紐約梅隆銀行 (BK) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-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 call webcast will be recorded and will consist of copyrighted materials.

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

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, January 19, 2011, and we will not update forward-looking statements.

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

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

We will be using the earnings review document to discuss our results.

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

Bob?

Thanks, Andy, and good morning, everyone.

Thanks for joining us.

Fourth-quarter EPS was $0.55 or $690 million, and that includes $0.04 of primarily M&I expense.

Total revenue grew 14% year-over-year and 9% versus third quarter.

Significantly, 38% of all our revenue came from outside the US, which is a new record for us.

To put that into perspective, in 2007 that number was 32%.

So we continue to become more a global company.

NII was stable.

Our growth came from fee revenue, which was 11% during the quarter, our best quarter since the financial crisis began back in 2008.

In the 11% growth there was virtually no impact from acquisitions, because they had essentially started at the beginning of the third quarter.

So it is organic.

Securities servicing fees were up 8% sequentially.

Depositary receipts and clearing had a very strong quarter.

Asset Servicing continued to benefit from new business, and assets under custody reached $25 trillion, a new record and up 12% year-over-year.

Asset and Wealth Management fees were up 14% over Q3 due to stronger markets, performance fees, and long-term flow growth.

AUM was up 3% in the quarter to a new high of $1.17 trillion.

Foreign exchange trading revenue rebounded, up 29% sequentially due to high volumes and volatility.

And on the new business front, in Asset and Wealth Management we had our fifth consecutive quarter of positive long-term asset inflows, which was up $9 billion for the quarter, for a total of $48 billion in 2010.

We had new Asset Servicing wins of $350 billion in assets under custody.

We are seeing a lot of new business opportunities from our acquisitions last year, frankly, better than we expected.

In fact a lot of the deals in Asset Servicing and their pipelines are with our GIS acquisition and our new Asset Servicing clients in Germany, which is really encouraging.

Our balance sheet has remained what I would characterize as pristine all year.

Provision in the quarter was negative $22 million, identical to the third quarter.

Criticized assets were down 32% in the quarter and down 66% for the full year.

Our provision for the full year was only $11 million, and we had security gains of $27 million, a significant improvement compared to 2009.

I would like to think we are returning to normal levels here.

Expenses were up 8%, a little higher than we would like, driven by growth, some seasonality, and some costs above our typical run rate.

Two benefits of our model that provide us with strong capital ratios are, of course, firstly, earnings.

They generate us 20% to 25% of our equity base annually, and that would be higher than most financial institutions, we would expect.

And we also have a low level of risk-weighted assets.

This quarter we generated $576 million of new Tier 1 Common, up 5% from the last quarter; and we continue to invest our assets in high-quality securities and central bank deposits.

Tier 1 and Tier 1 Common both strengthened over 100 basis points during the quarter.

Our priority on the capital front remains to return capital to our shareholders through dividends and stock buybacks.

As you would expect, we submitted our capital plans to our regulators a few weeks ago, and we hope to know within the next few months how we did on the latest stress tests and whether we will get the go-ahead to start executing on it.

Given all the capital we generate, the quality of our assets, and the fact that we finished number one in the 2009 stress tests we expect we will do fine.

So to sum up, the story in the quarter is positive momentum that we are carrying into 2011.

Markets are stronger.

We certainly recorded encouraging revenue growth.

We had good growth in our core businesses, and new business trends are improving.

Our acquisitions are adding to growth in our pipeline.

Our balance sheet is exceptionally strong.

We continue to generate significant levels of capital, and we're looking forward to returning some of it to our shareholders this year.

And with that, why don't we turn it over to Todd to go through the numbers, and then we will open it up for questions.

Todd?

Thanks, Bob, and good morning, everyone.

First of all, I will take a deeper dive into the numbers.

My comments as in the past will follow the quarterly earnings review beginning on page 2.

On a GAAP basis, earnings for the quarter were $0.55, up 8% versus the third quarter and down 7% versus the year-ago quarter.

On an operating basis, after adjusting for $0.04 of M&I and restructuring expense, we get to $0.59; and that is up 7% versus both the year ago and the prior quarter.

Intangible amortization, which I think is pretty important when you consider the capital generation here, added an additional $0.06.

Some highlights on a sequential basis.

Total revenue was up 9% on an operating basis.

Fee revenue was up 11%, also on an operating basis, reflecting a strong quarter across our servicing businesses and the largest increase in Asset and Wealth Management fees that we have seen since the merger.

Net interest revenue was up slightly, reflecting a temporary spike in client deposits during the quarter.

Noninterest expenses including intangible amortization, restructuring charges, and M&I were up 8%, largely a function of higher volume-driven costs and some seasonality.

Fourth-quarter also included expenses of approximately $50 million that I would characterize as outside our typical run rate.

They included the full-year impact of adjusting compensation to market levels, equipment writeoffs, and the anticipated settlement of a withholding tax matter with the IRS.

Turning to page 4 of the review, AUM and AUC reflect higher equity values in new business, offset by a decline in fixed income and the relative strength of the US dollar.

Assets under management was up 5% year-over-year, 3% sequentially, to a record level of $1.17 trillion, with fourth-quarter long-term inflows of $9 billion and short-term inflows of $6 billion, as well and as higher market values.

In 2010 we had a record $48 billion in long-term flows.

Long-term inflows benefited from strength in institutional fixed income and global equity products and a record level of flows in retail funds in the fourth quarter.

AUC was up 12% year over year to a record level of $25 trillion, driven by the acquisitions, higher market values, and new business.

Turning to page 5 of the earnings review, which shows fee growth, security servicing fees were up 8% quarter over quarter and up 29% year over year.

Asset Servicing fees were up 5% sequentially, reflecting higher market values, new business, and asset inflows from existing clients.

Fees were up 41% year-over-year, driven by the impact of the acquisitions as well as the factors I just noted.

During the quarter we won an incremental $350 billion in new Asset Servicing business, and the acquisitions are adding significantly to our new business pipeline.

Issuer service fees benefited from more typical seasonal patterns.

Fee revenue increased 12% sequentially and 11% year-over-year.

DR issuances have exceeded cancellations for seven consecutive quarters, and we saw particular strength in corporate actions during the fourth quarter.

The corporate trust fee revenue was virtually flat sequentially and it declined relative to last year.

While the structured debt market remains weak, an increase in other debt issuance and continuing debt restructuring have increased our pipeline for new business in corporate trust.

Clearing fees were up 10% sequentially due to increased daily average revenue trades, higher market values, and new business.

Fees were up 25% year-over-year, reflecting the impact of the GIS acquisition, growth in mutual fund assets and positions,, higher market values, and new business.

I should add that you will see we had some outsized expense growth in clearing.

We have been converting some significant business wins, where the expenses are frontloaded.

We should start seeing a positive impact to our pretax earnings from these wins in the second quarter.

Asset and Wealth Management fees, adjusting for performance fees and income from consolidated asset management funds, were up 6% sequentially and 11% year over year, reflecting higher period-end market values and the impact of net new business.

In addition performance fees were strong at $75 million compared to $59 million in the fourth quarter of last year.

FX and other trading was up 77% sequentially.

FX revenue totaled $206 million, up 29% compared to the third quarter on higher volumes, new business, and a little higher volatility.

Other trading revenue return to profitability, generating $52 million versus a negative $14 million last quarter.

The increase was largely due to an improvement relative to the past two quarters in fixed income and derivatives trading.

Investment and other income was down $17 million sequentially driven primarily by lower foreign currency translation and seed capital revenue.

Turning to page 6 of the earnings review, NIR and the related margin continued to be impacted by low short-term interest rates globally and our risk-reduction strategy.

The risk-reduction strategy is hitting NII, but it is paying dividends, as you can see in lower credit charges.

NIR was up a bit due to the spike in short-term client deposits.

The net interest margin for the quarter was 1.54% compared with 1.67% in the prior quarter.

That spike in deposits negatively impacted the margin by approximately 10 basis points.

We remain asset sensitive, though slightly less so than in prior quarters.

We currently estimate an immediate 100 basis points move in the funds rate is worth a little less than $500 million on a pretax basis.

Going forward we expect the net interest margin to be in the range of 1.60% to 1.75%.

If rates move up it should be at the upper end of the range, and if the fund rates continues near zero it will be at the lower end.

In addition, if the balance sheet grows it will add to NIR but will negatively impact the net interest margin in the short run.

The net unrealized gain in our securities portfolio declined by $267 million, reflecting the higher long-term rates on the agency and treasury securities.

On page 10 you can see that during the quarter we continued to generate significant capital with Tier 1 Common up $576 million -- or as Bob indicated, 5% over the third quarter.

As a result of capital growth and lower risk-weighted assets our key regulatory ratios increased significantly.

Tier 1 was up 120 basis points to 13.4%.

Tier 1 Common increased 110 basis points to 11.8%.

And TCE increased 60 basis points to 5.8%.

The capital generation and strength of our ratios highlight the way our business model is supposed to work.

We benefit from our fee-based revenue and a low-risk asset mix, which is primarily comprised of high-grade securities, central bank deposits, liquid placements, and predominantly investment-grade loans.

We are also very comfortable with our ability to comply with Basel III.

We currently expect our Basel III Tier 1 Common equity ratio to exceed 7% by year end.

The difference here versus Basel I is largely driven by $4 billion of sub-investment-grade securitizations which we marked last year, and we now have a $500 million unrealized gain on them.

If we sold those securities, the ratio would be approximately 250 basis points higher.

But frankly we don't need or want to do anything uneconomic.

Given our capital generation and the limited need for risk-weighted assets in our business model, we are confident we will be able to increase our dividend and do buybacks without taking any additional actions.

Looking at our loan portfolio, the provision for credit losses was a credit of $22 million, identical to last quarter, which compares to a charge of $65 million in the fourth quarter of 2009.

Criticized assets decreased by 32% during the quarter and 66% over the full year.

Going forward we expect the quarterly provision to be in the range of zero to $20 million.

The effective tax rate in the third quarter was 27.3%, which compares to 26.4% last quarter and 28.3% for the full year.

Our current estimate for the 2011 tax rate is in the range of 30% to 31%.

Looking ahead to 2011, let me touch on four key areas -- seasonality, revenue, expense, and capital.

Typically our second and fourth quarters are sequentially stronger, and we expect this pattern to hold true in 2011.

Near term, let me remind you that performance fees and corporate action fees in depositary receipts are seasonally highest in the fourth quarter.

Looking at the big picture, we carry into the year the momentum of solid improvement in our core businesses.

While we are absorbing last year's acquisitions, we will focus primarily on our organic growth, a large percentage of which comes from cross-selling to our existing clients.

Over the last three years since our merger we have had great success in increasing the business line penetration of our top clients through cross-sell, but there is still plenty more for us to do with those relationships.

The acquisitions are providing the revenue synergies we anticipated.

We are successfully cross-selling our other capabilities to the acquired clients, and we have also gained a number of new capabilities and we're making nice progress in selling them to the rest of our clients.

In addition we continue to expand our client base globally.

Since our merger in 2007 we have increased annual revenue generated from clients outside the US to 36% from 32% and we expect this trend to continue.

We believe we can do better on the expense front by working to bring down the cost of delivering our services while maintaining our high quality.

Actions that we are currently taking include process reengineering and automation; rationalizing our systems; reducing occupancy costs; maximizing our purchasing power through supplier consolidation; and continuing to shift positions to our lower-cost global growth centers.

In just two years we have gone from having 25% of our headcount in growth centers to 30% today, and we'd expect to get one-third by the end of next year.

As we start realizing these savings we will likely reinvest some of it into additional reengineering efforts.

Importantly, we are currently absorbing the upfront cost of these efforts in our current expense base.

On the capital front we look for less M&A activity this year because we expect to have the opportunity to return capital to our shareholders through dividends and stock buybacks.

With that, I will turn it back to Bob.

Thanks, Todd.

Why don't we open it up for Q&A right away?

(Operator Instructions) Alex Blostein, Goldman Sachs.

Thanks.

Good morning, everybody.

A couple quick questions, maybe just to start off with expenses.

Seems like the fee businesses are clearly having a pretty nice momentum here, but the expenses are kind of trickling up with it.

So can you maybe talk about, ex the $50 million one-time number this quarter, do you think this is a decent base we should think about going into next year?

Or there is a little more you could do to reduce the overall expense number just in terms of dollar amount?

Yes, Alex, I will take that.

This is Todd.

I think if you look at the volume-related expenses with the business in the fourth quarter and you adjust that accordingly to what you expect in the first quarter, and knock the $50 million out of that, that is probably a reasonable base for us to get started.

We do think there are some things in addition to that.

I mean there were some seasonality to our business development expenses.

We tend to have conferences in the fourth quarter; there tends to be a little more traveling that comes on; donations and some of our marketing expenses.

But I think that is probably a pretty good basis for us to start.

Okay.

Yes, some of our other revenues are somewhat seasonal, and the depositary receipts tend to be strong in the fourth quarter as are performance fees as well in Asset Management.

That is not a consideration.

Got you.

Then maybe shifting over to the balance sheet for a second.

It looks like the cost of your deposits has been coming up throughout the year.

I guess you're closer to 22 bps at the end of the quarter; it was 16 earlier in the year; yet the rates stay low.

So can you just give us a little bit more color, I guess?

What is going on there?

Is it just more competition for deposits?

And do you expect that number to continue to go up and that is baked into your 160 to 165 guidance?

Yes, that is more mix, Alex, than it is -- so we are seeing an increase in sterling and euro.

And sterling and euro rates are a little higher than the dollar rates.

Got you.

So all of that move I would attribute to just mix of deposits.

Okay.

Makes sense.

Then just maybe one more.

Could you just -- a numbers question -- discount accretion in the quarter, benefit to EPS, and what was the impact from the fee waivers in the money market business?

Okay.

There's a few questions there.

Let me start with the accretion.

The way we have been looking at a net of -- when we started this net of the assets that we sold back in the third quarter of 2009, the impact is probably in the ballpark of about $70 million, Alex, in the quarter.

Your second question on fee waivers, the net impact to them for the fourth quarter was about flat to the third quarter.

So we have seen -- we saw it peak in the first two quarters and we have seen it come down.

But if the Fed keeps rates where they are now I don't think we are going to see any improvement from the waivers where they currently exist.

Great.

Thanks very much, guys.

Betsy Graseck, Morgan Stanley.

Thanks a lot.

Bob, a couple questions on capital.

Your Common Tier 1 and TCE to TA went up nicely in the quarter.

Could you talk about what kind of capital level you think you need to run the business, and how you think about excess capital?

Which measure is more relevant for you?

Yes, that's a good question, Betsy.

I don't see a lot of complexity to it other than there are some moving parts as we slowly shift around the world from Basel I to Basel III.

So given the quality of the assets we have, we don't have to hold much capital for credit risk.

But we do have operational risk and we do have a little bit of market risk, [that minutiae] of business this morning.

So we are increasingly thinking about where we are heading from a Basel III standpoint, and it looks like the world is going to -- if you read it the Basel III stuff, you are looking at a minimum 7% ratio for Basel III and Tier 1 Common in theory by the end of 2019.

But I am increasingly seeing a widening gap on how American financial institutions and banks think about that versus the Europeans.

Whereas the Europeans want to do it through retained earnings and do a little bit slower, it feels like the American banks want to do it a little bit faster.

There is negative implications we understand in going below 7%, although all the rules aren't written yet.

So I think most of the banks are going to have to think of a ratio where they can get comfortable, where it is somewhat higher than the 7% ratio, that you start to drive some problems for yourselves potentially in terms of dividends and buybacks.

So I don't know where that is heading yet, Betsy, because we have a lot to learn yet.

Is it an 8% number?

Maybe.

It's going to take us, I am guessing, a year or two before we really know all the rules.

There is a ton of moving parts.

What I do know that is that if we are above 7% by the end of this year we are going to be in -- well, we already are in very good shape going into this new capital regime.

I wish I could be more definitive for you, but I can't.

But I would just focus on Basel III increasingly and ask a lot of questions about what are all the ins and outs on those rules over the next year or two.

Where do you think you are on Basel III right now?

I would say we are a little under 6%.

And if we sold the $4 billion in assets we would be 8%, you know?

But again it doesn't make economic sense the way Basel works for that.

And we don't need the additional capital, so we're going to hold that portfolio because we like it and it is really in the money.

Okay, and when you said be at around 7% by year-end, you are talking 4Q '11?

Yes.

Yes.

Okay.

And even with that --

There is going to be a transition period, and my understanding is that that is the way that Washington and the regulators are thinking about Basel III versus Basel I.

My impression is that the greatest emphasis is on Tier 1 under Basel I and Tier 1 Common.

But they will be at least looking at Basel III as part of this process through the spring.

Sure, and then you -- I would have expected you to have submitted your plan capital plan to the regulators.

I know we haven't heard back yet, so hard to say.

But can you give us a sense as to what you did ask for?

No, I'm sorry.

No.

Okay.

Todd would love to tell you that, but I am not letting him.

Well, you know, Betsy, one thing I would add.

All these numbers that we are quoting you include actions.

Okay, yes, so you expect to take some actions this year to move you up from under 6% to 7%?

No, no, no, no.

We would expect to be able to take some capital actions; and that is reflected in our estimate to be above 7%.

Okay, got it.

Capital actions meaning --?

Oh, it'd be raise the dividend or do anything else or (multiple speakers).

Okay, got it.

Okay.

Right?

So in other words we would be above 7% otherwise; so we are saying including our anticipated actions, if they are approved, we would be in the 7% range by the end of 2011.

Got it.

Then one separate question on the expenses, the $50 million that you talked about that was a little bit of a one-timer in the quarter.

Can you tell us how much of that was the comp?

Because one of the questions I get from people is -- well, shouldn't that be in our run rate going forward even if it is a true-up in the quarter?

On an annualized basis should I keep that in the run rate?

So I am unclear how much of that $50 million I should put in the run rate.

Yes, about half of that impact, Betsy, was related to comp.

I think the way to think about it is that was the catch-up amount rather than the run rate amount.

Got it.

Okay.

But it should be -- it is catch-up to a new level going forward?

Correct.

But it is the previous three quarters impact if you will, not fourth-quarter impact.

Right, got it.

So you have got to divide by 4, not divide by 1.

Okay, and I want to make sure that we are crystal clear on that capital discussion.

We had assumed we will be over 7%.

That is with an increase -- assuming that the Fed approves our increase in dividend and buybacks.

Yes.

Thank you.

Mike Mayo, CLSA.

Good morning.

You had good revenue growth in the quarter, but assets under custody were only up 2% despite the big market moves.

That is not so different than your peers.

So I am just wondering shouldn't assets under custody be up more given the appreciation in the market?

Hi, Mike.

It's Gerald Hassell.

You have to remember about 60% of our assets under custody are fixed income.

With the long rates changing during the quarter, the value of those fixed income securities actually declined.

So versus some of our peers may have a higher mix in equities, which would benefit from the equity market rise, so when you factor that in we think we are right on line.

Okay.

Then as far as the linked-quarter revenue growth, you talked about a lot of ins and outs.

Just conceptually, of the linked-quarter revenue growth, the 9%, how much would you consider seasonal versus a more permanent cyclical pickup versus organic permanent customer improvement?

I will take a stab at that, Mike.

I would say that a fair amount of the performance fees are obviously seasonal, so they were $77 million for the quarter; and you might -- we typically get some, but not at that level in other quarters during the course of the year.

DRs were up quite a bit.

So I would say those were probably the two heaviest seasonal actions that we saw.

So I think you can put it into $100 million to $150 million.

Okay.

Then lastly the mortgage putback issue, where you guys are something liken in the middle, the Kathy Patrick group with all the investors that are trying to get you, the trustee, to potentially take some action.

Can you give us an update on that?

What are the possible scenarios after this current period runs its course, I guess, the end of this month?

Well, sure.

I don't think anything has changed from what we have indicated previously, Mike.

I think the good news is that the parties there are talking to each other on a direct basis.

I would suspect they will work something out.

But once again if they don't, the role that we play here is basically ministerial.

So right now we're very comfortable with our position, and we don't really see this as being an issue.

So I guess I have two questions from that.

You think they might work it out.

I don't know if you can give any color on that.

Then if they don't work it out, my understanding -- and correct me if I am wrong -- there could be a scenario where the servicer is fired and you become the servicer.

This is not something we see too often; but can you simply elaborate on that?

Yes, I think in terms of working -- I can't really speculate on how those negotiations are going because we are really not a party to them.

In terms of how it ultimately could play out, there is an extremely unlikely probability that we would ever end up in the servicing position.

In the case of a default, we do take on a Prudent Man role, but we think that there are other much more reasonable outcomes than that.

We have the two extremes, and either they work it out or -- you just said extremely unlikely, you become the servicer.

What are some middle ground possibilities?

Well, most likely it wouldn't be in the interest of the holders of the bonds to try to move the servicer midstream like this.

And most likely we would probably increase our oversight of the servicer.

All right.

When you say increase oversight of the servicer, what does that mean?

We would review a little more carefully what they are doing.

They [would] pay for that incrementally.

So, Mike, we just don't see this as a significant risk at this time.

All right, thank you.

Howard Chen, Credit Suisse.

Hi, good morning, everyone.

Thanks for all the detail on your Basel III expectations.

How much risk-weighted asset inflation and mitigating actions are you embedding specifically in your assumptions?

We are embedding zero mitigating actions in those assumptions.

If you think through it, the biggest driver, like we said, is that $4 billion of securities.

Well, we see about a 20% to 25% paydown annually in those securities anyway, so they naturally burn off.

If we wanted to take some other actions, there's a lot of other things that we could do, Howard.

We just don't feel compelled to do it at this point.

Right, okay.

Thanks, Todd.

Then I know there are a lot of ebbs and flows and we still don't have full clarity on Basel III, but I guess I am a little bit surprised that you seem really comfortable in restoring the dividend and buying back stock with where the pro forma ratios are now.

I don't know if I am getting the right impression, or if you have any thoughts in terms of just what is giving you that confidence level?

Well, it would be a couple of things.

First of all, the test is a Basel I test.

And as you can see where we are, we performed extremely well.

Number two, our business model does not rely on risk-weighted assets to generate income.

So we can demonstrate a plan to have a very high Basel III ratio well before it goes into implementation, comfortably, while taking actions.

You know, the other thing I would add to it, Howard, is there aren't a lot of balance sheets out there that you could stress and see essentially almost no impact from a stress scenario.

When you are generating 20% to 25% of new equity every year, that is a lot of capital generation, unlike most of our peers, because we are a capital-light model.

It is just fundamentally a different model than most banks that rely upon their balance sheets.

Understood.

Okay.

Thanks, Bob and Todd.

I know I guess in my mind one of the worries would be that Basel III or whatever the new regulation is, it is a bit more of a blunt instrument, right?

But that's good to hear, that there is differentiation in terms of your mind and that is resonating with regulators.

I guess my last question -- I know you had a bankruptcy recovery this quarter.

But just wondering how you are thinking in general about asset quality and the loan portfolio.

Do you see more opportunities to bleed reserves?

Or is it something that you would like to grow into from here?

Thanks.

Well, we are very comfortable with our loan portfolio.

I mean we have indicated that we would expect a provision to be zero to 20.

We have seen a very large decline in criticized assets over the course of the year.

We have done -- the team has done a great job cleaning it up, and we think we are in a very good position -- the best we have been in many, many years.

Perfect.

Thanks so much.

Brian Bedell, ISI Group.

Hi, good morning, folks.

To go back to the Basel III analysis, so if you had a 9.5% pro forma with the securities sale, I guess wouldn't that extra 2.5% give you a great deal of extra buyback capacity?

Maybe just talk about how you think about 7% versus the 9.5% and the extra buyback capacity that you would have if you sold those securities.

You know, Brian, I think that is a great way of looking at it.

You can think we are warehousing a lot of capital in that portfolio, and if it makes sense for us to do something with that capital versus holding it, we will.

That is exactly how we would look at it.

Okay.

Yes, you prefer to play it flexibly.

If the Fed wants to you to raise that, you could just sell the securities and then (multiple speakers) more flexibility?

Yes, you know, we don't want to be forced to do something uneconomic.

The portfolio does a nice job of hedging our interest rate risk, as we have indicated in the past.

It has got a high yield on it and it is relatively safe, because we have marked it well below its current market value at this point in time.

So if it makes more sense for us, like with anything, if we can deploy our capital more efficiently elsewhere we will do it.

Right, great.

What if the operational component increases the risk-weighted assets pro forma with Basel III?

The way I look at that, Brian, is there are two components.

In the core, if you shift the investment portfolio or the sub-investment-grade securities out, there is a benefit to the credit side that is reasonably meaningful.

And it offsets about two-thirds of the impact of operational risk.

So net-net that is probably about 10% or 15%.

Operational?

The increased impact under Basel III versus Basal I.

Operational risk for us will be higher than 15% total.

It will probably be in the 20% to 25%, maybe even 30%.

Got it.

Got it.

So the net change in risk-weighted assets.

Great.

Credit versus operational.

Okay, great.

Great.

Then just let's just talk about the expense structure.

Obviously you guys have been pretty advanced in reengineering for a long time.

When do you think we get to a state where the reengineering savings and other cost initiatives will accrue more to the bottom line so that you won't be -- you will be at a point where you are not reinvesting in those new initiatives?

I guess I will take that one too.

But I would like to add to it.

Go ahead.

No, no, you go ahead.

I'm actually going to back up to the last point, too, Brian.

I do want to make one comment here.

We are talking about the Basel III capital models, and frankly the Fed needs to approve your capital models, and none of these models have yet been approved for us or for anybody else that I am aware of.

So there's a lot of assumptions that are going into these.

We think they are reasonable estimates, but there are a lot of assumptions.

Right.

In terms of the run rate, this would be the first year if we didn't reinvest that I think we could go into a positive run rate especially on the global footprint.

So we are starting to see -- could be as high as say 1% of our expenses that we could reduce if we didn't reinvest some of that in our reengineering efforts.

It is our intent to reinvest a meaningful amount of that in our reengineering efforts.

Bob, I don't know if --?

Yes, what I would add to that, Brian, is we have been doing this for three or four years.

We are constantly reengineering how we conduct our business to drive efficiencies.

To date, our reengineering costs are higher than the savings.

But of course, every year the savings get higher, so the run rate is higher.

Frankly we are going to continue investing in reengineering.

I think that is the right thing to do for our businesses and for the shareholders.

We have some big buckets that we have opportunities in, whether it is in our IT platforms or operational platforms, in terms of reducing the number of systems we have.

We still have too many locations around the world, and we tend to be in fairly expensive locations in some cases.

Our procurement costs are too high.

I could go on, but we are going to continue investing.

I think there are more expense opportunities in our Company to not only run more efficiently but it also reduces risk and reduces complexity in our Company.

And all of those things I think are attractive and important.

Frankly I look to each one of our businesses as well as staff areas to think every year about incrementally what are they going to be doing to become more efficient than the prior year.

We don't just look at it in terms of the next quarter or the next -- the rest of the year; we look at it as a multiyear program.

We are becoming very disciplined about this, and we are going to continue this process.

That's very, very helpful.

Just one last one, maybe on the PNC GIS platform, maybe if you could talk about what you are thinking, to what degree you will migrate clients to that platform or actually reconstruct your mutual fund servicing platform between like BBK and the GISes?

Sure, Brian; it's Gerald.

We are going through that process right now.

There are certain elements that came with the acquisition that -- for example on the transfer agency we are going to continue to use the existing transfer agency platform that PNC built out.

We are winning some new business on that platform.

Many parts of the acquisition have already been slid into our three business units -- Asset Servicing, our AIS Alternative Investment Services, and the third part went over to Pershing.

We are going through the rationalization process of those platforms, and it is well underway.

We feel very good about how the integration is going.

In fact about 10% of the new business that we have won in Asset Servicing came because of the fact that we had those increased capabilities from the GIS and BHF acquisitions.

So we feel very good about how this is integrating.

Great, great.

Thanks very much.

Gerard Cassidy, RBC.

Good morning, Bob.

Good morning, Todd.

Question coming back to the stress test that you have submitted your data for.

I just wanted to make sure I heard you correctly.

You said that the stress test will be using Basel I numbers to determine whether you can increase your dividend or do a buyback?

Yes, the stress test was presented -- it was tested around Basel I.

We also presented a plan on how we are going to ultimately meet Basel III.

But all of the information that I have received, the regulators have been unequivocal that this test is a Basel I test.

If I recall correctly, would you say that the Tier 1 Common ratio under Basel I -- though it was never officially determined -- is about 4%?

Is that right?

No, no, no, no.

What we said earlier on the call?

No, no.

Under Basel I we never really had a Tier 1 Common ratio officially defined.

We had Tier 1 of 6%; but we all imputed it was a 4% Tier 1 Common ratio under Basel I.

Was that a fair statement to say that is the numbers they are using under Basel I?

It is.

It is fair to consider it to be a bit of a discount.

I think that is a little more than what they are actually looking at though.

Okay.

In terms of a dividend payout ratio, where do you guys -- where would you like to see your dividend payout ratio?

Not necessarily suggesting it is going to get there in the first announcement, but where is the ultimate dividend payout ratio that you guys like to get to?

Historically we have probably been in the 30% to 40% range, Gerard.

That is probably a little bit high for a company like ours with some continued growth prospects and also the desire to do some buybacks as well.

So I would suspect we will be in the 20% to 30% range.

Okay.

Do you know with your conversations with the regulators, are they going to be looking at current level of earnings for let's say 2011 versus maybe more normalized earnings in '12 or '13 for determining where dividend payout ratios can go?

Yes, I don't think -- this is a confidential exam.

We are really not privy to disclose some of that information, Gerard.

Okay.

In regards to Basel III where you guys pointed out that if you were to sell the securities that bring down that ratio it would boost the ratio by about 250 basis points.

What is the bleed rate if you will where those securities will eventually just pay off, so that you will capture that 250 basis points?

Is that over a three-year period or a five-year period?

Yes, I think the way to look at it is it's about 20% to 25% per annum.

Okay.

All right?

So if you get 25%, you can figure we get 50 basis points or (multiple speakers) roughly.

These are good assets.

Do remember that is $4 billion in assets and $4 billion in capital.

Right.

Thank you.

Which is kind of astonishing.

Tom McCrohan, Janney.

Hi, everyone.

Do you expect to hear from the Fed on this current stress test by the end of March?

That's kind of the expectation I'm hearing.

We don't know, and I would hope to hear sometime this spring.

You know, it is a complicated process.

It was in '09.

I am sure it is still complicated.

We have a lot of regulators, and I am sure it won't just be one that will have input.

There will be multiple inputs.

So we may get fortunate, but I will think of it in terms of a first-half type event.

Okay.

Then on net interest margins, you didn't give a specific guidance, but it sounded like you were guiding us to adjust the 1.54% by 10 basis points.

So should we be thinking about a run rate of about 1.64%?

Yes, let me explain to you what we did there.

If you looked at the quarter, we had a pop for a good part of the quarter of about $15 billion, Tom, in interest earning assets that was really driven by our deposit base.

There wasn't much we could do with that but leave it in very short-term instruments or even at the Fed.

On our $720 million that earned us about $6 million.

So we would have been at $714 million.

Then if you net that out, you are right, the net interest margin would have been about 1.64%.

And that is probably a pretty good basis to start going into next year.

This pop in deposits, Todd, it was interest-bearing, I assume?

It was a mix.

It was a mix; got it.

The new business pipeline, can you just give us a feel for the $350 billion of assets under custody that was won during the quarter?

Geographies, type of firms, what kind of revenue yield, any type of color on that would be helpful.

Sure, Tom.

It's Gerald again.

The pipeline certainly in Asset Servicing has grown quite significantly from quarter to quarter mainly from financial institutions looking to lower their cost base in outsourced services.

More than 50% of it comes from outside the US.

The vast majority is financial institutions of one sort or another, including asset managers.

So the pipeline has grown quite significantly.

Time will tell how long it will take for them to make decisions.

We still have about $500 billion of assets under custody to convert from prior wins, so we see some good momentum going into this year from both the pipeline and the conversions of business won.

Great.

Thanks, guys.

Ken Usdin, Jefferies.

Good morning, everyone.

Just to a little more flesh out on the net interest income and net interest margin, Todd, you mentioned that the approximate accretion in the quarter was $70 million net.

I was wondering if first you can just give us the gross number compared to the --

Yes, Ken, I think it is a little over $90 million.

That compares to the $112 million from last quarter?

Yes.

Then can you also just level-set us then on what the expectation is for 2011?

I think it will continue to ease -- in terms of the accretion?

Yes.

Yes, I would expect to see it kind of at a 10% type of decreasing.

From the 90 run rated or from the (multiple speakers)?

Yes.

So if we are 90 -- I think we might even be in mid-90s.

If we are off of that run rate it will probably come off about 10% of that.

Okay.

Then how much is left in that?

How many years of re-accretion is there left?

Then does it -- I will let you answer that and then I will come back.

Yes, it can go on.

Most of it is going to go away in three or four years, but it really depends on the performance in the underlying securities.

So if they continue to do well, there could be more there.

Sure.

Then would you expect in the out-years it also continues to -- like it is a descending amortization schedule, that if it is down 10%-ish off of the current run rate in '11 then it kind of also drips in the future?

Or is it more steady-state until it --?

Yes, yes.

No, it is going to -- just as the payments come -- as the maturities come down we get prepayments, then we get actual payments of principal, we will see the accretion come down as well.

Okay, perfect.

My second question, Bob, you mentioned at a couple of recent conferences that you thought that M&A might be a lesser priority in 2011.

I was just wondering if you can flesh out that thought process.

Is it either because there are fewer opportunities, or because you are focused on integrating?

Is it because -- your capital plan?

What are you seeing as far as that interest level and also landscape?

Well, it's a good point.

Last year was quite exceptional in that we did four acquisitions really, and three of them had to do with sellers who were either distressed or wanted to raise capital reasonably quickly in our space.

We have a lot of integration activity to get done this year, and we are going to be focused on that because we were pretty busy last year.

The other reason was -- and over the last year or two we never really had an opportunity to raise a dividend or buy back stock.

So I would say that the combination of integration activity that we have underway and now the new capital opportunity this year has kind of changed our priority year-over-year.

I, frankly, am not seeing any noticeable activity on the M&A front.

Maybe others are, but certainly our team is not.

Ken, I might add that we feel very positive about our own organic growth capabilities, and not just in Asset Servicing but in our Asset Management and our other business units.

So I think we feel very good about the core organic growth and feel less of a need to turn to M&A.

It's interesting, Ken, you did ask about, Gerald, custody and the pipeline activity.

Maybe we will just have Curtis just talk to Asset Management and Wealth in terms of pipeline just for a second.

Sure, Bob.

We already mentioned that we had our fifth consecutive quarter of long-term deposit inflows and we continue to see our pipelines being very robust.

We put them at just over $70 billion today, with about $8 billion of that being high probability.

What is encouraging is that these pipelines are also geared towards products where we generally have higher fee realization.

We have clearly seen, as the market has, a shift towards equity products.

We don't do a pipeline necessarily for retail flows; but our retail flows have been robust and we have every reason to believe that they will continue to be.

So I would tell you that generally our pipelines are quite healthy in Asset Management as well.

Okay, great.

Thanks for the color.

Wendy, we have time for one more question.

John Stilmar, SunTrust.

Good morning, gentlemen.

I guess following up on Ken's previous question with regards to M&A activity, I think you guys have done a really nice job of laying out the transition with capital management at least in the near term.

But as we start looking out longer term, three to five years past the capital management, could you see another round of M&A, that M&A potential?

Is that something that you guys have baked into your long-term business plans?

Just as you do have capital management.

You still are going to be in somewhat of an excess capital position.

How do you think about that?

You know, John, it is always difficult to predict the future, and it usually is about people who want to divest versus people like us who occasionally want to buy.

I am not -- again, if you look over five years I am extremely confident that we can gain market share around the world.

We just want to continue adding product and geography as we become more and more global, and we are very focused on that.

Most of that activity is organic.

Asia-Pacific, it's really all of our opportunities were organic, and we did a number of things that you're probably aware of last year in multiple countries in Asia-Pacific to put in the seed capital required and start up businesses that I think long-term are going to be huge winners for our businesses and our shareholders.

In Europe, I am not getting any sense at this point that the bank managements are thinking about our space, either getting bigger in our space or even divesting.

I think they are more focused on their core activities and the outlook for the European economy.

We continue to invest in Brazil, but again that is all organic.

Long, long term, we continue to think that this space will continue to consolidate around the world.

And the players with scale, and multicurrency, wide platforms, with multi-products that can produce a lot of solutions for clients as the world gets more complicated and more global and global financial assets go up -- but it is hard to predict the timing of it, John, quite frankly.

Perfect.

Then we have talked obviously a lot and seen your actions in Asia.

And you have highlighted an interest at least in the growth markets in South America.

So as we look back on 2010 and as you look forward to 2011, one, the relative importance that we should think in the intermediate term for those markets?

And then two, how would you characterize those markets today relative to your expectations going into 2010?

Were they better than expected, as expected, or worse than expected?

I continue to be pleasantly shocked at how well the BRICs are doing.

Particularly the BIC.

Asia-Pacific and Brazil are just amazing stories.

The outlook in spite of -- you would expect some volatility at some point in those economies, but it continues to be an astonishingly good story.

We're just going to continue to invest as long-term contributors to their societies and their financial markets.

It sure feels like Asia-Pacific and Brazil are going to grow at twice the rate, at least, of the US economy.

And it kind of feels at least at this point that, at least in the next few years, that the US economy will probably outperform the European economy by a bit.

I love our business model and the opportunities around the world.

There's a few places that -- a few locations around the world where we don't have all our businesses on the ground yet.

And our distribution channels I think could be more effective over time as well, working together and just having better relationships with major retailers and institutional players in some of these other countries.

I have been pleasantly surprised over the last two years at how quickly the US financial institutions have returned to health, wrote down assets on their balance sheets, built up that capital very rapidly.

We are seeing some signs of that in Europe as well.

I certainly feel more optimistic going into 2011 than I did in 2010.

I do worry about sovereign risk issues in Europe, and I do worry about state and local governments here in the US, and I do worry about deficits.

But slowly, slowly, slowly and steadily the economy is improving around the world, which I think is great.

Perfect.

My final question.

As you look at your diverse platform, what footprint or competency would you -- did you look on with envy that it probably is not a part of Bank of New York today but you would like to have as a part of that product suite in the future?

We have talked about that a lot, John.

We at BNY Mellon, we love our platform.

It is basically two businesses, Asset Management and securities servicing.

There's lots of synergies between them.

There's lots of growth opportunities around the world.

It really does play to the long-term secular trends of a lot more financial assets around the planet and greater globalization.

As the economies continue to interlink with each other this is a great play.

And I can't think easily of a platform of our scale that can outperform us over time.

Thank you, guys.

Well, I think that is all the time we have for today.

I want to thank you all for joining the call and of course if you have any questions please make sure you get back to Andy and the IR team.

And all the best for 2011.

Thank you.

Thank you.

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

Andy Clark at 212-635-1803.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.