紐約梅隆銀行 (BK) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2009 earnings conference call hosted by BNY Mellon.

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

(Operator Instructions)

I will now turn the call over to Andy Clark.

Mr.

Clark, you may begin.

Thank you.

Welcome to the third quarter 2009 financial results for BNY Mellon.

This conference call webcast will be recorded and will consist of copyrighted material.

You may not record or rebroadcast these materials without BNY Mellon's content.

Before we begin, let me remind you that our remarks may include forward-looking statements.

The actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors.

These factors include those identified in the cautionary statement on page 15 of our press release and those identified in our documents filed with the SEC that are available on our website, BNYMellon.com.

Forward-looking statements in this call speak only as of today, January 20, 2010, and we will not update forward-looking statements.

This morning's press release provides the highlights of our results.

We also have the quarterly earnings review document available on our website and we will be using the quarterly earnings review to discuss our results.

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

In addition, several of our executive management team members are available to address questions about the performance of our businesses.

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

Bob?

Thank you, Andy, and good morning, everyone, and thank you for joining us.

Our earnings per share were $0.59, or $712 million on an operating basis they are $0.55 or $667 million.

In Q4 our balance sheet remains strong, as evidenced by the fact that we had a much lower provision and we actually had a small security gain.

This is the first time we've had a security gain in a quarterly result since the second quarter of '07.

So it's welcome to finally see that bit of a turnaround and a pretty solid indication of how differently we should view the securities markets versus a year ago or two years ago.

Several of our core businesses are showing some improvement with the particularly strong quarter in asset management.

However, the persistently low interest rate environment around the world continued to challenge our net interest revenue.

It also impacts fee revenue due to fee waivers that are pretty substantial in our company.

Todd's going to talk a little bit more about that a little later on.

Fee revenue was actually up 2% versus the prior quarter, excluding the net impact of third quarter asset sales.

We had excellent growth in assets in wealth management fees.

They were up 13%.

We had net long-term asset flows of $14 billion, which was the biggest increase since 2006, and performance fees were up $58 million.

Our securities servicing fees excluding SEC lending revenue was actually up 1% led by core fees in asset servicing, as well as in issuer services.

Securities lending spreads and FX volatility remains soft.

NII was up slightly, mostly due to our small increase in our balance sheet size.

Expenses were a little higher than recent levels on an operating basis.

They were down 1% year-over-year, but up 6% sequentially.

The sequential increase was largely driven by a seasonal increase in business development, the insight acquisition, employee and benefit adjustments, higher legal and FDIC expenses.

In other words, you shouldn't view it as a run rate and they were unusually high.

We do want to point out that on a full year basis incentive expense was actually down 20% versus 2008.

We took a restructuring charge of 139 million to allow us to continue to drive efficiencies in future quarters and it was more than offset by a one-time tax gain in our financials.

During the quarter we also completed the previously announced restructuring of our investment portfolio to reduce risks.

That has helped put our biggest securities issues behind us.

Going forward, they should be modest in size, if at all.

We also declared victory on our merger integration, outperforming our original goals handily.

We're continuing to win new business and pipelines are actually good.

In addition to strong new flows in asset management in asset servicing, we won $400 billion in new assets under custody.

In wealth management, we had our 16th consecutive quarter of net positive client asset flows.

In DRs and corporate trust, we continue to win business away from our competitors.

In fact, we won two more DRs moved to established programs from competitors to us during the quarter.

In broker dealer services, we continued to gain market share, both internationally and domestically.

And in Pershing, we've had great success in converting business opportunities and 2010 should be another good year.

We continue to love our business model.

We are well positioned for improving stock and debt markets for increased global capital flows and for new issuance levels.

And of course, any increase in short-term interest rates will greatly increase our fees in net interest income.

Finally, we expect a better year in 2010 versus 2009.

So at this point, let's hand it off to Todd to go deeper into the numbers and then we'll come back for questions.

Todd?

Thanks, Bob, and good morning, everyone.

As Bob indicated, our core businesses are showing signs of improvement and our asset management results were particularly strong.

As I get into the numbers, my comments will follow the quarterly earnings review beginning on page three.

You can see our continuing EPS was $0.59 on a reported basis, and that includes a benefit of $0.04 related to a discreet tax item and the securities gains Bob just mentioned.

It was partially offset by a charge related to our reengineering initiatives and M&I expenses.

That gets to us an operating EPS of $0.55 for the quarter.

Operating earnings expense at approximately $0.05 to $0.06 from a lower effective tax rate, which was driven by a higher proportion of foreign earnings.

Operating earnings were negatively impacted $0.02 to $0.03 by adjustments to benefits expenses and the seasonal increase in certain expense items.

Thus I view our core operating earnings in the $0.51 to $0.53 range.

Net interest revenue was up 1%.

Fee revenue decreased 1%.

But if you exclude asset sales that we made in the third quarter, fee revenue increased 2% sequentially, and provision for credit losses declined $82 million.

If you turn to page five of the review, you can see the Assets Under Management and Assets Under Custody rose for the quarter and Securities on Loan declined.

The decline of securities lendings assets was probably a year end event.

We expect the decline to be temporary.

Assets Under Management was up 15%, largely driven by the insight acquisition, however, we're pleased to see a $14 billion increase in long-term flows.

Turning to page six of the earnings review it shows fee growth.

Security servicing fees, which excludes securities lending revenue were up 1% quarter over quarter and essentially flat from last year.

In asset servicing, core fees were up 4% sequentially, reflecting higher market values and net new business, as assets under custody were up 1%.

Securities lending fees were up $14 million sequentially, and $138 million compared with the fourth quarter of 2008.

Both declines reflect lower spreads and lower volumes.

Spreads were off 33% sequentially and 80% year-over-year.

Average volumes were off 4% sequentially.

Spreads are now at historically low levels and we expect them to improve as interest rates move.

During the quarter, we won an incremental $400 billion in new business in asset servicing and the pipeline remains strong.

Issuer services fees were up 3% sequentially, primarily reflecting higher DR revenue, and that was offset somewhat by lower money market-related distribution fees in corporate trust.

Clearing fees declined 6% over the prior quarter and 20% over the prior year, once again resulting from lower money market related distribution fees, as well as lower trading volumes.

One of the key drivers of our total performance was the strong quarter in asset management.

Asset and wealth management fees were up 13% sequentially and 5% over last year.

Both increases reflect the impact of the acquisition of Insight in the fourth quarter, stronger investment performance, and improved market values, which is partially offset by reduction in money market-related fees due to outflows in money market products and higher fee waivers due to the impact of lower interest rates.

Assets Under Management increased 15% over the prior quarter, well outpacing the rate of growth in the equity markets.

If we look at the asset management business, AUM here reached 1.04 trillion in the quarter.

Assets under management benefited from the Insight acquisition, as mentioned and the net long term benefits of $14 billion in the quarter, primarily reflecting the benefit from the strength in global equity and fixed income products.

Assets Under Management were negatively impacted by short-term outflows.

Note that the Insight acquisition closed on November 2, so we're not yet seeing a full quarter impact on our earnings.

Finally, as mentioned above, the new zero rate environment continues to impact money market distribution fees in several of our businesses.

Fee waivers are currently costing us about $0.04 per quarter and are unlikely to change until the Central Banks increase rates.

FX and other trading revenue was flat sequentially and down 52% compared to the record fourth quarter of 2008.

The sequential results reflect higher FX revenue and lower fixed income trading revenue.

The decrease year-over-year reflects lower FX revenue driven by reduced volatility, as well as a lower valuation of credit derivatives to hedge the loan portfolio.

Turning to net interest revenue, which is detailed on page seven of the earnings review, NIR and the related margin continue to be impacted by persistently low short-term interest rates globally and our strategy to invest in high quality at relatively short duration assets.

NIR increased 1% sequentially, primarily reflecting a higher level of interest earning assets.

The net interest margin was 1.77% compared with 1.85% in the prior quarter.

The decrease in the margin reflects an increase in interest earning assets driven by deposit growth.

In the current rate environment, we cannot invest new deposits at historical spreads.

Thus the net interest margin will vary slightly with the overall size of the balance sheet.

In the quarter, there was modest accretion of the restructured assets which was largely offset by lower hedging gains.

In 2010, we expect the portfolio restructuring to contribute approximately $200 million to net interest income and that's slightly better than the high end of our original estimates.

Turning to noninterest expense on page eight, you can see that operating expenses were up 6% sequentially, and this was primarily reflecting seasonally higher business development expenses, including branding costs, the impact of the Insight acquisition, employee benefit adjustments, and higher legal and FDIC expenses.

On page nine of the earnings review, we provide detail on our securities portfolio.

The first table details activity in fourth quarter of '09.

In the second is our traditional table showing amortized costs, fair value, and ratings.

During the fourth quarter, we successfully completed the investment portfolio restructuring.

The net impact of that was a $15 million pretax securities gain.

First of all, what we did is we moved $5 billion in fair value of our investment securities portfolio into a Grantor Trust.

As you can see from the schedule, the Grantor Trust contains Alt A, prime and subprime RMBS, which had previously been written down to fair value as part of the third quarter efforts.

As a result of this transaction, we received $771 million in cash for a Class A senior tranche that was sold to third parties.

And we retained the class B certificates with a fair value of $4.2 billion, as you can see in the table.

The securities held in the Grantor Trust had been marked down to approximately $0.60 on the $1 so the likelihood of future impairments is low.

In fact, we expect to recover a significant amount of the write-down over time.

The Grantor Trust resulted in a $39 million net loss in the fourth quarter.

In addition to completing the Grantor Trust, we sold an additional $2.9 billion fair value of securities and most of that was was from the watch list and that was for a gain of $54 million.

The following table represents the fourth quarter 2009 activity related to restructuring, as well as the investments we made in the quarter.

And as you can see from the table, the watch list declined 38% in the quarter and it's now down over 50% from the peak.

Although it's been painful, we're pleased with the restructuring's execution and comfortable with the level of risk in the portfolio.

In December, we recorded a pretax restructuring charge of $139 million.

The charge was comprised of $102 million for severance costs, along with $37 million of asset write-offs.

The severance costs are related to the execution of our global location strategy, which will involve migrating positions to global growth centers and eliminating certain positions.

Since there will be additional costs, as well as some benefits related to these initiatives in 2010, we will not actually start to see the net benefit until the beginning of 2011.

Our regulatory capital ratios remain strong.

Tier 1 increased 60 basis points to 12% and Tier 1 common increased 60 basis points to 10.5%.

TCE remains stable at 5.2, as the acquisition of Insight absorbed approximately 15 basis points and our tangible assets were higher due to lower levels of cash with Central Banks and an increase in deposits.

In terms of our loan portfolio on page 11, the provision for credit losses declined from $147 million to $65 million in the fourth quarter, reflecting improved credit migration over the period.

Going forward, we expect the quarterly provision to be roughly in the same range we've seen in this quarter.

During the quarter, the total reserve for credit increased $32 million and net charge-offs totaled $33 million.

Our results for the quarter include a net income tax benefit of $41 million, which consists primarily of a $51 million benefit from proportionally higher foreign earnings and a $133 million benefit from a discreet tax item, which is related to a tax loss on mortgages.

The effective tax rate in the fourth quarter on an operating basis was 22%, and that included the $51 million benefit I noted earlier.

We would not expect -- excuse me.

We would expect our effective tax rate to be approximately 30 to 32% in 2010.

Turning to page 19, during December, we declared victory on our merger.

Year to date, we achieved $251 million in annualized revenue synergies, well above our full year target, and we also realized $206 million in expense synergies during the quarter, an incremental increase of $10 million from the third quarter.

Looking ahead to 2010, we are pleased to see revenue momentum in our core asset management and security servicing businesses, though our revenue continues to be impacted by the persistently low interest rate environment.

In fact, we estimate that 100 basis point increase in overnight rate should add about $500 million of pretax earnings to our annual run rate, and that assumes no change in client deposit and money market activities.

So once interest rates start to rise, we will benefit greatly.

In the meantime, we're focused on improving our performance, by increasing revenues, controlling costs, and reducing earnings volatility.

Let me provide a little color on each.

I'll start on the revenue front.

Here, we are actively identifying opportunities to consolidate market share and enhance our global capabilities to create more growth.

There are also natural ties that exist between many of our product capabilities.

We're working to more effectively package various services for certain client segments, which will enable us to offer more comprehensive solutions that our competitors simply can't match.

Our second initiative is to grow margins by improving our operating models.

Across the Company we're looking at which jobs really need to be performed in major metropolitan areas and which could be done equally well in our growth centers.

The expense benefits from our 2010 moves will begin to show up in 2011.

Parallel to this, we are continuing our ongoing reengineering and process automation efforts, looking across the Company as a whole.

Third, it's to continue to limit the risk on our balance sheet, something you saw with the previously announced securities portfolio restructuring that we completed in fourth quarter.

We've also nearly completed right sizing our largest credit exposures, which will also reduce earnings volatility.

And on Friday, we closed on the sale of our Florida bank.

Together, these three initiatives will improve our performance and the consistency of our earnings going forward.

With that, I'll turn it back to Bob.

Well, thanks, Todd.

Let's open it up for questions now.

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

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

Good morning.

Good morning, Mike.

Can you give a little more color on the pipeline.

I mean you mentioned a lot of different areas where you see business, but it's hard for us to put that in context.

I mean maybe as a percentage of revenues or at least compared to last quarter or last year, kind of the percentage increase.

Just some sort of context to that would be helpful.

Sure.

Mike, why don't I start with Ron O'Hanley, because that's where we obviously are seeing the most mention in this in asset management.

Ron?

Yes, the overall pipeline is up significantly early 2010 versus early 2009, as you might expect, activity levels were just simply down last year.

The rough estimate for the industry is down in the institutional areas by about two-thirds.

So we're seeing a dramatic increase in our pipeline, even more of an increase outside the US than in, as much reflecting the fact that our non-US revenues are growing.

But it's a very robust pipeline.

I would like in effect to kind of the mid part of this last decade, kind of levels.

Hopefully it's a bit of a new run rate for us and it's great to see the performance in the funds as well.

Karen, anything you would say about your various businesses?

Sure.

No, very similarly, and actually Todd referenced them, large deals in (inaudible) received, broker dealer business, and corporate trust our pipelines are strong, so we're quite positive.

Right, and Jim, how about the (inaudible)?

Pipelines are basically flat versus a year ago.

About a quarter of our pipeline is in the large outsourcing deals from investment management firms.

Matter of fact, we just recently won a very large mandate in Europe that we'll be able to announce publicly shortly and looking forward to doing that.

And, Rich?

Yes, Bob, I would say that we have the strongest pipeline going into the year that we've had in a good long time.

We've got verbals and letters of intent on $50 million in new revenue and about $100 billion in assets in Pershing.

So, we feel good about that and we're very close to getting a few more marquee names across the goal line.

So strongest time going into the year we've seen in a while.

I guess to kind of summarize it, Mike, if that was helpful, is obviously very strong in asset management and wealth management, generally strong in (inaudible) businesses, obviously we would like to see a lot more issuance of corporate paper and have the securitization market come back at some point.

What we see in Pershing is great, great pipelines and activity and in Jim and Tim's world, in the custody business, it's going to have to take the economy to continue to turn around and for eventually for interest rates to pick up.

We are highly levered, as you know, to improving capital markets and eventually higher interest rates.

All right.

Well, that was comprehensive.

One more slice at it.

Non-US relative to US growth this quarter, I mean is it growing a little faster, twice as fast, any metric for that?

Yes, I would say that actually we were pleased with the growth that we saw outside of the, outside of the US.

Off the top of my head, I don't want to put it -- I don't have a precise number on that.

I'm going to have to look to the various businesses.

Jim, do you have that?

Yes, Mike, our business in the last quarter, more than half of it came from outside the US.

And to give you some perspective in the asset servicing side, our revenues have moved from a year ago at 37% outside the US to now 41%.

I think asset management was particularly strong.

Yes, and for the last couple of years, about two-thirds of the growth has been non-US versus one third in the US.

It was even more for the last quarter simply because of the acquisition of Insight.

But I think you will see non-US business continuing to grow and in fact asset management now 50% of the revenues are from non-US clients.

We're pretty optimistic that we can continue to gain share outside the US.

All right.

Thank you.

Thanks, Mike.

Thank you.

Our next question is from Howard Chen of Credit Suisse.

Your line is now open.

Good morning, everyone.

Hi, Howard.

The core balance sheet seemed to grow nicely this quarter.

Curious on your thoughts on whether we've hit an infection point here or if there's still some lumpiness and frictional issues that we need to work through?

Yes, the, the driver of the balance sheet was, it was really deposit-driven, Howard, and there are some lumpy deposits in there, but I would say you're seeing just reasonably good trend and I would expect the balance sheet to grow with our businesses, probably not quite as fast as revenue growth, but certainly correlated to revenue growth.

It seems to be a lot more normalization of it, though I would say couple of lumpy deposits but it's starting to get back to normal.

Thanks, Todd.

Then, Todd, in your prepared remarks, you mentioned this $500 million benefit from a 100 basis points rise in rates, just curious could you flush that out a little bit?

I know there's a bunch of moving parts between NII, money market fee waivers, SEC lending spreads, bunch of other impacts.

So curious if you could help bucket that and kind of walk through what time frame it takes to get the full benefit of all of that?

Sure.

It's probably about equally split between fee waivers and net interest income.

And so if we look at fee waivers we start to recover probably in the vicinity of 60% of the fee waivers from a mere 25 basis point move.

So of that 500 figure, there's 250 or so to be generated there.

So when I indicated 100 basis points, that's if rates moved instantaneously and that would be the next one-year run rate.

So at 100 basis points, we recover just about all the waivers that we're -- the fee waivers that we're currently waiving.

In terms of net interest income, there's a real benefit there is from the lack of compression on some of the low rates.

We'll pay for deposits, for example, fed funds minus 50 basis points, which as you can see is impossible to do.

So they are interest-sensitive deposits, but we'll recover that as soon as we do see a move in rates.

So that $500 million was the run rate given an immediate 100-basis point move in the overnight Central Bank rates.

Okay, thanks.

And, Howard, the way I would also say it, most of the benefit is in the first 100-basis point rise, of which the first 25 basis points is most important.

If we had a rise above 100 basis points, the benefit would probably be half what it would have been for the first 100 basis points.

That's very helpful.

And then just a follow-up on that, just the SEC lending spreads, is that -- given how much you generate on that, is that somewhat de minimus -- obviously it's smaller than the money market fee waivers, the NAI benefit, but how would you think about that?

Is that within that $500 million as well, Todd?

It is not.

We didn't include the SEC lending.

It was very simple what we included in that $500 million, that's net interest income and the fee waivers that we've mentioned.

The SEC lending spreads are really being hit.

A little bit of an interest rate move would help, but they are really being hit by very light TED spread are the difference between the demand for treasuries and the attendant -- kind of the risk-free rate and the overnight rate.

There's really no spread there.

And this is as narrow as we've ever seen it historically.

That would probably change - if you just saw an overall movement in rates.

It would also change if there was a move back to risk premiums.

So you've kind of got the worst combination.

No rate, no core interest rate and no risk premium in the market right now.

Right.

Makes sense to me.

And then final one for me, capital ratios remain very strong.

Bob, could you just give us an update on the M&A landscape, which you've been pretty open about, and any evolution of banking between doing strategic acquisitions versus dividends and other forms of capital deployment?

Thanks.

Yes, what I would say, Howard, is that we are seeing a little bit of activity on the M&A front.

As you know, we look at a lot of things, but don't necessarily do them.

And because we have pretty tough financial hurdles, we are, as you know, we are gaining.

It's a very specialized model, asset management and security servicing.

So we'll tend to focus on those spaces and we'll do it globally.

But again, our hurdles are tough and we'll be disciplined.

We'll also be very careful of our capital ratios.

We don't want to run them down either, but when I think about our relative priorities, I, I'm getting the sense from yourself, from analysts, and shareholders that you want us to invest in our businesses so we can grow them over time, particularly right now, given where we are hopefully at more of a secular low in the securities markets or close to it.

I don't get the impression that there's going to be a lot of dividend increases in the short-term in the US.

That might be something that we'll look at in the second half and, and frankly that would be a higher priority for us versus buying back stock.

We would expect given the quality of our balance sheet now and our core earnings capabilities that we'll be generating a lot of capital in due course.

But that will be -- those will be issues that we'll be thinking about more in the second half of the year.

Great, thanks so much.

Thank you.

Our next question is from Betsy Graseck from JPMorgan Stanley.

Your line is now open.

Thanks, from Morgan Stanley.

How are you guys?

How are you, Betsy?

Good.

Couple of questions.

One is on the reinvestment that you announced today.

I'm sorry if I missed it, but could you just go through what the total reinvestment dollars are expected to be in this program and the size and the pace of the benefit and when that comes, the timing?

Sure, Betsy.

We -- it's not reinvestment.

Restructuring, a bit of a restructuring charge that we took.

It was a total of $139 million.

$102 million of that was related to severance and $37 million of it was related to asset write-offs.

There will actually -- we will commence that as probably a little more heavily weighted toward the second half of 2010, and there will be operating expenses associated with that.

The operating expenses will basically eat up the initial benefits and we'll really see it in our 2011 run rate.

We expect about -- when we take these actions about an 18-month period to recover the charge-off.

So this is really investing in our 2011, making us more efficient and continuing to grow in our growth centers.

But the investment that you're making today, what kind of dollar return do you anticipate coming from that once it's all baked into your run rate?

Yes, if you think of it, it's a 1.5 times that number.

We will recover in 1.5 years, so it's about, it's about -- you can do the arithmetic--.

The IRR is extremely high.

The IRR will be super high, because you're recovering at 1.5 years.

So your run rate is going down at 75% per annum.

And Betsy, if I could, it's Bob, we see a huge number of opportunities to drive efficiencies in our various processing businesses over the next three to five years and it's -- part of the theme for our Company is a core competency of each one of our businesses and each one of our executives will be their ability to continually reengineer their operations to make them not only more efficient, but actually increase the quality of service to our clients.

So if I'm thinking about the operating leverage in the business, obviously the first lever is going to be rising rates, which depending on when you think that occurs will start to flow in potentially at the end of 2010.

Do you see this as a second wave of operating leverage benefit as you move into 2011, 2012?

Yes.

Yes.

So if you're assuming that the restructuring is going to reduce your expense base in '11 and '12 by about $100 million, that's going to give you another point or two.

Okay, and then just kind of a nitpicking question on the tax that was suggested by the president, I think it was last week, I realize that it's early stages and you have to go through congress and all of that.

But I just wanted to make sure I understood what the potential impact would be on you and your business model given that it's a tax on essentially uninsured deposits?

Sure.

Obviously we have a perspective on that tax.

I'll let Bob talk to that.

But in terms of the impact to us, basically the tax is a percentage of assets and you take out Tier 1 and you take out your insurable FDIC deposits.

So assuming that we do nothing with the rest of our balance sheet, it's probably in the 175 million, $200 million range.

Annually, right?

It appears to will be tax deductible, although that's not absolutely certain.

Right.

That's what we've heard as well.

Betsy, we've thought about this a lot and, we -- you just have to conclude it's bad policy for the country.

I always worry about the unintended consequences of really material actions and things that may, may result from that.

You always worry about how it would impact jobs if you can't pass on costs.

I know shareholders are going to want the industry to reduce costs and the most obvious place to do that is against the work force.

I also think it impairs the ability for less healthy banks to be able to lend, which of course has been one of the key stories -- the banks have been trying to deal with over the last two years.

It also really, because it's -- because it's a, it's a essentially a tax on balance sheet size, it's also going to really encourage the banks to reduce the size of their balance sheets and ultimately it's going to encourage people to reduce liquidity, to reduce the fee.

And that's not a very good thing to do in the early phases of a fragile economic recovery and, there's other things, too.

I worry a lot about it creating unlevel playing field with non-US banks, because it essentially makes US banks competitive in raising foreign deposits and we're in a global industry and if our competitors in Europe don't have to pay the fee and we're trying to raise deposits in Europe, it's very expensive and we're uncompetitive.

Level playing field's extremely important in our industry.

And lastly, it actually discourages acquisitions because I don't know if you really follow through but you would end up paying the fee on goodwill and intangibles, so there's a lot of things that really need to be thought through here that I don't think are good for our industry or for the country.

And it's something that if it were to go through, you think that you would manage to try to offset through either other expense cuts or through passing on to the customers?

Well, we're all trying to -- it's very early days on this, but, obviously we want to mitigate whatever the costs would be and, sure, everyone is thinking about that now, including our foreign competitors.

Okay.

All right.

Thank you.

Thank you.

Ken Usdin of Banc of America Merrill Lynch, your line is now open.

Thanks.

Good morning, everyone.

Two quick questions.

First of all, Todd, the accretion benefit of $200 million for this year, can you talk about it in two ways?

First of all, does it come in fairly ratably over the course of the year and then it just kind of give us an outlook of does that tail off as you get to 2011 and beyond?

It will stay with us for a while, Ken.

The way we look at this is we'll look at the performance of the underlying assets and so we may, we may adjust it based on performance.

But we think we've taken a pretty conservative view on it, and I would look at it as probably kind of a three-year before it starts to tail out completely.

Got it.

So pretty ratable over three years or so?

It is.

We would expect it to be pretty ratable over the three-year period.

Okay, and my second question is just about -- well, it's kind of 1A.

Can you just give us a sense, Bob made the point earlier, actually had net securities gains this quarter.

With the watch list down, with the markets underlying improving, that helps the unrealized.

But can you just give us a broad sense of I guess, some type of magnitude of loss content you might see coming through over time in the OTTI side?

Sure.

We've done a lot of work and actually we're very pleased with what we're able to do in this quarter as well.

For example, we sold out our complete portfolio of HELOCs and did that above where we had marked it at the end of Q3.

We're very pleased with actually the execution, the market.

I'd say the market bids are stronger than what we had anticipated, so we've been able to sell the stuff that we thought had a higher probability of impairments.

So I think impairments should be, should be relatively small.

That's not to say we might see an issue here or there that deteriorates further than we had expected it, but it should be manageable to our earnings.

Okay, and my last question, just keeping on the credit theme, obviously we saw some stability in the MPA's.

You mentioned that downgrades were less and the provision did reset back to that kind of first half level.

Any thoughts going forward as far as provision, expectations and the movement through the credit cycle on credit?

Sure.

Brian Rogan, our Chief Risk Officer is here.

Brian, do you want to answer that?

Yes, Todd actually covered it in his prepared remarks.

We're seeing the run rate in 2010 similar to the fourth quarter.

We see some potential for improvement in 2010 from that run rate.

But as always, we're subject to a single name event risk on a particular credit.

Okay, great.

Thanks, guys.

Thank you.

Thank you.

Glenn Schorr of UBS, your line is now open.

Thanks.

One follow-up on Ken's watch list question.

Just making sure, nothing sold this quarter at watch list, correct?

No, we did sell stuff out of the watch list in the quarter.

And which bucket?

I'm just looking, and as Ken mentioned, the, obviously the marks have gone up with the improvement in the markets.

I don't think there's been much migration on the credit front, but curious where the sales came from and if that's right on the credit migration front.

Sure, we put a table together on page 9.

I'm looking at it.

Of the earnings review.

You can see the sales we made.

Some of these we had announced because we made them pretty close to the third quarter, but there's some additional we made in the fourth quarter.

So you can see, we sold -- if you go to the third column from the right, the proceeds from sales, we sold a fair amount of the floating rate notes.

We sold commercial MBSs, we sold Alt A's, we sold subprime, we sold 100% of our home equity HELOCs so there was $2.6 billion right out of the watch list that we sold.

And -- but that's inclusive of what was previously announced, correct?

It is.

There was several hundred million additional to that in this quarter and we've actually sold a little bit more in 2010.

And would you say -- I would say it would be a theme that over time here we're going to look, depending upon prices and opportunities, we're going to look at selling more of the watch list securities.

Yes, this will be a dynamic process.

If there's something that we don't like and we think there's a pretty good bid for it, we'll hit it.

Got it.

So bottom line, then, in reading into this answer, and last one is, of the almost $1.2 billion of unrealized loss, there might be a little bleed-in, but you still think there's a decent liquidity component to the marks?

Definitely.

We've actually seen just since year end pretty significant further recovery here.

I would say over $400 million in market value.

Some of that interest rate benefits, lot of that coming from the credit product as well.

Just switching gears, one asset management question, the money market outflows and the long-term inflows, just curious if there is any, any capture in there, meaning money markets staying within family and switching in some of the longer data funds, or are those reasonably mutually exclusive?

Yes, it's Ron, Glenn.

For the most part, they are mutually exclusive because a lot of what you're seeing in the money market funds are really big institutional flows or where we're subadvising for somebody else.

What we are seeing interestingly is the stabilization of the outflows.

Most of the quarterly outflows actually occurred in October and early November, and we saw remarkably little at year end.

That's probably because interest rates are stable and anybody that was going to move did move.

But for the most part, these are independent to get to your core question.

Appreciate it.

Last one is just if you could, a reminder on the -- are the bulk of the assets fourth quarter payable on performance fees, or do you have a certain percentage that's in first quarter as well?

Yes, no, the bulk are fourth quarter payable.

So, there's some, and as these hard watermarks are reachieved, you'll start to see some in '10 and '11 outside the fourth quarter, but even so, it's 80%-plus are fourth quarter payable.

Excellent.

Thanks very much.

Thank you.

Our next question is from Brian Bedell of ISI Group.

Your line is now open.

Hi, good morning, folks.

Hi, Brian.

Just a question on the tarp tax.

It does seem to unfairly penalize both custodian-related deposits and other processing-related deposits.

What do you think the chances are of you effectively fighting that?

Supposedly the treasury is open to consulting with the financial companies and do you have any sort of read of your success at being able to exclude those types of deposits from the tax?

Brian, I don't really have a sense for it yet.

It's also new that we're trying to work through it and obviously, we would like to have some influence on that just because our business model is so different from traditional banks.

But it's just too early to say.

Okay, and then just some questions on the seasonality in the fourth quarter.

Can you talk about to what degree seasonality influenced the balance sheet size and also revenues and issuer services?

Well, why don't I talk -- take the balance sheet side.

I wouldn't say there was a whole lot of seasonality.

Kind of unusual.

There wasn't a lot of window dressing or anything that took place.

Maybe we saw a little bit of that in the SEC lending, but that's not a balance sheet item.

So it, it looked to be, it looked to have limited seasonality to it, if any at all.

In terms of issuer services, Karen, do you want to take that?

Yes, the only thing we've seen is less seasonality than historically in corporate trust, so we wouldn't expect too much fluctuation quarter on quarter in corporate trust but deposit carrier receipt, first quarter tends to be not as strong as fourth quarter.

Right, right.

Okay.

So a little reversion back in 1Q there, but not so much on corporate trust?

Right.

Okay, and then just on the fee waivers, we're at about a $0.04 run rate.

I think we were around $0.03 last quarter.

What was the -- in which area did you see the incremental impact this quarter versus last?

Yes, it's consistent.

It's across the board, Brian, and what it has ended up happening is basically the overnight funds rate continued to creep down closer and closer to zero.

We kind of thought the target was closer to 25 basis points and that's when we're at the $0.03, but it's not.

It's inside of that, so that's what's respectively driven it down.

Do you think you're at a full year run rate right now?

I don't think we're going to go negative at this point.

Let's hope not.

And lastly, on acquisitions, obviously international is a focus, also asset management.

What about more asset servicing type businesses in the mutual fund area and within the US?

Are those areas of interest?

You're not implying anything, are you, Brian?

May have an idea.

Well, it's -- we've stated in the past that we love both phases, both (inaudible) and management assets surfacing, we completed two transactions last year in Ron and John Little's world.

We're looking at asset servicing.

There's been a number of things pop up in Europe over the last year and I would expect to see more and clearly that's a space where we can continue to continue to grow and not just organically, but if you hit the right financials, we would be interested in acquisitions there.

In the US, it's a slightly different dynamic in that it would have to be a space where we have a strategic product set to manage so that's really all I can say at this point.

And you would prefer to do acquisitions over share buybacks at this stage?

Depending upon the financials, because if you can get -- I know buybacks is an instantaneous return of whatever you want to view as being a return on, say, cost of capital, 11 or 12%.

If we can find acquisitions that make sense financially in terms of accretion and provide an internal rate of return using conservative assumptions that are materially higher than that, and if it's in our space, we would probably look seriously at it.

Great.

Thanks so much.

Thank you.

Thanks, Brian.

Thank you.

Tom McCrohan with Janney, you may announce your question, please.

I was wondering if you could comment on the hedge fund administration business and where you guys stand from a market share perspective and assets under administration?

Yes, sure, Tom.

It's Art Certosimo here, over the last year, we've been very successful at grabbing market share and moving up from, say, a year ago of 8th on the charts to now 4th.

So we expect to continue that, both in the US and in Europe.

Most of our market share has been grabbed -- has come from the United States and we feel that over the next probably 18 months, we'll focus both in the US and on Europe.

Most of our market share has been grabbed -- has come from the United States and we feel that over the next probably 18 months we'll focus both on the US and in Europe.

And Art, does that include some type of prime broker's capability that you're also marketing to win share?

No, it doesn't actually.

It's really just the pure administration services, related to the accounting and valuation.

We do partner up with Pershing and their prime brokerage services for some joint solutions to the hedge funds, but the numbers that I mentioned were specifically on hedge fund administration.

And are you starting to see any kind of new hedge fund creation right now, now that things are starting to recover and there's more of a focus on distressed debt?

I think we saw that actually in early 2008 when it seemed that the hedge funds pretty much at the same time around April or so started opening up distressed debt funds and we saw big influx of that type of security.

And then around the end of the summer, we started seeing long equities really materialize as the hedge funds thought that US global valuations were starting to recover.

Thanks, guys.

Tom, I would just add that this is a space where we've had tremendous growth in.

We're very optimistic about the future of that business.

Thank you.

Thank you.

Nancy Bush of NAB Research, your line is now open.

Good morning, guys.

Hi, Nancy.

Quick question on a business that you haven't talked a lot about in a long time, and I heard you mention it this morning, which is the DR business.

I think there is a fair amount of confusion, and I admit to being confused about the ongoing prospects for that business.

Could you just talk about it and talk about volumes and pricing and that sort of thing.

Sure.

Nancy, it's Karen Peetz.

DR's did experience a pretty big deflation, if you will, with kind of the issuance and cancellation.

We actually make a fair amount of money on cancellations, but of course that's not a good long-term position to be in.

So we're quite thrilled to see that for the last nine months, we've seen net issuance every month for the last nine months and we're back up to about 1.2 billion DR's outstanding, with very good indications in large markets like China, India and Taiwan, and DR programs, really accelerating.

So we're much more positive about DRs having come through a tough year.

Okay, thank you.

It's interesting, Nancy.

It's an emerging market product, of course, and people always talk about the eventual demise of it, but the fact is, that's not going to happen.

And we've been saying it for decades now and we still see good prospects in that business and clearly we have huge market share on the world.

And it's very profitable.

Very profitable.

All right, thanks.

Thank you.

Our next question is from John Stilmar of SunTrust.

Your line is now open.

Good morning.

Thank you for taking my question.

The first one comes, I believe last quarter we talked about in the asset management, the net flows.

You were seeing clearly the movement away from lower risk product, but you particularly highlighted that flows were still coming out of your alternative asset management function.

Can you please update us on where those flows are in the alternative space?

Sure, John.

It's Ron O'Hanley.

The outflows from alternatives have stabilized, so we certainly saw a lot of that as clients really rethought their alternative programs, but we have seen for the most part pretty good performance in our alternatives in 2009.

That's not gone unnoticed by clients.

I would say that has stabilized.

And that really does reflect into the numbers that you saw for the fourth quarter because as we've been reporting for most of 2009, we were seeing long-term inflows on the retail side and outflows on the institutional side.

That reversed -- well, the institutional part reversed in the fourth quarter.

We saw positive long-term flows in both institutional and retail.

And what you're seeing I think is a return to the market of institutions getting at least if not more than our share and some pretty sophisticated clients looking at their programs in a holistic way which means that the inflows ought to be coming to us in pretty sizeable chunks as we go through 2010 and 2011.

Okay, great.

Thank you.

Then shifting gears to a more tactical question on clearing services, as we take a step back, and it seems like you're talking about a pretty robust pipeline.

Is it fair for us to start to call a bottom in terms of where the servicing fees might be, given that there's probably some fee waivers that are pressuring those?

It seems like with alternative asset management starting to show a little bit more robustness and your presence in hedge fund community, it seems like clearing services might be an area of potential growth from at least where we are today.

Can you give me some sort -- your sense of where we sit today as of the fourth quarter and what we should be starting to expect for servicing fee waivers, or servicing fees in clearing services outside of just the normal fee waiver?

Well, this is Rich Brueckner.

The big multi item of course is the waivers on the money market funds, so that won't turn around until we get interest rate increase.

Otherwise, though, I think we have turned the corner and I think the new business pipeline has been an indication of that.

And, one of the trends we're seeing, John, is for our largest financial institutions around the world, they are increasingly looking at ways in which they can add shareholder value and one of the ways is to outsource middle office and back office processes, including in the clearing business and we're seeing more banks and financial institutions coming to us on that and as you know, there's ongoing migration to more and more financial advisors and registered investment advisors, starting their own shops and that's a space where obviously we can compete very, very effectively to help them be more successful.

So thank you.

Thank you for my question.

Thank you, John.

Well, listen, that was the last question we had, and thank you very much for joining the call, and very much appreciate the questions.

Have a good day.

Thank you.

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

Andy Clark at 212-635-1803.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.