紐約梅隆銀行 (BK) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2011 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 material.

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, July 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 Quarterly Earnings Review document available on our website, which provides a quarterly review of the total Company and individual businesses.

We will be using the Quarterly Earnings Review to discuss our results.

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

Bob?

Thanks, Andy, and good morning, everyone.

In Q2 earnings per share were $0.59 or $735 million; that was up 18% versus the first quarter and 9% versus prior year.

First on the revenue front.

Both fees and net interest income increased year-over-year as well as sequentially.

And revenue was up 15% year-over-year, including acquisitions.

So excluding acquisitions, which is the way I look at it, revenue growth was about 7% year-over-year.

This trend is, frankly, encouraging because if you look back, we had 5% growth Q1 versus Q1, and 3% growth in 2010 versus 2009.

Fees were up about 18%, or about 8% including acquisitions, as we benefited nicely from new business trends and improved market values.

Net interest income was actually up from Q1 and last year, driven by much higher client deposits, reflecting the appeal of a strong balance sheet.

And speaking of the strong balance sheet, we still had a gain, had a zero provision for credit losses during the quarter.

In terms of expenses, they are too high.

We are up 21% year-over-year, or 12% with no acquisitions.

If you kind of peel that back a little bit, about 2% or 3% of that growth came from increased regulatory compliance and litigation costs.

These, frankly, are the unpleasant realities of the post-crisis environment.

So net of these factors, expense growth was in line with our fee revenue growth.

However, the bottom line is we are not getting positive operating leverage year-over-year.

We need to, and we will.

We plan to hold an investor conference this fall, likely October or November.

We will provide you with lots of details about our expense reductions initiatives as well as some thoughts on revenue growth opportunities as well.

Investor Relations will get back to you soon with a date.

A few thoughts on our two major businesses, Investment Management and Investment Services.

In Investment Management, the results are strong and there are no acquisitions affecting the numbers.

We had 11% revenue growth year-over-year, 8% expense growth; and this generated 300 basis points of positive operating leverage and a 20% growth in pretax earnings.

In terms of metrics underneath it, we had AUM growth of 22% year-over-year, which took us to a new high of $1.3 trillion.

We had our seventh consecutive quarter of positive long-term asset inflows, or $32 billion, also a new record.

I would also like to note that in Wealth Management we opened an office in Chicago and are currently planning to expand in DC and Dallas.

In Investment Services, we had 16% growth in revenue year-over-year, as Asset Servicing benefited from acquisitions, new business, and improved market values.

Assets under custody were up 21% year-over-year to $26.3 trillion, which is a new record for us.

Issuer Services had a very nice performance through the depositary receipts business.

Pershing was up 21% year-over-year, helped by some very large new business wins.

It was also good to see sec lending revenue was up 73% year-over-year.

So within securities lending we had nine new clients, and another 26 existing clients either expanded their mandates with us or they expanded their collateral guidelines which, of course, leads to increased activity.

In terms of our capital account, we generated more than $800 million worth of new Tier 1 common equity before dividends and share repurchases.

As you know, our dividend was raised from $0.09 to $0.13 in the quarter.

We also bought back 10 million shares almost, and we generated an additional 45 basis points of Basel III capital.

We don't know what our final SIFI buffer will be for us, but we hope to know in coming months.

But given our high-quality balance sheet and rapid capital generation we feel very comfortable that we can continue to repurchase shares and comply with any regulatory capital requirements.

So beyond that, there are two main issues that currently concern us.

First is Washington's inability to resolve the nation's debt and deficit issues.

The debt ceiling must be raised, and it is really just a sideshow to the real issue.

We must have a real plan to eliminate the deficit -- not reduce it, eliminate it.

And we need to couple it with a pro-growth agenda to get people back to work over time.

We're also keeping a close eye on the situation in Europe and being very cautious.

Our exposure is in three areas -- balance sheet, money market bonds, and securities lending collateral funds.

The good news is our primary exposure on balance sheet is deposits with banks.

They are only to the largest and healthiest banks and short-term in tenor.

In terms of money market funds and securities lending funds, we have greatly increased liquidity; and our exposure is also limited to the largest and healthiest banks.

It is hard to speculate about what are the ultimate ripple effects should the situation deteriorate further, but we feel good about how we are positioned in this environment.

So to summarize, we continue to consistently grow revenue.

Expenses are running higher than we'd like and we will manage them lower.

Our balance sheet is of the highest quality.

We generate a lot of capital every quarter, and we expect to continue to return some of that to our shareholders via share repurchases.

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

Todd?

Thanks, Bob.

It was a solid quarter overall, with good fee growth and a nice pickup in net interest revenue.

Earnings for the quarter of $0.59 were up 9% from a year ago.

This includes a total of $0.04 per share, similar to last quarter, of litigation and M&I expenses.

It also reflects the benefit of approximately $0.06 from loan and securities gains.

So the way we look at our core earnings, it nets to about $0.57 for the quarter.

As I take you through the numbers, my comments well follow the Quarterly Earnings Review beginning on page 2.

Some highlights on a year-over-year basis.

Total revenue was $3.9 billion, up 15%.

Our core fees are growing nicely.

Investment Services fees were up 27%; and as Bob mentioned, that is 9% excluding acquisitions, reflecting net new business, higher depositary receipts, and higher securities lending revenue.

That is partially offset by higher money market fee waivers this quarter as well.

Investment management fees were up 14% driven by higher market values and net new business.

Net interest revenue was up 1%, largely reflecting growth in client deposits.

Noninterest expense increased 21%; that is 12% excluding acquisitions.

That is reflecting the higher litigation and legal expenses.

This is the quarter for our annual merit, as well as higher volume-related and business development expenses.

Turning to page 4, where we will call out some business metrics that will help you understand our underlying performance, you can see that AUM and AUC reached record levels, reflecting new business and higher market values.

AUM was up 22% year-over-year to a record level of $1.3 trillion.

Second-quarter long-term inflows of $32 billion were also a new record.

Long-term inflows benefited from strength in fixed income, especially our liability-driven investment products, as well as equity indexed products.

Short-term outflows were $1 billion.

Assets under custody was up 21% year-over-year to a record level of $26.3 trillion, benefiting from the higher -- from the acquisitions, new business, and higher market values.

The other Investment Services metrics continue to show positive trends with one exception, and that is corporate trust, where the trend is relatively flat given the continued softness in the structured debt markets.

DR programs and net issuances increased.

Most of the major drivers of our clearing business improved.

And the broker-dealer collateral management book continues to grow as we gain market share, develop new products, and benefit from the need for secure exposures globally.

Turning to page 6 of the earnings review which shows fee growth.

Asset servicing fees were up 47% year-over-year as we continue to benefit from the acquisitions made last year.

Ex-acquisitions, asset servicing fees were up 14%.

We also benefited from higher market values, net new business, and higher securities lending revenue due to higher loan balances and spreads, as Bob had mentioned.

Asset servicing fees were up 6% quarter-over-quarter, reflecting seasonally higher securities lending revenue and net new business.

Our 2010 acquisitions of GIS and BHF are both performing as planned, with solid revenue growth.

During the quarter we won an incremental $196 billion in new asset servicing business for a total of $1.5 trillion over the past 12 months, of which $560 billion is yet to be converted.

Issuer services fees were up 3% year-over-year and 4% sequentially.

That is driven by higher DR revenue from higher corporate actions and service fees, and it's partially offset by lower shareowner services and corporate trust revenue.

Clearing fees were up 19% year-over-year due to growth in client assets.

We set a record during the quarter of exceeding $1 trillion in client assets for the first time, and we also benefited from other new business.

That reflects the positive impact of the significant new clearing businesses we were converting over the last couple quarters and the impact of the GIS acquisition.

Sequentially the growth in assets was offset by lower transaction volumes and higher money market fee waivers.

Investment management had another strong quarter.

Higher market values; net new business was partially offset once again by higher money market fee waivers.

FX and other trading was up slightly both year-over-year and sequentially.

FX revenue totaled $184 million, a decrease of 25% year-over-year, reflecting lower volatility partially offset by higher volumes.

FX revenue was up 6% sequentially, reflecting higher volatility.

Other trading revenue was $38 million versus $25 million in the first quarter.

That was driven by fixed income trading.

Now let me give you some perspective on our FX activity.

It is currently 5% of our total revenue.

Of that 5%, approximately 40% is done through standing instruction while the majority, 60% is negotiated.

Of that 40% done under standing instruction, only 15% is related to US public pension funds; and that is where the recent publicity has centered.

In other words, the recent publicity is related to the FX activity that comprises less than 0.5% of our total revenues.

Investment and other income totaled $145 million, flat from a year ago, and up from $81 million in the first quarter.

The sequential increase largely reflects gains related to loans held for sale, retained from a previously divested banking subsidiary.

During the quarter we took securities gains of $48 million as we saw an opportunity, with the very low dip in interest rates, to reduce the risk of our portfolio by selling longer-dated U.S.

Treasury agency securities, shortening the duration in these very uncertain times.

Turning to page 8 of the Earnings Review, NIR was up $9 million versus the year-ago quarter and up $33 million sequentially.

Both increases were primarily driven by growth in client deposits.

Interest earning assets were up for the quarter and particularly spiked at quarter-end, driven by negative repo rates, market uncertainty, and the substantial level of liquidity that is still in the system.

Revenue was also enhanced by the purchase of high-quality asset-backed securities in the first two quarters.

The net interest margin was 1.41% compared with 1.49% in the prior quarter.

The decrease was primarily driven by an increase in deposits.

Had we not seen that growth in deposits, we estimate that the net interest margin would have increased slightly.

So it would have been probably a little bit above 1.49%, but earnings would have been down probably in the vicinity of about $8 million.

Given the volatility we are seeing in our balances, we are really not currently trying to manage to the net interest margin.

Frankly, earning 20 to 25 basis points on cash in a zero-risk asset is not bad, even if it temporarily hurts the margin.

Turning to page 9 on expenses, noninterest expense increased 21% year-over-year.

That was driven by the impact of the acquisitions as well as litigation and legal expenses.

Excluding the expenses associated with acquisitions, we are up about 12%.

On a quarter-over-quarter basis, expenses grew 4%.

Both increases reflect the fact that we had the second-quarter 2011 merit increase, and that becomes effective the first day of the quarter on April 1, as well as higher volume-related business development expense.

Other expenses were up $15 million primarily due to a gain on a credit support agreement in the first quarter.

On page 10 you can see that we continued to generate significant capital during the quarter.

We generated more than $800 million in new Basel III Tier 1 common, most of that through earnings, a little bit through intangible amortization.

Net Basel Tier 1 common less dividends and buybacks was up $510 million.

Looking at our capital ratio table, you will note that we are now disclosing our pro forma Basel III Tier 1 common ratio, which we estimated was 6.6% at the end of the quarter.

I would like to emphasize that we continue to like our capital position.

Our Tier 1 common Basel III ratio increased 45 basis points in the second quarter, reflecting the capital generation and slightly lower Basel III risk-weighted assets for the quarter.

Looking forward, our earnings net of dividends and buybacks are generating about 20 to 25 basis points of Basel Tier 1 common per quarter.

And the expected quarterly paydown of our sub-investment-grade securities should add an additional 10 basis points.

So you can expect us to generate somewhere in the 30 to 35 basis points a quarter.

On top of that, the anticipated closing of our Shareowner Services transaction is expected to add approximately 20 more basis points to our Basel III ratio when it is closed.

We also like the performance of our sub-investment-grade portfolio.

However, it is important to note that we could sell this portfolio and add approximately 250 additional basis points to the ratio.

It's certainly nice to have this flexibility.

But our capital position is already so strong that we have no intention of doing something uneconomic.

Bottom line, we remain confident in our ability to exceed the Basel III 7% target by year-end, if not earlier.

Given our current capital position and the strength of our balance sheet, we don't anticipate accelerating our timeline to meet the proposed Basel III capital guidelines.

As Bob said, we don't know what our SIFI buffer will be, but we are confident we can comply while continuing to return capital to our shareholders.

On page 11 you can see that our investment securities portfolio continues to improve and is actually performing quite well.

The value of the portfolio has increased over the first quarter, and the pretax net unrealized gain on our securities portfolio increased by $201 million to $770 million.

I might add that paydowns in the sub-investment-grade securities were approximately $330 million in the second quarter.

Looking at our loan portfolio, you will see that -- just as with last quarter -- we had no provision for credit losses in the second quarter, compared with a charge of $20 million in the second quarter of 2010.

NPAs declined from $386 million to $351 million.

And the total allowance for credit losses decreased $19 million, driven by chargeoffs.

The effective tax rate of 26.9% compares to 29.3% last quarter and 30.2% in the year-ago quarter.

The lower tax rate is a little misleading in the second quarter, because it was driven primarily by the impact of the consolidated investment funds.

On a going-forward basis, excluding the impact of investment fund consolidation, we continue to expect the effective operating tax rate to be in the range of 30% to 31%.

Looking ahead, while there is a great deal of uncertainty in the markets given the events playing out in Europe and our own unresolved debt issues here in the US, we are encouraged by the revenue momentum we have achieved these last few quarters.

We had nice fee growth, and it felt like we have turned the corner on NII.

We continue to work on addressing our expense growth and look forward to sharing more specific plans at our Investor Day in late fall.

A few points to factor into your thinking about the coming quarter.

Both NIR and fees continue to be impacted by this persistently low interest rate environment but should benefit from our ongoing investment program.

We would expect to continue to generate NII at the level we did in the second quarter.

Litigation remains a risk.

Third-quarter earnings have traditionally been impacted by seasonality that is associated with lower levels of capital markets-related revenues, particularly securities lending and foreign exchange; so we'd expect to see that.

One thing that is a little bit different in the third quarter is we expect the seasonal spike in dividend payments that normally occurs during the fourth quarter -- we might actually see some of that in the third quarter, so that is going to be a positive.

We expect the quarterly provision to be in the range of zero to $15 million as we have seen in the last few quarters.

And finally, we expect to continue our buyback program.

In summary, we had a solid quarter.

With that I will turn it back to Bob.

Thanks very much, Todd.

Why don't we open it up for questions?

(Operator Instructions) Betsy Graseck, Morgan Stanley.

Hi, good morning.

I just want to hone in a little bit on the capital ratio discussion that you breezed through earlier on page 10, and link it with the securities disclosure that you give on page 11.

Just wanted to make sure I understand how you are thinking about the runoff in the non-investment-grade securities from here.

Is it going to be at the same pace as you have this quarter?

And how do you think about how your common Tier 1 under Basel III changes over the course of the next couple of quarters as the non-investment-grade pays down?

Sure.

Betsy, the securities are running off at about $100 million a quarter -- excuse me, a month.

And there is some accretion, so some of the runoff is reduced by the net impact of the accretion.

But our best estimate for the next few quarters, we should see about a 10 basis point benefit to our Basel III ratio from that securities runoff.

So it is reducing our risk-weighted assets and it is almost a dollar-for-dollar impact on risk-weighted assets.

So every $100 million down is like having another $100 million of capital.

That rate of change or that pace of change is expected to be consistent or accelerating, decelerating?

It will slightly decelerate over time.

Okay.

Have you given what the yield is on those securities.

We have not, Betsy.

Okay.

So you're saying your Basel III ratio you think is going to accrete a little bit faster than your Basel I?

Yes.

Because you don't have the same treatment of those securities, so that is an additional 10 you just get right there.

Sure.

When would you reapply to the regulators for the next round of capital management activity?

We think the way this is developing it is going to be an annual process.

So we will pretty much just go through our typical budgeting season, have things approved by the Board, and submit some kind of a plan with the regulators.

We're pretty sure that is how it is going to work.

Okay, all right.

Thank you.

Alex Blostein, Goldman Sachs.

Hey, good morning, guys.

Just hoping to maybe talk a little bit more about expense management.

I know this may be a little bit premature.

But can you give us a sense of what areas you particularly might be targeting, I guess, in your expense management plans over the next few quarters?

Alex, it's Bob.

We have been working on this for some time, and of course we have a lot of expense management stuff flowing through our income statement right now as we continue to reposition ourselves.

And there's investment costs involved in getting costs out over time.

But the basic categories are moving people to lower-cost locations that aren't in major cities.

Real estate and working down the number of locations, the number of buildings that we have.

Procurements, where we are doing a good job but I wouldn't call us first quartile in our capabilities.

And, frankly, we have too many applications in our Company in terms of systems, and we want to cull those fairly materially over the next few years.

Got it.

So this is over and above from what I guess you guys have been doing already.

Because you have been moving, I guess, some people to lower-cost locations for quite some time, right?

Yes, and that has been pretty successful.

But we are now looking at things that are materially above that run rate.

Got it.

Then just a couple other nuances on the quarter.

Can you give us a sense what the discount accretion was just in dollar terms for the second quarter?

And then maybe a sense of what money market fee waivers were?

Sure.

The discounted ratio was actually down a little bit in the quarter, almost $10 million.

So I think it was about $95 million, $96 million.

The money market fee waivers actually picked up during the quarter, probably worth about $0.01 to our earnings on a sequential basis.

So they have not gone back to the highs we saw last year; but with the very, very low treasury rates we are getting pretty close to that.

Got it, so that was like a $60 million, $65 million number or so?

That's correct.

Got it.

Thanks.

Glenn Schorr, Nomura.

Howard Chen, Credit Suisse.

Hi, good morning.

Bob, thanks for the commentary on peripheral Europe.

I realize it's a fluid situation, but just maybe was hoping to get more details on how you are thinking about some of the potential pluses, like customer inflows and acquisition environment; and how you are weighing that versus some of the minuses, things like increased counterparty risk and a tail event within the money market fund business.

Yes, from a business standpoint, I really like our positioning from both an asset management standpoint as well as our various investment services products standpoint.

I think we have really good opportunities to gain market share in Europe over time, just because of the quality of our products and services that we have.

I am not getting a sense that there is a lot of acquisition opportunities in the near term.

But I would think over two or three years some of the major banks in Europe have to really think about how they are creating value for shareholders in coming years and over the longer term.

And that may or may not -- it is just too early to tell -- result in other opportunities for us like joint ventures or more outsourcings, longer-term partnerships from a middle-office and back-office standpoint, and from the standpoint of providing more asset management products to these firms where perhaps they don't have to manufacture their own products.

There is a pretty long list of opportunities here.

So the real question is how quickly and aggressively will European counterparties and banks generally, financial institutions, want to act to refocus their business models and to free up capital.

So, we will see.

I worry much less than perhaps the market is from a standpoint of the impact on our balance sheet as well as our off-balance-sheet activities.

We have been watching this extraordinarily closely, of course, and we are very cognizant of what happened several years ago in the markets with market instability.

So we have learned from that, and we are being pretty proactive.

Maybe just following up on that, Bob, just honing in on two specific things.

On the positive side, during the crisis you saw a significant amount of balance sheet growth.

Has that -- what is the pace of that, specific to Europe and the events in Europe now?

And on the potential negative side, within Asset Management, could you just think about -- is anything changing with respect to how you are managing the money market fund business and, again, a potential tail event there?

Thanks.

Yes, I would say on the latter we are much, much more liquid than we ever have been in the past.

In fact, enormously liquid, so that provides us with maximum flexibility for our clients as well as from a risk management standpoint.

We have been extraordinarily careful in terms of where our investments are, in terms of the countries, and in terms of the entities.

We only want the biggest, healthiest companies within our funds.

So that has been a real-time activity for us as we continue to stay on top of the developments in the market and -- what was the former question?

I'll take that, Bob.

In terms of the balance sheet growth, it is really hard to attribute it to anything in particular, Howard, because you have got a confluence of events.

You have had repo rates in the US go negative, so rather than having funds holding negative repo, they are leaving money in their DDA accounts.

Zero is better than negative 8.

So we are seeing a little bit of noise from that.

Certainly some of the disruptions in Europe is going to be contributing somewhat to it.

And our balance sheet is probably running -- the deposit base is probably $30 billion higher than we would've expected because of the noise around the world right now, would be our best guess.

There is also an awful lot of excess liquidity in the system, and so we are the beneficiary of that as well.

That is the big difference from a few years ago in that we have all been pretty well trained and hardened to market volatility over the past three years.

Plus we have an enormously liquid financial system around the world.

Very helpful, thanks.

Then separate topic, Todd, on the NIM and net interest revenue outlook.

I appreciate what you are saying on the challenging environment over the near term.

But just thinking longer term, how are you thinking about the longer term leverage to rising rates in the business model, now that things have changed on the NIM and the balance sheet?

You have previously framed that as maybe a $500 million revenue opportunity with very high incremental margins.

Could you just refresh that for us today?

Yes.

I would stick with that, Howard.

I don't think it has changed much.

We might have dipped a couple of quarters ago with the move in -- the fee waivers start to decline a bit.

But with these very, very low treasury rates right now a few waivers have increased.

So the opportunity is probably in the $450 million to $500 million range.

Great.

Thanks and then -- sorry.

Pretax too, Howard.

Right.

Then final one for me.

Again thanks for the detail on the Basel III capital.

Just curious; any updated thoughts on Basel III liquidity and leverage proposals, updates similar to what you have done on capital for things like net stable funding ratio?

Yes, it is still a little bit early.

The net stable funding ratio really isn't -- there is nothing out there to really work with.

The liquidity coverage ratio is one that seems to be gaining some traction in its current form.

Just look at the nature of our balance sheet, Howard; you can just see how well we would expect to do on that ratio.

We are sitting on massive amounts of cash.

Howard, it's Bob again.

I'd also mention that we are getting a strong impression from the regulators that they are not going to be quick to act on the various liquidity components of Basel III; that they want to really study this and understand the systemwide implications of this over time.

That's really helpful.

Thanks for all the updates.

Glenn Schorr, Nomura.

Thanks very much.

Sorry about earlier.

A quick one is -- I think you mentioned it earlier; I just didn't write it down quick enough, the won-but-not-yet-converted pipeline in investment servicing.

It was -- I think about $560 billion, Tim?

$560 billion, Todd; that's right.

You have had a steady flow of new business through thick and thin in these tough markets.

Are you seeing any signs of clients looking to outsource more, given the market pressures and what that can do for them on the expense side?

Yes, Tim Keaney here.

Yes, the pipeline is almost double what it was a year ago, and this has been a continuing trend.

I think we talked about this last quarter.

About 40% of our new business wins year-to-date and, as it turns out, about 40% of our pipeline is outsourcing.

Certainly what we continue to see is, as banks and insurance companies and fund managers remain profit challenged, they are turning to outsourcing non-core activities.

We certainly feel that that plays to one of our strengths.

Maybe Brian Shea could answer that from a Pershing perspective.

Yes, I would say we are seeing similar trends on the clearing side as well and an increase in the level of interest by self-clearing firms to variablize their cost structure and free up regulatory and investment capital.

So our pipeline is also solidly up year-over-year on the traditional clearing side.

We are also seeing a doubling in the pipeline of revenue associated with the cross-selling between Pershing-related activity and the PNC GIS legacy businesses, specifically Albridge Solutions and the managed investments side.

So a good pickup in pipeline activity there as well.

While we're on new business trends, Curtis, why don't you just give us your views on the quarter and where you see opportunities?

Yes, we had a good quarter again on the net new business front.

Our wins not yet funded have also remained pretty strong.

In the quarter, the bulk of our net new business did come in fixed income, both active and LDI strategies.

On the equity side, net new business did -- Todd mentioned -- was more on the index side.

I would say our wins not yet funded would follow that trend.

Active opportunities where we are competing and we have a reasonably strong belief that we are going to be in the hunt, the business mix is a little broader, with more clients looking to put money to work in active equity strategies.

But I would tell you that our real strength has been on the fixed income side in the second quarter and looking into the third quarter at the moment.

As an aggregate comment would you agree -- it looks like all the related fees are growing enough in line with the assets; so pricing is reasonably stable across all the businesses.

Is that fair?

Yes, I think the short answer is yes, Glenn.

There hasn't been any big change, I would say.

Again as we talked about, as we reprice the current clients as contracts come up and as we price new business, we take very, very conservative views that clearly incorporate the current economic environment.

And we are certainly driving clients to higher fees as a percentage of total revenues.

Great.

Then my last question is on -- BofA had a proposed settlement with its investor base where you guys act as trustee.

I am just curious to get your thoughts on what that readthrough is for you as well as trustee.

In other words, at first when the private-label putback issue came up there were some people asking lots of questions about the role of the trustee and where they fit in.

It looks to me like the settlement backs up your previous comments, but I wanted to see how you feel as your role of trustee and what you thought happens if it doesn't get approved.

Yes, we think that is exactly right, Glenn.

I think it is consistent with what we have said in the past.

We did participate in the negotiations in our role as trustee; and we believe the proposed settlement is reasonable and ultimately in the best interest of the trust.

It imposes no financial obligations on us, nor are we going to receive any part of the $8.5 billion settlement in our capacity as trustee.

We continue to be fully indemnified as trustee for any losses, liability, or expenses associated with this.

So we think it makes a lot of sense, and we think it is reasonable, and we think the courts should approve it.

Great.

Thanks very much for the answers.

Ken Usdin, Jefferies.

Thanks, good morning.

A couple little clarification things if I might real quick.

Todd, you gave it to us in the per-share terms at the very beginning, but can you just quantify for us the magnitude of the loan sale gains and also the incremental litigation reserves that you set up?

Between the loan sales and the revaluation and the securities sales, it is about $100 million.

Okay.

Then in terms of litigation and M&I, you can see our M&I expenses directly.

But we don't really care to show litigation on a regular basis in that kind of detail and give too much advantage to some of our plaintiffs here.

Okay.

On the litigation point though, just generally speaking then, I believe this is the first reserve that you have explicitly set up, aside from the commentary in the conference call.

Can you just walk us through your process and your thinking and how this could evolve over time?

Ken, can you repeat that?

I didn't hear exactly what that (multiple speakers).

Yes.

Just a broader comment on the litigation reserves.

Not the ongoing legal expense but just on the specifics of the legal reserve.

Just how do you get to the point where you start to set aside the specific reserves?

And I guess just a general thought on how this litigation is progressing and evolving.

Yes, we follow very much the FASB guidelines.

It's based on estimable and probable.

So when we feel something we can estimate what a loss is going to be and it is probable, we will reserve for it.

Okay.

My second question relates just to -- Bob, just coming back to your points on expenses, the laundry list of things that you gave seem to be very logical progression of cost saves, but things that wouldn't necessarily be out of line with normal operations of the business.

So just wondering, like when you are thinking about going forward and starting to really attack the cost base, is it because there is really some low-hanging fruit?

Or is it anything that you see in terms of the long-term profitability and revenue trends of the business that have just put the Company on higher alert that there needs to be a realignment there?

No, I think the fundamentals are pretty straightforward, Ken, and that is operating leverage.

I want to get some -- I want to get revenue growth higher than expense growth.

So I am encouraged on the revenue side.

The expense run rate remains pretty high.

And as we indicated back in January in the fourth-quarter numbers, we were expecting quite a few headwinds this year in terms of higher pension costs, higher healthcare costs.

People are still, of course, getting raises -- and they should be.

We have higher depreciation costs.

We have this litigation environment.

We have higher compliance and regulatory costs.

There is a lot of headwinds in our industry right now.

But we have got to manage through it.

So what I would say is that we are going through all of our programs, but more aggressively than we have in the past, to create more favorable trends and to moderate these growth in expenses.

That even goes to the level of looking at individual client profitability and making sure that we are doing the right thing not just from a client standpoint but also from a shareholder standpoint.

Ken, if I can add a couple of points here.

There is some low-lying fruit.

I mean if you think about it, we have gone through a number of acquisitions over the past three or four years; so when we go back and reflect on our technology infrastructure, there is quite a bit we can attack there.

We have got too many desktop configurations, just the nature of our business model, and we are going to go after that.

We also had some applications dating back to the Mellon-Bank of New York merger, which we think we can sunset.

So there are -- and we have also for the first time, we're really looking at combining some of our common operations, not just within Asset Servicing, but even across some of our different businesses.

I think that is an advantage that we have that we can leverage.

So these are the types of things in addition to the normal course.

We do see some fruit here that we can go after.

The other thing is we have very good process around this.

We have been working on this for some time.

We are going to treat it just like a merger integration.

We will have -- it will be very metrics-driven, very specific initiative-driven, with definitive numbers and people signing on the bottom line for what they can get and when.

Great.

Okay; thanks a lot for all that color.

Appreciate it.

Mike Mayo, CLSA.

Good morning.

Can you just summarize this $30 billion increase in deposits?

Is this similar to what we saw during the crisis in the US a couple years ago, and you're getting a lot of deposits in Europe?

Or what is the geography of this deposit increase?

Yes, I would say it is quite a bit different in its nature.

I would say there is a fair amount of it is just this negative interest rate, especially the spike toward the quarter-end, Mike.

This negative interest rate just created an arbitrage with -- better leave it in cash with your custodian than to put it out on repo at a negative rate.

So that is a significant component of it.

I am sure there is some of it related to dislocation.

But it has got a very different feel to it than it did after the Lehman crisis, where it was just an immediate spike and hedge funds and everybody just dumped their money on us.

It is not quite like this.

This has been a slower build and a build related to not just the risk off trade but some market disruptions in the treasury market.

So how much of that is from outside the US, of the $30 billion?

I don't have that off the top of my head.

It feels like it's -- I would really be speculating.

We will get back to you on that.

Okay.

Then separately -- I know you have touched on this.

What is the dollar amount of your money market assets under management that are invested in European bank debt?

Our prime assets, we have roughly $34 billion in our 2a-7 prime funds that are in the euro zone core.

We had a view that about less than 20% of all of the eligible European banks actually make it through our credit screen.

So that represents roughly 28% of our total prime 2a-7 assets in our main money market business.

We have done a pretty good job of selecting the right names.

And, quite frankly, the stress tests that came out last week confirm exactly that.

I guess you have over $300 billion of money market assets.

Yes, we have -- again, we have money market assets that would include treasury funds and other offshore funds.

I am giving you the US prime 2a-7 assets.

I certainly can work with you if you want to talk off-line; we can certainly walk through our statistics more broadly.

But I just -- there are big articles just a few weeks ago.

The Wall Street Journal said Money Market Mayhem and that this is a big risk.

I just want you to give us some reassurance that it is not as big a risk as highlighted in this lead editorial in the Wall Street Journal, June 27.

So if you look at the overall complex of money market assets that you have, what would be the total amount that would be invested in European bank debt?

I guess the reassurance part -- maybe you have a lot invested in that but you don't have support agreements where you would have to make up any shortfall.

Well, the thing to remember, Mike, is these are extremely senior instruments.

The tenor is extremely short.

And these assets are in the biggest, healthiest names in Europe.

These aren't to countries or to markets that you'd view or names that you'd view as being unstable.

And we have been very proactive in being extremely liquid in all of these funds as well to provide us with maximum flexibility.

Yes, I would say -- just so you know, in the euro zone there are 124 Tier 1 2a-7 eligible banks.

Again, less than 20% of those make it through our credit screen.

So where we do have exposures in that segment, they are again, as Bob said, to the largest, most significant institutions in those countries.

All right, thank you.

Yes, and we have no exposure and haven't had exposure to Greece and Portugal directly, and have de minimis exposure to the rest of the more troubled sovereigns.

So we feel like we are well positioned here.

Just to follow-up on that last point, so to the countries that are defined as PIIGS, how much investments do you have in banks in those countries through your money market funds for the overall complex?

Well, if you don't have that now it would be nice to have.

Yes, we have none in our prime funds and de minimis in our sec lending activities, de minimis being less than 1%.

And where we have exposure in those countries, they are actually to -- we have some Irish mortgage-backed securities, but again less than 1% of sec lending exposures.

All right, thank you.

John Stilmar, SunTrust.

Good morning, gentlemen.

Most of my questions have already been answered, but just a real technical one.

Investment in other income, Todd, moved up a little bit.

I was wondering if you could drill down and maybe reveal a little bit more of the drivers of what is going on underneath that segment or line item.

I think I missed that in your commentary.

Yes, there are a couple of items that are in there.

A couple of our joint ventures are a minority ownership interest, for example, are in there and they are doing pretty well.

We have an interest in Wing Hang Bank, for example.

We have an interest in ConvergEx, which continues to do pretty well.

So that has been a positive.

It did run high in the -- are you specifically referring to Investment Management other income?

No, just to other fee and revenue, that consolidated (multiple speakers)

Okay, that is what I was referring to.

I wanted to make sure I had that clear.

So we have a number of items.

We would expect that, John, to typically run in the $80 million range.

So it was a little high because of the gains that we had taken on those loans that we talked about during the quarter.

Okay.

You had mentioned the ConvergEx, and there is some commentary obviously in the headlines of ConvergEx being taken out.

Is there any residual positive impact that that can have at least in the near term?

How should we think about that as we start thinking about our earnings estimates going forward?

Yes, we have no comment on any -- we have heard rumors of a transaction.

I really can't comment on that.

But what ConvergEx has done is filed for an S-1 for an initial public offering, where we would monetize some of our interest in the company.

And that would certainly be a positive for our capital position.

Okay, perfect.

Thank you, gentlemen.

Brian Bedell, ISI Group.

Hi, good morning, folks.

Just to go back on the expenses, Todd, are you talking about the -- obviously the sunsetting of systems and the consolidation across businesses.

Has anything changed from what you said last quarter in terms of a three- to four-year overall timeline of integrating those systems?

Or has that advanced?

Yes, we are honing in on this right now, Brian.

We are honing in on it right now.

It's going to actually be a subject of our Investor Conference in the fall.

We are going to walk you through exactly what the timelines and what our expectations are.

As Bob pointed out, we are going to have commitments around the table here about how we are going to achieve the kind of positive operating leverage that we are looking for.

So we will give you a lot more color; but it is around the same general themes, this concept of reengineering and combining common operations, improving our technology infrastructure.

That is some of the lower-lying fruit.

And looking at our application portfolio and seeing if we can reduce it.

Right, okay.

So stay tuned for that.

Then maybe on the regulatory costs, not the litigation or legal reserves, but the actual costs that you would attribute to the regulatory environment.

Can you frame out what that is right now?

And then any kind of expectation of how those might abate over the next several quarters, or is it too early to --?

Yes, we have pored through our numbers.

It is pretty difficult to tell what is ongoing and what is not.

But obviously complying with Basel II, Basel II.5, and Basel III, there is quite a bit of systems infrastructure associated with that.

Over the past couple of years as you would expect our FDIC charges have gone up quite dramatically.

And then we have invested; one of our fastest growing shared services is our risk area as we have continued to invest in that.

And legal costs continue to rise.

I don't see the growth rate continuing at the level that we have seen over the past couple of years.

FDIC is still high, but it's at least flattened out, for example.

I would say that is consistent with some of the other things.

So I think the step-up has occurred.

And some of it will -- eventually we will get a dividend here.

But that is probably a year or so away.

Okay.

Clearly we have added hundreds of millions of dollars to our cost base over the last two or three years.

Yes, that would be nice to be able to adjust that down.

But it does sound like you can talk about it maybe a little bit more on Analyst Day as well.

Yes, we will.

We will, Brian.

Okay.

Then just maybe conceptually on this whole prospect of the US debt potentially being downgraded.

Obviously you guys have a major stake in the country's infrastructure.

What -- maybe if you can talk a little bit about what you are thinking for your collateral management businesses and the corporate trust business, and maybe even the money market business if US debt is downgraded.

And maybe contrast the long-term debt being downgraded versus any risk of the short-term debt being downgraded, which doesn't appear to be an issue right now.

But if you could just talk about that through some of your main business.

That's a lot of questions, Brian.

I know, I know.

Maybe just -- maybe focusing on the collateral management (multiple speakers) obviously --

And as Todd is thinking (inaudible), I just want to reinforce that we have got to raise the debt ceiling and we have got to balance the books.

Not over 10 years; over like three or four years.

We have got to get some growth back in this country again.

So this is important to the whole nation and the global economy, and we should just stop fooling around with it.

So we have worked to make sure that our -- in fact our team has been working on this all the way back as early as April of this year.

We have been working to make sure that our systems are flexible and we will be able to manage whatever happens here.

We are obviously coordinating with Treasury and the regulators and also within the industry.

I mean there is still some uncertainty.

We don't know how treasuries might trade.

We don't know whether the pricing services, how they are going to put value on them.

We don't know whether counterparties are going to want treasuries as collateral.

I would expect that they would.

But we are going through our contingency planning.

We are not doing this unilaterally.

We are working with industry groups and obviously we are talking with the Treasury, and we will do as directed.

But we do have the flexibility in our systems to accommodate what we think could happen.

Yes.

It doesn't require any systems changes and we are very ready for any eventuality, but I don't expect they will be necessary.

Let's hope for that.

Then just a couple other housekeeping ones.

The shareowner services business, when do you expect that to close?

Right now we would expect in the fourth quarter.

4Q?

Then the seasonal spike in dividend payments in the third quarter instead of the fourth quarter, that is in the DR business?

Yes, it is.

There is a little bit of uncertainty.

I wanted to point that out.

I think we might get a little bit of that in the third quarter, so the third quarter might look a little better than we would have otherwise expected.

Okay, great.

Thank you very much.

Jeff Hopson, Stifel Nicolaus.

Okay, thanks a lot.

You talked a little bit about pricing being stable.

You also talked about looking at individual client profitability.

So I guess the question is, are you having renegotiations, significant renegotiation conversations, with clients?

Any kind of net result of that?

Then on the expense, in terms of some of the systems work, are we talking about evolutionary or potentially revolutionary changes here?

Because you are talking about expense cuts in one respect.

But also given that you are having to continue to invest significantly to keep up with -- keep your systems up to date and moving forward, how can you reconcile those two thoughts?

On the former, do you went to talk to that for a second, Tim, and just how you think about client profitability?

Yes, Jeff, it's Tim Keaney here.

We talked a little bit in the past where if you look at the duration of contracts for public funds it is three or four years; for corporate-type pension fund clients it is probably five years or so.

So our clients come up for review regularly.

They did last quarter.

They did this quarter.

We are having very, very open discussions with clients around the new economic reality as it relates to capital markets revenues.

We also have very open discussions with clients about how our costs are escalating around things like helping clients comply with a myriad of increased regulations around the world.

And we have been very, very successful retaining clients and very successful at repackaging our relationships with clients so that our fee revenue which we can count on is the lion's share of our total revenue base.

It is just the new attitude we have taken in dealing with clients in terms of renegotiations and bidding on new business.

One of the things that -- just on the systems side what I would say is that we have been -- historically we have been pretty decentralized in how we run our operations.

As a result we have a lot of overlapping applications that do very similar things, that are almost identical but aren't quite.

So we have been bucketing those into various categories, everything from trade entry to reconciliations to you name it.

We are going to get to common platforms by having more centralized utilities and be able to reap the benefits of that.

Ultimately what it will mean is that we can reduce our maintenance and turning on the lights run rate cost, and we can invest a bit of that into new systems activity and product enhancements over time as well.

Okay.

On the former issue, would you say there has been any change in the client retention rate?

Jeff, it's Tim.

No, our new business win rates and our retention rates are very, very solid.

They have been since we have been tracking it.

One of the things we do look at is giveaway and takeaway ratios.

We continue to win about 3 times more than we lose when we do lose a client.

So we continue to be a big net winner.

Okay, great.

Thank you.

Wendy, we have time for one more question.

Gerard Cassidy, RBC Capital Markets.

Thank you.

Good morning, guys.

Can you give us some thoughts on Basel II?

I think, if I recall, you folks were part of the group that is testing Basel II.

Is that going to become a reality, or are they going to leap right to Basel III, from your understanding?

I will take that one, Gerard.

We don't know, but it certainly feels like we will never see Basel -- I mean, Basel II is kind of the backbone for Basel III.

So everything that you do in Basel II you kind of need for Basel III.

But my expectation is we will go straight to Basel III; but that is just speculation on my part.

What we need is a level playing field with the rest of the world here.

We never implemented Basel II.

We're all focused on Basel III now.

Let's just get it done.

And my hope would be that with the FSOC oversight group in Washington and given the fact that we have way too many regulators, hopefully we can get consensus through the FSOC group.

Then a couple balance sheet questions.

You guys mentioned about the great growth in the non-interest-bearing deposits that you had in the quarter because of some disruptions.

If the markets become more normal would you expect to see that line item come down in the third or fourth quarter?

We certainly hope so.

If you noticed, a lot of that was just left at the central banks.

So we would like to see some normalization.

There would be a little giveaway of NII if we do this.

So we don't really mind having it, Gerard.

It is not a -- it is a terrible ROA; it is not a bad ROE since there is really no risk associated with it.

But we, like everybody else, would like to go back to a little more normalized environment.

Sure.

Then just the last question on the liability side of the balance sheet, could you share with us the borrowings from the FRB related to the asset-backed conduit?

It looks like it was $1.3 billion, it looks like, versus nothing in the prior quarter.

I don't know, Gerard, what you are actually referring to.

I don't think we borrowed anything from the FRB in asset-backed; but we will follow up with you on that one.

Okay, thank you.

Okay.

Well, thank you, everyone.

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.