紐約梅隆銀行 (BK) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2007 earnings conference call hosted by the Bank of New York Mellon Corporation.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Steve Lackey.

Mr.

Lackey, you may begin.

Thank you very much, Melissa, and good morning, everyone.

Thanks for joining us to review the second quarter financial results for the Bank of New York Mellon Corporation.

Before we begin let me remind 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 2006 10K, our most recent 10Q, and other documents filed with the SEC that are available on our website at bnymellon.com.

Forward-looking statements in this call speak only as of today, October 19, 2007 -- October 18th, excuse me.

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

This morning's press release focuses on the results of the Bank of New York Mellon.

We also have a supplemental document, the quarterly earnings summary available on our home page which provides a five quarter trend combined view of the company.

This morning's call will include comments from Bob Kelly, Gerald Hassell and Bruce Van Saun.

In addition, there are several members of our executive management team to address questions about the performance of our businesses during this quarter.

I would like to turn the call now over to Bob Kelly, CEO of the Bank of New York Mellon Corporations.

Thank you, Steve, and good morning, everyone, and thank you very much for joining us.

We had a terrific quarter.

This was our first as a merged company, and in a really volatile market environment we performed well.

We generated strong growth in both revenue and net income and with significant positive operating leverage.

The numbers this quarter are a little noisy, given our merger and integration expenses and a significant increase in intangible amortization, but we do have to remember that the intangible amortization is of course a noncash, noneconomic number.

Here is the big picture.

Overall our GAAP earnings were $0.56 per share.

Excluding M&I we earned $0.67 versus $0.61 street expectation.

Adjusted further to exclude intangible amortization, we earned $0.74 per share.

The way I think about the $0.74 per share is kind of straightforward.

When you compare it on an apples-to-apples basis to Q3 '06, i.e.

adjusting for the Corporate Trust acquisition and the sale of ConvergEx, it shows a very strong 19% increase in revenue year-over-year and a powerful 24% EPS growth year-over-year.

Now there were some one-time items in the numbers, both positive and negative, that are detailed in the first page of the release.

But they added only about a $0.01 to our results.

Bruce will go through them with you shortly.

And next quarter our numbers year-over-year will be a lot simpler as Q4 '06 included the Corporate Trust acquisition.

During the quarter, that was stressful for a lot of financial institutions, we enjoyed very strong growth in both fee and net interest income.

Securities services businesses benefited nicely from higher client volumes, generating significant revenue growth in asset servicing, issuer services, particularly in the DR business, and clearing services.

In asset management we generated net flows of $29 billion during the quarter.

The flows principally reflect our strength in money markets at a time when investors were looking for safe havens.

We also won a landmark equity deal in -- mandate in China with $4 billion in long-term flows at the end of the third quarter.

However, our asset management business experienced a negative impact of volatility with a significant reduction in performance fees and writedowns and C capital.

The outlook for asset management remains strong.

The mandate in China is a reflection of our growth opportunities outside the U.S.

market.

It demonstrates our ability to leverage the dual strength of asset management and asset servicing because we also won the global custody associated with this landmark asset management mandate.

We continue to grow rapidly outside the U.S., from 25% of our revenues last year growing to 31% in the third quarter of '07.

We're meeting our expense synergy targets.

The real upside of our merger, though, is the opportunity to further accelerate top line growth.

The early returns are positive.

From a balance sheet perspective we ended the quarter with $184 billion in total assets, stronger capital ratios, and terrific liquidity.

The credit quality of our securities and loan portfolios remain very strong.

During the quarter we also made substantial progress in some nonfinancial fronts that will be critical to our ongoing success.

We launched our new brand and logo on October 1st.

The logo is simple and elegant, and it reflects our focus on institutional and high net worth clients.

We hope you like it.

We're introducing a new brand identity through our website and through a new advertising campaign.

It focuses on the three P's that distinguish us in the market; the strength of our people, the partnerships we forge with our clients, and performance, consistently delivering superior performance to all of our constituencies, including of course our shareholders.

In the earnings summary you will see that we included client service goals as part of our metrics to emphasize our commitment at being number one in client service globally versus our peers.

Inside the Company we're institutionalizing our commitment to service.

This quarter we put in place the building blocks for a corporate culture that supports our brand.

We introduced our new values of client focus, trust, teamwork, and outperformance.

We conducted an employee survey that showed broad commitment to these core principles and values.

Our goal is to achieve top quartile employee engagement scores versus our peers, so top quartile overall from an engagement standpoint.

We think this is going to take us about two years.

This is going to help us to attract and retain better people, and ultimately that's going to lead to higher levels of client service and also greater top line growth.

Now, shortly Bruce is going to provide greater detail into the numbers, and as well as our great progress in integrating our two companies, but first I am going to ask Gerald to make a couple of comments around revenue synergies, and then we'll open it up for Q&A.

Gerald.

Great.

Thanks, Bob.

First I want to say how pleased we are about how we've come together as a new company, and our performance has been excellent.

Our integration is on track, and at the same time we're posting strong growth in all of our businesses.

Security servicing fees in the aggregate were up 31% year-over-year led by asset servicing, depository receipts and corporate trust.

Plus we had a strong deposit flow and net interest income from these businesses that Bruce will speak to in a minute.

I know an area of great interest to you is asset servicing.

There have been a few skeptics out there who have wondered if we could go through an integration and simultaneously grow our business.

Well, the marketplace and our clients are responding very favorably to our new company's offering and the excellent service we are providing them.

We have won 41 of 82 publicly announced new business wins in January through June, equaling the total of all competitors combined.

The third quarter was even better as we won $500 billion in new mandates.

That's a 75% success rate on the deals we bid on.

Now hitting a few high points, we are the clear winner in China.

We have won all the QDII mandates from an asset servicing perspective, which complements our asset management win that Bob commented on earlier.

And in Korea we won a mandate from the National Pension Service and [Cumin] Bank.

In Europe we won the largest European transfer agency appointments from Barclays private client business.

We also won the EBS Building Society, which is the largest building society in Ireland.

In the U.S.

we won the Ohio Bureau of Workers' Compensation plan.

We've also won yet another middle and back office outsourcing mandate.

Quietly we've been growing this business very substantially.

This one is from O'Shaughnessy Asset Management.

This is our 16th win out of 16 bids this year for mid- and backoffice outsourcing, representing a total of $220 billion in assets.

Now on top of all of our wins we have business representing $366 billion in assets come up for rebid.

We retained every single one, including TCW for mid- and backoffice outsourcing.

Now already in the fourth quarter we have had major wins in Australia, Europe, China and the U.S., none of which is factored into these numbers.

New business has been running at a higher rate than either company could have achieved.

At the same time our attrition rate was de minimis, lower than historic rates for either Legacy company.

Our momentum is terrific.

Our pipelines are in great shape, and we are feeling very good about how we're positioned in the marketplace.

Last quarter Bob commented that we would share with you our revenue synergies that we see coming out of the merger.

Over the past few months our businesses have been working closely to identify and quantify these revenue synergies, which are above and beyond our normal growth expectations.

This exercise has identified opportunities to generate incremental revenue of $250 million to $400 million by 2011.

On page 10 of the earnings summary we outlined 15 specific opportunities falling into three major categories.

First, revenue enhancements that we can achieve by applying best practices, simply doing a better job as a combined organization.

Second, taking advantage of the opportunities within business lines to deliver more services.

And third, leveraging new business lines in support of one another, delivering more of our firm to our clients through cross-selling.

The China mandate that we just mentioned is a great example of the latter, where asset management and asset servicing work together to win both the subadvisory and global custody business.

It is a real win-win for our franchise.

As I said, these synergies will be incremental to the growth rates of our businesses.

We will fill you in on how we're doing against these targets in the future.

Now, with that, let me turn it over to Bruce to run through the numbers.

Thanks, Gerald.

I will walk you through the highlights of the quarter, update you on our merger integration milestones and offer a few thoughts about our outlook for the fourth quarter.

The power of our business model was apparent.

We thrived in a volatile market environment which occurred in what is typically our seasonally slowest quarter.

Strength in our volume sensitive securities businesses more than offset a somewhat challenging environment for asset management business, demonstrating the diversification and balance of our business model.

We also achieved sizable positive operating leverage as the strong revenue performance was matched with an impressive effort on the expense side of the equation.

We delivered $79 million in merger-related synergies and kept core expense growth under 1%.

This resulted in 1,100 basis points of positive operating leverage year-over-year and 400 basis points sequentially.

Consequently our pre-tax margins improved versus a year ago, from 30% to 35%.

Our capital ratios came in a little better than expected, with a Tier I ratio of 9.1% and an adjusted TCE ratio of 5.31%.

And our credit quality continues to be very good in both loans and securities as our prudent risk management posture is paying off.

So all in all, a very satisfying quarter although we still have plenty of work ahead of us.

Let's get into the numbers.

I will start with a stepdown from reported to operating results.

We start with a reported $0.56 EPS, add back $0.11 of merger and integration charges to arrive at $0.67 EPS from continuing operations.

There were several items that were nonoperating in nature which netted out to a $0.01 positive.

Backing that out yields an operating EPS result of $0.66.

These nonoperating items are detailed in the press release, but briefly they include a $27 million termination fee settlement of a clearing contract at Pershing, a $32 million write-off of our interest in a hedge fund manager that was sold last year, a $6 million write-off of internally developed software, and a rerun of our leverage lease portfolio under FAS 13 stemming from the merger which reduced NIR by $22 million, but which generated a $45 million tax benefit which was reflected as a reduction to taxes.

Net-net an operating EPS of $0.66, which compares with $0.50 a year ago and $0.66 last quarter.

I should also point out that intangible amortization was up $91 million sequentially due to the merger.

Backing out the intangible amortization results in a $0.73 EPS result, up from $0.69 sequentially on the same basis.

That's 6% unannualized sequential growth in what is generally a seasonally light quarter.

On page four of the earnings summary I would like to spotlight the key revenue growth statistics.

Operating revenues were up 25% year-over-year and 2% sequentially, with fees up 20% year-over-year and about flat sequentially, and NIR up big, 47% year-over-year and 18% sequentially.

The year-over-year numbers in both cases are impacted by the JPM swap and the ConvergEx transaction.

Even with adjustment to an apples-to-apples basis, revenues were still up 19% year-over-year.

So let's focus first on the fee story, and details are provided on page six of the earnings summary.

Security servicing fees were up 31% year-over-year given strong performance in volume-driven activities, and they were up 4% sequentially in a period when they generally declined.

Asset servicing had an excellent quarter with fees up 26%, primarily due to record securities lending revenue, also up 26%, increased volumes related to market volatility, and strong net new business.

Our assets under custody and administration increased 22% and were $20.8 trillion.

Issuer services fees increased 79%, due primarily to the impact of the acquired corporate trust business and increased depository receipt revenue.

Excluding the impact of the acquired corporate trust business, issuer service fees increased 15%.

On a linked quarter basis, fees were up 5%, driven by another great quarter in DRs and good performance in our global corporate trust area.

Pre-tax margins in this business are already excellent and they've improved further to 53%, quite stellar.

Clearing and execution services fees increased by 3%, but keep in mind that the third quarter of 2006 includes BNY ConvergEx, which was converted into a minority ownership in the fourth quarter of '06.

Excluding the impact of ConvergEx, fees in this segment increased 25%, driven by higher client balances as well as strong market activity in the quarter.

Asset and wealth management fees showed good year-over-year growth, up 24%, and were up slightly sequentially given the relatively flat market environment.

Our AUM grew to $1.1 trillion, representing a 19% increase from the third quarter of last year.

Net in-flows totaled $29 billion, which represents 10% organic growth annualized.

This is comprised of $27 billion in net money market flows plus $2 billion of net long-term flows.

Performance fees were a negative $3 million.

This is down $62 million year-over-year and $66 million sequentially.

Market volatility took a toll on certain quantitative and alternative strategies, and we had a reversal of $18 million in fees recognized earlier this year by [IVML Centra].

We expect the performance fees to bounce back in the fourth quarter, but not to the record levels seen in 2006.

In addition, investment income declined $32 million year-over-year and $55 million sequentially, principally reflecting lower returns on seed capital investments.

We clearly were impacted in several products where we held the equity in CDO or CLO structures and warehouse facilities.

However, we see limited further downside at this point and again would expect to see performance improve in Q4.

To summarize then, the core asset management business has held up well but some of the performance and valuation sensitive revenues took a hit given the environment.

FX and other trading showed excellent growth, year-over-year and sequentially.

FX volatility and volumes were way up given the market conditions and we capitalized.

To a much smaller degree we also benefited from the higher value of our credit derivatives portfolio.

Flipping over to net interest income, detailed on page seven of the earnings summary, revenue increased 40% year-over-year and 14% sequentially.

Clearly there is a flight to quality in a treacherous market.

We benefited from that and from the cash that naturally flows to us when market volumes are high.

Interest earning assets on our balance sheet increased 26% year-over-year and 10% sequentially.

And in the liquidity constrained environment, those who have it are king.

We were able to take advantage of widened spreads on all short-term instruments, as our yield came in at 2.02% ahead of our expectations.

We estimate that volume accounted for about two-thirds of the growth relative to both prior periods and spread around one-third.

Turning to expenses, total noninterest expenses grew 14% on an operating basis excluding M&I costs and the amortization of intangibles.

If you exclude the impact of the acquired Corporate Trust business and ConvergEx, total noninterest expenses were up 12%.

This is well below the rate of growth in revenues and reflects the scalability of our business model, a favorable mix in terms of high margin revenue growth and the commencement of synergy realization tied to the merger.

Sequentially total expenses actually declined by $40 million or 2%, reflecting the benefit of synergies which offset the impact of business growth and Legacy Mellon July 1st merit increases.

Synergies were $79 million in Q3, but factoring out cancellations of open [wrecks] in that number, the potential benefit was really $62 million.

But we did a great job on expense control above and beyond the synergies with sequential growth of $22 million or less than 1%.

The credit quality of our loan portfolio remains excellent.

The provision for credit losses was zero, and NPAs remain at historically low levels.

We benefited from an aircraft lease sale early in the quarter, and we recycled the reserves release to cover some modest credit issues tied to the environment.

The effective tax rate was 28.2% compared with 29.4% in the year ago quarter of '06 and 31.9% in the prior quarter of 2007.

The lower effective tax rate includes the impact of the FAS 13 adjustment to the leverage lease portfolio.

Excluding this adjustment the effective tax rate was 32.3%.

Although we had expected a higher tax rate in Q3 closer to 34%, we had some favorable developments in the quarter, particularly on the foreign tax side.

We currently anticipate a rate back in the 33.5% to 34% range in Q4.

On the capital front client deposits again drove the balance sheet higher which hurts the leverage sensitive ratios a bit, although the positive of that is strong NIR performance.

We continue to stay focused on maintaining a strong capital and liquidity position.

Our Tier I target is 8%, and our adjusted TCE target is 5%.

As I noted earlier, at the end of the third quarter we were above both of these targets.

Given that we anticipate closing the ABN AMRO JV buyout in Q4 and we expect market activity to remain robust, we do not expect to buy back much stock until the first quarter of 2008.

That said, we should be at or close to the targets by year end.

Turning to a progress report on the merger for a moment, on page nine of your earnings summary is an update on our progress against our integration milestones.

The aforementioned $79 million in expense synergies during the quarter is roughly 11% of our target of $700 million, and we expect to finish 2007 ahead of our target.

Synergies will increase only modestly sequentially as the next big actions are scheduled for the first quarter.

So far we've achieved more than a third of the 3,900 positions we had targeted incluses -- inclusive of canceled open requisitions.

Through the third quarter we have absorbed $527 million or 40% of our total estimated M&I charges of $1.325 billion.

Bob mentioned the launch of our new branding strategy.

We also complemented an advertising campaign to build awareness and familiarity.

Finally, you'll note that consolidation of banks is expected to occur by the midpoint of next year.

On page 10 we focus on the revenue synergies that Gerald referenced.

There are 71 revenue synergy ideas in total.

And we group them into the three major categories which Gerald described earlier.

We've listed out the top 15 ideas.

These represent over 60% of our target of $250 million to $400 million of incremental revenue that should phase in by 2011.

Now this is still work in progress, but we are putting specific programs in place to drive success in hitting these targets, and we will update you on our progress along the way.

I am going to conclude my remarks by offering a few observations about the fourth quarter.

The fourth quarter market environment should be more favorable to asset management which was below trend in Q3, and I expect to see some drop-off in asset servicing which was above trend, particularly in foreign exchange and securities lending.

Net interest revenue may decline somewhat with more normal market conditions leading to slightly lower liquidity and less spread.

Keep in mind, however, that issuer services is typically seasonally stronger in the fourth quarter.

As I mentioned, synergies will increase only modestly in Q4 and the tax rate should go up a bit.

But regardless of the environment, rest assured we will be very focused on executing our strategy and on outperforming our peers.

So to sum up, we have great revenue and earnings momentum, our pipelines are strong, and our merger is on track.

It is an excellent beginning for our new company.

With that, I will turn it back to Bob.

Thanks, Bruce.

We hope you find our quarterly earnings package helpful, and very transparent.

That is certainly our goal, and now we have around the table most of the management team, certainly everyone who runs the major businesses around the Company.

Everyone is here except for Ron O'Hanley.

Ron is on the phone, though.

He is on business down in Brazil this week.

So at this point why don't we open it up for questions.

Thank you.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Glenn Schorr with UBS.

Please go ahead.

Hey, guys.

Good morning, Glenn.

So I guess it is good Ron is on the phone.

First question is -- there was some turnover at Boston Company, and curious if you could outline -- you probably don't want to spell out what percent -- what number of assets went out, but if you could just give some color around have we seen the full impact of that move and we move forward from here?

Glenn, this is Ron.

The team that left, the international core team, it clearly was a loss for the Boston Company, but I think for the overall franchise is minimal, and happy to talk about what the impact is.

We lost about just under $11 billion in assets under management which would be in the long-term column.

So in fact the way we think about the quarter is that but for that long-term flows actually would have been quite high, close to $11 billion -- close to $12 billion.

So have we seen the end of it?

I think we have seen most of it.

You -- typically what happens in these cases are the clients that are sensitive to this kind of thing, or don't see the rationale for staying, go.

Obviously we've spent a lot of time with clients.

We retained all the intellectual property.

We've retained some of the people, and have actively worked with those clients that are remaining with us.

So could there be more?

Yes.

Do I expect that we've seen the worst?

Yes.

Okay.

That's very helpful.

And then in issuer services, it is great to see the DR business offset what I think was a lot lower CDO issuance.

Is there any way you could give us an update on the revenue breakdown on issuer services on a general basis?

Glenn, this is Gerald.

The CDO business is still a small portion of the overall corporate trust business, and so I don't think it is fair to assume that corporate trust did not have a good quarter.

In fact, just the opposite.

Corporate trust had a very good quarter in spite of the negative activity occurring in CDOs, and I think it is a reflection of the diversity of the corporate trust business overall.

So we don't break it out line item by line item.

But corporate trust had a very strong quarter in spite of that.

Just to build on that, Karen, what percentage of your business would be CDOs?

It is actually about 20%.

Yes.

It would imply a slowdown in revenue growth but still very good overall.

Right, right.

And then last question is Bruce maybe.

There is a big drop in finance-related fees, just curious what would cause that?

Is that a more of a permanent number that we're looking at?

Yes.

That was, Glenn, really just in our capital markets activities which we've somewhat deemphasized and also reflects what's happening in the markets.

Okay.

Helpful.

Thanks, guys.

Thanks, Glenn.

Thank you.

Our next question comes from Betsy Graseck with Morgan Stanley.

Please go ahead.

Good morning.

I was just wondering if you could give a little more color on the revenue enhancements.

I know you talked about the $250 million to $400 million you're looking to generate by 2011, but is it possible to speak to the magnitude in the various groups and the degree to which you have to invest to get these revenues?

Betsy, this is Gerald again.

It is a little early to get terribly specific on it.

I think we try to give you the 15 major line items that we see as being 60% of that number.

We're going to work on the phased-in approach in the coming quarters.

We do feel very good about these in terms of being just able to realize on these revenue synergies without a whole lot of incremental investment, just doing better practices, better marketing, better sales efforts, and having our new management teams work together to tease out these synergies from the businesses.

It is not a whole lot of incremental investment that's required.

Betsy, it is Bob.

Gerald and I have created what we call a revenue council.

All the business heads are around the table.

We're working on how we're going to measure ourselves across business lines, what goals are we going to set for ourselves, what kind of compensation will we have across the business lines, and what are we doing for recognition programs.

My experience has always been it takes longer to get revenue synergies than it does to get expense synergies because you have to train people, you have to get them excited about, it they have to feel confident that they are able to sell the products and execute well.

But we've gone through a pretty detailed process, and we have great measurement systems now in place to help us track this, and be really specific with our people, so that they know what we're trying to achieve by every one of these opportunities, and we'll be tracking it closely.

So I would say we're going to get some of these pretty quickly, and others it will take longer, so I don't see us reporting necessarily this number, how we're doing every quarter, but we're certainly going to update you regularly a couple times a year, and we'll give you a real good sense generally for each one of the buckets how we're doing.

Okay?

Got it.

And then just on the performance fee question, I'm just trying to understand if there is likely to be impact in the fourth quarter, first quarter from the activity that happened in the third quarter that generated negative performance fee?

Betsy, this is Ron.

Let me go through that.

I mean, as I think you know, the third quarter is historically the lowest quarter.

Right.

But for the third quarter of last year at Legacy Mellon, it is typically a de minimis quarter.

What happened was really a few things.

We had two quarter -- two performance fee accounts that we are eligible for quarterly performance fees that we had in '06 and earned no fee in '07.

We obviously may or may not earn a quarterly fee in the fourth quarter.

We had some other performance fees that were just down off the record levels of 2006 at Legacy Mellon.

And then finally, as Bruce mentioned at IVML Centro there were performance fees accrued in the first and second quarter that were taken back.

We've now changed the accounting policy not to an accrual policy, so that everybody, all performance fees are done the same way as they were at Legacy Mellon, so I would and expect not to see any of the so-called noise in there from that.

So it will just be how we are doing performance wise.

And I would just echo again what Bruce said.

We had in Legacy Mellon a blistering performance fee performance last year.

We would not expect to be at that level this year.

Okay.

Thanks.

Thank you.

Our next question comes from Mike Mayo with Deutsche Bank.

Please go ahead.

Good morning.

Good morning, Mike.

I mean, all the firms say they have a whole lot of new business, but it is tough to get a context for what that means.

If you can just put some color around that.

Is the new business higher than last quarter?

Is it big percentage of your existing revenues, or how should we think about that?

Mike, it is Gerald.

On the asset servicing side, some of the statistics that I threw out I think are already showing up in the revenues.

That's why you're seeing such a strong revenue increase.

It is not just market activity and market volumes.

New business wins are actually coming in.

Jim, maybe you want to comment on it.

Yes.

Thanks, Gerald.

Mike, it's Jim.

Of the $500 billion that Gerald referenced earlier, just under one-third of that we actually converted in the third quarter in addition to wins from prior quarters, so we're beginning to see some of the that flow through on the revenue line that Gerald alluded to.

Okay.

And --

I would -- Mike, I would say I think it is fairly evident and something that we're going to be tracking for you externally, because we've certainly showed this in Legacy Mellon before is my hope and expectation is we're going to track ourselves closely vis-a-vis our peers, and ultimately the best measure is going to be who gained share of revenue and who gained share bottom line, and that's what we'll be watching.

And who are you gaining from, then?

Is it the other big players or all the many smaller players outside of the big five or so?

It is Jim again.

Mike, it has been from both, and many of the competitions we face the same major three, four, five competitors that you all know, and then in some of the other markets that we compete in, there is some local entries that we compete against.

And so it has been a combination, but I would say the vast preponderance were from the large major competitors.

As far as competition, you've had two huge mergers this quarter.

Does that have any impact, or is everyone beating each other up like they've done for the last decade?

I would say it is more the latter.

I think it has been a pretty consistent pattern for amongst the major players competing very aggressively against one another for some take-away business.

Non-U.S.

is up to 31% now, so is that growing faster and how much so?

That non-U.S.

number is for the Company at large at 31%.

Clearly in asset servicing and asset management it is an even higher percentage, and it is accelerating.

I think in asset management, Mike, we're about 35%.

36%.

36%, and asset servicing?

39% non-U.S.

And we also have to recall of course we're growing much fast in Europe and Asia than we are in the United States.

Our expectation is that will continue, and we also have the ABN AMRO joint venture we expect to close in the fourth quarter as well which will increase the numbers, so we have great momentum.

And you're closing on the ABN AMRO joint venture and that's going to bring the Tier I ratio back down.

What's the earnings benefit from that, say, next year?

I mean the deal will be accretive.

It is not that material.

It has a good rate of return, and it positions us well for future growth.

How should we think about your capital ratio after you close that?

I mean, it is ironic that you have less credit risk and a much higher Tier I ratio than some of your peers.

I mean, Mike, the Tier I ratio is comfortably above the 8% target.

What's been our constraint really is the more leverage sensitive adjusted TCE ratio.

That was posted at [5.31%] at the end of the third quarter after we factor in the ABN, the closing of that transaction, we still expect to be above the 5%, but pretty close to it.

All right.

Thank you.

Yes.

Thanks, Mike.

Thank you.

Our next question comes from Ken Usdin with Bank of America Securities.

Please go ahead.

Thanks.

Good morning, everyone.

Follow up on capital.

So, Bruce, if you're above 5% going into next year, can you give us any color kind of around the magnitude of buyback that you might be able to do?

It seems like you would be a little bit ahead of your initial plans of buying back stock.

Any idea of the magnitude of size of a buyback you could do?

Yes.

I don't think we've given guidance fully on that, but as you're aware, we have -- if we're at -- we're positioned with the 5% ratio, and that's the target, all the free cash flow we're generating we can allocate, obviously, we're going to increase our dividend commensurate with our earnings growth expectations.

We're also then going to look for acquisitions and then we'll also have allocate some to the buyback, so I think we'll have a meaningful amount of buyback, but some of that is dependent on what the acquisition opportunities that we see.

Sure.

Yes.

Okay.

And then the follow-up to that you started to mention there on the dividend, I mean, both Legacy companies used to pay out in the low 40%, and now obviously with the earnings power accelerating you're only kind of in the mid 30% right now.

So can you give us an idea of where you expect the payout ratio to be in the future and when you might be -- address that?

We had -- we said that our policy, our target is about 40% on a GAAP basis, and 35% to 40% on a cash basis, and so obviously that's -- we're slightly both behind that at this point given the strong growth in earnings we've experienced.

Ken, what I would say, this is Bob again, this is our first quarter.

Obviously, we're delighted, and we're going to be watching this closely, and we've already thrown our guidance out there.

And frankly I watch a little bit more of the so-called cash earnings when you back out the intangibles because intangible is a non-cash item, and it is better to look at it excluding that.

So we'll watch both ratios, and stay tuned.

We'll continue to build the Company.

And one more question just on the cost saves.

It sounds like you're comfortable with just -- with your recognition of cost saves.

I am just wondering, do you think that there is a chance that you come in either ahead of schedule on the $700 million or above $700 million?

And what could we expect as far as perhaps incremental cost saves, now that you've kind of gotten full into the beginning of the integration?

Yes.

I think it is a little early to start adjusting that guidance.

Clearly any target we put out there is achievable in our mind and we're going to work hard to try and beat it.

I would say also in the model, if you go back to the December 4th presentation when we announced the transaction, we do have inflation adjustment against that synergy target, and so we'll start to score ourselves on that basis.

So in any event I think the inflation factor in the model was 3% per annum.

We will exceed $700 million, but then the question is will we beat the inflation number over time, and I think at this point clearly we're feeling good about how we came out of the chute, but it is probably a little early to say.

Okay.

Thanks a lot.

I will just finish that off by saying, I think our teams have done a terrific job, particularly the integration people, of really doing all the legwork it required to make this a real success for our company.

And real hats off to everyone from Tom [Reny], and Don [Monks] and Steve Elliot and all the teams, and frankly the finance guys doing a fantastic job over the last three or four weeks and haven't been able to sleep probably.

So what I am really heartened by is the fact that we've gotten good numbers out of the first quarter.

We're feeling increasingly comfortable.

At this point, though, we're still mostly focused on the first year or two, and we'll figure out the final numbers as we get further into the integration process and as we all get more comfortable with what's really possible here.

Still early days, in other words.

Thank you.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Hi, Brian.

Just on the revenue synergies again, you said these on page one there, that they're gross revenue synergies.

Is that -- what would be the net impact?

Well, if you look at our overall margin as a company, we're at 35%, 36%.

If you look at incremental revenue synergies, it would be a safe bet that they come in somewhat higher than that, but we really haven't -- at this point we're just putting out the big boxcar numbers, and we haven't fully flushed that out, Brian.

So I was thinking net is you were expecting some attrition and the gross number was the $250 million to $400 million.

I thought you were asking about what the net impact of pre-tax would be in the flow-through.

I meant just the word gross revenues, I was wondering if that was -- if you were expecting some attrition that we should offset against gross revenue target?

Well, as you recall, in the deal model we said that we would expect the benefit of revenue synergies to offset any expected attrition.

At this point we're not seeing any attrition, and we're still managing to have no attrition beyond what we would experience in the ordinary course of our business.

Right.

So the $250 million to $400 million really is incremental to the deal model?

Hopefully it is.

Right, right.

Great.

And then is this by the -- are you targeting this run rate by the end of '11 or the beginning?

Yes.

That's probably '00 -- 2011 number, kind of on a run rate sense standpoint.

Right.

Okay.

And if you have to name three of the synergies that you have on page 10, maybe, I don't know, the top three that you think are most visible and sort of quickest to realize, what would you say they would be?

Brian, this is Gerald.

I would say the first one that's most realizable and probably the largest is the cross-selling of asset management and asset servicing and vice versa, and that's where we're getting very good traction.

The China mandate that we commented on here is a great example of that, and we see more of those opportunities all around the world.

And that -- what were the assets in the QDII mandate you mentioned for the servicing end of it?

It was $4 billion.

I thought that was the asset management.

You're getting the servicing and the asset management on the $4 billion.

That's correct.

That's not the only QDII mandate for asset servicing.

We've won all the other ones as well.

This is the only one we're managing.

I see.

What's that total if you can say?

We can't really comment on it because it is not out in the public forum.

Actually, Tim Keaney may have some comment on that.

Yes, Gerald, we'll be announcing formerly the second big mandate in the next couple of weeks.

You read in the press who it is.

It is significantly over subscribed as was the China Southern transaction.

So that will be at least $4 billion, and these are particularly important because they're equity QDIIs rather than fixed income.

And of course we've talked about the P&L impact of the equity kicker on top of that.

So it is about $8 billion, Gerald.

Jim, could you just mention what your attrition rate was last quarter?

Would you have that?

On the lost business?

Yes, on lost business just overall.

If we thought in terms of 2% or 2.5% per annum for most large asset servicers.

Yes.

As we mentioned earlier it was actually lower than we've been experiencing separately, historically it was actually up .03%.

Great.

Great.

And then, Gerald, I think you're talking about that revenue synergy, if you have a couple others that you think are extremely very visible or sizable in comparison?

Let me jump in, Brian.

I think that whole first category of best practices, I would almost view as a category because those things are really within our control, and they're tangibles, and they're soon, and so some of those have already kicked in.

And so I think that's one that we're very focused on in the near term.

So that would be one.

And that middle bucket as a group, the two asset servicing businesses come together and they're very complementary in nature.

So just within asset servicing, forgetting about cross-selling across our business line of business silos, just within asset servicing itself you have very rich products that Mellon can offer to the Legacy BK customers and similarly that BK can offer to the Mellon customers.

Great.

Great.

And just one last question.

You mentioned issuer services as seasonally strong in the fourth quarter.

Even with the really strong volumes we've seen in the third quarter, you still anticipate that we could have an up quarter in issuer -- in depository receipts in the fourth quarter?

Yes.

I will turn that to Brian for more color, but I think we have to recognize that third quarter was exceptionally strong, so you might not see a huge seasonal bounce, but we still feel good about how we're positioned and the momentum we have in the businesses, so we still would expect to see some uptick.

Brian, you want to --

Yes, I think the only comment to add to that is the corporate trust business traditionally also has a seasonal bounce in the fourth quarter, particularly December, but agreeing with Bruce, I think given the strong third quarter probably a less percentage than previous years.

Great.

Thank you.

Thank you.

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

Please go ahead.

Thank you.

Hi, Bob.

Hi, Gerard.

You guys mentioned about the wins you had this quarter, and I think you put out a number that you won 75% of the businesses that you bid on in the specific area.

How does that compare to Legacy Mellon or Bank of New York for that type of business?

I know back of the mid- and back office you had 100% win rate, but in other areas is that better than what you've seen in the past, about average?

Gerard, it is Jim again.

Yes.

It actually is higher than historical.

Typically what we've experienced over the past few years, both Legacy organizations is around 35%, 40% win rate, and so we've actually significantly exceeded that so far with the third quarter performance.

Great.

And circling back to the dividend question, would you guys establish a dividend policy in that once a year around the annual meeting, the board meeting, that's when if you were going to increase a dividend that might be the time period, or what's your view on that, Bob?

We haven't really decided yet, Gerard.

It is a good question, and frankly we haven't even talked about it.

We're focusing initially on getting our companies together and making sure we stick to business as usual.

We're very comfortable with the policy, and timing yet remains to be decided.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from Mark Fitzgibbon with Sandler O'Neill.

Please go ahead.

Good morning.

The first question is for Gerald.

Gerald, I guess I am one of the skeptics you talked about with respect to revenue synergies and the asset servicing business.

And you said you had won 62 of 82 of the mandates or more than $500 billion of assets more than all your competitors.

And yet two days ago State Street said they won 281 mandates for a total of $825 billion.

How do you reconcile these differences?

And then secondly, a lot of your competitors have been talking about winning business from you folks, and we haven't heard at all about potential loss of business or pieces of business you know are going to go away.

I wondered if you could share some of the details on that with us?

Sure.

First of all, I am not going to comment on how our competitors derive their numbers.

The 41 out of 82 is a publicly produced document by the consultants, and so that's the document that I am referring to.

It was 82 public bids.

We won 41 of them.

It is in a public document.

So, I am not going to comment on how others may have derived their numbers.

In terms of the de minimis losses on our side, I think Jim gave you a very good sense of what we've seen, "go out the back door." It has been very, very small.

We've been able to hold onto the clients, and we're servicing them very, very well.

So some of the numbers you have to look at how different people report and when it actually translates into quarters.

And as Mike Mayo had asked earlier, where does it show up in the numbers?

Well, you're seeing it in the growth in the revenues.

So you don't want to share with us any of the numbers on loss of business?

No.

Jim did.

0.3% --

.03% was the the number, Mark.

Okay.

That's to date.

But the stuff that you know is going to leave that hasn't transitioned out yet?

We don't have any that I am aware of.

I am not aware of any.

Are you?

Yes.

Oh.

You can go over it with Jim later if you like.

I will.

Thank you.

One last question if I may with respect to the buyback.

But it is really important to realize -- let me just say, we have fabulous momentum in this business.

Just look at the P&L on page 13.

And of course competitors are always going to say that they're going to use this as an opportunity to steal business from us.

The bottom line is they're not.

So let's continue on.

Go ahead.

The last question is with respect to the buyback -- you talked about buying back the stock early next year, with the stock trading at 7.5 times tangible book value and call it 18 times forward earnings, the internal rates of return are fairly low on the buyback.

I am curious, does tangible book dilution matter, and how do you look at it from a return standpoint?

Yes.

I would say I think the tangible book is not a principal driver of -- in that decision process, and it depends on where you think the growth in earnings is going.

I think we still think there is good momentum in the earnings of the company, and it is a good -- so we think there is upside in the stock and overall.

Having said that, we continue to believe that a disciplined approach to returning capital to shareholders makes sense, and you do that on a consistent basis.

You don't try and time the market.

Don't you view it like an investment, you're investing $1 capital and generating some return on it?

Yes.

You do, and I think we said in the past our first use of capital is to support organic growth in our business which gets the highest IRR.

Secondly, if we find acquisition that is we think we have a good record of spotting it, acquisitions and integrating and executing on those acquisitions, that's a very strong IRR, and buying back our stock is a relatively lower IRR, but there is no execution risk.

The thing -- I view -- I have said this before, Mark, it is Bob again.

I view stock buybacks worth maybe 10% to 12% in terms of IRR in terms of returns.

We can certainly make much, much higher returns on organic items and if we are very disciplined on some acquisitions.

And so my first choice is not stock buybacks, generally, but on the other hand we don't want to balloon our capital ratios either.

Thank you.

Thank you.

Our next question comes from Robert Lee with KBW.

Please go ahead.

Thanks.

Just a couple of quick questions.

Understanding that Q3 there's a huge fight to quality and you see money fund flows across the street as being very strong, I am just curious if you're starting to see any of these revenue synergies at least in the money fund business, or -- and that would seem to be the lowest hanging fruit to a certain degree, do you expect that to start kicking in sooner?

Yes.

Just give you a quick stat on that, Rob.

We had $20 billion of new flows into our suite platform, and we put -- over 50% of that went into proprietary product, and so I think we're starting to move the dial on that as we speak.

Okay.

Great.

And understanding that credit has remained pristine and no provisionings, you still do have -- although the mix has changed a lot over the years fairly large, decent-sized loan book, how should we be thinking about -- what are your expectations for provisioning going forward?

Rob, this is Todd Gibbons.

In simplest terms we're working on our strategy right now, but I would say we'll continue to grant credit judiciously to our clients that are large consumers of our products, and I think we have the good fortune those are primarily investment grade companies.

So that's where our portfolio will be focused.

We have taken some actions to reduce some of the concentration risks that have come with the combination, and we have now combed through the portfolio to identify where opportunities exist, and where they don't, and what names might be an exit strategy.

So I think we'll come to you in the next quarter or so with a clearer strategy around credit.

Okay.

That was it.

Thank you.

We're -- this is Bob.

We're -- just to finish that off, Todd and the team working with the business units and doing a great job at really slicing and dicing the portfolio, and thinking as a new company what sort of credit risk do we want to be taking going forward, and what are the strategies we should employ.

I think bottom line is I think what you heard from Todd is that we're going to be reducing credit risk to some degree through various strategies, and while we're still working through that, credit is still important to our company, but policies and strategies will evolve here.

Great.

Thanks.

Thank you.

Our next question comes from Tom McCrohan with Janney Montgomery Scott.

Please go ahead.

Yes.

Hi.

Just a follow-up on corporate trust, I was kind of surprised at the strong the organic growth, given the quarter had some of that turmoil and the CDO issuance obviously was kind of frozen up a little bit.

Could you just touch on where you saw the strength in corporate trust during the quarter outside of CDO?

Yes.

The key strength was in the CDO business in EMEA actually.

Europe, Middle East and Africa.

and we also had some good activity in Islamic financing.

Okay.

Thank you.

That's all I had.

Thanks, Karen.

Thank you.

Our next question comes from Nancy Bush with NAB Research.

Please go ahead.

Good morning, guys.

Good morning, Nancy.

Quick question on the profitability of the China business.

We've heard a lot about the potential there and the size of the asset flows, etc.

Is this sort of -- I mean, have the expenses associated with this business already been realized, or are we going to get sort of all incremental profitability here?

If you could just expand on that slightly.

Nancy, it is Gerald.

Let me comment at least on the asset servicing side.

Given our size and scale, it just layers into our existing infrastructure, and as the assets are accumulated under management we'll start to service those through our core platforms, and so the pricing and the profitability are very favorable.

Okay.

So did there have to be --

I would add to that.

The money is being managed by existing -- some of our existing money managers outside of the region, so obviously you have client service people on the ground there, but this is a very attractively priced and profitable business.

And Nancy, I would just say that Ron and Karen Peetz and a group of our people in Asia have just recently formed -- struck a committee to start thinking about the medium term strategy for Asia to make sure we get all our revenue synergies across the region, make sure that we take advantage of all of our products that are manufactured in other regions, and to really think about what is the real opportunity here over the medium term by product and in total.

So that will be an interesting process to go through as well.

If I could also ask, I mean, what was -- what do you see as the differentiating factor that enabled you to win this business?

Was it pricing?

Was -- if you could just give me a little color there, I would appreciate it.

Ron, why don't you start on the asset management standpoint.

I think in the asset management it was product breadth was -- and reputation is -- were the key buying factors there.

The pricing -- I mean, ultimately this is priced to the end-user buyer closer to a retail kind of product, so pricing was not a factor here.

Nancy, it is Tim Keaney here.

I would add two other things.

The DR business has been very active in China for about 12 years.

We have two offices in China and have been calling there for quite a long time.

And of course we have our major Asian operations hub in Singapore, and I think it is a combination of those things and having existing capabilities right now.

Ron O'Hanley would know quite well, these vehicles fund very quickly.

From decision to funding is a matter of weeks, so having existing capabilities and existing technology has been a big factor for us there.

Nancy, one of the things that Ron and I were talking about just a few days ago is the fact that Legacy Bank of New York has much longer-standing relationships, and much more longer-standing relationships, than Legacy Mellon did, meaning that it is easier for us to get into see people and make pitches to people more than a year ago, and I think that's going to help us in Asia on the asset management side.

Bob, if I could also just ask a final question on wealth management.

Where do you stand now in your thinking about the expansion of wealth management?

What has happened right up front with expanding Mellon product into Bank of New York wealth management network, etc.?

Well, good question.

I continue to like the business.

We have great fee growth, net interest income has been really hurt here over the last year.

We've had great loan and deposit growth, but the NII hasn't been great.

I think a little bit of this is just making sure that we get the right inner business transfer pricing right, but we'll be studying that more, but I would continue to support having more offices here.

And Dave has a number of strategies under way to bring the Legacy Mellon products to the New York City market.

Dave, what would you add to that?

I would just say that we're in the early stages of bringing products to existing clients.

What we're really focused on as well as building out the sales organization primarily here in Manhattan and around the tri-state region will be over 100 sales people combined at the end of the year which is a significant difference in what we had in the past.

I think we see early results in that, the third quarter, where our sales were up significantly from the year before.

And so I would expect it is a combination of both delivering more capabilities to the existing clients, but then just getting out more broadly with the combined offering and more places.

As far as expansion is concerned, we haven't focused on that over the first little bit here.

I would say that we continue to think the same way we had in the past.

We talked about Texas, the southwest, and maybe a little bit more in the midwest.

Those would be target areas.

We do have some conversations going on, but first priority for us right now is around New York.

Yes.

Great.

Thank you.

Melissa, we have time for one more question.

Thank you.

Our last question comes from Andrew Marquardt with Fox-Pitt, Kelton.

Please go ahead.

Good morning, guys.

Good morning.

Just a quick question on performance fees.

Did I hear correctly that perhaps fourth quarter performance fees could also be impacted by this quarter or rather the market dislocations?

No.

That's not what I said.

The -- and I am happy to go through again the third quarter, but the fourth quarter should not be affected by any of that.

What we would be looking at is how is performance, and what I can say now is barring something completely unanticipated, performance -- the absolute performance levels are not at the pace that they were last year.

That was, as I think I said on this call last year, that it was a three or four sigma event, but we would expect to see stronger performance fees in the fourth quarter than the third.

Great.

Thanks for the clarification.

And lastly, maybe I missed it on the net interest margin.

Could you talk a little bit about how you guys are impacted by the current yield curve and potential additional Fed cuts?

Yes.

I think the yield curve -- having a slope to the yield curve is certainly positive from the absolute level of rates.

We try and stay relatively neutral, and if you look at the sensitivity tables, moves in either direction don't affect the absolute number all that much.

Okay.

Great.

Thank you.

Thanks, Andrew.

Well, thanks, everyone.

I really appreciate you being on the call and the quality and number of questions.

We'll continue working hard for you.

Thank you.

All the best.

Thank you.

If there are any additional questions or comments, you may contact Mr.

Steve Lackey at 212-635-1578.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.