紐約梅隆銀行 (BK) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the first quarter 2010 earnings conference call hosted by BNY Mellon.

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'd now like to turn the call over to Mr.

Andy Clark.

You may begin, Mr.

Clark.

Thank you, Wendy and welcome everyone to the review of the first quarter 2010 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 consent.

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 and the cautionary statement on page 14 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, April 20, 2010.

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, which provides a quarterly review of the total Company and business segments.

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'd like to turn the call over to Bob.

Bob?

Thanks, Andy and good morning everyone.

Thank you very much for joining us.

EPS for the quarter was $0.49 or $601 million.

On an operating basis, that was $0.59 or $715 million.

Earnings were reduced by about 10% mainly due to increased litigation reserves for several existing matters.

Overall, I characterize the quarter as an encouraging quarter.

Fee revenue was positively impacted by higher market values and we demonstrated superb asset quality in both our loan and securities portfolios.

Offsetting this was money-market fee waivers, lower trading volume, and lower volatility quarter-over-quarter.

As you know our business model is really levered to rates edging up and financial flows beginning to normalize at higher levels and we've yet to see that at this point.

Fee revenue has been unchanged sequentially, and mostly due to seasonality in some of our businesses, which are somewhat unique and up 6% versus a year ago.

Asset and Wealth Management fees were up 13% over a year ago.

We had net positive long term flows of $16 billion in client assets.

Asset service and fee revenue grew by 17% year-over-year.

Security lending spreads and FX volatility levels remain muted, and NII is down slightly compared to last year but up 6% sequentially, principally reflecting the higher yield related to the restructured assets in our securities portfolio.

Operating expenses remain very well controlled.

Together with our success in winning new business, we achieved another quarter of positive operating leverage.

On the new business front, in addition to strong in flows and Asset Management, we had new asset servicing wins of over $200 billion in Assets Under Custody, cutting across all client segments and geographies, whether there was corporates, financial institutions, endowments or international.

An encouraging number of mandates, with we expect to be able to announce shortly, and Wealth Management had its 17th consecutive quarter of net long term client asset in flows.

Realize too, that since the beginning of our financial crisis a couple years ago, we've been successful in creating new products to help our clients fulfill more difficult and stringent reporting requirements.

A couple of examples might include our new portfolio stress testing capabilities and our derivatives 360 product, which improves the transparency and helps clients reduce risk overall.

Both of these products are strengthening our ties with clients and creating new revenue streams for the Company overall.

Credit quality trends are improving nicely.

You may have noticed the provision was down 46% and non-performing assets were down 17% sequentially, and our unrealized pre-tax loss on the investment portfolio has not quite hit breakeven yet but it's down 77% from year-end, just in the last three months.

Service levels remain very strong.

In the last annual R& M survey of custody clients and fund managers, BNY Mellon asset servicing was ranked number one overall in six key categories, and ahead of our peer group in a further seven categories.

In Global Investor Magazine's annual FX survey, we were ranked number one in 25 categories including four overall performance categories and 14 out of 20 service categories.

This is the third consecutive year in which we've essentially dominated this survey.

On the capital side all of our key capital ratios strengthened during the quarter.

You may have noticed that our Tier 1 common and the Tier 1 capital are up over 100 basis points sequentially.

As you know, we're using our capital to make accretive acquisitions and to support organic growth in both core Asset Management and security servicing businesses.

Our Asset Management results this quarter are already benefiting from the acquisition of Insight, which we closed last November.

In this quarter, you may recall that we announced two asset servicing acquisitions, Global Investor Services with operations primarily in the US but also in Ireland and Poland, and BHF Asset Servicing in Germany.

Both of these deals are expected to close in the third quarter and will be immediately accretive to earnings.

Also as previously reported, we still intend to raise about $700 million in common equity to fund these purchases and also to maintain strong capital ratios in spite of the sense that we did see in the first quarter.

So in summary, what I would say the positives from this quarter is that we had nice year-over-year growth in revenue, AUM, and Assets Under Custody.

Second, we had new business in flows which are encouraging, credit quality is excellent, expense control is evident, and capital generation is strong, so maybe with that I'll turn it over to Todd so he can review the numbers with you in more detail.

Thanks, Bob.

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

Our continuing EPS was $0.49 on a reported basis.

It was reduced by a total of $0.10 due to an increase in our litigation reserve and M&I expenses.

That gets us to an operating EPS of $0.59 for the quarter.

Let's look at a few key items on a sequential basis.

Net interest revenue was up 6%.

Fee revenue was flat but up 6% year-over-year.

Non-interest expenses were down 5% and that resulted in 600 basis points of positive operating leverage for the link quarter.

The provision for credit losses declined $30 million and credit quality trends in the investment portfolio both showed good improvement.

And as Bob had mentioned, all of our capital ratios strengthened.

To put the quarter in perspective, we generated above trend net interest and investment income of approximately $0.05 and I'll review those items in more detail shortly.

Turning to page five of the review, you can see that during the quarter our Asset Management business generated $16 billion of positive long term flows.

Also during the quarter, equity appreciation was basically offset by the stronger US dollar.

Our AUM composition has a better balance than last year, which should lead to higher fee realization going forward.

Assets Under Custody, which was flat sequentially was helped by increased equity prices and new business offset by the stronger US dollar as well as our concentration in the fixed income markets.

Securities on loan were modestly up at period end.

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

Security servicing fees excluding securities lending revenue, were down 3% quarter-over-quarter and down 2% year-over-year.

In asset servicing, fees were down 2% sequentially, due primarily to lower volumes and the stronger US dollar and up 17% year-over-year, reflecting higher market values and net new business.

During the quarter, we won an incremental $205 billion in new business and asset servicing, and the pipeline remains healthy.

Security lendings fees were down $1 million sequentially and $55 million compared with the first quarter 2009.

Both declines reflect lower volumes and lower spreads.

Issuer service fees were down 10% sequentially and that was primarily reflecting seasonally lower DR revenues in the first quarter and lower corporate trust fees driven by the continuing impact of money-market fee waivers.

On a positive note if you look at trust fees and exclude money-market related distribution excluding money-market related distribution fees, trust fees are actually up 1% sequentially and year-over-year.

Clearing fees were up 3% over the prior quarter, and were down 9% over the prior year, resulting from lower volumes and also from money-market fee waivers.

Asset and Wealth Management fees, excluding performance fees, were up 1% sequentially and 12% year-over-year.

Both increases reflect improved equity values, stronger investment performance, the Insight acquisition and the impact of long term in flows, partially offset by a reduction in fees due to money-market out flows and fee waivers, due to the very low interest rate environment.

The sequential increase was also negatively impacted by a stronger US dollar.

Money-market fee waivers reduced fee revenue during the quarter by about 5% or $117 million, impacting security servicing fees and Asset and Wealth Management fees.

This has continued is expected to continue until we see the central banks increase short-term rates.

FX and other trading revenue was up 7% sequentially reflecting higher fixed income trading revenue and lower mark-to-market adjustments on credit default swaps that we use to hedge loan portfolio.

The increase was partially offset by lower FX revenue, which was down 14% compared to the first quarter of 2009, reflecting lower volatility, partially offset by volumes.

Investment and other income was driven by above trend gains on continued disposition of lease assets and a positive FX revaluation for the quarter.

We would expect lease gains to be lower going forward.

Turning to page seven of the earnings review, net interest revenue in the related margin reflect the positive impact of the higher yield related to the restructuring investments to securities portfolio and higher hedging gains.

This was partially offset by persistently low short-term interest rates globally.

The margin is also impacted by a risk reduction strategy, which is helping to drive lower credit and impairment charges in the long run.

Net interest revenue increased 6% sequentially, and was down 1% over the year ago quarter.

The net interest margin was 1.89%, compared with 1.77% in the prior quarter.

The increase primarily reflects the higher yield in the assets in the grantor trust partially offset by lower rates.

As a reminder, in the third and fourth quarters we restructured the investment securities portfolio.

That enabled us to sell the securities we didn't think would perform well and retain the securities we thought had good potential for recovery, so those retained securities were mark-to-market and put in a grantor trust.

The grantor trust accretion for the quarter was higher than we had anticipated, due to higher projected cash flows.

The future yield on these assets will be driven by the level of interest rates and also the credit performance of the underlying securities.

An added benefit is that the trust will actually help hedge our interest rate sensitivity.

If rates rise, the yield will decline and if rates go down, the yield should improve.

In addition, we expect the trust principal to amortize over a five or six year period so the NII benefit will decline modestly, quarter by quarter as the principal reduces on this high-yielding asset.

We now estimate the restructuring will actually increase interest income for this year by about $320 million.

NII was also benefited from hedging gains, which are not likely to continue.

We expect the impact from hedging gains and accretion to reduce the current quarterly run rate on NII by about $25 million $30 million.

And of course the other key driver of our net interest margin will be when and if the Fed decides to raise rates.

We continue to estimate that 100 basis point immediate increase in the funds rate will add $500 million to our pre-tax, assuming no change in client behavior.

Turning to non-interest expense on page eight.

You can see we did a good job of controlling expenses.

Excluding the increase in the litigation reserve relating to several existing matters, operating expenses were down 5% sequentially, primarily reflecting lower professional and consulting fees, and seasonally lower business development expense and decreases in nearly all other expense categories.

On January 1, we adopted FAS-167.

This new statement increased our balance sheet by approximately 1% or $2.7 billion for the consolidation of certain Asset Management funds, seed capital investments and securitization.

The changes make it a bit difficult to compare prior results.

There's $22 million on a net basis in affected revenue.

$16 million would have been in the investment income and $6 million in asset and Wealth Management revenue.

The non-controlling interest is a negative number.

It's not a cost.

It's just basically the performance of our client's assets that we manage and we're required to consolidate.

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

The table provided shows amortized cost, fair value, and ratings.

Watch list securities continue to climb from the prior quarter.

The restructured securities are included under the grantor trust and their market value has improved nicely as did every other asset class.

Portfolio value was up about $750 million sequentially, and nearly $8 billion year-over-year, and its continued to improve in the current quarter.

During the quarter, we enjoyed significant growth in capital and a reduction in risk weighted assets.

As a result, our key regulatory ratio strengthened meaningfully, Tier 1 increased 110 basis points to 13.2%, Tier 1 common also increased 110 basis points to 11.6%, and our tangible common equity increased 90 basis points to 6.1%.

In terms of our loan portfolio on Page 11, we're pleased to see our risk reduction efforts have begun to pay dividends.

The provision for credit losses declined from $65 million to $35 million in the first quarter and that's driven by a decrease in higher risk rated loans and non-performing loans.

During the quarter the total reserve for credit increased to $10 million and net charge-offs totaled $25 million.

The effective tax rate in the quarter on an operating basis was approximately 29%.

If you exclude the impact of the litigation reserves, the restructuring charge and MI expenses the effective tax rate was closer to 31%, and we would expect our effective tax rate to come in around the same area in the second quarter, so around 31%.

Looking ahead and recognizing how the equity markets are moving, we're optimistic that the revenue momentum in Asset Management will continue in the coming quarters.

In addition, DRs and SEC lending should benefit from seasonality.

Both NIR and fees continue to be impacted by the low interest rate environment, so any rise in rates will substantially improve performance.

We expect net interest margin to be around 1.70% to 1.80% and in terms of credit, we've been giving up yield but improving quality.

Because of that strategy we expect our lower credit provision to be sustainable.

Two expense items to note.

Our operating expense for the second quarter will reflect the impact of the UK bonus tax which is approximately $25 million, and we awarded our annual Company-wide merit increase of approximately 2% on April 1, so that will also come into our numbers.

As Bob mentioned, we're using some of the excess capital that we're generating to make accretive transactions that contribute to the growth of our asset management and securities servicing businesses and we would expect to start to see some of the benefits of the GIS and BHF acquisitions in the third quarter.

In the meantime, the key to our performance will be continuing to win new business, controlling cost, and delivering outstanding client service, all of which we've been successful in doing.

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

Thanks very much, Todd.

Why don't we open it up for questions now.

(Operator Instructions).

Our first question today is from Betsy Graseck with Morgan Stanley.

Your line is now open.

Hi, good morning.

Hi, Betsy.

A couple of questions.

One is on the capital, you indicated that common Tier 1 11.6% was up very strongly in the quarter and I realize you indicated you're going to be going ahead with the capital rates you announced when you acquired the GIS business.

Could you just give us a sense as to whether or not that's capital that you feel that you needed to stage or that you just have to execute on that capital raised due to the fact that it was a part of the previously announced acquisition.

Well, Betsy, the way I'd put it is clearly, the capital ratios are stronger than even we would have expected a quarter ago, but having said that we believe in having a really strong balance sheet and we want to make sure we can continue to invest organically and maybe at the margin at least some small acquisitions and the way that I kind of think about it is it's less than 2% of our market cap.

It's like 1.8%, and so it's not a lot of money incrementally, and we don't need it until the third quarter, so we haven't been in a rush and frankly since the last quarter, our stock is higher, so at the margin it's been helpful for us to wait.

Thank you.

Our next question is from Brian Foran with Goldman Sachs.

Your line is now open.

Good morning.

Hi, Brian.

Coming back to the Assets Under Custody and Assets Under Management conversation, and I'm sorry if I missed it in the up front remarks, but how much did the strong dollar actually impact it and I guess overall, how should we think about a core growth rate on those two sides, given the money-market out flows, given different things going on?

Brian, it's Ron O'Hanley here.

Let me talk about Asset Management.

In terms of the dollar, the stronger dollar actually offset market effect for us almost dollar for dollar.

Market effect was $19 billion for the quarter, the stronger dollar eroded assets by about $19 billion, so that was a wash.

In terms of AUM flows, we had about $16 billion overall across Asset and Wealth Management and net long term flows, positive net long term flows which was very strong, the strongest since certainly the last five years per quarter, coming off the $13 billion we had last quarter.

Short-term flows though is, you're seeing everywhere or negative, for us it was a negative $25 billion and we would expect to see, until you get some kind of stabilization in interest rates, we would expect, we certainly wouldn't expect to see a lot of in flows in the short-term.

Do you want to add to anything to that?

On the AUC side and the asset servicing, as I think you know Brian, and Todd mentioned earlier, we're more weighted on the fixed income side so we don't see the as dramatic an impact in the AUC when you see the equity Markets rising and I think principally what you're discussing.

And then one follow-up, in past quarters, you guys have mentioned the earnings suppression from the 0% rate environment.

Is it possible to give us an update, given some of the comments you made about the accretable yield, now maybe acting as a hedge on net interest income?

Sure, Brian.

As we see pre-payments, we would expect the grantor trust to wind down more quickly and net-net we received the same number of cash flows so the yield goes up pretty significantly and there is still some rate sensitivity from it from that perspective, so it's pretty highly levered to the direction of interest rates.

Great.

Thank you.

Thank you.

Our next question is from Brian Bedell with ISI Group.

Your line is now open.

Hi, good morning folks.

Hi, Brian.

A couple questions.

One on the NIM guidance.

I think Todd, you mentioned 170 to 180 basis points.

Is that including discount accretion?

That would include the discount accretion, Brian.

I'm getting about a core NIM rate ex-discount accretion of 166 for the quarter.

What would your outlook be I guess going forward based on that basis?

Yes, I think it's fair to put it in the 160 to 170 range if you excluded it.

Okay, and that's for full year 2010?

Yes.

And if you could just talk about the litigation reserves, I guess more specifically, what items or what areas are those for?

Yes, I'll take that.

We can't really comment, Brian, as you'd expect.

We're in discussions with any specific litigations.

It probably doesn't surprise you or anybody else that given the environment that we're in, the violent activity that we've had during the financial crisis here, that if things are a little more, there's a little more litigation, but we feel where we are at the time that we're adequately reserved.

And this is all stuff that you've disclosed in your K in terms of the legal exposure?

Yes, we feel it got pretty good disclosures in our public disclosures that you can take a look at.

Okay, great.

And then just on acquisitions, are you still expecting a runoff July 1 close for PNC?

That's our target date, yes.

And then I guess if you're thinking about acquisitions going forward, Bob you mentioned you're still going ahead with roughly $700 million cap raise.

I guess as you integrate PNC, which is somewhat of a complex integration, do you still feel you have the capacity to do another large deal in the near to intermediate term if something came up on the asset servicing side?

Well there's certainly nothing on the horizon here, Brian, so anything I would see I would expect to be fairly small, and it would really depend upon the geography firstly, and that's the advantage is that it's in Germany versus BNC being in the US, so it's different teams backed up by basically the same technology so we have to be careful, and in other businesses, we would still have some opportunity to do things, so we don't worry about it too much, but I would think more or less we're more or less done for the year other than perhaps a few things outside of the US perhaps.

It's still early.

Great and then one last one if I may.

Sure.

Just on the money-market strategy obviously for the entire industry, we're seeing pretty substantial out flows of money just from the low rates and also the redeployment into riskier assets but have you thought about a strategy where you might recapture some of that by shifting clients on to balance sheet and some say your wealth bank clients into bank deposit products?

Brian, it's Ron O'Hanley here.

We think about our cash business quite holistically, and if you think about all of the various businesses we're in, whether it's our security services businesses or our wealth business, there's a lot of associated cash.

Some of it goes on to the balance sheet.

Some of it goes into our proprietary products and some of it we put off to third party, so we've got one of the most sophisticated liquidity platforms out there, so our view is that this business is quite an important part of our overall business.

We have to manage it sensibly.

We have to be careful of the risks, here but we view ourselves particularly relative to most others as an at scale player and one that should be able to not just survive but thrive through this cycle.

Right.

I would just add to that, Ron, this is David, that actually deposits in the wealth business were up 7% or 8% sequentially so we have seen deposits come on to the Balance Sheet in the wealth side.

The other thing I'd say is this is a pretty core strategy.

As you know, we're in the business of attracting an awful lot of cash and that's why we've been signaling that if rates go up it's really profitable for us.

We actually, to Ron's point we think of this business very holistically, on balance sheet, off balance sheet, to run these businesses and off balance sheet to third parties and we think about it SoHo list icily that we actually have our former Treasurer now running all these businesses.

Great.

Thanks a lot for that, guys.

Thank you.

Thanks Brian.

Thank you.

(Operator Instructions.) Our next question is from Tom McCrohan with Janney Montgomery Scott.

Your line is now open.

Good morning and thanks for taking the question.

Just had a question on the trends and issue of services if you could help us kind of decompose kind of what contributed to the trends in that business, what we can expect going forward, how much was low interest rates driving kind of the sequential decline we keep seeing in that segment of the business, thanks.

Sure, Tom, it's Karen, and we actually had client deposits growing, similar to Dave's comment.

The core fees were flat, but we had some seasonal activity in DRs and the money-market fees in corporate trust with the client.

Yes, that's a pretty big part of your income.

Yes.

And money-market fee waivers are pretty, it has a pretty big impact and I guess the DR business is seasonally slower in the first quarter.

Right, exactly, so we would expect the DR business to pick up toward the end of the year because of the seasonality and we're also seeing a very good pipeline in corporate trust.

Okay, so is there anything outside of external factors like the interest rates and low volumes that are kind of driving that or sort of just really external factors that you're waiting on to improve?

Yes, and we keep driving market share gains as well, so overall, we're pretty positive about the end of the year.

Okay, good.

Pipelines are growing, just a matter of things turning your way as far as external environment.

Exactly.

Okay, and just on the high net worth side there was a report that's a newspaper reporting there was some offices being closed on the high net worth side, I was wondering if Dave, you could talk to that?

Yes, what we did decide to do was to close a couple offices in Pennsylvania which we didn't feel necessary to continue to serve our clients.

These were legacy offices back when we originally sold the retail bank on the Mellon side, so not significant from our perspective.

We still have locations in each of those areas, and this was just sort of tidying up as opposed to strategy.

Are you gaining share or losing share during this downturn?

Yes, we believe we're gaining share.

Share counts are really hard in our business but as you can see and Bob mentioned earlier we've had pretty consistent new asset flows across the country.

I would say pipelines much like Karen said, pipelines are good although as I think you can see across the industry, high net worth investors have been a little bit reluctant over the last couple quarters to put things to work.

We're starting to see that change, a little bit more risk appetite coming into the decision so we think the second and third quarters actually will pick up from where the first quarter was.

Okay, thanks very much.

Our next question is John Stilmar of SunTrust, your line is now open.

Good morning.

Thank you for letting me ask my question.

Dovetails on the last point with regards Asset Management and talking about positive momentum there.

As we look at the revenues as a revenue per Assets Under Management and obviously since the fourth quarter come down a little bit but it's showing signs of stabilization to potentially building.

On that metric, how should we be thinking about it, given the fact that as risk appetite increases the marginal level of profitability or marginal unit of revenue may be increasing.

Can you give me context towards revenue growth versus Asset Management growth for the Asset Management section?

John, it's Ron O'Hanley again.

I think you're thinking about it in exactly the right way.

As you see our AUM shift and it will shift as money moves out of cash into other assets and as we enjoy positive net long term flows, you will see the realized fee go up and that's, I mean that's obviously something good here.

That coupled with, I'm not predicting the market here but as long as we continue to have positive market effect, that tends to as you know hit the higher value assets and the higher fee assets, so we would expect to see all things being equal, realized fee continue to go up.

Is there any guidance you can give me or ways to think about the slope of that?

I mean it's obviously going to happen at some point but I didn't know, if we look back to 2008 it was obviously a lot higher than it is today.

Is there any sort of data points you may have in looking at your customer base that might help us a little bit more precisely judge the slope of that improvement?

I don't know that I can give you guidance, but what I can do is our pipelines remain strong, both outside the US, they've been consistently strong and they started to strengthen nicely in the US as decisions are being made.

These tend to be in areas that are non-cash, so again, they are the higher fee rates, so we would continue and expect to see a higher revenue rate, and the higher realized fee rate.

The other thing John that I think you're aware of this, but I would point you to is the comparison between the fourth and the first quarter is a little bit hard to do because of performance fees so you have to take that out and I assume you're doing that so leaving that aside, given the pipeline, given the change in investor behavior, given our investment performance we would expect to see these numbers continue to trend up.

Okay, great, thank you and one last follow-up question.

Obviously.

you guys this quarter with lower discretionary expenses certainly surprised me at least in terms of the operating leverage, the potential in the business.

You highlighted the 2% merit increase and then the $25 million bonus accrual but how should we be thinking about operating margins going forward?

Is this kind of a temporary area or is this something that you hope to repeat in future quarters?

Well, we continue to look very carefully at our expenses and we've got a number of initiatives managing our costs as we move into our growth centers on the expense side but as well on the revenue side, so there's a lot of operating leverage in the business so we start seeing revenues come back, I think you'll see these numbers.

We are making investment to manage that cost going forward so we are continuing to invest in some of these transitions, but I think each of our businesses is pretty well leveraged for operating leverage.

Jim or Tim do you want to comment?

Sure, it's Tim here.

When I think about business expense and asset servicing we're thinking about two things, core process reengineering and leveraging our global growth centers and last year we had about 29% of our staff in low cost locations.

First quarter will be at 33% and we'll make continued progress through the year.

That affects our total comp base here, and we'll drop compensation by 6% or $4000 per person on average, so we'll continue to focus on leveraging the global growth center, and continue to focus on core process reengineering.

And I would add the same thing for issuer services and treasury services, we're particularly looking for places where we have similar processes in different businesses that can be done the same to look for expense reduction.

Yes, I think the other thing I would add to that is all of our high margin businesses whether it's net interest revenue, FX, or securities lending are relatively low levels right now because of where we are in the capital markets, so if we see a little bit of volatility or a little bit of rate that drops right to the bottom line.

Thank you guys very much.

Thanks, John.

Thank you.

Our next question is from Betsy Graseck with Morgan Stanley.

Your line is now open.

Oh, thanks.

Yes, I had a follow-up from an earlier question.

Just on the money-market funds business, if you don't mind a couple of detailed questions.

Sure.

One was on the fact that you've indicated that 100 basis point increase in Fed funds would lead to a $500 million pretax improvement in earnings.

Could you just give us a sense as to the speed with which that comes through for each 25 bips, and if you could also help us understand if your assumption there is that no money-market funds leave or what size of business you end up having?

Yes, Betsy, it's Todd.

I'll take that.

It really is coming from two areas.

It's coming from the release of the compression on our net interest income and also having a little higher yield in the money-market funds means we won't have to wave so many fees.

It is not linear, the first 25 basis points is more valuable to us than the last 25 basis points of that hundred so I would say we probably capture close to 50 to 60% in maybe the first two moves so we'll definitely catch more than 60% in the first two moves but almost all of that in the first move and then it kind of slows down.

The assumption that we've made and it's hard for us to do it any other way because we would just be speculating is that our deposit levels remain where they are today and that the money-market funds remain where they are today.

Now typically you might see some money exit money-market funds, if you see a rise in rates who knows, you might see people actually attracted to them, but in order to give you the statistic and give you the sense of really what's driving off of what we know, that's how we came up with that estimate.

And the sensitivity describing in terms of Fed funds, is there an incremental impact from other countries raising interest rates or is that kind of baked into your $500 million number?

There is.

We're assuming that it would be a coordinated kind of global effort.

It's primarily dollar related and to a lesser extent Sterling and Euro.

Okay, and then can you just give us a sense of the money-market fund retention relative to what your plans have been for that, how has that been going?

Betsy, it's Ron.

When you mean retention, are you talking about client retention?

Well either client and/or volumes.

What we have historically seen in the past in this kind of a rate environment, although we've never seen this kind of rate environment, but typically what you will see is as there's an expectation of rising rates, you start to see some client erosion.

As rates start to go up, you'll see more client erosion, particularly the most sophisticated institutions will simply go direct and not go into a co-mingled pool like this, but the other thing that we seen and again given our position, is we always end up after one of these cycles with more share than what we started, so we tend to, once this period is over, we tend to if you will bottom out at a higher level than we did the last time, and with slightly more share.

If you think about, and that's through a long history of being in this business.

If you think about now the fact that we're three years into this merger and we quite integrated and insinuated the money-market business with all of our other security services businesses, in essence we're serving a lot of our own clients, we would expect to in fact bottom out at a much higher number.

Okay, and then just lastly on the MMF, there's been some question with regard to what kind of product it will end up being offered, the NAV of one or the floater and then the capital required against those two different product sets.

Could you speak a little bit about how you're managing for those changes?

Yes.

We are actually coming out it's in SEC registration now but we're actually coming out with a floating product.

I think it's up in the air as to what the demand will be, but it certainly will have a higher yield, so it could be at least for some clients quite attractive, so we're prepared for this and again, our clients tend to be sophisticated institutions, so we want to have a full range of product and we expect to be one of the first out with one of those kinds of products.

Okay and the capital associated with the MMF business?

Yes, we do currently include in our economic capital the risk of the MMF business and it really depends on the implicit report that might be embedded in it, Betsy.

Okay.

If the retail to a seven fund that attracts a pretty significant amount of our economic capital.

Okay, thanks a lot for the color on that business.

Thanks, Betsy.

Thank you.

Our next question is from Gerard Cassidy with RBC.

Your line is now open.

Thank you, good morning guys.

Hi, Gerard.

The question has to do with the BASIL III, now that the input on the commentary the banks were permitted to send to the BASIL through last Friday, what do you see happening there, do you think the major changes to the proposals?

Yes, we do.

The feedback that we're getting as we've talked to the regulators is that the initial consultative paper is out there for discussion.

It's got a few issues as you would expect in the first cut of a whole new capital regime, so we would expect it to change quite a bit from where it currently stands at least that's the feedback that we're hearing.

I think there is a good dialogue, the regulators in the US have had a couple of sessions both in New York and Washington where they're getting the industry feedback and I think they are listening.

What I'd add to that too Gerard, is I would say that most of the US banks haven't been heavily focused on it although they are starting to focus more on it and more focused on US regulatory reform.

The Europeans have been all over this for about a year and they are quite ahead of us in terms of thinking of it in various position papers in terms of pros and cons of the various approaches.

It's all about quality of capital, globally, and Europeans and It's all about quality capital and Europeans and more consolidation as well, so the key to it is that we have a level playing field globally.

I don't think this is going to be implemented very quickly and I also suspect it's going to be a lot of changes between now and the end of the year if they can even get there by the end of the year.

Great.

Just a clarification.

On the compensation increase that you mentioned in the call, starting April 1, was that 1% or 2%?

That's a 2% merit increase on salaries.

Okay, great.

And then on the UK bonus tax of $25 million, is that being entirely absorbed by the Company or do the employees have to absorb some of it as well?

We are absorbing that, Gerard.

And then finally, on the waiver of fees on the money-market funds, is there any possibility that once rates start to go higher, that you can recapture those waivers in the future or are they forever gone?

We would expect to recapture them immediately with the first move in rates.

In fact,--

The past one.

Oh, the past one, I'm sorry.

We hadn't thought about that.

We would love to, but there's no way that's going to happen.

Okay, so the past ones you will not be able to recapture?

That's correct.

And then finally just on the litigation reserve, is there any chance that you're going to need to add to that going forward?

There's like I would say in this environment, we think we are adequately reserved for what we know now but it's a tough environment so I would expect that both legal expenses and litigation costs run a little hot right now.

Hopefully you'll find over time that we have a fairly low market share compared to others but it is a current issue that we'll probably continue to see in the industry for some time and it's a natural look of the stresses we've seen in the financial markets over the last two years.

And if you don't mind just one last one.

On the grantor trust portfolio, what did you guys see or where are you seeing that has pushed these values up a fair amount to enable you to have a higher mark now or accretable yield coming into this year?

Yeah, we actually run four different cash flow models against it, Gerard, two of our own and two external and we are starting to see severities finally peak so we're starting to see some modest improvements in various components, subprime is actually doing a little bit better than what we had.

We had been pretty severe in our assumptions around the accretions so we do a projected cash flow it's been positive.

In addition the market value of the underlying assets have risen quite nicely so it's not directly correlated where we expect the projected cash flows but it's nice to see the market is also supporting our own assessment here.

Thank you.

Well thanks, everyone.

I think that was the last call of people who were dialed in and very much appreciate your support and the level of questions and on to Q2.

Thank you.

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.