarter, on a sequential basis, and clearly, the year-over-year operating leverage was quite good, especially on the staff costs.

All right.

Thank you.

Next question, please.

Thank you, Andrew Collins from Piper Jaffray.

Your line is open.

Good morning.

Just a couple of questions here for you.

On the net interest margins, just wondering if we can assume kind of that 2.42, is a run rate going forward, and also what the duration is on your securities book?

I was just wondering what that is?

I think if you looked at the number as published, and then you made certain adjustments for the items we detailed, that in the 240 ballpark is an area that we've held now for a couple of quarters, again, we are relatively neutral positioned and we will see most of the drive in terms of NII improvement coming from growth in earning assets next year, but there still should be the potential for some yield enhancement, particularly if we get a steepening of the curve.

And then we would make a little more on our asset side.

With respect to the duration of the securities portfolio right now, I would put it at about 1.9 years.

1.9 years.

Great.

And then also, you didn't really touch on the pre-tax profit by line of business and what your goals are for '06, is what you normally do on the analyst day, and I was just wondering if one area drives EPS growth faster than the others, and, correspondingly, which ones might be weaker in '06?

I think we're very focused on having all of the business pull the oars here and make a contribution and deliver to the positive operating leverage objective, so I think the environment is a little different.

I think the equity markets may be a little better than they were last year, although I think we came off a very high market, strong market in fixed income and that may back off a little bit.

So I think the areas that have momentum, like DR's and the broker dealer services, and investor services continue to be well positioned going into next year.

Okay.

So what if some of those areas fall short?

Like the retail bank, I'm just wondering what your plans are for that area long term?

Well, Andy, we have said and I will continue to say we are constantly looking at all of our businesses, and not just simply retail in terms of their growth expectations, in terms of the return, and they're supporting our overall corporate goals, and that goes far, extends beyond retail.

Having said that, I think retail, while it did not show the growth that we would -- that we have seen in some of our core businesses, I think did pretty well in terms of the return on our investments, we continue to make some very selected investments in that business to ensure that the value is maintained, and we will see where that takes us.

Great.

Thank you very much.

Next question, please.

Thank you.

Ruchi Madan of Citigroup.

Your line is open.

You may ask your question.

Okay, thanks, hi.

Several questions.

I understand you're not going to provide '06 guidance, but any commentary on your long-term goals such as the EPS as 12%, ROE 18% to 20%?

You know, those have been goals of ours for some time.

We've not been able to necessarily achieve them over the course of the last several years.

But we have been able to, I think, put together a program that we demonstrated significant progress in '05.

In terms of achieving above market EPS growth.

And that is our focus here.

We think that we can create a top line revenue growth that is strong and above the market, what the markets would ever give us, as well as the -- a very solid sustainable positive operating leverage, will, by definition, give us a very attractive EPS growth prospect.

In that 12% range in line with your goals, in other words?

Yes.

Through the cycle, yes.

And just on '06, in terms of the environment that you described as your backdrop, you said it is different but net-net, similar to '05, and I'm just wondering if that implies that you are expecting less revenue growth than this year considering the less tail wind in net interest income?

No, not necessarily.

I think we're at this point not commenting specifically on expectations for revenue and expense growth.

There may be some pluses and minuses, but the key driver at the end of the day is going to be delivering on that positive operating leverage, Ruchi.

Just relative to 2005, though, if we're expecting less net interest income growth, where could we expect greater revenue growth?

Well, certainly, we are looking to expand our business in the asset management side, we've made a couple of acquisitions of late, we expect to consider more.

We are focusing more of our investment dollars in that area.

We do see some very attractive market segments in the hedge fund market.

Again, our collateral management business was -- did very, very strongly in '05, and we see the same environment extending into '06.

So we've got some new areas there.

The alliances that we've been able to form in Europe, in Nordea is already kicking in some new business so we do still see some very excellent prospects in a variety of our new businesses, Ruchi.

And I think that is the design here in terms of being able to have a diversified business model so that inevitably there are some elements of the business model so that inevitably that there are some elements of the business model that may see some softness or may not have the strength behind it.

Others will, and we are creating new ones.

Okay.

And then last question, on operating leverage, the last year, excluding all the corporate items you were targeting, 100 basis points of operating leverage, and this year, you're commenting about tempering expense growth based on several of the comments that you made, yet you're still looking for about 100 basis points plus of operating leverage, so my question is really why isn't it 200?

Well, I think have you to look at what the target really was, the reported target, which is what -- how we performed, including some of those head wind items like the pension, the options, the data center, turned out to be about negative 100 in '05.

And so the move towards a positive 100 target again comprehends any drags we would have from the relocation programs, from the additional pension step-up this year, and it moves to 100 positive, so, really, we're flipping from 100 negative to 100 positive, which is about an improvement of 200 basis points in that relationship.

Okay, but just in general, if you look at your business model, do you contemplate operating leverage much greater than this 100 basis points in the future?

Well, Ruchi, I think it is pretty clear that we are not necessarily going to rely or rest on any laurels.

We're certainly not doing that for '05.

And we're not going to necessarily do it for '06.

But we are -- what we're offering is I think a very realistic assessment of where we think we can -- what we think we can accomplish in '06.

And we've got a very much of an explicit game plan to get us there and we need to execute it.

And I think in the corporate model, we've always said that we want operating leverage to deliver 200 basis points to the growth rate, which at relatively high levels of revenues, 100 basis points spread gets you there.

So rest assured we're always working on ways to try and enhance that and widen that, particularly,at the business unit level.

Okay.

Thank you.

Thanks, Ruchi.

Next question, please?

Next question is from Brian Bedell of Merrill Lynch.

Your line is open.

Thank you.

Good morning, guys.

For your fee revenue growth outlook for '06, I mean you framed the market environment that is mid-single digits in terms of trading volumes and in equity market appreciation and reasonable growth, and capital raising or at least in M&A.

What type of percentage ranges roughly, what type of organic growth do you think you can achieve on top of that, on top of what the market is giving you in '06?

And this would be in fee revenues.

Well, I think that is difficult, given the breadth of business lines that we have.

I think, historically, we've tended to add 300 basis points, or so plus, to what the market gives us, based on just the new business wins that we have, the cross-selling, the product innovation, delivering new products, capturing some of that outsourcing trend that's out there in the marketplace, and so I think that's, again, something that kind of year in and year out we've been able to deliver pretty regularly.

And you feel comfortable with that for '06?

I don't see why anything there would change.

I don't think anything would change there, Brian.

I think again, we've been able to demonstrate the new business wins and gaining market share.

That is probably the single most important variable to be able to outgrow the market, the market overall, we've got some great expectations for a number of our businesses.

As I mentioned earlier, our hedge fund servicing business has gone very well and I think entering strongly into the new year.

The RIA marketplace through the Pershing vehicle has done quite well in terms of asset gathering, and we see a clear, clear path for that to improve, and increase and enhance the value-added services that Pershing is offering.

So there are a number of areas.

I talked about asset management.

The alternative investment platform that we've developed here.

Alcentra, I think, is built on structured credit but it will be able to create product through the business cycle.

Real estate and management, while there I see significant demand from our pension clients, from our asset servicing clients, and their ability to create their asset allocation models, their increasingly is a greater and greater proportion devoted to these alternative asset vehicles and now real estate, as well, through a business cycle.

So I think through all of those, we will be able to develop, I think, an above average growth rate, above certainly what the market will give us here.

And the idea is to create our own growth here.

We're not waiting around.

It sounds like if you get a market environment that is in line with your expectations, you're looking at very high single digit fee revenue growth based on that type of performance.

I would say so.

Well, we're not going to comment specifically on revenue and expense growth, Brian.

Okay.

That's fair.

The operating leverage of 100 basis points, what operating margin assumption are you using for full-year 2005?

I'm sorry, you could say that again, Brian?

What kind of operating margin assumption are you using for 2005?

There is always this objective exercise because you can, you know, put in one timers or not, but I just wanted to see sort of what you're considering as an operating margin for '05.

I think in ballpark, we're in the 64, 65 territory.

For efficiency, you mean?

Yes.

And I think at last, in last January, when you went through all the business lines and everything in your meeting, you kind of implied in '06 that you get through a lot of the corporate head winds and this would be a clearer year.

And given your view of only muted or very moderate provision expense increase, in '06, or ramp-up, it looks -- it looked at that point that you would be back on your 12% EPS growth track in '06.

So based on that, it would sound like, and given your revenue assumption here, with that operating leverage, that you would be back up around that rate.

Would you dispute that?

Well we're not commenting, again, on specific EPS guidance.

I would say one thing to notice when you look at your provision expense, is we've said that we expect to ramp up off the current run rate and in the first half of the year, we had actually a credit in the first quarter, and then I think a 5 million in the second, if my memory serves me, so for the full year that provisioning is only 15.

And so if the current run rate is about 10, there is still going to be an increase there that you would have to factor in.

Sure.

Of course.

And do you want to frame what an increase would be roughly?

No, I said we -- I think our statement stands, that we think we will see a modest increase, so off the current run rate, we don't see any great size of deterioration in the credit environment, so we still feel good about the credit portfolio, but we're certainly in the best of times, and eventually, that is going to move back towards the median.

Right, that makes sense.

And then if we -- let's say we get a weaker environment on a revenue basis, from what the market is giving you in '06, let's say equity marks are down in '06 and volumes are sluggish, do you fill feel that there is enough flexibility in your operating models to deliver 100 basis points of leverage in that kind of environment?

We do, Brian.

I think that the flexibility comes from a number of very specific sources here, and in an environment where revenue growth is not as robust as we're seeing here, clearly there will be an impact on the compensation, incentive compensation.

There will clearly be an impact in terms of the number of people necessary to service a marketplace that is not growing as fast as we would have anticipated.

And of course, we said all along, that our technology spend has a level of deceleration in it, as we get beyond the infrastructure costs, focusing more on the client, the client offerings, and which we are clearly doing, but even within that, there is flexibility here to be able to continue to achieve that positive operating leverage at 100 basis points plus.

Great.

Great, thanks very much.

Okay, Brian.

Next question, please?

Thank you.

Betsy Graseck, Morgan Stanley, your line is open.

Oh, thanks.

Just a couple of quick questions on expenses and capital.

On the expense side, you mentioned that you had done something with the pension to lessen the overall impact of the increase in '06 versus '05.

Could you just give us a sense of what you did there?

Well, we changed -- Betsy, we changed the plan to a career average pay from a final average pay.

We effectively froze the benefits as it stands today, with a 1% per annum, effectively, cost of living increase, if you will, for the remainder.

And really are focusing our people very heavily towards the 401(k) plan that we instituted last year.

That 401(k) plan is a very attractive one.

So that overall, we feel we are clearly taking care of our staff in this environment, but yet, recognizing that we do need to moderate the inherent increase in pension costs that the economy is facing overall.

And so did you restrict participation to existing employees?

In other words, can new employees join the pension plan or not?

No, we have not done that.

New employees can join the plan.

However, I would have to expand and say that given the nature of our business, and the business mix that we have and are pointing towards, many of our -- of any increase of staff are in the operating subsidiaries, in activities which historically have not had defined benefit plans and have really been relying only focusing solely on defined contribution plans that they brought over and that we've enhanced.

So for example the broker dealers and asset management companies typically are more in a defined contribution environment and we've left that the way it is.

Okay.

Separately, you had indicated that during '06, you would be anticipating an ability to moderate expense growth given the restructurings that you're doing in terms of processes, and work flows and efficiencies.

Could you just give us a sense of what type of run rate you're running at already?

That is sort of normal course of business to constantly be improving the efficiencies, and I'm just wondering why you think that '06 is going to be able to deliver increased or enhanced efficiency gains from those activities than you got in '05?

Well, I think that's an ongoing program here that we basically incorporated into the way we do business.

You're correct in stating that.

But we typically have been able to knock about 1% off the expense growth rate through those programs and we do track each initiative and the impact that it has in our financials.

That existed in '04, and '05.

We probably on a cumulative basis are close to a 95 million to 100 million in benefit from those programs.

We have a carry-over effect of what we did in '05 that is at least 30 million into next year.

And we're, obviously, still looking for additional opportunities.

So I think, you know, that's clearly impactful, but again, some of that improvement in the expense growth rate for next year is the absence of some of the corporate items that we had last year, and the pension, the option expensing, third year of option expensing, and then also the commencement of this data center before we've been able to retire some of the pre-existing data centers.

Okay, and is it fair to say that you're expecting that the benefits from these enhancement activities or work flow enhancement activities will be similar to what you've been able to generate in previous years?

Yes, I think, you know, clearly we looked at labor efficiency, really within silos, I think, in each of the business areas, and I think if there is any change, kind of prospectively, we have to look a little bit across the Company and see where we can centralize some activities and if there is a common function that different businesses provide, maybe there is a way to have a best in class operation and centralize that.

So it is moving a little more in that direction, but again, it is the same people, the same approach.

And on the separate topic about share buybacks you mentioned that you would continue the share buybacks in '06.

Can you give us a sense as to whether or not you are going to be altering the equity asset ratio, the 5 to 5.25 that you mentioned earlier or should we be anticipating you will be staying in that range?

I think that is our target.

That can move around a little bit depending on acquisitions or other events.

But I think, in general, we try to stay pretty close to that range.

Okay.

Thanks.

Thank you, Betsy.

Next question, please?

Glenn Schorr from UBS, your line is open.

Thanks very much.

Two quickies.

One, on global payments, I know it is not huge, but if you could just comment just on the sluggishness, I don't know if that is a volume in fed wire chips or some of the businesses or if there is margin compression, or if it is a function of share?

Well, it is certainly not a function of share.

I think actually we've gotten some nice new business wins in the global payments business.

There is a little bit of a level of price competition and compression there, but in terms of our market share, we continue to do quite well.

The overall global payments business is very much of a function of the underlying strength of global transactions.

It is also interestingly, Glenn, I think a function of global payments, I might add, also include some of our trade services, and that happens to be a function of the overall health of the credit markets, globally.

And as you can see, and experience, the health of global credit generally is quite good, and as a result, we see, we do not see a significant reliance on trade, trade credit, letters of credit, trade service, et cetera, and again, a lowering of the margins in that business.

And in some other countries, too, have come down, as their credit standing has improved.

I think the -- one of the statistics we do clearly use, to look at is, a level of services that are invoiced, and that is increasing and increasing by 5%.

So that is I think has done quite well.

Okay.

Appreciate that.

The only other question on -- just asset management, so we see what you've done to date, and I just want to make sure that I understand the exact strategy, it seems, obviously, much more institutional than building out a retail based asset management business.

And it seems like it is premised on cross sell into existing customers and if you can comment on that strategy and then whether or not you feel you have the full infrastructure in place already?

Sure.

I think it is a good question.

It is a strategy that would be, obviously, apparent to everyone that is focused on the institutional side.

Having said that, I must add that the -- in the private bank, in the affluent marketplace, the high net worth and ultra high net worth marketplace that we are attending through the private bank, those very same products are of significant interest.

So the asset allocation models that we're seeing that the institutions are utilizing, as we see in so many other areas, tend to go down market, if I may, and are getting into the individual side.

So every -- all of the products, to even include the structured credit products, the CDO products have an attraction to some of our private clients.

But it is a much more institutional approach that has been taken in the past year.

We do see the active cross-sell.

I suspect you hear that from some of our brethren in the trust and custody world, but there is no question that we have a ready door open to us to market our product lines, and as we're getting, as we're answering RFP's with regard to asset servicing.

So from that perspective, we think it is a natural cross-sell.

We've experienced it to date and now we are looking to expand our product, product array.

What we have said, and we will demonstrate that through the course of '06 in some of our tutorials, that we are looking to expand in this juncture with regard to Alcentra and Urdang, our alternative assets platform.

We may still have some more to do but then we will migrate that toward our core or more traditional asset management products, as well, expanding our core fixed income product, as well, and getting into some of the other sectors in the fixed income world, which we have had historically a very strong client base.

Is the likelihood that they are in this relative size and scope?

In other words I get -- the alternatives I would assume are in the couple of billion range to fill in slots and then grow them the way you're planning now, when you get to the core, do they get a little bigger?

I think the size in terms of 2.5 to 5, maybe even 10, is still probably the sweet spot, because in many instances, those companies have developed very good product capabilities, and they may be a little bit distribution challenged and we can add to their distribution, so we would like to get that growth, we would like to get that synergy for our shareholders, and so that is where we focused.

Certainly, Ivy is a good model for that, Glenn.

I think when we acquired Ivy it was about 2.5 billion in AUM, and now it is at 14, and so that is certainly a great success story.

If we could replicate that in some of our other markets, we would be thrilled and we think we have an opportunity to do that in, again, some of these product areas.

As long as they've got a wide variety to be able to service the outset allocation model through the business cycle and we see Alcentra and Urdang having that.

Thanks very much.

Okay, Glenn.

Next question, please?

Thank you.

Ken Usdin, Banc of America Securities.

Your line is open.

Thanks.

Good morning.

A couple of quick clarifications.

First of all, on the FX business, that was up this quarter, can you just break down, was that strength in core FX or was that strength on the derivative side?

I think it is a little bit of both.

But, really, the foreign exchange continues to perform quite well.

We have very good new business penetration, good cross-selling into the investor customer base, and so there has been good customer order flow, and then also the -- there is a little bit of volatility in the quarter.

So that was quite good.

I think also in the interest rate derivatives, we've really focused on our sales effort and expanding that overseas into Europe and into Asia and we're getting some traction there, so that business has also been picking up.

I would focus on the FX side.

I think that is clearly where some strength has been.

We're getting a better and better, better brand for our foreign exchange operations abroad.

And you may have seen that the award that we received yesterday for our foreign exchange research product, that has been a -- kind of the door opener here in terms of our credibility, and being able to, again, cross-sell every one of our asset servicing clients, with a bit of foreign exchange.

And that seems to be playing out well.

Okay.

Second question, on securities lending, could you just tell us directionally was that up or down sequentially?

They had positive sequential performance, although it was more modest, because with the third quarter, it was quite strong.

And so I think we continue to see there good new business, good volume, the book continues to grow, and there was a little pressure on spreads, on the fourth, relative to the third, but it didn't stop them from having positive sequential performance.

Okay.

And then the third question is simply on the '06 side, last year, you mentioned that kind of things came out differently than you expected in '05.

One of those areas was securities gains, where you had said kind of 25, 35, and you came in closer to 70 million.

I was just wondering if you could kind of walk us through kind of what is left in the portfolio and how you think that one area might be stacking up next year versus, you know, this year, where it had come in significantly different than your expectations?

Yes, sure.

We've had about 350 million on average invested through our LBO sponsored portfolio, legacy portfolio, and then some of the direct investments that we made.

What we've seen in the last couple of years is that there has been a realization on some of those investments and a draw-down on the commitment, in terms of kind of that overhang, so the portfolio average amount invested has stayed relatively constant.

When we gave the guidance for 35 million last year, we assumed about a 10% return.

We thought that was a reasonable return expectation.

In fact, you're correct, it has come in closer to about 20% this year.

It is again something to factor in, we're -- we would expect to still see the average investment maybe trend down a little bit, but not move too far off that 350, and then whether it falls back to the 10%, or can stay up at the 20% will depend to a large extent on the markets.

And what piece of the markets is the most kind of directly -- you know, what part of your general guidance on directionality of some of those market trends should we look at to try to best gauge that?

I think it is really equity price levels and the astuteness of the private equity people that we put the money with.

Sometimes that has no relation to what is happening in the general markets but I think in general, have you to have a reasonably good equity backdrop to get liquidation events, and that's been the case for the past couple of years, and I think the private equity folks are still looking to recycle gains.

So I think that is really it.

We've had very little of the [INAUDIBLE] gains has been in the fixed income side.

Occasionally, when we're repositioning some bonds we might trip a gain but we haven't consciously tried to generate securities gains on the fixed income side.

Okay.

Thanks a lot.

Thank you, Ken.

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

Thank you.

Tom McCrohan of Janney Montgomery Scott.

Your line is open.

Thank you.

Hi, Tom.

Hi, most of my questions have been answered so I will just ask one question on the operating leverage.

It seems like that is to some extent going to replace the 100 basis points guidance seems to be replacing going forward everyone's EPS guidance that you provided, so someone had already asked earlier about the flexibility in your model, given -- in the event of the operating environment doesn't pan out as expected, it seems to respond 100 basis points is still achievable.

Conversely, on the upside if the environment is little better than what you've laid out for us, will you guide towards the 100 basis points in how you manage kinds of discretionary spending or would you let more of that fall to the bottom line and let the operating leverage kind of expand above 100 basis points?

Well, that is a very good question, Tom.

I think that the -- we understand very much what drives shareholder value here.

And it is having a consistent solid revenue growth line that -- and through that, we have the diversified product that will allow us to create more products, and enter new markets, to create the growth to have above market growth there.

The other concomitant goal here is positive operating leverage, and the more that is apparent, the more that is sustainable through a business cycle, we know that that is going to have very positive impact on our share price.

That is our goal.

How much visibility would you say you have in your revenue line throughout the year?

And maybe one way to conceptually think about that is given the business that has already been -- being converted and in the process of converting, in the pipeline, you feel like half of your internal targets, revenue growth targets, already kind of are highly probable, or is it less than that?

How much does the market need to cooperate for you to kind of achieve your internal targets?

Well, I think have you to look at it really almost on a business by business basis, and you know, in terms of visibility, we track businesses that have daily production, such as execution, and clearing and of trading businesses, very closely, and those, obviously, are going to be most closely tied to the market.

But even in core businesses, like custody, the amount of transactions and the level of trading in the marketplace, and the price levels, are also going to have an influence.

Suffice it to say that we do have a very rigorous process to assess what we think the market performance is going to be.

We look at our customers and try and factor how much organic growth is going to happen from those customers.

We look at the new business pipeline and factor that in.

And then there is pretty much of what we expect, is identified at a very rigorous level, when we get through the budget process.

And then, again, as you say, the market has to cooperate, because that's one of the underlying assumptions.

Okay.

Well, thank you very much.

Thanks, everyone.

It is Joe Murphy again.

Before we conclude I just wanted to remind everyone of our next analyst event which will be on February 6.

Gerald Hassell will be hosting a seminar on issuer services businesses, and this seminar will include presentations by Karen Peetz from Corporate Trust, as well as Chris Sturdy from our Depository Receipts business.

So this concludes our fourth quarter earnings call.

We appreciate you joining us this morning and encourage you to contact me with any further questions.

Thanks.

Thank you all.