紐約梅隆銀行 (BK) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2012 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.

Clarke, 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 12 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, April 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 individual businesses.

We will 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 and thanks for joining us today.

For the quarter, we generated net income of $619 million, and earnings per share of $0.52.

Which compares to $0.50 in the first quarter of last year, and $0.42 in the fourth quarter of 2011.

Total revenues were up 6% sequentially, if you exclude the shareowner services business that we sold, right at year end 2011.

On a reported basis, revenue was up 3%.

Now, that improvement reflected the solid sequential growth in investment management and investment services fees.

We clearly benefited from new business coming on board and improved market values.

And, we achieved that growth in spite of the fact that levels of client activity remained lower than normal.

Now, as an indicator of that, volumes -- indicator of the volumes, combined share volume on the net -- New York Stock Exchange and NASDAQ was down 17% year-over-year, and 10% sequentially.

Lower volatility in the currency markets also negatively impacted our foreign exchange and investment services fee revenues.

Most of our other core investment services metrics showed positive trends.

And, in investment management, the key metrics we focus on are flows and investment performance.

We had our tenth consecutive quarter of positive long-term flows of $7 billion, and we are pleased to see nice improvements in the performance of our US equity products.

So overall, the trends remain encouraging.

While we can't control market conditions, we made good progress in controlling what we can, which is winning new business, managing our expenses carefully, and strengthening our balance sheet.

On the new business front, in addition to the positive long-term flows in investment management, Asset Servicing had its strongest quarter in terms of new business wins in 12 months.

I should also mention that during the quarter, in Asset Servicing, we were ranked number 1 in our peer group in terms of service quality in both the R&M and global custody surveys.

That speaks to our success in maintaining our focus on our clients as we transform the Asset Servicing business to simultaneously improve the client experience and business profitability.

In fact, our quality scores rose year-over-year, which is encouraging.

On the expense front, we're seeing the early benefits of our operational excellence initiatives.

On an operating basis, total expenses were up 4% sequentially, which mostly reflected higher litigation and legal expenses and some seasonal staff expense.

On an operating basis, again adjusting for the sale of shareowner services, revenues were up 6% sequentially, while expenses were up 4%.

Producing 200 basis points of positive operating leverage.

In terms of capital, we generated nearly $700 million of Basel I Tier 1 common.

And, we delivered a strong 21% return on that increased level of equity.

We also repurchased more than 17 million shares during the quarter.

The strength of our balance sheet was borne out by the results of the latest Fed stress test, which reflect the strength of our business model and excellent quality of our balance sheet.

The results also show our continuing ability to return capital to our shareholders while maintaining our strong capital position.

As a result, there was no objection to our annual capital plan, which includes the continuation of our current dividend and the repurchase of up to $1.16 billion of outstanding common stock in the next 12 months.

This is consistent with a combined dividend and share buyback ratio of 60% to 65% that we had discussed at our investors day.

So again, nice progress in those areas that we can control.

Looking ahead, we continue to believe the lower level of client activity is a cyclical issue and that our fee revenues should recover quickly as we return to normal levels of activity.

In the meantime, we're focused on delivering a high quality of service and high standard of investment performance to support our revenue growth, reducing our costs through operational excellence initiatives and maintaining our financial strength, which is enabling us to rapidly return capital to shareholders.

So, in summary, it was a solid quarter, and we're delivering on all the items we laid out for you back in November at our investor conference.

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

Thanks, Gerald, and good morning, everyone.

As in the past, my comments will follow the quarterly earnings review, and let's start on page 2.

As I take you through the results, keep in mind that the first quarter of 2012 is the first quarter without our Shareowner Services business, which we divested at the end of last year, in fact, at the end of December.

As a result, many of my comments around fee revenue and non-interest expense will actually exclude the impact of Shareowner Services.

I would also note that we have adjusted some of our disclosures on those schedules to reflect this divestiture.

We had a solid quarter.

Earnings were $0.52, which is a good reflection of our core performance, as we had higher litigation and legal expenses and also had the impact -- seasonal impact of our equity compensation programs.

And, they were offset by an increase in securities and leasing gains.

This compares to $0.50 in the first quarter 2011, and $0.42 in the fourth quarter.

Recall that the fourth quarter included a restructuring charge.

Highlights on a sequential basis, total revenue was $3.6 billion, up 3%.

If you exclude shareowner services it was up 6%.

Investment services fees were also up 3%, and also 6% excluding shareowner services.

That increase was primarily due to improved market values, higher volumes, and net new business.

Investment management fees, excluding the impact of the seasonal performance fees in the fourth quarter, were up 7% driven by higher market values and net new business.

FX and other trading was down 16%, due to the significantly decreased volatility in the first quarter.

Net interest revenue was off 2%.

That largely affects a bit of a smaller balance sheet and lower accretion, both of which were partially offset by increased investments in the high quality investment securities portfolio.

The provision for credit losses was $5 million.

Non-interest expense for the quarter was down 3% on a GAAP basis, but up 4% excluding amortization of intangible assets, restructuring charges, M&I expenses, and most importantly the direct expenses related to shareowner services.

We did a pretty good job of controlling expenses during the quarter.

The increase was primarily driven by higher litigation and legal expenses, and the seasonal impact of stock awards, as I'll get into in just a minute.

But first, turning to page 4, we will call out some of the business metrics that help explain how our underlying performance is going.

Here, you can see that AUM increased 4% sequentially, and 6% year-over-year, to a new record level of $1.3 trillion, with long-term inflows of $7 billion in the quarter.

They benefited from strength in fixed income, and actively managed equity assets.

It was our tenth consecutive quarter of positive long-term inflows.

While the level of long-term flows is lower than in some recent quarters, we saw a shift toward more active asset classes, which have higher fee realization.

Assets under custody was up 3% sequentially and 4% year-over-year, also to a record level of $26.6 trillion, driven by net new business and higher market values.

Most of the key metrics showed solid growth on a year-over-year basis.

Loans and deposits are up, DR programs are up modestly, and most clearing and broker dealer services metrics are up substantially.

So, the fundamentals that we control remain strong.

However, there continues to be softness in volumes and volatility and it has impacted our Investment Services business.

Looking at the fees on page 6, asset servicing fees were up 7% sequentially and 3% year-over-year.

That's reflecting net new business and sequentially higher domestic equity markets, as well as higher lending revenue, which was driven by better spreads.

We had our best new business quarter in four quarters, with $453 billion in new AUC wins.

Over the last 12 months, new assets under custody wins have now totaled $1.2 trillion, with approximately $450 billion yet to be converted.

Most of those conversions we expect to occur over the next three months.

Issuer service fees, excluding the Shareowner Services business were down -- excuse me, were up 2% sequentially and down 14% year-over-year.

Sequentially, higher DR revenue was partially offset by lower corporate trust fees.

The year-over-year decrease resulted from lower money market fees and lower corporate trust fees.

Those lower fees are driven by weakness in structured products, and we also saw a little lower DR revenue year-over-year.

Clearing fees were up 9% sequentially and up 4% year-over-year.

The sequential increase primarily reflects higher trading volumes and growth in mutual fund assets.

The year-over-year increase was driven by net new business and growth in mutual fund assets and retirement accounts, which was partially offset by lower trading volumes.

So, there were lower trading volume's year-over-year but higher sequentially.

And, there were also higher money market fee waivers on a year-over-year basis.

Turning to investment management fees, it is important to understand the impact of the overall AUM on our level of fees.

We do have a balanced AUM mix, with roughly one-third in equities, 35% in fixed income, 24% in money markets, and the remainder in alternatives and overlay.

In addition, we have a significant portion of assets under management that are impacted by global markets, more international markets.

Given these dynamics, roughly 50% of annualized investment management fees are actually correlated to equity markets.

Of that total, over two-thirds are priced on a daily or monthly basis.

So, the average level of market indices is important.

As noted earlier, our boutique managed assets across international emerging markets to the value of the FTSE and MSCI indices are just as important as the S&P 500.

Looking at the first quarter 2012 results, investment management fees, excluding performance fees, were up 7% sequentially, and down 2% year-over-year.

The sequential increase reflects the impact of net new business, the year-over-year decrease reflects higher money market fleet fee waivers partially offset by net new business.

Equity values benefit investment management fees sequentially, but had little impact year-over-year.

And, you can see this from the metrics.

The S&P, FTSE, and MSCI indices were up sequentially both on a spot and average basis.

But, year-over-year the S&P increased but the FTSE 100 and MSCI indices were down both on a spot and average basis.

As we reported in the past, fee waivers continue to impact a number of our businesses, and our estimated aggregate impact to EPS this quarter was about $0.06.

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

When we look at the underlying components, FX revenue totaled $136 million, that's a decrease of 26% sequentially and 21% year-over-year.

Sequentially, volumes were flat, but volatility decreased substantially while the year-over-year decrease primarily reflects both lower volumes and volatility.

The standing instruction alternative continues to be very important to our clients.

Although, we saw a decline year-over-year in the use of standing instructions as a percentage of all transactions, it increased sequentially.

Other trading revenue was $55 million compared to $45 million in the fourth quarter and $25 million in the year-ago quarter.

Both increases were primarily driven by a high fixed income trading.

Investment and other income totaled $139 million in the quarter.

That compares with $146 million in the prior quarter, and $81 million in the year-ago quarter.

Sequentially, it was down slightly, and that's because of the $98 million pretax gain on the sale of shareowner services in the fourth quarter.

And, that was somewhat offset by leasing and seed capital gains in the first quarter of 2012.

Leasing and seed capital gains also accounted for the year-over-year increase.

Turning to page 8 of the earnings review, NIR was down $15 million sequentially, and up $67 million versus the year-ago quarter.

The sequential decrease was primarily driven by lower average client deposits, a little lower accretion and that was partially offset by increased investments in our high quality investment securities.

This is consistent with what we told you -- what our NIR strategy was going to be during our investor day presentation in November.

I should add that we had expected, as it occurred, deposits to contract from the sharp rise that we saw late at the end of the fourth quarter, so those deposits did leave us.

The year-over-year increase was primarily driven by higher average client deposits, increased investments in securities, and higher loan levels, partially offset by lower accretion and narrower spreads.

We would expect deposit volumes to continue to be volatile due to the uncertainty of the global financial markets and the potential for regulatory changes as we look forward.

The net interest margin was 1.32%, compared with 1.27% in the fourth quarter and 1.49% in the year-ago quarter.

The sequential increase reflects increased investment in the securities portfolio and a decrease in lower yielding interest-bearing deposits with banks.

The year-over-year decrease is primarily driven by the increase in client deposits.

Nearly half of which were invested in liquid, but very low yielding, assets.

Turning to page 9, you can see that total non-interest expense, and here if you exclude intangible assets, restructuring, M&I, and most importantly the direct expenses related to Shareowner Services, was up 4% sequentially and 5% year-over-year.

The biggest driver for the increase was litigation and legal expense, which was up $60 million sequentially and $70 million year-over-year.

The sequential and year-over-year increase also reflects higher incentive expense, due to the vesting of long-term stock awards for retirement eligible employees, as well as higher pension expense.

As Gerald noted, we are beginning to realize the benefits of our operational excellence initiatives, as reflected in lower business development, professional and other purchased services, compensation, net occupancy, and software and equipment expense.

Page 10 details our capital ratios.

Our estimated Basel III Tier 1 common equity ratio was up 50 basis points to 7.6% at quarter end.

The improvement was driven by an increase in the value of our investment securities portfolio, earnings retention, and lower risk weighted assets, partially offset by share buybacks and dividends.

Our Basel I Tier 1 common equity ratio was 13.9% at year-end (sic), also up 50 basis points from the end of December, driven primarily by earnings retention from the approximately $680 million of Basel I equity generated during the quarter.

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

The pretax net unrealized gain on our securities portfolio increased by [$389 billion] to $1.2 billion.

Looking now at our loan portfolio, you'll see that the provision for credit losses was $5 million.

That compares with $23 million in the fourth quarter, and a zero provision in the year-ago quarter, and, NPAs have declined from $341 million to $331 million.

The effective tax rate of 28.7% compared with 29.3% in the year-ago quarter.

So, looking ahead, in the second quarter, we should see a seasonal increase in DR's and securities lending revenues.

NII should be relatively stable, depending on the size of our client deposits.

Fee waivers should be consistent with the last couple of quarters.

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

We continue to be focused on driving the expense savings through our operational excellence initiatives that we've laid out with you.

We also expect to continue repurchasing shares in the second quarter, but as always, the timing will depend on market conditions.

The tax rate in the second quarter of 2012 should also be approximately 29%.

So, with that, let me turn it back to Gerald.

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

Thank you.

(Operator Instructions)

Alex Blostein, Goldman Sachs.

Great, thanks everybody, good morning.

Gerald, I was hoping you could update us on the pricing dynamics and how those dial-ups with clients are going?

And, I guess when we could see a little bit more of a tangible result on the servicing pricing?

Sure, Alex.

Thanks.

I'll start, and then if Tim Keaney want to jump in, we're still in the early stages of it.

I think, as we laid out for you last November.

We're beginning with the smaller clients, we're working through that process.

On a net basis, we're positive.

But, it's a long, drawn out process.

We want to make sure we're handling it the right way and we're getting good information from the clients on how they react to it.

But, on a general basis, it's been net positive.

And, we're off to a good start.

Tim, do you want to add anything?

Sure, Gerald, as you mentioned we're starting at the smaller client range.

We've identified a universe of about 700 clients to go after first.

We're about 50% through that process.

We hope to be done through the entire universe in June.

We've had about a 70% success rate, keeping clients at an increased rate.

And, I'm also encouraged that we've had about nine larger clients, so clients that pass over $0.5 million a year or more, that have come up for review, we've retained nine out of nine with an increase in fees.

So, still early days.

Got you.

That's very helpful detail, thanks.

And then, just to follow-up on FX, it feels like the sequential decline was a little bit larger relative to some of your peers.

JPMorgan down 11%, State Street flattish, Northern down 15% or so.

So, it feels like everybody was operating in a similar environment, volumes were flattish, volatility came down a lot.

So, is there something else going on why your results were down more than 20% sequentially?

Or is it just a mix of business, the volatility and currencies that you are more active in was sequentially weaker?

Yes, Alex, it's Todd.

I would say it's consistent with what we have seen in the past.

So, the volatility impact was very direct.

The same percentage that we saw the decline in volatility that would have impacted our earnings reflected right through to our numbers.

The level of standing instruction actually rose a bit in the first quarter.

But, we saw on a sequential basis, total volumes were absolutely flat.

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

No, I would just say, Todd, looking forward we see a huge opportunity to increase the percentage of volumes that should naturally be coming to us as custodian and asset servicer.

And, we're razor focused on launching some new products to collect that volume.

We're pleased with the launch of our defined spread program, which we launched in February.

We've gotten around to about -- just about all the clients, it's very good news.

A little over half of the clients have decided to stay in our current range a day program, and about 40% or so have signed up for the new defined spread program.

So, we're watching very carefully.

The key mission for us is to increase the volumes.

And, we're focused on launching the new products and we'll be watching that quite carefully.

Got you.

Thanks.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

Good morning, Betsy.

Couple questions, one on expenses, could you quantify how much the cost save program impacted this quarter?

And then, as you're talking about the next quarter outlook, could you give us a sense as to how it's likely to trend given that you usually have a step up in salary in 2Q?

Sure, Betsy, the -- it's hard to decipher exactly how much the cost save program has benefited, to tease it out in its entirety.

We are seeing some significant benefit from the technology front.

And, the best ratio that we provide, I think that will help you look at this, is if you look at our investment services revenues relative to the related expenses.

They did move from -- revenues are now 94% of expenses versus 90% in the fourth quarter.

So, it looks to me like there's 100 basis points or so, would be my best guess for what we're getting out of that.

And then, there was a follow-up question was on the merit increase?

Right.

Yes, I think seasonally you're not going to see quite as much impact because --.

In the second quarter, it's going to show up in the third.

Yes, it's going to show up in the third quarter.

We're going to delay the increase, until July 1.

And, there's also, I want to bring to your attention, that the accelerator -- acceleration of our equity programs, there's a seasonal impact to that.

So, as employees near retirement age, we recognize 100% of that expense in the period that it's granted.

So, that had quite a bit of impact, probably at least $30 million delta to what we would see in the second quarter.

Right, okay.

And then, separately, gross margins in your business, the Asset Servicing business, obviously improved, which is different from what we've seen from other folks.

Could you speak to what you're doing there to drive that kind of result?

Obviously, you've had the repricing, but you mentioned it's early days, so there must be something else going on there.

I think, Betsy, it's really assumption of good expense management.

And, Tim can talk to it a little bit more.

But, last call, we started -- not started, but we really focused in on reducing the expense base and the employee base to better match the revenue growth that we were experiencing.

And so, I think those programs have kicked in.

And, it's really been principally on the expense side controlling that as new revenues are coming on board.

So, that's allowed for the margin to expand.

Okay, but even your gross margins have expanded as well.

So, I'm just looking at fees over AUC.

I'm sorry?

Can you say that --?

Even gross margins to have expanded recently.

If I'm looking at fees over AUC?

Higher-margin --.

Yes.

If you noticed that our assets under custody are up about 3% sequentially.

And, I think you'll see that our revenues are up about 6% sequentially in asset servicing.

Tim, you might want to comment on that.

Yes, Betsy, it's really a mix point.

We've been talking about is now a few quarters in a row.

We've been winning a lot of new business in middle office outsourcing and transfer agency, which really aren't geared to AUC.

I think you see the opposite kind of playing through in the year-on-year results.

Right.

It's definitely a business mix point that you've raised.

Okay.

Thank you.

Cynthia Mayer, Bank of America Merrill Lynch.

Hi, good morning.

Maybe just to follow-up on that briefly, I think you said there's something like $30 million and the comp was from the upfront expensing of the equity awards?

All told, how much of the comp expense was seasonal?

I would say that's about what the seasonality was.

I think that -- it nets out to about that number, Cynthia.

Nothing beyond that?

Okay.

And, you mentioned also that you expect stable NII depending on -- or NIM depending on deposits.

So, what kind of trend are you seeing so far this quarter?

And, what do you regard as a normalized rate?

Or normalized level?

Okay, I think normalized in this abnormal environment is about where we are.

So, in a zero rate environment, it feels like about $130 million to $135 million type of range is what we could squeeze out of the NIM.

But, there are a lot of factors that will impact that, because if we see a shock one way or the other, we could see imbalances grow.

But, if we don't see any meaningful change in behavior or any meaningful change in interest rates, our balance sheet seems to be behaving pretty stable at about this level, which is about where we closed in the third quarter.

Okay.

I mean, excuse me, about where we closed the first quarter, I'm sorry.

About $300 billion is the, probably, the average balance sheet size.

The fourth quarter we saw the spike in deposits, when everyone was leaving cash with us.

That's more normalized of the $300 billion range.

And, the net interest margin in this $130 million to $140 million is probably about right.

Okay.

And then, just lastly maybe on the issuer services, post the sale of the Shareowner business, is that a good run rate at this point?

Yes.

That line is now issuer services, it's just two of our underlying businesses.

It's Corporate Trust and DRs.

And, Karen Peetz, the head of that Business is with us.

Karen, any comment there?

Yes, about half of the decline on the first quarter was Corporate Trust, about half was DR.

Of course, Corporate Trust has to do with the market and the global debt markets were flat for the quarter.

And, the US market, though, showed some improvement, it was up about 2%.

And, we also had 12 CLOs for the first quarter.

So, that was very encouraging.

So, in that Business, we're very much looking to decrease expenses and manage risk.

And, in the DR business, of course, that's emerging market related.

And, it's also impacted by corporate actions.

So, there's just a little less corporate action.

Yes, and global M&A is down.

Cynthia, I'd say the DR business is pretty volatile, because it's episodic with corporate actions.

And so, that's a little harder for us to forecast.

Right.

Okay.

Sounds like overall, maybe cyclically depressed still a little bit.

So, could bounce back but, as you say, volatile.

It is.

And, it's a reflection of activity that's going on primarily in the emerging markets.

Corporate trust is a reflection of what's going on in the debt issuance.

With the lack of a structured debt market, it's a little more challenging.

Got it.

Okay.

Thank you, very much.

Thank you.

Ken Usdin, Jefferies.

Good morning, it's actually Casey filling in for Ken.

Just a question, I guess, following up on the NII outlook.

How much -- with the understanding that the balance sheet is probably at a right size, how much of the NIM improvement was due to just the excess liquidity drag coming off versus a slightly more aggressive investment strategy?

I'd say it's about half and half, Casey.

Okay.

Got you.

And then, within expenses and there's a couple specials within, on the fee side, the investment income, obviously, was pretty high, and then on the expense side of things, the other line was pretty high relative -- due to the litigation expense.

What do you see as a good run rate going forward for these lines?

I think lower for both, hopefully.

Okay.

And then, just lastly on capital, the $1.16 billion for CCARs, are you looking to do that pretty ratably throughout the year?

And than, if you could share any thoughts as to why no dividend hike?

Thank you.

I'll take the -- when we submitted the CCAR, you do submit it on a quarterly basis.

And, our plan is to do it ratably throughout the course of the year.

And, actually, over the following four quarters, because now it does really stem into the first quarter of next year.

So, it is a continuous four quarters.

In terms of the dividend hike, we had indicated at November that we would be in the 20% to 25% range as payout.

I think we're, given where consensus is, we're falling to that range.

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

Just a couple quick comments on that.

I think we were, as we tend to be, relatively conservative in our approach to capital plans.

When we submitted the plan, we did not want to break any ratios even under a stressed environment.

We also wanted to maintain that 20% to 25% payout per dividend and 60% to 65% payout in total including buybacks.

We were well within that -- within those numbers, even in a stress scenario.

And, I think it just shows the resiliency of our business model and the flexibility we have going forward.

So, time will tell on what we'll do beyond what the plan is today.

Next question?

Operator, do we have any more questions?

Howard Chen, Credit Suisse.

Hi, good morning Gerald, good morning, Todd.

Hi, Howard.

Just a follow-up on that fairly large buyback approval you have.

Assuming no more frictional deposit rolloff, when does leverage become a potential constraint again as we saw a little bit when the market was choppier at the end of the year?

Yes.

We're off to a 560 leverage ratio, so we're pretty comparable with where we are right now.

We could actually take on quite a significant increase in deposits.

And so, we build, as you can see, we're building even with this type of activity.

We bought back a lot in the first quarter, and paid our dividend, we continue to build both Basel I and Basel III capital.

So, we think that's going to be much, much less of a constraint for us on a go forward.

And, given the world's just fragile, Todd, what is that leverage constraint or target that we should be thinking about in the back of our minds?

That you would want to get close to?

Yes, I'd like to see us keep it above 5.25%.

So, we had gotten as low as 5.2%, 5.10%, something like that.

Okay, great.

And than, another one on the numbers, apologies if I missed this in your remarks.

But, leasing and C Capital gains were elevated again.

I know that's partly the core business, but could you just provide some more detail on all that and maybe your outlook for the sustainability of that going forward?

Yes.

In the other income line, you can see we've had some volatility.

It's probably been in the $60 million- to $150 million-type of range depending on some of the one off items like C Capital, the sale of Shareowner Services, the -- we do from time to time, as we're winding down our lease portfolio, sell off some of those leases at a gain.

I think the normalized -- what's the normal in that line item, probably in the $80 million to $100 million range.

Okay.

Great.

Thanks.

And then, just final one for me.

As the statute of limitations is ending here, it appears we're seeing some more mortgage related lawsuits for the industry targeted at more the trustee rather than the originator.

Gerald, I know you've made some fairly strong statements on all of this, at the investor day, but I'm just curious if you had any evolved thoughts on that?

And, how you all our preparing for some of this coming down industry pipeline?

Thanks.

We continue to feel very good about our position as trustee as these cases have been going through the process.

As you may have seen, we got a favorable ruling here in the state of New York around the BofA settlement.

I think it endorsed again our role as trustee and the limitations of our liabilities.

So, we still feel quite good about our position as trustee in these situations.

Great.

Thanks for taking the questions.

Thanks, Howard.

John Stilmar, SunTrust.

Good morning, gentlemen.

Just one quick question for you.

Obviously deposit outflows have been persistent across the space.

I was wondering given your vantage point, have you any sense as to where those flows are moving back into?

Obviously, we've seen some volumes starting to move into equities, and as a general re-risking theme.

But, are most flows moving back into 287 funds?

Or where does this capital that's been sloshing around the system that's sitting on your balance sheet?

Where is it ending up today?

Yes.

I'd say, generally, it is a re-risking theme, John, let me turn this one over to Curtis Arledge our head of Asset Management.

Curtis?

Yes, we've definitely seen flows out of both deposits and money funds, generally moving back into re-risking.

Flows have been into international equity markets and bond markets.

So, there has definitely been a theme of investors who are re-risking being more diversified in their approach.

It's hard to know exactly where deposit flows and money flows go.

But from AUM flows, there is some re-risking going on.

And then, given the fact that you have your strong position with your clients, and the balance sheet, there's always a debate about whether the custodians have the ability to potentially cross sell their Asset Management business to some of those deposit bases.

How would you say your ability to retain those deposits outflows from the balance sheet back into your Bank of New York Asset Management businesses?

Can you talk about where those funds might have been recaptured?

And, that as a potential opportunity to grow the asset management, AUM, or fee per AUM?

We obviously have clients that have relationships across many of our asset management boutiques.

And, when they have a relationship with us and they also use our money funds or our deposits to hold cash, we're always talking to them about their holistic needs, whether they are positioned well against their liabilities, do they have the appropriate amount of diversification again, around there global portfolios.

And, I'd say we're actually making real progress there.

I'd say it's one of the biggest opportunities for us as a company, is to continue to mine the holistic relationship.

Clients can hold cash with us, they can also invest across a wide array of equity and fixed income products.

We're going to be announcing later this week a new head of our client distribution function, really to continue to work very closely with the investment services team around broad relationships.

So, I think it's a really big opportunity for us.

Would you say that the progress now is better than it was maybe a year ago?

Being able to capture that?

Yes.

Absolutely.

Thank you.

John, I would just add onto that.

I'm quite encouraged with how the teams are collaborating across the Businesses and really focusing on the client and the client needs.

And, whether it's Investment Management providing products for those people looking to invest their money or a variety of different other services that we offer to our clients.

I just think we're really working much better together across our Businesses.

And, the theme of our Business is to provide solutions to our clients.

Brian Bedell, ISI Group.

Hi, good morning folks.

Good morning, Brian.

Todd, you were talking about the excess deposit trends and potential impact of regulatory changes on that.

Could you just elaborate a little bit more?

And, also the non-interest-bearing deposits, obviously, declined a lot on a period end basis.

Do you think that is just noise?

Or is that indicative of a substantial downward direction into the second quarter?

Sure, Brian.

Why don't I start with the last question?

I think the period endpoint was really a spike and it was a spike in the fourth quarter, and that was mostly noise.

I think there was a little bit of a move into risky assets as we just discussed.

In terms of the looking out, there are a couple of things to look at that can have different impacts, I would say, on the deposit base.

One would be if there is a significant -- if the rating agencies significantly downgrade other financial institutions, we may see more deposits directed here.

Another item is, when I mentioned regulatory reform, it's both money market reform, and, for that matter, FDIC insurance.

So, depending on what happens, whether there's an extension of the significant FDIC insurance that exists today, that could be -- could go either way.

For us, since we have such a strong balance sheet, we could end up seeing more deposits.

Or you could see the deposits moving elsewhere into some other lower risk type of assets, such as treasuries.

In terms of money market reform, you could, depending on how significant it was, obviously, that will take some time, you could see a move out of money markets and into the deposit base.

So, there's a lot of uncertainty and variables, which is what I was alluding to there.

Okay, great.

And, on the money fund reform, you wouldn't see any impact on that until at least 2013, I would think.

Is that you're understanding also?

Curtis, you might be in a better position to answer that.

Yes.

No, I think that we -- six months ago we would have thought there might have been something in place by the end of the year.

As all of you have read.

The SEC proposals, or suggested proposals, they're still, I think, discussing themselves exactly what they're going to put out.

So, I do think it's going to be more of a 2013 implementation year.

Obviously, there are other regulators besides the SEC that are focused on this.

So, we do think that something is forthcoming.

But, I think the industry has definitely helped the regulators understand the dynamics of floating NAV, the challenges that that would create both operationally and really limit the convenience of the products.

And, there's a lot of active dialogue going on, as you well know.

But, I think we will take the rest of this year to figure it out.

Okay, great.

And then, a question for Tim on the asset servicing.

Obviously the growth's pretty good at 6.5% last quarter.

Can you describe what contribution came from broker-dealer services in terms of the growth?

Or was that mostly really driven by the mix shift that you alluded to as you converted over to no office?

And then, the new business that your still bringing on, the $400 billion plus still yet to be converted, how should we think of that from a revenue capture rate relative to your overall capture?

Yes, Brian, I would say overall Broker-Dealer Services was a small portion of the story.

I think there's absolutely a net new business inflow story.

I think Todd might have mentioned the $450 billion still to convert.

We converted just over $300 billion in the last quarter.

We expect to convert what hasn't been converted in the next three months, and it's an excellent mix of business.

It's good, solid core fee business in Middle Office Outsourcing, Custody and Transfer Agency.

And, I think as we talked about before, that's really sticky business.

Okay, great.

And the 70% success rate that you mentioned, can you just define exactly what that is, is that 70% retention or success relative to your objectives?

Yes, that's 70% of the clients have agreed to the repricing, Brian.

And, of the clients that haven't yet, that doesn't mean they won't.

A very small majority of -- a very small number of the clients, pardon me, that have said they're leaving us actually haven't told us whether or not they've found a custodian to take the business.

So, it's 70% have accepted our new pricing.

And, as I mentioned we're only halfway through that 700 client base.

So, it's still early days.

I'm just reminded to say it's a very different story at the high end of the Business.

So, the largest clients that are multiproduct, that are in the securities lending and foreign exchange program, it's still very, very price competitive.

Right, okay.

That's helpful.

And, just a couple housekeeping ones.

The level of discount accretion and interest revenue in the quarter?

And, also the money fund fee waivers on pretax income?

Yes, the accretion was down a bit to about $80 million on the quarter.

And, that's probably about where it should run for the next few quarters.

And, the fee waivers were just about flat with the fourth quarter, maybe slightly improved.

And, that -- that's costing us a somewhere between $0.05 and $0.06.

It's kind of in the middle of that, Brian.

Is that $70 million about, approximately?

It's actually a little bit higher than that.

Closer to $90 million?

Closer to $90 million, Brian.

Got it.

Okay.

Thank you, so much.

Glenn Schorr, Nomura.

Hi, thanks very much.

Could we go back to asset management just for a sec and talk about what products are bringing in the money?

You noted the last, what, 10 quarters in a row of positive long-term flows?

It seems pretty consistent.

Can you just talk about what the greatest asset gatherers are?

Yes.

Actually, I think it's really important to understand the composition of the flows, because too often I think we use AUM as a blunt instrument to describe what's going on.

If you go back to a year ago, first quarter of 2011, a lot of the flows were very much index-oriented and fixed income low fee-oriented.

So, we actually had a $31 billion positive flow a year ago, and it generated about $26 million in net annual revenues.

The flows have definitely shifted more toward active mandates, again with an international flavor, both international stock and international bond flows have been favorable.

And then, within bond flows, we've seen more of a move to emerging market debt.

That's true for us, I think those trends are generally true for the industry.

We are well-positioned, we have good performance, good investment teams in those categories.

So, the flow numbers are not necessarily as big.

$7 billion of long-term flows this quarter, actually generated more net annual revenues.

So, I really do think it's important to understand both the AUM and the net revenue composition of the flows.

And, again, I don't -- I think it's too early to say that people are re-risking aggressively.

But, there absolutely is a shift away from more passively conservative-oriented products to investors, thinking that at least some of the chaos and volatility is behind them and they are putting money back to work.

They need to eventually earn a return.

And, in a low rate, low return environment they are deploying more capital.

And, I would say, Glenn, just to add to it, that again, the beauty of our business model is we have a whole series of boutiques with a variety of different investment strategies.

And so, as people shift their thought process to different types of asset classes, we're able to capture those flows and internalize it.

One other point I would make is that there definitely is also a trend away from investors buying products, and they are definitely looking more for solutions.

The types of investment offerings that we have that appeal to them really are in the absolute return, asset allocation, real return category.

So, the balance fund of old is in many ways making a comeback as investors really are spending more time looking at their liabilities and trying to find a solution that is well-matched to it.

And, again, we have a number of investment offerings there.

I'd actually say it also fits BNY Mellon well as a firm, because as clients are trying to figure out, what is my overall solution, they're actually asking who understands my overall needs?

And, when you have a large institution where you are both their assets servicer and manage a lot of their assets, you tend to be one of those people who really does have a holistic perspective on the entire client issue.

All right.

I appreciate that.

The $60 million increase in litigation costs, is there any allocation you can give us towards what that's for?

I know Howard pointed out some of the ongoing mortgage issues, but you also have that STARS case picking up steam.

Yes.

There is -- no, Glenn, we really don't think it would be in our interest to disclose which items any of the provisions are related to.

Okay.

And, on that front, my gut it's the same answer, but you have you given us a number on what your total litigation reserve is right now?

No, we have not.

Okay.

And then, just making sure on the STARS tax case, there's no reserves against that, correct?

No, we've not indicated what our provisions are.

But, we do give a very clear indication with what the potential risk to us is on STARS.

By the way, that trial just began this week, and we continue to believe we've got a very strong tax position there.

Okay.

Last one.

The jump up, this is not a this quarter issue, but it's just more making sure, the jump up from Basel I risk weighted assets to Basel III, it's bigger for you guys than a lot of other companies.

Is that just the low rate of securities in the investment portfolio that eventually run off?

Yes, I'd say really there's two contributors there.

We have a little higher operational risk, I would think, than average.

But, by far, the largest contributor is the treatment of the sub-investment grade securities portfolio.

And, that portfolio is at almost at $4 billion.

It's attracting about the equivalent of $50 billion of risk-weighted assets.

So, that's burning off at a few billion dollars of risk-weighted assets a quarter.

Got it.

And, obviously, that's incorporated into the capital plan CCAR process?

Yes, it is.

That's correct.

Excellent.

Appreciate it.

Thanks.

Andrew Marquardt, Evercore Partners.

Good morning, guys.

Back to the margin, can you just remind me, probably if I missed it, the amount of excess deposits that you guys are thinking about that are still sitting on your balance sheet?

How do we think about that potentially in a more normalized environment?

Again, I think we are in a more normalized balance sheet environment.

We have to remind you all that right at year-end last year, we had a significant spike in deposits, as everyone was in a risk off mode.

We probably had $20 billion to $30 billion of quote excess deposits right at year end.

That has more normalized and burned off, so to speak.

And, we're running an average balance sheet in the $300 billion range.

And, that feels about normal for us given our client activities.

Okay.

And then, you had mentioned that the discount accretion this quarter was about $80 million, and that should hold for the next couple quarters.

After that, will that trend lower or how do we think about that?

Yes.

That's probably got about a -- it will slowly trend lower, as you see prepayments in that portfolio.

So, you can pretty much just look at it as a yield adjustment on a portfolio, that's now a little over $3 billion and that's probably amortizing at about 20% per annum.

So, you can just look at it that way, Andrew.

Okay, great.

And then, you had mentioned the normalized margin in an abnormal environment is now $130 million, $135 million.

Can you remind us the normalized -- in normalized environment, should that still be in the $160 million, $180 million that you mentioned at your analyst day?

I think it would be, Andrew.

That's our best guess.

There's probably still some deposits here.

Some free deposits that are here because of this extremely low interest rates environment, that if we do go into a normal environment of a couple hundred basis points Fed funds rate, we'd see a little smaller balance sheet but we would see a lot higher yield on it.

Got it.

And, does that include or exclude the discount accretion benefit?

You can -- it would -- basically before I think we're going to see that environment that discount accretion is going to have burned off.

So, I think we have pretty much -- what we've tried to point out in November is, we're adding, we're putting some assets to work at enough yield to offset the discount accretion burnoff.

Got it.

That's helpful.

And then, just lastly, in terms of the expense initiative that's gaining traction, how do we think about the ability to achieve positive operating leverage this year in still -- what is still a tough revenue environment?

Is it possible to get positive operating leverage with that new initiative in this environment?

It certainly is our goal.

And, just as we laid out for you in investor day in November even in a slow growth environment, with the kicking in of our initiatives, we expect to produce positive operating leverage over the course of the year.

Great.

Thank you.

Thanks, Andrew.

Greg Ketron, UBS.

Good morning.

Couple of questions, one on in general, you touched on this a couple times this morning, but pricing overall, as you have built a very nice pipeline, we've heard a couple people talk about looking at pricing and trying to improve the pricing that exists out in the marketplace.

Are you seeing any better pricing as you move forward on bidding on contracts?

I'll take this real quick and then we can turn it over.

Of our businesses, the one that's getting the most attention regarding pricing is asset servicing.

We're not seeing a lot pricing pressure or noise elsewhere.

So, for us, our Asset Servicing business is 25% to 30% of our Business and I think that's going to most volume on this topic.

So, Tim, you want to address it further?

Sure, Todd.

I think I just maybe, at the risk of repeating myself a little bit, I think on the very largest end of the market, the very large clients by asset terms that are looking to leverage a number of our products and services, including securities lending and foreign exchange, it's just still really competitive.

But, for us, it's about trying to do more business with those firms, given the range of products and services that we have.

I have seen a bit more pricing pressure when you get to smaller clients, and unbundled clients.

So, I think that's probably the best way to characterize it at this point.

And, if there is an area where there might be still a little bit of pricing irrationality, I would say it's just generally in the public fund sector.

And, as we've said before, we're just staying incredibly disciplined, making sure that every client, no matter what size it is, is hitting our minimum profit thresholds.

And, if that means we lose a couple clients, we lose a couple clients.

Okay, great.

And then, if we can get an update on the asset sensitivity, you had mentioned the fee waivers had reached maybe close to $90 million a quarter?

Yes.

The -- it is a little higher than we had indicated in the past.

What we had indicated historically, or for the past number of quarters here, is that 100 basis point mediate shift in short-term interest rates would have something like a $500 million pretax income impact to us, assuming there wasn't a significant change in our client behavior.

That number is probably a little higher now, it's probably over $600 million.

Over $600 million, up 100 basis points?

Yes.

And, with that just be the revenue impact?

Or would that include also any related expenses like comp on the higher revenue?

Greg, that includes our best guess at related expenses.

That's pretax.

Okay, great.

Thank you.

Wendy, we have time for one more question.

Jeff Harte, Sandler O'Neill.

Good morning, guys.

On the FX, a theme we've been hearing from bank FX trading operations has been a lot of margin compression in developed markets, but things going a little better in the emerging markets.

Can you talk a bit about to what extent your franchise touches the emerging markets versus being very developed market centric in FX trading?

Yes.

We provide FX services across all the markets, developed and emerging, it's a pretty broad-based client base.

And, therefore we do trade and provide capabilities across all the markets.

I think that's one of the reasons why when we described a decline in volatility why it impacts us the way it does.

And, as Tim mentioned earlier, we're continuing to address the market demands and provide services that meet their needs.

And, it's not surprising with a low growth environment for everyone across the board in slow economies that this kind of activity is viewed very, very competitively.

So, our job is to try to capture as much volume that touches us as humanly possible, and to be sensitive to client demand.

Yes, Jeff, we cover over 100 markets, so our revenues are very client focused.

So, it depends on what the business activity of our clients is and that's what is driving our revenues.

But, we do cover just about every conceivable market.

And, to the extent you cover non, say, developed markets is that a function of where client assets are?

The FX is theoretically largely tied to asset under -- your asset under custody clients.

That's exactly right.

Okay.

Thank you.

Thank you, very much.

Well, thank you very much, everyone, for joining us this morning.

If you have any further questions, please give Andy Clark or lzzy Dawood a call and we appreciate you dialing in.

Have a good morning.

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.