紐約梅隆銀行 (BK) 2013 Q4 法說會逐字稿

Welcome to the fourth quarter 2013 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 and webcast will be recorded and will consist of copyrighted material.

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

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

Mr. Clark, you may begin.

Thanks, Wendy.

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, January 17, 2014.

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.

Welcome, everyone.

Thanks for joining us.

As you saw from the release, for the fourth quarter, we reported earnings of $0.44 per share.

Now, this includes an after-tax loss of $115 million or $0.10 per share related to the write-down of an equity investment.

After netting out this loss, we had adjusted earnings of $0.54 per share.

We had strong year-over-year growth in core Investment Management and Investment Services fees.

The growth reflects improved market conditions and importantly, our success in providing solution sets across our businesses that our clients are seeking.

As we have said in the past, we are making strategic investments in several areas to expand our capabilities.

We're seeing early evidence of returns on those investments.

For the quarter, we had total revenues of $3.8 billion, which is up 4% over the fourth quarter of 2012.

The Investment Management business performance remains terrific.

Our success in attracting new assets helped drive a 14% increase in assets under management year-over-year to a record $1.58 trillion.

In 2013, net long-term flows were $95 billion, as we continue to have particular strength in the liability-driven investments category.

Now, this organic growth, along with higher equity values and performance fees helped mitigate the pressure from higher money market fee waivers year-over-year.

Similar to Investment Management, we had strong year-over-year growth in Investment Services.

We saw growth in asset servicing, issuer services and clearing fees driven by higher volumes, improved equity values and net new business.

Clearing services, in particular, continues to show strong growth as our technology platforms serving investment advisors is more broadly adopted.

Now, some of our investments also contributed to this growth.

Our global collateral services business continued to gather collateral management assets.

We enjoyed better foreign exchange results year-over-year as our investments in the electronic channel have made us more competitive.

We are attracting greater volumes.

Now, in terms of our expenses, seasonality played a large part of the sequential growth.

Our expenses have been impacted by our strategic investments for future growth as well as increasing regulatory and compliance requirements.

Notably, our operational excellence initiative savings helped mitigate some of this expense pressure.

You will see that we achieved our operational excellence targets of over $650 million, a full one year ahead of schedule.

Importantly, we're not done.

We're now transitioning to a broader, continuous improvement process designed to improve efficiencies.

This process is not a program or an initiative or a one-time project.

It will be an ongoing area of emphasis that is becoming part of the fabric of our culture.

Now, we already have line-of-sight into several hundred millions of dollars of financial benefit over the next few years.

Turning to the capital front.

Our business model generates a significant level of capital and allows us to perform well in stress scenarios, giving us increased financial flexibility.

In 2013, we returned approximately $1.7 billion to shareholders in the form of dividends or share repurchases.

Now, in terms of share repurchases, during the first quarter, we are in a position to potentially increase the total share buyback relative to the fourth quarter.

Todd will cover that in more detail in a minute.

So for the quarter, continued growth in core Investment Services and Investment Management fees, successful completion of our operational excellence initiatives and continued strong capital position.

Now, looking ahead to 2014, we expect to see more of the benefits of some of the investments we've been making.

In global markets, we're continuing to roll out new electronic foreign exchange and capital markets trading capabilities that position us to capture additional activity.

The growth of our global collateral services business should benefit as the markets deal with new collateral regulations.

In Investment Management, we're in the midst of greatly expanding our wealth management sales force.

Additionally, we are making significant progress reaching individual investors by expanding our retail distribution capabilities and product offerings.

We've also made progress in expanding our Investment Management and Investment Services capabilities in the Asia-Pacific region, with our separately managed accounts platform scheduled to go live shortly.

We've successfully piloted an intermediary private banking program between wealth management and Pershing.

We'll look to build on that momentum.

We continue to repositioned to benefit even more as fund managers look to leverage our technology and advisors and brokers move away from self-clearing.

We like how we're positioned.

We're upbeat about our prospects for 2014.

With that, let me turn it over to Todd.

Thanks, Gerald.

Good morning, everyone.

As in the past, my comments will follow the quarterly review.

Let's begin on Page 2. As Gerald noted, EPS was $0.44, that includes the after-tax loss of $115 million or $0.10 per share.

That was related to the equity investment.

We have a minority interest in ConvergEx.

So we see it as a $0.54 quarter, but that does include the benefit of approximately $0.01 on tax.

Looking at the numbers on a year-over-year basis, total revenue was $3.8 billion.

That's on a non-GAAP and that's up 4%.

In our Investment Services business, we had growth in asset servicing, issuer and clearing services.

Investment Management and performance fees continued their strong trend.

FX revenue was up and NIR also grew.

Expenses were up 2% on a GAAP basis.

Adjusted, they were up about 4%, largely reflecting higher staff, legal, consulting and business development expenses.

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

You can see that AUM of $1.58 trillion was up 14% year-over-year and 3% sequentially.

Now, this was driven by net new business wins and higher equity market values.

During the quarter, we had net long-term in-flows of $2 billion and short-term in-flows of $6 billion.

Assets under custody and administration at quarter end were $27.6 trillion, that's up $1.3 trillion or 5% year-over-year.

It primarily reflects the impact of higher market values and net new business.

Linked quarter AUC/AUA was up about 1%.

That's due to improved market values.

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

Average loans and deposits in wealth management and Investment Services were up very strongly -- strong.

Most clearing metrics were up quite nicely as well.

DARTS volume and average long-term mutual fund assets continued that recent strong growth trend.

DR programs were down in the quarter.

That's really reflecting market events including M&A and corporate restructurings.

So, when you do see an M&A transaction, it can result in the termination of a given program.

We have been disciplined, I might say, around the pricing in that business.

Average tri-party repo balances were down year-over-year but up sequentially, as we continue to see opportunities for growth for global collateral services.

Asset servicing fees were up -- this is on Page 6 -- were up 4% year-over-year and 2% sequentially.

Both those increases largely reflect higher market values, organic growth and higher collateral management and segregation fees in global collateral services.

The year-over-year increase was partially offset by lower securities lending revenue.

That was primarily driven to -- by lower spreads.

We had an estimated $123 billion in new AUC/A wins in asset servicing.

For the year in total, we had new AUC/A wins totaling $639 billion.

Clearing fees were up 10% year-over-year and 3% sequentially.

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

That was partially offset by higher money market fee waivers.

The sequential increase was primarily driven by higher clearing revenue and mutual fund fees.

Issuer service fees were up 10% year-over-year.

They were down 26% sequentially.

The year-over-year increase primarily reflects DR revenue that was really driven by corporate actions.

That was partially offset by the runoff that we've seen in securitizations and corporate trust.

The sequential decrease, as we've mentioned before, is primarily resulted from seasonally lower DR revenue in the fourth quarter versus the third.

Investment Management and performance fees were up 6% year-over-year and 10% sequentially.

If you adjust them for the sale of our Newton private client business last quarter, they were up 7% and 11%.

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

That was partially offset by higher money market fee waivers and the average impact that we saw in the strengths of the dollar.

The sequential increase primarily reflects seasonally higher performance fees and higher equity market values.

Now, in terms of money market fees, the aggregate impact to our EPS this quarter was approximately $0.06 to $0.07.

That's pretty much in the range that we saw in the third quarter.

From a revenue perspective on a year-over-year basis, that drag was $47 million.

It's split fairly evenly between our Investment Management and our Investment Services business.

Moving on to FX and other trading, revenue was up 5% year-over-year and is down 9% sequentially.

The underlying components: FX revenue was $126 million; that's up 19% from last year; it's down 18% sequentially.

The year-over-year increase primarily reflects higher volumes.

We did see a little bit higher volatility.

The sequential decrease was driven by a significant decline in volatility sequentially, but that was partially offset by volume increases.

So as Gerald noted earlier, the enhancements we've made to our electronic trading platforms have contributed to the results.

We have definitely seen a significant increase in volume.

Other trading revenue was down $13 million from the year-ago quarter and up $14 million from the third quarter.

The year-over-year decrease primarily reflects lower derivatives trading revenue.

The sequential increase was driven by higher fixed income trading.

That's partially offset by lower equity derivatives trading.

Investment and other income was a loss of $60 million compared with income of $116 million in the year-ago quarter and income of $135 million in the prior quarter.

Both decreases primarily reflect the write-down of the goodwill in our equity investment in ConvergEx.

Turning to Page 8 of the earnings review.

You'll see that net interest revenue on a fully tax equivalent basis was up $41 million versus the year-ago quarter.

It was down $6 million sequentially.

The year-over-year increase in net interest revenue was primarily driven by higher average interest earning assets.

The sequential decrease primarily reflects the change in the mix, as we saw a full quarter impact of the move to a defensive rate position that we took pretty much in the third quarter.

That was partially offset by an increase in revenue generated by the higher deposits.

The net interest margin for the quarter was 1.09%.

That was flat with where we were last year at this time and down a bit from 1.16% in the third quarter.

Turning to Page 9, total non-interest expenses and this excludes the amortization of intangibles, M&I, as well as litigation restructuring charges were up 4% year-over-year and about the same sequentially.

The year-over-year increase primarily resulted from increased staff expense.

That was driven by higher incentives due to the higher pretax income that we had, as well as increased employee benefit costs.

That's really -- came down to higher pension expense for the year 2013.

Higher legal expense was related to litigation defense.

We did see some increased consulting expense -- Gerald had mentioned, largely driven by regulatory and compliance requirements, but also to support some of our key business initiatives.

We did have higher business development expense.

That's a lot to do with our corporate branding campaign and the marketing initiatives that we've had as we continue to invest in building our brand.

The sequential increase primarily resulted from higher legal consulting and business development expenses, reflecting the factors that I noted above, as well as seasonality and the timing of client conferences and corporate sponsorships.

Page 10 details our success in achieving our operational excellence initiative goal of more than $650 million in expenses.

We've done that a year ahead of schedule.

In fact, we've now achieved savings at a rate of about $760 million.

One noteworthy accomplishment is a recent move of our New York treasury and trading operations from a leased building in downtown Manhattan to one of own properties.

It's a state of the art facility.

It's another example of how we are taking action to reduce the cost of our real estate footprint around the globe.

Now that we have met our operational excellence goals, this will be the last quarter that we report them to you.

Now, as Gerald mentioned, we're now shifting to a broader transformation process, one that we've internally branded Transforming For Success.

That moves us from a project or program orientation to one of a culture of continuous improvement.

This work should provide significant beneficial impact, as we've identified a number of things that we'll be doing over the next few years, but it's not simply about cost.

Of course, that's very important to me, an important component.

It's also about raising the bar on service quality, driving productivity gains and importantly, reducing risk.

Turning to our capital story.

As you can see on Page 11, our key ratios strengthened substantially over the quarter.

At December 31, our estimated Basel III Tier 1 common ratio under the standardized approach was 10.6% and that compared to 10.1% at the end of September.

This ratio is calculated on a fully phased-in basis.

The 50 basis points sequential increase primarily reflects lower risk weighted assets that are related both to securitizations as well as to margin [runs].

Our estimated supplementary leverage ratio actually declined by about 10 basis points during the quarter.

That was largely due to a spike that we saw in year-end balance sheet.

Our year-end balance sheet was actually $18 billion larger than what -- the average for the quarter.

On Page 12, you can see that at quarter end, we had a net unrealized gain on the investment securities portfolio of $309 million.

That was down from $723 million at the end of the prior quarter.

That was driven by the rise in interest rates that we saw in the fourth quarter.

Looking at our loan book on Page 13, you can see that the provision for credit losses was $6 million.

This was driven by an increase in the allowance related to a municipal related entity.

That compares on a year-over-year basis to a credit of $61 million and a provision of $2 million in the prior quarter.

The effective tax rate for the quarter was 21.8%.

That was positively impacted both by the tax benefit associated with the loss to an equity investment, in fact, that was the major driver, as well as some benefit from lower state taxes.

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

Incentive expenses impacted by the vesting of long-term stock awards, as we've mentioned in the past for retirement eligible employees -- so, typically we do see a seasonal increase in the first quarter.

We would expect a decrease in our pension expense, given the very strong performance that we've seen on the assets in 2013, as well as an increase in the discount rate.

We would expect net interest income to be down in the quarter, due to a lower day count.

So there's two fewer days, as well as a smaller balance sheet as we have seen a lot of the spike in deposits run off.

The quarterly provisions should be in the range zero to $15 million as we've seen in the previous number of quarters.

We expect the tax rate to be around 26%.

Also in the fourth quarter, our gross share repurchases including open market employee benefit plan related repurchases totaled about $321 million.

In the first quarter, our gross share repurchases could increase by as much as $60 million.

But that is, of course, subject to market conditions and other factors.

During the quarter and all of 2014, we'll be focused, as I think you've heard from both Gerald and I, on three main activities.

One is investing in our organic growth opportunities.

Number two is transforming our businesses to this continuous improvement that drives productivity gains, saves us some money and generates premium service quality.

Number three is we will continue to deploy our capital and manage our risks wisely.

With that, let me turn it back to Gerald.

Thanks, Todd.

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

(Operator Instructions)

Betsy Graseck, Morgan Stanley.

One question just on the outlook for the SLR.

There was over the past weekend some discussion coming out of Basel that a lot of investors kind of focused on that did not have a carve-out for deposits at the Fed or central banks.

Just wanted to get your updated sense on how you're thinking about that.

I realize that the US regulator hasn't opined yet, but there's a little bit of a concern that since Basel did this, that we'll follow.

Sure, Betsy.

It's Todd.

I think the good news on the final Basel rule is that they are going to treat unfunded commitments a little more reasonably.

So the impact of that is probably a reduction of about 50% on the balance sheet.

There still is an open issue, not so much with Basel and the treatment of central bank cash, but ultimately how the US is going to treat that.

I think it's too early to call.

So there's plenty of room within US interpretation to do something.

We hear things both positively and negatively along that but I'd just say at this point, we really don't know.

Okay.

Can you give us a sense on the unfunded commitments, what the benefit is to you from that?

Yes, we have anywhere from around $45 billion, $40 billion to $45 billion in unfunded commitments.

It'd move it from about 100% to about 50%, is our rough estimate.

We really haven't -- this news just came out, so we really haven't gotten completely underneath that yet.

Sure.

Okay.

That's great.

Then separately, on the investments that you've been making in retail, Gerald, you highlighted at the beginning of the call some of the opportunities out there and the expectation.

Can you just give a sense as to kind of the time frame for which you're thinking the retail investment spend will drive some increases in top line?

Over what time frame magnitude?

Yes.

I'll start and then perhaps turn it over to Curtis.

As you know, we are relatively under-exposed to the retail investor.

This has been something of great focus by the firm.

We're starting with improving some of our distribution capabilities, investing in wholesalers to get our products on various retail platforms around the world, not just in the US.

We're investing in some of the product capabilities.

We're investing in some of the areas around the Dreyfus brand and capabilities to enhance some of those product offerings.

So this is not a short-term fix because this takes a fair amount of investment in both people and strategies to broaden our exposure to the retail investor.

So this is a long-term investment.

This is something we plan to continue to push.

Curtis?

Yes.

I think that's well-said.

We've obviously got a great start.

The Dreyfus platform here in the US has obviously got all the infrastructure and very importantly, the relationships with the advisory community through Pershing.

We're able to connect with some of their clients as well.

So I think that we have a lot of foundation to build upon.

To your specific question, we've gotten started adding staff, adding product development capabilities, investing in our brand.

I actually think we're going to see some -- begin to see the beginning edges of our improvement toward the end of this year.

There are some products specifically that we have very strong investment performance in that I think the market has great demand for.

So, we're very optimistic about our future here.

So what percentage into the investment spend would you say you are?

I'd say we're about 20% of the way into the investment spend.

I think at the end of 2014, I expect to be closer to 50%.

Okay.

Got it.

Then the revenue piece is starting at the end of 2014?

Yes, I mean, obviously we're already in the business.

So we have revenues --

Yes, yes, of course.

-- in the retail space.

But seeing real momentum, I think -- I hope we'll be able to see it in the third and fourth quarter this year.

Got it.

Okay.

Thanks.

Thank you.

Ken Usdin, Jefferies.

Gerald, you guys had made some comments at a recent conference just about operating leverage going forward and what kind of environment you'd need to deliver positive operating leverage.

It seemed like even with these hundreds of millions of expenses and per the last answers about where you on the build that the operating environment needs to still get meaningfully better to really generate bigger operating leverage.

So can you kind of give us your thoughts as far as the next year or two on your belief in what revenues you think could look like on the top line?

Then if you can, in fact, deliver operating leverage as you look ahead?

Well, first, Ken, I don't want to get in the forward guidance business.

But I think in this environment we are challenged, but we're challenging the team to produce positive operating leverage.

I think we said in the 4% to 5% its own or north of that.

We should be able to produce it.

We are obviously bearing the cost of regulatory compliance and investments in our businesses, so we're partially reinvesting some of those gains from operational excellence, right back into the business and covering those other costs.

But I sure would like to produce positive operating leverage.

It's our goal.

I know it's top of the mind on our investors and by you all.

That is part of our goal.

Yes.

Ken, I'd add to that.

I think that what we had indicated a couple of years ago at our investors conference is we felt our revenue growth rate should be in the 3% to 5% range.

It's been approximately there, about 4% this year.

At the lower end of that, it's pretty difficult to generate a lot of positive operating leverage as we get to the higher end of it.

We do start to generate it.

This year we made -- this year being 2013, we made a conscious decision -- I think Curtis just pointed out a couple of the types of investments that we're making.

We made a conscious decision to put 1% or 2%, if you will, of our expenses growth into reinvesting in opportunities for the future.

So, I think that otherwise, you would have seen a meaningful operating -- the core business did generate a meaningful operating leverage.

Yes.

Related to that, just on -- you pointed out that this quarter there seemed to be a good amount of partially seasonal expense pick-up.

But can you help us try to identify how much of that increase might have been one-time or above trend relative to the expense result this quarter?

Sure.

I mean, some of it is episodic.

So we have seen a sharp rise in our litigation defenses.

That's likely to run for some time.

But certainly not permanently.

We have seen a pick-up around certain compliance and regulatory issues.

Some of that is episodic.

But the run rate is certainly higher.

I'd say the growth rate of that has probably curtailed a bit.

Then we saw marketing costs which tend to be somewhat seasonal as we picked up our advertising campaign.

We have a number of conferences and corporate events that typically take place in the fourth quarter.

So that is seasonal.

I think we did make a push with our brand campaign in 2013 that would abate a little bit.

Okay.

Great.

Ken, the other point I would like to make is it's one of the reasons why we view this continuous improvement process as something that's got to be part of the core fabric of the Company.

We do see, as I said in my opening comments, a line of sight for continuing to get expenses and efficiencies and higher levels of productivity out of our core operation.

There's no question in my mind that there's hundreds of millions of dollars there.

We have an ability and certainly, an attitude to get at it.

Understood.

Thanks, guys.

Thanks, Ken.

Glenn Schorr, ISI.

A quick one on RWA inflation or lack thereof, which is a good thing.

So I see RWAs, whether it be standardized or advanced came down some in the quarter.

So, my quick question is, a couple of banks have been reporting inflation on higher operational risk, I think that's been accounted for in your models, a while ago.

I just want to know if we should be looking for any other RWA inflation as all these final rules have come out?

Sure, Glenn.

It's getting complicated because there's a lot going on right now.

But if you look at -- we give a fairly detailed disclosure around the changes to our risk weighted assets, both in the standardized and in the advanced approach.

When we reflect that, that's on a fully phased-in basis.

Actually, now there are phase-ins that start to take place this year.

So our actual reported numbers this year as we move into Basel III are going to be quite higher than the fully phased-in numbers.

All of that being said, if you look through the numbers, there's a couple of drivers there.

OCI had a modest impact to us because we did see a little bit of downturn in the securities portfolio.

We got a little bit of a pick-up in the pension portfolios.

It's gone up in value.

Then the meaningful driver is the RWA calculation in the standardized approach.

Now, just to add complexity, the standardized approach does not take into consideration operational risk.

It just uses Basel I and adds severity to it, if you will.

So the large driver there is around securities -- our securities lending mix as well as margin lending and the quality of the collateral that you have in those margin loans.

So we did see some improvement there.

We saw less of that reflected in the advanced approach.

So it's not to say that there couldn't be changes but from our best estimates right now, we're not really -- we don't really require a whole lot of RWAs to build our business.

I think kind of the other thing to point out is we do have these non-agency securities and the securitizations.

They do trend to draw a little bit higher capital charges.

They're slowly paying themselves down, so that should continue to be a positive for us.

Okay.

I get that.

Then LDI flows for the year were awesome.

I don't know if I saw what they were for the quarter.

I'm just curious if higher long end rates are in a weird way bad in the short-term but really good in the long-term for that business?

I'm just curious if it had an impact in the quarter?

What your outlook for the LDI flows are?

Yes.

Glenn, it's Curtis.

I definitely think that looking at the funded status ratio of pension plans is an important indicator here of kind of what's going on.

If you look at where we are today, just where the average plan is funded at about a 95%, 96% ratio which dipped actually below 75% back in 2011.

We're at the highest levels we've been at since before the financial crisis in 2008.

So pension plans have been on a pretty wild ride around their funded status ratio.

In the quarter, we definitely saw more interest in talking about whether they should move towards locking in some of this recent improvement.

There was definitely some derisking.

We even saw it in the index businesses, where there were actually outflows in equity index products and movement towards fixed income and towards more balanced risk.

So I definitely think that the LDI business is still a very promising business as pension plans are in many ways better positioned to be able to move to that strategy.

Okay.

Thank you very much.

Alex Blostein, Goldman Sachs.

So I wanted to touch base on the collateral management opportunity and kind of what the learning is this year.

The migration to clearing happened this year, fairly seamlessly, which I guess is a good thing.

But looking out, I guess, when you think about the opportunity for yourself -- it sounded like there's already a little bit of revenues coming through the model today.

So I was hoping maybe you could help us quantify that?

Maybe give an update on, how big do you guys think collateral management could be for you?

I guess, what are the catalysts we need to look forward to, to see more of a material impact?

Sure, Alex.

I think as we said in the past, we're still I think frankly in the early stages of the impact on the marketplace.

The dealer side has been impacted early on; now the long investors have risked their accounts; other market participants -- the buy side is now having to deal with this particular issue.

We've cited insurance companies as a good example in the past, where historically they have not had to post collateral.

Now they have to start doing so.

So I think we're still in the early innings of the impact on the marketplace broadly.

So most of the revenues that we've seen as we've been seeing some success here in collateral services has been around the segregation or the optimization of the collateral as opposed to moving into the next phase of transforming it and making it more available and more easily movable around the world.

So I still think we have many innings to go in terms of the opportunity here.

So as I said in my opening comments, we're seeing increased revenues.

It's showing up in our asset servicing fee line.

That's where it shows up.

We're quite positive about the prospects here.

Got you.

Then Todd, just a question on expenses, a follow-up to Ken's question I guess as well.

As you pointed out, a couple of years ago you said, I think around 3% expense growth rate is reasonable.

There's new investments you guys are making relative to what you outlined a few years ago but also it sounds like there's new savings that you will try to achieve.

So blending it all together, is a 3% kind of normal expense growth rate for the next couple years still a reasonable way to think about it?

Yes.

But Alex, it's going to obviously be tied to the revenues.

It's going to be tied to the types of revenues that we see.

So the mix can have a meaningful impact.

Certain of our revenues are very -- have fixed costs, so massive amounts of operating leverage to them.

Whereas others come with meaningful cost.

So, the revenue mix has a big impact.

The good news is we've had a headwind of increasing pension expenses year-after-year.

That should ease a bit this year.

But I think generally, it's going to come with -- depending on the mix of revenues and the amount of investments as opportunities that we see for organic growth.

Got you.

Thanks.

Ashley Serrao, Credit Suisse.

So on expenses, I hear you loud and clear on your $100 million program.

But maybe you can give us some examples of what you're working on today.

How we should be thinking about the incremental investment spend there versus the savings?

Sure.

I'll take a stab at it.

Then Todd, maybe you want to weigh in.

In many ways, it's fairly basic.

We've said in the past, we have multiple operating platforms.

We're going through the conversions of that now and being able to shut down different things.

It makes it a much more efficient operating environment when you have fewer platforms and fewer engines to work across.

So improvement and going from a more manual process or to a more automated process, really applying some metrics and engineering around our capabilities.

We have multiple centers around the world that do things like reconciliations and tax claims and corporate actions and stuff like that.

There's ways to consolidate those.

Just a whole variety of different things.

Brian Shea is really leading the charge with Suresh Kumar, our Chief Technology Information Officer.

Brian, maybe you want to weigh in here.

Yes.

Thanks, Gerald.

I think what we're doing in terms of this Transforming For Success program is expanding the focus beyond just pure expense reductions; although, that's an important part of it for sure.

A couple of things that are new and different.

One is we're working across the Investment Services businesses which have been run more like individual businesses in the past and effectively.

But we're trying to drive best practices across those businesses and create more leverage.

So an example would be cross line of business solutions for clients which actually generate new revenue streams.

One example which -- that's happening within Investment Services and across Investment Services and Investment Management.

A good recent example would be that we just piloted an intermediary private banking service for the Pershing [emerging] investment advisor customers.

In a pilot program of only -- less than six months, we've had over $300 million in loan demand generated from the independent RIAs who were actually leveraging BNY Mellon's wealth management capabilities in a different way.

Similarly, by working across the businesses, we're looking at -- we're evaluating the portfolio of services and solutions we deliver, trying to figure out if there are sub-scale solutions or services that we don't actually need to provide that can reduce expenses.

We're instituting essentially consistent expense management disciplines and process and reporting and doing other things like that, that actually can drive a higher return on what we already do.

It's not rocket science, but it's just working differently across the businesses.

So that's one of the big things.

We believe that there's tremendous opportunity in these cross-business solutions that we can generate revenues.

So that's why this is different.

It's going to include revenue generation as well as expense reductions.

Great.

Thanks for all the color there.

Maybe on capital, you got a welcome downgrade in the G-SIF rankings.

I believe the substitutability criteria helped you there.

But how does this impact how you think about running a capital cushion on top of your leverage requirements?

How does this impact how you think about CCAR in general?

In terms of running the cushion, we're already, as you can see, actually running a pretty substantial cushion.

So that we, obviously, think that puts us in a better position.

But what we do is we sensitize what those capital ratios can be.

We do our own internal stress test of many different types to estimate what we ultimately think the cushion ought to be.

We don't really know what our additional G-SIF requirement is going to be.

That was the -- under the Basel framework, the global requirement.

But we have not been designated within the US what that might be.

But we certainly feel quite comfortable about the level that we're operating today.

We think it's prudent.

We think it's got plenty of cushion for potential down side.

I think the good news in our business model is we have, as you know, very low risk weighted assets.

So there's not -- there doesn't tend to be a lot of volatility around those assets.

They're very high quality.

Most of them are secured and short-term.

Then our securities portfolio is also extremely high quality, mostly agencies and treasuries.

So it survives any stress test typically quite well.

I think the other thing in our business model is we do have a lot of annuity like businesses.

We've got a less risky mix of assets.

Now, that doesn't always help us when the equity market shoots up like it did in the fourth quarter.

But when it goes the other direction, we don't feel the pain quite as much as most.

That makes us a little more resilient in terms of stress testing as well.

So, hopefully that helps you get a little better understanding of our perspective.

Yes.

I think in general that we have a low risk weighted asset model.

We have good capital cushions.

We're getting a better line of sight on some of these new rules and regulations as they're unfolding.

As we said earlier, we think we have some pretty good financial flexibility as we go into 2014.

We'll see the results of the CCAR exam at the end of March and stay tuned.

Great.

Thanks for taking my questions.

Josh Levin, Citigroup.

You talked about meeting operational excellence goals a year ahead of schedule.

For those of us on the outside who don't work for the Company and we only have access to publicly available information, where can we look to sort of see the fruits of operational excellence?

Where is it flowing through?

Yes, Josh, I think what we had indicated in the -- three years ago, almost three years ago now, was if we initiate this program, those numbers amount to about 2% reduction in our annual run rate.

We had indicated there was probably about a 2% inflation in our annual run rate.

So by making these improvements, we won't feel the impact of the inflation.

That's merit increases, the increasing cost of pensions and the increased software amortization was largely what I reflected in the inflation component.

So that would let our businesses and our business mix reflect upon itself.

So we indicated at a 5% type of revenue growth rate.

We thought we could see something like 100 to 150 basis points positive operating leverage.

4%, a little bit less than that.

So that's exactly where we are running right now.

Obviously, the revenue mix makes a little bit of a difference.

But what you saw this year on a GAAP basis was 4% over 2% and adjusting it for some of those one-timers, you saw basically 4% over 4%.

The reason you didn't see more operating leverage is because we made a decision to invest organically.

If we were investing -- if we were going M&A rather than organic growth, you would have seen it.

We think the organic growth comes with much higher IRR.

It's a much more interesting, rather than paying somebody else for their labor, developing ourselves is much more interesting in our long-term run rate.

That's why you see what you see.

Okay.

There's been a lot of talk that the M&A environment might pick up.

If we do see a lot more M&A activity, how does that impact your various businesses?

Well, usually when there's more M&A activity, it increases volumes and volatility in the marketplace.

Volumes and volatility help our business model.

Anytime there's more action going on in the markets, people are willing to take a little more risk, take a little more positioning.

We see that flow through our business model through transactions.

It also improves some values.

Areas like depository receipts -- anytime there's corporate actions, boy, it shows up there real fast.

Thank you very much.

Luke Montgomery, Sanford Bernstein.

So coming back to the asset management business for a second, the margins there in the low 30% range.

That's below I think what you see at some of your peers.

So, I wondered if you might touch on what you think the issue is there?

Is there a good structural reason for it?

Or do you see some opportunity to get it higher?

I think you talked earlier on the call about the retail opportunity.

Is that part of a margin improvement story?

What level of margin do you think the asset management business could support beyond the investments you're making at retail?

No, I think you're actually right on it, which is that some of the higher margin activities within the Investment Management industry are in the areas that we've talked about investing in which is retail, growing our overall absolute return and alternatives effort which we've seen actually some nice progress in.

We actually do a whole lot of work around our margins and benchmarking to the industry.

Margins obviously vary across different asset classes that investment managers are exposed to.

So we're a pretty diversified asset manager that is more weighted towards institutional at the moment.

Equity managers might have higher margins but they're also substantially more volatile.

Our margin actually is pretty stable through time.

So those are some of the factors that we look to.

We -- clearly, the last several years have been very challenging in fee waivers.

So the business has a large mix of assets that are exposed to the money market business.

That has been a major dampening.

You talk about a reasonably higher margin business that has been under downward pressure now for a number of years.

So that has definitely put a damper on it.

We're obviously waiting to see where the SEC goes with the rules around money markets.

But hopeful that some day that actually will bear fruit either in money market form or those assets will have to move somewhere and potentially to -- some of them will go to short duration, fixed income products.

That's sort of the thought around margins.

I also would add, that's why strategically in longer term we feel like we need to make the investments to have greater exposure to the retail investor and retail products and also in the alternative space.

Those are two key areas of focus that are going to require a level of investment.

But I think those are the areas for growth and are also the areas for margin improvement.

Okay.

Helpful.

Thank you.

Then the issue of spinning off asset management, I'm actually not sure the rational for that's very good but it's something you've been asked about more lately.

Some people question whether there are real synergy with the servicing business.

So, I thought perhaps an opportunity to comment on that?

Sure.

We obviously like the Investment Management business.

We think there are some benefits and synergies across our Investment Services areas.

We see clear evidence of it in terms of the clients we serve when they trust us to manage the money.

We have opportunities in servicing and vice versa.

Having the intellectual capital internally around our Investment Management [boutiques] to help us being a better service provider absolutely helps.

You heard Brian Shea talk about some of the initiatives that we're doing across Pershing and Investment Management, utilizing that platform more robustly.

We just see a number of different opportunities connecting to our wealth business, investment management, the whole strategy in Asia-Pacific is building technology platform to put our products on top of it.

It attracts advisors and wealth managers globally; to use that platform and put our products front and center on it.

We're just seeing lots and lots of different opportunities to continue to grow both businesses together.

Great.

Thanks a lot.

Mike Mayo, CLSA.

I have some real specific questions.

Then just a broader question.

But my specific questions -- can you just remind us what are your main financial targets?

You mentioned 3% to 5% revenue growth but what are the other main targets?

What we had indicated, Mike, back on investors day, that we anticipated 3% to 5% revenue growth.

We expected anywhere from zero to 200 basis points of operating leverage based upon where we would be within that.

Obviously, that would be largely driven by revenue mix.

One of the issues that Curtis just pointed out on fee waivers is meaningful.

It's $0.06 to $0.07 a quarter with very limited expenses associated with it.

The other indication is we thought we would, over time, generate a 10% plus return on shareholders equity.

That leads to quite a bit higher return on tangible common equity.

So those were the basic underlying themes.

The investment spending that you're talking about, you said you're 20% done.

What is the total dollar amount of the investment spending?

We haven't disclosed that, Mike.

What Curtis was speaking to specifically was investment spending within Investment Management, where we've got a number of projects that he alluded to.

So we're about 20% of the way through that.

We'll be, as he indicated, about halfway through by the end of the year at which point we'll see some of the benefits of the earlier investments.

That was specifically in the retail space.

Right.

That was specific to the retail space.

But we --

Sorry -- last year you said -- sorry --

Go ahead.

Go ahead, Mike.

No.

I didn't mean to interrupt.

Okay.

I said -- we also have mentioned on a number of occasion, the types of investments that we're making in our Investment Services businesses as well.

So last year, that investment spending equaled 2% of expenses?

Or maybe -- how much did it equal last year?

I think we had indicated for 2013, it was roughly in line with a 2% increase in our expenses.

Okay.

Then as far as the continuous improvement project, you said that should save a few hundred million?

Can you specify that a little bit more concretely?

At this point, we're debating that internally, whether we want to go public with that, Mike.

So I think it's too early to say.

We are looking at the various expense savings that we're going to be able to generate.

As Brian pointed out, some of this is, as we become much more process oriented, there's some also revenue benefits that we think we will get out of this as well.

But we haven't determined whether we're going to go public with that or not yet.

The reason I asked those specific questions -- someone else asked about the operational excellence and where do we see it?

So, how do we on the outside know if you're achieving your targets with the continuous improvement or the investment spending?

Or do you want us just to look at those general financial metrics that you're shooting for?

Yes, that's what we're debating internally, Mike.

We really haven't reached -- ultimately -- I think it was Josh at Citi that pointed this out -- ultimately you got to see it.

We believe you will see it.

I think we've been pretty consistent with the guidance that we gave a number of years ago.

There's obviously a lot of factors and markets that go on that can create noise there.

But that's why we're debating.

Let's drive it through and perhaps let it reflect itself.

Then my general question, you mentioned that you're underexposed to the retail investor.

You want to get more involved in the retail investor.

I'm just trying to reconcile my thought of Bank of New York from several years back when Bank of New York was referred to as the banker to banks.

More wholesale, institutional, now we're talking about Bank of New York getting involved with the retail investor.

Going back you had branches.

So, I'm trying to reconcile that prior perception with the direction where you're going now.

You also mentioned Investment Management, private banking, how far to the retail investor would you like to go?

When did you make this mental change?

So Mike, retail banking and exposure to the retail investor are two different things in my mind.

When I say exposure to the retail investor, when you think about pension funds -- things like that are not growing.

That's not where the assets are being accumulated.

They're being accumulated at the individual investor as they plan for retirement on a global scale.

So, we manage a lot of money in the institutional space.

We manage some money in the retail space.

We'd like to be able to have a better balance there.

Dreyfus is our principal retail mutual fund brand but it's not just Dreyfus.

It's having our boutiques and their investment strategies on various platforms around the world.

So, I don't think you're going to see us get into the retail banking space, but utilize the things like the Pershing platform to make our products available on different platforms around the world where our investment boutiques and investment strategies are quite strong.

Yes.

Mike, maybe I would add, if you think about it, we're the 8th largest Investment Management firm in the world.

Dreyfus ranks about 23, 24 in terms of mutual fund volume.

So we have all of the investment capability around the globe and certainly within the United States, specifically, to create investment offerings we think would be very attractive that really the advisor community -- we'll reach retail investors and mutual funds primarily through the advisor community.

Again, Pershing helps with that, but certain Dreyfus has a very long, as long as anyone, relationship with much of this community.

We just need to invest more in it to make more of it.

Then we directly reach individual clients through our Wealth Management business.

We're the 8th largest Wealth Management firm in the United States, but have been heavily concentrated in a few key markets.

So our investment there actually has been expanding our geographic footprint in the Wealth Management business, where again, we are delivering investment capabilities to clients, Wealth Management clients but not in a large enough part of the market.

When would you say you this made this change overall?

I mean, it just seems like -- it's a continuum from -- you don't want to do consumer banking I guess, but more wealth managers are talking about a little bit more consumer banking, take a look at Morgan Stanley, all the way up to your Dreyfus.

Where do you draw the line and say we want to be here, we don't want to be on the other side of that line?

Well, as the investments Company of the world, we go to where the investment assets are.

The investments assets are with wealthy individuals.

They're being managed through advisors and being managed through different retail strategies.

That's what we want to continue to build upon, Mike.

Cynthia Mayer, Bank of America-Merrill Lynch.

Just very briefly, to follow up on the investing in organic opportunities.

So you guys gave a sense of the time frame for the Investment Management business, but outside of that, what kind of time frame are you thinking of?

Is this investing over this year, next year?

Or is it sort of a permanent shift?

Well, why don't we hit on a couple of those things in the Investment Services business, in some ways those are even further along.

For example, we've talked about global collateral services quite a bit.

We've made investments in our capabilities there.

We're delivering on those.

Some of that's around financing, that's been a bit disappointing.

As Gerald had mentioned, it hasn't moved as quickly as we had hoped.

It's also being impacted a little bit just by market rates.

So a very low rate environment has made less need for transforming securities.

That's been offset with the segregation business and some of the legacy stuff which has been terrific, as well as some of the optimization capabilities that we ported to our clients, so we've seen good growth there.

The other area that we've talked a fair amount is the electronification of our FX business.

So we have -- we're probably about, I would say, are, what?

50% or 60% of the way through that investment.

It is starting to pay some dividends.

Or it's still early, but I think it's starting to pay some modest dividends.

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

Yes.

I might just add two points, Todd.

Some of this gets back to the question Mike Mayo was asking.

We continue to make investments around Pershing's platform and making it global, as a lot of these private banks see lots of opportunities to serve their clients well.

We feel really good about both the technology play there and our domain knowledge.

These private banks have a huge opportunity but they also have to deal with an increasing regulatory environment that makes it actually much easier for them to outsource.

Then Eagle and outsourcing, it's been a theme now for probably the last couple of years where asset managers and the insurance subsidiaries -- the asset management companies of insurance companies are outsourcing at an unprecedented rate.

The investments we continue to make in Eagle around data warehouse and accounting are driving well over a third of our new business pipeline now.

So those would be the things, Todd, I would say we're investing in and I think we see across the board.

Real signs that they're starting to pay off and should have real traction in 2014.

Okay.

Thanks.

Maybe just to follow up on FX, can you give a little color on how you're thinking about the market -- your market share at this point?

The mix of electronic and higher touch, is the sort of rotation over the to more electronic trading done?

Or do you feel like there's more to go?

How is your market share?

Yes.

As I said in my opening comments, we are seeing the benefits of our electronic platforms being adopted.

We definitely feel we're capturing more volume than we were in the past.

We're clearly moving more to more negotiated type trades or commercial type trades on the platform itself.

It's very fast.

It's very efficient.

It's very transparent.

So, we feel pretty good about the positioning of it.

We're streaming prices to our traders.

We're getting in a position to stream prices to our clients on desktops so they can automatically tap into us if they like the price.

We'll be able to execute it.

So, we feel good that the investments we're making are gaining traction.

Maybe just a last small one.

You mentioned pension costs will fall.

Can you size that?

We're analyzing it right now.

We will disclose that in the annual report.

But it could be in the range of $10 million to $20 million a quarter.

Great.

Thank you.

Wendy, we have time for one more question.

Andrew Marquardt, Evercore.

Just to pile on a little bit on the Transformation of Success or -- sorry, the initiative or non-initiative in terms of cultural shift.

Can you help us maybe frame it a different way, in terms of how should we think about it in terms of operating margins?

Right?

Maybe piling into the former initiative laid out that you've now met and exceeded.

How should we think about getting operating margins up from kind of the mid-20%s to maybe the upper 20%s or 30%s?

Is that going to be kind of the next leg to do that?

Or do you still need have kind of a better macro rate environment?

Yes.

I think there are a couple of drivers there, Andrew.

So one of the disclosures that we make around our Investment Services business is our revenue, fee revenue -- our core fee revenue to expenses.

That will be the first place that you visibly see that.

Ultimately that will come into the operating margin as well.

Now, two things can happen there.

We're either getting more efficient or less efficient which you would see.

We're getting better pricing or pricing is more challenging.

So right now we are starting to see some modest improvements.

We didn't see a big improvement over it last year and this year and a lot of that can be driven by revenue -- by mix.

So as you see more and more of loss of fee waivers, for example, there's no -- that's all pretty much a fixed cost business.

There's no additional expenses.

That can make noise in those numbers from period to period.

But I think we've given adequate -- actually, we give very good disclosures.

So you'll get a sense of where that's driving.

Our goal is to get that on average.

There's some seasonality to it.

On average, to pick that up 4 or 5 points.

Thanks.

Then -- so does that translate into kind of an all-in pretax operating margin in the upper 20%s?

Or can we kind of get back to or maybe press --

Most of that would fall through the operating margin.

But if you think about it, if we're saying $0.06 or $0.07 a quarter on fee waivers, that's a substantial growth rate right there.

It doesn't come with much expenses.

That would overwhelm what we do on a period to period as we grind out -- make ourselves more efficient.

I think the way to think about it is, certainly, in the traditional custody business it's highly commoditized.

We want to be very aggressive around making sure we have a highly efficient operation around commoditized products.

So that's one issue.

We can't wait for rising interest rates to improve our operating margins.

That's what this program's about -- this process.

We were just taking control of what we can do and making it much more efficient, using technology, using productivity to drive the cost down in commoditized areas.

On the investment side, introducing applications onto those platforms that our clients want and are willing to pay for.

So that's a good way to think about it.

That's helpful.

Then related to this transformation process, one of the things you noted, obviously cost, service and productivity but then also you had mentioned reducing of risk.

Is that more of an outcome of this initiative or this process?

Or is that kind of a dedicated focus?

How should we think about that?

What is that related to?

Yes.

In some ways, it's a dedicated focus but it's also an outcome.

The more human labor content you take out of the process, the more straight through, the more electronic it is, the more you use technology, the less chance for error.

The less chance for error means less risk.

So we're really trying to constantly drive down the operational risk associated with the many things that we do.

Using technology and using the capabilities that we have, we think we can improve efficiencies and reduce the operational risk.

The infamous straight-through processing, the higher levels of straight-through processing, the less risk associated with the business.

Yes.

That's helpful.

Then just a couple ticky-tack --

Thanks --

Yes.

Go ahead.

No, go ahead.

Last one Andrew.

Sorry, thanks.

Just a couple ticky-tacks.

On the balance sheet side, you previously talked about excess deposits maybe in the range of $50 billion.

Does that still hold?

What kind of rate environment do you have to see to -- do you think, to maybe have that reverse?

Yes, we've -- as we do a lot of analysis around our deposit base, right now, it is most correlated -- it's correlated to a couple of things.

It's correlated, obviously, to our underlying core business.

So it's very much tied in to fee business.

So it tends to be frictional types of cash.

So the more we grow our fee business, the more we grow our deposit business.

So there's probably an underlying 4% or 5% growth rate in it for our core fee business.

But right now what's overwhelming is the unusual monetary policy that we're facing.

So the Fed's got a $4 trillion balance sheet, it's sitting on $3 trillion of excess reserves.

As those excess reserves come down and there is draining, we are going to see a substantial decline in the -- in our balance sheet anywhere from $50 billion to $80 billion would be our expectation, as we get to more normalized rate environment.

So all that cash that we're leaving at the Fed and not earning that much, we would expect to, in a normal rate environment, to normalize.

The good news there is we more than offset that with spread on the remaining cash and the fee waivers.

Got it.

That's helpful.

Thank you.

Then if I may, this last one --

We do have a large balance sheet that's at this point in time that's really reflecting this current environment.

I think it's important to understand.

Got it.

That's helpful.

Then, just lastly, on other, other, in fees, investments in other income, obviously reflected the write-down or the loss, but also had some maybe higher than usual seed capital gains and asset gains.

Should we -- I think you'd previously talked about that line should be in kind of the $80 million kind of quarterly range.

Does that still hold?

It's --

No.

We had indicated that it would be more in the $80 million to $100 million range.

(multiple speakers) We've been on the high end of it.

It's based on circumstances.

But yes, we still look to keep it in that range.

Thanks, guys.

Okay.

Thank you.

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

Wendy and everyone else who's still on the line, if you have further questions please follow up with Andy Clark and our IR team.

So, again, thank you very much, everyone.

Thank you.

If there are any additional questions or comments you may contact Mr Andy Clark at 212-635-1803.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.