紐約梅隆銀行 (BK) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the third 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 that this conference is being recorded.

I will now turn the call over to Mr.

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 13 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, October 19, 2010 and we will not update forward-looking statements.

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

We also have the quarterly earnings review document available on our website which provides a quarterly review of the total Company and our businesses.

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.

Good morning, everyone, and thanks for joining us.

Q3 EPS was $0.51, or $625 million, and that includes $0.04 of primarily M&I expense.

Revenues were up 3% year-over-year, and what is encouraging about that is our two largest sources of fees, namely security servicing and asset management which together contribute over 80% of fee revenue, are up nicely.

Specifically, security servicing fees are up 20% year-over-year.

We're benefiting from the GIS and BHF asset servicing acquisitions and, of course, the new business growth.

Underlying this, assets under custody were $24.4 trillion, up 10% year-over-year, a new record for us.

Asset and wealth management fees were up 8% year-over-year.

AUM was $1.14 trillion, up 18% year-over-year, also a new record.

This is our fourth consecutive quarter of positive long term asset inflows for asset and wealth management.

That's $11 billion for the quarter and a total of $53 billion over the past 12 months.

In terms of offsets, it was weakness in FX and other trading.

Q3 is seasonally the weakest quarter for FX, volatility was lower and derivatives and fixed income trading still weak.

Trading volumes were low and that impacts Pershing, and net interest income was down a few million dollars sequentially, which is essentially due to the impact of lower interest rates.

On the new business front, on top of strong in flows in asset management, we had new asset servicing wins of $480 billion in assets under custody, that's up 15% from the second quarter.

Pershing also had some significant new business wins that will start to be converted during the fourth quarter and into next year.

We're already realizing revenue synergies related to the acquisitions.

About a third of the $480 billion in new assets under custody was directly attributable to the acquisitions.

Our newly combined capabilities position us to bid for and win pieces of business that we never would have won previously.

As a couple of examples, in broker dealer services we've already won three significant collateral management deals in Germany since the BHF acquisitions.

Clients told us very clearly that our expanded infrastructure in Germany was an important factor in the decision to award us new business.

Here in the US, our new integrated administration and transfer agency capabilities have already generated some nice wins in the insurance base.

Credit quality continues to improve.

The provision went from plus $20 million last quarter to minus $22 million this quarter.

Criticized assets were down 26%, and behind that.

Expenses backing out acquisitions were only up 2% year-over-year and well controlled.

Capital ratios were slightly above where we expected them to be after we closed on the acquisitions so our Tier 1 capital ratio was 12.2% and our Tier 1 common ratio was 10.7%.

Our business model generates a lot of capital and that would be approximately $800 million per quarter.

As you know, we've been deploying some of that capital to make acquisitions.

Both GIS and BHF were accretive to earnings and EPS in the third quarter.

There's also been a lot of comments recently about the impact of Basel III, but, frankly, we still don't have all of the detail related to implementation so there's still some guesswork involved.

However, given the strength of our balance sheet and our ability to generate significant levels of capital we feel really good about our relative positioning versus peers.

So, to sum up, the story of the quarter is this.

Good growth in asset management, security servicing is benefiting from our acquisitions both top line and bottom line, it was a seasonally weak quarter for FX trading and some of the volume related businesses, and we have a very strong balance sheet and are generating terrific excess capital.

With that, let me turn it over to Todd who will go through the numbers and then we'll open it up for regular questions.

Todd?

Thanks, Bob, and good morning.

To get started, I'll take a deeper dive into the numbers.

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

On an operating basis, earnings for the quarter were flat for the second quarter and up 2% over the year ago quarter.

Intangible amortization was $0.06 and that's actually been trending down, but it was up due to the acquisitions.

If you exclude intangible amortization, operating earnings were up 2% over the second quarter.

Some highlights on a sequential basis.

Fee revenue was up 5% and total revenue was up 4%, reflecting the benefit of the acquisitions on security servicing fees and the 3% increase in asset and wealth management fees.

Net interest revenue was basically flat.

The seasonal decline in FX and weakness in other trading was offset by the negative credit provision and a lower effective tax rate.

The tax rate gave us a benefit of about $0.02.

And finally, non-interest expenses were up 13% primarily reflecting the impact of the acquisitions.

If you exclude the acquisitions, expenses were up about 1%.

Turning to page five of the review.

Assets under management was up 18% year-over-year and up 9% sequentially to a record level of $1.14 trillion, reflecting net long term inflows of $11 billion and net short-term inflows of $18 billion, as well as increased market values.

Long term inflows benefited from strength in institutional fixed income and global equity products, and the sixth consecutive quarter of positive flows in retail funds.

I should point out that approximately 75% of long term net inflows came in September, so the P&L didn't reflect much of the benefit.

Assets under custody was up 10% year-over-year and up 12% sequentially, to a record level of $24.4 trillion, driven primarily by the acquisitions.

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

Security servicing fees were up 17% quarter-over-quarter and up 20% year-over-year reflecting the impact of the acquisitions and new business.

If you exclude securities lending and the acquisitions, security servicing fees were up 1% sequentially.

Asset servicing fees were up 34% sequentially and 39% year-over-year, primarily reflecting the impact of the acquisitions, higher market values, new business and asset inflows to existing clients.

These results include the full quarter impact of GIS and two months of BHF asset servicing.

During the quarter we won an incremental $480 billion in new asset servicing business.

As Bob mentioned, around a third of that business we won because of the acquisitions.

We are very pleased with the early cross-sell results.

Securities lending fees were down $8 million sequentially and $5 million compared with the third quarter of 2009.

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

However, during the quarter loan balances did increase.

Issuer services fees were up 3% sequentially primarily reflecting higher depositary receipt revenue, which was partially offset by shareowner services fee revenue that was down due to seasonality.

Before I leave issuer services I want to comment on the role of trustees for asset backed securitization.

What we do as trustee is fairly straightforward.

As trustee what we do is we receive cash and then we pay that cash on to the bondholders.

For most deals we also act as a document custodian, where we receive loan files and report to the servicers and originators if the files are incomplete.

We have good agreements that limit our role so we don't foresee liability related to the recent foreclosure issues.

Now let's turn back to the revenues.

Clearing fees were up 3% due primarily to the GIS acquisition.

Excluding GIS, clearing fees decreased 6% sequentially due to the lower transaction volumes as share volume on US exchanges declined over 20% during the quarter.

Asset and wealth management fees, adjusting for performance fees and the income from consolidated asset management funds, were up 3% sequentially, reflecting the impact of new business in higher period end market values.

Fees were up 8% year-over-year reflecting improved market values, the Insight acquisition and the impact of new business.

FX and other trading was down 34% sequentially.

FX revenue totaled $160 million down 35% compared to the second quarter.

The decline was driven by seasonality and lower volatility.

Other trading revenue was a negative $14 million.

The loss was related to hedges on balance sheet items, such as loans and currency, totaling $14 million and a rate driven decline in the CVA which was offset by other gains.

We expect other trading to return to profitability in the fourth quarter.

We were able to achieve operating earnings of $0.55 even though investment and other income was down $48 million sequentially, driven primarily by lower foreign currency translation revenue.

It was down $108 million over last year, reflecting lower lease residual gains and a gain on the sale of Visa shares in the third quarter of 2009.

Turning to page seven of the earnings review.

NIR was down slightly sequentially, reflecting the impact of lower spreads, and it was flat year-over-year.

The net interest margin was 1.67% compared with 1.74% in the prior quarter, reflecting deposit noted liability growth in a lower rate environment.

As the balance sheet grows in this low rate market it will be difficult to hold the margin, but the good news is that the growth will increase income.

Turning to page eight, if you strip out intangible amortization restructuring and M&I expenses, non-interest expense increased 9% sequentially, primarily driven by the acquisitions.

Excluding them, expenses were up 1% sequentially, largely due to higher litigation and software expense.

On page 11, you can see that our key capital ratios came in a bit higher than expected after funding the acquisitions.

The sequential decrease primarily reflect the acquisitions which was partially offset by the $677 million issuance of common equity via forward sale agreement that settled in mid September.

It also reflects earnings retentions.

The acquisitions net of the equity raise reduced Tier 1 and Tier 1 common by approximately 185 basis points and tangible common by approximately 100.

Our Tier 1 common is still a strong 10.7% post the acquisitions.

Looking out to our loan portfolio, you can see that our risk reduction efforts are continuing to benefit our credit cost.

The provision for credit losses declined from a charge of $20 million last quarter to a credit of $22 million in the third quarter, reflecting a 26% decline in criticized assets.

The effective tax rate in the third quarter was 27.3% due to a discrete benefit of approximately $0.02, largely driven by a change in state and local tax laws.

During the fourth quarter we would expect our effective tax rate to come in between 28% and 30%.

Other factors for you to consider when you're looking out to the fourth quarter.

In asset and wealth management we should benefit from those long term inflows that came in later in the third quarter and then the typical fourth quarter performance fees.

The fourth quarter should also benefit from client conversions and clearing, as well as improved other trading.

The net interest margin should be in the range of 1.60% to 1.75%, depending on the size of the balance sheet.

And the credit provision should be relatively low given the quality of our assets and the limited growth in the portfolio.

Looking forward, our focus will be on managing expense growth through reengineering efforts, optimizing our footprint, realizing the synergies associated with the recent acquisitions, and continuing to transition new business through the pipeline and on to the revenue line.

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

Thanks, Todd.

Why don't we open it up for questions right away.

Operator, let's go to questions.

Thank you.

(Operator Instructions).

Our first question is from Howard Chen with Credit Suisse.

Your line is now open.

Good morning, Howard.

Howard, we're not hearing you.

Sorry.

Hello.

Hi, Howard.

Hi, apologies about that.

The first question, Todd, just to follow up in terms of your net interest margin guidance.

I think just given the tighter reinvestment yields that we're seeing out there, et cetera, I know last quarter you had spoken to some measures to protect NIM, and I was just wondering if you could maybe just elaborate that and give us a little bit more detail for timing and magnitude of that?

Sure.

What we have done is we increased, first of all, the duration of our placement portfolios.

So if you look at our numbers there, you can see we've actually bumped up the average rate on placements a little bit just reflecting that.

With the VHF acquisition we also took on some covered bond securities and we've now broken that out in the investment portfolio.

They are relatively short duration, a couple of years but they are fixed so they will come with a little better yield.

So over the next couple of years, you will see some burn off of securities and if you don't see the market improving or you don't see a move by the Fed in the next year or two, you'll see a continued slight decline in the rate on the interest earning assets.

Okay, great.

And then just a follow-up to that, Todd.

The 4Q guidance in terms of the 1.60% to 1.75%, is it safe to assume that's where your NIM exited the third quarter?

No.

I'd say 1.67% where we were is a pretty good indication but we also had a pretty big balance sheet, Howard.

The balance sheet grew about $18 billion point to point.

We would expect it to contract a little bit from there.

Okay.

And then second question, Todd.

Helpful in terms of just you framing out your role as a trustee with respect to the mortgage and foreclosure issue.

But under what kind of scenario would you have any liability here in the broader scheme of things?

Yes, we don't envision any liability here.

It's a pretty straightforward thing that we would do.

Perhaps if we paid the wrong bondholders or something like that we would be exposed.

But we're receiving the cash from the servicers and we then pay it on to the appropriate bondholders.

As documentation agent, all we're required to do is notify the servicer and the seller of the loan whether the documents are complete or not and straightforward information that we passed on to them all along.

Great.

And then final one for me, just given the environment continues to change and be a bit choppy, whether it's short-term interest rates and reinvestment yields or just GDP growth, just thoughts on cost containment and ability to kind of -- and then above just the deal synergies, abilities to realize more cost savings in what might be a slower growth environment?

Sure.

We've got four or five things that we're really working on.

One is the global footprint that we've talked about.

That really hasn't dropped a lot to the bottom line to date because we've been investing in it and there are bubble costs associated with it as fast as we realize them.

Next year you'll begin to see some of those benefits.

We also have a number of reengineering efforts, just reengineering processes and making them more efficient.

We're doing some work around our procurement process because we actually think there's some money there to be had.

We also, all the discretionary expenses we're keeping a very close eye on.

And then we need to execute and realize on the expense synergies with the two acquisitions so we've got quite a few programs going.

There are some headwinds but we think we can overcome them.

Great, thanks.

And just to wrap that in numbers, if we took all of your commentary, Todd, is there a way to bucket a number around that or a desire to maintain a certain operating margin level or positive operating leverage?

We would certainly think that we are in a position to generate some positive operating leverage.

Even in a soft interest rate environment we aren't projecting any Fed moves for the foreseeable future.

So it's a pretty tough revenue environment, although I'm pretty pleased with the performance of the team in this particular quarter and what it bodes for the future.

But even with that, I think we can create positive operating leverage.

Great.

Thanks so much for taking the questions.

Thank you.

Your next question is from Betsy Graseck with Morgan Stanley.

Your line is now open.

Hi, good morning.

Just to follow-up on the trustee question, just wanted to make sure I understand.

So if a document -- your responsibility is to let people know that the documents are complete or are not complete, is that correct?

That's correct.

And you've got to remember, we don't have all of the underwriting documents or anything like that.

We have the notes and the mortgage.

Right.

And to the degree the documents are not complete and you said they were complete, does that expose you to anything?

All we do is we would send back a tape, Betsy, that the documents are complete or what percentage of the documents are not complete and the requirement to remedy that would be at either the seller or the servicer.

Okay.

And then just turning to asset management business.

Could you comment a little bit on the long term flows and the short-term flows that you experienced in the quarter, what the drivers were and sustainability or forward look?

Yes.

On the cash, yield stripped it up so I think we saw a benefit for the first time in over a year positive flows coming into cash.

I wouldn't expect to see that continue as I think yields will start to drift down in the fourth quarter.

So we don't see cash as a continuing positive.

On the long term flows, however, we continue to see very significant movements into fixed income and into alternatives.

It's actually balanced that business very nicely now because while equity I think has slowed down in terms of its outflows, that's starting to show positive inflows again.

You have fixed income, you have alternatives and it's only really the cash at this point that's a weak spot.

So I think what I'm saying is you'll see continued growth in fixed income.

You'll see increasing growth now in the equity and we will continue to see growth on the alternative side.

And I think it would be fair to say that performance is steadily improving as well, which bodes well for the future.

It helps, a lot.

And then just on the cash loss question, any color that you can share with regard to the capital question requirements as it relates to the money market funds?

Sure.

Under Basel II there are capital requirements for operational risk.

We would look at the money market funds and any potential support of money market funds under our operational risk.

And we do today, Betsy, in our economic capital but we'll just reflect that in our regulatory capital, as well.

Okay.

But there's no change relative to the economic capital?

Reg cap isn't different from what you're expecting in the economic capital model?

That's correct.

It's pretty much in line with our expectation.

Okay, thank you.

Our next question is from Glenn Schorr with Nomura.

Your line is now open.

Thanks very much.

A couple of quick housekeepings.

The other trading revenue was negative on the quarter.

You explained it as largely a decline in long term rates.

I don't follow.

Maybe I'm missing something on how that happens.

Glenn, let me walk you through that.

There are actually a couple of things.

I simplified it but there are a couple of things.

Within the other trading we do have some balance sheet hedges on, so we do do some currency hedging which does not merit hedge accounting treatment so it runs through the trading line.

That created about $8 million in losses.

We have about $6 million of losses on our CDS portfolio so we did obviously see an improvement in our provision.

As you might expect, it was offset somewhat by the loan hedges that we have in that portfolio.

And finally, the credit value adjustment in our derivatives portfolio, that is largely driven by interest rates, so as interest rates go down, our receivable goes up.

And we expect to collect all of that so basically the traders in this very low rate environment decided not to hedge it all because it will temporarily impact and we expect to recover it.

Right.

That's great.

I appreciate that.

I'm not sure if I missed it or not but did you mention what the accretion was from the restructured assets in the quarter?

It's about what it has been in previous quarters so our guidance there would be the same as where we've been.

Got it.

Okay, that's it for me, thank you.

Thank you.

Our next question is from Mike Mayo with CLSA.

Your line is now open.

Good morning.

Can you just elaborate a little bit more on Basel III?

What's going to be the adjustment to your risk weighted assets?

Or what do you think the ultimate range is going to be for Tier 1 common?

Or what else can you tell us about what's going on?

Okay, that's a pretty broad question, Mike.

It's Todd.

I'll take some, and Bob, if you want to jump in?

No, please do.

Under Basel III there's a couple of things going on.

First of all, there is a new definition, as you know, so the numerator is different.

It's basically the same as tangible common with some deductions for various items.

We don't expect the deductions to have any impact on us so you can kind of look at our tangible common and that's basically what it's going to be.

In the denominator, there are new definitions around risk weighted assets and they're primarily driven by the trading book.

And that's actually coming in Basel 2.5.

But also tougher definitions around the counterparties and so forth.

Again there, we see that as a de minimus impact.

The only meaningful impact to us right now that we see is related to securitizations.

So if you own below investment grade securitization, they garner a significant amount of capital in the form of risk weighted assets.

And as you know, we have actually marked ours to market and they are amortizing off, so we think that that will basically burn off and not have a significant impact.

So we're very well positioned, I think as well as anybody, for what ultimately is going to come forward.

We don't know exactly what the rule set is yet but we think we're in a very good position.

Actually the fact that we're generating $800 million a quarter on top of that.

So I'm pretty confident we will be well ahead before implementation of the ultimate target.

The other question you raised is what additional cushions are there going to be or where should we be operating ourselves.

We are analyzing that internally and we really haven't reached a conclusion, but we will shortly.

The only thing I'd add to that, Mike -- it's Bob -- is clearly there's a lot of industry talk now about the whole weightings issue for non-investment grade securities.

And of course most of our balance sheet is investment grade so we're not as impacted.

And there's quite a bit of worries that the weightings are just too tough for many asset categories and it could create -- any time you have a situation where the regulatory requirement is higher than the economic requirement it could create shadow lending situations.

So I know the industry is spending a lot of time looking at that.

And the other issue is what's going to be the impact on systemically important banks versus non-systemically important banks here in the US.

Certainly the early signals we're getting is that there won't be any material difference between systemically important and non-systemically important institutions, although there has to be a little bit of difference.

So am I hearing you say that if you were to adopt Basel III right now, your Tier 1 common would at least be above 10%?

No.

I didn't say that, Mike.

We wouldn't, I'm not projecting exactly what that's going to be.

All I can tell you is until we know exactly how this is all going to play out we are very well positioned to meet it.

And there are actions that we can obviously take, as well, that would leapfrog us ahead.

I know just what I heard, though, is that there are no impacts to the numerator and not a whole lot of impacts to the denominator.

Is it your uncertainty about the clarity of the rules or you just don't want to release it now because you might be off?

It just seems like if you have so much more capital than some of your peers why wouldn't you want to advertise that?

But a related question is when might we see a redeployment of that capital whether for dividends, buybacks or acquisitions?

Mike, if I could, it's just too early to say.

There's still a lot of uncertainty out there.

We've got to get through the G20 in November and there's still a lot of clarity required.

So we're the sort of Company where we don't want to advertise what we think are the facts until we actually know the facts.

So we're going to hold off on that.

In terms of dividend increases or stock buybacks, we would like to think we're well positioned for the beginning of next year.

We'll see.

All right, thanks a lot.

That's helpful.

Thank you.

Our next question is from Brian Bedell with ISI Group.

Your line is now open.

Hi, good morning folks.

A couple questions.

I'll start off with the issuer services area.

The depository receipts was stronger than I expected.

It looked like it was actually up sequentially versus second quarter.

Typically that's weaker seasonally.

If you could just comment on what drove that, and then what the outlook is for the fourth quarter, do you think we'll see the typical seasonal improvement in the fourth quarter?

Sure, Brian.

It's Karen Peetz.

We did have a really good quarter in depositary receipts.

It's continued global demand for equities both with corporate actions as well as new business.

We were definitely benefiting from the strong activity in the emerging markets, particularly in India and Brazil.

And we acted as depositary for 75% of new offerings, maintaining our 63% share.

With our pipeline up 51% year on year.

So we pretty much think that fourth quarter is going to be very positive, as well.

And do you think you'll see a normal seasonal balance as well in the fourth quarter?

Yes.

There's some corporate action type activity that we know will happen in the fourth quarter.

Okay, great.

On the asset servicing side, you won $480 billion.

What is the nature of the pipeline of installation of that and then how much did you install in the asset servicing business in the third quarter?

Brian, Tim Keaney here.

About 120 converted in the fourth quarter which was a bit soft but we had a terrific fourth quarter.

Bob mentioned the $480 billion.

I must say a bright spot is -- third quarter, pardon me -- a bright spot is the contribution of the acquisition related wins.

I thought I might just characterize that for you because they are really helping a lot.

The first category of wins is cross-selling GIS products into legacy BNY Mellon and vice versa.

That was terrific.

Those are really wins, the way we think about it, we wouldn't have won had we not done this deal.

The second category of wins is when we extend current products into new geographies, and we mentioned the three big collateral wins in Germany.

And the third category, we had five significant GIS current clients extend and expand their relationships with us and one of the signals we like about that is the strong support for the deal logic here.

So all in all very good momentum in the third quarter.

Great.

And maybe if you could just elaborate a little bit more about the GIS acquisition in terms of, first of all, to what extent do you expect to retool the fund accounting and fund administration business broadly at BK in terms of merging legacy BK with GIS?

And then secondly, if you can just outline what you would expect for revenue synergies over the next couple of years and reiterate the cost save expense target?

Yes, Brian.

It's still early days.

We're still working on the plan but maybe I could characterize this at a high level for you because there's some real low hanging fruit there, very simple things like GIS was using another provider for custody so we're internalizing the custody and the foreign exchange flows on the back of that.

GIS has a terrific transfer agency and administrative capability that Bob referenced.

It's already helping us in terms of cross sell.

And obviously taking advantage of BNY Mellon's legacy securities lending capabilities and our derivatives 360 and collateral capabilities, marketing those into the GIS client base is all part of the plan.

But I think it's probably going to take us another couple of months on the detailed technology agenda and we can probably share that with you on the next call.

And on cost saves?

I think that's really dependent on the technology agenda, so it's still early days.

We absolutely expect cost savings where we overlap.

So in the custody area there will be some clear cost savings there, some of our front office expenses, and obviously as we decommission some of the overlapping technology, but the latter takes more time, to be honest.

The last bit is probably three years away.

Okay.

And then just very lastly on the long term inflows, were they mostly into Newton or Walter Scott?

Actually, they were, on the equity side, more into Walter Scott but the bigger flows were into Insight and Standish.

Great.

Thanks very much.

Thank you.

Our next question is from John Levin with Levin Capital.

Your line is now open.

Hi.

Could you review -- suppose the trust documents were either fraudulent or incomplete?

Do you have a duty to review them or just to merely accept as stated what is proferred?

Our responsibility is to receive in the documents and accept them and report back whether they're complete or not complete, not to test for their accuracy or whether they're fraudulent or not.

Got you.

So if a document is submitted that is the standard which you have to adhere to?

Ex borrower comes in, we report back to that borrower we got their document.

Perfect.

Thank you.

Thank you.

Our next question is from Gerard Cassidy with RBC.

Your line is now open.

Thank you.

Good morning, guys.

Bob, what's the outlook for the dividend?

Do you guys still have a high desire to increase that dividend?

And if you do, what are some of the hurdles that you have to overcome before you can increase that dividend, specifically with the regulators?

It's a good question, Gerard.

We don't know all of the answers to that yet.

And given what's going on with Basel III and where we are just generally in the regulatory environment today.

We do hope that in the near term we're going to get more clarification of that in the coming few months.

And I'm sure, I wouldn't be surprised if there was a stress test involved using the various Basels I, II, and III in terms of thinking process going forward.

So I would say it's still a little early but we're still optimistic that the industry will have the opportunity to think about dividend increases and buybacks early next year.

And the reason why I said what I said was just given the quality of our balance sheet and our excess capital generation we feel pretty well positioned.

But it's still a little early but we're optimistic that we can get something done next year.

We've never seen as much complexity in terms of the regulatory environment ever probably.

And given not just Basel but also Dodd-Franks, and everyone is trying to work through that, both the regulators as well as the banks.

So it's just too early to nail it down.

Do you expect the US regulators, specifically the Federal Reserve, to come out with specific capital numbers for everyone publicly so that we all know what those are similar to what Basel has done?

No.

I really don't have a good enough sense for it, Gerard, at this point.

These are incredibly busy people given all the studies they have got to do on Dodd-Franks, and given just the real time activity going on Basel III.

So obviously we're all trying to be helpful and constructive, and the regulators are extraordinarily busy people.

And also I think they are recognizing the importance of being globally competitive as well.

We have a global economy, global financial institutions and I know they're working pretty hard.

Everyone is working hard to try to coordinate this around the world particularly between Europe and the US in terms of the new capital standards and particularly about the quality in capital.

So it's amazing how quickly everyone shifted from Dodd-Frank to Basel right after the passing of Dodd-Frank in July, and everyone is very focused on the process now and I would think there will be a lot more clarity over the next two or three months on this.

Okay.

And then again, in talking about the excess capital, you guys have been successful over the years in acquisitions.

Do you see anything on the horizon in terms of acquisitions?

And are there any lines of businesses that you're most focused on in terms of potentially doing acquisitions?

No.

I wouldn't say so.

I would say there's absolutely nothing out there that appears that the industry is or players out there are looking to sell or to partner with other players in a material way.

We did -- we were pretty busy this year and it's not clear to me we'll be as busy in 2011 as we were in 2010.

And we clearly have quite a bit of integration work to do.

So it could be a quieter year.

But on the other hand, what's sort of new from, let's say, six months ago or even three months ago, so I think you're going to see as more and more people look at their business plans for next year and perhaps the year after, people are going to have to become increasingly focused on exactly how do they create shareholder value over time and what are the businesses that they're in that create value versus the businesses where they just aren't competitive on a long term basis.

So I would expect activity to pick up over the next couple of years but probably not in the short-term.

And in the end it's really up to the sellers versus the buyers.

And finally, you guys mentioned about the new business wins of $480 billion and you show here that you had a win rate of 68%.

How does that compare to other periods of time?

And if it's materially different, why is it better?

I'm assuming it's better than it was maybe earlier?

Tim Keaney here, Gerard.

Its been between 60% and 70% so it's about as high as we've seen.

And maybe a point worth elaborating on is if you look at our 10 largest wins for the quarters, about a third are takeaways from our primary competitors and about two-thirds are companies that are continuing to outsource both in the insurance space and in the asset management space.

When you win it from your competitors, is there a specific reason the customer cites why you were able to take it away from one of your competitors?

Yes, there are two primary reasons we hear, Gerard.

One is the quality reputation.

We work very hard to be number one in the lead tables in all three independent surveys.

And number two, and this is probably an important point to make, the bundle.

More and more asset managers, insurance companies are bundling.

So the fact that we continue to roll out and have enhanced our bundle through these acquisitions, have expanded geographically and have launched new products like Derivatives 360, as an example, the more we seem to be a better fit for these companies that want to do more business with fewer people.

So quality and the full service product spectrum.

Maybe just to add to that just for a second, Jim Palermo is now responsible for our largest clients around the world as well as for our marketing efforts on how we actually present ourselves to our clients.

Jim, I know you've been traveling around the world pretty extensively here the last couple of months.

Anything to add to that?

Yes, Bob.

What I have seen, particularly just coming back from a long trip in Asia, the activity levels there are very high.

Literally in every single meeting that we had during that period there was significant new opportunities.

They are really looking to the large global providers to come in and really make a real meaningful impact in what they are doing whether it's from a pure custody standpoint or from related services.

Clearly what we have going on in our issuer services business, we have a real strong play going on in that market and we expect that to continue, as well.

The other thing that I would mention, Bob, is the -- we continue to build out our senior client executive team around the globe as we really focus on very very large partnerships around the globe and we expect to see good dividends from that over the course of the next year or two.

Thanks, Jim.

One of the messages we're getting loud and clear from our largest clients around the world is don't sell us products.

Tell us how we can increase our revenues or decrease our costs.

We need long term partnerships so understand our strategies, understand our business and how can you add value for us.

That's a different game than 5 or 10 years ago and we like that challenge, frankly.

Thank you.

Thank you.

Our next question is from [John Frigov] with Equinox.

Your line is now open.

Hi.

Just following up on some of the discussions of capital, capital creation.

Is there a potential as the business grows in terms of revenue and assets under custody to shrink the balance sheet in relative terms and free up some capital that way?

How much of the balance sheet is directly driven by revenue generating activities and how much of it is just due to the size of your relationships with your client?

Yes, John, our mix has been pretty consistent.

We're about 80% fee revenue and about 20% NII.

The net interest income and the balance sheet tends to be liability driven so as our clients grow, there's frictional cash that will stick to our balance sheet.

We can direct some of that into money market funds and other things, which we've done, so there's not a huge need for us to actually increase balance sheets to support our business growth.

We've always looked at it maybe half or even less of the revenue growth would result.

Let's say the revenue growth rate was 5%, we would expect no more than, say, 2% of balance sheet growth associated with that.

And by the way the assets that we were going into versus where we were historically are much lower risk weighted assets as well, so you're not going to move the risk weighted assets by much through growth.

But in terms of a material change in that structure, the growth rate may be half but it's not going to be zero or negative relative to revenue growth?

It's unlikely to be zero or negative but the change in risk weighted assets could be.

So we're allowing the higher risk weighted assets to run off and we're replacing them by either zero or 20% risk weighted assets.

And how much of your capital generation do you think has come from that process, from reducing risk weightings and capital requirements on those?

There has been a little bit over the course of the past year.

Most of it has come because we've cut the dividend and we have a very high retention right now.

We're generating, it's an interesting model, we're generating, Bob had indicated something like $800 million.

Well, just the amortization of our intangibles is creating about $115 million a quarter in capital so it effectively pays for the dividend.

Okay, thank you very much.

Thank you.

Our next question is from Scott Scher with Clovis Capital.

Your line is now open.

Any plans next year to do an Analyst Day?

I know it's been a couple years.

You seem to have a lot to talk about, you made a lot of acquisitions, restructured the business the last couple years, you got an international story you want to tell.

Any thoughts on doing an Analyst Day in the beginning of next year?

Scott, it's Bob.

I've had that pitched to me several times internally so we're talking about whether or not we should do it.

The thing I'm always mindful of is we've got an awful lot of stuff going on around the Company and people are really busy.

So we got to make sure we do the basic stuff really well, i.e., continue to improve servicing and get our costs down.

And if we feel we have some important messages we want to deliver, we'll consider it but it's a little early.

Do you think your story is understood right now?

Do you think people understand the excess capital you have at the Company, the cash flow, the quality of the business, the fact that you have such a high percentage of your revenue in fee businesses and non-NIM?

Do you think that's completely understood?

Can I quote you on all that stuff?

Can you say that again?

I don't know.

Your stock is rating at 10 times.

It's the same place it was 13 years ago.

If you guys are comfortable with that then maybe there's a story in that.

I'm not sure.

It seems to me a couple hours of your time would be possibly worth it to the extent to tell your story.

You guys are working hard.

It seems to be misunderstood but I don't know, maybe I'm wrong.

Well, maybe.

The thing to bear in mind here is that we had a situation 18 months ago where everyone thought that all financial institutions were insolvent.

Then we had a situation where everyone recapitalized and there was some euphoria going into the spring and everything was fabulous again.

And then even though things are a lot better than a year ago, people are still -- they don't feel as good as they did three months ago.

So we still have a lot of volatility and uncertainty in these markets, so I want to give a little bit more time to take place before we consider doing something like that.

We love our business model.

We love our balance sheet, we love our cash flow and excess capital generation and we're still a little early in the regulatory process and we want to get more clarity on the goals that the regulators set for us and what our ability will be to generate revenue and to, over time, increase the dividends and buyback stock.

So I'm not going to show up in front of our investors until we have greater clarity on exactly what our goals should be and that requires a little more clarity on where this economy is and what our regulators are going to be indicating that we should be doing over time.

If we are in a position where that's possible we will.

Excellent.

Thank you.

Thank you.

Our next question is from Tom McCrohan with Janney Capital Markets.

Your line is now open.

Hi, thanks.

In terms of the new business, one of the $480 billion, could you give us a little drill down on where you're seeing that geographically?

Sure, Tom.

Tim Keaney here.

About 36%, 37% came from outside the US.

It's actually been a little bit higher than that in the past.

The remainder is really in the US, and then as Jim Palermo mentioned a few minutes ago, in our emerging markets business in particular in Asia where we continue to see very good flow from our current client base.

So this particular quarter, it's two-thirds US, one-third outside US.

And the US, is it primarily the cross-selling success you talked about with GIS?

Yes.

Again, the statistic on the $480 million is about a third was GIS and BAS, the German acquisition we did, two-thirds was our traditional new business development, and this particular quarter, about 87% of all of our new business came from current clients and that's why we stay so focused on keeping quality levels high, especially in our financial institutions business.

If you serve them well they buy more products and services from you and that's certainly what we saw in the quarter.

Great.

And just as a follow-up on securities lending.

I know trends have been weak there due to the interest rate environment.

Can we just talk a little bit about the demand environment.

Are you seeing any less willingness amongst your clients to engage with security lending agents such as yourselves?

Actually, I'd say it's a very different story we're seeing.

About 20% of our new business pipeline includes clients considering going into the securities lending program and we have a number of our clients that might have exited or cut back on their risk profile, looking to reenter the program.

And as we look at what's happened -- I think we talked about this last quarter -- we come back to a range that feels like this business has reset.

The loan on balance range is anywhere between $260 billion and $290 billion and we've settled in at a comfortable 26 basis points, so I feel like the business reset and the long term and near term trends is more clients looking to enter the program than exit.

Great.

Thanks.

Tom, we did see quite a bit of growth just in the sequential quarter in balances.

They were up 13%.

Okay, so that's a good sign.

So you really just, we need the rates to get better.

Yes, we're growing off this level.

Yes.

And sorry to beat a dead horse on the foreclosure debacle but just to ask one last question on that.

Has your role as documentation agent been challenged in the course in the past by an investor unrelated to some type of issue with your role as a documentation agent?

It seems like a pretty tough hurdle for someone coming after a trustee in a fiduciary in the course, but is there any history there that you can share with us that boosts your confidence?

Tom, no history.

Never been a case that I'm aware of.

We're just acting as custodian.

Fair enough.

Thanks.

Thanks, everyone.

Appreciate you getting on the call and just as a reminder, please don't hesitate to call Andy Clark with any questions.

Have a great 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.