紐約梅隆銀行 (BK) 2006 Q3 法說會逐字稿

Welcome to the Bank of New York's third quarter 2006 earnings conference call.

Today's conference is being recorded. [OPERATOR INSTRUCTIONS]

Now Ken Brause, Managing Director, Investor Relations for The Bank of New York.

Thank you, Melissa.

Good morning everyone, and thank you for joining The Bank of New York 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 2005 10-K, our most recent 10-Q, and other documents filed with the SEC, that are available on our website at www.BankofNY.Com.

Forward-looking statements in this call speak only as of today, October 19, 2006.

We will not update forward-looking statements to reflect facts, assumptions, circumstances, or events, which may 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.

Thank you, Ken.

And I'm joined this morning by Todd Gibbons, who is our new Chief Financial Officer, although Todd is certainly not new to our Company, and as you know we are kind of at the end of a bit of a transition period between Todd and Bruce, and therefore Bruce is also with us for today.

While Bruce doesn't have a speaking part necessarily, that hasn't stopped him before from making comments, so I expect that he will add some color to the quarter, as well as offer some historical perspective on some of the questions that might arise.

Now, certainly as all of you have seen, we put out a fairly lengthy release this morning, but I would like to review and summarize maybe a few of the key points for you.

First, the numbers certainly reflect a good quarter and without question, the breadth of our services I think helped us on the revenue front, specifically in our Issuer Services businesses, which helped offset markets that were rather seasonally weak.

Overall, we did quite well.

Our operating earnings were up 10% versus the year ago quarter, and 12% year-to-date.

Assets under custody continue to grow, it's up 18% from a year ago, and $200 billion sequentially, to over 12 trillion, and that certainly bodes well for the future.

The biggest contributor to this growth was cross-border assets under custody, which are up 35% from a year ago, and now total $4.2 trillion, or over 30% of our total.

And again, that is a reflection of where the growth is, and the growing global nature of our business.

During the quarter, we maintained our focus on sound expense management, mitigating the impact of lower transaction volumes.

Our overall credit quality has remained excellent, as we benefit both from actions that we have taken to strengthen our risk profile, and where we are in the credit cycle.

With our past actions to reduce our exposure to credit risks, continue to pay dividends in the form of lower credit costs, and we have realigned our use of credit in support of our primary business lines, which we believe will differentiate us when the credit cycle turns.

Finally, this has been a watershed month for us, in terms of repositioning our Company to a pure, trust and custody model.

Taken together, these actions substantially complete the transformation of our business, to focus on security servicing and Asset Management.

And it is through these transactions that we have significantly expanded our global corporate trust franchise, and repositioned our execution business for better growth and higher returns on our invested capital.

With the results in new business mix, we are now better positioned to accelerate growth and generate attractive returns going forward.

Now as I alluded to earlier, one key aspect of our model is it's diversity, which provides natural offsets when performance does vary among market segments or regions of the world, and I think this quarter showed that benefit very clearly.

Issuer Services for example, fees were up 15% over a year ago quarter, and 19% for the first nine months of '06 over the comparable period.

The strongest growth was in the Depository receipts business, which continues to benefit from the growth in cross-border investing activity, as well as the associated corporate actions.

Total spinoff of Arkima, share reorganizations including Vodafone share consolidations, and mergers such as Metal's Steels acquisition of [Arcola] are good examples.

In Corporate Trust, we continue to achieve strong growth in global and structured trust products, areas where I might add, we are significantly and have significantly expanded our leadership through the recent acquisition.

I think it's important to note that going forward, issuer services will be our second largest business line, in terms of revenue.

Now another strong performer this quarter was private banking and Asset Management where we grew revenues by 23% versus the year ago quarter.

Assets under management in this sector were up 13%, and now total total $120 billion.

A growth here was led by our investments in our alternative asset platform where assets under management doubled from a year ago, at an area where we've indicated in the past that we expect to concentrate further resources.

Over the past year, we have added Alcentra and Urdang, we have expanded our capabilities in structured credit and real estate Investment Management respectively.

In particular, Alcentra has had a very strong year.

They grew assets under Management from $6.6 billion at the start to $10.4 billion today, again beating our deal model.

They have capitalized on the exceptionally strong appetite for structured products, which we again expect to continue.

And we are seeing, we are beginning to see again a great deal of opportunities to once again leverage The Bank of New York's name and distribution around the world, much of the same way we did with Ivy.

Broker-dealer services has another quarter of great performance and continues to excel at creating value, both for our clients as well as our shareholders.

In that area, fees grew by 14% from last year on again continued global adoption, as well as utilization of collateral management, and that is becoming an increasingly important financing tool used by broker-dealers around the world.

I think you will hear maybe a metric from Todd that I think will substantiate this, and give you a barometer on this business going forward.

These strong performers helped offset the pronounced seasonal decline that impacted results in other market related businesses, such as foreign exchange and execution services, and that demonstrates the benefit of our diverse service offering, and again it provides a level of consistency in our earnings flow.

Turning to expenses, as we have repeatedly emphasized, controlling costs to achieve positive operating leverage has been a focal point for this organization, and will remain so.

For the quarter, excluding merger and integration costs associated with our swap transactions, we reduced expenses by $40 million sequentially, and I believe that reflected our disciplined expense control, and lower expenses related to activity levels as well.

Through the first nine months, we have over 100 basis points of positive operating leverage, and that is very much in-line with our expectations at this stage in the year.

So a solid quarter all-in-all, with continued success in growing the top line and maintaining our expense discipline.

As well as clear progress in strengthening our business mix to enhance our organic growth rate.

With that, let me turn it over to Todd to share more details regarding this quarter.

Todd?

Thanks, Tom.

I am pleased to be here on my first earnings call as the Chief Financial Officer.

I have had the opportunity to meet with many of you already, and look forward to meeting with the rest of you next month at our Investor seminars.

I would like to focus on some additional highlights of the Earnings Release we issued this morning.

As with last quarter, we provided you with income statements and balance sheets for both continuing and discontinued operations, as well as adjusted results which combine the two.

Since continuing operations obviously doesn't include the earnings we will gain from the swap transactions, it only provides a limited benefit in modeling future results.

In addition to these break outs we have added a new dimension.

We previously told you that we will start incurring and reporting merger integration charges this quarter.

We have broken out those costs for you, and displayed our financial results both with and without them.

Before I get into our actual performance, let me put the quarter in some perspective, with some metrics that impact our key businesses.

First of all, non-program equity trading volumes were down 11% sequentially, and up only 2% year-over-year.

Average daily U.S.

Fixed income trading volume was down 3% sequentially, and 1% year-over-year.

Total debt issuance declined 15% sequentially, and 8% year-over-year.

Tom alluded earlier to the low FX volatility in the market.

In fact it was at an 8 year low last quarter.

On the positive side, in the quarter, asset prices were strong sequentially, with the S&P 500 up 5.2%, and the EAFE was up 3.4%.

In the first nine months of 2006, global deposit receipt trading exceeded $1.1 trillion, that is up over 50% from the comparable period in 2005.

The global sale of CDOs, that is collateralized debt obligations is up 20% year-to-date versus 2005.

Despite these mixed conditions, we delivered a solid quarter because of the diversity of our business mix.

We have achieved top line growth of 5% versus a year ago, in an environment that was weaker than last year, and we managed our cost base, to bring as much of that growth as possible to the bottom line.

With that said, even with the seasonality in our quarter, our year-to-date results have been strong.

Earnings per share is up 12% on an operating basis for the first nine months.

Security servicing fees, our most important fee category, are up 11%.

Private banking and Asset Management fees are up 20%, and even with an inverted yield curve, net interest income is up 5% year-to-date.

Our execution services business have been under pressure, and we have addressed that through the formation of BNY ConvergEx.

You will see the results of this next quarter.

Now that our transactions have closed, you are likely trying to determine how to think about us going forward.

From a P&L perspective, our swap transactions effectively switched a 70% net interest income business, for a 70% fee-based business, as we have basically deconsolidated our execution business, so our 35% share of BNY ConvergEx earnings will be reported in other income.

In terms of our balance sheet, the biggest change is on the asset side, where our loans have decreased, short-term investments have increased, and our risk weighted assets have declined as a result.

This change in asset mix will result in an overall lower yield, but credit costs will be lower as well.

On the liability side, we have swapped retail deposits for corporate trust deposits, a higher proportion of which are foreign and interest sensitive, hence the need to reposition our portfolio.

This change in the nature of the deposits leads to a more liability-sensitive balance sheet.

We took actions in the third quarter to mitigate this sensitivity.

We sold $5.5 billion of securities and incurred a loss.

We reported that loss along with severance and other deal related expenses as merger and integration charges, that totaled 110 million pre-tax, 74 million after-tax.

We expect the total merger and integration charges to be close to 150 million after-tax.

The remainder of these charges will be incurred over the next few quarters.

On the capital front, there are several items that are going to be impacting our capital position.

As indicated, we repurchased about 12 million shares on October 3rd to effectively neutralize the impact of the lower earnings tied to the BNY ConvergEx transaction.

Because of the goodwill and intangibles associated with the corporate trust acquisition, we will have a temporary reduction in our TCE ratio, that is our Tangible Common Equity ratio, however with our strong earnings power, we plan to build the TCE ratio throughout 2007, and we anticipate that we will resume share buybacks in the fourth quarter.

As you saw, our effective tax rate was lower than the year ago and prior quarters.

We slowed recognition of tax credits related to our synfuel investments in the second quarter, given the uncertainty at the time over the price of oil.

As conditions have improved over the past few months, we have begun to factor in a larger benefit.

At this point, assuming oil prices stay near current levels, we expect the tax rate for continuing operations, and that is excluding the gain on the sale of retail in the fourth quarter to be somewhere around 32.5%.

Overall this was a solid operating quarter for us.

Looking ahead, let me mention a couple of thoughts pertaining to the fourth quarter.

As you know, it is typically one of our strongest and we have exchanged a no-growth business for one where growth has been strong, so we have an improved outlook in terms of performance, however, as we indicated when we announced the swap, we expected that the transaction would be around $0.03 to $0.04 dilutive in the fourth quarter.

While the goal is always to beat a deal model, we believe that this result is a reasonable expectation at this point.

All-in-all we believe the new base level and composition of earnings will make the earnings power of our franchise that much more apparent.

Bottom line for the third quarter and the nine months to date, we have executed well, and we are looking forward to delivering the full benefits of the most recent transactions.

With that I will turn it back to Tom.

Next quarter and the quarters to follow, our earnings will have a very different completion, and I think it will reflect our sharper focus and our strength in profile.

To get there though, our primary objective remains the same.

It's all about execution, it's about continuing to demonstrate solid, consistent operating performance first and foremost, and focusing on maximizing the value of our two strategic transactions.

And that means achieving a smooth and timely integration, and ensuring that we realize on the expected benefits that are embedded in the respective deal models, but clearly, our goal is going to be to even do better, and I'm very pleased with the success of the transition so far.

We've gotten off to a good start, a very strong start, the integration of the corporate trust business I believe is going exceptionally well.

Day one was a success.

All technology worked as planned, assets and liabilities were transferred, and we welcomed 2,400 new employees.

Our focus though remains on employee engagement and customer attention, and I can tell you firsthand that that is happening.

I, Gerald Hassell, a number of our senior people have walked the halls, and we have introduced ourselves to our new employees, and we have talked to our new clients, we know that our customers are being retained and certainly our employees are engaged, and when our employees are engaged we will retain our clients.

I think that's going exceptionally well.

We are excited.

Our new staff is excited as ever about the opportunities to grow the structured and CDO business, and about the growth opportunities, abroad and overall.

Given the strategic actions that we've taken, and our ongoing efforts to create our own growth as we've said time and again, we are confident in how we are positioned to benefit from key global trends, including increased cross-border investing, where again virtually every single one of our product lines have an international or global focus, as well as the growing complexity of investment products, again where we provide overall solutions.

We are excited about the opportunities at hand and we're optimistic that we can realize on our enhanced earnings potential.

Now, let me ask the Operator to come in and open the call to some of your questions.

Thank you.

Melanie?

Thank you.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] One moment for the first question.

Mike Mayo with Prudential.

You may ask your question.

Good morning.

Good morning, Mike.

Can you elaborate a little bit more on the decline in the trading volume, and what you are seeing now and expectations for that to pick up, and the reason I ask that, I see the securities servicing fees down sequentially, in really all of your four main categories, and also where is securities lending?

How much was securities lending, that decline?

Okay, Mike, this is Todd.

Looking at trading volumes, obviously it impacted most significantly our foreign exchange, and you can see what the numbers are there.

We've taken a look at that.

That is primarily driven by a number of factors, the size of our custody business and our customer related business, transaction volumes in general, and then volatility.

We have no issues around retaining clients.

This is really a market-related situation, and we are confident that we will see that come back to more normal levels, perhaps not the level of the first and second quarter, but certainly significantly over the third quarter.

Yes.

I think, Mike, the trading experience is really due to really abnormally low volatilities and we expect to see that will, we expect come back, and I can assure you there is no customer erosion, no trading losses.

It is strictly market-related, and it goes up and it will come down, and it will go back up as well.

And securities lending, how much was that down linked quarter?

That's not something we typically break out, Mike.

It was down slightly as you would expect for seasonal factors, probably not as much as the peer group.

And then just regarding the fourth quarter, I guess you had $0.56 this quarter without the merger charge.

Right.

You're saying the tax rate is going to go back closer to normal, so maybe that's, call it $0.06, so you are up $0.50.

No, no, no, wait where did you get that, Mike?

Okay, so we aren't computing it correctly then?

No.

There's minimal impact on taxes.

I think there was a little benefit from recalibrating the synfuel number, but we were just giving guidance for a slight uptick in taxes.

A couple cents for that?

No, not a couple cents for that.

I mean, you're still putting words in our mouth.

It's a modest increase in that side.

Right.

But go ahead.

Okay, well, yes, please correct me if I'm wrong.

The tax rate, 29% going to 32.5%, or am I looking at the tax rate incorrectly there?

This quarter's tax rate.

Right.

That's true.

So wouldn't that be at least a few cents there, if you go back to more normal tax rate in the fourth quarter?

Probably in the order of 1 to 2, Mike.

Okay so a couple cents there, and then as far as for our models, how you guys think about provisioning since it was a little bit negative, and I recognize you will have less credit risk with the swap now.

There is a significant, most of our credit costs recently have been in the middle market and consumer area, which is the business that went with the swap.

We are going to give a little more color around what we expect going forward, but clearly on average, it will decline from where we were.

Okay.

So what you reported less an adjustment for taxes, less you said $0.03 to $0.04 for the merger, kind of gets us to a run rate looking ahead?

Well, I mean we get a seasonal bounce in the fourth quarter.

If you look in the past, we have typically had anywhere from a $0.02 to $0.04 uptick, third to fourth, just on seasonal factors.

Sure.

All right well thanks a lot.

Good.

Thank you, Mike.

Next question, please?

Thank you.

Our next question comes from Andrew Collins with Piper Jaffray.

Please go ahead.

Good morning.

Hi, Andy.

Just wondering on the ConvergEx, is that going to be kind of accretive, dilutive?

Can you talk a little bit about the strategic benefit, and how we could look at the fourth quarter relative to that transaction?

Okay.

Because we took the proceeds from the sale and we bought back our stock, we expect it to be neutral to earnings per share.

What you will see is the income related to ConvergEx, and since it's an equity position, it will be coming through our other income category going forward.

Okay.

Next, more big picture, can you talk about the corporate trust acquisition from JPM a little bit, in terms of client retention, how is it tracking so far, and if you could remind us of the economic impact of any attrition there?

Yes.

Well, Andy, the retention is going exceptionally well.

I would say that it's still obviously very early but nonetheless, I have to say and I think I may have said in the past, that the effort for client retention began quite a few months ago.

We have been able to not only influence in some ways the client calling.

We have been participating in that, both Gerald and I have made client calls and we've talked to our new staff.

We've talked to certainly our current staff, and to make sure that that integration is going very smoothly.

All of that has taken place.

I am very optimistic with regard to client retention, and as I mentioned I think in my remarks, it's all a matter of employee engagement, and these 2,400 people that we have taken on, now understand that they are front and center, in terms of our business model, and they represent now the second largest revenue source, the Issuer Services overall in our Company, so they are a major influencer on the focus of our Company and it's performance.

They feel good about it.

They are excited about it and they also happen to be attending a market that's in a growth mode, with regard to the global activity as well as the structured credit, so I feel actually darn good about it, and I think we're doing quite well.

Okay, and next, on the global cross-border activities, and kind of your investments in that space, how are you positioned to be a leader there, and how does this transaction kind of help you in that initiative?

Well, certainly, Andy, again virtually every product that we have has a global orientation to it, and that is where the fastest growing element is in virtually every business.

Custody, you saw that we had a 35% growth in global assets under custody.

That's where the growth is there.

DRs has had a blowout year and that is all cross-border activity.

The Collateral management business with regard to broker-dealer services, it's fastest growing element within that, collateral management, is the adoption abroad using non-dollar securities, and we will be putting together some statistics and some metrics on that as well in the future, which I think will give you an idea of how that adoption rate is taking, in terms of the percentage of financing by broker-dealers globally using the tri-party repo effort.

So, again, I think the growth that we are seeing this quarter is very much oriented towards international, towards global, and we'll continue to do that.

Can you give us some idea about what the pro forma contribution is from international, either revenue or EPS, or maybe even headcount if you don't have either one of those?

We're working on that, but I think Todd may have preliminary views of that.

Yes.

I mean all of our businesses are global, and in fact the one business that was not, the retail business is what we did swap out.

There is no question.

It is hard to determine, for example with a DR you may have, it could not be an American depository receipt.

What's kind of interesting there, is the growth is really coming on the global side, the GDRs, rather than in the States.

Assets under custody are now about 35% global, and they are in the cross-border is growing much faster than domestically, and I think another metric we can give you is we have got 25% of our staff now located outside of the U.S.

And with the swap transaction, we have added a number of foreign offices.

Tom was alluding to our broker-dealer business globally, both global clearance and collateral management.

We are seeing European repo and the acceptance of repo growing at about a 15% per annum rate, and within that you are seeing a significant acceptance of tri-party, the role that we play to facilitate repo, that is growing on top of that another 10%, and we see a long way for that to go.

I think overall, Andy, I would say our total revenues probably approach 30%, but with the corporate trust acquisition, that's going to be modified.

I want to make, that's a rough estimate, and we are going to come up with some more precise numbers going forward.

Finally, on the foreign exchange, what have we seen so far quarter to date, and clearly with an eight year low recognized in the third quarter, that had an impact on your numbers.

It did.

That was the biggest driver of our numbers for the third quarter.

We don't give guidance here, but we are seeing the market move back to normalcy.

I think the thing that was a little bit different this year, is usually you see that snap back in September, and it was a little bit late in September.

Great.

Thank you.

Next question, please?

Yes, our next question comes from Glenn Schorr with UBS.

Please go ahead.

Thanks very much, guys.

Hi, Glenn.

Just a couple quick quickies.

I saw the text.

I just was looking for a little more color on the other income reflected, higher level of asset related gains?

Yes.

There were no significant individual items.

If you look at our other income, it was at 69 million for the quarter, that is in-line with where we were for the first quarter, I would say it's a little higher obviously, than where we have been running at between 45 to 50 million, but certainly not out of bounds with normal trends.

Just if you could help me, what kind of stuff goes in there?

What kind of asset related gains?

Like seat gains earlier in the year?

Exactly.

We could have things like the seat gains earlier in the year.

Sales of physical properties, recoveries on loans in some instances can flow through that line.

Got it.

And then, okay, so the ROE is a little bit lower this quarter, but my gut is capital built a little bit ahead of the buyback.

Exactly.

Where does it all shake out?

Put it this way.

Where is your expected range after the business swaps and spins, being that there's a little less of a lending component?

Yes.

Well, clearly, because of the goodwill associated with the transaction, we are going to see in the fourth quarter a dip in our TCE ratio, a dip in our capital ratios.

We will rebuild that back to our more normal levels during the course of the year, and look to buyback in the fourth quarter.

It's too early to say right now that we are going to adjust down, how much our leverage ratio we are willing to tolerate, but there's no question that we've got a reduction in our risk weighted assets, and once we've had a little time to digest and experience the characteristic of the business, and the deposits that have come to us, we are going to give that a hard look.

Got you, yes.

Because I guess you start to look like in the range of 100 basis points over on the TCE some of the competitors.

That's right, Glenn, and I think that it should be very apparent that the business mix migration that we are going through should give us a little bit more flexibility there, given the risk weighted assets in particular, but also the enormous liquidity that continues to be generated in the Company on a very, very stable basis.

We have talked to the rating agencies now for quite some time about that characteristic.

They are looking at it, and we are guiding them through that and we'll do so through the course of '07.

Okay, thanks, guys.

You bet.

Next question, please?

Thank you.

Our next question comes from Tom McCrohan with Janney Montgomery.

Please go ahead.

Hi, thanks for taking the call, and welcome Todd, to the quarterly earnings calls.

Thank you.

Just had a couple of clarifications.

The share buybacks, did you say it's expended through the fourth quarter of this year, or is that fourth quarter of '07 you'll start resuming buybacks?

We would look to the fourth quarter of '07.

Although we did, Tom, repurchase shares as part of the ConvergEx strategy to offset the dilution of the transaction at the beginning of this month.

Right and that was the 12 million shares?

Yes, right.

Are there any plans to provide pro forma of supplemental financial statements before next quarter's fourth quarter earnings, that reflects the formation of ConvergEx?

The supplemental information is helpful, it reflects more of the swap.

Is there going to be any pro forma or supplemental statements for ConvergEx before Q4?

Well, I think we put out various projections when we announced the transaction, we refreshed that today and still think a 3ish to maybe 4ish cent dilution number is what you would expect because from a GAAP standpoint, because of the intangible amortization, which will take place certainly a lot less on a cash basis.

But I do want to go back on one thing, Tom, because I think maybe where Mike Mayo earlier in the call was going was pointing to a number that he thought was the run rate probably lower than what we're comfortable with so right now with the Street kind of at a $0.56 cent number, that would imply that we are going to have a seasonal uptick in the business offset by the dilution, and I think that's a range that at this point we're comfortable with.

So I don't want the wrong conclusions to be drawn from that earlier question.

Okay.

Thanks for clarifying that.

And trying to get a read on where the execution and clearing line is going forward, after taking effective ConvergEx, I mean, it was down year-over-year, and it was also down sequentially.

Can you help us distill what portion of the decline was really due to the pressures in the Commission business, more the execution stuff, as opposed to the client loss from Pershing?

Well, by far the largest component on that line is Pershing, but the businesses that we saw particularly soft in the quarter were really on the execution businesses.

I mean, Pershing did have the loss of a large client, as we talked about, if you take that out, that line would be up.

Okay.

And then again, just a clarification, Todd.

After ConvergEx takes effect, the results of your equity ownership in that has been reported as an after-tax number included in other income?

It will be recorded on a pretax basis.

Pretax?

Yes.

In other income?

Correct.

Got you.

And the last question, just another clarification.

On the merger and integration charges, the future charges, I want to clarify did you say is was 150 million total after-tax?

Correct.

Okay so you are basically half way --

A little shy of half way.

And how much if you can give us a composition of the total merger and integration charges, how much of those are going to be due to the balance sheet repositioning?

Probably about half.

About half?

Great.

Most of that is already done, so there's very little left to do of that, and I think what you'll see from here on out will be people-related costs, technology shut downs, and vendor-related costs.

Okay, and the saving of the additional charges that have yet to be absorbed is the majority in Q4?

No, I think it will drag out as the conversions and consolidations take place in '04 and throughout '07.

Great.

And certainly in the first half of '07 for sure.

The conversions will take place in a staged basis beginning in December, and another phase in January, and I think the final phase of the technology conversion is in February, and then we've got a couple of tag-ins overseas.

Yes.

Okay.

Thank you.

Thank you, Tom.

Next question, please?

Yes.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Thanks, good morning, guys.

Good morning, Brian.

Just to talk about the $0.03 to $0.04 dilution, once again that excludes merger charges, right on an operating basis?

Correct.

Naturally, this will be a tailwind for you guys over the next couple years, as that dilution gets mitigated over time.

What kind of trajectory in that can we expect over the next few quarters?

So we had $0.03 to $0.04 this quarter.

Would it be a penny less in the first quarter, and so on and so fourth?

Well, I think that you saw that the transaction when we announced it was maybe 4 to 4.5% GAAP dilutive for all of '07.

If you're just building out your models for '07, clearly the key to starting to mitigate the dilution off of the current run rate, or actually to accelerate our growth rate as another way to look at it, is how quickly we're able to pull those synergies in.

We have 115 million was the estimated synergies on a pretax basis, and we would expect to see that commence, that effort commence as Tom indicated, with some of these first quarter conversions.

We'll be shutting off systems that we're paying for under our TSA agreement with Chase, and that will start to lower costs and then we'll be consolidating personnel when those conversions take place.

So at this point, I think it's a safe assumption for all of '07 would be 50 to 60 million of those 115 would be the impact on '07.

Great and that's pretty much the same as when you have the deal?

There's no major change to that?

At this point I think that's where we are, and obviously we're looking at ways to see if we can improve upon that.

Great and then is there any update, I know you haven't said it, but I guess maybe when would you maybe provide us with an update on whether you get some of this swap characterized as a tax free swap?

Funny you should ask that, but I think we are finally prepared to give some guidance on that, but it looks like at this point, 15 to 20% is probably the amount of tax that we think we would benefit from in the like kind exchange, that saves us tax cash flows say of 175 million at today's interest rates, that's probably a 10 million pick up to NII, which probably improves the dilution estimates by about $0.01.

Per year?

Yes.

Okay, great.

Does that help your tangible capital ratios enough that you would consider repurchasing more shares as a result of that?

Well, actually, the way the accounting works around that, you book a deferred tax liability, and you increase your goodwill, so there's really not an opportunity to buyback more stock.

And then just along those lines you mentioned Q4 '07 was your anticipated time that you would be back on the market, and you also said you'd be revisiting your tangible capital ratio.

Does that mean that if you guys decide that you can hold less capital, you may be back in the market before Q4 '07?

I think that's possible, but we would really like to digest the transaction.

We would like to gain a level of confidence on what we have here, and build that TCE ratio up, at which point we will I think be in a position to consider whether we feel like we should be more leveraged or not.

Great.

And Brian, we need to be prudent about it but we will be very aggressive in our analysis, and as I said earlier, we are going to be in contact with the rating agencies, to make sure they understand the flows, the liquidity that we have, and the risk profile, the very modified risk profile that we now present.

Right and so these discussions probably will be taking place over what, the next couple of quarters?

In fact they already have taken place because we reviewed these transactions with the agencies before we even close on them, to make sure that they fully understood the impact as we saw them then, but then we will have constant discussion with them, certainly through the transactions, and through the conversions as well.

Okay great.

And then just a couple more quick questions.

One on the other income.

I know that was higher from some of the gains.

What would you consider a normal run rate of that and I know it's going to be enhanced by the JV being included in that, but excluding the JV, what would you consider sort of a normal ongoing run rate for that line?

You know, just to give you some historical perspective, we've been running in the 45 to $50 million range.

If we see 20 or 30% swings around that, I don't think that would be--

Yes, I think Brian, if you went back to last day quarters the low was maybe 30 million and the high is close to 70 million, the average has been probably somewhere in the middle of that.

I think if in the quarter where we had 30 million, we had probably none or very few asset-based gains so, that's really been the wildcard there.

Equity Investment in subs, like or affiliates, like Wing Hang Bank, that are in that number, so there's a base level there, and then on top of that there's been layered these events, which can be somewhat lumpy in terms of affecting that line item.

It tends to average out though over time.

Right so basically historical trends should apply for the future on that before the JV?

I think it's a reasonable assumption.

I think when you look at it in the context of you were a little stronger perhaps on that line item in the quarter, but you saw unusually low levels of FX volatility, for example, and then I think those things also tend to trend back to more the basic secular trend line.

Okay and then just one last question.

Just Tom, if you want to elaborate a little bit more on the DR business.

I know we've had great secular trends there, and the way that I look at it, I know you don't disclose DRs, but I would estimate that you had just kind of a modest seasonal decline Q2 to Q3, despite having of course Q2 being the high point in the dividend distribution.

That's a good, I think a valid observation.

It is still up quite strong on a year-over-year basis, Brian.

Right.

So I guess the question is then fourth quarter, again is a seasonally strong quarter for that.

I just I guess in taking your temperature on the DR business if you want to elaborate how you feel about that?

I still feel very good about it, Brian.

The basic indicators here of cross-border flows, the continued interest by the Investment managers in non-dollar assets continue.

There is still a lot of action, if you will, in terms of corporate actions, in terms of reorgs, spins, mergers abroad, so I do still see some very nice strength there, absolutely.

And it wasn't anything lumpy in the third quarter that we, you know if you look at the fourth quarter, you would be taking out of the fourth quarter because it occurred in the third quarter?

On the DR side?

No, there wasn't.

Thanks very much.

Thank you, Brian.

May I have the next question, please?

Yes, our next question comes from Ken Usdin with Banc of America Securities.

Please go ahead.

Thanks, good morning.

Hi, Ken.

Bruce, I just want to ask you again to clarify what you were mentioning about the fourth quarter in the context of '07.

I don't want to put any words in your mouth, but could you just describe again what you said about general comfort around 56, as including some dilution already in there?

Could you just repeat what you said?

I just wanted to, I think Mike was going places that were going to be decidedly more negative than our view, which is typically we don't give guidance, but I wanted to say all things equal, if we get a reasonable seasonal bounce like we have seen in the fourth quarter.

The Street estimates of being in the mid 50s is where we think is a reasonable place to get to.

So you would see from our $0.56 in the third quarter, an uptick in the core business, but then you'd have the dilution really from the intangibles that come with the Chase deal knocking that down say by $0.03 to $0.04.

There will be a slight impact also from the tax rate, but that's factored into our thinking so that roughly becomes again predicated on the markets a reasonable place to be in Q4, and then the trajectory off of that as you plan into '07, is just what you would expect from the growth in the business, amplified by the synergies that we will be pulling in off of the corporate trust business.

Got it and on top of that then, do you get the sense that next year's estimates do reflect the GAAP dilution accurately?

I'm not going to go there.

I just wanted to specifically, since we're not in the guidance business, but I did think that people might have taken the wrong impression from that first question, I wanted to at least clarify that.

Okay, I appreciate that.

My second question is just about the corporate trust business for JP Morgan.

You said in the release that for Bank of New York corporate trust was essentially flat sequentially.

Can you just give us some color on how the JP Morgan corporate trust acted this quarter?

Yes.

From what we can see, it's done about as we had expected it would do, and if you go back to the estimates that we had given you when we announced the transaction, it's still tracking pretty close to them.

Now, it's not tracking exactly how we had.

There are some things that are doing a little better and some things that aren't going quite as well, but it's pretty much on-track.

But on-track, I'm really asking.

Did they have also a flat quarter or was it better up or down, not relative to necessarily what you thought at the time of the deal.

How was their performance in the third quarter?

It was probably in-line with our expectations and what we are seeing trends in our own business, so they have a slightly different business mix.

They have a very big CDO and structured business.

That continues to do well.

Some of their international business continues to do well.

I think the softer spots are in the corporate and the Muni side of the business, and that is as we would have expected.

My third question is just about the private bank business.

I think you guys get a typical, bit of a second quarter bounce from tax-related stuff, but can you also just let us know, was there anything else in the sequential decline?

You had good flows, the mark to market was probably a little negative for you, but can you just talk through that sequential quarter decline for us?

There was beyond that tax preparation decline the other thing at work there was lower performance fees in some of the products, and particularly some of the Ivy products, and it just was the second quarter was very strong, and it just tailed off somewhat in the third quarter.

Can you give us a general sense of how big performance fees are as a proportion of the Asset Management and private banking revenues?

It's relatively modest.

There's very few products in the traditional side that have performance fees.

The biggest area would be Ivy.

Okay, thanks a lot.

Sure.

Thank you, Ken.

Next question, please?

Thank you.

Our next question comes from Gerard Cassidy with RBC Capital Markets.

Thank you, good morning, guys.

The question getting back to your tax rate with the synfuel investment, at what price of oil do you start to have to scale back those credits, and how long does that price have to stay elevated for, is it a full 12 month period or longer?

Yes, we gave you disclosure in the previous Q about the impact, given various price levels, and we're going to show that again this quarter.

What we have estimated in the guidance that we've given around this today, is if we were using $65 a barrel for NYMEX crude, which is about the best indicator we could use, so if it comes below that, we will see some additional benefit, and so far this quarter we have the price of oil has averaged below that.

Now would the price of oil have to stay that way, let's say below 65 for the entire quarter, to get the full benefit of the synfuel investment, or would it have to be a longer period of time for it?

It would be for the quarter.

What we've been doing, Gerard, is to update that schedule.

If you look at what we put out in the second quarter Q, it was really prospectively what the price would have to be going forward, so you can calibrate to that, because we've already taken into effect where the year-to-date average is up until that point.

Great.

And then the second question is, On the private banking and Asset Management fees, the growth was very strong year-over-year.

If you pull out the acquisitions, what kind of organic growth would you guys report?

I think there, it's much more modest.

It's been running probably in the mid-single digits, and obviously that's something that we aspire to improve upon.

I think we have some very good people, good product capability.

We are working on alignment with our salesforce, to make sure that those products get more shelf space, and we can drive more growth out of that area.

Thank you.

Thank you, Gerard.

I think we have time for one more question.

Yes, sir.

Last question comes from Robert Lee with KBW.

Thank you.

Good morning.

Good morning, Rob.

Just two quick questions, most of them were asked.

As it relates to Capital Management, understanding your putting off share repurchases hopefully until Q4 next year, but what about your appetite for deals?

I mean in the past you've typically, I guess set aside or allocated a certain amount of cash flow for transactions, and you have expressed an interest, particularly I guess in Europe, in acquiring some asset servicing businesses.

If something came up, would you feel that you're in a position to take advantage of it?

Yes.

A couple of comments on that, Rob.

First of all, we are pretty pleased with the business mix that we have today.

I think that we can grow this one, this business mix organically.

Given where we are in our capital ratios, we are not actively out searching for additions.

I mean, if we see something modest that's attractive to us, obviously we'll give that some consideration.

I would say on the Asset Management side, Rob, it is something that we're very much focused on, especially on the enhanced index area.

We are building up resources there, I might add in terms of people, in terms of intellectual talent, intellectual capital in that area, and if we see any opportunities for properties that will further accelerate that, we would be prepared to do that as well.

So we have clearly got an eye on building up capita,l but we do have, we have in fact earmarked a number, a part of our cash flow in '07 for these types of transactions.

If it doesn't happen, well, maybe we can increase, we will accelerate our capital replenishment, but we do have an interest especially on the Asset Management side.

You're right.

We have been looking in Europe, building out our franchise there, and there's been some activity that we have not been necessarily successful.

We have our eye there, and we expect to be at least looking.

Okay, and just one last question.

Are there any expenses in the quarter that were not part of the merger charges that that may be related to, either the Eze Castle transaction, or the JP Morgan transaction, that we should think of as maybe temporary in nature?

I don't think so.

I think other than Management time, everything was, any direct cost associated with it, we did drop to that merger and integration line.

Okay, great.

Thank you.

Thank you and I think that brings to a conclusion the question period, but let me just say before we do conclude, that I want to remind everybody that we are going to have an Analyst event, a seminar on November 7th with regard to Risk Management.

Gerald Hassell will be hosting that seminar, so I think, I certainly want to encourage everyone to be there if they can.

I think it will be of great interest, and we'll talk about all aspects of risk Management to include credit.

The seminar will include presentations by Todd as well, Tory Bernsten, Head of Client Management, Don Monks, out Chief Administrative Officer, and the Head of Global Treasury, Jeff Landau, so we will be able do comment about a variety of areas with regard to risk management.

This concludes our third quarter earnings call.

We certainly appreciate your joining us this morning.

We would encourage you to reach out to Ken Brause in Investor Relations for any further questions that you might have.

Thank you very much.

Have a great day.