紐約梅隆銀行 (BK) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the second 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 call webcast will be recorded and will consist of copyrighted material.

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

I'll now turn the call over to Andy Clark.

Mr Clark, you may begin.

Thanks, Wendy and welcome everyone.

With us today are Bob Kelly, our Chairman and CEO, Todd Gibbons, our CFO, as well as several members of our executive management team.

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

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 10 of the 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, July 20, 2010 and we will not update forward-looking statements.

This mornings press release provides the highlights of our results.

We also have the quarterly earnings 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.

Now, I'd like to turn the call over to Bob.

Bob?

Thanks, Andy and good morning everyone.

Thanks for joining us.

EPS in Q2 was $0.55 or $668 million.

We booked good growth in security servicing fees and in Asset Management and Wealth Management, and posted our third consecutive quarter of positive long term asset flows.

That's equivalent to $12 billion for the quarter and $42 billion over the last nine months.

Continuing on the new business front, we had new asset servicing wins of $419 billion and assets under custody in Broker-Dealer Services we had really nice success in winning new collateral management business, particularly in Europe.

Pershing had some big wins that we will be converting in the third and fourth quarters, but with a lot of expenses in Q2 in advance of that.

Depositary receipts are continuing to win new business and overall we're maintaining or growing our market shares.

Net interest income was up slightly compared to last year and down about 6% sequentially.

This decline was primarily due to our risk management strategy in both loan and bank placement portfolios, and we'll be looking closely at strategies to replace this revenue in the third and fourth quarters.

Credit improvement continues.

It reflects what is clearly now a very clean balance sheet.

Sequentially our provision was actually down 43% and non-performing assets were down 12%.

We also went from having an unrealized pre-tax loss on the investment portfolio in Q1 to a gain of $292 million at June 30.

We continue to generate capital, TCE, Tier 1, and Tier 1 common all strengthened.

Service levels remain excellent.

In the latest global investor survey, the global custody client we were ranked number one over major peers in 16 categories.

Global custodian magazine released its securities lending survey in May.

We were ranked number one overall in two categories, which is particularly pleasing to see since the last couple years have been a pretty tough time for both the holders and the lenders of assets.

We're also continuing to invest in the future growth of our businesses.

On July 1, we successfully closed the GIS acquisition and just a quick update on that.

We're really pleased with how everything is going so far, which is a reflection of the terrific work being done by the integration teams across the Company.

As you may recall, our deal model relied very little on revenue synergies in the early years.

Having said that, the first couple of weeks post closing have been pretty encouraging.

We're starting to see very nice revenue synergies.

We're looking forward to seeing more of that to come.

Cultures are mixing well.

People are working very well together as one Company already and it's also a nice expansion into Europe, particularly related to hedge fund administration.

So, bottom line is we're pretty optimistic about our ability to achieve the expense and revenue synergies that made this deal so attractive in the first place.

On other fronts, we expect to close the VHF asset servicing deal in Germany next month.

We recently received final regulatory approval to open our Asset Management joint venture based in Shanghai.

This will enable us to start offering new products in China, as well as to our international clients and we expect to be able to do that later this year.

We've received approval to provide more Asset Management capabilities in Korea.

We also announced the acquisition of a Wealth Management firm in Toronto.

Our first Wealth Management acquisition outside the United States.

So, there's a lot of activity under way to build the future revenue pipeline as well as our global footprint.

I would say the key takeaways before we hand it over to Todd would be solid earnings, very strong balance sheet, we're generating capital and we're investing for the future.

So, let's hand it over to Todd to go through the numbers in more detail.

Thanks, Bob and good morning.

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

Let me isolate a few points, key data points on a sequential basis.

First of all we earned $0.55 for the quarter on both a reported and operating basis.

Fee revenue benefited from a 6% increase in security servicing fees and a 39% increase in foreign exchange.

Net interest revenue was down 6%, which was slightly more than expected due to the defense and investment strategy that Bob just mentioned.

Non-interest expenses were up 3%.

We'll get into the detail on that in a minute.

Credit quality trends continue to improve.

Provision for credit losses was $20 million, down from $35 million in Q1 and reserve levels actually increased.

Our businesses continued to generate excess capital during the second quarter.

We actually increased Tier 1 capital by over $430 million and tangible capital by almost $800 million.

If you turn to page five of the review, assets under management and assets under custody were both up year-over-year, but down sequentially due to the strong dollar and the decline of the value of equity markets globally.

In assets under management we had our third consecutive quarter of strong long term asset flows.

Over the last three quarters we had a total of $42 billion in long term flows including $12 billion this quarter, and these are principally fixed income and global equity strategies.

Money-market flows remained negative and that's consistent with industry trends.

The good news here is that we're beginning to see an increase in money-market yields reflecting a steeper yield curve at the short end.

If you turn to page six of the earnings review that shows our fee growth.

Security servicing fees were up 6% quarter-over-quarter and down 2% year-over-year, and asset servicing fees were up 2% sequentially due primarily to new business and higher transaction volumes and up 8% year-over-year reflecting higher market values, net new business, and higher transaction volumes.

During the quarter we won an incremental $419 billion in new business and asset servicing.

Securities lending fees were up $17 million sequentially and down $51 million compared with the second quarter of 2009.

The sequential increase reflects seasonality, while the year-over-year decline reflects narrower spreads and slightly lower loan balances.

Issuer service fees were up 6% sequentially primarily reflecting seasonality and depositary receipts and shareowner services, which is partially offset by lower corporate trust fees which is impacted by the continued very low debt issuance globally.

Clearing fees were up 7% due to higher trading volumes as well as stronger money-market related fees, and they were down 2% over the prior year, primarily reflecting lower money-market related distribution fees from that period.

Asset and Wealth Management fees adjusting for performance fees and income from consolidated Asset Management funds were down 1% sequentially, not too bad given that the S&P was down 12% and the MSTI was down 15%.

Fees were up 12% year-over-year reflecting improved market values.

The Insight acquisition and the impact of new business, which was partially offset by higher fee waivers and a reduction in fees due to money-market out flows.

FX revenue of $244 million was up 39% sequentially on higher volatility.

The FX and other trading line was down 16% however due to negative other trading revenue of $24 million, which is largely a result of the credit value adjustment driven by widening spreads in the quarter, as well as lower level of fixed income trading.

The decline in FX and other trading is somewhat offset by translation of leasing residual gains and investment in other income, which is up $92 million on the year-over-year basis.

The translation gain largely resulted from the decline in the Euro over the period.

Turning to page seven of the earnings review, NIR and the related margin reflect the impact of persistently low short-term interest rates globally.

As you may recall, we indicated in Q1 that net interest revenue would decline by about $30 million versus Q1 in the second quarter, and that was due to hedging gains that we enjoyed in the first quarter as well as some other items.

As it turned out, NIR was actually down $43 million sequentially.

The larger decline was primarily driven by the defensive stance we took in short-term investments, in light of the situation in Europe, and the continued reduction in our targeted loan portfolio, which is actually moving a little faster than expected.

Versus the year ago quarter, net interest revenue was actually up 3%.

The net interest margin was 1.74% compared with 1.89% in the prior quarter.

It's pretty much in line with previous guidance and the decrease primarily reflects the factors that I just discussed.

Turning to non-interest expense on page eight, you can see that the sequential increase of 3% primarily reflects four items.

First of all we had the impact of our annual merit increase which is 2% effective April 1.

We also expensed the UK business tax in the quarter.

Excuse me, the UK bonus tax.

We also had seasonally high Business Development expenses.

This was partially due to client conferences we held in the second quarter that have been cancelled last year, and they are also costs related to business we expect to convert in the second half, and finally about half of the increase was related to the quarterly change in the market value of Lehman securities that we've supported.

During the quarter we continued to generate significant capital, $430 million in Tier 1 and nearly 800 in tangible.

As a result our key regulatory ratios have all increased by 20 basis points, Tier 1 to 1350, Tier 1 common to 1180 and TCE to 630.

Our balance sheet was a bit high at quarter end, largely reflecting a spike in the number of large client deposits and concurrent with the GIS and VHF acquisitions.

What we had projected in the deal model is that after closing our TCE would be around 4.9% and Tier 1 common would be at 10%.

We also successfully, as we indicated we would do, we successfully raised $700 million of common equity via forward sale agreement and that will settle in the third quarter, and based on the current levels of our capital ratios, we're confident the ratios will actually come in higher than we've indicated when we announced the acquisitions.

Moving to our loan portfolio on page 11.

While risk reduction efforts are having a modestly negative impact on NII, as I discussed earlier, they are actually benefiting our credit costs.

The provision from credit losses declined from $35 million to $20 million in the second quarter and that reflects the decrease in higher risk rated loans, as well as non-performing loans.

During the quarter the total reserve for credit losses actually increased $7 million as net charge-offs totaled 13 versus the provision of 20.

The effective tax rate in the second quarter was approximately 30.2%.

During the third quarter we would expect our effective tax rate to come in around 30% to 31% range as well.

So looking ahead, our third quarter results will begin to reflect the full quarter impact of GIS and the two month impact of the VHF acquisition, and we expect these to be neutral to slightly accretive.

Bear in mind that the third quarter earnings have traditionally been impacted by seasonality associated with lower levels of capital markets related revenues, particularly securities lending and foreign exchange.

We expect the net interest margin to continue to be in the range of 170-180, our lower credit provision should be sustainable, and we will continue to manage expense growth.

We will also continue to focus on the drivers of revenue growth which include winning new business, converting it as quickly as possible, and delivering exceptional client service.

These are the keys to success and they are things we've proven we can do well.

With that I'll turn it back to Bob.

Well thanks, Todd.

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

Thank you.

(Operator Instructions) Our first question today is from Ken Usdin with Banc of America Merrill Lynch.

Your line is now open.

Thanks, good morning guys.

Good morning, Ken.

A couple just questions here.

Can you just detail for us in some of the fee items how much of an issue was the market and as far as in the FX line, what caused the big delta in the fixed income trading, and then in the other fee income line, how much was the benefit from FX translation gains?

Okay, why don't we start with the trading revenue.

There are really three drivers of what -- let's start with FX.

FX was strong, volumes were pretty good, obviously volatility was up and we saw the 39% increase.

The decline in other trading revenue was a reflection of three things.

First of all it's just lower fixed income across trading across-the-board.

Secondly, the credit valuation adjustment in our derivatives portfolio was a negative for the quarter.

We saw spreads widen, had less of an impact where we had a payable because our spreads didn't widen that much, but where we had a receivable it had a meaningful impact, and finally we did incur some modest trading losses due to some volatility on the client positions, Ken.

I would say probably, Todd, the biggest impact was the mark-to-market on the positions and because we have the strongest rating of the banks in the United States and our counterparts tend to have lower ratings, their spreads look wider than our own.

So we would have an unusual change this quarter.

Ken, we do disclose those numbers on page 11 of the earnings review.

Yes, I was just really looking for the color on why the movements, I saw that.

And then could you also walk through the FX translation gains and any other offsets throughout the income statement?

Yes.

I think they kind of neutralize each other.

We had a win on a payable that we had booked in dollars which ultimately we had elected book and dollars and was paid in Euro.

So the quarter saw fairly significant move on that and it turned out to be a positive.

It's obviously going to be a one-time event.

Otherwise we've hedged the balance sheet pretty carefully.

And last quick one.

Can you talk about how much of fee waiver recapture you might have gotten from the LIBOR widening?

Yes, there is a modest improvement there, Ken.

I'd say it's probably less than a fifth of what we are waving, but we did see a little bit of improvement in the quarter.

Okay, thanks very much.

Thanks, Ken.

Thank you.

Our next question is from Dan Fannon with Jefferies.

Your line is now open.

Good morning.

Can you talk a little bit about the pipeline for new business, specifically within Asset Management and then also on the asset servicing side as you look at kind of the remainder of the year?

Sure.

Well, actually why don't we start with asset servicing and then we'll go to Asset Management.

Yes, sure, Dan.

Tim Keaney here.

We have a pretty solid pipeline, about 2.4 trillion.

It's pretty flat quarter on quarter, similar number of deals.

I think one thing of note is we tend to see a little bit of smaller and mid sized deals, which are actually a good news story because those deals convert into the revenue line pretty easily and you would continue to see an emphasis in terms of size and scale to be geared towards global FIs, and a larger number of names from outside the US.

So generally a solid pipeline is the answer.

Mitchell, what would you say from an Asset Management point of view?

I'd say similarly, a couple things.

The US and non-US are both building at about a 50% rate that in the first half of the year, we have seen a slow but increasing pipeline of long term flows coming in.

The mix of business has been very beneficial to us.

A lot of fixed income and alternatives, especially given the equity markets, but we're seeing equity as well, and it's being supported by pretty good performance across-the-board, especially on our three year numbers.

So overall I'm pretty optimistic about the pipeline.

Funding has also been accelerating for us as well from the win, so that's been encouraging.

Why don't we talk about Pershing, because that's one of the interesting stories that have been developing here over the last three to six months here.

Yes, thanks, Bob.

It's Rich Brueckner.

I would say that we've had significant wins.

Bob mentioned this earlier in his remarks.

Significant wins throughout the first half of 2010 and part of that is in the pipeline that we think of as business that's not yet to be signed, which is stronger than it was last year by a pretty significant amount of about 150% or 160% from last year, but in addition to that we have a conversion pipeline where we've already signed business and that's due to be converted in over the next six to nine months and that, I would say, is as strong as I've ever seen it in our business.

Order of magnitude $80 million $100 million in new revenue, $100 billion in new assets scheduled to come on over the next six to nine months.

So we feel very good about that and that's what we're investing in, which is why the numbers are the way they are.

Right.

And that's what I said earlier on, Dan, that we have some costs going through Rich's P&L in the short-term, but the revenue shows up later this year and early next year.

Karen is there anything you'd add from your businesses?

I would just add the DR pipeline is quite strong.

We've had a lot of new business wins and we're up about 25 new programs year on year.

So quite good.

And hedge fund administration is doing very well?

Yes, Bob.

This is Art here.

We're up significantly from the core growth before the merger with GIS and putting GIS on top of it has just accelerated it again.

So we're very encouraged and not only is the pipeline growing, but the rate of implementation is accelerating.

So it's moving into the revenue stream quicker.

Larry is there anything you'd add from a wealth perspective?

Sure.

We had the best new business quarter in the second quarter that we've had in the last year and the pipeline is the same.

So it's the best pipeline we've had over the course of last year, up about 7% from Q1.

So good strong results.

I think the message here is it's a tough environment to grow revenue and we're working really hard to outperform on it and this is going to be our key focus going forward now that our balance sheet is so strong.

Great.

Thank you very much.

Thanks, Dan.

Thank you.

Our next question is from Betsy Graseck with Morgan Stanley.

Your line is now open.

Thanks, good morning.

Hi, Betsy.

Hi.

Follow-up to the last question.

Could you just talk a little bit about how you're winning this business in terms of your positioning relative to competitors?

Is it a function of just more investment spend on your part?

More feet on the street, or is there also weakening competitors that are adding to this?

Betsy, it's Jim Palermo.

How are you doing?

Actually it's similar to the pipeline is strong.

We really haven't added a lot of new sales staff.

We think we've got excellent global coverage at this point in time, but what we are seeing is a pretty competitive landscape.

We've seen a few deals that we actually saw some unusual pricing from some of our competitors.

I would say that as we've alluded in the past, we continue to have, I'd say, very strong pricing discipline for all of our client activity and we're actually seeing a high percentage of our overall revenue streams associated with high dollar fees versus the capital markets.

Yes, I was intrigued in the quarter because while volumes might have come in a little bit lighter than expected, at least versus our expectations probably due to the market activity, market valuation, the revenue line hit our number.

It looks to me like your gross margins went up both in Asset Management and asset servicing.

Is that accurate and if so can you talk about why?

Well, on the asset servicing side we didn't go up on a link basis.

So margins from 28% to 30% and that's principally due to the seasonality though, Betsy, when you have the big lift in securities lending as well as the foreign exchange that Todd was talking about earlier.

As you look out into, particularly in the third quarter those have a tendency to soften.

What we have seen which is encouraging on both fronts is because of the new business activity that we've converted over the last year, specifically we've converted about 1.3 trillion over the last four quarters.

That results in more global across border activity.

So that accounts for some of the foreign exchange growth and then also, encouraging on the securities lending side, we continue to see more clients either returning to the program or new clients being added to the program and spreads are slightly wider with the spread differential between LIBOR and Fed funds.

And are you doing something different to get the clients back in?

I'm sorry?

Are you doing anything different to get the clients back in?

Nothing specific.

What we have done is I think we've introduced a lot of clarity around the reinvestment portfolios.

There's a lot more transparency that goes on in the business today than I think you saw a few years ago, and then clients are feeling a little bit more comfortable with the stability that exists in the securities lending environment.

One thing I'd add, Betsy, to this is we don't talk about this very often, but we have a lot more business lines than most of our typically quoted competitors.

As a result, at the top of the house, we have a group called the global client management which is about 300 people around the world that are really focused on managing our biggest client relationships globally, and the object of the game for them is not just to insure that we really meet the needs of our clients and deliver great client service, but also to insure that we deliver the entire firm to our clients, which is a message we're receiving over and over and over again from our major clients and that is just don't show up with one product.

Show up with a whole firm.

That's run by Tim Keaney amongst a few other things, but Tim what would you add-on what we're doing kind of differently over the last year or two?

Yes, I think that's a good point, Bob.

Betsy, one of the things we've recognized, in particular around financial institutions, when you look at the range of products across all of our business lines from Pershing to our Broker-Dealer Services area, asset servicing and Asset Management, we're finding we have more opportunities to partner with whether it's a fund manager or bank and insurance company or a broker, and they're under pressure because they want to do more business with fewer players and there's very few people that can stack up as a partner and one of the things we've recognized is the number of those client segments are changing their business models because of what's happened in the outside world over the last 18-24 months.

And, so we're really talking about all of the things we do for these market segments and that's what we do in client management and that compliments very nicely the product line sales approach that we have.

As a result of that, we're seeing a larger number of big play high revenue opportunities particularly amongst financial institutions, and I think you'll see that continue to show up in our sales pipeline.

Okay, and the clients are interested in doing that you think from a cost perspective, consolidating their business activity or is there something more there?

I think what they're trying to do is simplify their own operations and they are also looking at outsourcing.

That's an area we've seen a big pick up in overall activity, particularly in the fund management space and in insurance companies.

They are narrowing the number of partners.

They want a better deal and because we have a wider range of products and services, including some of the new ones that we've just launched around derivatives 360 and our futures clearing opportunities, they are very happy to talk to us about moving more business to us.

It ends up being cost neutral to them, but a big positive for us.

Okay, thanks.

Appreciate the color.

Thanks, Betsy.

Thank you.

Our next question is from Howard Chen with Credit Suisse.

Your line is now open.

Good morning, everyone.

Good morning Howard.

In your commentary you alluded to strategies to replace net interest income.

Was curious if you could just elaborate on what you're thinking there?

Sure, Howard, it's Todd.

We have traditionally kept our liquid deposit base, a significant amount of it in relatively short-term placements.

There's some alternative strategies, even very low risk strategies if we move over to securities.

So we are evaluating a number of them, or repo types of transactions as well.

So we would expect to start implementing some of these in the third quarter.

You won't see much of a change.

You'll probably just see a little bit of a growth in our securities portfolio relative to our placement portfolio.

Right, thanks.

And then just follow-up on that, on the quarter, could you just provide some details on the impact of the discount accretion, on the spread revenues and the NIM?

Sure.

As we had indicated, I guess it was one or two quarters ago, the restructuring really hasn't changed the impact to our NIR at this point, or to our NIM from where we had previously indicated, and our best guess is for the year that should be in the vicinity of about $320 million positive.

Okay, thanks and then switching gears, I guess within the industry we started to see more of the securities lending gates coming down.

I know you don't necessarily go head-to-head with some of those folks that are taking down sec lending gates, but just curious if you have any thoughts as to how this changes the competitive landscape if at all.

Well, I'll take that one and maybe my colleagues from asset servicing can jump in here, but as I understand it, the issues that have come to light here are related to issues around affiliated funds and we just don't have that issue.

So I don't see that as having a specific impact to us, Howard.

Okay, thanks and then finally I don't know if Bob is still on, but I'm curious bigger picture curious if you could comment on your appetite and ability to take on another deal here and how you prioritize that versus other uses of capital deployment.

Yes, that's a good question, Howard.

At this point, of course, we are generating still excess capital, but we're very mindful of what's happening with Basel 3 and what's eventually going to happen there.

So we're being cautious.

The last two or three things you saw were just, frankly, really attractive and they really built on our franchise and products and geographies we didn't have before.

We're still interested in doing other things, particularly in Asia Pacific, but I wouldn't say it's anything of size on the horizon, it would be smaller fill-ins and particularly in specific geographies.

Great.

Thanks.

Thanks, Howard and by the way it's very difficult to predict the timing of these sort of things.

Okay, thanks, that's very helpful.

Thanks for hosting the call.

Thank you.

Our next question is from Mike Mayo with CLSA.

Your line is now open.

Good morning.

Hi, Mike.

We're hearing everybody is winning new business.

So your security servicing revenues were up 6% linked and that's good and you're saying you're winning new business and State Street segment is winning new business and JPMorgan says they win new business and I'm sure Northern Trust tomorrow will say they're winning new business.

So how can you all be winning new business at the same time, or what percent of the new business is coming from the other top five players and how much is coming from the rest?

Hi, Mike.

It's Tim Keaney.

How are you?

Good.

Just some general comments first.

Bob mentioned the 419 billion, we have won 1.2 trillion in the last four quarters.

As I look at it, we're still winning over 60% of the deals we're picking up.

I think you're seeing the asset pools are growing.

So you're seeing asset managers now attracting new assets.

Banks and insurance companies the same, which is why we continue to emphasize and put an emphasis on financial institutions.

I will say over the last four quarters we've been a net new business winner versus every single one of our competitors, and aside from the odd question mark around pricing, I think winning the quality game is making a difference here and quality has become a key differentiator, much less so on price.

The thing to remember too, Mike, is savings globally are increasing and that is a big change from three years ago.

With savings increasing that implies that the banks are going to be longer deposits, but more importantly, asset managers are going to be really bringing in a lot of money as well which would be very beneficial to asset servicing, to Asset Management, to Pershing, to a lot of our businesses, which is all about growing the pools of cash as people, as the population ages and gets closer to retirement and we play to that long term trend.

Just a short follow-up to that, Bob.

By geography could you be more specific as far as the money flows or the business?

Well, it's a good question.

The biggest change I think globally is the United States.

Just from the standpoint that we were over levered.

The consumer was over levered in the United States from both a debt standpoint and as you know, the savings rate in the 50s to the 80s was 8% or 9% per annum, and basically into 2002-2003 it basically went to zero or negative and it feels like the savings is more like 5% or 6% today and you're seeing that people are putting money in longer term instruments, longer duration instruments versus short-term instruments.

So I think the US is probably the biggest delta, Asia Pacific will continue to be saving, I just saw that Australia put up their super annuation to 12% and even though you're going to have lower GDP growth, or low GDP growth in Europe, the fact of the matter is you're going to still have very strong savings rates in Europe, and increasingly individuals are going to have to focus on savings versus allowing the governments to look after their retirement needs.

Mitchell, is there anything you'd add to that as a general theme?

Well I think there's a couple things.

You also see a shift of asset classes.

So you're seeing movements from the cash and equity into fixed income and alternatives at this point.

Your savings rates in Italy and Japan have been significant.

We're certainly seeing flows from there, as Bob said, Australia, Korea, so you have significant savings still coming from outside the United States that I think we're all benefiting from.

So asset shifts and non-US, I think are where you're seeing a lot of wins from.

When you think about your 12 billion geographically where was it over the last quarter, Mitchell?

50% of it was outside the United States.

50% was in the US, but the US I would call more of a shift.

We benefit because we have such a broad product diversification and we have such a deep, particularly on the fixed income side, range of product that we benefited significantly from that.

One of the things we noticed, Mike, during the toughest part of the European issues in the last quarter was a lot of people were shifting to emerging markets in both debt and equity as a diversification play, and hopefully uncorrelated diversification play, which was something new that we had seen and we also had seen some Europeans liquidating American investments in order to get cash back into Europe.

Jim or Tim, is there anything you'd add-on this?

Yes, Bob.

I think Mike, the knock on impact from what Mitchell was describing is more financial institution activity, there's more fund activity, and it shows up in our results as well, where more than 50% of our revenues came from outside the US, two thirds of it came from our existing client base, and more than three quarters of it came from financial institutions.

So all of those factors that we're describing here are all coming into play quite nicely.

So now our overall revenue stream on the asset servicing side is over 40% outside the United States.

And that, I think what that does is it highlights why we're investing in GIS and VHF.

That's more about financial institutions and asset managers.

So promise, last follow-up.

So what percent of the asset servicing business is being gained from the other big players, State Street, Northern, JPMorgan, and Citi, and what percent would be gained simply from more activity or the lower scale players?

I guess we don't know the answer to that, Mike, because we don't have that data really accurately.

What I would say is that's the main reason why we're so focused on having number one client service in the world, that is it reduces the odds of losing the client and it increases the odds of our existing clients referring new business to us from another client, and so we'll see.

I think the pools are getting bigger and when you can best service at the margin over time, it should allow us to grow market share.

I guess if two thirds of your business comes from existing clients, then it's certainly less than one third coming from other big players?

Well not always because they could involve multiple providers.

Got it.

All right, thank you.

Thank you.

Our next question is from Jeff Hopson with Stifel.

Your line is now open.

Okay, thank you.

Just in regard to the pipeline again, any change in that because of the market volatility?

Are clients pulling back at all?

It sounds like they are not.

Could they actually accelerate their activity to lower costs, et cetera?

And what impact is regulatory issues?

How is that affecting their willingness to outsource back office versus previously doing that internally?

Hi, Jeff, it's Tim Keaney here.

There are a couple of market segments that continue to be under profit pressures.

This is general commentary.

I would say fund managers and insurance companies in particular.

We continue to see a shift in outsourcing, and this has been a steady point now, where some are around 20% of our pipeline is around outsourcing.

What's changed is clients are willing to talk about the bundle now, and they are not just outsourcing middle office, they are looking at the bundle for the reasons I talked about earlier, where they are trying to simplify their operating model and do more business with a fewer number of strategic providers.

I would say that's at least a six quarter trend and it plays to the real strength of the organization because we have a breadth of products that most of our competitors don't have for those market segments, and we are one of the leaders in the outsourcing space.

Okay.

Just a follow-up on the money market, is that -- you mentioned about 20%.

I assume in future quarters, that will be greater in terms of reduced fee waivers?

Yes, Jeff, it's Todd.

I'll take that one.

That's not necessarily the case.

The real mover in fee waivers will be to see a rise in overall interest rates.

The good news is we see some level of deal curve change here.

There's actually a little more yield in money-market funds and therefore a little more fees for us.

Until we see the Fed actually do something here, I'd be surprised to see a big increase there, a big relief on the fee waivers.

Okay, 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.

Just a couple few quick questions.

First of all on the discount accretion, I think, did I hear correctly 320 million is your expectation for this year?

Yes, the restructuring that we did in the third quarter or last year, we initially estimated obviously it would be less than that.

As we saw some improvement in the underlying performance, we bumped it up to now we expect a positive impact to be about 320 million and I should say, Brian, we're actually seeing pretty good performance in the underlying.

We're pretty pleased with how it's working and how it's going.

So it's possible we could tweak that up, but right now that's our best estimate.

And were you about 75 for the quarter?

The total impact, yes.

75, right, okay.

And just on Asset Management, if you could just talk a little bit about the institutional equity side of Asset Management in terms of pricing.

I thought a lot of the pricing was done at quarter end rather than let's say average month in or average daily and a little bit, I would have thought there would be a little bit more impact to the weak equity markets in June.

So maybe if you could just talk to that and whether you think there will be more pressure on equity based Asset Management fees in the third quarter if markets sort of stay where they are.

This is Mitchell Harris, Brian.

A couple comments.

First off, it is based on the month end value and it has been down about 12% to 13% depending what market you're referring to, but what I would say is a couple things.

Performance irrespective of the market has actually been pretty good.

Our international equity products, our small and mid cap value products have all seen strong flows in.

We have not seen pricing pressure in the equities, clearly that's not where the majority of our growth is coming from, but I guess the mix of products and the performance has helped us quite well.

Large cap has suffered the most quite frankly, but we're still seeing flows into the others as I said, and again just moving off equities, we've benefited because of our broad fixed income capabilities in particular, and alternatives in foreign currency.

Great, and on the performance fees, do you expect the 19 million, is that coming to be mostly from the good International performance that you mentioned or coming more from the alternative?

It's coming from the International.

Okay, great.

And then on the money-market fee waivers that's 20%, you mentioned is that across the franchise, so including the Pershing distribution channel or are you talking about just the Asset Management business?

No, it is Brian.

It's the pre-tax income impact across the entire Company.

Okay, so if we have a situation where LIBOR let's say settles back down, if that ever happens and if the Fed funds effective rate stays well under 25 basis points, do you think you might come back to the fee waiver levels that you were at or should we expect this going forward?

I think that we can see it back up a little bit but not that much.

Part of the reason is because just there's lower money-market funds.

Right.

But just a lower base on what you're waving.

Okay.

I don't think it's going to move too far away from this, Brian.

Maybe $5 one way or the other.

Got it.

And then just lastly on the fixed income trading side, can you quantify the losses you had in the fixed income, not the CVA, but the actual?

Yes, the total losses which we disclosed on page 11 was $24 million and the other trading and if you look historically we probably make another trading obviously that can be a pretty volatile revenue line for us.

We probably make in the $25 million to $75 million range.

So we posted a negative 24 that was very unusual for us.

I would expect that we would in a very soft environment we're seeing today, we would expect to be to the middle to the lower end of that range.

And it's the 25-75 range?

Yes.

And I'm sorry, just the CVA versus the actual fixed income trading?

Of the 24, the CVA accounted for a significant component of it.

Okay, great.

That's all I had.

Thank you very much.

Thank you.

Our next question is from Nancy Bush with NAB Research.

Your line is now open.

Good morning.

Hi, Nancy.

Quick question on Wealth Management.

There was some commentary you were saying the best new business quarter in Wealth Management that you'd seen all year or in a year and I was just wondering if you could elaborate a little bit on that in client segments and geography and whether as a result of the wacky markets we've had, the investment into Wealth Management those plans have changed or stayed the same or gotten better?

Hi Nancy, it's Larry Hughes.

In fact we've seen strength across our entire business.

So the family office business and the core US markets business have both been strong for us.

So results are good and the same statement is true for both that the pipeline is the best that we've seen in a year.

It's up sequentially from the first quarter about 7% overall.

The opportunity for us to expand is clearly there.

There are additional markets we would like to serve, we announced during the course of the quarter an acquisition of a firm called i3 Advisors in Canada.

We expect that that will be an opportunity for us to expand into some additional international markets.

So we see strength and opportunity.

How about Florida?

What are you seeing there?

The Florida market has been one of the brightest spots for us during the course of 2009 and 2010.

So the Florida market is a strong and growing market.

We have seven offices in the state of Florida and seeing strength across the state.

Okay, and your investment plans for that business are basically the same over the last year?

We've expanded our sales force for Wealth Management, we're up about 6%.

We expect to be up about 15% in terms of the sales force during the course of 2010.

So we expect to continue to invest both for organic growth and for potential acquisitions as they arise opportunistically.

Nancy, what I'd add to that is we've been under invested in sales capabilities and Wealth Management and we don't want to reduce that investment level and there's still geographies in the United States that we're interested in and we'll continue to focus on.

We got to be opportunistic on that as things occur.

One thing that's a little new here is we're so strong outside of the US in terms of our other business lines that Larry is increasingly thinking about what are the opportunities on the back of that to be able to grow share globally and offer these sort of products and services on a more integrated basis with our other business lines, and frankly, I'm encouraging him to continue to think that way.

Yes, and a quick question for Todd.

On the NIM, are we basically at sort of a stable rate in NIM right now given the kind of interest rate environment we're in?

Have all of the declines in rates sort of factored in and it's at this level until rates start to rise?

Nancy, I would say so.

There's the possibility depending on what happens with the yield curve for it to be some slight contraction from here and based on what our asset mix is going to be, but it feels to me and then we've looked at this pretty hard, that we should be able to keep it around the 170 on the low end of the range to 180.

Great.

Thanks very much.

And one thing I should add to that.

If the balance sheet grows a lot it's hard for us to keep it there.

So it will be positive net interest revenues.

So we see a significant amount of new deposits, which we did see a fair amount of that in the second quarter and that would put a little pressure on the NIM as well.

Okay, great.

Thank you.

Thank you.

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

Your line is now open.

Thank you, good morning.

Bob, in the past you've talked about the business from overseas of the non-US business and a couple of the highlights in the sectors of the Company, you mentioned for example, Asset Management now 49% is non-US.

With what's going on in Europe, does that alter your view of how much business you're going to generate from non-US sources and could you remind us what the optimal number is for the consolidated Bank of New York?

I don't know the optimal number, but I suspect that, I don't suspect, I know that we're in an increasingly globalized economy and that's not going away.

It's going to be more and more and more global and more integrated which will imply that over time, more and more of our business is going to be outside of the US.

So one of the themes you heard here this morning is that at the margin we are becoming more international by business.

We are particularly focused on Asia Pacific.

No acquisition opportunities there, but on the other hand great organic growth opportunities, we're continuing to invest executives and strategies there.

Maybe there will be some JV opportunities in Asia Pacific where we can partner with important players there to help them be more successful over time and to provide our global infrastructure.

Europe is, I suspect, is going to be an opportunity going forward as well, both organically and maybe even through smaller acquisitions in our core businesses.

I keep thinking about a very simplistic reality that over the last 10 or 20 years in the United States just about everyone got out of the custody business because if you were sub scale in terms of the size of your book to business and in recognition what clients we're expecting in terms of investment in new software and capabilities, eventually that's going to happen in Europe as well and no one can predict timing on that, but it's hard core reality is theres a lot of sub scale players in Europe still and we'll see if that creates opportunities for us in years to come.

And the other advantage we have that's fairly material is that on average, our Asset Management products are very well priced and the performance is excellent compared to many of our global competitors outside of the US.

So I think the inevitable outcome is that even in an environment where you have more uncertainty about the global savings rates are going to continue to be extraordinarily strong and across border capabilities will be undoubtedly a huge importance.

Would you then still pursue if assuming the Basel capital requirements force many of the European banks to raise capital and they choose to do it by selling some of their assets like their custody business in view of what's going on in Europe that would not deter you from looking at those types of businesses in an acquisition?

Well it would have to be really financially attractive, as usual which are pretty tough hurdles for us and then the question would be, which is really important, is could you actually grow the business because you never want to buy something that even though it's financially attractive on day 1 that is low growth.

So if we could bring our global capabilities to something would it make sense over time, and I guess the easy answer to that is I just don't know the answer to that yet, but that's something that you obviously have to think about.

I do worry frankly about higher regulatory costs in Europe, bank taxes, we saw the UK do this and recently there's talk of France and Germany doing it, perhaps Belgium.

We're not hearing it from Ireland, but if national entities want to really increase taxes, that makes the economics much more difficult and less attractive to us and I guess we could talk separately about any bank tax in the US.

Speaking of capital, you have a very strong Tier 1 common ratio.

Do you have any sense from talking to the US regulators where they're going to come out on what's an appropriate level for companies like yours?

No, Gerard, we don't.

It is one of the, I guess closely guarded realities of people working very, very hard towards -- which I still am continuing to hear and continue to read that there's going to be some kind of global accord on capital and liquidity by November for the Korean G20 announcement.

So I think most governments want to get this over with and so that progress has been made.

I think it's a given that minimal, that the minimum capital ratios are going to rise.

The quality of capital has to go up.

Liquidity has to go up.

That's an easy bet and then the question would be for the median player, will their capital have to increase as well?

My guess is probably true.

It's not clear to me though that for the top quartile players whether or not they will have to add to capital because one of the realities I've learned over the past six months in speaking with our colleagues around the world is you do have to remember that in the US here, we've been pretty aggressive at writing our assets and raising capital, much more so than in other countries around the world.

So we have to think globally here, there are going to be other nations where they just are not going to be able to reach our level of capital for a long time.

So I would think American banks have an advantage over many of our global peers and I think we're going to have a long implementation period as a result as well, because certain of these economies are going to be very low growth and it will be hard to grow capital rapidly.

So it's going to be very interesting to see where we end up and I'm somewhat optimistic, but of course this is the next very, very, very important step as we get into the next phase of regulatory reform, which is these global accords.

Sure, and then just finally for Todd.

Two quick questions.

What were the after-tax numbers for the UK bonus tax that you had to pay and also for the money-market waivers that you gave up in this quarter, the after-tax number for both of those?

We had indicated that the UK bonus tax would cost us, we had indicated in the Q that it cost us about $15 million.

It came in a little more than half of that on a pre-tax basis.

So if you assign a 30% tax rate to it you can figure that out.

And the fee waivers are hitting us in the vicinity of $65 million to $70 million a quarter pre-tax.

Gerard, just to maybe to hit the point more bluntly on global issues and taxes, what I thought about, when I think about the discussion going on in Washington now about the possibility of having a bank tax next coming into the US, I know the number we've all seen is about $90 billion over 10 years.

So that's $9 billion per annum.

BK, Bank of New York Mellon is the eighth largest bank in the United States.

So that $9 billion per annum would be the equivalent of they annual profit of two BNY Mellon's per annum, and that's probably equivalent if you want to offset it that would be a loss of 100,000 jobs in the industry over a 10 year period and I just can't see how that's very good for the country.

I totally agree with you.

Staggering numbers.

Thank you.

Thank you.

Thank you.

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

Your line is now open.

Yes, hi.

Just curious in your confidence in your ability to sustain the positive trends you've had in credit recently.

Brian, our Chief Risk Officer?

Brian likes to talk about that.

We feel pretty good about it.

Obviously we're always subject as you mentioned to event risk of any individual customer or the infamous double dip, but we feel pretty good that we can remain stable with the provision for the second half of the year.

We probably have time for one more question.

One thing I'd add to that Tom is we actually added to the reserve for the quarter.

So even though we only provided 20 we only charged off 13.

That's great.

I guess my last question is just on the pricing side.

Is there any changes being made in the pricing side of the model, particularly in asset servicing to make the model even more or less sensitive to market valuations going forward?

Yes, Tom.

It's Jim.

As I said before, we're seeing beginnings of that transition moving to more explicit or high dollar fees as a percentage of total revenues.

The reality is that's going to take a period of time because you need to work through your lengthy contracts that you have with clients.

So we've taken a methodical approach and as new client contracts come due or new opportunities present themselves, we find a high percentage of our high dollar fees going into the overall equation.

Great.

Thank you.

Wendy, we have time for one more question.

Thank you.

Our final question today is from John Stilmar with SunTrust.

Your line is now open.

Thank you gentlemen for squeezing me in.

My first question just has to do, Bob, as you talked about the M&A environment, it seems like you've laid out the capital competency, price and geographic uncertainty have all sort of lead to a diminished outlook for potential targets.

Can you prioritize as you look out there and you look at platforms, which one of those four is probably the predominant or dominant part of, that shapes your view of potential acquisitions and pipeline?

When you think about the longer term trends, John, you just have to think about Asia Pacific.

There's really three economies on the planet now.

There's Asia Pacific plus Latin America, and then there's North America, and then there's Europe and they're growing at very different rates.

So I was in Brazil last month and Brazil added 1.7 million jobs in the last 12 months.

GDP growth is 6% per annum.

Brazil is a country that's on a roll.

They have 200 million people, huge natural resources, we're investing aggressively in Brazil.

We're going to continue to invest in Asia Pacific.

You think about a developed economy like Australia.

They haven't had a recession in 20 years because they are enjoying the halo effect of good fundamental management of their economy, plus everything that's going on North of them in China and India and Korea and other places.

So that's going to be our primary focus and that is the smallest percentage of our Company today and we really want that to grow, but that is the one area that really stands out as being a longer term priority for us.

Okay, and then in those markets would you characterize their potential opportunities as you look out by acquisition or organic, is it a competency issue?

Is it capital?

Is it -- what are kind of the primary criteria as you move forward in this market?

I think it will be mostly organic, and we may have a few strategic relationships with a few major clients in the region that may accelerate that growth beyond normal organic rates.

Great, and then just one final question.

As we revert back to the servicing segment, it seems like to me that the servicing revenues have grown at a faster pace than servicing assets now for three quarters, and as we look out, my assumption is that that is reflective of the trends that we saw with expanding services that aren't necessarily tied to asset values.

How should we think about that trend over the coming quarters on sort of an intermediate term basis by virtue of the fact that should we expect that trend to continue, and if you could give me a sense for how much of servicing fees in the current quarter or in the past couple quarters have not been tied to assets, but more tied towards a functionality or a service?

Yes, boy, that's a big question, John.

There are a lot of issues there, but if you look in security servicing fees we're really looking at a number of businesses including our issuer servicing business, our clearing business, as well as our asset servicing business and there's a fair amount of volatility as you know in our issuer services specifically around depositary receipts.

So ultimately it is a reflection of the total amount of issuance and shares outstanding, but there are corporate actions and other things that tend to be a bit seasonal that can move that.

So a little bit of the bump that you saw in the second quarter is reflective of that.

It's somewhat offset by the very slow limited amount of activity that we're seeing in corporate trust, which again is reflective of the amount of trusteeships that we have, and there you just aren't seeing new debt issuance globally.

In terms of asset servicing I'll turn that over to Jim to comment on.

Yes, John, when we take a look at all our revenue streams and time to asset growth, about 40% of our revenues are tied to directly to asset growth.

The other 60% comes from transaction volumes, from holdings that we have with our clients, our performance measurement, analytics capabilities, our fund economy, fund administration transfer agency.

So you're seeing at the highlighted areas that will continue to be more over rated going forward, particularly with the GIS acquisition which is largely weighted on fund economy, fund administration and transfer agency, ie, high dollar fees.

So I think you can expect that 40% to be more likely to decline than increase as it relates to market sensitivity.

Great.

Thank you.

Okay, everyone.

Thank you very much.

We're mindful of time and really appreciate you being on the call.

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.