紐約梅隆銀行 (BK) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-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, those identified in our documents filed with the SEC that are available on our website, BNYMellon.com.

Forward-looking statements in this call speak only as of today, January 18, 2012 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 the individual businesses.

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

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

Thanks, Andy, and good morning, everyone, and thanks for joining us on what I know is a very busy day for you all.

For the quarter, we generated net income of $505 million and earnings per share of $0.42, which compares to $0.54 in the fourth quarter of last year.

I should note that the fourth quarter of 2011 included a restructuring charge related to our efficiency initiatives and some other items that Todd will cover in just a minute.

Obviously, it was a tough revenue quarter, as our results reflected the ongoing macro environment challenges.

The general uncertainty in the financial markets resulted in lower than normal levels of client activity.

Now, a good indicator of that is the combined share volume on the New York Stock Exchange and NASDAQ, which was down 6% year-over-year and 18% sequentially.

That clearly has an impact on areas like our Investment Services fee revenues.

Investors have been very risk-averse.

We saw a lack of organic growth as our clients reallocated their assets in a more defensive posture, significantly to cash, in response to uncertainty in the markets.

Money market fund managers, including our own, have been particularly conservative.

They shortened durations and reduced European exposure, which resulted in lower yields and even higher money markets fee fund waivers.

Now despite those challenges, we were pleased with what we were able to accomplish in terms of winning new business, strengthening our balance sheet, controlling expenses, and positioning our Company for 2012.

We are continuing to win new business.

In Asset Management, we had positive long-term flows in every quarter in 2011.

And in the fourth quarter, we had another strong quarter in terms of new assets under custody wins.

Our balance sheet continues to strengthen in terms of liquidity, asset quality and capital.

On the liquidity front, deposit levels grew significantly.

For example, non-interest-bearing deposits were up 93% year-over-year.

Asset quality improved, as our sub-investment-grade securities declined 11% due to paydowns and some opportunistic selling.

And on the capital front, we generated almost $570 million of Tier 1 common and are ahead of where we expected to be in terms of Basel III Tier 1 common ratios.

And excluding the restructuring charge, we delivered a very strong 20% return on that increased level of equity capital.

Now we did slow down our buyback program a bit in the fourth quarter to make sure we met our capital targets, but we are looking to resume our program this quarter.

Most of our core investment services metrics continue to look good, especially in Clearing, but they were severely impacted by volumes.

And in Investment Management, we are encouraged by our continued strong long-term investment performance and positive flow.

On the expense front, we made meaningful progress in containing expense growth and bringing down our run rate as we have begun to realize the benefits of the efficiency initiatives we discussed at our Investor Day.

Excluding the restructuring charge, total expenses were down 3% sequentially and down 2% year-over-year.

That's ahead of where we expected to be at this particular point.

Now those efficiency initiatives are still in their early days and we have substantial benefits to come, but we are off to a strong start in terms of adjusting our cost base to manage through the current environment.

Now I should also note that we closed a deal to sell our shareowner services business.

We were able to get a good price for the business, and it takes goodwill intangibles off our balance sheet and positions us to improve our profit margin going forward.

So lots of meaningful progress during the quarter.

And while the revenue environment was tough, we believe the lower level of client activity is a short-term issue.

Our fee revenue should recover quickly as we return to normal levels of activity.

In the meantime, we are controlling our expense base to offset market weakness, we are investing in areas that will generate organic revenue growth, we're putting our deposits to work and we remain very focused on returning capital to shareholders.

With that, let me turn it over to Todd to go through the numbers.

Thanks, Gerald, and good morning, everyone.

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

Earnings for the quarter were $0.42.

As Gerald noted, that included a restructuring charge of $107 million, or approximately $0.06, and that was related to our efficiency efforts, and there was about $0.02 of charges related to a higher provision and higher M&I expenses.

Our results include the impact of lower volumes, as Gerald mentioned, generally reflecting the uncertainty in the financial markets.

And we saw that especially late in the quarter.

Combined share volume on the exchanges was down meaningfully.

Year-over-year, key international markets were down substantially and the US indices were flat.

More specifically to our results, we were impacted by the new seasonality that we experienced in our depositary receipts business.

So in this environment, our success is really based on our ability to reduce the growth rate of operating expenses, and we made some pretty good progress, as Gerald had noted.

Now let's look at the highlights on a year-over-year basis.

Total revenue was $3.5 billion; that's down 6%.

Investment services fees were down 8%, and that's primarily due to the lower DR revenue, but it also was impacted by lower volumes and higher money market fee waivers.

As you will recall, the seasonal spike in corporate actions in our DR business that normally occur in the fourth quarter now occur in the third quarter.

If you adjust for that seasonal impact, investment services fees decreased 3%.

Investment Management and performance fees were down 9%.

That too was driven by higher money market fee waivers, lower performance fees, and weaker international equity markets that were partially offset by net new business.

Net interest revenue here was a bright spot; it was up 8%.

And that largely reflects the additional client deposits in the growth and secured lending, as well as our securities portfolio.

The provision was $23 million, and it primarily resulted from the default of a broker-dealer customer.

Our noninterest expense increased just 1%, and it was down 2% if we exclude the restructuring charges and M&I expenses, and 3% on that same basis for the linked quarter.

Turning to page 4, where we call out some business metrics that will help explain our underlying performance.

You can see that assets under management was up 8% year-over-year to $1.26 trillion.

We had long-term inflows of $16 billion in the fourth quarter, and so we've had positive long-term flows in every quarter of 2011.

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

Short-term inflows for the quarter was about $7 billion.

Assets under custody was flat sequentially, but it is up 3% year-over-year to a total of $25.8 trillion.

Most of that was driven by net new business.

Now, most of the metrics that you see here showed solid growth on a year-over-year basis.

Loans and deposits continue to grow, DR programs are up modestly and clearing and broker-dealer services metrics are up substantially.

However, each of our investment services businesses was impacted by the sharp decline in volume in the quarter.

So the underlying financials of our business remain pretty strong and that positions us well for any rebound in the capital markets.

Asset servicing fees were down 3% year-over-year and 4% sequentially.

Both decreases reflect lower volumes, shifting client asset allocations and the termination of client relationships from recent acquisitions that we made.

And these terminations result from the fact that the clients don't meet our risk profile.

That was partially offset by the impact of net new business.

We had a very strong new business quarter, with $431 billion in new AUC wins, all of which we would expect to be converted by the end of the second quarter of this year.

Issuer services fees were down 30% year-over-year and 35% sequentially, and again, that's due to the seasonally lower DR revenues.

If you adjust for that seasonality, fees were basically flat sequentially.

Clearing fees were flat year-over-year as new business was offset by lower volumes and then higher fee waivers.

They were down 6% sequentially, reflecting the lower trading volumes, and again, the higher linked-quarter money market fee waivers.

Investment management and performance fees were down 9% year-over-year and flat sequentially.

Sequentially, investment management fees were flat as net new business and higher performance fees were offset by lower revenue on equity investments and higher money market fee waivers.

Now you have heard me mention the money market fee waivers several times now.

Let me now aggregate the impact across our companies.

For the quarter, money market fee waivers were a $0.06 drag on our EPS, and that compares to 3% last year and $0.05 in the third quarter.

The revenue impact was nearly $65 million for the year-over-year quarter.

In FX and other trading, revenue was down year-over-year, but it was up sequentially.

Looking at the components, FX revenue totaled $183 million; that's a decrease of 11% year-over-year and 17% sequentially.

Both decreases reflected lower volumes.

The year-over-year decrease was partially offset by higher volatility, while sequentially, volatility actually decreased.

Other trading revenue was $45 million.

That compares to $52 million last year, and a loss of $21 million in the third quarter.

The sequential improvement was primarily driven by a lower credit valuation adjustment.

Now some of you may have seen that yesterday we reached a partial settlement in the FX lawsuit was brought by the US Attorney's Office.

The settlement resolves disclosure claims that were related to FX marketing.

We are pleased with the settlement, but you should be aware that no financial agreement is related to it and it does not affect any claims for monetary damages.

And importantly, it also does not admit to any wrongdoing on our part.

As we've said in the past, we will continue to be alert to opportunities for pragmatic resolutions; however, we remain convinced that our legal defenses continue to be rock solid.

Turning to investment and other income, it totaled $146 million in the fourth quarter of 2011.

That compares with $80 million in the prior year and $83 million in the third quarter.

The increases over both periods primarily resulted from a pretax gain of $98 million on the sale of shareowner services, and that was partially offset by a $30 million write-down of an equity investment.

I would like to point out that the $98 million pretax gain on the sale of shareowner services translated into only a $4 million after-tax gain due to the non-tax-deductible goodwill that was associated with the business.

Turning to page 8 of the earnings review, NIR was up $60 million versus the year-ago quarter and it was up 5% sequentially.

Both increases reflect growth in client deposits, which drove the increase in cash at central banks.

Average non-interest-bearing client deposits increased $3 billion or 4% versus the third quarter.

The year-over-year increase also reflects increased investment in high-grade securities and growth in our secured lending program.

The net interest margin was 1.27%.

That compares to 1.54% a year ago, and the decrease was driven by just the increased deposit base.

Turning to page 9, you can see that year-over-year total non-interest expense, excluding the restructuring charges and M&I expenses, declined 2%, and that's reflecting lower staff expense, which was partially offset by higher litigation expense.

If you exclude the impact of litigation, expenses actually declined 3%.

The sequential decrease primarily resulted from lower staff expense, reflecting lower incentives, as well as a decline in headcount and lower litigation expense and lower volume-driven expense.

All of that was partially offset by higher professional, legal, and other purchased services, which was primarily consulting, software and equipment, and business development expenses.

The increase in software and equipment was due to increased license fees and some new software that we brought online.

As you can see, the $107 million in restructuring charges was comprised of $78 million for severance costs, and there was $29 million of lease write-offs and consulting expenses.

Page 10 details our capital ratios.

As Gerald noted, our estimated Basel III Tier 1 common equity ratio was up 60 basis points to 7.1% at quarter end.

That's a little ahead of what our previous guidance was.

A little less than half of the improvement was driven by the reduction in goodwill and intangible assets, as well as the risk-weighted assets related to our sales of shareowner services business and paydowns.

And sales of investment securities accounted for most of the remaining benefit from the reduction in risk-weighted assets, and the other contribution was obviously the retention of earnings.

We continue to expect to generate about 20 to 25 basis points a quarter in Basel III Tier 1 common, and that includes the impact of buybacks and dividends.

We are fortunate that our business model enables us to rapidly generate capital and it does not require significant growth in risk-weighted assets.

Both of these attributes position us very well to comply with all the Basel III requirements well ahead of the phase-in periods.

Our Basel Tier 1 common equity ratio was 13.4% at year-end.

That's up 90 basis points from the end of September, driven primarily by earnings retention and the sale of shareowner services, as we generated approximately $570 million of Basel I equity in the fourth quarter.

Part of the growth resulted from the decision to slow our buybacks in the quarter to strengthen our leverage ratio.

Now that we have done that, we are well-positioned to continue buying back shares in the fourth quarter -- excuse me -- in the first quarter under our existing program.

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

The watch list actually declined 15%, and the sub investment-grade RMBS securities were down about 11%, and those were down driven by sales -- excuse me -- by paydowns.

But we did do some opportunistic sales as well.

The pretax net unrealized gain in our securities portfolio decreased modestly to $793 million.

Looking at our loan portfolio, you will see that the provision for credit losses was $23 million.

That compares with a credit of $22 million in the prior and year-ago quarters.

And the increased provision was primarily the result of the bankruptcy of a broker-dealer that I earlier mentioned.

NPAs actually declined in the quarter from $344 million to $341 million.

The effective tax rate of 30.6% was negatively impacted by the nondeductible goodwill associated with the sale of shareowner services, but most of that was offset by a more favorable mix of foreign and domestic income.

Now looking ahead, NII should be steady; fee waivers may not get better, but they should have troughed.

Of course, I think I had mentioned that on multiple earlier calls that I thought that they had troughed, but at this point, there's not much left to waive.

The quarterly provision should be in the range of $0 to $15 million.

We are focused on driving down expenses through our operational excellence initiatives.

As we have outlined at our Investor Day, our initiatives are projected to drive net savings of $240 million to $260 million this year, and we've made some pretty good early progress.

Assuming regulatory approval, we plan on combined dividend and share buyback ratio of 60% to 65% for 2012.

As always, the timing of our share buybacks will be based on prevailing market condition.

The significant growth in our capital positions us well for the stress test that we -- by the way, we just recently submitted to our regulators.

Finally, the tax rate in the first quarter should continue to be approximately 30%.

With that, let me turn it back to Gerald.

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

(Operation Instructions) Glenn Schorr, Nomura.

Timing sometimes gets in the way here, but I think it is a little interesting.

Assets under management up 5% quarter on quarter.

Fees are flat.

Assets under custody, flat quarter on quarter; fees are down, whether you want to include the seasonality in DR or not.

Is there a little function of timing there?

There's a little money market in there.

But is the mix of business changing such that the relationship between the assets and the fees don't match as much as they did in the past?

Why don't I start on that and then ask Todd and maybe Curtis or Tim to jump in.

I think we saw, one, client activity on the volumes decline; two, the shift into risk-off mode, so assets went into cash, or frankly, they went into deposits.

And so you don't get an asset under custody fee if it's in a bank deposit.

The same would hold true in the asset management side.

So I think we just saw as the year end approached last year a complete risk-off mode.

So a decline in volumes, movement to cash, more risk-averse, which doesn't allow for fee activity on either investment services or investment management area.

We do think that that is short-lived.

Investors do have to invest, they do have to get a return.

And I just think we saw a very soft fourth quarter that we don't expect to continue for the long term.

But I don't know, Curtis, do you maybe want to comment on the investment management side?

Yes, absolutely.

From an investment management perspective, the growth in AUM has absolutely come in fixed income, and, as Todd mentioned, equity index products; so lower fee products generally.

We have actually held our own pretty well in equity flows, where the industry had pretty tough year generally, so we are happy about that.

I think that what you're seeing in fees is really the impact of two things.

And Glenn, to your point, it is a bit of a timing dynamic around performance fees.

It had been a very strong quarter in the fourth quarter of 2010.

We had a pretty good quarter this quarter, just not as strong.

And then fee waivers have definitely had a very significant impact, as Todd mentioned.

So money market fee waivers and lower performance fees are causing an offset to nice business -- new business growth.

Let me add a little bit to that, Glenn, and then maybe Tim wants to add something as well.

One of the things that you don't see is -- in the fee side, is as money moves out of money market funds, we are seeing it come on to our balance sheet, and that's why we've seen some of the growth in net interest revenue.

It's not as meaningful as it would have been in the fee side in this very low interest rate environment, but that is masking some of the moves.

So there is some modest offset, not as much as we would like, just in the growth of the balance sheet due to that risk off trade.

I don't know, Tim, if you have anything to add.

No, Todd, the only last point maybe I would make is, Glenn, that we only converted about $165 billion for the quarter in new business, so on a relative basis, as you look backwards, that was one of our lower quarters.

The good news is of the $1.2 trillion that we won, we still have yet to convert about $530 billion.

Does that $530 billion include what you just announced as new business wins in the fourth quarter?

Is that your won but not yet converted pipeline?

Exactly.

And I think as Jerrold mentioned in his opening comments, we see a lot of that converting by the second quarter.

That's perfect.

One last one.

Just curious on your thoughts -- your comments on the partial settlement.

Maybe we could -- you mentioned the no money component.

What's next?

In other words, what does the settlement represent with the AG?

Is the principal and how you conduct business going forward?

And then it's up to individual clients to go about suits, if that's how they want to proceed?

Just to clarify a bit, Glenn, the settlement was with the US Attorney, not the --

Apologize, yes.

-- AG.

And so it was primarily around our marketing materials, and so we were happy to get that behind us.

As far as the AG suits, that continues to progress.

There's not much to add on that, other than we think our legal defenses are very strong.

Okay, so that's something that's might just have a much longer tail.

Okay, I very much appreciate it.

Thank you.

Howard Chen, Credit Suisse.

You are protecting and growing spread income really well.

I was just hoping you could provide a bit more color with the deposit flows during the quarter, given all that's going on in a macro environment.

We can see a bunch of the puts and takes with the non-interest-bearing and the interest-bearing deposits.

I was just hoping you could elaborate a bit there.

Sure.

A lot of that tends to be -- in our client base, there is a core amount and then there's some kind of what I would call episodic amounts.

We did see -- especially at quarter end, we saw a spike when we saw it -- once again, we actually saw negative repo rates at quarter end.

So the core custody and trust deposits are seeing pretty continuous growth.

And then from hedge funds and even in some instances broker-dealers, we are seeing some spikes.

Those spikes have mostly worn off now in the first quarter, and we are continuing at what I would call -- what has become the new kind of core deposit base, which continues to show some modest growth.

Okay.

Thanks, Todd.

At the Investor Day, you outlined some actions focus on stabilizing the NIM.

Could you just get update us on where we stand on those initiatives?

And is it still feasible to kind of think about stabilization, given the rates environment's deteriorated a bit?

Yes, I think it is, because we are putting -- as Gerald mentioned, we are putting more and more of the cash to work.

So if we -- say we move $20 billion out of the central banks, where we are earning 25 basis points, and we can put them into securities and secured loans at 100 to 150 basis points, that can offset even the lower rate environment pretty rapidly.

So we feel okay that we can stabilize.

It's going to be hard to grow in this kind of an environment.

Actually, what would grow the NIM the most is if deposits were to come off a little bit and just normalize.

That makes sense.

Thanks, Todd.

And then finally for me, you touched on money market fee waivers.

But I was just hoping you could just update us on your thoughts on when and what you expect to hear from the SEC on broader money market reform and how you are scenario planning for all of that.

Thanks.

Curtis, why don't you take that one?

So we're expecting over the next two or three months for the SEC to come out with some proposals.

Again, they have gone in the direction of either moving to a floating NAV or to having some capital buffers put in place.

There are other things that are suggested, redemption fees and some other things that have been proposed.

We then think it'll take 60 to 90 days of comment period, and then it will go back to the SEC for sort of final -- any final rule changes toward the second half of the year.

Obviously, we are spending a lot of time thinking about where it might go, impact on clients, where the money might go if there are significant changes to the industry.

We do think that we may capture some of the shifts in flows in other places.

And we also think that the impact is going to be felt by clients; we are having a dialogue with them about how to manage their flows, as you can imagine.

The point that has been made -- Todd made a minute ago, though -- is I would tell you that the fee waiver dynamic is quite large already.

And so if there were a really negative impact, it has already been felt in lower yields.

And so today, I think that our 2a-7 business is only about 4% of total investment management pretax.

So it has already -- the yield environment has already had a pretty significant impact on us.

Okay, thanks for all the thoughts.

Alex Blostein, Goldman Sachs.

I wanted to touch base on the comment, Todd, you made earlier about termination of certain client agreements and client arrangements I guess that are falling below your risk profile.

Could you elaborate on that little bit further and maybe give us a sense as you go through the sort of client review, how many more do you think you could have and what kind of impact that could have on your revenues?

Yes, sure.

I think that we have worked our way through that is the good news, so I don't think you will see any additional impact.

And we have some very high standards around documentation and anti-money laundering and so forth.

And so if our clients aren't going to meet those standards, we won't accept them as clients.

And that's what that was related to.

And we did bump out a handful of clients, and we felt it mostly in the fourth quarter, and now that's built into our run rate and we're building back off of that.

Go you.

So this had really has nothing to do with the pricing and the margining on those clients not being in line with what sort of you are targeting for the business?

No, this was not pricing.

This was not pricing-related; it was risk-related.

Alex, they were mostly small alternative managers or small broker-dealers who came to us by way of the GIS acquisition.

Got you, okay.

Then maybe a minute on capital priorities.

So you pointed out that you guys were thinking you'll be a little bit below 7%, but then you felt like you probably needed to get to 7% by the end of the year, and the buyback sort of slowed down here a little bit.

Do you think that -- there's a few people out there that I guess said they want to get to a higher capital level sooner.

How do you think about the pace of your capital build over the course of 2012 versus buybacks?

we feel pretty good about it.

We were a little -- we actually did a little better in the fourth quarter than we anticipated.

A couple of things went on there.

We got some meaningful paydowns and we were a little more opportunistic against some sales of our sub-investment-grade securities.

So that added to the benefit of shareowner services, and then we had -- we thought there was going to be a bit of an OCI adjustment that didn't take place.

Let me make one thing a little bit clearer here, though.

We were pretty tight on our leverage ratio with the substantial increase -- we had a 93% increase, and that was just in the free deposits; but we also had a substantial increase in the rest of our deposits.

We wanted to go ahead and build that ratio up a bit during the quarter as well.

So we got the benefit of having a little pop in our Basel III Tier 1, but that's not what we were actually looking for.

So now that we have [shorn] that up, we can go back -- we're comfortably in the 60% to 65% what I will call capital deployment range between payouts, between buybacks and dividend increases.

And we are also positioned to restart or complete the program that we announced last year for 2011.

The regulators do give you -- they don't object to you -- as long as we asked for it, and we did, they don't object that we continue to proceed against that program in the first quarter, and that's what we intend to do.

Got you.

And then just a last one for me.

Just looking at the balance sheet and the shift in earning assets this quarter, it feels like there is a decent amount that came out of the interest-bearing deposits with banks, primarily, I guess, foreign banks.

Is that just reflective of the risk appetite you guys try to manage to, given what's going on in Europe, or there something else going on?

Because obviously there was a big bump at the Fed and some of that came out of the, I guess, foreign banks.

Yes, I think we've been defensive on a risk position as well.

We don't need to leave as much short-term cash in the European banks.

We are just leaving it in a handful of what we think are the strongest in the right regions.

And that ended up building up a little bit in the central banks, which we intend to put back to work as we described earlier.

Got it, thank you.

Ken Usdin, Jefferies.

I was wondering if you could give us a little bit more color on the issuer services results, and then the outlook, given the closing of the shareholder services, just to get us an understanding of what we should expect going forward.

It seemed like a month ago you were talking about a decline certainly from the pull-forward.

So I'm just wondering if you can kind of -- sorry for the long question -- can you give us kind of the total, what was the real pull-forward in issuer, in DRs?

How did Corporate Trust act?

And then remind us of what goes away with shareholder, so we can understand how the first quarter starting point it looks like?

Yes, Ken, let's have Todd take the last part of your question; then we will ask Karen to comment about the core business.

Kind of the way we would look at it, Ken, the pull-forward from the corporate actions from the third and fourth quarter, what we did is we just averaged the revenues in the two quarters and we kind of compared that to averaging the revenues in the two quarters in 2010.

But if you average those in the third and fourth quarter, our issuer services fees were flat sequentially.

That kind of gives you, I think, a good basis.

And they are down about 6% on a year-over-year basis, and I think Karen can give some more color on that.

For issuer services in the aggregate.

We are talking specifically about issuer services.

Right.

And Ken, you know I'm sure, that global debt issuance was down about 7% year on year.

And so the difference in corporate trust actually was issuance-related and deal-related, but also money market fees in that category as well.

And then the shareowner services businesses was pretty soft right before we sold it, as would be understandable.

So the DR business continues to be pretty strong.

And with that seasonality against the corporate actions happening now going forward in the third quarter versus the fourth quarter, that's a change that you will see stick for the future.

But the business itself, pipeline is pretty good, very large win in Brazil that will be public soon and a pretty strong pipeline otherwise.

We expect both DRs and corporate trust to be kind of in the 3% to 5% range revenue growth next year.

On a year-over-year basis?

Yes.

Okay.

So then can you just remind us again -- so the first quarter versus this fourth-quarter number, just trying to understand the trajectory.

So you said the run rate when it was announced, Computershare had put out that it was about a -- what -- $280 million, $290 million revenue run rate; but, Karen, to your point that that was weaker, should we presume that the run rate that comes out was lower than that?

Yes.

Yes, the run rate was lower kind of toward the end.

Obviously, we announced the deal in April, and as soon as you announce a deal like that, as you can imagine, new business pretty much dries up.

Existing clients, we did lose a couple of clients before the sale.

And I think that's all just understandable, based on that news coming out in the marketplace.

So the run rate is somewhere lower than the $70 million.

Was it meaningfully different?

I'm just trying to, again, understand the moving parts between this change in the DR seasonality and then the moving parts of that line going forward.

It wasn't meaningfully different.

And from a pretax perspective, that's a very low-margin business.

So it really didn't have any impact on the pretax.

Ken, I don't think you will see any impact on pretax earnings.

You will see a bit of a reduction in the issuer services fee line, obviously, probably in -- I'd call it -- the run rate in the past couple of years has been somewhere around $200 million.

Okay.

My second question, just regarding expenses, which looked really good and obviously started to show the benefits, can you talk us through just the decline in compensation that happened this quarter, how much of that is related to the beginning of the saves, the prior expense save -- employee reductions that had already been announced versus what may have been either a compensation true-up or an adjustment to the actual revenues?

Yes, Ken, a couple of things.

One, we did see, as we expected, a decline in our headcount of about 900 people in the fourth quarter.

So that obviously has some impact on our running rate on the compensation site.

Obviously, our earnings were off, and so that lowers compensation.

And so the combination of the two plus our initiatives starts to put in place a lower run rate in both of those categories.

Okay.

My last final thing, just on the capital front, again, you mentioned that you had slowed the buyback this quarter.

In advance of getting the CCAR results, can you use the remainder of the authorized buyback in 1Q, and do you imagine that you will?

Or will you just be trying to continue to kind of build, so to speak -- build capital faster until you get those results?

We are allowed to continue the program that was approved or -- the Fed did not object to last year.

And we plan to resume our buyback in the first quarter of this year.

Okay.

Thanks, guys.

Let me add one thing there.

At a payout of 60% to 65%, that puts us in a retention every quarter, on average, of about 25 basis points increase in our Basel III Tier 1 commons.

We think that's a pretty rapid retention rate and there's no need for us to -- we are now at 7.1%, so if we do that for the year, we are at 8.1% at the end of the year.

We think that puts us in -- well ahead of where we need to meet our ultimate targets.

Thanks for that, Todd.

Mike Mayo, CLSA.

It's Rob Rutschow.

One question on the -- commercial loan growth this quarter was pretty decent.

Are you guys seeing any shift out of capital markets and onto your balance sheet?

The loan growth for us is principally in secured loans to our financial institution clients, and it was really putting some of our excess deposits and cash to work for those clients, rather than traditional loan growth that you would experience at other commercial banks.

Okay.

And a follow-up on the deposits.

You mentioned that some of the excess deposits have come off so far this year.

Can you give us any sort of numbers or give us a sense for how much they are down so far?

Sure, Rob.

Probably, on average, about $10 billion.

Okay, a couple housekeeping items.

The 900 in headcount reduction, how much of that was related to the shareholder services sale?

None of that.

It was December 31.

That was December 31, so that's not in those numbers.

Okay.

And then a second question.

I think you guys had around $80 million in litigation costs last quarter.

Can you give us a similar number for this quarter?

For obvious reasons, Rob, we don't disclose actual litigation reserves.

There's no reason to give anybody an advantage there.

But they were down somewhat from what we had experienced in the third quarter, and they were up pretty meaningfully from what we experienced in the fourth quarter of last year.

Okay, thanks a lot.

Marty Mosby, Guggenheim.

I was curious about the deterioration in the waivers on the money market accounts.

What was the deterioration between third and fourth quarter?

Why did it end up hurting another penny?

Was the question why, or it did hurt by another penny.

And the reason was that the yields in the money market funds continued to decline.

Curtis, you probably could give some more --

Yes, the third quarter -- the drop to the third quarter actually was the steepest drop.

The first and second were not terrible, the third was bad and the fourth was just a little bit worse than that.

So kind of a full quarterly impact on the decline.

The way to think about it is all the money market funds, including our own, went to more cash reserves, less European exposure.

That brings the yield down.

Whatever securities were already on, the yield has come down.

So with less yield available to the investor, that's where the higher money market fee waivers come in.

And as we've said a number of times, we think we have been at the trough, but there sure isn't much left.

And we shouldn't kid ourselves -- the money market fee waivers across our firm are quite significant and we are looking at other alternatives on how to offset that.

And then on the capital front, you talked about the leverage ratio being the constraint.

In other words, it wasn't the Tier 1 common ratios you were really concerned about or trying to improve.

Have you looked at -- is that the ratio we should be looking at more for the trust banks relative to the other ratios?

No, I don't think so, Marty.

I think was -- it was kind of an unusual circumstance as we saw the very sharp spike, not in risk-weighted assets, but just in the balance sheet, with the deposit growth in the third and also in the fourth quarter.

Now that we have built that ratio up during the quarter and the fact that it will grow on a quarterly basis as we retain 35%, we don't see it any longer as a constraint.

Do you see the impact in Basel I to Basel III in the sense of how your assets can change even in the leverage ratio due to some off-balance-sheet consolidation, being trading accounts or positions in derivatives and things like that, is that something as well that we should be kind of thinking about is that (inaudible) or haircut you would take on that ratio is well?

Actually, you don't.

The constraint will be Basel -- the Basel III Tier 1 common.

So that's going to be the ratio I think that you are going to really want to focus on.

And we don't see leverage as a problem.

Okay.

And the last question is the 60% to 65%, have you given any thought in the sense of distribution between what you would think dividends versus share repurchase and how do you look at that going forward?

Sure.

With our share price below book value, we certainly like buying our shares, so we probably will lean to consistent with what we've said in the past.

Right now, we look for a 20 to 25% dividend payout, and we will make up the difference in share buybacks.

Thank you.

Brian Bedell, ISI Group.

A question for Tim Keaney.

Tim, can you talk a little bit about your initiative to reprice the core asset servicing business, basically how that's going in terms of conversations with clients, whether you are seeing any attrition yet and to what extent?

I guess if you can talk about it between different types of businesses, the middle office versus the core custody business.

Yes, Brian, I'd say it's still very early days.

And I think as we talked about in the Investor Day, we are starting with the smaller clients.

And we've got about 1000 clients.

We are working our way through on the smaller end.

So it's probably still too early to give a full report out to you, but I'm somewhat encouraged by what we have seen.

Certainly as we reprice current clients, we are doing that with the new economic reality.

So we are rebidding our business with minimum target profit margins and not being overly dependent on capital-markets-related revenue.

So I think that's probably the best way to answer your question.

And when we win new business -- and we have been successful with that $431 billion that we did in the last quarter -- we are doing that with our new pricing disciplines in mind.

Right, so the new business is coming on with a more appropriate price.

Does part of that business to be converted include Bridgewater?

It does, yes.

We will be converting Bridgewater over the next three quarters.

Okay.

And if you had to sort of say when you think you will start to see sort of a material recalibration of revenues and expenses in this business, do you think it's more later this year or more over a couple of years?

Brian, it's a cycle.

Some of our clients are on three-year contracts.

A small number of our clients are on four- and five-year.

And I just think it's going to take patience and discipline and work through that cycle, and that's exactly what we are doing.

Great, okay.

And a question for Curtis in the investment management business.

On the performance side, can you talk little bit about where you think performance fees are levered to in terms of the equity markets and fixed income markets, and sort of how your performance sort of dovetails with that?

I guess what I'm looking for is are new mandates coming on that are structured with large performance fee components within the mix, just so we can sort of get a sense going forward of how we might model that?

Yes, we have an array of investment products that have performance fees that are linked to benchmarks, either benchmarks or to absolute return goals.

And so it's hard to say if equity markets are up, performance fees are going to be up.

And they are correlated, as you would guess; we have some fixed income products as well that have performance fees.

But again, they're really geared more to the benchmarks than they are to the absolute level of markets.

Really, it's a wide array of products that drive performance fees, so it's hard to correlate it to anything specific.

Okay.

And then just flipping to foreign exchange trading, can you talk a little bit about -- obviously, volatility and volumes were a weak factor for everybody this quarter.

But can you talk about the mix of standing instruction within the total foreign exchange trading.

Brian, let me pass that to Art Certosimo, who runs all our global market activities now.

We are starting to see more volume through our negotiated channels as the FX market becomes more competitive.

And we continue to develop products for our clients that should offset that with our ability to capture more volume.

What is the standing instruction mix overall?

Is it still close to 40% or is it down significantly?

It's about 42%.

Okay.

And then just lastly, what was net interest revenue discount accretion for the quarter, in terms of dollar amount?

I think it was 94, Brian.

It was down slightly, but not much.

Okay, great.

Thank you so much.

John Stilmar, SunTrust.

Real quickly, the move from 39% international revenue composition to 34%, clearly de-risking and currency can have a pretty profound impact.

But is there anything more that we should be thinking about, aside from just specific concentrations in Europe more rapidly de-risking than other parts of the world?

Is there another sort of business trend that might be underneath that move or is that just kind of the result of the couple themes that we've talked about earlier?

The simple answer is the vast majority of the quarter-to-quarter decline in the percentage was depositary receipts, depositary receipts or non-US-sourced revenues.

With the change in the seasonality and the significant swing in it, you saw the decline in non-US-sourced revenues.

So we think when you normalize all that, there might have been a percent or so decline, but not much.

Okay, perfect.

And then really quickly, just wondering if we can dig into a little bit more in terms of fee waivers.

And one of the discussions that was brought up earlier was potential offsets to fee waivers as you're thinking about product structure in the future.

Can you go into a little bit more detail about what some of those product structures are and how enthusiastic you are for being able to recapture those fee waivers absent any macro movement in rate?

Let me start on the servicing side, and then, Curtis, maybe you can think about it a little bit on the investment management.

The servicing side, we provide a lot of administrative services for clients to sweep their cash through us, either onto our balance sheet, into various liquidity options or various money market funds.

So we may have to find a different way to structure those administrative services that we provide that have traditionally come through distribution fees.

So that's one of the things we're working on.

Pershing is a great example, where they're trying to take some initiatives on their platforms.

But it is a bit of a conundrum because the yields on the investments are so low.

How much can you keep hitting the client for no return?

So it is something we're looking at.

We are trying to find structural ways and other ways to deal with it.

And on investment management -- Curtis?

I would say -- listen, clients, there are an array of clients that use money market funds for various reasons.

Generally, they want to have various tremendous liquidity and get the best deal that they can.

If the rules actually change on making a floating-rate NAV or with capital buffers make it a difficult product, we think clients are going to look for alternatives.

And we have had conversations with them about everything from ultra-short-duration fixed-income products that would be the highest-quality assets, and try and maintain as much liquidity as possible.

Floating rate funds obviously are potentially interesting to them because of the more stable net asset values that could be had, but not necessarily completely fixed, as they are today.

And clients, again, depending on how they use money market funds, have different levels of interest in each of them.

But we think if the changes actually do occur and everyone has to step back and think about what they are really going to do in a new environment that people will have to shift to these products.

And of course, Todd talked about our deposits.

Banks are clearly going to see some of the flows go to deposits, and I think we've seen some of that.

So it's good to have the ability to offer both.

John, if I could, maybe Brian Shea could comment a little bit about what Pershing is trying to do.

I would just build on Curtis's comments that retail investors are starting to shift some of their cash management sweep vehicles from traditional money market funds to FDIC-insured bank deposit sweeps.

And we have a growing array of cash management sweep options, including FDIC options.

So while we had cash management growth on our platform of about 9% to 10% year-over-year, we had 34% growth in FDIC-insured sweep, which is where customers and investors are seeing slightly higher yields and the protection of FDIC as well.

So I think what we are working on is trying to create more capacity, not only internally, but with other banks, and working with Promontory Financial and others to get that accomplished.

Hopefully, we will see more growth in the future.

Great.

Thank you, guys.

Betsy Graseck, Morgan Stanley

I just wanted to ask how client flows and activity have been more recently.

I know you gave the information for the full quarter.

But, middle of December, we had LTRO in Europe.

And first couple of weeks of this year -- I know it's only 2.5 weeks in -- but just wanted to get a sense as to how client activity inflows have been kind of latter half of 4Q and into the beginning of this quarter.

Well, certainly, the last part of the fourth quarter was very slow.

It started off the year a bit slow as well.

We are hopeful that once we get through earnings season and investors start realizing they have to put money to work for yield, we will see normal client activity.

But we did start off the year a bit slow.

Okay, and that's consistent across geographies?

Yes.

Okay, thanks.

Gerard Cassidy, RBC Capital Markets.

Thank you.

The question, Todd, on the sale of the sub-investment-grade securities, what is the total now of the old grantor trust in sub-investment-grade, about?

A little over $3 billion -- it's right about $3 billion, is the (technical difficulty) that we have on them.

Is there any expectation for sales this year of any of those securities?

We don't feel the urgent need to sell any of them.

If we see that there is a decent bid or we don't like the particular risk profile of any security, we have offered it, and if it gets taken, that's fine.

If it doesn't, we will live with it, is pretty much the position that we have taken.

We have actually seen an improved bid so far in the month of January.

But at this point, we really haven't done anything.

Okay.

You mentioned that one of the real positives to the net interest margin expanding would be if the deposits started to shrink.

Is there any evidence that customers are taking deposits off the balance sheet?

Or just the opposite, are they continuing to put them on?

I would say what I had mentioned, Gerard, there are some spikes that we see from some individual clients that might leave a significant amount of cash because of some kind of a transaction or something that they were doing.

So that tends to -- that has fallen off.

The underlying what I would call the core component of it has been pretty stable to showing modest growth over the last three quarters.

We saw the big spike back in June, and then it's been growing modestly thereafter.

And then when we look at your loans outstanding, you had a nice increase in the margin loans, I believe, in the quarter.

Was that existing customers taking on more loans or new customers?

Where did the good growth come in that area?

This is Brian Shea.

It's primarily driven by growth in the prime brokerage business, Pershing's Prime Services group.

And also somewhat by our traditional -- the growth of our broker-dealer business.

But I would say -- I give a little more credit to the Prime group, as growing momentum in that business.

Great, thank you very much.

Thank you.

And thank you very much, everyone, for dialing in on a busy day.

And if you have other questions, please follow up with Andy Clark or the rest of our investor relations team.

Thank you.

Thank you.

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

Andy Clark at 212-635-1803.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.