紐約梅隆銀行 (BK) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the third 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 Gerald Hassell, our Chairman, President and CEO; Todd Gibbons, our CFO; as well as several members of our executive management team.

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

Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors.

These factors include those identified in the cautionary statement on page 13 of the press release.

And those identified in our documents filed with the SEC that are available on our website, BNYMellon.com.

Forward-looking statements in this call speak only as of today, October 19, 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'll be using the quarterly earnings review document to discuss our results.

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

Gerald?

Thanks, Andy, and good morning, everyone.

Thanks so much for joining us today on what I know is a very busy day for all of you.

I'd like to make a few comments about the quarter, comment on the FX legal issues that we're facing, and then turn it over to Todd for a deeper dive into the numbers.

The headline for our quarter is solid fee and net interest revenue growth, and 200 basis points of positive operating leverage.

Sequentially, we certainly faced difficult market conditions which have resulted in lower revenues.

But we were able to manage expenses down despite higher litigation, legal, and severance costs.

The result was earnings per share for the quarter of $0.53 or $651 million.

That's an improvement of 4% year-over-year.

Revenue was up 8% year-over-year.

The fact that we achieved the growth notwithstanding the macro environment, low interest rates, the continued aversion to riskier assets, and the lack of structured debt issuance reflects the strength of our business model.

Fees were up 9% as we benefited from new business, net long-term asset flows, and increased foreign exchange revenues.

In addition, DRs had a particularly strong quarter as certain corporate actions for some clients moved up to the third quarter versus the fourth quarter.

Net interest income was up year-over-year and sequentially, driven primarily by higher client deposits.

Our loan loss provision was actually a credit of $22 million.

And we remain very focused on containing expense growth and bringing down our run rate.

It's one of the things we can control in this very challenging environment.

Now, we're undertaking a number of actions to achieve what I call operational excellence.

A term that brings together the concepts of improving efficiency, reducing risk, and delivering the highest quality of service to our clients, and we'll talk more about this at our Investor Day next month.

Now, looking at our two major businesses on a year-over-year basis, investment services fees were up 11% with issuer services benefiting from the seasonal strength in DRs, I mentioned earlier.

We had strong new business activity in our clearing businesses and asset servicing was also up as we grew assets under custody to almost $26 trillion.

Investment management fees were up 5% as we had yet another quarter of positive long-term asset flows.

In terms of capital, we generated $718 million in Basal Tier 1 common equity.

We deployed approximately $620 million of that to a combination of share buybacks and dividends.

Our Tier 1 common ratio came in at 12.5% and we delivered a return on tangible common equity of 22%.

So, to summarize the highlights of the quarter, year-over-year revenue growth was solid.

We generated positive operating leverage and managed expenses down sequentially in the face of legal headwinds.

Our balance sheet remains strong and extremely liquid.

And we continue to generate significant levels of capital and are committed to controlling our expenses in a challenging environment.

Now, before handing it over to Todd, I want to comment on FX litigation.

As you probably saw in our open letter in various publications, we feel very strongly that the lawsuits against us are unwarranted and flat out wrong on the facts in the law.

While we will be pragmatic in our approach to resolving these matters, we feel compelled to defend our reputation.

We truly believe we have provided a valuable service at a fair price.

And therefore, will not be coerced into paying huge sums for no wrong doing.

We are very engaged with our clients to help them understand the issues.

Some of our clients are, of course, frustrated that they need to explain what is going on to their superiors and boards.

But we are answering their questions, and allowing them to explain to their constituents how the service provides real value at competitive prices.

The overwhelming majority of our clients and the investment managers who act as their fiduciaries understand the standing instruction service very well.

They like the service and they know it provides them with vastly better pricing than they could get anywhere else for what are essentially retail sized trades.

Now, I just returned from our asset servicing conference where I met with our client advisory board and a large group of clients.

They are very appreciative of our outreach to them and the value our standing instruction program provides.

We continue to work with them to innovate our products and services to meet their needs, including developing additional options for our foreign exchange execution service.

We are committed to continuing to be a great service provider to them.

Importantly, even in this noisy period, our standing instruction volumes have increased over the past 2 years, which we think is very telling.

Now, although the lawsuits may take some time to resolve, and it is very frustrating for all of us, we are confident that we have the legal high ground and that we will prevail.

So with that, let me turn it over to Todd to get into the numbers.

Thanks, Gerald.

As I take you into the numbers, my comments will follow the quarterly earnings review beginning on page 2.

The highlights on a year-over-year basis, earnings for the quarter of $0.53, up 4%.

We benefited from net new business, the seasonally higher depositary receipts revenue, and also positive operating leverage.

Now, we had to manage through pretty difficult market conditions.

The S&P, for example, was down 14% during the quarter.

And we also saw a period where rates continued to decline.

In face of that we also absorbed higher litigation expenses and legal costs and a charge related to the change in executive management.

Looking into the specifics, total revenue was $3.7 billion, that's up 8%.

Non-US revenue hit a new record for us at 39% of the total revenue.

Our core fees continued to grow nicely.

Investment services fees were up 11%.

Again a lot of that was driven by the depositary receipts revenue, as well as net new business which was partially offset by higher money-market fund waivers, fee waivers.

Investment management fees were up 5%, benefiting from net new business in higher average equity markets, partially offset by higher money-market fee waivers, as well.

Net interest revenue was up 8%, largely reflecting the growth in client deposits as well as growth in the securities portfolio.

Non-interest expense increased 6% -- and that was due to higher litigation expenses -- increased the variable expenses in support of revenue growth, a $22 million charge as a result of change in executive management.

Overall, our increase in revenue, combined with the lower expense growth rate, resulted in 200 basis points of operating leverage.

Turning to page 4, we would call out some metrics that will help explain the underlying performance.

For example, you can see that assets under management and assets under custody both grew year-over-year, primarily reflecting new business.

Assets under management were up 5% year-over-year to $1.2 trillion, with long-term in flows of $4 billion in the third quarter and $76 billion over the last 12 months.

Long-term inflows have benefited from strength in fixed income and equity indexed products.

Short-term outflows for the quarter were $15 billion and that's consistent with what we've seen in the industry trends.

Assets under custody was up 6% year-over-year to $25.9 trillion.

And that's driven primarily from net new business.

Assets under custody decreased only 2% sequentially despite the much steeper decline in equity market values.

And that's because we benefit from net new business as well as an increase in some of the fixed income values.

Most of our other investment securities metrics continue to show positive trends.

The broker dealer collateral management book continues to grow as collateralized lending is growing globally.

The major drivers of our clearing business improved substantially year-over-year as we brought on significant new business.

And total debt service and deals administered within corporate trust showed a bit of sequential growth for the first time in a while.

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

Asset servicing fees were up 7% year-over-year, reflecting the positive impact of net new business.

Asset servicing fees were down 5% quarter-over-quarter, reflecting seasonally lower securities lending revenue as well as the impact of lower equity values.

Over the past 12 months, we've won an incremental $1.1 trillion in new asset servicing AUC.

Issuer services fees were up 21% year-over-year and sequentially due to the seasonal spike in corporate actions in our DR business that normally occurs during the fourth quarter.

Both increases also reflect net new business which was partially offset by lower revenue in our shareowner services and corporate trust businesses.

Clearing fees were up 18% year-over-year due to net new business, growth in mutual fund assets, and a 29% increase in daily average revenue trades.

That was partially offset by higher money-market fee waivers.

Clearing fees were up 2% sequentially, reflecting higher cash management balances and an increase in [darts] which were partially offset by higher money-market fee waivers also.

Investment management fees, as I mentioned earlier, were up 5% year-over-year.

Sequentially investment management fees were down 6%, primarily reflecting lower period end and average equity market values, and higher money-market fee waivers, partially offset by net new business.

For the quarter, FX revenue totaled $221 million.

That's roughly 6% of our total revenue.

FX revenue increased 38% year-over-year.

That's reflecting creased volatility and higher year-over-year volumes.

FX revenue was up 20% sequentially, driven by higher volatility.

And there were steady volumes on a sequential quarter basis.

Other trading revenue was a loss of $27 million.

And this compares to a loss of $14 million in the year-ago quarter.

And revenue of $38 million in the second quarter of the year.

The sequential decrease was primarily driven by a $40 million net impact of wider credit spreads on the credit valuation adjustment that we recorded in the third quarter of 2011.

Regarding our FX activity, I would note that standing instruction revenue continues to make up roughly 40% of the total FX revenue.

I think it is also worth noting that standing instruction volumes have increased over the past 2 years, demonstrating the comments that Gerald was making at the value our clients see in this FX trading option.

Investment and other income totaled $89 million which was down by $8 million from a year ago, and down by $56 million from the prior quarter.

The sequential decrease largely reflects lower gains related to loans held for sale retained from a previously divested bank subsidiary.

Both decreases also reflect mark-to-market losses on our seed capital.

Many of our businesses continue to be impacted by increased fee waivers, due to lower rates and shortened maturities in the money-market funds.

For the quarter, money-market fee waivers -- and this is the impact I'm about to discuss is the impact to revenues -- increased about $50 million year-over-year and $24 million sequentially.

Market conditions have driven waivers to the levels that we experienced as the highest levels we experienced back at the end of 2009.

And that's about $0.05 a quarter for us.

Turning to page 8 of the earnings review, NIR was up $57 million versus the year ago quarter and it was up $44 million sequentially.

Both increases were primarily driven by the significant growth in client deposits which we invested in short-term low-yielding assets.

As well as an increase in the investment securities portfolio.

Average non-interest bearing client deposits increased $30 billion or 71% versus the prior quarter, and are more than double what they were in the year-ago quarter.

The net interest margin was 1.3%.

That's compared with 1.41% in the prior quarter.

The decrease was driven primarily by the increase in client deposits I just mentioned, but it was partially offset by the increase in the investment securities portfolio.

If the balance sheet had been stable, we estimate the margin probably would have been up slightly.

Turning to page 9, total non-interest expense increased 6% year-over-year and declined 2% sequentially.

The third quarter included $80 million of litigation expense and a $22 million charge as a result of a change in executive management, as well as lower M&I costs.

The year-over-year increase also reflects higher incentives and variable expenses in support of revenue growth, as well as higher legal costs, and they were offset somewhat by a state investment tax credit.

The sequential decline in expenses was driven by compensation, business development, and the state investment tax credit.

So, we are pleased our expense numbers in the quarter declined 2% despite some of the higher litigation and severance costs we've been talking about.

Page 10 details our Tier 1 common capital generation and capital ratios.

We generated $718 million in new Basal Tier 1 common.

Most of that was through earnings.

We deployed the majority of that through a combination of dividends and share repurchases.

I'd like to add in the third quarter, our share repurchases totaled $462 million.

I'd characterize that total as much higher than our average, driven by the market conditions in the third quarter.

Our estimated Basal III Tier 1 common equity ratio was 6.6% at quarter end.

That's unchanged from where we were in June.

The combination of the higher buybacks -- for example, we bought back over $460 million, and our buyback rate had been at about $320 million -- as well as the higher risk-weighted assets that was driven by the much larger balance sheet, cost us about 25 basis points.

So, as we've said in the past, we continue to expect in a more typical quarter to grow the ratio by about 20 to 30 basis points.

On page 11, you can see that our investment securities portfolio continues to perform well.

The value of the portfolio is improved over the second quarter.

And the pre-tax net unrealized gain in our securities portfolio increased by $93 million to $863 million.

Paydowns on the sub investment grade securities were approximately $300 million during the quarter.

Looking at our loan portfolio, you'll see the provision for credit losses was a credit of $22 million.

This compares with a similar credit in the third quarter of 2010.

And we had a zero provision in the second quarter.

The credit in the provision this quarter resulted from an improvement in the performance of the loan portfolio and the decline in criticized assets.

Non-performing assets declined from $351 million to $344 million.

And the total allowance for credit losses decreased $37 million as a combination of the credit and the $15 million of net charge-offs.

The effective tax rate was 29.7%, and that's in line with the previous guidance that we had given you.

Looking forward to the fourth quarter, given the accelerated corporate action seasons and DRs, investment services will likely not realize the seasonal benefits that we typically experience during the fourth quarter, and probably see a decline in revenues.

This should be partially offset by performance fees in our asset management business.

We also expected to continue to generate NII at the level we did in the third quarter.

Fee waivers should run at about the level of the third quarter.

The quarterly provision should be in the range of zero to $15 million.

We continue to expect to do buybacks, and that will be based on market conditions.

And the tax rate should be approximately 30%.

Finally, as a reminder I'd like to let you know we will be hosting our Investor Day on November 14.

Three things that will actually be focused on.

The first is the strength of our business model.

The second is opportunities to generate above market revenue growth in these challenging environments.

And finally, some of the key initiatives that we are going to be implementing to drive operational efficiencies.

With that let me turn it back to Gerald.

Thanks, Todd, and I think we can open it up to questions.

(Operator Instructions) Howard Chen from Credit Suisse.

Helpful commentary on the foreign exchange and litigation, Gerald.

I know this remains a process with customers, et cetera.

But was just wondering your thoughts about -- I hear the standing instruction and FX revenues are improved but how are you thinking about just potential turnover amongst fuller asset servicing relationships?

What's the level of concern that you might have some broader attrition over time?

Howard, thanks.

We haven't seen any attrition in the clients certainly over the FX matter.

If anything, as I said in my opening comments, we've seen standing instruction volumes hold up and increase.

There has been a more rapid increase in the negotiated trades.

And I think that's just reflective of the market in general where everyone is negotiating tighter pricing on everything they can do.

But it's not impacting our ability to continue to service our clients and win new business.

We've had a very extensive outreach program to our clients.

You would expect it of us.

It's part of good client service.

We're explaining the service over and over again to them and giving them good talking points for the constituents they have to interface with, their boards, their managers, their trustees, whatever the case may be.

So we think we've given them not only good ammunition in terms of explaining the service but once again, providing a very valuable service at a very fair price for retail trades.

And then switching gears, maybe one for you or Todd.

Just on capital management, given the current environment, and the capital that you're generating that you know, to Todd.

I was just hoping to get your thoughts on capital process from here.

We're hearing different things from some of the big bank management teams this quarter on the capital planning process.

So was just hoping to get your evolved thoughts.

Yes, our capital planning process really hasn't changed, Howard.

We put through an annual budget, we make a plan, we share that with the Directors, we stress test it, and we then share that with the regulators.

We continue to generate capital with about the rates that we estimated that we would.

We feel particularly comfortable.

6.6 might sound a bit light but if you add 250 basis points for sub investment grade securities that we've marked down to fair market value, and they are now actually worth more than where we marked it, and if we actually were to write them down to zero, our capital would actually increase.

So we feel very comfortable with where we are with the generation and our ability to continue to redeploy capital.

And we especially like it with our stock price where it is today.

And would there be any appetite to potentially sell those securities and accelerate share repurchase or do something else with that capital?

Yes, we're certainly not wed to those securities.

As circumstances change, if the risk return relationship on those securities, or if there's any reason that we would want to do something with that capital that's basically parked there, we would.

But at this point we don't feel any need to accelerate to meet a Basel III ratio.

And that really hasn't even been determined what it is yet, when we got such strong ratios under Basel I.

But it's something that we could always consider.

Howard just a quick comment.

It is yielding a good economic return to us right now and it gives us enormous flexibility on the capital ratios going forward.

So it is something we continue to look at.

And then final one for me, Todd, just helpful commentary on the money-market fee waivers.

Just overall on the business, one, could you just give a sense of what the investment team has done with all the peripheral Europe issues that have been out there.

And second, could we just get updated thoughts on just broader money-market fund reform, and just how you see that playing out, whether it be the scenarios like some capital underpinning the business or variable NAV, that would be helpful, thanks.

Okay, why don't I start and then I'll turn it over to Curtis, I think, to get into some of the details.

But obviously, the positions are being managed very carefully.

There is no exposure in any of the books to the peripheral Eurozone.

The exposure is going to where there is exposure to Europe.

It's in the, what I'll call the non-peripheral Eurozone or the other non-Eurozone Europe.

It's become very short-term in nature.

A very significant amount of it is in overnight or overnight equivalents.

And that's having an impact, obviously, on the yield, and further depressing the yield.

But also and therefore further impacting the fee waivers.

I think, Curtis, do you want to add anything on the regulatory reform and the impact to money-market funds going forward?

Other than, obviously, watching very closely how it's evolving, different perspectives on how this should play out.

I think the low yield environment obviously impacts some of those discussions.

But we're obviously watching very closely.

And I would just, to Todd's point about how we manage the portfolio, certainly have good liquidity in our overnight positions.

And away from overnight, have reduced exposures to both the non-Eurozone and Eurozone, just in sync with overall market dynamics.

Betsy Graseck with Morgan Stanley.

2 questions.

One on expenses and one on M&A.

On expense side, could you just explain a little bit how much more room you have to bring down expenses here, given what looks like you had relatively tight management in this quarter.

And part of this is, is the headcount reduction that you announced in the past quarter fully embedded within the third quarter results?

Yes, why don't I take that and then I'll turn it over to Gerald.

Yes, the announcements that we made in the third quarter with the freeze and the intent to, through attrition, primarily reduce the headcount really went into effect late in the quarter, Betsy.

So it had limited, if any, impact on the third quarter itself.

We do continue to benefit from some of our growth centers, and that's where the growth in our headcount has taken place.

We are going to go through this in some detail on November 14 at our Investor Day where we will talk to some very specific initiatives, give you a sense of the timing of those initiatives and how they will be driven through the P&L.

And the impact they should have on our operating margins going forward, which I think is the only way you can really measure those.

So we will give, from a longer term perspective, I think we'll give a lot more color there.

Looking to the fourth quarter, our goal is to try to keep the expenses pretty stable.

So if we can manage to go through a couple of quarters, I think we can demonstrate that -- there could be some noise there but we could demonstrate that I think we can keep them reasonably stable, even showing some of the modest revenue growth that we've been seeing over the past year or so.

And Betsy, let me just add, I view the headcount reduction and the hiring freeze as the foundation for a broad-based program.

And there are a number of initiatives which we'll outline, as Todd said, November 14.

But the headcount and the salaries are just the foundation.

So things like platform consolidations, working on the networks, working on procurement, a whole variety of different things.

And we're going to try to lay it out for you by general category and by business, not just for 2012 but over a 3-year period of time.

And it will be very focused for you to be able to go through.

Okay, that will be helpful because you've been ramping investment spend to get the platform consolidation already, haven't you?

So is there an uptick from that or is that a steady run rate at this stage?

The way I look at it is we've got to afford it within the expense reductions.

So we're going to take some level of the expense reductions and reinvest in the businesses and reinvest in growth.

But we still have to, as Todd said, improve the margins.

You have to see it in the income statement.

And then on strategic opportunities, is there anything that you're looking at or thinking about?

Or does your capital ratio preclude you from being able to be more creative there?

Yes, obviously, the first priority is, given our share price, is share buybacks and dividends.

We want to get the capital ratios up, even though we have the flexibility to get them up to above the 7% relatively quickly if we chose to.

And so acquisitions are a lesser priority.

If the turmoil in Europe springs out an asset that's incredibly cheap and incredibly accretive, we might look at it.

But the first priority is to really return the excess capital to shareholders.

With a $19, $20 share price there's no better investment.

John Stilmar with SunTrust.

A quick question for you guys, and it touches on Betsy's last point with regards to expenses.

And not to front run the Analyst Day but if we're trying to look back to an achievable operating margin, which seems like you're not necessarily going to get to by slashing the bottom line but continuing to reinvest for the top line, what is a reasonable frame that we should be thinking about for your business over the 3-year time horizon for us, bouncing around the bottom here in today's current environment?

John, you're pushing pretty hard there.

We don't give a quarter's guidance and now you're looking for 3 years of it.

But there is operating leverage in the business model and we do get scaled benefits.

What we will try to give you on Investor Day is you plug in what you think market conditions are going to look like and revenue growth rates will be, and we'll give you a sense, I think you'll be able to come away with a sense of where the operating margins can be and just how much operating leverage there will be.

Obviously it's a function of revenue growth.

If revenue is flat it's pretty hard to generate much in the way of operating margin, of operating leverage.

But if we've got a little bit of revenue growth, I think we can create it.

And in terms of your custody business, can you talk to me a little bit more about the pipeline?

It seems like new business wins may have taken a step back this quarter.

And just curious about what your vantage point is from here, given the market volatility.

Are you seeing more people come to you for back office and middle office support?

I'm just trying to compare and contrast how you see your pipeline.

John, I'll make a quick comment and then turn it over to Tim Keaney who's on the line, actually from our asset servicing conference.

So he can give you the real scoop firsthand.

But generally, the pipeline is quite strong.

There's a lot of outsourcing activity within it.

And a lot of the new business wins that you saw in the quarter didn't necessarily bring assets under custody with it.

It brought fees and outsourcing services and ancillary services.

So not as heavy in the assets under custody area.

But maybe with that as a general comment, Tim, can you pick up on it?

Yes, thanks, Gerald, and thanks for the question, John.

Yes, the pipeline's up about 50% year-on-year, John.

Most of it's driven by financial institutions and outsourcing, as you point out.

That's been about a 3-quarter trend now.

And about 50% of the new business pipeline is outsourcing.

And that's really defined broadly things that clients do for themselves today that look for us to provide.

And as you know, and I think we've talked about before, we feel particularly well positioned in that space.

Glenn Schorr with Nomura.

So I appreciate the comments on the 250 basis points worth of sub investment grade securities.

Can you just talk a little bit about the maturity profile?

Because I'm assuming that you feel that they're good assets, they're yielding high, and so it's not worth getting rid of them now.

But just curious on when that starts leaking into the capital base.

Yes, we're seeing paydowns at close to, the way the numbers work, Glenn, we're seeing paydowns of about $100 million a month, maybe slightly less.

And the portfolio will probably burn off, it's probably got an average life of about 4 years.

But we are treating some of that back into the P&L at about $100 million a quarter level.

So net-net about $200 million-and-some-odd decrease.

Since it's a 1250% risk-weighted asset, you multiply that by 12.5 times.

That's $2.5 billion or about 1% of our risk-weighted assets that's coming off, a little bit more than that, each quarter.

And then just further on that, you had about an 87%-ish payout ratio this quarter.

Hear your comments loud and clear on how you feel about the stock.

And you're generating a lot of capital.

Everybody okay -- meaning regulars -- with an 87% payout ratio?

Didn't know how they balance capital now, capital in the future, and current period capital generation.

Yes, the plan that we had passed was over the course of 12 months, we bought back $1.3 billion.

So you can expect that we won't buy back at the rate that we did in the second quarter in future quarters.

But we are following our plan.

And in fact our ratios are in line or better than what we had planned.

So for the whole year, Glenn, it's certainly in line with what the regulators would expect in terms of combination of dividends and buybacks on a payout ratio.

The third quarter was just particularly heavy.

Final one, on NIM.

You'd mentioned NIM was slightly up, let's just call it stable, ex the big balance sheet growth this quarter.

Steady state balance sheet.

What are the puts and takes that are helping you see that stable NIM, because obviously the natural weight of gravity right now with rates is going to pull it down?

Are you doing a little more investing further out or in corporates on the security side?

And I did see loans pick up, as well.

Yes, there are a couple of items there.

One of the things that we have seen spike, we think that's pretty hot money and we're not going to do a lot with that.

But there has been underlying growth in the deposit base that we think will be core.

So we've invested that in a number of different securities, relatively short duration, some of it is in floating rate.

The duration that we're getting from that is we've bought some munis, we've bought mostly short-duration treasuries inside the window of when the Fed would probably expect to do something.

Any of the duration that we add comes to agency RMBS.

Some of that is floaters, most of it is seasoned 15-year type of stuff.

As well as munis and some corporates.

So there's a mix of assets that we've added to the portfolio, probably about $7 billion or $8 billion over the past 2 quarters or so.

And Glenn, regarding the secured loan program that you saw, it's mostly to broker dealers and other very large clients.

Highly secured, highly visible assets, margined and valued daily.

And we feel pretty good about being able to provide that sort of liquidity to major clients in a very secured way.

And can get a little better yield off of that versus certainly leaving it in central banks.

Brian Bedell with ISI Group.

Just to add onto that question, on the deposit side, what would you characterize as the level of hot money deposits in the quarter on an average basis?

And how is that trending into fourth quarter and whether you'll think that will stick around into year end?

Yes, we saw most of the pop in the deposit base, Brian, take place at the end of the second quarter and into the third quarter.

It's been reasonably stable since then and it's starting to trend down slightly.

But in this rate environment and the risk off and defensive environment that so many are taking, we could be here for a while.

And certainly the noise in Europe -- more than noise -- is continuing to cause clients to want to leave deposits with us.

So it's been a fairly extended period of time that the, quote, hot money has been here.

And that's one of our challenges, is how to determine how long it's going to be here versus putting it to work and through the investments.

And as regards to the charges that you're putting on, what you, I think, regard as not just excess deposits but excess over some normal levels for some of the large clients, do you see those levels increasing or decreasing?

Yes, we had proposed a deposit charge to our clients if they kept a significant amount of excess deposits from what was already a spiked rate.

And these were really targeted to the clients, I think, that had taken advantage and perhaps even arbitraged some of the market conditions at the time.

After we spoke to them, we basically explained how they could go about avoiding those charges through managing those deposits, which they have done.

So we really don't expect that to be a generator.

For the vast majority of our clients, it really had no impact.

Not to say if conditions didn't change we wouldn't reconsider but that's where we are right now.

And it's interesting and amazing, Brian, it shouldn't be too amazing that when you consider charging someone for something and they can change their behavior, they actually do.

And then just quick on the Basel III ratio.

So as far as getting to 7% by year end, are you basically thinking about it in a more flexible way?

Like, you don't really need to get to the 7.0% because you've got the flexibility on the investment grade book?

Or are you still really trying to get there?

We would like to achieve it.

It's going to be a little more difficult if the balance sheet and the risk-based assets are going to stay higher than we had anticipated, so we're not wed to being there.

If we generate at the typical level, you can estimate where we might be.

But we think we have adequate flexibility.

Things do change.

But given the risks that we have on our balance sheet and mix of assets we have, we're very comfortable with our capital ratios.

And how much is left to buyback as the $1.3 billion?

We've done about $800 million in the first 2 quarters of the buyback.

And just very last on new business trends.

So the $96 billion on asset servicing, what was installed in the quarter?

And then what do you still have in your pipeline left to convert that's not in the custody numbers yet?

Tim, why don't you pick up on that one.

Thanks, Brian.

First of all, I think as we talked about the new business, of the $96 billion, is a little bit misleading.

Because if you looked at it on revenue terms, it's very steady over the last 5 quarters.

Because of the mix of new business that doesn't really relate to assets under custody.

So transfer agency and middle office outsourcing.

We converted $245 billion for the quarter and we still have about $320 billion left to convert.

And I would say that will probably come in pretty evenly over the next 2 quarters, if that's helpful.

Mike Mayo with CLSA.

So it seems like competition is still pretty high in the servicing business.

And everyone points fingers at everybody else as to who's causing it.

But when we looked at your late quarter numbers, assets under custody are only down 2% but your fees are down 5%.

And so my question is, are you causing that competition?

Maybe it makes sense to cut prices and gain market share or why would there be that disconnect?

Yes, the majority of that, Mike, of that decline, is we combine in our asset servicing number you see both sec lending and asset servicing.

So about, I think it was close to half of the decline was related to the sec lending numbers.

And I don't know if Tim or Gerald, you have anything else?

But even excluding sec lending, the fees are still down more than the assets under custody.

Slightly.

Just slightly.

Mike, we've had this conversation for years.

It's always going to be a competitive environment.

And we are maintaining price discipline in terms of new services and gaining new business.

I know Tim is working on a program to look at how we potentially change some level of pricing paradigm for different types of clients.

And maybe once we get into it, we're certainly going to share more of that in Investor Day.

But we're very mindful of getting the fees to cover the operating expenses in the business, so we're less reliant on the, quote, capital markets activity.

And that's one of our goals.

And Gerald, this is the first conference call we've had with you as CEO.

I know you'll talk about this at your Investor Day but how do you see running the Company?

What changes might we expect?

And also why did Bob Kelly leave?

I can't comment on the last part.

But in terms of the first part of your question, Mike, clearly I think the power of our Company is the breadth of our services and our business model.

We need to do a better job collaborating across our Company and making it easier for our clients to do business with us.

And providing solution sets to them that I don't think anyone else on the planet can do.

Instead of selling individual product lines or individual business lines to clients, we really need to think more holistically on their behalf.

And present a combined set of services in a better way than we have done.

And so our client coverage model, our go-to-market model, working more collaboratively as a team across our businesses, I think is going to be the best way we improve and increase our revenue growth and market position with our clients.

And that's my focus.

And I guess we'll hear more about this at Investor Day but if we were to look at 1 or 2 metrics to see your progress to measure that focus, what would that be?

I think in terms of operating efficiencies, Mike, one of the metrics we started giving you is our investor services fees over expenses.

And they're inching upward.

We'd like to get them, they're about 97%, I believe, this quarter.

We would like to get them up above 100%.

And that's going to demonstrate that we've either improved pricing or we've improved efficiencies.

And then last question, the fee waivers are hurting $0.05 per quarter.

At what point do you get a little bit more aggressive in charging clients?

In charging clients for fees?

I think that in the instances where we are looking at bringing in clients, we're looking at all of the fees that we'd anticipate generating from that.

And we're holding the discipline and taking into consideration impacts, whether it's around fee waivers or NIR or even sec lending in this environment.

So I think the team is trying to hold the discipline to do that now.

In terms of if there's no yield it's pretty hard to charge much of a rate, so it's going to be more of a market consideration specifically on fee waivers.

Ken Usdin with Jefferies.

2 questions.

Just one with the balance sheet side.

I know all of it that's coming in is not risk weighted but there eventually becomes a leverage constraint.

I'm just wondering if in fact does the bloated balance sheet come into your thinking at all about capital management and balance sheet planning?

Sure, because there is a leverage ratio that we need to meet.

It did decline given the $30 billion moves in the course of the quarter.

Now that it's stabilized and we continue to see the Tier 1 capital ratio grow, we don't think there's going to be much pressure there.

Okay, so that doesn't weigh on it, okay.

My second question is just about, you mentioned that corporate trust was actually up a little bit sequentially.

And I saw that the debt administered was up.

It was obviously clearly a meaningful down quarter in terms of origination activity.

So I'm just wondering if you could give us a little more color on what the underlying trends are in corporate trust and what's happening as far as either market share or pricing?

Sure, Ken.

Why don't we have Karen address that?

Sure.

Ken, our corporate trust business performed pretty well.

It was also impacted by fee waivers, money-market funds.

But some of that money actually went into NIR.

And you're right that market activity was down other than ABS and high yield, and US municipal debt is looking better.

And so, Ken, the way to think about it is while the structured market has obviously not come back, which is the highest fee realization of our fee shifts, we are seeing some of the activity in the corporate and muni market.

And that's why the number of trustees under administration have gone up.

So we're hopeful that we'll start to see a comeback in that marketplace.

Obviously, at some point, given the bank's balance sheet globally cannot carry debt to support economic growth, they're going to have to access the capital markets.

And so we think we're going to be in a great position when that turns around.

And the only other thing I'd add is that we are reducing expenses and looking to make the business more efficient.

So that's a big focus in that business.

And my last follow-up is, just on the issuer services strengths, I'm just wondering, can you tease that out a little bit more for us in terms of, I'm talking about the fee side not the income side because we don't see that segment data anymore.

But on the fee income side, 365 going to 442, can you just break down what was the pull forward of seasonality and what was activity in DRs versus how corporate trust acted?

Yes, why don't I take that one, Karen.

It was primarily the pull forward of DRs.

And that's why I think as you look out to the fourth quarter, you should adjust to reflect that.

And what I made in my forward-looking comments is we would expect the revenues in issuer services to go down sequentially as a result of that.

And offset somewhat by performance fees.

For example, in asset management.

But it will be a headwind for us in the fourth quarter, Ken.

I'm just trying to understand if just core DR activity was also better or worse, just based on volume trends, as opposed to the corporate actions that got pulled forward.

Do you know what I mean?

Just core market activity versus the pull forward of the seasonality.

Ken, year-to-date some of the issuance facts or DRs we had $5.1 billion DRs compared to $2.2 billion this time last year, so that obviously increased volume.

Of course we continue to have great market share.

55% of the new business we won.

And we acted as a depository for 53% of new offerings.

So that's all very strong.

We had a great quarter for DRs and a strong pipeline.

But there is some slowing in corporate action and some delays in IPO activity.

So net-net, we have more DRs outstanding than we've ever had, $35 billion.

Sorry for this last one and I'm finished.

Can you tell us what the gains from the sale of loans was in the investment and other line this quarter?

Yes, we don't disclose that but it was down pretty meaningfully from where it was in the second quarter, Ken.

And if you look at what our asset and other income was running this quarter, about $90 million, that's consistent with where it was a year ago, and that's where we would ballpark what we would expect there.

Alex Blostein with Goldman Sachs.

Sorry to circle back on this again but can you actually just give us a dollar amount of seasonality in the DR business this quarter?

And then as a follow-up to that, I think it might be just helpful to maybe quantify year-to-date revenues in issuer services.

And if you could break it down by what's DR, what's corporate action, and the last piece would be shareowner services which I think goes away in the fourth quarter.

So what would be the impact of that?

Sure.

I'll take some of that.

We don't break out all of that detail, Alex.

But to give you a little color, shareowner services, we anticipate closing on that either late this quarter or early in the first quarter.

That will have a nominal impact to our net earnings.

You'll see a modest loss of revenues for the Company as a result of that.

But you'll also see a reduction in expenses that go with it.

And we don't think it will have a meaningful impact to the P&L.

And there will be some capital generation, probably on the order of about 20 basis points in our Basel III Tier 1 common ratio.

And that will leave the issuer services, the primary businesses there obviously being the corporate trust and the DRs.

And they're both substantial businesses.

DRs has got the momentum that Karen just explained.

As we continue to see growth, it really is the developing markets play for us, although we're seeing a little softness around IPOs and that type of activity, just given the current market events.

We continue to see pretty good strength there.

In terms of corporate trust, there's some headwinds.

There really is no structured debt market, as you know.

And that was probably the highest margin business.

So we're seeing that run off faster than anything is replacing it.

The business itself is actually doing reasonably well because balances continue to grow.

But it will be difficult, in the near term, to keep fees flat there.

And then the dollar amount of seasonality this quarter?

What I'd indicated is, I think the way to look at it is if you average the last 2 quarters of last year, you'd probably get a ballpark with this year.

And then shifting gears a little bit, can you elaborate a little bit on the CVA adjustment this quarter?

Where the loss came from and anything you could disclose on the counter-party, that would be helpful.

Sure.

The CVA adjustment is, as spreads widen, we discount a receivable back at a higher rate and therefore it's less valuable.

So we generally see spread widens.

Now, our counter parties tend to be very high quality but there are a substantial number where we are actually a receiver of the fixed rate in interest rate derivatives.

And as interest rates came down, the exposure went up, so you had a little larger exposure.

And that larger exposure was discounted at a little higher rate.

I expect we'll recover that over the next few quarters.

And then the last one for me maybe on just going back to the FX issue.

And if you could tie that in maybe with litigation expenses this quarter.

So, do you have anything reserved for FX issues so far.

And the $80 million this quarter, can you elaborate a little bit on what in particular that had to do with?

Yes, for obvious reasons, Alex, we don't disclose specific litigation reserves.

Gerard Cassidy with RBC.

When do you guys think that you might find out what your SIFI buffer will be?

And do you expect to be included in the global SIFIs when those names come out?

Gerard, right now, we're not certain.

I would expect by year-end we should know.

And although we don't know for sure, I would expect we would probably be included in the global SIFI.

And any idea in what you think is an appropriate SIFI buffer for you folks?

I think appropriate would be zero.

But what do I expect it will actually be?

I really don't know.

Could be in the 50 to150 basis point range probably.

And then last quarter, I think yourselves as well as your 2 main competitors talked a lot about raising prices for certain services with your customers on existing relationships.

Are you still trying to do that?

Is there any progress that you're making there?

Are customers accepting price increases?

Maybe you can share some color on that.

Yes, Gerard, we're just beginning the process.

We're going through a bifurcation process with smaller clients and a more standardized operating service and some level of pricing paradigm change there.

We have a beta group that we're working with, as we speak.

And then in terms of, as contracts come up for renewals, we are having the normal conversations with clients, trying to have them appreciate the value of the services we bring versus the fees they pay.

And less reliance, again, on the capital markets activity.

So we're in the early innings of this, and we'll give you more of an update at Investor Day.

And the final question, on the fee waivers that you gave us some detail on, how much higher can they grow?

Do interest rates, meaning maybe the long end of the curve, have to fall another 25 or 40 basis points?

Or are they going to be constant at these levels where it just stays at this level?

I would expect that this is the bottom.

But it's possible that that could change.

So if we saw short-term rates decline even further, I think it would put additional pressure on money-market funds being able to generate any kind of a spread.

And therefore they could potentially pick up.

But when we look back and we look at the current environment, this feels like the bottom.

And if we see a little normalcy coming around the globe, you might be able to generate a little more yield and therefore not waive quite as much of the fees.

Thank you very much, everyone, for joining our call.

If you have further questions, please give Andy Clark a call.

And we look forward to seeing you on Investor Day.

Thank you very much, everyone.

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.