紐約梅隆銀行 (BK) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2009 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 this conference is being recorded.

I will now turn the call over to Mr.

Steve Lackey.

Mr.

Lackey, you may begin.

Thanks very much, Wendy, and good morning everyone.

Thanks for joining to us 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 prospect 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 2008 10-K and other documents filed with the SEC that are available on our website, www.bnymellon.com.

Forward-looking statements in this call speak only as of today, April 21st, 2009.

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 provides the highlights of our results.

We also have a supplemental document, the quarterly earnings review, available on our home page which provides a five quarter view of the total Company and our six business segments.

We will be using this document to review our first quarter results.

This morning's call will include comments from Bob Kelly, our Chairman and CEO, and Todd Gibbons, our 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.

Thanks Steve and good morning, everyone.

Thank you very much for joining us.

EPS in the first quarter was $0.28, on an operating basis $0.53.

The bad news is revenue is down 14% year-over-year.

Now, we've been talking about revenue eventually slowing for about six months now, and it's finally happened.

As you know, our company has benefited tremendously from financial market stress in late 2007 and all of 2008.

We saw a flight to quality in deposits and higher spreads in NII, FX, and securities lending.

In Q1 interbank lending spreads declined, deposits levels had finally started to moderate and volatility has come down in FX.

The good news is that this is, of course, positive for the financial markets overall.

We're starting to see some improvements in the money markets, with fixed income activity and in some of the equity mark.

Part of the NII down draft represents a conscious decision by us to manage the investment process very conservatively over the past six months.

We're now beginning to take a little more risk placing term money in the interbank markets over quarter end versus just keeping it at the Fed.

In other words, we could have earned more but we didn't.

This was a quarter for conservatism.

The good news is, personally, we continue to gain market share in our businesses.

In asset management, stronger investment performance is leading to improved market share in the US and Europe in most of our long-term strategies.

We're seeing positive inflows into equity products for the first time since our companies were merged in 2007 which is very encouraging.

Prime money markets were strong, as well.

We saw outflows of low yielding government and treasury funds for four months in a row.

During the first quarter we saw inflows of prime funds of $13 billion and outflows of treasury and government funds of $27 billion.

This is a huge improvement since the Lehman bankruptcy.

In wealth management we had our 13th consecutive quarter of net positive client asset flows.

In asset servicing we posted strong new business wins.

Over the past year we won $1.9 trillion in assets in new assets under custody, and that's over $300 billion in the most recent quarter.

In issuer services we're maintaining a strong number one position and we're seeing continued success in corporate trust and in the DR business.

In clearing, we continue to enhance our number one market position by introducing broker dealers, and broker dealer and treasury services are also bringing in a lot of new business.

In fact, issuer services, clearing, and treasury services all posted good revenue trends.

As a result of the revenue challenge, we're aggressively managing expenses.

Operating expenses were down 10% year-over-year.

We reduced staff expense by 15%.

We held the line on nonstaff expenditures.

And from a merger synergy standpoint, we're continuing along as expected.

We also built capital.

Todd is going to review this in better detail and more detail but just a couple key points.

Both Tier 1 and TCE were up this quarter versus the fourth quarter.

On a Tier 1 basis we're in the first quartile of banks with or without TARP money.

Our Tier 1 was 13.8% and 11.2% without TARP.

Our TCE was 4.2% versus 3.8% last quarter.

We're currently median versus our peer banks but there's a clear reason for this.

We have, of course, a large exposure to the value of securities relative to loans versus traditional banks.

Hopefully most of the problems in that class of asserts are now behind us.

You should know that excluding OCI our TCE is above 7%.

That would be first quartile versus peers.

This should eventually provide a lot of capital up side as security prices recover.

Finally we decided to build capital more aggressively by reducing our dividend.

In fact, we reduced it from $0.24 to $0.09.

This will generate approximately $700 million per annum in common equity.

It also provides us with more flexibility for ongoing investment and growth, both organic and inorganic.

Very importantly we believe it also strengthens our ability to repay TARP in a very cost effective way once we get permission from our regulators.

We fully intend to return to historic payout ratios as soon as practical.

We would also note that the new dividend yield of 1.3% based on yesterday's closing price is now in line with the average of our peer banks.

Overall, based upon business trends we see and recent client actions, it feels like we're at or close to the bottom.

We're very well positioned to manage out of this recession, and we're going to continue to gain share.

I'm going to turn it over to Todd so he can provide you with more color.

Todd.

Thanks, Bob, and good morning.

As I take you through the highlights of the quarter, please note that for comparative purposes, I will exclude the impact of investment securities and asset write-downs from our results.

Before I get into the numbers let me offer metrics around some of the key drivers of our businesses.

During the quarter, we continued to enjoy strong new business wins, increasing our global market share in every business line.

Nonetheless, global equity market values were down between 40% to 48%.

Activity levels in our servicing businesses were lower than we've seen in recent quarters.

And to protect our balance sheet in an uncertain environment, we kept a larger percentage of our assets in low yielding, very short-term liquid instruments that, combined with historically low interest rates and the normalization of client balances, affected NIR.

This led to a 14% decline in operating revenue.

With that as a backdrop, let's get into the numbers.

My comments will follow the quarterly earnings review report beginning on page three.

Our continuing EPS was $0.28.

It was reduced by a total of $0.25 including $0.21 per share or $246 million from investment and goodwill write-downs, and $0.04 of merger and integration expenses.

The decline in market values and volatility impacted asset and wealth management and asset servicing, though our success in winning new business offset a portion of these declines.

Our other servicing businesses performed very well.

You can also see from the chart on page three that all our businesses showed great expense control, particularly those most impacted by the market environment.

Total company operating revenue declined by 14% year-over-year and 21% sequentially, and we reduced operating expenses by 10% year-over-year and 9% sequentially.

Our operating margin for the quarter was 33%.

Turning to page five of the earnings review you can see that while US equity market values were down 40% and global equity values were down 48%, our assets under management and assets under custody held up relatively well, reflecting the benefit from product diversification and new business.

Over the past 12 months we have won an incremental $1.9 trillion in new business in asset servicing, with $335 billion of that coming in the first quarter.

The benefit of this new business has helped to offset the impact of lower market values and a stronger US dollar.

An example of our success at gaining market share has been with hedge funds.

Over the past year, hedge fund assets have declined significantly, as most of you know, from a peak of $2 trillion to $1.2 trillion.

Over the same period, hedge funds administered by The Bank of New York Mellon remained stable at approximately $200 billion.

Our long-term flows of assets under management were positive again in wealth management and based on stronger investment performance improved significantly in asset management.

Another example of this improvement is one of the goals that we established at our investor conference last June.

That was to improve the Morningstar rankings for Dreyfus.

In the most recent survey, Dreyfus' products averaged 3.4 stars compared to three last year.

Turning to page six of the earnings review which details fee growth, security servicing fees were down 20% year-over-year.

Even with the continued strong new business wins over the past year, asset servicing bore the brunt of this decline, due principally to lower volumes and spreads in securities lending, as well as lower market values, transaction volumes, and the strong US dollar.

As you may know, one of the impacts from the market's deleveraging process is a reduced demand for securities lending.

Securities lending fees decreased $155 million year-over-year, and $97 million sequentially, reflecting the reduced demand as well as lower spreads and lower market valuations.

On a positive note, in asset servicing for the second year in a row we ranked number one among all global custodians in the R&M survey and we now have the number one quality ranking across all three major custody surveys.

Issuer services fees were down 3% resulting from lower levels of fixed income issuances globally.

The sequential decline of 6% reflects lower depositary receipt fees due to the timing of corporate actions and lower shareholder services revenue also due to lower overall corporate action activity and the impact of lower equity values on stock option plan fees.

Clearing fees declined 4% over the prior year primarily reflecting lower asset values and lower money market related revenue.

During the first quarter we continue to benefit from new business in the introducing broker dealer segment where we maintain a strong number one market share.

Asset and wealth management fees were off 28%.

In asset management we enjoyed positive flows in equities, fixed income, and prime money funds offset by outflows in very low yielding government treasury funds and in certain alternative products.

Wealth management continued to benefit from strong organic growth, particularly in the family office segment and the Northeastern wealth markets.

Wealth management has had positive client flows for the 13th straight quarter.

FX and other trading revenue increased 19% year-over-year and it actually declined 40% sequentially.

The increase from the year-over-year quarter reflects the benefit from higher volatility of key currencies, partially offset by lower client volumes.

The decrease from the record fourth quarter reflects the impact of both lower volatility and client volumes.

With approximately 85% of the FX revenue driven by our security servicing clients, lower volume and values negatively impact the trading revenue.

We are pleased once again, however, to be recognized for our quality service in the Global Investor Magazine's FX survey, rated the number one FX provider, and we won best FX service overall.

Investment and other income was down $124 million compared to the first quarter of '08, and down $112 million sequentially.

This decline is principally due to a decline in the carrying value of certain equity investments.

Turning to net interest income, which is detailed on page seven of the earnings review, NIR and related margin continue to be influenced by the size of the balance sheet, mix of earning assets, historically low interest rates and our conservative investment strategy in this uncertain environment.

Net interest revenue increased 3% year-over-year principally reflecting a higher level of deposits, offset by narrower spreads driven by the asset mix.

49% of our earning assets were in liquid investments.

On average, cash and interbank placements were up 78% while loans and investment securities were actually down 12%.

NIR was lower sequentially by $278 million due to the drop in short rates globally which decreased the value of our non-interest bearing deposits.

Additionally the size of our balance sheet has declined from $238 billion at year end to $203 billion at the end of the first quarter, reflecting the stabilization of the short-term credit markets.

We believe our balance sheet is likely to remain at current levels unless conditions change once again.

The mix of earning assets together with the historically low rate environment resulted in declines in the net interest margin of 25 basis points compared to the prior year, and 45 basis points sequentially.

Our decision to maintain a highly liquid investment strategy was based on a very uncertain environment leading into and during the first quarter.

The approach actually improved liquidity and it strengthened our capital ratios at a cost of approximately $0.03 to $0.04 per share.

We are now in a position to invest in high quality assets with slightly longer durations.

These actions should keep the net interest margin in the 180 to 200 basis point range even in this current low rate environment.

Turning to page eight you can see we reduced operating expenses by 10% year over year and 9% sequentially.

Strong expense management in response to the operating environment and the continued impact of merger related synergies drove year-over-year expense in sequential declines in non-interest expense.

The 10% year-over-year decrease was driven by a 15% decline in total staff expense resulting from lower incentive and compensation expense, a 33% decline in business development expense and a stronger US dollar.

Partially offsetting these declines were higher net occupancy and professional, legal and other purchased services.

The sequential decrease includes declines in nearly all expense categories.

In the first quarter we incurred a $50 million goodwill impairment charge related to Mellon United National Bank, and we also recorded a $10 million restructuring charge on top of the $181 million charge we took in the fourth quarter.

This is related to the fourth quarter announcement of a 4% reduction in staff.

Recall that this restructuring will lower our expense base by $160 million to $170 million annually.

During the first quarter the FDIC proposed a 10 to 20 basis point special emergency deposit assessment for all depositary institutions.

The charge, if approved, is expected to be recorded in the second quarter, and based on average assessable deposits in the first quarter would be approximately $75 million, assuming 10 basis points.

This is in addition to last year's increase in the assessment which increased our cost $15 million year-over-year and $7 million sequentially.

Page nine of the earnings review shows the investment securities in our portfolio.

The unrealized net of tax loss of our available for sale portfolio was $4.5 billion at March 31st, an increase of approximately $400 million compared to the prior quarter.

This increase primarily reflects a decline in the value of the Alt-A securities.

We have again included a breakdown of investments that are on our watch list.

This is now approximately 39% of the portfolio, a slight uptick from the end of the fourth quarter.

These types of securities are under more credit stress and are generating the majority of the negative marks and impairments.

Since the end of the fourth quarter the housing market indicators and the broader economy continued to deteriorate.

To properly reflect the declining value of homes in the current environment, we adjusted our loss severity assumptions to decrease the amount we expect to receive to cover the original value of the securities.

As a result of these adjustments to our assumption, a larger number of securities, which were primarily Alt-As, generated an expected loss and consequently we recorded an impairment charge.

Combined with the write-down of the structured tax investment, we recorded a total of $295 million in pretax securities loss.

Effective March 31st we adopted two new accounting standards that impacted the securities portfolio.

The first new standard, FAS 115-2, changes the accounting for impairments.

Under the new standard for securities we do not intend to sell, only the credit related portion of an OTTI is required to be recorded through the income statement.

The remainder is recorded in other comprehensive income.

In the first quarter the credit loss component of $295 million was recorded as a securities loss on the income statement and the non credit related component of $1.2 billion remained in OCI.

As a result of adopting the other accounting -- also FAS 115-2, the transition rules required us to record an adjustment for previously recorded impairment charges.

This adjustment increased retained earnings by $681 million and also increased the loss in accumulated OCI by an equal amount.

All of our regulatory capital ratios strengthened compared to the prior quarter.

Tier 1 of 13.8 compares to 13.3.

Total capital, 17.7 compared to 17.1.

And the leverage ratio was 7.8 compared to 6.9.

We are conscious that the market is also focused on the tangible common equity ratio and it improved to 4.2%.

As I noted earlier, we did adopt the new FASB guidelines related to valuing securities, and the benefit was approximately 28 basis points.

However, that ratio would have been up whether we had adopted the new accounting or not.

We recognize that the investment community does not look at the various capital ratios in isolation, so relative to the eight banks in our peer group we rank in the top quartile for Tier 1, median in TCE, and median in our dividend yield based on the reduced quarterly dividend of $0.09.

I would also point out that among those peers we have the lowest relative amount of TARP to be repaid.

Now turning to our loan portfolio, our loan portfolio continues to be of high quality, mostly short term and investment grade.

The deterioration we have seen is primarily limited to the portfolio of the Florida bank as well as some other residential home loans.

During the quarter we raised the provision for credit losses to $80 million.

Charge-offs were less than provisioned at $50 million.

Non-performing assets increased by $129 million to $429 million, virtually all real-estate related.

The effective tax rate was 27.2% in the first quarter of 2009.

If we exclude the impact of the non-operating items the effective tax rate was 32.6%.

Turning to the integration front on page 12, we achieved $186 million in annualized revenue synergies.

We reached $173 million in expense synergies during the quarter, which is $16 million higher than the fourth quarter.

We are now almost 85% of the way through our M&I expenses, and we are meeting or exceeding our operating commitment in asset servicing, and that's where most of the overlap occurred.

Looking ahead we are confident we'll be among the first banks to recover from the global recession.

Bob has frequently talked in the past about the three waves of the downturn for banks.

The first is the mark to market declines and writedowns of securities.

Second is consumer debt losses.

And the third is commercial and commercial real-estate loans.

Our balance sheet is obviously most impacted by that first wave, and the good news is we appear to be emerging from this part of the cycle.

We have a strong balance sheet, excellent capital ratios, tremendous liquidity, and the earnings power to withstand an even more severe recession.

During the current downturn, our businesses have gained market share and as the market environment improves we are extremely well positioned to benefit.

Our fee revenue is leveraged to any improvement in the equity and credit markets, and as Bob indicated we're seeing some early signs that are making us a little more optimistic.

With that I will turn it back to Bob.

Thanks, Todd.

Why don't we open it for questions now.

(Operator Instructions) Our first question today is from Mike Mayo.

You may ask your questions, and please state your company name.

It's Mike Mayo with CLSA.

When it comes to the expense reduction, that's good news.

I guess it stems from the merger savings.

But my question is, given the revenue environment and the decline in revenues, how much more leverage do you have to reduce expenses, so as to prevent negative operating leverage?

Well, it's a good question.

Revenue, obviously, was our primary issue in the quarter, and we worked pretty hard on the expense side.

What I would say is our expense reductions are firstly sustainable, and largely permanent, and repeatable.

And also I want to say that, so in other words, there's not any one-time stuff in there.

It's a combination of the restructuring that we did in the fourth quarter -- you don't see the full run rate of that but it's there -- the merger saves, we are being tougher on compensation, quite frankly, on bonus type schemes, and we have other programs that are underway.

So what I would say is that, top of the house, there's other things we can do.

The only thing I'm going to be careful of, though, is that we're not going to impact quality or level of service in the Company.

We want to continue to gain market share throughout this process, but I do want to emphasize we have more flexibility from here if we need to.

As a follow-up, what percent of the expenses are variable versus fixed?

I know at Legacy Bank of New York, the number, if I'm correct, is close to like 80% or so, and at Mellon I thought it was more variable.

So what percentage of expenses are variable, and what are some additional levers you have in addition to compensation, should revenues continue to decline?

Well, I'll let Todd handle that but let's remember that all expenses over the medium term are variable.

In the long run, right.

Todd.

Obviously, Mike, the largest expense that we have is compensation expense, and with the actions we took in the fourth quarter and the synergies that we're going to continue to grind out of the Company I think we'll continue to do better there.

We are seeing opportunities to improve operating efficiencies, as well.

We're creating utilities that a number of our businesses can use, and I think it will increase efficiency and lower costs.

We're also running a little hot on our consulting expenses right now.

We're starting to see that phased down a little bit from where we were in the fourth quarter, but I think there's more room for us there.

But most of the leverage comes with how we're doing on the incentive side, and that's all related to revenue across the Company.

In the short term what percent would be variable?

Is it like a half or two-thirds?

It's hard to say.

I would say it's probably within that range of 50% to 60%.

The other thing I would say, Mike, is given our mix of businesses and the scale we have in each of our businesses, is that there are other things we can do in the medium term as well.

So there's short-term actions and medium term actions, and we're starting to think about medium terms things, as well.

So if you want to believe that there's a structural change in financial services, you can do that.

But we're not going to take the chance in case there is.

At some point these markets are going to return.

But I think we've got some great medium term opportunities in everything from real estate to more fundamental ways of reducing paper and getting common activities at a much lower unit cost.

We're going to be working on that, as well.

That just talks to the advantage of scale here.

Thank you.

Thank you.

Our next question is from Tom McCrohan from Janney Montgomery Scott.

Your line is open.

Good morning.

Hi Bob, hi Todd.

I'm just curious, the reduction of dividend why don't you just reduce is to like a penny in the interest to repay back the TARP money you talked about, just cut it even more than you did?

Hey, Tom, it's Bob.

I guess there's a couple reasons.

The first one is it gets back to that three wave type comment.

We would like to think that the majority of the issues on our balance sheet have been identified, and on a relative basis, we should outperform in terms of asset quality over the next year.

Second thing is, I think dividend is actually pretty important in companies, whether they be financial or industrial.

And we should pay a dividend, and I'm a believer in having a competitive dividend rate.

We were certainly much higher than our peers, and so our view was let's go to a peer type level, a peer average, and that puts us in the middle of the pack and generates us a lot of free capital that we can do other things with.

That's why.

I don't think we have to reduce it that much in the end.

It will be interesting to see if things progress here, but we all feel pretty comfortable at this level.

Fair enough.

And in your comment that you feel like we are at or close to bottom, is that a view for the revenue side or is that also talking about the credit position?

You think that's also at or close to bottom?

I will start with the revenue side.

We spend a lot of time, obviously, talking about the numbers.

We do it every quarter and we do it every month, as well.

But I'm getting more of a sense, Gerald and I both are, and we go around the table with our business heads, that we could be here or close to it.

Which is somewhat encouraging, although what I would say to you is let's be cautious and conservative here.

But we are seeing some encouraging signs.

The asset management ones were a good example that I pointed out and I'm sure Ron could talk about it more.

But on the credit side, Brian what would you say?

Sure.

It's Brian.

We're at the high end of our range right now.

We see similar numbers for the next couple quarters, at least, and until we see some real signs of the macro economic recovery.

But I think, as Todd mentioned, the important thing is we don't have credit card loans, we have minimal consumer loans and we stopped making LBO loans in 2006.

So we think we're at the high range, but it should continue probably for a couple quarters at this sort of level.

Ron, what would you say?

It's interesting to think about the asset management business and some of the changes you've seen in the last few months.

Any color you could add to that?

Sure.

This is Ron O'Hanley here.

What I would point to a little bit is asset flow.

What we saw happen in the first quarter was quite strong flows in long-term funds.

There were inflows and outflows.

I'll come to the outflows in a second, but the inflows start at the beginning of the quarter with institutional money come back in, but what was very positive for us was we started to see, as the quarter progressed, retail money.

And that's a combination of two things.

One is, some of the retail money started to move but us capturing a disproportionate share because investment performance has been so strong.

We're seeing that at Dreyfus.

Todd talked about the Morningstar rating now that's close to 3.5, up from 2.7 at the end of '06.

In our European fund sales, we were third in overall sales in Europe for the quarter.

And just in our overall shift in shares.

So we feel quite positive that as investors start to move into the market, given our performance and given our distribution capability, we will enjoy disproportionate share.

We'll see, but thanks for asking, Tom.

Thanks for take question.

(Operator Instructions) Our next question is from Gerard Cassidy of RBC Capital Markets.

Your line is open.

Hi, Bob.

Hey, Gerard.

Coming back to that answer you just gave about the bottoming -- possible bottoming -- in businesses, what should we look for, as outsiders that could actually push, or what are you guys most worried about that could actually -- the bottom maybe is not in the next three to six months but could be in 2010?

Is it a global economic decline?

What are some of the telltale signs that you guys are watching to make sure this does not get pushed out into 2010?

Let's talk macro, then a little more micro on markets, then finally to us.

If anyone else wants to jump in, please do.

Clearly, we are going to see unemployment rates in this country rise for some time yet.

And we don't see a near-term end to that.

But hopefully we'll see some peak in unemployment by the end of the year, start of next year.

Secondly, we're all watching Kay Shiller, the top 20 cities.

It would be great if we could see two or three cities at some point by the end of this year that have flattened out in terms of house price declines and maybe start to turn a little bit.

And we're watching inventories, as well.

I can't help but think that those are the key things that I'm watching, and just the employment data generally.

And I would say that I think we've got a pretty good shot here of turning around faster that Europe, for example.

If you look at some data, I don't know if you have been watching this at all, but if you look at bank loans or bank assets as a percentage of GDP, the US is pretty low compared to Europe.

We don't have the central and eastern Europe issues that Europe is currently struggling with, as well.

To some degree, our problem is a little bit easier to fix here, and, of course, we went into this earlier.

Getting a little more micro, you get into the financial markets, you've got to think about the fact that firstly the markets tend to see all that's turned six or nine months in advance.

We're certainly watching interbank market spreads.

The lending spreads are really coming nicely.

We've seen corporate bond spreads start to come in.

We're starting to see some high quality bond deals getting done, and eventually that's going to lead to more higher yield stuff getting done.

And you can't help but think that at some point here, hopefully later this year, you are going to see more banks be able to do five and ten-year unguaranteed bond-type issues.

Ultimately with more activity in the capital markets, that's going to be good for us as well.

Gerard, I would just add a couple of points.

From a financial markets perspective, as Bob started to allude to, we're seeing the financial markets open back up.

In January you saw some very high-grade companies be able to issue debt securities.

You're now seeing lower grade companies issue in size.

You're seeing some degree of leverage companies issue.

HCA last week had a big new issue.

We're seeing some structured notes in the corporate trust market start to come to market, as well.

We're not going to see CDOs come back, but we are going to see structured notes come back to the marketplace.

Ron commented on long assets being invested again in the asset management area.

So you're just seeing a general pickup in financial market activity, and I believe that de-leveraging in the broker dealer community and across the world has essentially occurred.

We're fairly de-leveraged now to a more sustainable rate, and from here we can build upon.

It's good to see consumer savings rates are now up around 4%.

They probably will go higher that that, 7% or 8%, and that's probably a good thing for the nation as well.

We're not saying that for the industry that loan losses have peaked.

You are going to see lots of losses this year and next, but you think in terms of those three waves.

But I think at some point what you are going to see is over the next 12 to 18 months you are going to be able to see, I hope, with an opening up of the financial markets, you'll see the ability of most of the banks to be able to start issuing debt as well as equity, and, of course, that's a great thing for the taxpayer and for the country because that means TARP is going to get repaid, and get repaid at a very nice profit to the taxpayer.

Speaking of TARP, I missed your opening comments, Bob, so I apologize if you addressed this.

What's your view on paying back your TARP, and did you make any comments about the stress test, what you're hearing about that?

Gerard, I didn't actually make any comments about it.

We don't know anything about the stress test more than you do.

We've been providing data.

All I can say is I'm not losing any sleep on it, and I think we're as well positioned as anyone in terms of our ability to repay, just using the simple measure of the amount of TARP as a percentage of our market cap we're probably number one in the industry here.

So we'll see.

And I like the relative strength of our balance sheet.

I like our liquidity, general earnings power.

These are all positive things, and we'll see what happens here in coming weeks.

Hopefully we will get some information relatively quickly from the regulators, and we'll take their lead, and obviously we won't do anything without their permission, but it's certainly our hope that we'll be in one of the earlier waves of being able to repay TARP, if that's allowed to occur.

The way I think about it is, we have a lot of excess Tier 1, and frankly, it's served its purpose.

The markets have returned to much better liquidity than they were in the fall when we had the crisis, and we've actually generated a couple hundred basis points of Tier 1 in the last couple of quarters.

We are good generators of Tier 1.

We have more than we need.

And the thing to think about, too, is this TARP money is pretty expensive money, it's 5% after tax.

We could find alternative instruments that are a lot cheaper and therefore earnings would go up.

Ultimately I think it's a really strong message to our clients around the world and also to the financial markets and indeed to the taxpayers.

Lastly, and I think about this all the time, I want to make sure that we continue to be a destination for the most valuable and talented people around the world.

We have outstanding people and I would never want to jeopardize us on the recruiting side or people being worried about payment structures or whatever in terms of longer term competitiveness.

I think there's a lot of reasons why the healthier companies should be allowed to repay TARP eventually but, of course, we still have a lot to learn about the process and I look forward to hearing more in due course.

I have one last question.

Have you found with new business wins, companies that don't do any business with Bank of New York, have they asked you more recently than if you guys think back a couple years ago, about capital, about the capital ratios?

Is that part of your conversation more today with new potential clients versus a year or two ago?

It's been a big change, frankly.

Last year I would say that it was a non issue at the beginning of the year, in the post-Lehman bankruptcy, and the TARP money being received, I think it was a big positive, that it clearly identified particularly to some non-US clients and potential clients, that here's the survivors.

I think it has subtly changed over the past three or four months.

Outside of the US, and increasingly inside the US, now it's kind of viewed as a negative.

Certainly when I travel in the Middle East or Asia or in Europe, I do get more comments about capital levels generally and TARP generally as well.

We never would have had those conversations six months ago.

And let's face it, as you've become, as you view the market, the supply side and sell side have become very much more sensitive to it, so have clients.

So it comes up regularly.

Frankly, we view it as a selling plus when we're pitching outside of the country.

Thank you.

Bob, if I can just add to that, we also enjoy very high credit ratings as well as strong capital ratios.

I think maybe a few of the other business leaders here could comment.

Jim, how is it helping your business?

Absolutely.

As Bob indicated, the competitions that we're involved in now, at the top of the list is the capital and financial strength of our organization vis-a-vis the competition.

And that's come up more readily over the last few months.

That used to be somewhere in the 8th, 9th, 10th on the criteria list a year or so ago.

So it's absolutely led to new business opportunities.

It's led to expanded relationships, and it's actually caused some clients to think about the different models that they have where we're seeing in the past, where a very large financial institution had multiple custodians, now they're looking to see if they shouldn't in fact reduce their number of custodians and be much more careful who those business partners are.

Thank you.

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

Your line is open.

Thanks, good morning, everyone.

My question revolves around the business model.

Obviously revenue diversity has always been a hallmark of the Company.

This is the type of quarter where obviously things are challenging across the board.

And you feel that on all revenue lines.

As you look forward to some of the comments you made about starting to see the hopes of some improvement, how do you think the business model will react on the positive side, meaning that we've had a lot of businesses that have quote/unquote over-earned but then this quarter everything had its own challenges.

So what's that prospect of things going directionally the right way when things improve as opposed to how they've come in on the down side?

One of the things to remember on that, Ken, is we actually did have some positives.

Karen had a great quarter in her business mix.

Karen, why don't you talk about it for a second.

Really, all of issuer services had a terrific showing for the first quarter, mostly off new business wins, as we talked about.

We have the number one market position in all three of those businesses, and particularly corporate trust had a pickup in issuance as well as deposit growth with great expense control.

So we had a terrific quarter.

When you take a look at the P&L, Ken, by business line you will see Karen's businesses had a very nice quarter.

Rich also had a very good quarter, as well.

Anything you would add, Rich?

Yes, Bob, I'd say we had a good quarter in the sense that fixed income trading was very robust.

And I would say looking forward the pipeline is very strong, too.

It's 20% over what it was a year ago so I feel very good about that.

And most of our peers don't have that, and frankly that's probably, I would expect at some level we would probably outperform a bit in this revenue story, which is not pleasant this quarter, but it is what it is.

Where the over-earning was, was in asset management and security servicing, on the custody side.

And that's where it showed up in the P&L when you look at that.

Our other businesses continue to be in pretty good shape here.

Jim or Tim, Is there anything about outlook or pipeline at this point in the model?

Yes, Bob, just a couple points.

Tim Keaney here.

It's actually a little bit of a good news story in here.

Year-over-year with equity markets down 39% we actually converted in $1.5 trillion in new assets.

That's a 6.5% increase in assets under custody.

That's a good news story, especially when you couple it with the quality.

We actually picked up 2% market share in a declining market.

In terms of the new business pipeline, Bob, we have about $4 trillion in pipeline.

That's up a little over 30% sequentially.

We still enjoy a very high new business win rate, about 63%.

And as Todd mentioned, we won $335 billion in new wins and converted $371 billion in new conversions into the organization in the first quarter.

I think we're really levered to the upside in both asset management and in asset servicing.

I love the platform we have.

It's just that we're reflecting right now the incredible stress that we've seen in the equity markets.

At some point that's going to turn.

As Tim point out, the pipelines, I think decisions are being made.

They're pretty big pipelines but the decisions have been made a little bit slower than typically, and that's not surprising given what's going on out here.

But I love our model, and it will turn here eventually.

Thanks for the color, Bob.

Our next question is from Betsy Graseck from Morgan Stanley.

Your line is open.

Thanks, good morning.

I'm sorry if I missed this, but if you could just talk about the trends in sec lending.

I know you indicated you think we're close to a bottom for the overall organization.

Could you just give us your thoughts and color on the sec lending?

Probably the best person to do that is Jim since it reports to him.

Sure, Betsy.

As we've been talking about, and Gerald mentioned, and I think appropriately, we really do believe we're at or near the end of the de-leveraging process, so that i concert with the market value declines we've seen, our on loan balance at the end of the first quarter was reminiscent going back to as far as 2004.

So we clearly have a reset base in the securities lending from an on loan standpoint.

That's the bad news.

The good news is, the pipeline is very strong on secures lending side.

We in fact added ten new securities lending clients in the first quarter.

And we've got a pipeline that includes 83 different prospects for securities lending.

So we really think there's brighter days ahead in the securities lending side and we're looking forward to reeling in some of these new prospects and bringing them in as clients.

And Betsy, what I would say, we have to be a little careful here.

It's encouraging but it's early days, so let's see what happens.

Obviously people exited the program.

Have any of those folks come back yet or not?

We've had about just over 2% of the number of clients in the program actually fully exit.

Some have capped their programs, Betsy, and now we're beginning to see some of those caps coming off.

But as Bob said, I think it's going to be a slower process as we look ahead over the next few quarters until we get some more confirmation around the stability of the market.

And the prospects that you are talking about, are these folks who have never been in this product before or they're just looking around, they're folks who had left maybe from other shops and are looking around at what the best option might be to get back into the program?

It's actually a mix of what you just described.

On the gross margin or on the margin on securities lending, clearly part of it had benefited from a function of dislocation and spreads at the short end of the curve.

Could you talk a little bit about the margin outlook here?

Spreads on a linked basis are actually down over 40%, and down about 17% year-over-year.

And we would expect that they'll be at or near the levels that they're currently at for a period of time.

We are coming into the international dividend season, so we're seeing a little pickup in the on loan volumes, and we would expect that spreads would widen just a little bit during this period.

Okay, but the negative drag from LIBOR OIS normalizing, is that pretty much (inaudible)?

We think so.

Bob, I understand, and completely understand, that your view on capital is that you are more than adequately capitalized but you did cut the dividend.

Can you give us a sense where you anticipate your capital levels to go and at what trigger point you might be able to pay back TARP?

I've thought a bit about it, Betsy and the way I think about it is we want to outperform our peers on a competitive basis in everything we do, whether it's revenue growth or long-term shareholder value creation.

And so we watch an awful lot of measures, and we're clearly easily first quartile in Tier 1.

We're probably number two of the top 20 banks or something like that.

With or without TARP.

On TCE, which I know a lot of people care about, we're median, so you say, okay, well, let's do a little better than median here.

But given our mix of business I don't think we have to be a lot better.

So we'll see here.

And I think the dividend solution helps shore up that even further.

I guess the thing I'm looking for at this point is some evidence of the financial markets being stabilized or improved, because it kind of gets back to my earlier comment that if you exclude OCI from our TCE ratio, we have an awesome TCE ratio.

And that is mostly about illiquidity, we think.

So most of that is going to come back.

So I'm looking forward to just the day, whether it's next quarter or future quarter, where we start to see some slow improvement in the financial markets.

If we see it as sustainable, then good, and that's when we'll start to rethink our decision.

The key is, we want to give ourselves flexibility in terms of stress markets but also in terms of ability to repay TARP when we're allowed, and also in terms of investing organically and inorganically.

We're starting to think a little bit more aggressively than we did in the past.

Okay.

So no bright line test but move up in the rankings.

Yes that's how I think about it.

If you're watching the financial markets, particularly the debt markets, and you're starting to see them improve, obviously that will be helpful.

Thank you.

Our next question is from Gerard Cassidy or RBC Capital Markets.

Thank you.

I had a follow-up question.

Bob, I heard you guys mention that you think the de-leveraging is completed.

Could you focus in and share with us what you mean by de-leveraging?

Obviously a number of the big banks in Europe have de-leveraged, and the broker dealers in this country have de-leveraged, The consumer and the US borrower hasn't really de-leveraged yet.

But what are you guys, when you mention de-leveraging, what are you referring to?

Gerard this is Todd.

I think there's a couple areas.

Number one, in our sec lending business, part of the de-leveraging is coming from the demand side, it's the borrowers of the securities.

As they've brought down their balance sheet to the prime brokers, that's been one aspect of the de-leveraging.

We're also seeing it a little bit on the broker dealer side.

So we're really more discussing here the broker dealer institutional market, not the consumer markets since that's a space we really don't play in.

And the consumer needs to continue to de-lever.

Art, you might want to add.

Art Certosimo, head of our broker dealer services area, I think could add to what he is seeing on the stabilization.

I agree with Todd.

I think that the way we see that is through the balances in the collateral programs and the global repo markets.

Clearly have declined not only due to market value but due to specifically this de-levering, and we've been able to offset that by continuing to grab market share, but clearly we see the de-levering.

Great, thank you.

Okay.

Well, thank you everyone for the level of questions.

It continues to be a challenging environment.

There's some hopeful signs.

On the other hand it's a challenging time, as well.

We're working hard on expenses and capital and continuing to gain market share, and we'll continue to work very hard on your behalf.

So thank you for calling in, and have a good day.

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.