紐約梅隆銀行 (BK) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2008 earnings conference call hosted by 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, Melissa, and good morning, everyone.

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

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 2007 10K and other documents filed with the SEC that are available on our website BNYMellon.com.

Forward-looking statements in this call speak only as of today, April 17th, 2008.

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

This morning's press release focuses on the results for 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 pro forma combined view of the total company and six business sectors.

Unless otherwise noted -- unless noted otherwise, all comparisons to the prior year results reflect this pro forma combined view.

This mornings call will include prepared comments from: Bob Kelly, Chief Executive Officer, and Bruce Van Saun, Chief Financial Officer.

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

Now I would like to turn the call over to Bob Kelly.

Bob.

Thank, Steve, and good morning, everyone.

Thank you very much for joining us this morning.

Clearly we are in a pretty challenging economy right now and most of the financial markets are in distress and given that backdrop your businesses are performing well in a tough environment.

Year-over-year we generated revenue growth of 14%, 750 basis points of operating leverage and another quarter of double digit earnings growth.

We continue to meet our commitments we have made to our clients, shareholders and 40,000 employees.

When you think about EPS, our -- excluding our merger and integration charges, EPS was $0.72 an increase of 16% year-over-year, and excluding the impact of merger and integration charges as well as intangible amortization, which had is a noncash expense of course, EPS was $0.78, an increase of 20% over the first quarter of 2007.

These results also include the impact of approximately $0.04 of net charges detailed in our earnings release.

Our securities services business led the way with continued extraordinarily strong performance.

Revenue benefited from significant growth in asset servicing, foreign exchange and clearing services.

We enjoyed single digit growth in corporate trust fees despite a tough fixed income environment due to our diversification of our global franchise.

Wealth management fees were up 9% with good new business volumes and organic growth.

Treasury service fee revenue increased 10% on higher global payment and cash management volumes.

In asset management we continue to grow money market funds with net flows of $23 billion during the quarter.

Weak equity market conditions impacted our performance fees which were down sequentially and year-over-year as well as returns on C-capital investments.

We continue to grow rapidly outside the U.S.

Now 1/3 of our revenue is international compared to 28% this time last year.

Credit quality deteriorated marginally but overall remains very strong.

Our expenses remain very well controlled and we are running ahead of our synergy targets.

We continue to enjoy very strong liquidity and excellent client deposit growth.

Our tier one capital ratio remains well above our target, but our TCE ratio fell below target this quarter reflecting our deposit driven larger balance sheet of $205 billion and the impact of spread widening on our investment securities portfolio.

In my opinion, the lower tangible common equity ratio is the only real negative this quarter.

However, we have the ability and the intent to hold these investments to maturity and we don't expect any material losses in these securities.

In our release we provided you with very transparent and hopefully very useful disclosures around this.

Earlier I eluded to commitments we made to our shareholders.

One was to exit those businesses that don't support our growth and asset management and security servicing, so we can laser-focus our capital into those that do.

I would like to report further progress on that front during the quarter.

We entered into an agreement to sell 1st Business Bank in California.

We sold our B-trade and G-trade businesses to BNY ConvergEx completing the repositioning of our execution businesses.

We have sold our fixed income sales and trading operation further reducing our exposure to the credit markets.

And on the investment side we also closed our asset management acquisition in Brazil, making us now the number two nonbank-owned provider in the country.

You should assume that we will continue to sharpen our focus in the coming quarters.

One of the fundamental commitments we have made to our clients is industry-leading client service around the world in all of your businesses.

I am delighted to advise that this further evidence we're succeeding on that front in most notably in asset servicing.

Last quarter we told you about your number one performance in the global custodian survey.

This quarter the results of the R&M global survey were released and we were again ranked number one amongst the world's largest global custodians, so we are consistently achieving our goal of outperforming our peers.

Our success on the quality front is also paying off.

In asset servicing during the quarter we won approximately $350 billion in new assets.

This represents a 60% success rate on the deals we bid on.

In asset servicing our pipeline remains strong up over the prior quarter and this time last year, and we again exceeded client retention goals with the rate now well in excess of 99%.

Another area with new business momentum is clearing.

At Pershing we have seen a big pick-up in new deals.

During the first quarter Pershing's pipeline of deals waiting to be converted has actually doubled year-over-year, and we are seeing the benefit of those increased revenues as your clients begin to convert on to our systems.

In summary then, we can't control the market environment we are in, but we are generating strong revenue growth, good expense control, good operating leverage, we have maintained a strong capital base and excellent liquidity.

We have made good progress in raising the bar in service, growing our client base and keeping the integration on track and ahead of plan.

At this point I would like to ask Bruce to provide you with more detail on the numbers, and then we're going to open it up for your Q&A.

Bruce?

Thanks, Bob.

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

As our earnings show, our business model continues to deliver excellent results through a challenging environment.

Strength in our volume and volatility sensitive businesses such as asset servicing and clearing more than offset the low-trend performance in our asset management business, again demonstrating the diversification and the balance of your business model.

We also did an effective job in containing expense growth, resulting in significant positive operating leverage year-over-year and sequentially.

Consequently our pretax margins versus a year ago improved from 33% to 36%.

Our capital ratios came in lower than expected as a result of spread widening on our securities portfolio as well as the size of our balance sheet.

And our credit quality overall remains solid.

In short, a good start to the year.

But let's get into the numbers.

We reported a $0.72 EPS from continuing operations.

Included in this result were several balance sheet items that had a negative impact of $0.04 per share.

More on that later.

Excluding these items our EPS result was $0.76.

Our strong performance was led by continued good top line growth as operating revenues were up 14% year-over-year.

Fees were up 9% and net interest revenue was up 39%.

We demonstrated disciplined expense management as expenses were up only 6.5% year-over-year resulting in excellent operating leverage of approximately 750 basis points revenues generated outside the U.S.

now comprise a full 1/3 of our total revenues, that's up from 28% in the first quarter of 2007.

Turning to page five of the earning summary, which details fee growth, security servicing fees up 20% year-over-year, given strong performance in volume-driven activities and were down slightly sequentially reflecting seasonality in our DR business and in performance fees.

Asset servicing had a stellar quarter with fees up 40% primarily due to a huge increase in securities lending revenue as well as increased client activity related to market volatility, continued strong net new business, and the impact of the buy out of the joint venture with ABN AMRO which we completed late in the fourth quarter.

Our assets under custody and administration increased 9% year-over-year to $23.1 trillion.

This business continues to overearn relative to the trend line performance given the current turbulent market environment.

Favorable short term credit spreads and the fed rate cuts have continued to benefit our [sec] lending activity.

Issuers services fees grew modestly year-over-year.

Corporate trust fee revenues were up slightly, reflecting strength in the global business, largely offset by weakness in CDOs and structured products.

[DRs] were flat year-over-year as a slow down in new issues offset active trading levels.

Remember that the first quarter is seasonally the weakest of the year reflecting a lower level of corporate actions like dividend payments.

Clearing and execution services fees decreased by 3%.

However this includes the impact of the sale of the B&G trade execution businesses which were sold to BNY Convergex.

Adjusting for this transaction clearing and execution fee revenue increased 12% over the prior year, principally due to increased activity resulting from market volatility along with continued growth in money market and mutual fund positions by our clients reflecting success in our asset gathering activities.

The B&G trade sale was done at book value with an earn out based on 2008 performance which is payable in the first half of 2009.

As such, the transaction is slightly dilutive in '08, about $0.03, until we receive the earn out.

These businesses have historically contributed $50 million to $60 million in revenue and $10 million to $15 million in pretax income on a quarterly basis.

Asset and wealth management fees increased by 5%, primarily reflecting strong money market flows and continued growth in business outside the U.S., partially offset by the previously disclosed loss of business at one of the investment [votifs] as well as lower equity market values.

Our AUM were $1.1 trillion representing an 8% increase from the first quarter of last year.

Net inflows totaled $23 billion.

This is comprised of $29 billion in net money market inflows offset by $6 billion of net long term flows.

The outflows reflect a general market shift from equities to money markets.

Performance fees were $20 million.

This is down $29 million year-over-year and $42 million sequentially.

The year-over-year decline represents a lower level of performance fees generated from alternative and other quantitative products.

The sequential decline represents a typical seasonal fall off.

In addition, investment income declined $38 million compared to first quarter '07 and $29 million sequential, principally reflecting losses associated with seed capital investments and lower levels of private equity gains.

The weak equity market conditions and difficult credit markets have negatively impacted both performance fees and investment income, which should eventually rebound as markets recover.

FX and other trading generated 42% growth year-over-year.

We benefited from high levels of currency volatility as well as higher client volumes and business wins.

A partial offset to these positives was the impact of FAS 157 on our derivatives business given deterioration and counterparty credit ratings.

These decreased sequentially, primarily reflecting a lower valuation of our credit derivatives portfolio and the aforementioned impact of FAS 157.

Turning to net interest revenue detailed on page seven of the earnings summary, revenue increased 39% year-over-year and 2% sequentially.

This strong performance compared to the first quarter of 2007 reflects both higher volumes and wider spreads.

Interest earning assets on our balance sheet increased 36% year-over-year and 5% sequentially.

This growth is driven by client deposits.

When markets are active we take on more frictional cash deposits and we also are viewed favorably by clients in these treacherous markets given our strong credit rating.

Our yield came in at 2.10%, up two basis points from the year ago quarter and down six basis points from Q4.

The sequential decline reflects a lower level of interest free deposits as well as the impact of a lower rate environment on these deposits.

We expect further modest contraction on the yield as asset repricing catches up with liabilities in the next few months.

On the expense front, total noninterest expenses grew 6% on an operating basis excluding M&I costs and the amortization of intangibles.

Sequentially, total expenses actually declined by $123 million or 5%.

We are pulling through synergies and exhibiting good overall expense discipline.

On page nine of the earnings summary we have displayed our investment securities portfolios by asset categories and ratings.

We have also highlighted both the unrealized losses on these portfolios as well as the other than temporary impairment write downs during the quarter.

We believe that this degree of granularity provides clean transparent insights into the status of our portfolio.

We have always focused on very safe, short duration mortgage backed and asset backed securities, largely all AAA.

Our core portfolio remains 95% AAA, 99% AAA and AA, but the current marks on these assets reflect highly illiquid market conditions with few buyers and many forced liquidations.

I want to emphasize that we have the ability and the intent to hold these securities until the prices recover or until maturity.

We routinely test our investment securities for other than temporary impairment.

During the quarter we did record $74 million of OTTI.

This breaks out as follows.

First, $24 million related to CDOs, amortization costs less write downs is now reflected at 40% of par.

Second, $22 million related to SIV assets that were previously purchased from asset management portfolios which are now at 77% of par.

And third, $28 million related to securities backed by home equity lines of credit in the [TRFC] portfolio based on both a deterioration of specific securities as well as weakening credit support due to downgrades of certain underlying bond insurers.

It is hard to predict when the fixed income markets will fully stabilize and recover.

But in our view, we currently don't anticipate meaningful credit losses from our investment portfolios.

We extended our capital support agreements on a sect lending comingled fund to cover Thornburg Mortgage Capital Resources paper increasing our total exposure under these agreements to $85 million from $55 million.

We booked an estimated loss of $12 million on these support agreements during the quarter.

We will continue to closely monitor asset quality in this and in our other funds.

The credit quality of your loan portfolio remains solid.

The provision for credit losses was $16 million compared to a credit of $12 million a year ago and a provision of $20 million in the fourth quarter.

Charge-offs were less than provision at $13 million.

Nonperforming assets increased by $24 million to $210 million.

The effective tax rate excluding M&I expenses was 33.3% compared with 32.3% in the first quarter of '07 and essentially flat with the fourth quarter.

With our larger balance sheet combined with the sizable increase in our mark on these -- on the securities portfolio, we saw our capital ratios dip in the quarter.

That said, with a tier one ratio of 8.8%, we are still well above our target of 8% and very comfortable with our capital position.

But since the adjusted TC ratio is at 4.14%, which is below our target of 5%, we do not plan further repurchases of our stock in the near term.

We will however, we main opportunistic on acquisitions.

Remember that we generate about 25 basis points of TC per quarter so we we should get back to your target in reasonably short order.

We clearly have ample liquidity as we build liquid assets during the quarter which is prudent given the market environment.

Turning to the merger for a moment on page 11 of our earnings summary, there's an update on the progress against our integration milestones.

We are continuing to meet our interim revenue synergy targets toward the run rate goal of $250 million to $400 million in revenue by 2011, and we will provide a progress report on investor day.

On the expense side we are currently exceeding our cumulative expense synergies target.

The aforementioned $118 million in synergies annualized to $472 million, 2/3 of the way to the $700 million target.

Stay tuned, we will also update on investor day.

Finally, you will note the consolidation of banks is on track for completion by early in the third quarter.

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

There remains significant uncertainty around the market drivers of our performance which include place levels, volumes, volatility, and credit spreads.

Though we remain in the turbulent environment of the last three quarters, we would expect to see asset servicing and clearing continue to perform expectations.

If we see a gradual recovery and rebound in equity markets, we would expect to see a bounce back in asset management.

We generally see good depository receipts performance seasonally in Q2, and we expect to see that again this year.

On the other hand, as I mentioned earlier, we expect to see the net interest margin come in modestly.

In addition, we had our annual company-wide merit increase of approximately 3% on April 1st.

We are managing expense growth especially carefully given the revenue uncertainty, and we are continuing to focus on delivering our synergy commitments.

And we will be focused on maintaining a very strong balance sheet in terms of both liquidity and capital.

You can be sure that regardless of the environment, we remain focused on executing our strategy and outperforming our peers.

And with that I'll turn it back to Bob.

Thanks very much, Bruce.

I appreciate it.

And I think we've given you a pretty good overview of the quarter.

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

Thank you.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Mike Mayo with Deutsche Bank.

Please go ahead.

Good morning.

Hi, Mike.

Just in terms of the DR business it seemed like a little more of a decline than we were expecting.

Did you see any extra decline there, and do you think it will bounce back all the way in is second quarter?

Yes.

Brian can answer that.

It was actually slightly up from the first quarter of '07.

So it is what we expected.

And it is more seasonal, isn't it.

First quarter tends to be pretty weak.

Last three years it's almost been a 2% variance as the quarter.

We expect as Bruce mentioned the banks to come back in the second quarter.

And we feel pretty good about that business, it should have another good year, Mike.

Okay.

And then the asset management business, that's simply a function of the market.

Anything else going on there, in and outs?

Mike, this is Ron O'Hanley.

The -- most of it far and away is the market.

We saw very strong flows in short duration money markets as you would expect, continued strong growth outside the U.S.

The -- offsetting that are some long-term fund outflows in the U.S.

mutual fund market.

The we are suffering the full-year impact if you will, the annualized impact of the team that we lost last year, the Boston Company, although the new asset loss there is actually stabilized and performance there is actually quite strong.

So, we expect that to stabilize but you are getting the full-year impact of that.

Those are the major ins and outs right there.

And as it relates, Bruce, the margin, you expect that to come in some.

So is this the end of the benefit of the fed ease something.

Yes, I think when you get to the low rate levels that we have now, you start to get some compression on your interest bearing deposits.

So I think the benefit has largely worked its way through.

Having said that we have typically tried to be relatively neutral positioned.

And we may come in a bit but not overly dramatic.

And then lastly, the merger savings are ahead, why not increase the overall target?

We have said that we will post you on that at the investor day.

So we want to keep some good stuff for then, Mike.

Okay.

Thank you.

Thank you.

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

Please go ahead.

Thanks, good morning.

Hi, Ken.

Hey, Bob.

Two questions for you.

One, you have mentioned again the diversification of the business model.

Talking to a lot of positives a lot of negatives and I know obviously the business will continue to grow on a year-over-year basis, but I am just -- I want to understand how the positives and negatives balance out here as far as a go-forward perspective.

Meaning, are we back to an environment where you kind of just hope to keep the growth flat from here, or ex expense synergies which we know will help going forward, how do you just look at the balance of just core business growth in this environment?

Well, , what I would say, Ken is it is interesting to note how the security servicing business is different than the asset management business, in that they are not totally correlated which we actually find useful.

We continue to grow quickly around the world.

This is a long-term cycle that we are seeing here and it is not part of the economic cycle.

It is a secular trend we are seeing.

Our business model is that we should continue to pick up business in Europe and Asia as we continue to expand.

In fact, we announced last week, we are growing so quickly in Asia that until last week we did not have an Asia-Pacific division, we've had so much growth there, we've decided we have to invest a little more there and have more coordinated approach in Asia.

We have just announced one of your most senior executives is going over to Hong Kong and we are going to create a new head office for the Asian region there.

So we are building for the long term.

There's no question that some of our businesses are under a bit of stress at this point.

That's not surprising given this environment.

But we continue to see pretty good revenue growth.

I would hope that we would -- you will see that in coming quarters as well.

Bruce, anything you would add

I think, Bob, Ken don't lose sight of the fact that if you say there's some things on both sides of the ledger for the quarter.

We had 16% EPS growth and on a cash basis it was 20% year-over-year.

So I think, notwithstanding the environment, we are still performing quite well.

Yes, and I am not taking that away from year-over-year.

I am talk about perspectively off of the base that you've set to grow from, if everything offsets each other, some good, some bad, then the business could just run in a place on a core basis.

It is a scenario, Ken, but it's not what we are expecting when we sit around the table and talk about various scenarios about how the rest of this year will play out.

Okay.

That's helpful.

The second question was just on revenue synergies.

Any update on how those are coming in with regard to the deal?

Ken, this is Gerald Hassell.

The revenue synergies are tracking well against that $250 million to $400 million level we described last year.

We will give you a further update at the investor day conference, but we feel positive about those revenue synergies and think we will achieve them.

And just can you give us anecdotes, are there tangible revenue synergies in this quarter?

They are very similar to ones we have seen if the past, and that is greater use and greater trading capabilities in our sect lending and foreign exchange areas.

Money flows out of areas like Pershing and our corporate trust areas into Dreyfus.

Cross selling of asset management into our asset servicing clients.

Those are the three main areas that continue to perform quite well.

And we'll give specific examples at investor day, Ken.

Okay.

Thanks very much.

And, Ken, I would say we are running a little ahead of where we were hoping for.

Certainly by June of last year.

So we have been pleased with where we are.

Okay.

Thanks, Bob.

Thank you.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Good morning, folks.

Good morning, Brian.

We were just on the merger, just one more question.

Are you finding more merger synergies than the -- when you got more detailed on the $250 million to $400 million plan?

So in addition to that, are you discovering more opportunity throughout the organization?

I think we are -- we had it scoped out very well and we had a very detailed plan, and so we have executed along that plan.

You do find a few forks in the road and a few opportunities.

And where we see that we are executing on that.

Okay.

Great.

Then on the clearing business, I guess you are winning business from potentially the Bear, Stearns book.

How should we -- how significant should we be thinking about that in the future quarters?

How long does it take to come into the revenue stream and is it a very large improvement in the revenue steam?

Hey, Rich, you want to take that?

Sure, I will comment.

This is Rich Brueckner.

We have doubled the pipeline, as Bob mentioned earlier.

So that's, I think, significant.

We have another double that's not signed.

And we probably won't get all of that and it will take about six no nine months to convert most of that.

That's the normal conversion period although I must say we have accelerated the pace of that in the beginning.

We have converted a couple of accounts already.

Okay.

Great.

And then if you just talk about the SIV exposure.

I know in the 10K you said it was down in the money market funds.

I think to $1.7 billion, if you could just us an update on that and when you expect that to roll off and I think $8.9 billion in the securities collateral pools.

Do you have an idea of when that might run down?

And of course how comfortable you feel about the SIVs that are still in the money products.

Sure, Brian, this is Todd Gibbons.

The SIV exposure continues to pay down pretty rapidly as expected.

I think that most of the exposure, the significant majority of the exposure, is to names that have bank sponsors and they have indicated support.

In the securities funds it is now down to about $7.3 billion from that $8.9 billion that you talked about.

In the nonbank maturities are paying off.

They're very short in nature and they're paying quickly.

Okay.

And the $1.7 billion is in the money funds, is that $1.7 billion or is that down?

That's down somewhat, too.

Is there -- I know you said July, August was the time frame when you thought the SIVs in the money market funds would probably be pretty close to zero.

Is there a time frame on the sect lending pool that you can give us on that as well?

Well, the -- as I say, most of that is now bank sponsored so it is coming off over the course of the next year.

But it is really like having exposed your to a bank at this point.

Okay.

Great.

Thanks very much.

Thank you.

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

Please go ahead.

Hi, everyone.

Another question on growth, similar to Ken's question.

This quarter you had 9% performing growth with the income year-over-year.

Do you have any visibility on the kind of fee revenue growth you believe you can generate this year in the context of flat equity market, (inaudible) conversion to trend with financial fee income categories like sect lending and foreign exchange?

That would be really helpful.

These are unusual times and unusual results it is hard to get a baseline of what organic growth could be this year in that context.

Yes.

I think, Tom, given the uncertainty out there, that's a little hard one to call.

What we are trying to describe the frame work is that asset servicing has been off the charts and the comps will get tougher for us at servicing as we go through the year.

But asset management because of the weak equity markets and the impact on performance fees is quite a bit below the trend.

So how that plays out and the timing of how that plays out will have a lot to do on that ultimate fee growth number.

But I would say that, on the things that we can control in terms of providing excellent client service, the business pipelines, and bringing in that new business, we feel really good about how we are positioned for the rest of the year.

Thanks, Bruce.

And a follow up on the government treasury clearance area, you guys are one of only two banks that provide clearance of government treasury securities.

I was just wondering if you could elaborate on how the current market environment is possibly impacting that part of the business and if the recent fed actions like the new primary dealer credit facility if those type of actions are a net positive or negative for the business.

Tom, it is Gerald.

As you know, we are one of the two main clearers with the fed.

All the new fed actions that have been put in place, they are using our pipes to implement those actions.

So we are seeing some activity as a result of that.

In our global collateral management, what we call collateral management capabilities we are still seeing growth in the triparty repo market, because that's the safe haven for dealers to finance their inventories and for investors to feel comfortable.

So we are still seeing good growth and good activity out of our broker dealer services area.

Thanks, Gerald.

And those fees are in asset servicing, correct?

Yes.

Great.

And one last question for you all.

One of the merger milestones targeted this quarter was a complete review of all the business segments at the combined bank.

I was just wondering if you can you give us any type of preview on the outcome of all those review .

That's all I

I heard what he said.

Hey, Tom, I think the list of thing that is Bob talked about in his remarks is an indication that this process is underway and we are acting on some of these things.

So we have sold the 1st Business Bank in California.

We completed the sale on ConvergEx.

So there are activities around the periphery that we are currently dealing with.

And so I think when we get to investor day we will give a good view as to how we look at the businesses and what their full potential is and how we view those in terms of the total franchise.

Bob?

Yes.

We will give you a good sense as to how -- where we want to invest, why we want to invest, and what are the criteria we look at in terms of everything from revenue growth to globalization to expense and revenue synergies, capital usage.

We are in interesting times, and we're -- we have businesses that don't fit our model and we have been dealing with them and we will continue to.

At the same token we are going to redeploy some capital into those businesses where we very clearly have long-term competitive advantages and therefore superior shareholder returns.

So we will keep working on it, and even though the environment is tough, we can get interesting things done at the margin.

Great.

Thanks for taking the questions.

Sure.

Thank you.

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

Please go ahead.

Good morning, Bob.

Hi, Gerard.

On the incentive comp for the asset management business, was the decline mostly due to the market conditions, or did you see some of the decline because of the people that left Boston Company last year?

No, Gerard.

The decline is formulaic.

We pay incentives either -- most of our incentives are paid at a percentage of pretax.

There's also some incentives paid as a percentage of performance fees and since both declined, you saw a formulaic decline there.

Thank you.

And Bob you may have mentioned this and I had to jump off the call for a minute.

But in terms of review the business lines, obviously you announced the sale of the bank on the west coast very recently.

Are you finished going through the process of determining which lines you really want to keep and which ones may be subject to sale?

Yes.

The way we kind of think of it, Gerard, and it is not totally black and white but it is clearly way I think about it, and it is really about capital allocation.

I think of rough categories is being, here is the business where not only do we not want to constrain them in growing capital, but we would actually consider acquisitions.

So acquisition capital as well could be a category for businesses where you don't want to constrain capital at all.

But on the other hand you won't want to do acquisitions in that space.

And it could be a change-over time.

Then there'd be another category of businesses where you just want to maintain capital and not grow it.

And finally, a category where you want to harvest capital including true selling.

And we have finished all the reviews.

It has been an enormous amount of work.

You are seeing some of the output of that in terms of things we have told and purchased over the last few quarters.

We are -- as we complete that, I think we have had a wonderful education process for all of the executive team here as well as for our board of directors.

We are in the process of summarizing, quite frankly, and putting together a nice presentation for our board.

We are doing an off-site at the beginning of June, which is something we had scheduled about six months as prior to the inevitable outcome of this.

But we also want to give the highlights of everything we are going to show the market a couple of weeks later at our investor day, which is June --

17th.

June 17th, per Steve.

So I think the process is worked very nicely.

And it is accelerated our ability to understand our businesses, where we make money, and where we can get more revenue and expense synergies, frankly.

Would be fair when we see these results at the investor day that the lines of businesses that are capital intense and don't meet your return hurdles, that over time there would be less exposure to those business lines?

Well, yes.

That would be roughly true.

Clearly, we are not going to advertise which ones are in the last category.

That wouldn't be fair to our businesses or our people.

But it will be pretty clear to you as to what your criteria is and which are the ones that are clearly the ones we are going to be growing over time including what geography.

And beyond that, we simply can't advertise externally, in fact we don't advertise it outside of the executive committee which ones we are taking a much harder look at over time.

Thank you.

Thank you.

Thank you.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Hi.

Just a quick followup.

In the -- I guess this would be for Tim, and maybe Bruce, as we talk about the net margin outlook going forward, what's your ability to lower foreign office deposit rates and we have seen them as some competitors coming down pretty sharply.

And then how do you feel about fund deposit growth in Europe?

Brian, it is Jim.

Our growth in fund deposits as you have seen has been quite significant year-over-year.

A big piece of that obviously is with the significant growth that we've enjoyed in real life with the ABN AMRO Mellon joint venture.

The competition around rates, I would say is reasonably competitive at this point.

We would expect that to continue as we look out over the course of the balance of this year.

Bruce, I don't know if you have anything further to add on that.

No.

I think we are seeing the good environment and you are seeing the business wins affecting the levels and the rates are pretty stable.

Okay.

So, like you said, that won't really have a big impact on the net interest margin going forward.

It is really more of your balance -- your asset liability management that's driving them in.

That's correct.

Okay.

Great.

Thank you.

Melissa, we have time for one more question.

Thank you.

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

Please go ahead.

Thanks.

Thanks for the follow-up opportunity.

I think maybe a question for Todd.

Todd, just on the credit book I was wondering if you could give us an update.

There was -- the metrics show that the book is holding up very well with only a slight increase in nonperformers, but I was just wondering if you can touch on any updates to some of the area that you highlighted in the K as far as any concerns, and specific portfolios about credit deterioration?

And also, can you give us an update on exposure levels and how aggressive you have been or plan to be as far as taking down risks incrementally?

Sure, Ken.

In terms -- we have continued to take down exposures especially on the weaker credits.

We have let them mature off, we are no longer really in that type of business.

As you will see in our Q where we give more of a break down.

Our financial exposures have come down somewhat in the first quarter.

That's pretty easy for us to moderate.

There's no question that we are seeing some migration, that this is a tough environment.

It is difficult to precisely estimate credit costs, but we would expect them to trend up somewhat from the first quarter.

And is that -- when you say credit costs do you mean charge offs or the amount of provision?

Provisioning.

So for the year, provision expenses might be a little higher than what you had initially anticipated?

I think that's fair to say.

By major magnitude or just incremental?

I wish I could predict it exactly.

I would say incremental at this point.

Okay.

And my second just quick question is just, Bruce, on the TCE being below your target, do -- how important is TCE specifically to either the rating agencies or other parties?

Does it become anymore of an incremental issue and have you vetted that with your respective constituencies?

Yes.

I think our primary capital measure is the tier one and that most closely mirrors our economic capital measures that we use the framework internally.

But TCE clearly also is an important measure for the rating agencies.

And we have talked to the rating agencies.

In the past you may recall, Ken, when we have done acquisitions we have brought the TCE ratio down into this ZIP code, and because of the strong capital generation that we have from our businesses, we have been able to restore it relatively quickly.

So, we have had those conversations and we have internally a very good comfort level and I think our external constituents also share that view.

Okay, thanks for the follow up.

Appreciate it.

Thanks, Ken.

It is one of the, frankly, joys of this business, is it tends to be fairly capital light.

So we can generate the capital.

I wanted to thank everyone for the great questions.

We had the whole team here for you to get into any detail that you wanted to.

Obviously, looking forward to any follow-up calls that we have later to Steve and the team.

And I appreciate your support and analysis, and have a great day.

Thank you.

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.