紐約梅隆銀行 (BK) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the second 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'll 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 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 14 of the press release, and those identified in our documents filed with the SEC that are available on our website, BNYMellon.com.

Forward-looking statements in this call speak only as of today, July 18, 2012, and we will not update forward-looking statements.

Our press release and earnings review are available on our website, and we will be using the earnings review to discuss our results.

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

Gerald?

Thanks, Andy, and good morning, everyone.

Thanks for joining us.

As you saw from our release, in the second quarter we generated net income of $466 million, and earnings per share of $0.39.

Now of course this includes our previously announced litigation charge of $0.18 per share.

After netting out a few items, we look at our core earnings at about $0.53 per share, and Todd will walk you through how we get there.

That compares to $0.59 in the second quarter of last year, and $0.52 per share in the first quarter of this year.

We achieved another quarter of positive growth in investment management and investment services fees, a clear sign of the strength of our business model.

The impact of new business helped drive our fee growth.

In investment management we had $26 billion in long term in flows.

Now that's the eleventh consecutive quarter for positive long-term flows in our investment management segment.

We also are pleased to report that during the quarter, the pensions and investment publication published an annual survey that ranked us number 1 for providing liability driven solutions through our insight boutique.

In asset servicing, net new business helped drive assets under custody to a record level of more than $27 trillion.

Also like asset management, the quality of our asset servicing capabilities continues to be recognized by a third parties, and is clearly helping us win business.

During the quarter, we received 17 number 1 category rankings among our peer group of the world's largest global custodians in the global investor survey publications.

That follows top rankings last quarter among peers in the two other major surveys.

So we grew fees during the quarter in both major business segments when key equity indices were actually down, and there was lower volatility in the currency markets.

Turning to the expense front.

On an operating basis, total expenses were up 1% sequentially after adjusting for M&I, litigation, and restructuring charges, and were actually down 1% year over year.

We're continuing to make good progress on our operational excellence initiatives.

In addition, during the quarter we announced two leadership appointments that are intended to further develop those efforts.

We promoted Suresh Kumar to the role of Chief Information Officer.

Suresh is very skilled at driving efficiency, creating innovative, client-centric solutions, and simplifying our IT structure.

Just as information, he spent much of his career as the CIO of Pershing, and of course, Pershing had some of the leading technology in that space.

We also created the role of the Chief Operations Officer, which we filled with a gentleman named Ed Watson, who we brought in from the outside, and Ed has vast experience in the financial services industry.

He will help lead the effort to rationalize and optimize our core operations across the Company, and it's good that Ed is going to bring a fresh eye from the outside.

In terms of capital, we ended the quarter with our estimated Basel III Tier 1 common up over 100 basis points to 8.7%, reflecting the impact of the new notices of proposed rule making, as well as our positive performance and our slightly larger balance sheet.

We generated $527 million of gross Basel I Tier 1 common, and we delivered a 15.7% return on tangible common equity, even after the litigation charge.

We also purchased more than 12 million shares during the quarter.

Our strengthened capital position provides us greater flexibility for ongoing investment, while continuing to return capital to our shareholders.

Now also during the quarter, we made some significant progress in aligning our businesses to further leverage the breadth of our capabilities.

We formed a new unit called global collateral services, which will help us better serve the rapidly growing market for collateral management.

Now this is an area we're quite excited about, as the need to post, segregate and optimize collateral across all market participants continues to grow, and we are extremely well positioned to serve all of them, help them manage their risk and reduce their capital costs.

We also made some meaningful progress in navigating the litigation environment by putting some major litigation behind us with no significant impact to our capital.

In summary, we're growing fees in our core businesses, continuing to strengthen our balance sheet, and making progress in those areas that our investors are focused on, including investing in new areas to generate organic growth, and of course being very disciplined in managing our expense base.

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

Thanks, Gerald.

Good morning, everyone.

My comments will follow the quarterly earnings review, beginning on Page 2. Reported earnings per share of $0.39.

This includes the $0.18 for the litigation charge that we announced last week.

It also includes a total benefit of approximately $0.04 related to securities gains.

We had a slightly lower tax rate, and we also had a negative loan loss provision for the quarter.

The way we look at our core earnings, therefore, it nets to about $0.53 for the quarter.

On a sequential basis, total revenue was $3.6 billion.

That's down 1%, while fee and other revenue was unchanged.

Investment services fees, investment management, performance fees, and FX were all up.

They were offset by declines in NIR and investment and other income.

If you exclude the volatile category of investment and other income, our core fees were up 3% for the quarter, and we're continuing to hold the line on core expenses.

Now, let's turn to page 4, where we'll call out some of the business metrics that help explain our underlying performance.

On page 4, you can see that our assets under management of $1.3 trillion was down slightly sequentially, and that reflects the lower equity market values that we saw in the second quarter.

Those lower market values were offset partially by in flows, and they're up 2% year over year, as asset in flows were offset also by lower equity market values.

We had long term in flows for the quarter of $26 billion, and it benefited from the strengthen in our fixed income and equity index product.

It was our eleventh consecutive quarter of positive long term in flows.

Assets under custody and administration was up 2% sequentially to a new record of $27.1 trillion, driven by net new business, but also offset by slightly lower equity market values.

Assets under custody is up 3% on a year over year basis.

A number of our other key metrics showed growth on a year over year basis.

Loans and deposits are up significantly, DR programs are up slightly, and collateral management balances grew nicely, a trend we are well positioned to further leverage with our recently formed global collateral services group.

Now, except for those that are volume related, all of our clearing metrics also improved sequentially.

Moving on to fees on Page 6, asset servicing fees were up 1% sequentially, as the impact of net new business and seasonally higher securities lending revenues was partially offset by lower equity market values.

Asset servicing fees were down 2% year over year, primarily reflecting lower equity market values and securities lending revenue, partially offset by new business.

We had $314 billion in new AUC wins.

Over the last 12 months, new AUC wins have now totaled nearly $1.3 trillion, and there's still about $400 billion scheduled to be converted between now and year end.

Issuer services fees -- and we're excluding the shareowner services business that we sold last year -- were up 10% sequentially, and down 12% year over year.

The sequential increase resulted from higher DR revenue.

The year over year decrease resulted from lower DR revenue, as well as lower money market related fees, and lower trust fees related to the weakness in the structured products and corporate trust.

Clearing fees were up 2% sequentially and up 6% year over year.

The sequential increase is primarily due to higher mutual fund fees, and that's partially offset by the impact of lower DARTs volumes.

The year over year increase primarily reflects higher mutual fund fees, partially offset by the impact of lower DARTs volumes, and higher money market fee waivers.

Turning to investment management fees, where we performed very well, especially considering the weakness in the equity markets.

As a reminder, roughly 50% of our investment management fees are correlated to global equity markets.

Investment management and performance fees were up 7% sequentially, and up 2% year over year.

Both increases reflect higher performance fees.

If you exclude the performance fees, the underlying investment management fees were up 2% sequentially, and down 2% year over year.

Sequentially, the increase was due to net new business and higher money market fees, which were partially offset by lower equity market values.

The year over year decrease was due to lower equity market values, offset somewhat by net new business.

In FX and other trading revenue was down sequentially.

It was down 6% sequentially, and it was down 19% year over year.

If you look at the underlying components here, FX revenue totaled $157 million.

That's up 15% sequentially, but down 15% year over year.

The sequential increase resulted from higher volumes, while the year over year decrease reflects significantly lower volatility.

Other trading revenue was $23 million, compared to $55 million in the first quarter, and $38 million in the year-ago quarter.

Both decreases were driven by lower fixed income trading reflective of market conditions in the second quarter.

You will note that we have provided a new table in our earnings review that details investment and other income, and as you can see, the line item has a fair amount of variability.

Investment and other income totaled $48 million in the quarter, compared with $139 million in the prior quarter, and $145 million in the year-ago quarter.

Sequentially, the decline resulted from lower leasing gains, seed capital gains, and equity investment income.

The year over year decrease primarily resulted from lower asset related gains and lower equity investment income.

As we've indicated in the past, we expect investment and other income to be volatile, but to average approximately $80 million to $100 million per quarter.

Turning to page 8 of the earnings review, NIR was down $29 million sequentially, and up $10 million versus the first quarter, and that's on a tax equivalent basis.

NIR in the quarter was adversely impacted by narrower spreads and lower accretion.

Frankly, it's a little lower than we've anticipated, as it has taken us longer than expected to put our deposits to work in securities and secured loans.

The year over year increase in net interest revenue was primarily driven by higher average client deposits, increased investment in high quality investment securities, and higher loan levels, offset partially by narrower spreads and lower accretion.

The net interest margin was 1.25%, compared to 1.32% in the first quarter, and 1.41% in the year-ago quarter.

The sequential decrease reflects narrower spreads and lower accretion.

The year over year decrease was driven primarily by the significant increase in client deposits, which were invested in lower yielding assets, reflecting current market environment.

If you turn to page 9, you can see the total non-interest expense, excluding the amortization of intangible assets, M&I, litigation, and restructuring charges were up slightly sequentially, and that's primarily reflecting cost of certain tax credits, higher business development expenses, as well as deposit levy imposed on our Belgium bank subsidiary.

All of that was mostly offset by lower staff expenses.

Despite the headwinds I just mentioned, expenses were down 1% year over year on an operating basis, reflecting the impact of our operational excellence initiatives.

On page 10, we've broken out the progress we've made on those initiatives since the program began in the fourth quarter of 2011.

On a gross basis, our benefits have resulted in $94 million in quarterly run rate savings, and we have had incremental program costs totaling $23 million, for net savings in the quarter of $71 million.

The bulk of the savings, $55 million was related to integrating and consolidating our business operations, and also leveraging our global delivery centers.

On the technology front, we started the process of simplifying our infrastructure and eliminating a number of servers, as well as rationalizing applications, and actually in-sourcing software engineers.

Within corporate services, we've achieved benefits from consolidating some real estate, and we've begun to see the benefit of our enhanced procurement function.

Looking forward, program costs will remain elevated in the third quarter, but we remain on track to achieve our targeted savings by the end of 2012.

On Page 11, we have details on our capital ratios.

Our estimated Basel III Tier 1 common equity ratio was 8.7% at quarter end.

That reflects the impact of the final Basel 2.5 regulations, as well as the recently released rules by the Fed on the US interpretation of Basel.

As we noted in an earlier press release, our ratio benefited from a reduction of risk weighted assets related to the treatment of sub-investment grade securities, and that was partially offset by the treatment of investment grade securitizations and the methodology for accounting correlation among financial institutions exposures.

As well, we saw some meaningful balance sheet growth in the second quarter that did add risk weighted assets.

The table on Page 12 provides a reconciliation of our Basel III ratios.

The ratio for the first quarter of 2012 and second quarter 2011 were calculated using the prior BIS guidance.

Turning to Page 13, you can see that our investment securities portfolio continues to perform quite well.

The pretax net unrealized gain in our securities portfolio increased by $258 million to $1.4 billion, and the percentage of sub-investment grade declined from 5% to 4% of the portfolio.

Moving on to our loan book on page 14, you'll see that the provision for credit losses was a credit of $19 million that compares with a charge of $5 million in the first quarter, and a zero provision in the year-ago quarter.

This credit primarily resulted from the decline in the expected loss from a broker-dealer client that had previously filed for bankruptcy, as well as improvements in the mortgage portfolio.

NPAs declined from $331 million to $294 million.

The effective tax rate was 15.8%.

That was largely driven by the reduction in the tax rate due to the litigation charge of approximately 9%.

The operating tax rate was an estimated 26.1%, which is somewhat lower than a range of 27% to 28%, and that's due to an increased benefit from certain tax credits.

This also compares with 26.9% in the year-ago quarter.

Now, a few points to consider in your thinking about the third quarter.

Third quarter earnings have traditionally been impacted by a seasonal slowdown in transaction volumes, as well as capital market related revenues, particularly securities lending and foreign exchange.

We should see a seasonal increase in DRs, as that tends to be the dividend season now.

In terms of NII, we think we can maintain the second quarter run rate, even with the recently announced ECB move to zero rates.

The quarterly provision should be in the range of $0 to $15 million, and our merit increase was effective on July 1. Now, we continue to remain focused on driving expense savings through the operational excellence initiatives.

The tax rate in the third quarter of 2012 should be approximately 27% to 28%.

And finally, we'd expect to continue to execute on our share repurchase program.

Beyond that, as Gerald mentioned, the establishment of our global collateral services unit has positioned the Company to capture greater collateral management, collateral transformation, and collateral finance revenues going forward.

With that, let me turn it back to Gerald.

Great.

Thanks, Todd, and I think we're ready to open it up for questions.

(Operator Instructions)

Our first question today is from Glenn Schorr with Nomura.

Hi, thanks very much.

Curious if you could expand a little bit on the big increase in deposits, where it came from, what kind of clients, where you're putting the assets right now?

Yes, most of the deposit increase, Glenn, was a spike right in the end of the quarter.

So it's going to be relatively temporary.

If you look at for the quarter on average, it was only up about $3 billion.

Got it, but so you mentioned it's a spike at the end of the quarter, but temporary just client parking money, not putting money to work, so I'm assuming you're parking that at the Fed?

That's right.

It's going to be in and out over a four week period.

Got it.

Got it.

On the NIM side, if you look through the deeds on the average balance sheet, it's kind of simple that asset yields coming down, those deposits, primarily foreign deposits.

And it seems like you have less room on the liability side.

Is that basically where we're at, now?

And you mentioned you think you could defend these levels even with the ECB cut, but is there any chance to remove the deposits over maybe with the Fed and pick up a little bit?

It would be a wonderful thing if you could actually, Glenn, swap the deposits, swap Euros into dollars, and leave them at the Fed.

But the swap would go against you negatively, and actually create a negative interest rate, so at this time, not much of a change there.

And so with no change, is this the type of quarterly progression we're looking at, or was that like a one-time step down, and now we can hold these levels even if rates don't move?

I think we can hold these levels.

We do have some headwinds here, because we do tend to leave some money at the European central banks, and that was, in the past, we received a little bit of an interest rate.

We won't see that going forward for the foreseeable future, but we are continuing to put more money to work, primarily in dollars, where we are continuing to find some pretty attractive low risk assets.

And I think that will offset the two headwinds, if you will.

Glenn, I also want to emphasize that, as we're doing this, Todd made some comment in his opening commentary that we've been a little bit slower in putting some of the money to work because, frankly, we've been quite conservative in putting the money to work because we want to stay within our risk appetite.

We're not looking to go out of the bounds of our risk parameters, and we just don't think it's prudent to do so in this kind of environment.

I appreciate that.

Last one is just maybe a little more color on the huge flows that you keep seeing.

What products are these?

What's the average fee relative to the current book of business?

Anything you could help there would be great.

You're referring to asset management?

Correct.

Let me turn that one over to Curtis.

Hi, Glenn.

In the first quarter we actually, you may have seen we had long term flows of $7 billion, and in this past quarter it was $26 billion.

I'd tell you the competition was pretty different.

As you know, the markets were a little bit better in the first quarter.

Equity markets were up, and we saw higher average fee products in the first quarter.

In the second quarter, it did revert back to more fixed income, more index products.

So we frequently talk about our business in terms of assets under management.

From a revenue perspective, though, they are actually pretty similar quarters.

The $26 billion would have been in lower average fee products.

And we do see in our pipeline, I'll tell you that our pipelines generally are more favorable.

The mix is toward higher fee products.

So actually, our one not funded mandates have a slightly higher average fee going forward at the end of the second quarter than they did at the end of the first quarter.

Okay, thanks for all that, guys.

Thanks, Glenn.

Thank you.

Our next question is from Howard Chen with Credit Suisse.

Hi, good morning, everyone.

Good morning, Howard.

Todd, putting frictional deposits aside, can you just provide an update on some of the taxable actions to stabilize and expand the NIM you laid out at the investor day, and do your thoughts change at all now that we're seeing some further compression across the yield curve and the long end?

Sure.

Not a whole lot.

What we indicated to you is that we would invest in some RMBS securities, primarily agencies, but there are some non-agencies as well, some asset backed securities which we continue.

We're probably doing a little more treasuries than we would have thought, just given the rate environment and the risk environment.

So I'd say it was a combination of the three of those.

Outside of the securities portfolio, we have begun a program of secured lending globally.

That is slower than we had anticipated, but it is slowly building and we're continuing to add to that.

We also see some opportunities, for example, in trade finance, as we've had a number of folks exit.

That has grown.

We got a big pop a while back.

It's grown a little more modestly, but that's another area that we would be looking to push.

Great, thanks.

And then shifting gears to the revised Basel III guidance, there seems to be a lot of questions in the market, and I think it would be helpful if you could walk through some of the moving parts of the new guidance.

Maybe walk through what your risk weighting assumptions were before and what they are now in some of the various parts of the portfolio that are being impacted.

Okay, I mean, we're kind of unusual as you know, Howard, because we had maintained a large portfolio of sub-investment grade securitizations, and that was the portfolio, even though we had marked it to market, and we felt it was actually a pretty attractive, and not nearly as risky asset, especially when we were carrying it.

It actually required more than 100% capital against it.

So under the revised guidance, and what is known as the simplified supervisory formula approach, which I can tell you is anything but simplified, but under that guidance the capital associated with those sub-investment grade securities declined pretty significantly.

Still very high, but to a much more reasonable level.

So as we had indicated in the past, that was probably costing us 250 basis points, maybe even 300 basis points against our Tier 1 common ratio.

That probably declined by about 200 basis points.

So we picked up a very large benefit there, about a two-thirds reduction.

That was offset by a couple of other items.

Number one is the investment grade securitizations moved from a floor of about 7% to a floor of 20%, and depending on the attachment point, the detachment point, and the delinquencies, and the underlying securities, they can be even higher than the 20%.

So that was a give-back of some of that 200 basis points that I just described.

And in addition, there is a correlation multiplier for primarily financial institutions exposure.

Since we do have financial institutions exposure, that had a negative impact to us, as did the smaller one, as did the market risk assessment that came in the quarter, as well.

So all of those amounted to about 145 basis points of benefit, and then our balance sheet grew in the second quarter by about 35 basis points, hence the 110 basis points that we recorded.

Thanks for all that detail, Todd.

That's helpful.

And you've always stressed the point that the past few stress tests have been predominantly Basel I focused, but I'm just curious, given this improved guidance post the NPRs, how does this change your capital return philosophy?

Would you think about resubmitting a CCAR for more capital return this year?

Yes.

We're nicely positioned under Basel III.

As you can see here, we're well ahead of where even we had anticipated we would be.

I think we think it's reasonable because, frankly, we didn't think that the sub-investment grade securities should have attracted the amount of capital that they had.

So basically, it's in line with what our thinking was.

So we're happy to see we have greater flexibility, and we're happy to see others in the past have been able to take capital actions at significant levels.

Great, thanks.

And just final quick numbers one for me, Todd.

That merit increase that began in July 1 that you spoke to, is there any way to size the impact of that?

It will probably be about $0.01 of expense.

Great.

Thanks so much.

Thank you.

Our next question is from Betsy Graseck with Morgan Stanley.

Hi, good morning.

Hi, Betsy.

Two questions.

One on performance fees, very strong performance fees in the quarter.

Can you just give us some color on that, given that the markets wouldn't have suggested that strong of an outcome?

So our performance fees, we have a wide variety of mandates that generate performance fees, and the bulk of them are recorded and paid in the fourth quarter.

So our fourth quarter is generally our highest quarter for performance fees.

If you go back over the last four years, we've had an average performance fee of about $100 million on average annually, and roughly 60% of that would have occurred in the fourth quarter.

So that's the seasonality we would generally expect.

To your point, we had a very strong second quarter.

We do have a number of mandates that pay annually.

But the beginning date might be February, so February to February, or June to June.

We also do have mandates that pay more frequently than annually.

So they might -- we might value performance fees semi-annually.

So the second quarter has been the second highest quarter typically, and this particular quarter, the performance fees that we earn are indexed to a variety of benchmarks.

So it might be the client's portfolio benchmark.

It could be the S&P 500 and index, or it could be a nominal benchmark, like a target return of 8%.

In this particular quarter, we had, actually, nice breadth across our investment firms.

We have three of our investment firms actually have pretty meaningful performance fees because they beat a benchmark.

Again, I think a lot of people associate performance fees with just if the market goes up a lot you'll have a lot more performance fees.

And there is some correlation to that, but a lot of our performance fees actually are geared more to whether we beat a benchmark.

So in a down market, if we've been underweight risk, or underweight the right sectors, or if we have been positioned in a way that we can outperform a benchmark, then we have the opportunity to earn performance fees.

In the second quarter, that turned out to be pretty positive.

I do think that it's important to note, we still think the seasonality that has existed in the past is what you should expect going forward.

And so if on average we've earned $100 million annually in performance fees, so far year to date, we've earned about $64 million.

So we might have a better year, but the seasonality, we still expect the third quarter to be generally lower and the fourth quarter to be generally higher.

Okay, so two takeaways.

One is that the performance fees are reflecting second quarter performance.

There's no kind of lagging from what happened in the first quarter?

Yes.

So Betsy, there are a lot of things going on.

So many mandates contribute to the overall performance fee.

I would tell you that what drove the strength of it is mandates that outperformed in the second quarter, but they are mandates that have been around for a long period of time.

So it could have been a June to June measurement period, and in the second quarter we had the payment of those performance fees.

Got it, okay.

And it's more equity or FIC?

Again, it's mixed.

I would say that our fixed income mandates generated a large share of the performance fees this quarter.

Okay, great.

And just secondly for Todd, on the operational excellence initiatives update that you gave us, it feels like you're a little bit farther along than what your targeted plan is.

Does this suggest that you're going to be extending the amount of dollars you anticipate you'll be getting back from the program, does it suggest that you'll just be getting there sooner?

We knew, Betsy, and we try to make this evident in the first quarter, we knew that a lot of the benefit we were going to get for the initial actions that we took was going to be in the first quarter, and we've got that run rate.

So you can see, we invested in the second quarter about as much as we benefited.

And we would expect that to be the case for most of the rest of this year.

I think we can beat it.

I think we might be able to beat the target that we've established here, but we are going to be making some additional investments, and we want to make sure that that's understood, so not a huge amount of additional benefit in 2012.

I think you'll start to see it in 2013, the investments that we're making in the second half of this year.

And just to add, Betsy, just on a business as usual basis, given the slower revenue environment that we're all facing, we're being incredibly disciplined around the core expense base as well.

And we're really trying to manage those very very tightly in addition to the initiatives that we have in place.

So we're being very very mindful of all of our expenses across-the-board.

But the way we designed it, the cost to decommission systems, the cost to consolidate real estate is embedded in the benefit.

Got it.

Okay, thank you.

Thank you.

Our next question is from Cynthia Mayer with Bank of America Merrill Lynch.

Hi, good morning, thank you.

Good morning.

You mentioned that clearing services fees were higher despite lower transaction volumes, and I think you mentioned higher mutual fund fees.

So I'm wondering if you could give some color on why those are trending higher.

Is that a mix shift or a change in the actual fees somehow charged on the funds?

This is Brian Shea.

Just mutual fund assets are growing modestly driven by asset values, but we continue to have more individual investments or mutual fund positions on the platform.

And one of the things we're doing is we're seeing growth in the mutual fund no transaction fee platform that we have, and we're also in the process of converting our mutual fund processing to an internal sub-accounting system called SuRPAS, which is a service delivered by the asset servicing group within BNY Mellon.

So essentially what we're doing is we're making the mutual fund processing more operationally efficient, and that's part of the driver behind the mutual fund revenue growth.

And I would also add, Cynthia, that Brian's being a bit modest in the sense that we are getting a lot more accounts on the platform to begin with.

Some of the clients that are there today are being more successful in gathering assets, and we're being more successful in gathering clients.

And so I think it's just a reflection of the strength of the platform overall, and that we're not being heavily reliant on some of the traditional fee categories for us to be able to show improvement in clearing services.

Exactly.

We're still seeing underlying growth in the base of individual investments and individual security positions in custody, and that's helping drive strong core fee revenue growth.

Okay, great.

And then just on the record AUC levels and the $314 billion in wins, granted I'm sure there's a lot of variety there, but can you give any color on sort of the composition of the wins recently?

Any shift there?

Are the fees any different from your existing book?

Cynthia, Tim Keaney.

I would say, yes, we continued to see continued growth in outsourcing and transfer agency, part of what Brian just referenced.

We see a lot of activity from financial institutions.

That also drove a big uptick in our sales pipeline, which is up 50% quarter on quarter.

So I'd say you'd see about 40% to 50% kind of outsourcing and transfer agency, which really isn't geared towards AUC, and the rest are good stock and trade core asset servicing business.

And I wouldn't say there's an overall change in pricing.

I would say we've seen a tap down on repricing, as we've continued to maintain strong pricing disciplines.

But new business, I wouldn't say I've seen a material change in pricing.

Great, thanks a lot.

You're welcome.

Thank you.

Our next question is from Alex Blostein with Goldman Sachs.

Thanks.

Good morning guys.

Good morning.

Wanted to go back to the balance sheet for just one second.

Can you help us break down the balances that you guys have with central banks between the Fed, ECB, and maybe other ones, to just better gather sensitivity, if there are in fact more moves by other central banks?

Yes, Alex.

We don't disclose which central bank any balances might be sitting, where they might be sitting.

And it's so volatile.

I don't think it would be particularly helpful to get a snapshot.

Okay, and then within, I guess, Todd, you mentioned discount accretion was a little bit lower this quarter.

I was hoping you could give us the number, what that was this quarter versus last quarter?

Yes, it's probably down about $6 million or $7 million, Alex, on the quarter.

And I would expect that it will slowly amortize down.

You can probably look at it about $5 million a quarter reduction.

Got it, and then just maybe hoping to spend a couple minutes on the update on litigation.

So obviously the Sigma settlement that you guys announced a few weeks ago, I guess there's a few other lawsuits outstanding with a similar issue, so I was wondering how that might change your views around reserves or future litigation expenses on that front.

And the second one is around foreign tax credits, and the impact of the recent settlement from a similar lawsuit about 1.5 months ago, and how that impacts your view on the litigation reserves for that lawsuit.

So I didn't, the first question was related to the --

The Sigma settlement.

Why don't I take that one, and you can talk about the tax matter one.

You know, the charge that we took a couple weeks ago was principally related to the class action suit that was raised.

So $280 million, and it's subject to court approval.

But so principally related to that single class action suit.

There are similar clients who had similar issues who were not in that class action that we also incorporated into the charge.

So we feel like we have the vast majority of the financial crisis Sigma related litigation charges embedded in that single number.

And as regards to the tax matter that you raised, Alex, there was a recent court decision.

It was a possibility that could have influenced our thinking around the reserves, but the decision was not based on our case, which was economic substance, so it really did not inform our case at all at this point.

We have tried the case, and we're looking forward to -- I think our team did a very nice job -- and we're looking forward to a judgment probably some time in the Spring of next year.

Got it.

And Todd, just the last one for me.

In the issuer services this quarter, I think you guys had a bit of a seasonal benefit as well, obviously smaller than you have in the third quarter.

Can you give us a sense of what the benefit was this quarter, and how we should think about the seasonal benefit within issuer services for third quarter?

Yes, that was referring specifically, in the issuer services business, we really had three businesses.

We had shareowner services, we had corporate trust, and we had DRs.

And we sold shareowner services business at year end, so we tried to show you with and without the performance -- or the historical performance -- of shareowner services, and as regards the DR business, I'll turn it over to Karen.

Sure, yes.

The DR business has a lot of impact from the emerging markets activity, so when that turns down so does the activity in the market.

There's lower issuance and cancellation, less corporate action, as well as fewer IPOs.

So although we expect in the third quarter to see some increased dividend, the actual overall activity has decreased.

Okay, thanks.

Thank you.

Our next question is from Brian Bedell with ISI Group.

Hi, good morning folks.

Good morning, Brian.

Just quickly on the Basel III securities.

So for the sub-investment grade securities, based on your comments, Todd, if you were to sell them now, would they still generate some additional improvement in Tier 1 common?

They would, Brian, but nowhere near to the degree using the new rules that they would have in the past.

Right, so based on the numbers you put out, it looks like maybe 100 basis points or less, instead of the 250 basis points to 300 basis points?

Yes, something like that.

Okay, and does the change in the Basel III ratios impact your view on doing M&A over the next couple years?

I'll turn that one over to Gerald.

Yes, you know, Brian, as I said earlier, we're really focused on organic growth and the initiatives that we've identified internally.

We, interestingly, have identified a number of things that we think that are better investment than M&A activities.

Over a period of time, global services is a great example of pulling together a variety of activities across our Company and investing in the technology in the front end to solve a problem in the marketplace.

We're also more focused on making sure we execute on a variety of the integration and operational excellence initiatives, and those have some costs associated with them.

And we think there's a faster payback on those as well.

So we just think that those things are a better investment than looking externally for M&A opportunities.

Plus, our share buyback program, given our share price, I think that's a better investment, overall, as well.

You know, that being said, if something extraordinarily comes across the tape at a price that's unbelievable, sure we'll take a look at it.

But I think we have enough opportunities internally to really generate better returns for our shareholders.

Okay, great.

That's helpful.

And then in the asset servicing business, quick question for Tim.

On the net new business that was installed in the second quarter and how much is left to install in the pipeline, and then also, Tim, if you could comment on the FX trading.

It looks like you gained market share versus State Street and Northern Trust this quarter.

Is there anything that you've done to retool that platform, and how do you see that going forward?

Brian, I'll take the asset servicing and new business question, and I'll invite Art to talk about the FX.

We have about $400 billion to convert.

Just about all of it will convert before the end of the year, so I would say that's looking pretty good.

And I think I mentioned I'm also encouraged by the big uptick in the pipeline, and it's really driven by really fund managers that are rationalizing the number of their providers.

And we've also seen a shift now two quarters in a row as fund managers launching new products, which is something we've been delighted to see.

So a strong new pipeline and about $400 billion left to convert.

And just quickly on the pricing initiative, on the smaller clients, can you give us an update on how that is going?

Yes, thanks, Brian.

We finished pricing about 650 tail clients.

I'll just remind everyone, those are the smallest clients that we have.

We've retained just over 75% of those clients.

So I'm delighted with that result.

We've had about 20 larger clients.

So clients that are paying us $0.5 million and above whose contracts have come up for review.

And I think I mentioned last quarter that, as new clients come up, that may take a cycle of three or four years.

We're repricing those clients, and we've kept every one of those clients as well, because of the approach we've taken.

So I still call it early innings, Brian, but as we're working up the lead table, and as clients come up for review, those quality statistics that Gerald referenced in his opening comments are really making a difference.

Okay, that's great.

And then on the FX?

Yes, hi, Brian.

Art Certosimo here.

Recently, we implemented a new standing instructions program, which has helped maintain standing instructions volumes.

So giving clients choice in the standing instructions base clearly has made a difference, and clients are doing their part to either maintain or increase negotiated volume.

So we're seeing a pretty good positive trend on the volume side of foreign exchange.

That of course is being offset, though, by the difficult markets and the shrinking spreads that we see, due to most of the market condition around the world.

Okay, that's helpful color.

And just lastly, money market fee waivers for the quarter?

Can you give a sense of what they were?

Yes, they were slightly improved, Brian, but I think I'm hopeful to not even have to say this anymore.

They seem to have dropped and we seem to be dragging along at this level, both on a year over year and sequential basis.

And the absolute level, was it $65 million or something like that?

It's even a little bit more than that.

It's about $0.04 to $0.05 impact.

Okay, great.

Thank you so much.

Thanks, Brian.

Thank you.

Our next question is from Mike Mayo with CLSA.

Hi.

Hi, Mike.

Can you describe the behavior of your custody clients?

Are they gaining or losing assets in aggregate, with a lot of the money leaving the market, and a lot of institutions putting their money just simply into cash.

What's the characteristic of your clients?

Mike, it's Tim Keaney here.

I would say, year over year, we've seen more net new.

So we would see transaction volumes kind of flat to trending up.

We see net new organic positive.

Year over year, we saw pretty strong outflows.

That stopped in the sequential quarter.

And the other thing I didn't mention in terms of the new business, and this is a question I think you ask from time to time, about 50% of what we're seeing so far in the first half of this year is net new business.

So things, as an example, that clients had done for themselves, where they outsource to us, like transfer agency or fund accounting.

So I don't know if that answers your question, but that's certainly what we're seeing.

Well, Mike, maybe I can add.

Given the size of our book and the number of clients we have, if somebody changes their asset allocation, and they switch from equities to fixed income or to cash, it's still going to stay within the family.

We are seeing more cash balances, just because people are taking a less risky attitude towards the marketplace.

Earlier in the year, we saw more flows into equities, and more lately we've seen more flows into cash.

Now with cash around the world earning close to zero, that's becoming problematic for them.

But I think the size of our book and the breadth of our clients, it seems to move from one category to the other.

But Curtis, you're one of the largest asset managers on the planet.

How do you think about it?

What are you seeing in terms of your activity?

Yes, so Mike, Curtis Arledge.

I would say there's three major trends that I would describe investors are focused on.

We absolutely have seen clients who might in the past have owned equities increase the asset allocation to fixed income.

And many times, that is a defensive move.

It's also a move to be, in some cases, more in line with their liabilities, which are more fixed income in nature.

So that's one significant trend.

I'd say another major trend has been people who may have de-risked, and gone to cash or to more defensive positions have really spent a lot of time looking for real return, absolute return investments where they can get a generally higher level of total return, but really manage the downside volatility.

So investors are looking at investment offerings where they may not have as much upside, but the benefit of giving away some upside is that they take less downside risk.

And we've seen pretty meaningful discussions and in flows into those types of investment offerings.

So I'd say those are two kind of answers to what are people doing from a defensive perspective.

I'd say another, and the last thing I would point to is that there have been pretty meaningful flows and conversations with clients about diversifying their portfolios globally.

So really, I think clients are very aware of the debt situation in advanced economies, and that happens to be where they have the preponderance of their portfolios.

So there's been more discussion about diversifying internationally, especially movements towards countries where there is real economic growth.

So those are sort of the major, I'd describe it as sort of the very large picture of major themes.

Gerald, you opened your comments saying that you're not going to go outside your risk parameters, implying, still, a risk-off mentality.

What are the early indicators that would tell you to start taking more risk?

That's a very interesting question, Mike.

Europe is still an absolute mess.

I can't describe it any other way.

So given the kind of deposits we have in Europe, and in Euro dollars, and Euro currency, that's where we're probably most challenged.

Because simply putting money to work in Euro land, given the environment, has been a real challenge for us.

That's why we're looking to other parts of the world for, whether it's trade finance or other types of secured fundings, those are the categories that are still within our risk appetite that will allow us for investment opportunities.

So things like trade finance, secured repos in other parts of the world, increasing some of our lines there to offset what I think is a very negative environment in Europe.

And then lastly, a follow-up on the capital question, so you have a new ratio for the Basel III Tier 1 common ratio due to some changes.

Is this it?

Are we done or could there be some additional tweaks that would cause you to modify that ratio either up or down?

Yes, I wouldn't, you've got to remember this is a notice for proposed rule making.

It is not the final rule, and so there are a couple of elements in that rule that are out for discussion, and it's certainly possible that the regulators would revise this somewhat.

Whether it would be to the good or the bad is impossible for me to predict, Mike.

And this is our best estimate of our current interpretation of the rule, so it could be tweaked a little bit.

Great, thank you.

Thanks, Mike.

Thank you.

Our next question is from Ken Usdin with Jefferies.

Hi guys, good morning.

My first question is just a follow-up on the asset servicing comments.

There's good pipelines, there's good builds, but the line item core asset servicing was down a few million sequentially.

I'm wondering if you could tease out the market impact from the transactional impact, and maybe some color on what's going on in broker dealer services within?

Tim Keaney here.

Just on the asset servicing, one thing that I just brought to your attention that Todd may have made reference to is we had a pretty significant amount of drop in reimbursements, so clients, where we would have been charging them for mailing or postage that have internalized that, there was a big drop in reimbursements both year on year and sequentially.

That's not bad news at all, actually, because that's offset one for one in the expense line, so you're not seeing that.

So what you would really be doing is seeing kind of net new business and organic growth making up for soft markets.

I think that's the general theme on market and currency, both sequentially and year on year.

There is a slight, Ken, there is a slight negative currency impact in revenue, that's not quite offset fully in the expenses.

Okay, my second question is to follow-up on the legal questions.

Can you give us an idea of what that possible estimable number would be, the one that we usually get in the Q, just with regards to how the charge came through and then any adds to it?

Can you give us a sense of how that sets up?

I still think there's a lot of questions about the potential legal risks and incremental charges that could still happen from here.

Yes, I think you're referring to what we call the reasonably possible disclosure, and we would think that it's likely to decline.

By the magnitude of the charge, or hard to say if there's other things still coming in?

Well, we'll give it to you shortly, so I think we're in the process of developing that now, so it's a little bit early for me to say that, Ken.

But what I can say is that I think we've got quite a few matters behind us in this quarter.

We're feeling a lot better.

Got you.

Can you quickly just remind us what the accretion benefit was this quarter versus the $81 million last?

Yes, it was about I think it was about $7 million to $8 million less, Ken.

Okay, got it.

And the guidance I tried to give there is I would expect, as we look forward the next couple of quarters, that it would burn off at about a $5 million a quarter rate.

Right, okay.

And then just regarding the other clearing services, DARTs were down, but you had still pretty good performance here.

I'm just wondering for an update on that business, is there still a good pipeline of conversions, just underlying trends in that part of the business?

Yes, it's Brian Shea.

We've benefited, as I mentioned before, from system asset gathering and growth in the underlying mutual fund base and the underlying number of individual investments that we custody.

And so we're seeing, essentially, a record level of individual lessons in custody, and we close the second quarter with over $1 trillion in assets in custody overall with Pershing globally.

In terms of pipeline, the pipeline is solid, and given the environment, while DARTs are off, and there's pressure on broker dealer profitability all across the industry, in one way that's a possible silver lining for us in a sense that more self-clearing firms evaluate moving to a variable cost clearing platform and model.

So we do see a reasonable pipeline of firms that are engaged with us to consider Pershing as their clearing partner, so we feel reasonably good about that, and we'll have some decent third quarter conversions coming up.

Okay, and last quick one just on FX, you did have the nice sequential bump.

Any comments on just the makeup of your FX results, any switching between direct and indirect or in relative profitability within?

No, not really, Ken.

We benefited from some volume increase in the quarter.

Obviously, the volatility is still pretty low, and quite low in the marketplace, but we have some new service offerings which are helping capture some of that volume, and we're continuing to offer increased capabilities to capture that.

Got it.

Okay, great.

Thanks guys.

Thanks, Ken.

Wendy we have time for one more question.

Thank you.

Our final question today is from Gerard Cassidy with RBC.

Thank you, good morning guys.

Good morning.

A question I had, Todd, you referenced that the net interest revenue was adversely impacted by narrower spreads and lower accretion, but you also were a little disappointed that you weren't able to put the deposits to work fast enough in secured loans and securities.

On the secured loans side, what are you guys seeing?

Is it more challenging to put it to work in certain industries, or what are you seeing on the loan side?

Yes, I would say that it's probably taking us a little longer to have the team in place, the collateral monitoring in place that we look for for that, and also signing the clients up.

There's good interest there, but that's probably, primarily, what's driving it.

So I'd say we're only about 50% of the target we wanted to be at this point.

One other point I want to make sure, Gerard, that's clear is with the ECB cuts, we did have money, since I've mentioned, sitting at the ECB, and that will have a little bit of a headwind.

I think we can still overcome with the additional actions that we plan to take, and if we did nothing, that could be as much as $20 million to $25 million in the second half negative to us.

But we are considering options, including the possibility if we see a further build up in deposits of maybe even charging a negative rate, or imposing some kind of a charge on deposits in Euros.

And on the loans, when you're at 50% of where you would have liked to have been or thereabouts, is it more in sectors like telecommunications or real estate, that type of lending versus Financial Services lending?

It's mostly in the Financial Services space where we're getting good money market related types of collateral that we can mark on a daily basis, and margin on a daily basis.

Gerard, it's really relatively short-term secured financings with securities that we can understand and mark, and with counter parties that we feel very confident with.

So it's not traditional commercial bank lending.

Okay, thank you.

Thank you.

This does conclude the question and answer session.

I would now like to turn the call back over to speakers for closing comments.

Great.

Thank you, everybody, for joining us, and I really appreciate it, and if you have further questions, Andy Clark, Izzy Dawood are prepared to answer all your questions, and look forward to engaging with you in the near term.

Thanks a lot, everybody.

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.