紐約梅隆銀行 (BK) 2014 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the first-quarter 2014 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 and welcome everyone.

With us today are Gerald Hassell, our Chairman and CEO, Todd Gibbons, our CFO, as well as our Executive Management team.

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

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

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

Forward-looking statements in this call speak only as of today April 22, 2014, and we will not update forward-looking statements.

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

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

Gerald?

Thanks Andy and good morning everyone.

Thanks for joining us.

As you've seen from our release, we achieved good results this quarter, with pretax earnings up 12% year over year.

We reported earnings at $0.57 per share with total revenues of $3.6 billion.

We also achieved a 3% fee growth in Investment Management and Investment Services, which within the context of what is a persistently slow economic recovery is decent fee growth.

Investment Management benefited from our continued success in attracting new assets.

We recorded our 18th consecutive quarter of positive long-term flows with net long-term inflows of $21 billion.

Assets under management was up 14% year over to a record $1.62 trillion, driven by the continued strong flows into our liability-driven investment strategies.

Investment Service fees were also up, benefiting not only from strong growth in clearing, but also nice growth in asset servicing.

Now Investment Services business was also helped by the growing contributions from global collateral services, as usage of our optimization and segregation solutions continue to increase.

And in global markets, the enhancements we've made to our electronic foreign exchange platform have helped us attract greater volumes.

Now during the quarter, the strength and quality of our asset servicing capabilities were recognized in a key market service.

Among our peer group, we earned the number-one overall score in the R&M Global Custody survey of clients and fund managers.

We were also the number-one in the experts category, which included investment managers who rated five or more global custodians.

In total, we received 10 number-one rankings in our peer group.

It's the latest vote of confidence in our ability to provide the expertise clients need to navigate the challenging times as they struggle to manage regulatory change, risk, and costs.

We were able to achieve the growth in Investment Management and Investment Services fees in spite of some ongoing sizable challenges: one, the substantial impact of money market fee waivers; and two, the decline in the pre-tax income of corporate trust, as the revenue from structured debt securitizations has run off faster than the revenue coming from new business.

Year over year our rough estimate is that money market fee waivers and the run off in corporate trust fees accounted for a drag to our total fee revenue growth of approximately 200 basis points.

On the expense front, total expenses were down both year over year and sequentially, and Todd will cover more on expenses in a moment.

What I do want to emphasize is that we are take aggressive action in virtually every expense category to moderate the growth rate here.

So for example, we're controlling the rate of expense growth in technology by in-sourcing application development, reducing storage costs, and consolidating platforms.

We're reducing our real estate footprint.

We're reengineering how we work, including rationalizing our client coverage teams, making us more efficient and allowing us to reduce costs while enhancing the client experience.

And importantly, you will see evidence of all of these moves and our commitment to aggressive expense management this year.

I should add that like all large financial institutions, our regulatory control and compliance costs have risen substantially and continue to be high.

And I have to say it's critical that we maintain a great control environment.

But now that we are beginning to gain more clarity on the new rules, the rate of related expense growth should begin to slow and that's encouraging.

On the capital front, our capital story is among the very best in the industry.

Our key capital ratios continue to strengthen.

We achieved an excellent return on tangible common equity at 18%.

Now given the significant levels of capital that we generate and our strong capital position, we have the financial flexibility to invest in our businesses and maintain a high payout ratio, which was more than 80% in the first quarter of 2014.

Earlier this month, we announced another dividend increase of 13%, which followed a 15% increase last year.

So the bottom line is we're executing to drive shareholder value, we're actively aligning our business model, and we're focused on managing expenses well and generating strong returns on tangible common equity.

With that, let me turn it over to Todd.

Thanks Gerald, and good morning everyone.

My comments will follow the quarterly earnings review and we'll start on Page 2. As Gerald noted EPS was $0.57.

You should note that the $0.57 includes about $0.03 to $0.04 for the combined benefit of the lower tax rate, and also we had a loan loss provision credit.

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

Investment Services fees were up 3%, and that's driven by strength in asset servicing and our clearing businesses.

Investment Management and performance fees were also up 3%, and that number would be 5% if you excluded the impact of money market fee waivers.

FX revenue was down driven by the (inaudible) volatility we experienced in the quarter.

NIR on a fully taxable equivalent basis was up 2%, and securities gains were down $26 million.

Finally, expenses were down 1%.

Turning to Page 4 where we call out some business metrics that will help explain our underlying performance, you can see that AUM of $1.62 trillion was up 14% year over year, and that's 2% sequentially.

That's driven by both market as well as net new business.

During the quarter we had net long-term inflows of $21 billion, and the bottle of short-term outflows we've been seeing was $7 billion.

You will note that we've enhanced our flow disclosure, providing flows by all of our major asset classes including index and LDI strategies.

Assets under custody administration at quarter end were $27.9 trillion, that's up $1.6 trillion or 6% year over year.

That's primarily reflecting the impact of market as well as currency impact.

Linked quarter AUC/A was up 1% due to improved market values.

We had an estimated $161 billion in new AUC/A wins during the quarter.

As you look down the list, most of our key metrics continue to show growth on a year-over-year basis.

Average loans and deposits and both Management and Investment Services were again up strongly.

The market value of securities on loans at period end increased.

All of our clearing metrics were up with DART volumes particularly strong yet again.

On the flip side, DR programs and average tri-party repo balances were down slightly.

In terms of the key external indicators, markets were up, so most importantly for us the FX volatility index was down 14%, and that really is what's driving FX revenue.

The average fed funds effective rate was down 7 basis points or nearly 50% from last year, which had a negative impact on our money market fee waivers and our net interest income.

Looking at fees on Page 6, asset servicing fees were up 4% year over year and 3% sequentially.

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

The sequential increase primarily reflects organic growth, but it did benefit from higher securities lending revenue and net new business.

Clearing fees were up 7% year over year and flat sequentially.

The year-over-year increase was driven by higher mutual fund fees, higher asset base fees and an increase in DARTS.

All that was partially offset by higher money market fee waivers.

Sequentially higher clearance revenue was primarily offset by fewer trading days during the quarter.

Issuer service fees were down 3% both year over year and sequentially.

Both decreases reflect the impact of the continued net runoff in corporate trust.

The year-over-year decrease was partially offset by higher DR revenue driven by corporate actions.

The good news is we can see the net fee runoff abating in the next 18 to 24 months as the pace of the structured debt maturities slows, and new business should more than offset that runoff.

When you look at Investment Services you will see that Investment Services fees as a percentage of non-interest expense were up versus the year-ago quarter.

This improvement was primarily driven by an increase in Investment Services fees with lesser additional expenses.

Investment Management and performance fees were up 3% year over year and down 7% sequentially; excluding money market fee waivers, Investment Management and performance fees were up 5% year over year and down 6% sequentially.

The year-over-year increase primarily reflects higher equity market values and the net impact of new business.

The sequential decrease primarily reflects seasonal lower performance fees and there were also fewer days in the first quarter.

When you look at our Investment Management business you'll see new a disclosure that we think provides a better basis for comparison to other investment managers.

That is, it's an adjusted pre-tax operating margin which excludes intangible amortization, nets out distribution and servicing expense, and also adjusts for fee waivers.

On this basis, our pre-tax operating margin for the quarter is 35%.

In FX and Other, trading revenue was down 16% year over year and down 7% sequentially.

If you look at the underlying components, FX revenue of $130 million was down 13% year over year and up 3% sequentially.

Comparisons with both prior periods were impacted by lower volatility.

The good news here is we're capturing higher volumes, driven by enhancements to our electronic FX platform.

Other trading revenue was down $6 million from the year-ago quarter and $14 million from the fourth quarter.

Decreases from both periods reflect lower fixed income trading revenue and the impact of mark-to-market losses on certain hedges.

Turning to Page 8 of the earnings review you'll see that net interest revenue on a fully taxable equivalent basis was up $11 million versus the year-ago quarter, and it was down $37 million sequentially.

The year-over-year increase resulted from higher deposits, partially offset by lower yields in investment securities.

The sequential decrease primarily reflects lower yields in investment securities and fewer days in the first quarter, and that was partially offset by the change in the mix of assets as we reduced cash and interbank investments and increased our securities portfolio.

Net interest margin for the quarter was 1.05%, down from 1.11% in the year-ago quarter and 1.09% in the fourth quarter.

Turning to Page 9, total non-interest expenses were down 1% year over year and 4% sequentially.

Comparisons to both prior periods were impacted by lower pension expense and higher incentive expense due to the acceleration of investing in long-term stock awards for retirement eligible employees.

The sequential decline also reflects a decrease in business development expense, as well as lower professional, legal, and other purchase services and risk-related expenses.

The year-over-year decrease also resulted in a provision for administrative errors and the cost of generating certain tax credits, both of which were reported in the year-ago quarter.

On Page 10 you can see that at quarter end we had a net unrealized gain on the Investment Securities portfolio of $676 million.

The increase from $309 million at the end of the quarter was primarily driven by the reduction in market interest rates.

Looking at our loan book on Page 11, you can see that the provision for credit losses was a credit of $18 million.

This was driven by the continued improvement in the credit quality of the loan portfolio.

That compares to a credit of $24 million in the year-ago quarter and a provision of $6 million in the prior quarter.

Turning to our capital story as Gerald mentioned which is a good one, as you can see on Page 12 our key ratios strengthened over the quarter.

At March 31 our estimated Basel III Tier 1 common equity ratio under the standardized approach on a fully phased-in basis was 11%; that compares to 10.6% at the end of December.

The 40 basis points sequential increase primarily reflects capital generation during the period, and that was partially offset by some increase in a few of other risk-weighted assets categories.

Our estimated supplementary leverage ratio also improved substantially during the quarter to approximately 4.7%, primarily reflecting two things: one, there is some changes to the treatment of unfunded commitments in the methodology to actually calculate average assets, as well as the strong capital generation that we had mentioned earlier.

During the quarter, we repurchased 11.6 million shares for $375 million, completing our repurchases under the capital plan for 2013.

The effective tax rate for the quarter was 25.1%.

It was positively impacted by the change in New York state tax rates that was enacted on March 31.

A few points to factor into your thinking about our current quarter and beyond.

We would expect NII to stay in the range we saw this quarter, adjusting of course for day count.

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

We expect the tax rate to be around 27% for the second quarter.

We anticipate gross share repurchases of up to approximately $430 million.

Of course that's subject to market conditions.

And we also expect to record a pretax gain of nearly $500 million on our interest in Wing Hang when the sale closes, which is expected to be in the second or third quarter.

Bear in mind however, that Wing Hang equity income has averaged somewhere between $15 million and $20 million per quarter and was included in the Other income line.

Gerald had mentioned that we are consolidating our space which will lead to a net reduction in New York City of approximately 700,000 square feet.

There are going to be some costs associated with this consolidation as we reposition our staff, but we expect gains to more than offset these costs when we sell One Wall Street building and move to a more efficient space.

That sale and the gain could take place in the second or third quarter.

So as Gerald indicated you'll see evidence of these actions this year.

So wrapping up, we're taking action to control expenses relative to our revenues, and we want you to see it in our results.

We're going to provide you with more details on this at our investor day that we plan to be hosting in the fall.

With that, let me hand it back to Gerald.

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

(Operator Instructions)

Our first question today is from Betsy Graseck with Morgan Stanley.

Hi, thanks, good morning.

Good morning.

A couple of questions, one on expenses, one on capital.

On the expense side, Todd, you went through the outlook for the improvement in expenses associated with the space that you're getting rid of.

Could you give us a sense as to what that's going to be on a run rate basis?

I know you can't size exactly what the gain is going to be, but maybe you can help us on the run rate expense ratio side.

It's actually hard for us to put an exact number on that because we haven't decided where we're actually going to be located.

We haven't signed a lease on a new property or what some of the costs associated with that.

We do know there will be improvement, but it's a little early to actually specify a number.

Okay.

Maybe a little bigger picture on the expenses then.

Gerald you mentioned during your prepared remarks that expectations are that expense growth could slow down here with regulatory expenses slowing down.

Did you suggest there that regulatory expenses could actually start to fall slowing the overall growth rate, or just that regulatory expense growth would be slower?

Just slower.

They're not going to fall, that's for sure.

Because we're still building out risk compliance, variety of data aggregation models, risk analytics models, et cetera, that the regulators are asking for, so we don't see the expenses declining but we see the rate of growth slowing as some of these things have already been embedded in our run rate.

A good example is in our broker dealer services / tri-party area at the shareholder's meeting we gave a number that over the last two years we've incurred about $73 million of additional expense in that business associated with regulatory compliance and satisfying tri-party reform.

That's in our run rate today.

So that's a good example where the rate of growth will slow, but it won't decline.

Okay.

So if we're --

Betsy let me add something there, the rate of growth and the risk kind of what we'll call the center, or the shared services, has been at 2 to 3 times the rate of growth in the businesses, and we're trying to bring that more in line.

Okay.

So if we're thinking about just operating leverage generally and the kind of operating leverage you're looking to manage towards, maybe you could give us a sense of what kind of range you're anticipating all the actions that you're doing is going to end up driving in terms of operating leverage.

Yes, Betsy as we try to make clear, operating leverage is going to be driven both by the expense control that we implement as well as the revenue mix, so when we see fee waivers, for example, increase, we're not -- we're seeing a lost revenue with no additional expenses, and when it gets replaced by increases in either the Investment Management or Investment Services traditional fees, there are typically expenses that come with that.

So I want to make it clear that revenue mix is absolutely essential to what actually happens to operating leverage.

That being said, we are controlling nominal expenses, so we are -- we're getting our hands around a number of things both in the center in slowing the growth rate, even flattening it.

For example, our capital budget is flat.

We're getting more out of the tech spend that we currently have and we can expand on that conversation a bit.

But if all things hold constant, yes, you will see -- in other words if the revenue mix stays as it is, and the market stays as it is, you'll see positive operating leverage even at relatively low growth rates.

Okay.

That's great.

Just one quickie separate question.

You went through the capital ratios that all look good, going up obviously.

What was the reason that the TCE to TA came down?

The tangible common equity to total assets?

Right.

It's just like a 20 bps decline Q1, to 2.

It's not much of change if there's any change.

The balance sheet might have averaged a little bit larger, but I don't think there was much of a change to TCE.

Yes, no, it was 20 bps, I was just wondering.

And SLR up nicely in the quarter, what other -- I mean your SLR assumes that your deposits at fed are not taken out or they are taken out?

They're not in the denominator, is that right?

No, they are in the denominator.

Cash is not removed from the denominator.

Right, okay so you're assuming that.

I know it's a -- it's not final rule yet, but we're assuming that is going to be in the final rule.

From here is it just normal course to get up to the 5%?

Is there anything special that you feel like you need to do?

I know at one point we were talking about potentially having to charge for deposits, but it doesn't seem like that's in the run rate given how high you've gotten this up to now.

Yes, I think that we can actually get over the hurdle pretty quickly.

I think the one thing we've made clear is it doesn't make sense to get there just by holding additional capital, so we can look at the deposit base and deposits that add less value to us, less value under the SLR or even the liquidity coverage ratio.

We could certainly push those types of balances off the balance sheet, but we're still looking.

At some point we'll be able to deconsolidate some of the assets from our asset manager.

So there are a number of ways that we can get there, and then we obviously have more room to issue preferred stock if we thought it was appropriate to bolster our Tier 1 leverage which would be a lot less expensive than holding common.

Okay.

Great.

Thank you.

Thank you.

The next question is from Glenn Schorr with ISI Group.

Hi thanks.

One quick one on the Investment Management side.

I heard your comments and disclosure on the 25% versus 35% margin in Investment Management.

Are you able to break down which is due to the distribution adjustments versus the money market fee waivers?

Because I think it's fair and interesting.

Just curious on the breakdown.

Yes, my recollection, Glenn is about 200 basis points of it is related to fee waivers.

And you can -- we disclose intangible amortization so you can calculate that and then the remainder would be the impact of the distribution fees, some show it as a gross up and some show it as a net to the revenue.

Got it.

Okay.

That's cool.

I can do that.

Okay.

And then I don't know if you can talk a little bit more about the lending growth inside Investment Services.

I think it was up 18% year-on-year?

Just curious what's driving that.

Sure.

That's associated with in some ways with our collateral services area where we provide some level of secured financing to the broker dealer community as part of the optimization and segregation, but it's also around collateral services around that area.

So it's a program where they're good safe loans, highly collateralized to some of our largest clients around the world.

Okay.

Cool.

Glenn, this has come a little bit slower than we had hoped, but we're actually starting to see it pick up, and we're seeing that trend even in the second quarter.

Yes, and a little bit of it is quote, term funding, so it's having the dealers rely on less short-term wholesale funding, so we're seeing six, nine months, some cases one year maturities on these loans, so that helps our clients have less reliance on wholesale short-term funding, and it's a good earning asset for us.

Okay.

Last one, non-interest bearing deposit growth has -- was up 16% year on year.

If you look at your foreign deposits you have like $100 billion.

Curious what's driving the growth, and more importantly what's in the eurozone as they contemplate the negative deposit rates, just curious on how we should expect the balance sheet to react.

Yes, good question.

So there are a fair amount of European as well as US deposits, and the actual average deposits is about flat to slightly down.

Free deposits are actually up, but interest bearing deposits are slightly down on a quarter over quarter basis.

If the eurozone were to go to negative rates that would actually present the opportunity for us to charge for deposits, and we give that -- we are giving that very serious consideration.

In the two non-eurozone European countries that did go to negative rates, we did pass that through to depositors.

And no client pushback?

I guess where I'm going with it is one route is charging for deposits sometimes with large customers that's a bit of an issue.

Is it possible to run a mismatch and move your assets outside the zone, or is that not something that anybody wants to take on in terms of a mismatch?

Well, typically you'll have the interest rate parody that comes with the hedging of that type of a transaction as long as -- assuming you're not taking any FX risk.

There is some opportunity to do some of that with the hedging, but again, managing your liquidity and also the liquidity coverage ratio targets that the regulators are establishing will have to be taken into consideration when you do that Glenn.

Okay.

That makes sense.

I appreciate that.

Thank you.

(Operator Instructions)

The next question is from Alex Blostein with Goldman Sachs.

Great, thanks.

Good morning everybody.

Just a question on the Investment Management business.

I guess if we look at the growth in the assets and fee rate quarter over quarter, seems like it saw a pretty decent decline and understandably some of that is money market fee waivers, although it didn't seem like the dollar amount was that different sequentially.

So I guess the day count accounts for the rest of it.

But can you just kind of walk us through the expectations for the fee rate in the Investment Management business ex-performance fees in the coming quarters?

And to tie into that, maybe just to address what kind of fees are you guys getting on the LDI mandates?

Because that obviously seems to be a big driver.

It's Curtis Arledge here.

So on a year over year basis, and then I'll talk about sequentially as well.

The biggest drag as Todd mentioned was the fee waiver impact.

Very significant decline year over year in short rates and that has absolutely dampened revenue growth.

So revenue growth of 3% would have been north of 5% actually is Investment Management, a little more than 200 basis points just the fee waiver impact.

We also are comparing the first quarter of 2014 to what was a very strong first quarter of 2013 on the fee side.

We actually have fees when we own less than 20% of an investment boutique, their performance fees and carried interest actually -- our share of their performance fees and carried interest actually runs through that fee line, and it can be somewhat volatile.

We had a very strong first quarter 2013.

So if you just look at a normalized rate, that probably is another 100 to 200 basis points of fee growth.

So we actually are pretty happy with fee growth generally given the mix of assets that we have and the market performance overall.

Very nice performance on the new business front.

The sequential story is really not that different, so fee waivers had a smaller impact; as you said, the days actually was a pretty meaningful impact.

And then again, the volatility in our management fee line from performance fees that are earned at the boutiques where we have less than 20% stake also contributed to that volatility.

It's small, but nonetheless it's still directionally the same as the year over year results.

LDI obviously a business that we are doing extraordinarily well in, and not just the LDI business, Insight in the UK, but their ability to leverage that into other growth, in active fixed income, in absolute return products.

So it's a spring board for many other businesses.

LDI by itself is a business that does have lower fees, but on a giant volume of assets, and then I also would want to make sure that everybody understands that the -- while the management fees might be low, there also is a meaningful opportunity in a number of those mandates to earn performance fees.

So when you see our fourth-quarter performance fees, a meaningful portion of that is actually coming from LDI-related mandates where we are given an opportunity to earn performance fee if we are able to outperform a client's benchmark.

So it's a great business for us overall and, again, helping drive not just revenues in LDI but other revenues as well.

Got it.

Thanks.

That's a lot of color.

And just to follow up on expenses I guess Todd bigger picture, seasonally first quarter I guess tends to be a little bit lighter, some of the merit increases things like that I think kick in for you guys in the second half of the year.

So maybe just taking a step back, how should we think about the expense growth off of the current base?

Because it does seem that's one of the lower kind of core expense numbers we've seen from you guys in a while, said $2.7 billion, $2.8 billion run rate quarterly; is that a sustainable number or what kind of growth should we think about from off of this base?

Yes, in the second half you're right, typically July 1 is where a merit increase pulls through, but we're looking to -- I think we're looking to keep most of this expense lines as flat as we can.

I think you'll see little bit -- a little bit higher software amortization that's going to be a little bit more noise than anything.

But first quarter you've got to remember does also -- is also impacted by the acceleration of retirement eligible employees on their deferred comp, so that should reverse itself in the second quarter.

Got it.

Thanks guys.

Thank you.

Thank you.

The next question is from Luke Montgomery with Sanford Bernstein.

Good morning.

Good morning.

My sense is you've been working on a benchmarking analysis of your asset management segment margins versus your peers.

I guess adjusting for fee waivers you said they're in the mid-30% range, which I think seems a bit low for a firm of your scale on $1.6 trillion assets under management.

So I'm wonder if you're able at this point to communicate whether you think there's a good structural reason for that, or if you see there's a maybe a meaningful opportunity to improve margins in the business.

I think with the revenue yield on LDI, index, and cash are pretty low, and those are probably 65% of the total.

But maybe what are the contribution margins in those businesses and could that be enough to offset revenue yields?

Hey, Luke it's Curtis.

We obviously spent a lot of time on understanding the industry framework and working with clients across a lot of different channels thinking about what it means for our margins.

I do think as Todd walked through earlier, the intangible amortization, distribution, netting of distribution costs and fee waivers get us into that mid-30% range.

I also would highlight that as we've talked about in previous earnings calls, over the past year or so, really last nine months or so, most impactfully we've also been investing in our business.

So I would say that probably in the 1% to 2% rage range on margins just in terms of how we think about it.

When we look -- the structural -- the biggest structural thing that we talk about a lot has been the fee waiver impact and the contribution margins there are north of -- well north of what our overall margin is, so it would be nice to not have fee waivers.

Obviously that would help a great deal.

And then the other structural thing that we've also talked about is that if you look at our business and you commented on it somewhat in your question, we are a predominantly focused on institutional clients kind of management firm, and it's why we have been over the past nine months or so really making pretty meaningful investments in two ways to expand, to reach more individuals as investors.

We do that in two ways: one, directly through direct contact with individuals through our wealth management business here in the US.

Great business, seventh largest in the US, but great room, also great opportunity for us to expand it.

We've been growing in markets where we've had little presence, and even in some cases, no presence, that has actually gone quite well.

We talked about expanding that sales force by about 50% about a year ago and we're about 60% of the way through that expansion.

Starting to see revenues from having done that and really quite excited about it.

It's bringing the great offerings, investment offerings we have around our firm, plus also the power of being a private bank, and I would highlight the award that we note in our earnings release where we were named the top private bank.

Our wealth management team is doing an exceptional job and expanding their reach is going to be fantastic.

The other way we're expanding to individual investors.

The second method is through intermediaries where we work with advisors, and there's been some coverage of this and what's going on with us.

I would highlight, this is not a startup effort on our part.

In fact, BNY Mellon Dreyfus, Dreyfus was one of the original creators of mutual fund industry, and BNY Mellon has both a US presence through Dreyfus, but also has a global presence.

We have about $156 billion in long-term mutual fund assets, which would make us just on a retail basis one of the largest 100 asset managers in the world just from a retail asset base.

So we already have a pretty significant presence here, but it isn't anywhere close to what we think it should be, so we have also been investing there.

I think that when you look at firms who have margins higher than ours, they're able to take their investment offerings and get them through client channels that are not just institutional but also reach individuals as well.

And so that's why we've been doing that.

We do a lot of work, and Luke you and I have talked about the study that we used Mackenzie, we think Mackenzie's benchmarking study is one of the best in the marketplace.

We actually are right at or slightly above peers who look like us.

So that's sort of the long winded answer to your margin question.

Okay.

Just to follow up on that, in terms of the investments you're making in the retail business, I'm not clear whether you think that's a higher-margin business or that's more about having an underutilized retail platform that you're going to scale up.

And then I guess along with that, how do you rate the strength of the Dreyfus brand, especially in the wirehouse distribution channel?

And are you considering a rebranding campaign or do you think that's the brand that you really want to build on?

So the first question is I think there is a underutilized potential.

I think the contribution margins of taking investment capabilities that we already have today that we are offering in some ways to the retail channels and directly through wealth management also, but expanding that will be a pretty meaningful contribution margin.

We don't have to expand our investment capabilities all that much, and can reach a much broader universe of clients.

Again, this is a market where we are already very present and we just want to get bigger at it, because we think there's great opportunity with what we have.

On the Dreyfus branding side, I definitely think that will -- it isn't just about covering clients, you also have to have the right products.

We've launched a number of products and have actually seen some very early success, I would tell you we're already seeing benefits.

If you look at our line in the earnings release today, we've had $2 billion of inflows in alternatives as an example, and that has actually come through what would traditionally be called retail channels.

The new products we've launched have been everything from long-short funds for both Newton and the Boston Company, to multi-manager liquid alt strategies that are managed by EACM, which is our fund-of-hedge fund investment firm.

And we also launched a -- we'll use the term smart beta product as well.

So it's giving us the ability to reach more clients with more products.

And again, take benefiting from the great position we already have in those channels, the Dreyfus brand, I think, will grow with our expansion here and any changes around branding are -- those are certainly things we talk about, Gerald if you want to comment.

Yes, I'll just add one more comment Luke, and that is that we're not totally relying on the Dreyfus brand.

So the other boutique brands which have strong names in their own right, are being put on the various channels and various platforms around the world.

And so pick a name, a Newton, a Walter Scott, the Boston Company, Standish, all have branding name recognition in their category space, and placing those more aggressively on third-party platforms is part of the goal here.

And I think they have good names in order to attract assets.

And maybe, Luke, last question, the last point on this question is we actually have a BNY Mellon fund family outside the US, it's quite large, and actually inside the US is about $18 billion of assets.

It's been primarily used as the way that our wealth management business has managed mutual funds.

Dreyfus has about -- long-term assets is about $66 billion.

The wealth management in the US BNY Mellon family is right around $18 billion, and then there's north of $70 billion outside the US.

The BNY Mellon brand globally actually is in pretty good condition.

And then I would also tell you one of the places that we are very excited about is the ability to connect with our brethren in the Pershing organization, who are reaching the RIA and independent broker dealer network that has substantially more clients, and it's actually a very difficult client channel to reach unless you have the ability to partner our firm with Pershing and all the relationships they have with those clients.

So a lot of great opportunity here, we're very excited about it, it will obviously take some time, we've been making investments in it.

We went -- a little over a year ago, actually, had our Board and Management team here approve this investment, and very excited about the progress we're making already.

The team's working very hard in coming together.

We've made some senior hires recently, and those people are very important to helping build the brand that we'll market.

Very helpful.

Thank you very much.

Thank you.

The next question is from Ken Usdin with Jefferies.

Hi, thanks good morning.

Good morning, Ken.

Todd, I was wondering, or I'm sorry just for anyone who's most relevant, the new business wins on the custody side have kind of been running at sub $200 billion for a couple quarters now.

I just wanted to get a flavor for the business pipeline on the asset servicing side, whether it's a market effect or whether it is changes to the marketplace, and how your pipeline's looking.

Tim, why don't you take that.

Sure, hey, Ken, Tim Keaney.

We look at it Ken, both on an asset basis and revenue.

I would say it's actually been pretty consistent, particularly on the revenue side for the last six quarters or so.

And I think it's reflecting something we've talked about on the last few quarterly calls, a real shift in non-AUC/A types of business things like our transfer agency business, our sub transfer agency, our sub accounting business, and middle office outsourcing which now is about a third of our pipeline and has been consistently so now for the last several quarters as insurance companies and asset managers look to outsource.

So I wouldn't be overly concerned about that sub $200 billion number.

I feel pretty good about the consistency of the revenue and it's a sign of the mix.

And on the overall point on the sales pipeline, it's about $2 trillion.

That's been not quite a high water mark but a very, very, very strong pipeline both in asset servicing and I would also say Brian Shea at Pershing.

Okay.

Secondly on just Todd to your points on the NII front, I'm just wondering, you saw a decent decline in your earning asset yields and I hear your points about keeping duration short, but can you just talk to us about how you're balancing the rate environment with the longer-term asset sensitivity and where your kind of new investments are versus your rolling off rate?

Yes, the -- we're probably going to see a little more in the loan book so that's one of the things you've seen pick up as we've seen a little bit of a decline in cash at central banks as well as interbank placements.

So that's rolling into the secured loan book that we've talked about, and it's offset some of the slight spread tightening that we've seen just from generally from narrower spreads.

We are taking a hard look at the investment securities book now, and given the new regulations that are meant to go into effect next year, we will probably need to reposition that book a bit, and there are certain types of assets that will become more attractive to us such as commercial and mortgage-backed securities.

We'll probably hold a little less of certain high-quality, asset-backed securities.

We'll have to think about what we might want to do with munis for example because of how they get treated.

To date we've actually built up a bit of a short-term treasury portfolio as well, just to be defensive in case interest rates ever actually went south or the interest on excess reserves were to go south in the short-term.

We don't think that's going to happen, but it's a defensive position with very little risk.

So we are actually, Ken, in the middle of analyzing exactly what we're ultimately going to look like.

Okay.

And did -- I mean tough to have an answer today, but is that something that we'll hear about you think in a quarter or two or is that something that will evolve over the next year or so?

How do we get the sense of what the net effect of that all might be from an income statement perspective?

Right now we're thinking it's probably neutral.

I'll give you that much guidance, but this is one of the reasons that we targeted the -- the late fall to hold an investors' conference to give clarity around this and also around the capital implications, the balance sheet and so forth and some of our other strategies.

So it fits pretty neatly into that timing.

Okay.

And then last, just last two quick cleanups together, do you have the accretion number this quarter?

And also was there anything notable in the nice reduction you saw in Other expense?

The accretion and the -- they're really two things that are helping -- are actually negatively impacting the net interest margin.

One is the accretion, and both on a year over year and sequential basis, it's about $5 million, and the other is amortization of the premium.

And on a year over year basis, that was about $11 million, so that's about a $16 million impact, a little less sequentially.

And so that's what's driving some of that number.

I don't expect that to change too much.

So accretion should be kind of in that ballpark as we see these securities just continue to kind of burn off over time.

Nothing particular notable in the Other side.

We did have a litigation recovery or release from our provision of about $12 million, and so that's one of the beneficiaries.

But other than that everything is pretty well controlled in the Other category.

Okay.

Great, thanks a lot.

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

Hi, thanks a lot.

So a question on the corporate trust you mentioned the runoff, the higher-margin securitizations over the next 12 to 18 months.

I was just wondering if you could give us a sense of the magnitude of the revenue associated with that.

I saw for instance that issuer services was down about $8 million sequentially.

Is that typical of the kind of step-down we could expect or do you expect it to occur evenly?

Any color would go great.

Sure, Cynthia in terms of fee revenue, what we've explained or we've disclosed is that we expect about 0.5% of our total revenue to step down as a kind of the net runoff impact, so somewhere in the vicinity of $50 million to $75 million a year.

And within issuer services, there are really two businesses now, there's depositary receipts and there's corporate trust, and so depositary receipts actually did a little bit better and corporate trust was the difference.

So it's pretty consistent with the guidance that we've previously given.

Okay.

So you expect that to basically to bottom out after 18 months and then be steady?

Yes, a lot of these securitizations were in the ballpark of 10 years or so, and so a lot of them were constructed back in 2006 and 2007 so we'll get to that end point.

I think the other thing to note is there's not a lot of reduction in expenses that comes with it.

You still have to do the same servicing even though it's just on a smaller base.

I will point out we are getting more than our fair share of the new issuance market and we're seeing some CLO pickup, activity in the CLO space.

We're a bit encouraged that the housing market will see some recovery and securities coming out of that.

So I think we're a bit more optimistic about seeing some new business come on to hopefully shorten that timeframe, but it really depends on the markets recovering and new securities being issued.

The proposals that are currently coming out of the senate are looking for a private solution, at least in terms of the securitization market, which will present opportunities for us in our corporate trust function.

Again, who knows when that's actually going to be passed.

It's at least good to see some indication of what the future might look like.

Okay.

And then just a small one on sec lending.

I know it's not a big business for you, but it looked like the market value of securities on loan was up quite a bit sequentially.

What's behind that?

How do you see that business?

Is it ever going to recuperate to past levels do you think?

Yes, Cynthia, it was a very nice pickup.

The securities out on loan picked up during the quarter and we're taking some action on our own part to put some securities out in the marketplace and satisfy client demand.

So we're optimistic we'll see that the rate of growth there will continue to improve.

Spreads are very low, but the volumes are up, so we'll take it.

Okay.

Thank you.

The next question is from Geoff Elliott with Autonomous Research.

Hello there.

A quick question on the assets under custody growth which seems to be lagging some of the peer groups.

I guess the question I'd have is if your customers are very satisfied, you mentioned the global custody survey where you came out well, why isn't that translating into stronger growth in assets under custody, and do you want to change those?

Well, two things; I think we are pretty much in line with most of our peers, quarter to quarter, it's also a bit episodic.

You can have some lumpy new business come in and convert, so that's another issue.

We're also trying to be somewhat price disciplined in certain client categories, and so we're trying not to chase the lowest price on every piece of business, and so we're trying to impose some discipline on ourselves in the marketplace.

We feel reasonably good about the growth in the assets under custody and the mix of business that we have.

And you mentioned the need for price discipline and not chasing every piece of business, what are the areas where you think competition is particularly intense at the moment?

Tim, why don't you take that one.

Sure.

It's Tim Keaney.

As we've said as a consistent theme now, we do have pricing power in smaller, and I would say middle market clients where we have been very consistently repricing in the asset servicing business and continue to do so with pretty high retention rates.

It's the exact opposite with a minority of your largest clients where there's a couple things happening there.

They're being really tough on I would say core custody, but I would say on the flip side they're very open to doing more business with fewer providers.

And it's much more about share of wallet and gaining share of wallet which is why I think Gerald referenced a couple of key points that I hope weren't overlooked, the progress that we're making on the investments we've made on building out our collateral capabilities, and continuing to invest in our electronic platforms in foreign exchange, those are paying off.

So it's about doing more with the largest clients, but it is still very tough price competition at the high end of the market.

Thanks.

The next question is from Robert Lee with KBW.

Thank you.

Good morning.

Good morning.

Question on really focusing on asset servicing.

Understanding that your underlying mix is I believe skewed towards fixed income and cash, you don't necessarily get the full benefit of the market lift, but we've had I guess a pretty strong past year kind of at least equity market tailwinds.

It does seem like business activity's been reasonably active and I think that the 4% year over year growth excluding sec lending.

So what does it take to really get that business kind of to a faster growth rate, high-single digits?

Is there just -- is it structurally just even with some good tailwinds that structurally it's just kind of a mid-, low-single digit growth business.

Is there something else that we're not seeing that you think is really weighing on that particular revenue line?

Robert, Tim Keaney again.

I think if you pull out securities lending, which is probably the more helpful way to look at it, you'd see fees in asset servicing up 5% year-on-year and 2% sequentially, very closely aligned with sort of the AUC growth.

But I think what's changing in the market is a shift towards financial institutions.

We don't see a lot of defined benefit pension plan or central bank business moving, and that's a good thing because we have a big market share there.

But they are very slow growers.

What's really been growing the asset servicing business is financial institutions, so mutual funds, banks, (inaudible), and hedge funds, and I think that really plays to our strengths because we've been investing in our outsourcing capabilities, Bridgewater is I think a great example of where we've been making some big investments, I mentioned collateral and FX.

And I think that's where the opportunity for us is going to turn as we focus on bundled players that are winners in the consolidating industries that they compete in; when our clients grow, we grow.

But it also means we need to continue to invest in the products and services that our clients need, and those areas are ones that we really believe are going to continue to drive our growth.

I would also say there's a space that we have a unique position in that we don't see a lot of our traditional trust bank competitors, and that's where private banks and other financial advisors are getting out of self-clearing and they're looking at Pershing and the platforms that we've been investing in there.

That, we believe, over the next year or two is going to be another really bright spot for us.

So I guess those two or three things that will be real catalysts for us, and maintaining strong price discipline.

Okay.

And maybe just -- I don't know with the question and a suggestion maybe, you talked about new business wins and you did mention that you're seeing a lot of business not coming -- revenue streams that are tied to AUC or administrative assets, but possibly get a sense for what the revenue impact is on your new business wins.

If you have $160 billion of net new wins, should we be thinking -- it's always hard to translate that into what it really means, is that $5 million of revenue, $25 million of revenue?

So I guess it's a question, a suggestion would be great to get some of those kind of metrics, kind of the revenue impact of net new business.

I think Robert it's just a point -- I'm nodding at Todd here.

It's really hard to answer that question with any specificity because of the business mix.

And I just will go back and say the question that was asked earlier, am I worried at all about the sub $200 [billion] (corrected by company after the call) of AUC/A wins.

I'm not.

We've been looking at and quantify what we see the value of the business being each quarter, and it's been pretty darn consistent the last six quarters or so.

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

I think I'd just add the fact that our revenues in asset servicing is closely linked.

The growth rate is closely linked to the growth rate in AUC, whether it's market driven or new business wins.

I think it's keeping that correlation pretty tight.

All right.

Well thank you for taking my questions.

You're welcome.

The next question is from Brennan Hawken with UBS.

Good morning.

Good morning.

A couple -- just on the SLR here, a lot of encouraging momentum here this quarter, was hoping just mechanically maybe you could break down the improvement in the SLR to the different components, how much was retained earnings versus daily average balance on the asset side and such, and also give a reminder or some sort of sense about what kind of buffer you intend to run with above the 5% requirement at the hold co.

Sure Brennan.

In terms of the breakdown between capital generation and what I'll call the change in the denominator, it's about half in capital generation and half the change in the denominator.

So the change in the denominator, there are really two things as the US is moving towards the Basel adoption of the denominator definitions.

One is unfunded commitments get treated using the credit conversion factor that was established under Basel I. That was worth about a $20 billion reduction in assets that we'd have to otherwise have put into our denominator.

And then the rest of it was the change going from an average calculation of the balance sheet to a month-end calculation, so the average of three month ends.

So typically we would see balance sheets grow, especially [inaudible] a little bit, and you can see our spot balance sheet versus our average balance sheet is almost always higher.

That was probably worth about $12 billion or $15 billion in assets, so the combination of the two was just about evenly split.

Yes, on the buffer part of your question, given how much cash we have at central bank, we don't expect to run much in the way of a buffer.

Okay.

Okay.

That makes sense.

And then on the money market fund business, can you maybe give us a sense of the size of the institutional money market business that you have in the US and how much of that institutional -- and how that institutional book breaks down in between prime versus treasury and other?

Well, virtually all of the money market business is US.

We really don't have much in the way of outside the US money market funds.

Most of it is sourced through, almost 50% of our money market funds come from our asset servicing and Pershing platforms, so that's been one of the positive synergies that's not worth as much right now.

But it's one of the positive synergies of being associated with a large asset servicing book of business.

So a lot of the deposits in the money market funds are sourced from internal clients or Pershing platform.

That's the way to think about it.

So it's really a US based business.

As to the split between treasury and prime, I don't have that off the top of my head, Curtis do you have it?

Yes, it moves around quite a bit.

So let me give you some general answer.

We have a much larger institutional than retail money market business, and a much larger treasury than prime compared to many others.

Again, the numbers are -- but it's a pretty meaningful treasury business.

Okay.

So if we think about where the market is in those various -- in that various breakdown, you guys would probably be -- would skew more to the treasury side than the broad market would?

Yes, exactly.

That's correct.

That's why the fee waiver thing is obviously -- with treasury rates at zero.

More yields.

Yes, exactly.

Sure, sure.

Great.

Thanks for the color.

Thank you.

The next question is from Ashley Serrao with Credit Suisse.

Good morning.

On collateral management, you touched a little bit about the investments you're making to build out the business, but how should we think about the longer-term option for you there?

Any color on how much money you're making from the business today and how the competitive landscape is evolving would be appreciated.

Okay.

We've been making investments over the last year, 1.5 years in that space.

It's starting to show up in the Investment Services fees, it's one of the contributors to the growth there.

We don't break it out individually.

Right now we're seeing more in the segregation category, i.e., being the custodian for the segregated assets around collateral services; at some point it will start to move into the higher value transformational aspects of collateral services.

Doing some secured financing has also been a contributor to the collateral services.

We do see this evolving.

It's evolved more slowly than we would have expected as the new laws and regulations are kicking in.

We expect this to pick up over the course of time, and it's a global phenomena I might add.

We see opportunities to do this in all parts of the world.

Great.

Thanks for the color there.

And on the SLR, good progress this quarter, but as the rule hopefully enters the final inning, what impact do you think the rule as it stands today has on business decisions for you and more broadly the industry?

And then just a broader update on the global regulatory landscape will also be appreciated.

Well, I'll deal with the SLR question and maybe Gerald you can handle the broader question on the regulatory landscape.

In terms of -- for I think everybody in the industry and certainly the big institutions, they're going to be more balance sheet sensitive, and so use of the balance sheet is going to come with a higher cost.

So that as we look at any of our businesses, the balance sheet-intensive businesses are going to come under tighter scrutiny and then make the returns and how do we squeeze the returns out of them.

It's part of the reason that we frankly like the Investment Management business because there's no balance sheet that comes with that.

So I think that is a question that we -- that all large financial institutions are dealing with right now.

Gerald I don't know if you want to comment on the regulatory.

The regulatory front, I guess the thing that's challenging for all of us is the lack of harmonization across the regulatory environment, when Basel adopts, the US has a different standard, and the UK has a different standard, the ECB has a different standard.

It's particularly challenging to all of us to determine what's the right mix of businesses and use of balance sheet or not with this changing environment.

We're starting to get a little more clarity around it, and it's -- we're certainly very focused as a Company around making sure our business model performs well in the new environment.

Other firms are going through the same decision-making process.

I think as Todd pointed out, anything that's balance sheet intensive is either going to shrink or get priced out, and I think that's one of the things that regulators are looking for is to make sure risk is appropriately priced in the marketplace or stop doing the activity.

So I think that's going to be some of the changes you see more broadly across the industry.

Great.

Thanks for taking my questions.

The next question is from Rob Rutschow with CSLA.

Hey, good morning.

Thanks for taking my questions.

The first question's on expenses.

You had close to a 10% decline in the employee benefits expense sequentially, and if I'm reading the numbers right you also eliminated pension liabilities for capital purposes.

So was the sequential change just due to a change in assumptions or is there something else you're doing there that allows you to reduce those pension expenses?

Okay, Rob, the reduction in the pension expense is a combination of the -- there's nothing unusual there.

The plan has been the defined benefit plan, it's largely driven -- I should say by the defined benefit plan.

The defined benefit plan was frozen to new entrants quite a few years ago, and the year over year changes, the first time that we actually saw interest rates go up in quite a few years as a discount factor on the liability.

That in combination with the very strong underlying performance of the assets that sit in the fund, even though we reduced what we estimate our go-forward returns are going to be, that reduced our pension expense we estimated by about -- it should be by about $100 million this year, so $25 million a quarter or so.

That's largely the driver of what you're seeing on the benefits fund.

Okay.

That's helpful.

The follow-up question would be on -- I don't know if you guys have ever provided this or if you can, but what would be your total regulatory expense, and is there anyway to segment between Servicing and Investment Management?

Thank you.

We have not disclosed a specific number except for the cost of actually complying with tri-party reform where we have seen our expenses in the -- in that particular unit run rate go up, and it's not exclusively related to tri-party reform but most of it is, by over $70 million.

There's very limited impact in the Investment Management space around regulatory.

It's almost all Investment Services related.

The next question is from Jim --

Wait, Wendy, we have time for one more question.

The final question is from Jim Mitchell with Buckingham Research.

Good morning.

Maybe I could just ask about the DR business.

It looks like M&A is picking up, cross border IPO activity seems to be picking up.

Can you discuss the pipeline?

I guess and relative to the somewhat weak results this quarter, is it just a little too early to tell, or how do you think of that going forward?

Yes, let me start just by referring to this quarter, Jim, it actually wasn't a bad quarter.

We saw some decent corporate actions and revenues weren't too bad.

When you look at the issuer services number, that's masked by the weaker performance in corporate trust that we discussed.

I don't know --

Sponsored programs I guess were down this quarter?

No, the -- some of the sponsored programs are down mainly because of our own choice.

We're just being more -- again, more -- this is a category being more disciplined around the pricing of working with different programs where market share is still holding in the roughly 60% category, so you're just seeing a slight decline in the number of programs.

It's not a big deal, and it's really because we've been proactively managing it.

And in terms of the outlook?

The outlook, you know, as M&A activity picks up and as IPOs pick up around the world, this is an area that benefits, and it's mostly an emerging markets business, and so as you're seeing activity in that space, DRs will clearly benefit from it.

Corporate actions and M&A are the big revenue drivers for this business, not necessarily the day-to-day trading, although that's the foundation of it.

All those things that you mentioned really turbo charge the revenues in that business.

So we're optimistic as you are.

Okay.

Great, and then on the -- quick follow up on the capital ratios.

I noticed that your Tier 1 common on the standardized approach rose, I assume with retained earnings, but the advanced approach declined by 30 basis points.

Is that simply higher operational risk assumptions or is there anything else in there?

No, that's largely driven by some of the parameter changes as we got ready to go into -- to come out of the parallel run.

There were some of the parameter changes around some of our risk-weighted assets that drove that change.

Okay.

All right.

Thanks.

Great thank you.

Thank you very much everyone.

And before closing the call, I just want to remind you we will plan to host an investor day in the late fall, and we'll be able to share more details around our business model and our strategies.

So again, thank you for joining us today.

And look forward to talking with you.

If you have any questions, please follow up with Andy Clark.

Thank you very much everybody.

Thank you.

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

Thank you ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.