紐約梅隆銀行 (BK) 2013 Q3 法說會逐字稿

Welcome to the third-quarter 2013 earnings conference call hosted by BNY Mellon.

(Operator Instructions)

Please note that this conference call webcast will be recorded, and will consist of copyrighted material.

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

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

Mr. Clark, you may begin.

Thanks, Shirley.

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 in the press release, and those identified in our documents filed with the SEC that are available on our website.

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

We will not update forward-looking statements.

Our press release and earnings review are available on our website.

We'll be using the earnings review to discuss our results.

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

Gerald?

Thanks, Andy.

Good morning, everyone.

Thanks for joining us.

As you saw from our release, for the third quarter, we reported earnings of $0.82 per share.

Now, this includes the benefit related to a recent favorable tax ruling.

After netting out this benefit, we had earnings of $0.60 per share.

Now, looking at how our business model performed, we believe we earned about $0.58 per share on a core operating basis.

Todd will take you through those numbers and how we get there.

For the quarter, I see three key takeaways.

First, we had strong year-over-year core fee revenue growth, reflecting our focus on driving organic growth, our ability to deliver enhanced solution sets across our entire Company, and improved market conditions for most of our businesses.

Second, we continue to exceed the goals of our Operational Excellence initiatives, while making targeted investments to drive future growth.

Finally, our businesses continue to be a strong generator of capital.

In fact, we generated more than $1 billion of capital this quarter.

For the quarter, we had total revenues of $3.8 billion, which is up 3% over the third quarter of 2012.

Investment management business performance continues to be strong and resulted in a 16th consecutive quarter of net long-term inflows.

Net long-term inflows were $32 billion in the quarter, for a total in excess of $100 billion over the last 12 months.

We continue to have particular strength in the liability-driven investments, but we also enjoyed nice flows into more active asset classes, which have a higher fee realization.

Our success in attracting new assets helped drive a 13% increase in assets under management year over year to a record $1.53 trillion.

This organic growth, along with higher equity values, helped mitigate the pressure from higher money market fee waivers.

Todd will talk to that in a few moments.

I would also note that investment management continues to invest in its franchise, including -- the wealth management sales force expansion; enhancements to the US retail distribution platforms; and leveraging our investment services businesses, particularly in the Asia-Pacific region, to deliver solutions our clients need.

In investment services, we had a nice year-over-year fee growth in most of our businesses.

This growth was driven by new business, increased volumes, and improved equity values.

We're continuing to see increased interest and dialogue around our purging or advisory services technology platform, and that services advisors and wealth managers globally.

We see that as a long-term trend that we're well positioned to capitalize on.

We have both scale and a leading technology platform to deliver what the market is looking for.

Global collateral services also contributed to the investment services growth, as changes in the regulatory marketplace have created new business opportunities, particularly in collateral segregation and optimization.

Investment services also benefited from better foreign exchange results.

Certainly, increased market volumes and volatility contributed to this growth.

However, the enhancements we've made to our electronic trading platforms also contributed to our improved performance.

On the expense front, we remain ahead of our Operational Excellence initiative targets.

Our team has been focused on reengineering our processes and creating a simplified end-state operating platform.

We have also leveraged our procurement function and reduced our real estate footprint to reduce costs.

These savings have provided us with the flexibility to make targeted investments for future growth and help absorb the impact of regulatory costs, which are not insignificant.

On the capital front, as I said, we generated over $1 billion of new Basel III Tier 1 common capital.

We achieved an excellent return on tangible common equity of 21%.

The supplemental leverage ratio remains a focus for us and the market in general.

We're certainly supportive of strong leverage ratio standards and good liquidity management.

However, we've been meeting with policy makers to provide an opportunity for them to understand how the proposed SLR affects the market.

We hope to see final rule, which does not create a disincentive to hold strong liquidity positions.

In sum, it was a quarter with solid fee growth, good progress on our Operational Excellence initiatives, and a continuation of our strong capital generation.

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

Thanks, Gerald.

Good morning, everyone.

My comments will follow the quarterly earnings review.

We'll start on Page 2. As Gerald noted, EPS was $0.82; that's $0.60 after excluding the benefit of that recent Tax Court decision.

The $0.60 includes a benefit of approximately $0.02 related to the sale of a property in one of our equity investments.

So, we see it as a $0.58 quarter.

Looking at the numbers on a year-over-year basis, total revenue was $3.8 billion; that's up 3%.

In our investment services businesses, we enjoyed growth in asset servicing, issuer, and clearing.

Investment management and performance fees continued their upward momentum.

FX revenue was, again, up strongly year over year, NIR increased, and expenses were up 4% on a non-GAAP basis.

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

You can see that AUM of $1.53 trillion was up 13% year over year and 7% sequentially.

That was driven by net new business, as well as the higher market values.

During the quarter, we had net long-term inflows of $32 billion, benefiting from -- as Gerald said, from the strength in our liability-driven investments.

But we also saw some movement into alternative investments, as well as active equity and index funds.

Short-term inflows were $13 billion.

Assets under custody and administration were up 4% year over year to $27.4 trillion, primarily reflecting the impact of improved market values and net new business.

Linked quarter, AUCA was up 5% due to improved market values and also the impact of currency rates.

Many of our key metrics showed good growth on a year-over-year basis.

Most clearing metrics were up.

Our estimated DARTs volume and average long-term mutual fund assets continued the recent strong growth trend.

Average loans and deposits in wealth management and investment services were again up nicely.

The market value of securities on loans were also up.

We saw the declines -- we did see some declines in the number of sponsored DR programs, also in the average tri-party repo balances.

Looking at our fees on Page 6, asset servicing fees were up 2% year over year.

They were down 2% sequentially.

The year-over-year increase primarily reflects higher market values, some organic growth, and net new business.

That was partially offset by lower securities lending revenue.

The securities lending revenue is down largely because of narrower spreads.

The sequential decrease primarily resulted from a seasonal decrease in sec lending revenue, lower activity, as well as lower expense reimbursements in the third quarter.

We had an estimated $110 billion in new AUCA wins, for an estimated total of $700 billion in wins over the last 12 months.

Issuer services fees were up 4% year over year and 10% sequentially.

The year-over-year increase primarily reflects higher depositary receipts revenue.

That was partially offset by lower corporate trust fees, primarily related to lower money market mutual fund balances and higher money market fund fee waivers.

The sequential increase reflects seasonally higher DR revenue.

That was offset a bit by lower expense reimbursements, which we noted on our second-quarter earnings call.

Clearing fees were up 10% year over year.

They're down 2% sequentially.

The year-over-year increase was driven by higher mutual fund and asset-based fees and volumes.

That was partially offset by higher money market fee waivers.

The sequential decline was primarily driven by seasonally lower clearance revenue, reflecting a seasonal decrease in DARTs and higher money market fee waivers.

Investment management and performance fees were up 5% year over year and down 3% sequentially.

The year-over-year increase was primarily driven by higher equity market values and net new business.

That was partially offset by the average impact of the stronger US dollar.

The sequential decrease primarily reflects seasonally lower performance fees, partially offset by net new business and higher market values.

Comparisons to both prior periods were negatively impacted by higher money market fee waivers.

Now, in terms of money market fee waivers, the aggregate corporate impact to EPS this quarter was approximately $0.06.

So, that's as high as we've seen it.

From a revenue perspective, the incremental drag was $41 million on a year-over-year basis; it was $23 million sequentially.

If you exclude the impact of fee waivers, year-over-year fee growth would have been approximately 4.5%.

From a business line perspective, the drag was fairly evenly split between investment management and investment services.

In FX and other trading, total revenue was down 12% year over year and 23% sequentially.

Let's look at the underlying components there.

FX revenue was $154 million.

That's up 27% year over year; it's down 14% sequentially.

The year-over-year increase primarily reflects stronger volumes, as well as higher volatility.

The sequential decrease was primarily driven by lower volatility, while volumes increased a bit.

As Gerald noted, we've made some enhancements to our electronic trading platforms; they contributed to the improved volumes and results.

Other trading revenue was down $55 million over the year-ago quarter and $22 million over the second quarter.

Both decreases primarily reflect lower fixed income and derivatives trading revenue.

The year-over-year decrease also reflects a loss on an inventory positions driven by higher interest rates.

Investment and other income totaled $135 million in the quarter.

That compares with $124 million a year ago and $269 million in the second quarter.

The year-over-year increase primarily reflects higher equity investment revenue, which was partially offset by lower seed capital gains.

The sequential decrease primarily reflects a gain related to our equity investment in ConvergEx that was recorded in the second quarter.

To provide some more color here, equity investment income included $36 million of revenue from an equity investment, as we shared in the profit of a piece of real estate they sold.

So they sold a piece of real estate, and that was our equity share of it.

This favorably impacted our EPS by about $0.02.

The asset-related gain item that you see here included $32 million related to the pretax gain on the sale of [news] private banking business.

There was really no positive line impact here on the transaction, as the business had an extremely low tax basis, so the tax gain wiped out the pretax benefit.

Turning to Page 8 of the earnings review, you'll see that NIR on a fully taxable equivalent basis was up $22 million versus the year-ago quarter, and $16 million sequentially.

Both increases were primarily driven by lower premium amortization on investment securities, as well as a larger balance sheet with more interest-earning assets.

The year-over-year increase also reflects a change in the mix of earning assets, including a decrease in the size of the investment securities portfolio.

During the quarter, we reduced the size of the portfolio, which led to $22 million of securities gains.

We also transferred agency mortgage-backed securities with an amortized cost basis of $7.3 billion from available for sale to held to maturity.

We expect that both of these actions will help reduce our capital sensitivity to other comprehensive income in the event of a rise in long-term interest rates.

As our asset and liability management strategy continues to limit our overall exposure to long-term rates, we would expect to be relatively defensive in our reinvestment in the near term, resulting in a modest negative impact to net interest income.

The net interest margin for the quarter was 1.16%.

That's compared with 1.20% in the year-ago quarter and 1.15% in the prior quarter.

Turning to Page 9, total non-interest expense ex amortization of intangible assets and M&I litigation restructuring charges were up 4% year over year and down 1% sequentially.

The year-over-year increase primarily resulted from higher staff expense driven by the annual employee merit increase of 2%, which was effective on July 1, as well as higher incentive and employee benefit expenses.

Turning to Page 10, we're pleased with the performance of our Operational Excellence initiatives, and expect to beat our targets for the year.

Our efforts during the quarter resulted in $170 million in quarterly gross run-rate savings, as the $20 million in incremental savings came with about $11 million of program cost.

Among the areas that we continue to be focused on include -- reducing costs through our enhanced procurement process; continuing to work on reducing our expensive real estate here in New York; and as Gerald mentioned, we're already generating some savings and seeing more opportunities to enhance our technology and operations.

At a conference next month, Brian Shea, our Head of Client Service Delivery and Client Technology Solutions, and Suresh Kumar, our Chief Information Officer, will outline our efforts, progress, and potential in these areas.

Offsetting some of these benefits, we've seen increased costs related to the regulatory environment.

These costs continue to grow as we strengthen our compliance, risk, and control functions, and work to make us an even more resilient company.

As we've mentioned, we're also investing in our brand, as well as other revenue-producing initiatives, such as -- building the separately managed account business in APAC; increasing Dreyfus's share of the US retail market; building our global collateral services capabilities; enhancing our global markets capabilities; and expanding our wealth management franchise -- all important investments in our growth.

As you can see on Page 11, we generated $1.1 billion in gross Basel III Tier 1 common during the quarter.

Our estimated Basel III Tier 1 common-equity ratio has increased substantially.

We purchased 122 million shares of our shares in the third quarter.

That's less than what we've done in the earlier quarters, largely driven by defensive position, and given the ongoing uncertainty about interest rates, and the potential impact on AOCI and ultimately capital.

As mentioned earlier, we've muted the potential impact to the OCI through actions in the third quarter, and that, in addition to our significant capital generation during the quarter, has positioned us to increase our purchases in Q4.

At September 30, 2013, our estimated Basel III Tier 1 common-equity ratio -- this is under the standardized approach -- was 10.1%.

That compares to 9.30% at the end of June.

Now, we've calculated these ratios on a fully phased-in basis.

So the 80-basis-point sequential increase primarily reflects the benefit of capital generation.

If we looked at it under the advanced approach, also on a fully phased-in basis, we are at a very healthy 11.1%.

Our estimated supplementary leverage ratio during the quarter did rise, and is now approximately 4.3%, a little less than anticipated because of a spike in the balance sheet that we saw at quarter end.

Frankly, we permitted the spike because we have significant capacity and plenty of time to take the steps to ultimately comply with the SLR.

Some of those steps will just happen naturally through the normalization of monetary policy, and we'd see some decline in deposits.

As previously mentioned, we have many levers to pull if necessary to improve the ratio with only a limited impact on our Business.

For the time being, we see no reason for immediate actions given the uncertainty around the final definition, and the fact that it won't take effect for five years.

Page 12 details the composition of our investment securities portfolio.

You can see that at quarter end we had a net unrealized gain on the portfolio of $723 million.

That's a little increase from $656 million at the end of the prior quarter.

It was driven primarily by lower credit spreads on foreign securities.

Moving to our loan book on Page 13, the provision for credit losses was $2 million.

That compares to a credit in the year-ago quarter of $5 million, and a credit of $19 million in the prior quarter.

The effective tax rate for the quarter on an operating basis -- that's excluding the US Tax Court's reconsideration -- was 26%, in line with our previous guidance.

Now, a few factors to include in your thinking about the current quarter -- the fourth quarter.

We expect a significant seasonal decline in our high-margin DR fees.

A portion of that should be replaced with the lower-margin investment management performance fees, and should be down somewhat due to our defensive investing.

In the fourth quarter, we typically see higher business development and marketing expenses.

I also want to remind you that preferred dividends will have an impact of approximately $0.02 because of the recent issuance.

The quarterly provisions should be somewhere around zero.

We expect the tax rate to come in, in the range of 26%.

Based on market conditions, we believe we're much better positioned, and expect to execute on our buyback plans, which should be in a range similar to the second quarter.

To recap, all in all, a good revenue quarter in our investment services and investment management businesses.

We continue to execute on the Operational Excellence initiatives.

We strengthened our balance sheet and improved our capital position.

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

Great.

Thanks, Todd.

I think we can now open it up for questions.

(Operator Instructions)

Betsy Graseck, Morgan Stanley.

Two questions.

One is on the outlook for NII.

Todd, you mentioned during this quarter that you were shortening the duration of the portfolio.

Obviously, that didn't come through in the NIM, in part given the premium amortization reduction.

But if you could help us understand -- what kind of pace or rate of change we should expect in the NIM, given the actions you're taking on the portfolio?

Yes, I think in the fourth quarter you're likely to see NIR, given those actions and the rate of the amortization premium -- premium of the amortization of the premium.

I would expect it to be somewhere in the range of what we saw in the second quarter, Betsy.

So, what's the duration of the securities portfolio right now?

What's the targeted duration?

Maybe you could speak to the entire portfolio, not just the AFS or the HTM bucket separately.

Yes, it's a little over two, and we target the duration of the AFS to be in the two range.

So, we're pretty close to where we want to be.

Okay.

Was it higher last quarter?

Because I know you were trying to shorten duration?

Yes, it had gotten a bit higher when we saw the extension that came late in the second quarter.

Right.

So, we did sell out of some securities.

Then we just let some -- we didn't add aggressively to the portfolio in the third quarter.

That's why it's down.

So, we just let some securities burn off -- a natural duration burn off.

Okay.

That's the AFS book, not the HTM book?

It includes both.

But more directed to the AFS book.

Got it.

Okay, helpful.

Then just second thing is on the buyback.

So, I know you indicated that, given market conditions, you'd be more likely to buy back more this quarter.

Obviously, your capital ratio is up significantly with earnings and the benefit of the court decision.

But I guess I'm just honing in on your comment that market conditions make it more appealing to buy back stock this quarter.

Are you just talking about seasonal weakness in the third quarter, is what kept you from doing more buyback in 3Q?

We're a little defensive around the AOCI issue, too, Betsy.

So, until we got the portfolio better positioned, so we had less volatility to our capital account, that made us a bit defensive.

Then we had the good things at the end of the quarter play themselves out.

We're just in a much stronger position.

Sure.

Okay.

Great.

Thank you.

Alex Blostein, Goldman Sachs.

Just picking up on the last question, as you guys approach this year's CCAR exam, it feels like there is a lot more elements that you have to balance around and weigh in on.

So, maybe you can just talk broadly about -- how do you expect to approach this year's stress test?

When it comes to the capital returns, should we still expect you guys to shoot to return more capital next year versus this year, either from the amount basis or as a percentage of earnings?

Alex, we don't know what the stress test is yet.

Our understanding is we'll get the instructions around November 1 -- what the actual environment would look like.

But obviously we've grown our capital; our ratios have improved.

So, we are well positioned to approach the stress test.

But I think it's too early to say, and obviously I wouldn't -- I can't -- there's no way I can talk about what our future actions would be, but we're certainly in as good a position as we were last year.

Just to add to that, Alex, I think we feel very good about the strength of our capital and liquidity going into the stress test.

We think the earnings are very solid.

So, we feel pretty good about our position.

We'll wait to see what the parameters are of the stress test, and then layer into it what capital actions we think are appropriate.

Great.

Then on the core kind of asset services side of the business, I know that you mentioned there's some seasonal changes 2Q to 3Q.

But I guess if you look at broadly, pretty good growth in assets under custody.

If you look at the servicing fees, even excluding securities lending, they were down sequentially.

The fee rate is also kind of down.

Just can you help us just flush out a little bit more?

Is there any changes you're seeing on the pricing front?

Or is this just a seasonally slower activity quarter for you guys?

I think that would be helpful.

Okay.

Lots of questions in there, Alex.

Maybe I can start, and then turn it over to Tim.

On a year-over-year basis, you can see that our assets under custody and administration are up about 4%.

Our fees are also up about 4%.

The third quarter was a bit of an anomaly, both in our AUM, and Curtis can talk to that in AUC.

Because we saw a quarter where the dollar was stronger for most of the quarter, and then weaker at quarter end.

We saw fixed income prices down for most of the quarter, but then strengthening at quarter end.

As you know, we're largely a fixed income shop.

So, I don't think -- I think you'll from time to time see these kind of anomalies on a quarter-to-quarter basis, so it's not necessarily reflective of what you might see in the fees.

Tim, why don't you do a little more deeper dive on the fees.

Hi, Alex.

It's Tim.

There are three things I'd point to, worth mentioning on this call.

One is we saw a pretty significant drop from second quarter to third quarter in out-of-pockets.

These would be things that would come from our subcustody network and CSDs, largely to support growth in handling corporate action activity in our network.

The second thing, which we expected to see, a seasonal drop in overall activity.

I would say across the board, whether you looked at middle office, outsourcing, transfer agency or accounting, we saw an across-the-board drop in activity.

A bit more, frankly, than I would have expected to see.

Then we also saw redemptions.

I didn't quite expect to see the level of redemptions that we saw third quarter over second quarter.

I think if you had put all those things aside, I would have expected to see us flat to maybe up just slightly.

On your pricing question, it's still white hot, at the high end, which is why we keep repricing the low end of our book.

But the story I would maybe draw your attention to is around expenses; both Gerald and Todd talked about this.

You see expenses down for the quarter 3%.

If you adjusted for the seasonality of DRs, you would have seen that our coverage ratios -- so, fees to expenses -- actually improved by 0.5 points despite increased fee waivers and soft sec lending.

Then year on year, you see the expense story as well.

We continue to be very, very disciplined.

Our operational expense initiatives are paying off.

So, a bit of an anomaly on the quarter-to-quarter drop, but we're razor focused on Operational Excellence initiatives.

They're showing up in these results.

Got it.

That's very helpful.

Then, could you just clarify the seasonal benefit in DR business this quarter -- like how much was in that $322-million number?

Todd, you want to take that?

Yes.

It's about -- sequentially, it's about $70 million.

Just to give you a heads up, into the fourth quarter -- that fourth quarter tends to be our weakest.

So, it can be even larger than that.

Got you.

Understood.

Great.

Thanks, guys.

Howard Chen, Credit Suisse.

First, with the government shutdown and looming default, was just hoping you could discuss two aspects of it.

One, recent client behavior across the businesses.

Two, what have you all been doing operationally to prepare -- maybe including from a balance sheet management perspective, or as an important part of the tri-party repo market?

Thanks.

Sure.

Howard, it's Gerald.

Obviously, we're taking this very seriously.

We have a variety of contingency plans in place, with a variety of different scenarios.

Because we're not quite sure what may come out of Washington.

That being said, I think we're as well prepared as anyone going into this.

Client activity, not surprisingly, we've seen some various money market funds and various clients get more defensive and put more into cash.

So our balance sheet's up about $10 billion since quarter end.

We are prepared to handle that.

We've talked to clients about utilizing our balance sheet at least on a short-term basis to accommodate their needs.

So, we're sort of acting business as usual as it relates to clients -- client activity.

As every day goes by, more people are getting more defensive and liquefying more.

No real impact on tri-party, per se.

The market has been deleveraging for quite a period of time.

You've seen what's happening in our tri-party balances.

They've come down a little bit, but generally holding pretty steady.

So, that's about it.

Great.

Thanks.

My follow-up is on the core investment management franchise -- flows have been excellent.

You had another strong quarter of equity market tailwind.

I guess we would have thought you might see a little bit more revenue growth in the core management fees from last quarter.

Was hoping you could -- as you look deeper into the data, was that -- what do you see?

Then, could we get sort of a check on what investment performance is like for those strategies that generate year-end incentive fees?

Thanks.

Yes.

Absolutely.

I think what Todd talked about earlier around assets under custody and some of the dynamics actually played out for us as well.

So, AUM quarter over quarter up 7%.

Almost 3% of that came from the movement in FX.

So, weaker dollar means that our non-US revenues -- non-US AUM, I should say, were boosted by, we thought, really right at the end of the quarter.

We charged management fees primarily on an average FX rate.

The 7% number is actually a spot AUM comparison.

So, we didn't get, in this quarter, the benefit of the weaker dollar and what it does to the AUM of our non-dollar assets.

Just to remind you, about 46% of our revenues are non-US.

So, it's pretty meaningful to know what is happening on the FX front.

Then the remaining portion of the story really is about the AUM growth that we had in short-term assets, and more importantly, the overall impact from fee waivers.

So, this is the second-worst quarter we've had in terms of fee waivers; very low Fed funds rates and short-term market rates significantly depressed the management fee revenues in our business there.

So I think that is really -- those two really tell the story.

I would tell you that the -- sort of the organic activities are pretty promising.

We have -- as you pointed out, we've had good AUM growth.

Todd and Gerald mentioned that has come from some of the lower-fee LDI-oriented products over the past several quarters.

But in the third quarter, we actually began to see some of the confidence that I think the market was feeling earlier in the third quarter, show up in our growth.

We had good growth in active equity.

We actually have -- been positioning our platform around a number of alternative and absolute return products.

They actually had great AUM growth in the quarter.

Some of that came later in the quarter.

So the revenue impact is not felt in the quarter.

You may get new revenues in the quarter, but not have earned as much of the revenue yet.

In fact, so we look very closely at forward revenue streams from our assets -- our asset growth.

The third quarter is seasonally a low quarter.

Generally, clients put money to work in the first quarter, and it remains reasonably strong in the second.

The third quarter is lighter.

Then the fourth quarter is not usually strong as the first quarter, but picks back up.

We actually, this year, have a very different seasonal.

Our third quarter was quite strong, in terms of what forward revenue from new mandates.

Additionally, last thing I'll say is that our one not-funded pipeline is also growing.

The forward revenues from wins that have not yet funded for various reasons -- just haven't happened yet or some of them are triggered based on market outcomes -- has grown by over 20%.

So, I think the organic AUM story is more promising, both on an AUM basis and a revenue basis going forward.

Performance across the platform, as you can imagine, a Firm our size with over $1.5 trillion in assets under management, we have a number of strategies, quite large strategies, that drive revenue.

There are an array of investment performance outcomes.

We continue to see pretty strong performance in some of the larger categories that I've just gone through.

Our LDI team continues to have exceptional performance, and has done a great job for those clients.

It's why Insight, most specifically, has won a number of awards this year for the great work they've done.

If I had to characterize our overall platform, we have a Firm that, I think, is more built around equity and fixed income management that is more conservative in nature, so we don't have big momentum strategies.

Sharp increases in the market all at once -- again, this is a very blunt statement, but generally we lag in those types of markets, and then do better as valuation analysis and finding value in markets becomes more important.

Again, we have a big index business that follows the market, and so it's important to understand the mix of assets that we have on our platform.

Okay.

Great.

Thanks for all that detail.

Lucas Montgomery, Sanford Bernstein.

Thinking about top-line growth, AUC, AUM -- actually AUC -- was wondering if you might comment on the decision of one of your clients to appoint a shadow servicer?

Whether you think that could be an increasing trend going forward?

If so, what underpins that demand?

Do you think there's a meaningful opportunity in it for BNY Mellon?

Tim, why don't you take that one.

Hi, Luke, Tim Keaney.

Yes, we're watching this situation very carefully.

This is a large hedge fund that's appointed us for their middle office.

The reason why this is an interesting space for us, Luke, which we're watching very carefully is, the regulators are putting more and more pressure on clients that outsource activity to make sure that they lower the risk of their operations.

That's happening in Europe first.

It's also gaining traction here.

There are some companies that will look to provide or have shadow providers for contingency purposes.

So, that's what's happening.

This is the first major hedge fund to do that.

I think there's a lot of interest and people watching to see how this plays out between now and next May, June.

I suspect we'll keep that on our radar screen.

So, it's unique.

But I think it's a function of risk management and risk tolerances, and the fact that the regulators are putting a lot of pressure on those that outsource activities to make sure that they've got good risk management plans.

Great, thanks.

Then just switching gears a little bit, a question on your philosophy for managing the securities portfolio.

I think we often focus on top-line revenue and yield.

But I think there's an argument that the fixed-income markets are relatively efficient, and that the higher yields in the credit product are simply compensation for risk.

It also seems like most of the value in your balance sheet comes from the deposits.

So, I know these securities are mostly A rated.

But given what happened in 2008 and 2009, what's the justification for it continuing to hold private-label MBS, CLOs, et cetera?

I'm not making a judgment, but I would like to understand the philosophy better.

It's something you guys debate internally or not?

Yes, Luke.

We don't buy private label.

There's no production of it any more.

But we don't buy private-label MBS.

These are remnants from what we owned back in 2008.

So, if you look at the quality of our securities portfolio, it's primarily agencies, treasuries, and other top-rated sovereigns.

So, it's extremely low risk.

The legacy assets that we've chosen to continue to hold, we actually like their interest rate characteristics a lot because as rates have moved up, those things have performed very nicely.

They've held their values.

So, they were so depressed back in 2008 and 2009, we elected -- we reviewed the portfolio very carefully.

We sold about 30% of the portfolio.

We retained the other securities.

We're letting them burn off and act as a very nice interest rate hedge.

They've performed exactly as we hoped they would.

I would just add to it.

It is our philosophy to run a very conservative investment portfolio.

Our clients entrust their most precious assets with us as a custodian or as a trust organization or as an investment manager.

We don't want to do anything that has the appearance that we don't have the capital strength and liquidity to be able to manage through any crisis or any cycle.

So, our posture is to run a very conservative investment portfolio -- short duration, high quality.

That spills over into our loan book as well.

So, it's a very clean, high-quality loan book.

Our philosophy is not a lot different than what you just said -- to be a buyer of securities we don't think is creating tremendous value.

Perhaps if we were an originator, we might think of it otherwise.

Okay, great.

Thanks for taking my questions.

Sure.

Thanks, Luke.

Cynthia Mayer, Bank of America.

Apologies if you covered this, but it looks like in terms of the AUC, in the earnings release, you mention the increase attributed to higher market values in FX?

I'm just wondering -- does this mean you didn't have net wins in the quarter?

Just in general, how's your win/loss trend?

Tim, why don't you take that one.

Okay.

Yes, Cynthia, we had three things happen.

Obviously, currency and market helped a lot, in the 5% linked.

We did have some new business convert during the quarter, about $145 billion.

It didn't all convert in the beginning of the quarter.

But one point I made to an earlier question was around redemptions.

We did see an awful lot of redemptions in the market that basically ate away what we did convert during the quarter.

But more broadly, to your point, it is a competitive environment.

Pipeline and asset servicing year on year has grown substantially.

It's up about 30%.

We pay very close attention to our win rate.

That's been pretty steady on the last four quarters, a little over 50%.

So, I don't know if that directly answers your questions, but that's what -- the way I'd describe it.

Yes, it does.

Thank you.

Then you mentioned -- I think you mentioned core EPS at about $0.58.

So, I'm just wondering if you could just go through the -- what you exclude there?

How you think about that versus the adjusted?

Yes, there's really only -- it's a pretty clean quarter.

We had a little bit of unusual gains on the asset gains.

One of them was related to an equity accounting.

One of our minority interests sold a building.

The gain on that sale is -- our percentage of that -- our pro rata portion of that is in the P&L.

That was about $0.02.

The rest of it's pretty straightforward.

Okay.

Great.

Thanks a lot.

Thank you.

Ken Usdin, Jefferies.

First, just a couple quick clean-up things.

Can you tell us either what the premium amortization amount was or, at minimum, what the delta was sequentially?

Yes, the delta was about $25 million, Ken.

Is that a substantial reduction of what the overall carry is of it?

Yes, I mean, the way to look at that was probably a little more than 20% reduction in the amortization that we had seen in the previous quarter.

All right.

That's helpful.

The [account day] accretion was $55 million?

That's right.

That was about flat.

That was flat.

Okay.

Then my bigger picture question is -- you guys are doing a really good job on the cost containment, and are obviously well ahead of the original plan that you guys had laid out.

But I just wanted to ask you guys just conceptually and structurally, where are we from here in terms of incremental cost reduction?

What initiatives are going on, given that we're still in this kind of so-so revenue environment to either reduce or control the rate of expense growth from here given that you're already well over your original plan, so-to-speak?

Yes.

Ken, it's Gerald.

Obviously, we have a philosophy of continuous improvement in our operations and technology areas.

We talked, in terms of the opening comments, that we are working very diligently and very focused on simplifying our operating platforms and models.

We think there's more upside to be had from that.

We're finishing out sort of what I call the lifted shift, in terms of labor movements.

We're towards the end of that.

But we do see a lot of upside still to be had in continuous improvement in the operating and technology areas.

So, you'll hear more about that as time goes on.

Okay.

Thanks, guys.

Thanks, Ken.

Glenn Schorr, ISI.

So, I heard your comments loud and clear on leverage ratio before.

But I'm curious -- if about a third of the balance sheet is sitting in deposits with banks or deposits with the Fed, is that one of the big primary sources of your confidence that if and when you need to adjust, you can adjust?

Then just a follow-on to that is -- how else does the leverage ratio focus make its way, impact from a business standpoint.

Because from a balance sheet standpoint, it looks like you have the flexibility.

Yes, I mean, I think there's a number of things that we can do.

We actually -- on that big balance sheet right now, we've consolidated some asset management funds, which the accounting is likely to change and we'd be able to de-consolidate that before these go into effect.

The other thing is, you point out well, that a lot of those are Central Bank deposits and cash.

We would think, Glenn, just in the normal course, we are sitting on an awful lot of balances because of the very unusual interest rate scenario that we're in right now.

We would expect at least $50 billion or so of that to be reduced, just in a more normalized interest rate [world].

Then, we are -- even if we continue to pay out at the same levels that we pay out, we're also creating quite a bit of capital.

We can also manage the balance sheet more tightly in a number of places, including we make some loans out of the holding company.

We don't need to do that.

So, there's $10 billions and even $20 billions of things that we can do outside just the normalization.

So, we don't see any business-model action that we need to take.

We think that during the normal course, it will work through it.

It's also -- we don't know what the final rules are going to be.

So, there's some possibility they could change in our favor or not.

We will adjust to them as we need to.

Okay.

Appreciate that.

I agree with that.

Last one is just on LDI.

It seems like Insight's doing great.

Looking at $93 billion total inflows for the year to date so far.

I'm just curious -- what percentage is LDI?

What's the average fee rate?

What are the type of clients that they're landing?

Because those are pretty long-dated mandates, right?

Yes, they are.

I think it's a very important trend to understand.

In the big debate about the great rotation, in the top of everybody's mind -- I think it really is important to understand the accounting changes that have happened in the pension industry, and that will start to also take place for public funds after June of next year, where volatility in pension plans is less welcome.

So, there are a lot of pension plans globally, both corporate and public, that are focused on being able to manage against their liability stream.

Insight is the world leader in being able to help those plans with that.

The fees -- it's a lot of the mandates.

Because the liability is fixed income in nature, a lot of the fees are oriented more towards fixed income type fees, and are lower fees in general on an absolute basis.

But as you point out, the size of the mandates are very large.

So, as rates go up, actually it becomes easier for pension plans to address their managing against their liability, and as they become more funded.

So, again, I would tell you that we are very excited about the business.

One of our initiatives is to -- we've actually invested in helping Insight grow its business in the US and in Asia.

They have been primarily focused in the UK and also growing in Europe.

So, really excited about what they're doing there.

I would also say their products extend.

When you have the ability to evaluate liability streams and hedge them very effectively and manage portfolios of assets that are outperforming the liability, those are a lot of the same skills that are broadly needed by a larger group of clients in the absolute return space, where we think a lot of clients are growing.

Everyone from wealth clients to other institutions that are just simply looking for less volatility, but still trying to get some return in their investment portfolio.

So, very excited about it, and think they have a great future, as many of our other investment firms do as well.

Excellent.

Thank you.

Thanks, Glenn.

Shirley, we have time for one more question.

Gerard Cassidy, RBC.

Can you guys come back to the planning that you're doing with the government problems that we're having, and tell us -- do you guys own many short-term t-bills that may be maturing in the next 15 to 30 days?

Todd can talk to our own ownership?

Yes.

We have very few.

But we do have a little bit that mature within this year, probably in the $60-million range or so.

Okay.

Then the second -- over the years, you guys have done a number of acquisitions.

Obviously, you haven't done anything materially recently.

Do you get the sense, aside from market conditions as maybe the reason nothing has happened in the custody world in terms of acquisitions -- but do you get a sense that the regulators are more or less supportive of banks your size going out making sizable acquisitions?

Well, let me put it this way, Gerard.

I think we have so much opportunity internally to invest in our existing businesses and our operations and technology platforms; it's not a high priority.

We think we can get a much better return on investments in our own businesses, in our own products and services.

That we have so much on our plate right now and so much in motion right now that I think there's a much better return to our shareholders than even considering what you're suggesting.

So, I don't even want to comment on the regulatory part.

It's really a matter of our choice to invest in ourselves.

Gerald, we have done a couple of small things.

We've done something in asset management, where we --

Yes.

-- where we closed on a German JV, where we had a partial ownership of it.

Then we own all of it.

We took Pershing international a little bit more, too, with some of it, in Australia.

So, we've done some fill-in things.

But I don't think we believe we need to do anything major, certainly not in the asset-servicing space.

Thank you.

Thank you very much.

Thank you very much, everyone, for dialing in.

We really appreciate it.

You can contact Andy Clark for a further follow-up.

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 your participation.