紐約梅隆銀行 (BK) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-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 materials.

You may not record or rebroadcast these materials without BNY Mellon's consent.

I will now turn the call over to Mr. Andy Clark.

Mr. Clark, you may begin.

Thanks, Wendy, and welcome, everyone.

With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as our executive management team.

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

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

These factors include those identified in the cautionary statement on page 13 of the press release and those identified in our documents filed with the SEC that are available on our website, BNYMellon.com.

Forward-looking statements in this call speak only as of today, January 16, 2013.

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 today.

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

Gerald?

Thanks, Andy, and good morning, everyone.

As you saw from our release, for the fourth quarter we generated net income of $622 million and earnings per share of $0.53.

Just as a reminder, we recorded $0.42 per share in the fourth quarter of last year, which included restructuring charges related to our operational excellence initiatives of $0.06 per share.

Now I'm pleased to report strong growth in a number of our businesses.

Investment Management had another excellent quarter, benefiting from the 13th consecutive quarter of long-term inflows and higher market values.

We've had $56 billion in net long-term flows over the last 12 months, which included $14 billion during the quarter.

Our success in attracting new assets helped drive assets under management to a record level of $1.4 trillion.

And Investment Services, Asset Servicing, Clearing, and Treasury Services all saw nice growth in fee income as well.

Now that being said, the market environment continues to be challenging to some of our revenue streams as volumes, volatility, interest rates, and tepid capital markets all continue to trend below normalized levels.

These factors resulted in a decline in revenues in our lower variable cost businesses such as depositary receipts, foreign exchange, and net interest income.

We were able to offset the decline in these revenues with growth in Investment Management and other investment services businesses.

But the growth occurred in those areas that have higher variable costs.

So the shift in the revenue mix was the principal cause of the growth in expenses year-over-year and sequentially above the level that you might have expected.

In addition, we acquired the remaining 50% interest in the WestLB asset management joint venture which we renamed Meriten that brought with it a higher expense base.

Finally, we had some seasonally higher expenses in the fourth quarter and we are investing in our brand, businesses, and strategic initiatives to help our clients succeed in a very difficult market.

Now we have a relentless focus on creating organic growth continuing to drive some of the opportunities we've outlined for you in the past.

Some examples -- accelerating our asset management growth strategies particularly in Asia and the retail space; capturing opportunities through our global collateral services business; leveraging our Pershing platform and distribution capability; and building out global markets to capture more order flow.

We recently received approval to launch our new issuer Central Securities Depositary based in Belgium which will enhance our offering for investment services and collateral management for clients in Europe.

All of these initiatives will help drive our long-term growth but do in fact require investments today that are showing up in our expense base.

So we are not standing still waiting for the markets to improve.

We are in fact taking actions to strengthen our revenue streams.

In that regard we announced several executive appointments to accelerate our progress.

Karen Peetz was named President of the Company and she will focus on one of the three key pillars of our firm, our clients and employees -- so client management, the regions, innovation, collaboration, employee training and development, and some of our key growth initiatives will come under Karen.

The second pillar is Investment Services and Tim Keaney is now CEO of all our Investment Services businesses.

This brings together all of our capabilities under one manager, which will improve collaboration and enhance our ability to offer integrated solutions.

Brian Shea is now President of Investment Services and very importantly, Head of Operations and Technology for the Company.

These businesses are technology- and operations- intensive and we want those attributes closer to the client and part of the fabric of any business decision.

I also firmly believe that we have the opportunity to simplify our operating model and get better operational efficiencies across our businesses beyond the operational excellence initiatives we are currently tracking.

That is one of Brian's challenges and I know he is up for it.

Finally, the third pillar of our firm is Investment Management, which Curtis Arledge continues to run.

We have built some very nice revenue momentum here and the team is executing on our important growth opportunities.

So we have a broad, deep leadership team.

We are sharpening our client focus, better collaborating across our businesses, and driving further productivity gains in our operating platform all while maintaining a strong capital position and returning capital to shareholders.

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

Thanks, Gerald, and good morning, everyone.

My comments will follow the quarterly earnings review and we will start on page 2.

Reported earnings per share were $0.53 this quarter.

Our results included a $0.03 benefit related to a credit to the lower -- a credit to the loan loss provisions, where we have seen some progress or continued progress in reducing the risk of the portfolio and it is really paying dividends.

We did have a lower tax rate and some securities gains but in the end we don't think that they were really unusual and I'll talk about that in some detail in a minute.

There were also some seasonally higher expenses not indicative of our core underlying run rate.

If you take all those items into account, we see this as about a $0.50 quarter.

This compares with $0.42 in the year-ago quarter, which as Gerald mentioned included a negative impact of about $0.06 per share related to restructuring charges.

Looking at the numbers on a year-over-year basis, total revenue was $3.6 billion.

That's up 2% while fee and other revenue was up 3%.

Investment management fees were up strongly and we had nice fee growth in Asset Servicing, Clearing, and Treasury Services.

Those were partially offset by declines in FX revenue and NIR as well as softness in Issuer Services.

While the current low interest rate environment continues to negatively impact net interest revenue, it has driven a significant improvement in the value of the investment securities portfolio, and that has given us the opportunity to realize some gains there.

Expenses were up 7% but if you look at it on a core basis, that is on a core basis which excludes amortization of intangible assets, M&I litigation, restructuring charges, and some direct expenses related to shareowner services.

As Gerald had mentioned earlier, the biggest factor in the increase was the change in our revenue mix and I will give you some more color on that in a moment.

Turning to page 4 where we call out some business metrics that will help explain our underlying performance, you can see that AUM of $1.4 trillion was up 10% year-over-year and up 2% sequentially resulting from higher market values and net inflows.

During the quarter we had net long-term inflows of $14 billion and short-term outflows of $6 billion.

It was our 13th consecutive quarter of positive long-term inflows with long-term flows of $56 billion over the last 12 months.

Assets under custody and administration were up 9% year-over-year to $26.7 trillion.

Those were driven by higher market values and net new business.

Linked-quarter AUC was up slightly.

As you may see here, AUC in our prior periods is down about 4% to 5% as we have restated to reflect a correction of a double count of legacy Mellon assets.

The restatement had no impact to our growth rate, our revenues or our earnings.

A number of key metrics showed growth in a year-over-year basis.

All Clearing metrics improved, margin loans were up nicely and collateral management balances continued to grow at a robust rate, a trend that our global collateral services group is positioned to capitalize on.

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

The year-over-year increase primarily reflects net new business, higher market values, and higher collateral management revenue.

Sequentially those positives were partially offset by a decline in securities revenues -- securities lending revenue and that was driven by slightly lower balances as well as lower spreads.

We had $190 billion in new AUC wins for a total of $1.5 trillion in AUC wins over the last 12 months.

If you look at issuer services fees excluding the shareowner services business, which we sold at the end of last year, they were down 12% year-over-year and 31% sequentially.

The year-over-year decrease primarily resulted from lower DR revenue as volumes are down quite a bit this year, also lower corporate trust fees resulting from that continued net runoff of structured debt securitizations that we've mentioned previously.

The sequential decrease primarily resulted from the $107 million decrease in DR revenues that we had indicated, which was largely seasonal.

As you saw last quarter, this is a relatively high fixed cost business so a gain or loss of revenue doesn't have much in the way of expenses associated with it.

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

Both increases primarily reflect higher mutual fund fees driven by increases in positions and balances, higher cash management balances, and also an increase in DARTs.

So all in all not bad performance considering the weaker volumes we are seeing on the exchanges.

The year-over-year increase also reflects the higher impact of -- the impact of higher Clearance revenue.

Investment management and performance fees were up 17% year-over-year and 9% sequentially.

Both increases were impacted by the Meriten acquisition.

If you exclude Meriten, investment management and performance fees were up 15% year-over-year.

Those were driven by higher market values, net new business, and slightly lower fee waivers.

In FX and other trading, revenue was down 39% year-over-year and 24% sequentially.

If you look at the components, FX revenue of $106 million was down 42% year-over-year and 12% sequentially.

Both decreases reflect a sharp decline in market volatility and that's consistent with the index that we show you on page 5. That's the JPMorgan G-7 Volatility Index.

We also saw in the period a modest decline in volumes.

Other trading revenue was $33 million and that compares with $45 million in the year ago quarter and $61 million in the prior quarter.

Both comparisons reflect lower fixed income trading revenues, driven by lower interest rate trading.

Investment and other income totaled $116 million in the quarter compared with $146 million in the year ago quarter and $124 million in the third quarter.

The year-over-year decrease primarily reflects the pretax gain on the sale of shareowner services while the sequential decrease reflects lower seed capital gains and equity investment revenue.

Turning to page 8 of the earnings review, NIR was down $55 million versus the year ago quarter and $24 million sequentially.

The year-over-year decrease was principally driven by the elimination of interest on ECB deposits.

We had lower accretion and there were lower yields on the reinvestment of securities.

Partially that was offset by higher interest earning assets as we saw a significant increase in deposit levels.

The sequential decrease in NIR had all of the above.

In addition, it was impacted by the decline in LIBOR after the Fed announced QE3.

We have quite a few floating-rate assets that are linked to LIBOR and three-month LIBOR fell about 10 basis points on average for the quarter.

The net interest margin was 109 basis points compared with 127 basis points in the year ago quarter and 1.2% in the prior quarter.

During the quarter, the margin was negatively impacted by the sharp rise in deposits that I mentioned as that cash was prematurely left at the Fed, where it earned only 25 basis points.

Overall the increase in deposits, we estimate, reduced the margin by approximately 6 basis points sequentially and about 8 basis points on a year-over-year basis.

Today we have a $2.4 billion unrealized gain in the investment securities portfolio and we have sold and we would expect to continue to sell in this environment securities to rebalance the portfolio and manage our duration risk.

As such, the gains realized on these sales should be considered along with net interest revenue when evaluating our overall results.

In the fourth quarter, combined NIR and securities gains totaled $775 million.

That compares with $770 million in the year-ago quarter -- excuse me -- $777 million in the year-ago quarter and $771 million in the linked-quarter.

Now turning to page 9, you can see that total noninterest expense ex amortization of intangible assets, M&I, litigation and restructuring charges, and also the direct expenses with shareholder services were up 7% year-over-year and 4% sequentially.

Both increases were primarily driven by the revenue mix as the low rate environment and tepid capital markets activity drove a decline in our fixed cost businesses.

For example, DR revenue was down $107 million; FX and other trading revenue declined $43 million; and NIR was down $24 million sequentially.

All of these variable costs -- have very little variable costs associated with them unlike the revenue that replaced them in Investment Management, Asset Servicing, Clearing and Treasury Services.

Expenses over both periods also reflect higher software and business development expenses as well as the operating expenses associated with the Meriten acquisition.

The M&I litigation and restructuring line item of our P&L included expenses related to our operational excellence initiatives just as it did in the year-ago quarter.

In fourth quarter of 2012, the restructuring component also included severance expense and a lease restructuring charge and these were offset by the gain on the sale of a property.

The net restructuring charge totaled less than $1 million for the fourth quarter of 2012.

For the full year total expense was up about $220 million and in terms of that increase, M&I litigation and restructuring offset the reduction that was related to the sale of shareowner services last year.

The operational excellence initiatives ended up offsetting the headwinds in compensation and other operating expenses that we've spoken about in the past.

As a result, the overall increase in expenses was largely driven by the impact of the revenue mix that I just described.

Turning to page 10, you can see the progress of our operational excellence initiatives which are improving our efficiency, helping to offset merit and benefit increases, and positioning us for an improved operating environment.

You will see that the full year we exceeded our target on a gross savings basis with about $397 million versus the target of $360 million to $390 million.

For 2012, the incremental program cost total was $88 million resulting in net savings of $309 million versus the $240 million to $260 million target.

As you can see, our program costs were largely the driver for this as they came in lower than expected and the reason for that is a significant portion of the lease restructuring and severance expenses were allocated to the restructuring charges I just mentioned.

As you can see on page 11, our capital ratio strengthened.

Our estimated Basel III Tier 1 common equity ratio was 9.8% at quarter end.

That compares to 9.30% at the end of the third quarter.

This increase was chiefly attributable to lower risk-weighted assets as well as some earnings retention.

During the year, we repurchased nearly 50 million common shares for $1.1 billion so we are executing on our 2012 CCAR plan and our strong capital position provides us with the flexibility to continue to return capital to our shareholders.

Moving onto our loan book on page 13, you can see that the provision for credit losses was a credit this quarter of $61 million.

This compares to a provision of $23 million in the year-ago quarter.

The credit was largely driven by a reduction in the allowance for credit losses related to the residential loan portfolio, which has experienced better performance when you compare it to the industry historical losses.

During the quarter, we began using our actual loan-loss experience rather than the industry data in order to get a better estimate for the allowance for credit losses and hence the release.

The effective tax rate was 24.3%, which primarily reflects a benefit associated with the reorganization of certain foreign operations.

But the good news here is the lower tax rate should continue as we benefit from increased investment tax credits against a lower earnings stream and we also have a larger tax exempt municipal bond portfolio.

Before I provide some updates for your models, I wanted to give you another look at how the revenue mix is impacting our expenses.

So if you turn to page 16 in the earnings review, where we break out investment services fees as a percentage of non-interest expense, I can walk you through this impact.

The reported ratio was 90% for both the fourth quarter of 2012 as well as for 2011.

But if you recall from our revenue commentary, depositary receipt fees are down year-over-year due to lower volumes.

This decline in revenue only results in a minimal reduction in expenses, so if you adjust for the year-over-year impact of DRs, the fourth-quarter 2012 ratio would have been in the 92% range rather than 90% and that demonstrates that we are making some progress in our operational excellence initiatives, particularly in asset servicing.

Now a few points to factor into your thinking about the current quarter.

We don't -- and looking forward -- we don't foresee a significant improvement in interest rates and FX volatility in the near term.

In terms of NIR and securities gains, we expect them to remain flat and that is if we are able to execute on our loan growth related to our global security services businesses.

Operational excellence initiatives should be on plan.

The quarterly provisions should be around zero.

Preferred dividends will be about $0.01 a quarter and the effective tax rate should come in a bit lower than we previously guided, say about 25% or so.

During the quarter and all of 2013, we will be focused on four main activities, creating organic growth, executing on our operational excellence initiatives, continuing to maintain our strong balance sheet and strengthening our capital position, and returning some of that capital to our shareholders.

With that, let me turn it back to Gerald.

Thanks, Todd.

Wendy, I think we can open it up to questions.

(Operator Instructions).

Howard Chen, Credit Suisse.

Good morning.

Just throughout the commentary, you spoke a lot about the fourth-quarter environment being one of which you had low client activity and low volatility.

Just curious given we had a couple idiosyncratic events like the US election and the fiscal cliff and we are into 2013 now, have you seen any meaningful changes across the business or early signs of re-risking, whether it's kind of a custodial and servicing side of the business or things like frictional deposits rolling off?

Interesting question, Howard.

What we did see towards the end of the year just as we saw in August of 2011 was with the fiscal cliff looming we saw a fairly significant increase in our deposits on our balance sheet.

And so we saw a run-up of $20 billion, $30 billion in our deposits.

Most of that has already moved back off the balance sheet, some of which has moved into traditional money market funds, some of which appears to be going into investments.

I think we are going to be facing in some ways a bit of -- a number of cliffs.

I think the debt ceiling limit is going to put another potential concern in the eyes of investors.

Hopefully we will get through that.

But we are seeing people trying to put some money to work but still there's an enormous amount of cash sitting on the sidelines waiting for better certainty and clarity.

I think some of the investment management flows which maybe I can ask Curtis to speak to, he's seeing some activity pick up there and showing up in some of our numbers.

So maybe, Curtis, do you want to just touch upon that a little bit, too?

Yes, absolutely.

There's been a lot discussed in the media about the flows that have been into equity funds in the first part of this year and we have seen that and then some.

I think at the end of 2012, clients broadly were waiting to see kind of how the fiscal cliff played out and obviously with debt ceiling and sequester and budget and other things still in front of us, there still are some uncertainties but I think as each uncertainty gets removed, we definitely see a reason to not -- [at fall away].

And the flows that we've seen and the conversation that we are having would lead us to believe that investors -- when I say investors -- I mean everything from retail mutual fund investors to some of the world's largest sovereign wealth funds are absolutely looking at this as an environment to begin to put money back to work.

Again I think uncertainty has dampened people's activity in terms of making a decision to invest and as we get passage of these events, we have seen people absolutely take action.

I know other parts of our Company see flows as well.

Brian, I don't know if you want to --

Yes, Brian, maybe you want to talk about what you see on the Pershing platform on the retail side in particular.

Yes, we have only had a couple of weeks of data to monitor, but so far this year there's a significant shift both an increase in net inflows and to mutual funds on the platform and a big shift from what was in 2012 primarily fixed income-oriented funds to more of a balance.

And so you are seeing a big growth in equity mutual fund inflows at least for the first couple of weeks.

So hard to tell if that's a long-term trend yet but definitely it's a positive sign.

Great.

Thanks, everyone.

That's really helpful.

And then Todd, you provided some near-term outlook for spread revenues.

Just putting aside that outsized deposit movement that we just spoke about for a minute, can you just discuss the reinvestment environment for the securities book as you see it?

We have clearly seen some movement on the longer end of the curve but not a lot on the shorter end where I think in my opinion historically has mattered more for you guys.

I think that's a good observation, Howard.

The shorter end of the curve is more important at this point because the duration of our liabilities is more better matched there.

When you look through the course of the year or even the quarter, the decline that we have seen in the interest margin is a reflection of two things.

One is spreads and the other as balances and it is about 50-50.

And so we don't see the spread environment on the short end improving.

In fact, we've pretty much gone through the repricing as you would've expected with the resets in the lower LIBOR rates.

So it's a headwind and we expect more of the same as we had indicated, we are not expecting a better environment in 2013.

We're expecting more of the same.

We got a couple of pretty tough punches in 2012 when the ECB eliminated the credit on excess reserves as well as QE3, which dragged down the mortgages as well as some of the short end of the curve.

So hopefully we won't see those kind of events again in 2013 but we don't expect a lot of improvement.

Fantastic, thanks.

The final one for me just on capital return, Todd, you mentioned the capital ratio is continuing to grow and just continuing to plug along on the buyback.

But on the near-term, the fourth quarter, did the buybacks slow down due to timing of year or potentially the Meriten acquisition or something else?

Do you have any more evolved thoughts on CCAR in 2013 as you enter the year with really strong Basel I and Basel III ratios?

Yes, at the end of 2012, as Gerald had mentioned, we saw a pretty sharp spike in our balances and most of that spike has since whittled away.

But when we saw that, we actually saw a little bit of what could've been a little bit of pressure on our leverage ratio and we thought it was in our interest to hold back on about $100 million or so of buybacks that we probably could've done to make sure that we had a strong leverage ratio and a strong CCAR that we could present in 2013.

So we didn't want it to interfere at all with our 2013 efforts.

Great.

Thanks so much for taking the questions.

Betsy Graseck, Morgan Stanley.

Thank you, good morning.

Two questions.

One on the expense ratio, Todd, you mentioned that the expenses reflect the revenue profile that you have right now.

Should I take that to mean that we should anticipate a higher expense ratio going forward until we see some rate hikes or that there is going to be another round of efforts on trying to lower the expense ratio?

Or is this about as low as it can go?

No.

I think mix will be key to it, Betsy.

In the fourth quarter, it was particularly soft for DRs so if you just imagine $100 million with very little variable expense from quarter to quarter, so it's going to be the revenue mix and DRs was the noisiest component of that revenue mix.

So we would expect it to improve a little bit as the revenue mix gets more normal and just some of the seasonal impacts.

I think in your model you will have to average that out a little bit better.

We probably should give you a little clearer guidance on that.

Okay and you are running ahead of your expense programs in terms of targeted improvement in the expenses?

We are slightly ahead of where we would've expected to be.

The costs are slightly less to get there and the reason for that largely is because we allocated a lot of those costs in a restructuring charge against a gain that we took on the sale of a property.

Right, okay.

Then from here how should we be thinking about the benefit of the program on earnings?

I think it's going to be consistent with what we have indicated in the past.

Effectively what the operational expense initiatives are doing for us is they are offsetting some of the growth related to pension, related to other benefits, expenses related to merit increases, and some slight inflation in our other operating expenses.

So those are matching themselves off.

So in order to generate operating leverage it's pretty hard if we don't show a little bit of growth outside of that to generate a whole lot of operating leverage.

If we can generate 2% or 3% or 4% of revenue growth, then we can see some operating leverage.

But again, we want you to be mindful of the revenue mix in that.

So if NIR is flat and FX is flat and we are seeing in the lower margin business the revenue growth, then the operating leverage is going to be more challenging.

Got it, and then second question is on the capital ratio and you mentioned that part of the reason for the improvement this quarter was the lower RWA.

Could you describe what's backing that?

And I guess just the follow-up on that is are you as able to pay out against lower RWAs as you are against earnings accreted improvements in the capital ratio?

Yes, a couple of questions there.

The reason for the little improvement in the Basel III Tier 1 common ratio, the numerator accounted for about 10 basis points, as we did see about $150 million or 10 basis point increase in the capital.

And that's pretty consistent with what we would expect to retain in a quarter, in a normal quarter.

The denominator we would expect to get some benefit as we see some runoff, typically in some of the higher risk-weighted assets.

This quarter, for the same reason that we got some improvement on the reserve, we got some improvement using the similar model.

So we got some improvement on the risk-weighted assets as our historical data against a lot of retail and also some commercial loans has improved dramatically.

So as we have improved the quality of our portfolio, it's reflected in our risk weights, and we have readdressed those risk weights in the quarter, so we picked up some of the benefit of that.

So that was a little bit more -- the 40 basis points in the denominator is probably heavy by about 20 to 25.

Okay.

Then just thinking on the payout ratio, we hear that sustainable earnings obviously very critical for payout ratios.

And I'm just trying to understand.

Do you think that the improvement in the capital ratio you got this quarter feeds into that much higher of an ability to do the payouts in 2013, or should we really be looking at what the earnings generation is driving in terms of improvement in the capital ratio?

Let me make a couple comments and then Gerald will probably want to make a comment or two.

Where -- the CCAR looks for things under normal and also under stress and as we've indicated in the past we tend to do pretty well because we've got some -- really two things going for us.

One is we don't rely on a lot of risky assets in order to generate our revenues and the other thing is the mix of our business is a little less equity-intensive so that a deep drop in the equity markets has little less impact to us.

So as a result, we can kind of continue to generate even through a pretty ugly environment like the one that we've gone through for us.

So it's really based on -- the payouts will be based on where we see our performance and what we see as being prudent given where our capital ratios are.

But certainly it puts us in a position with stronger capital ratios than we would have expected at this point of the year to do a little better.

Gerald, anything to add to that?

So maybe I can add onto that a little bit.

We are quite pleased with that 9.8% Basel III Tier 1 common ratio.

I think it gives us increased flexibility to consider capital actions.

I would generally say that a dividend payout ratio in the 25% to 30% is probably something for all of us to think about and a total payout ratio last year we guided you too about the 65% range.

I think we have the flexibility to see that north of that 65% but (multiple speakers)

Okay, thanks a lot.

Glenn Schorr, Nomura.

Thank you.

Hello there.

A quickie as I think this has been asked in the past but just always want a little more color.

If you look at assets under management, they are up nicely 10% year on year and the fees associated up 15% ex acquisitions, that's great and normal.

Assets under custody up 9% year on year.

The servicing fees are flattish.

You gave some pieces to that.

But I guess the question is, is there a reason why that over longer periods of time wouldn't have the same rational relationship?

Is something changing in the mix that we shouldn't expect fees and assets to grow in line with each other?

I think some of that, Glenn, has to do with the fact that corporate trust and DRs are included in the investment services revenues and so I think our asset servicing fees have in fact been growing but the corporate trust and DRs have been declining particularly in this quarter.

DR is more seasonal than structural and corporate trust, we've just seen a runoff in these structured products, which are impacting the overall revenues.

Asset servicing fees have been growing, maybe not totally in line with the assets under custody, but maybe I will ask Tim to comment specifically on that.

Sure, Glenn.

It's Tim.

Year-over-year just a reminder, the asset servicing fees grew at 7% versus AUC of 9%.

And I think you see a couple of things.

I think you see a little bit of a mix shift.

I think some of it is timing.

I would certainly say that more of our new business converted towards the back-end of the year.

And then frankly a little bit of it is lost business by maintaining our strong pricing discipline.

So hopefully that answers your question.

Definitely.

I appreciate all of that.

Maybe a quickie on not the biggest number, just more curious if you ex FX, if you look at fixed income trading, you have had big swing up last quarter and down 46% this quarter, the explanation was lower interest rate trading revs.

I'm just curious, we see -- if we look at the big broker-dealers we're looking at like 15% swings, not a 46% swing, so just maybe a little explanation on what you are trading for whom on a quarterly basis as you grow out the global markets business?

Okay, there are really two activities there outside -- two key activities outside of FX in the other trading category.

One of them is general fixed income trading, where we do make markets for our clients so we saw that a little softer.

The thing that is more episodic is really around some interest rate trading, so we saw interest rate derivative trading, so we saw a fair number of interest-rate derivative trading activity in the third quarter that we didn't see replicate itself in the fourth quarter.

The nature of that businesses, it is for us, it is on such a small number, Glenn, that a little change is a pretty significant impact percentage-wise.

I hear you, I hear you.

Just more curious than anything else.

Last one on -- a lot of talk about the collateral management opportunity, I know you are investing in it.

We have seen some of the market participants not ready for central clearing so maybe a question on timing, but also if you can even size the opportunity of - and where you are at in the investment cycle for that opportunity?

Glenn, we continue to build out the capabilities.

We have seen very good interest from the buy side.

Traditionally our collateral management has been supporting the dealer community and we've seen some nice growth in our Tri-Party collateral balances.

I think we produced a number for you.

We are experiencing some fee-growth in the area already and we are also seeing some net interest income growth in that area as we help optimize and transform some of the collateral for the dealer community in particular.

So we are starting to see some good further traction in this space.

Part of the CSD announcement that we made is to support collateral services in Europe into the future, so we're excited about that.

I know you all are anxious to see more transparency and information around this and later in the year I think we'll be able to put together some better numbers and direction for you.

But we feel good about our progress and continue to see very good interest in it.

All right.

Thanks, both.

Luke Montgomery, Sanford Bernstein.

Good morning.

Thanks for taking my call.

I was intrigued by your announcement last week that you are going to start the Central Securities Depositary in Europe.

You just mentioned it.

I am wondering if you might comment on the cost of that and really the longer-term strategic possibilities?

And then also, do you think that's an opportunity that's unique to BNY Mellon because you have the corporate issuer client base or can it be replicated by your global facility and peers?

Great question.

I love that question.

Tim, it's in your area.

I will ask you to address it.

Sure, Luke.

It's a bright spot for us.

You know the regulations are changing.

Both Dodd-Frank and EMIR are coming upon us very quickly, so that's driving people to make decisions partly around the collateral question that was just asked of Gerald.

But more importantly, there is a number of CSDs in Europe.

We are the only one that provides the full value chain of services, particularly the notary function, so the things that happened before secondary trading, and we think that's a unique differentiator for us.

We started to do this initially to defend our Issuer Services business in Europe but as the bond business and Issuer Services business grows, we think this could become a needle-mover for us.

So I would say watch this space, but you correctly connect the CSD strategy to collateral.

Because in a post-Target 2 Securities environment, T2S should go into effect in June of 2015.

You have to be a CSD to play in Central Bank money collateral so that's the other reason why we did this, which has a much more strategic aspect to it and connects our collateral ambitions here in the US to our collateral ambitions in Europe.

Great, and then just could you quickly come back to whether you think that's a unique opportunity to you and could State Street do it, for example?

I would say relative to our traditional trust bank competitors, I don't think -- see anybody that can offer the level of services that we have.

The landscape is changing in terms of the current players like Euroclear and Clearstream, but again I would say they are missing one important part of the value chain.

But again, just think of this in terms of impact in 2013 as being somewhat modest and building over the next -- I would say two years.

Great, thanks.

That's helpful.

And then on the collateral management, clearly people are talking a lot about the revenue opportunity but I think a lot less so about what this means to risk and the interconnectedness of the financial system.

And I think in one sense this is just repo but I am wondering whether the types of collateral transformation I hear you say that you are going to engage in, say like lending out treasuries for corporate bonds, whether we should be concerned about the contingent liquidity risk you and others are going to be taking on to facilitate those types of activities for your clients?

Sure.

It's a very good question.

It's something we're very, very mindful of.

We obviously need to continue to enhance our risk management capabilities in this space and ability to liquidate collateral if we had to.

But don't think of all of the transformation occurring on our balance sheet.

Some of our role is to be an intermediary between parties where we act as the agent, so in some cases we will use our clients' treasuries or our treasuries in that transformation process.

In other cases we will simply be the agent between the parties.

So we don't always have to be the lender.

Obviously there's a lot of value in that but you are correct in saying there is risk associated with it and we have to be mindful of that risk and manage it very, very well.

So we are enhancing and building out our capabilities in that space to be able to handle it.

Luke, if I could add something to that, we're sitting on $90 billion or up to $90 billion in central bank deposits and we could put little bit of that to work through relatively short term secured floating rate loans that effectively convert corporate bonds to cash that can then be posted at a central clearer.

That's a great trading and it comes with very little -- we certainly have liquidity to handle it.

And it comes with very, very little incremental risk and some incremental income.

Okay, just a follow-up on that one final question.

Do you envision the bulk of your activities to be as the agent/administrator or as principal?

Like which of the two of those is the bigger revenue opportunity for you?

The immediate quick hit is net interest income shows up with virtually no expense and therefore bottom-line income, so you are going to see a more quick revenue hit in that space.

But longer term, we want to have it be more in an agent position where we get continuous repeatable fees and that's what we expect out of this and so it's creating that neural network as we refer to it and have all the parties use us as agent rather than acting as principal and using our balance sheet.

Great, thanks for taking all the questions.

Ken Usdin, Jefferies.

Thanks.

Good morning, guys.

Just to follow-up on the NII and securities gains topic, Todd, I heard your comments about hoping to keep that combination of the two flat.

But can you talk a little bit more about how risk is changing within it And you obviously have a lot of unrealized gains left but at some point, you're going to sacrifice net interest income for gains and that could run out.

So I just want to understand how long you can see the visibility out on keeping those two kind of working together because at some point you may not be able to keep the gains going in lieu of protecting your NII.

Actually I look forward to that date because it probably implies a little higher interest rates, Ken.

But I think the simple way to think about this is we try to maintain a portfolio about two years in duration, relatively very low credit risk as you see from looking at it.

So each quarter, a quarter burns through and as we take some of those securities come down and they get very rich because there's a strong interest on the short -- on the relatively short end to the curve for those assets, we will sell some of the richer securities and then we will reinvest back out on the curve.

That gives up -- it can give up a little bit of NII on a go-forward basis but it's not too much and that's why -- and it maintains the portfolio balance where we want it and that's why as we started to look more and more on this, it's exactly what's been going on and we wanted to make sure investors see that and that we would intend to do that as long as the interest rate environment stays where it is.

If the rate environment changes, so if we see a rise in rates and probably do a little of extension duration, there would be no need for that type of activity but we would be making up for it in our NIR.

Okay, and just a cleanup one.

Can you tell us what the accretion portion was this quarter?

I don't recall off the top of my head.

It was probably around $60 million.

It tends to come in about $5 million or so a quarter, as we had indicated in the past.

Right, okay.

On a separate topic, good trajectory on custody, but what's getting harder to understand within that asset servicing line is how the custody fees are going.

Following on Glenn's question, this quarter also looked like you had about the slowest win rate of new custody wins, so I was just wondering if you could just kind of talk us through what's happening just on core custody revenues because you have to x out collateral management, x out broker-dealer services, x out securities lending and we don't see any of that.

And then also if you just could touch on like is anything changing with regards to the speed of new wins on the core custody side?

Tim, why don't you take that one?

Sure, I'll take that.

First let me take them in kind of reverse order.

Don't get overly concerned about that new business win rate because less of the business is geared to AUC and that's something we need to think about.

I've gone back and looked it over the last six quarters in terms of win and pipeline, it's been pretty consistent.

And the mix and the ratio between AUC going up 9% year on year and fees going up 7%, I talked a little bit about earlier.

I wouldn't be overly concerned about that although the mix is changing a bit and so we are doing more of middle office outsourcing and transfer agency and things.

But there's also some good news in there.

You're also seeing the repricing that we have been implementing now for some time has some traction.

So I wouldn't say -- I would also just say that the business continues to be very competitive especially in the large end of the market.

So no, I can't tell you there's been any significant shift there, Ken.

The assets under custody wins from quarter to quarter are pretty lumpy if you get some big ones in one quarter, you won't necessarily see them in the next quarter, so that's not a steady state but we are seeing a steady state in terms of the increased interest in mid office and derivatives servicing and a variety of other things so some of which required that are slow to ramp up on the revenue side even with the announcements that we make over time that we expect those revenues to come in.

Got it, and then my third question, last question, is just on issuer services.

You guys had very much given us an understanding of the seasonal -- the seasonal decline that we would expect to see in DRs and then also the ongoing challenges on the structured finance runoff, which you've given that kind of 50 to 75 basis points headwind.

So how close are we to -- it's tough now to talk about it sequentially because of the seasonality but as far as just the business is concerned, as we think about the year ahead, knowing what we know about the environment, at what point are we getting to kind of a bottoming of those two line items and do you expect growth in issuer services as we look ahead on a year-over-year basis?

Yes, I'll make a couple of comments there.

First of all, let's split issuer services into two businesses.

There's corporate trust and there's DRs.

So DRs is a cyclical business.

It's really largely driven by the developing markets and the BRICs, so we are seeing softness and new capital development there and M&A and any type of corporate action.

So that -- and tends to be somewhat cyclical, so with the global downturn it's reflected even more dramatically there.

Back in September when we did an analysis, unfortunately we don't -- we haven't computed these numbers yet.

When we looked at the total number of corporate actions in the DR space, it was down about 30% year-over-year and that's what really drives the revenue base there.

So that's going to come with the cycle.

So we expect an uptick in little combinations and corporate actions and in the development world, we will see that.

But if not, it will stay here and that will have some impact as I mentioned on leverage because it doesn't come both ways -- there's not a lot of expenses associated with it.

In terms of corporate trust, that's more a reflection.

We are seeing okay business in most components of it but the non-agency book and the CLO CEO book continues to run off.

There are some CLOs being created and we are getting our market share of those at least so that's the good news.

But it's not fast enough to stop that decline that we've seen.

We would probably expect over the next couple of years.

Ken, the only thing I would add -- it's Karen Peetz -- is that we did see some growth spots.

It's not enough to kind of set a trend for depositary receipts but December of the quarter we had some optimism where the pipeline is up pretty significantly as we head into the new year.

And then the only thing I would amplify on Todd's comments about CLOs, is we are the market leader as those new CLO's are coming to market, there were 127 all of last year of which we won 33%, so hopefully it will begin to offset the decline that is happening on the existing book.

Thank you for all the color.

I appreciate it.

Alex Blostein, Goldman Sachs.

Thanks.

Good morning, guys.

I want to go back to NII for just one sec.

Todd, you talked about in the past trying to keep net interest income flattish.

Balance sheet is up about 12% year-over-year and I got that interest rates are lower but you guys talked in the past about trying to I guess reinvest a little bit more.

So I guess, should we think about the decline in NII just from a dollar perspective as a sign you guys are not able to reinvest quickly enough or I guess the rate compression is a little bit worse.

And again, what gives you confidence that you guys can again kind of keep the number flattish from here if rates stay where they are?

Yes, I would say there are two things.

Number one, the contraction rates was a little heavier than we had expected and QE3 drove some of that.

And the one thing that hasn't moved as quickly as we had hoped is some of that secured lending that we just described.

So our view is we're going to see some burn off of assets.

We can fight that headwind if we have the growth in our collateral services business and the principal lending side of that business, that will basically moderate it along with the repayment of some of our trust preferreds.

But spreads are tough.

There's no question about it and with the Fed in there buying mortgages they become so rich it doesn't really make sense to put some of the shorter duration mortgages on our book.

So the way we sustain the NII that we have is going to be and the securities gains is going to be a combination of managing the portfolio the way we had described and putting more of that money to work at a little faster pace.

We weren't as successful as we would've liked to have been this quarter.

Okay, and a follow-up on the collateral transformation opportunity for you guys.

I understand there's still lots of questions around the size of the market and how much collateral is really going to be needed over time but I guess when you think about the incremental NIM pickup for you guys, what is it today?

You mentioned $90 billion sitting -- deposits with the Fed or just in treasuries earning 25-ish basis points.

What do you guys get currently on secured lending, which I guess we could try to use as a proxy for what you would do on the -- what you would get on the collateral transformation opportunity?

It could be all over the place based on the counterparty and the collateral underneath it.

But it would certainly be 35 to 75 basis points higher than what you would see holding the money at the Fed, Alex.

And the way to think about it is we would like to see the book grow by $20 billion and so that's some of the -- that would be our ability to offset some of that spread contraction headwind.

And, Alex, just a little bit of other color.

The fourth quarter between the fiscal cliff and Europe and a variety of other things that were going on, I think people particularly towards the end of the quarter were really in a risk-off mode in terms of leaving a lot of cash all around the world.

We're already starting to see some of that cash go back to work.

Hopefully we will see some more capital markets activities and therefore demand for borrowed securities in the sec lending side, demand for further collateral transformation as people pick up their trading activities.

So we are a little bit more hopeful than certainly the fourth-quarter activity that market activity will pick up in that space and therefore we will be able to put some more money to work.

Got you.

And then just the last one for me.

I was hoping you could dissect the issuer services a little bit.

I think kind of the picture on the DR side of the business is [clear] -- some of that is cyclical and that's certainly shown up in the numbers.

But when you think about the corporate trust business, 2012 was still a pretty good year for total DCM activity sort of speaking.

Corporate high yield was probably one of the better issues this year we've seen.

So is there a way to kind of tease out I guess the sensitivity to your business if we see a decline in kind of corporate issuance and I guess couple that with the fact that the structured credit stuff, which I guess is about $100 million of annual revenues or so keeps running off?

Right, so it is Karen again.

The high yield and the corporate debt types tend to be our lower fees and there's also even though high-yield as an example, we always dominate, it's still a small number of deals in around those kind of global issuance.

So that can't kind of carry the day.

The other thing, the structured book has historically been the highest fee and margin and so as that has run off and also as new deals are coming in priced less than the old deals were, you get this kind of real churn that's happening in the business.

So to a large extent how we are reacting is to just transform the business model.

We've gone to a more functional alignment so that we can manage the expenses and we are in this kind of wait-and-see mode.

We have a great footprint.

We have a great kind of strategic capability but we are very much going to have a lot more flexibility in how we can manage expenses as we go forward.

Got it, thanks so much.

Brian Bedell, ISI Group.

Good morning, folks.

Can you just flesh out the expenses a little bit more in the fourth quarter?

I'm just looking to try to understand the trajectory as we go into 2013 in a few lines, such as professional services and software and equipment and business development.

They looked a little high.

I was wondering if you can frame out the seasonality of that versus what we might see in 2013?

And then also talk about the pace of the cost-saving initiatives.

I think you are targeting a little over $400 million for 2013.

Is that still the number we should be thinking of?

And so I guess what I'm getting at is are we still looking at around a $2.8 billion quarterly run rate or do you think you can improve upon that?

Sure, Brian.

Answering the question around our initiatives, I think you should look at what we had, the guidance that we had previously given and we expect that we will be in line with that guidance for 2013 and that is what we certainly budgeted for.

In terms of some of the quarter end drive in expenses and when we saw some seasonal things like our donations were up, our marketing expenses were up, we tend to have a conference -- in fact we had one conference that we only have every four years and it came in this fourth quarter.

As well there tends to be -- we take a hard look at some of our assets in terms of software and there were a couple of write-offs there and typically that will happen in the fourth quarter and it can also be related to our operational excellence initiatives as we start to sunset some of the systems.

We are also making some investment in our brands as well and we will roll that out in the first quarter.

That being said, Brian, given the environment that we are operating in, we just have to be very, very disciplined around our expenses and it's one of the things I said in my opening comments, we're going to continue to try to drive efficiencies across our operating platforms and our expense base.

So it's something we have a lot of focus on and a lot of attention on.

Okay, so it sounds like that $2.8 billion is a little elevated and as you go into 2013, the cost-saving initiatives should help offset some of the natural inflation from a base that is a little bit lower than $2.8 billion on a quarterly basis.

Is that fair to say?

I think you're spot-on on that.

I think it's fair and be careful as you design your model, think about the revenue mix.

Right, of course.

And on asset servicing, Tim, maybe can you talk about how the pricing initiative is going?

You repriced a lot of the lower base or do you expect some more attrition to come from some of those repriced agreements in 2013?

If you can talk about that in conjunction with the business that you are winning on the mid-office, maybe just sort of a net outlook for growth in assets serviced and revenue in 2013 in that area.

Sure.

Why don't I start with something I haven't mentioned yet, Brian, which is we have an excellent pipeline of business that will convert over the next three quarters so of the wins that we have not converted yet, which is significant, it's a little over $800 billion.

So there is 1.5 kind of quarters of activity and value that hasn't quite converted yet into the run rate.

But on pricing, just to remind you -- this is a long-term strategy for us of structurally realigning the business.

We started with the low-end of the client base, as you will recall.

The way I would think about it is if you look at asset servicing fees, not investment services fees but asset servicing fees, we think we've got pricing power over let's say 10% to 12%.

We have been raising prices steadily but we're allowed contractually to do so.

We are retaining 75% of the clients with about a 20% uplift.

I don't think that's going to change at all.

We are staying very disciplined on that.

And the great news there is that all drops straight to the bottom line.

So we've only got about 10% of that showing up in the run rate yet so I think there's upside there but because of the nature of when clients are repricing, we are largely tying the repricing now to when clients' contracts come up for review, that will largely be done by the first quarter of 2015.

Personally I think the more impactful thing over time will be the other end of the spectrum, which is those very large clients where we see opportunity to do a lot more in places like collateral in our global markets capabilities and that's something we are equally focused on as well.

Okay, and a large part of that $800 million is mid-office that's coming in?

It's really mixed, Brian.

You would see a core bundle of asset servicing with securities lending and foreign exchange and accounting and then you would see about half of it which are things like middle office outsourcing, transfer agency, fund administration.

That is something that mix has shifted slightly over time.

So it's about 50-50.

Okay, that's helpful.

And then just real quick on the net interest revenue outlook of staying flat, does that include the assumption of deploying some of the $90 billion of central bank deposits into higher-yielding secured loans, Todd?

It does, Brian.

Okay, then money market fee waivers for the fourth quarter, you mentioned the EPS hit from that and then whether you see fee waivers moving up in the first quarter given a little bit of a decline in short-term rates?

Yes, the money market fee waivers were consistent with what we had seen in the third quarter so there really hasn't been much of a change.

There is actually slightly improved from where we were on a year-over-year basis, so right now I don't know -- Curtis if you're seeing any -- I don't think we are seeing any real change into the first quarter as well.

In investment management, fee waivers were the lowest negative impact to us that they had been in six quarters and it's been pretty steady so far.

We are still sorting through some of the year-end flows and impact on repo markets and what not, but I would say it's definitely improved from a year ago.

Great, thanks.

That's helpful.

Thanks so much.

Wendy, we have time for one more question.

Josh Levin, Citigroup.

Good morning.

So someday interest rates will go up and when interest rates go up that's certainly very positive for your business overall.

But given that most of your assets are fixed income, is there a partial drag on your revenues because higher rates means lower fixed income volumes just because of the way duration works and that means translates to lower servicing fees?

How should we think about that relationship?

Maybe a few of my colleagues can jump in here on this question, but if you had a very sharp selloff in fixed income, it would probably be a price change across the portfolio pretty modest.

If it was 5%, that would be a lot.

And for most of our asset servicing businesses, our fees are not necessarily a function.

It is not like AUM where it is basis points.

There's a little bit of that but most of the fees are related to transactions as well as to accounts.

So there's three different sources of fees.

So you might see a modest decline in the AUC / assets under administration and a very modest decline in the amount of related fee revenue to it.

Todd, if I could just add one other thing -- Josh, it's Tim.

Back to this whole collateral theme, I would hasten to guess we are the largest custodian of US treasuries in the world.

And as these regulations take effect where we've talked a little bit about what the increase in volume will demand in terms of posting a collateral, a lot of those US Treasuries are going to be needed and that's why we link that back directly to an inherent medium-term strength whether it was transforming the collateral or through our traditional securities lending and financing capabilities, I think that's going to be a big plus for us.

Okay, my final question is on the Tri-Party Repo market, there have been some changes there in terms of structurally and working with the Fed.

Are you seeing -- are any changes to pricing or margin in that market?

Essentially no.

We are putting through the quote Tri-Party Reform working with the industry, both the buy side and the sell side.

Pricing for our services is held up as it has been in the past.

There's been more activity.

I think the main issue around Tri-Party Reform is taking risk out of the system and I think we're making very good progress on doing that.

So it's not a pricing issue.

It's really a reform issue on taking risks, intraday risk out of the system.

The only thing I would add is that we have been pricing for daylight that hadn't been priced before and so there has been some revenue benefit from that, but it's modest.

Thank you very much.

Thank you very much, everyone, for your interest and dialing in today.

Sorry we couldn't get to everyone's questions.

If you have further questions, please give Andy Clark and the team a direct call and we will be happy to follow up with you.

Thanks again, everyone.

Thank you.

If there 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.