紐約梅隆銀行 (BK) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2014 earnings conference call hosted by BNY Mellon.

(Operator Instructions)

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 Ms. Valerie Haertel.

Ms. Haertel, you may begin.

Thank you, Wendy.

Good morning and welcome everyone to the BNY Mellon fourth-quarter 2014 earnings conference call.

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

The fourth-quarter earnings materials include a financial highlights presentation that will be referred to in our discussion of results and can be found on the investor relations section of our website.

Before Gerald and Todd begin their remarks let me take a moment to 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 earnings press release, the financial highlights presentation and those identified in our documents filed with the SEC that are available on our website bnymellon.com.

Forward-looking statements in this call speak only of today, January 23, 2015, and we will not update forward-looking statements.

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

Gerald?

Thanks, Valerie, and good morning, everybody, and thanks for joining us today.

Our performance in the quarter caps a solid year of delivering for our shareholders.

Throughout 2014 we demonstrated our focus on and commitment to controlling expenses to create positive operating leverage.

We were disciplined in our efforts to continue to drive profitable revenue growth.

We maintained our strong capital position and executed on our capital plan.

And we created value added solutions for our clients and good returns for our shareholders.

So looking at the full year earnings per share were up 5% on an adjusted basis.

We generated significant positive operating leverage even while absorbing elevated regulatory compliance costs and investing in our business to support future growth.

Approximately 79% of our earnings were returned to our shareholders in the form of dividends and share repurchases.

If you exclude a couple of the sizable gains that we had our payout ratio was 94%, which is in line with our targeted payout ratio objective of 80% to 100%.

And from a total shareholder return perspective we outperformed the trust banks, the S&P 500 financials and a median of our 11 member peer group in 2014.

We also achieved that same feat over a three-year period, which is really nice to see.

So all in all a good year.

We got a lot done.

Now focusing on the fourth quarter in comparison to the same quarter a year ago, I will provide you with some high-level overview and Todd will take you through the financial details.

Earnings per share were $0.70, which included $0.12 per share primarily for a previously disclosed tax benefit net of litigation and restructuring charges.

Importantly, on an adjusted EPS basis, we were up 7% year-over-year.

We believe we did an excellent job in demonstrating our expense discipline and we are confident that it is sustainable.

Now just as a reminder, some of the actions that we have taken include rationalizing staffing levels, insourcing application development, reducing our real estate portfolio, simplifying our operating environment and focusing on all of those little items and big items in the discretionary expense category.

Now these actions are paying off as total adjusted expenses were down 5% year-over-year and 1% sequentially.

Now as we pointed out at our Investor Day conference, we are committed to EPS growth in all environments as we work through the challenges of low interest rates and increased regulatory compliance requirements, which are impacting the industry at large.

Now looking at investment services, during the quarter we delivered solid growth in asset servicing, which was up 4%, clearing services was up 7% and treasury services was up 6%.

Now those areas of strength more than offset the decline in issuer services, which was down 19% due to seasonality in depositary receipts and the episodic nature of that business as well as the ongoing maturation of high-value securitizations in corporate trust.

Now the good news is we are increasingly confident that we are near the inflection point for the improved revenue growth in corporate trust.

Now I should add that assets under custody or administration were up 3% to $28.5 trillion and we had $130 billion in new assets under custody and administration wins in asset servicing.

Turning to investment management and performance fees, they actually declined 2%.

However, investment management was most impacted by the strength of the US dollar.

If adjusted for currency swings these would have been up 2%.

Now also impacting our business results were lower performance fees versus a strong quarter a year ago.

Now assets under management increased 8% to a new record $1.71 trillion benefiting from improved equity market values and net new business.

During the quarter we had a long-term inflow of $27 billion reflecting continued strength in our liability driven investment strategies and we also had short-term inflows of $5 billion.

Wealth management fees were also up 5%.

As you know we've been investing and expanding our wealth management sales force and entering new markets.

Those efforts are starting to generate revenue, which we are very pleased to see.

And we've also been working to position investment services and investment management for long-term success by focusing on several areas for growth.

Within investment services collateral services is a great example.

Usage of our optimization, segregation and securities financing solutions have been increasing and as a result the revenue contributions from these services have been growing very nicely.

Now another example is foreign exchange where we have enhanced our platform.

We are now capturing more volume as clients are increasingly utilizing our electronic trading capabilities.

In investment management some of the strategic initiatives we have discussed are coming through in the results.

I have already mentioned wealth management growth initiatives and now how that is beginning to generate revenues.

But we have also focused on expanding distribution of our investment solutions through the intermediary channels and further accessing our Pershing platform that services broker-dealers and financial advisors.

These are just a few examples of where we are investing in growth to leverage our strength and business synergies to further extend our competitive advantages.

Turning to capital, it remains very strong even after investing in our businesses to fuel future growth.

And also importantly, we repurchased 11 million shares during the quarter for $432 million.

We also delivered a strong return on tangible common equity of 16% on an adjusted basis for the quarter and 18% on the same basis for the full year.

So turning to 2015, we remain confident in our ability to execute on the strategic priorities we shared with you back in October.

They include driving further improvement in productivity and service quality while reducing cost and risk throughout the organization, investing in opportunities that will help us deliver innovative solutions and differentiate our service offering, achieving profitable revenue growth and maintaining a strong capital position while returning significant levels of excess capital to our shareholders.

And we continue to look for ways to deliver even greater value to clients and shareholders.

And we have implemented processes, capabilities and organizational enhancements that are making us more efficient and effective.

And we've added new executive talent to our leadership team and to our Board to complement our existing expertise that will help drive the execution of our plan.

So with that I will turn it over to Todd.

Thanks, Gerald, and good morning, everyone.

My commentary will follow the financial highlights document starting with page 6 that details our non-GAAP results for the quarter.

As Gerald noted, reported EPS was $0.70.

That includes the $0.12 benefit related to the tax carryback claim.

And it is also netted of litigation restructuring charges in the quarter.

We had a number of items impacting our fourth-quarter and our full-year results, the larger of which we have listed on page 21.

So as I go through this report I will focus on the numbers adjusted for those items.

Revenue in the fourth quarter was down approximately 3% year-over-year as strong growth in asset servicing, clearing services and treasury services was offset by lower issuer services fees and performance fees.

Expenses were significantly lower year-over-year and down slightly sequentially, representing our continued expense discipline and the progress on driving efficiency and transformation.

Our strong commitment to expense control resulted in us generating 232 basis points of positive operating leverage year-over-year on an adjusted basis.

Income before taxes was up year-over-year.

On a year-over-year basis our pretax margin increased approximately 200 basis points to 28% from 26% in the fourth quarter of 2013.

Return on tangible common equity remained strong at 16%.

We had a modest negative impact to pretax income from a stronger US dollar -- that is for the whole Company.

It reduced -- and this is in the fourth quarter -- it reduced our revenue and expense each by approximately 1%.

At the business unit level the currency impact was unfavorable to investment management and slightly favorable to investment services.

Our capital ratios were not affected by the currency moves.

For the full year shown on page 9 revenue declined slightly and expenses were down even more enabling us to generate 87 basis points of positive operating leverage, or 190 basis points if you exclude investment in other income and securities gains.

Income before taxes was up slightly and our operating margin remained unchanged from the prior year at 28%.

EPS for the full year was up 5%.

Return on tangible common equity for the full year was approximately 18%.

Page 10 shows the drivers of our investment management business that help explain the underlying performance.

In the fourth quarter we achieved record AUM of $1.71 trillion, that is up 8% year-over-year, driven by the equity market values, new business and it was partially offset by the dollar impact.

During the quarter we had long-term net inflows of $27 billion and that reflected the continued strength in the liability driven fixed income and alternative investments.

Short-term net inflows were also positive, they were up $5 billion.

For the full year we experienced net long-term inflows of $48 billion.

We had net outflows in equities in the fourth quarter and we also had them on a full-year basis.

And that has been consistent with what we've seen elsewhere in the industry.

Our wealth management business continues to perform well.

Average loans and deposits continue to trend up nicely.

Turning to page 11, you can see our financial results for investment management.

I will touch on just a few points before I move on to investment services.

Performance fees were $882 million -- excuse me, investment management and performance fees -- which includes the performance fees of $44 million.

Investment management fees reflect the dollar impact, also benefited however by higher equity market values.

Compared to the third quarter of 2014 our performance fees doubled from $22 million.

That is a seasonal event for us.

And as Gerald noted performance fees were lower versus a much stronger than average year-ago quarter.

Other revenue was $7 million in the fourth quarter compared with $43 million in the fourth quarter of 2013 and $16 million in the third quarter.

The year-over-year decrease primarily reflects lower other revenue related to hedging activity within a boutique and then also lower seed capital gains.

The hedge is designed to mitigate the impact of market movements in future fee revenues.

Given the substantial growth in related AUM, we would expect future revenues to more than offset the loss on the hedge.

Income before taxes excluding amortization of intangible assets and the charge related to investment management funds net of incentives was 8% lower year-over-year and essentially unchanged sequentially.

If you adjust for the other revenue and currency impact the earnings would have been up 7%.

Turning to our investment services metrics on page 12, you can see that assets under custody and administration at quarter end were $28.5 trillion.

That is up 3% year-over-year primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger US dollar.

Linked quarter AUC/A was also higher.

Many of our other key investment services metrics show growth on a year-over-year basis.

The market value of securities on loan at period end again showed strong growth especially as compared to the fourth quarter of 2013.

Securities on loan were up 23% to $289 billion, largely due to higher levels of equity collateral as well as higher value of fixed income and equity securities.

Average loans and deposits were both up.

Our key broker-dealer metric of average tri-party repo balances also grew.

All of our clearing metrics recorded solid gains with DARTS volume and average long-term mutual fund assets each showing double-digit growth.

Looking at the DR program metrics you will see that we had a focus on exiting low activity programs and programs that did not meet profitability criteria.

This combined with routine disclosures due to corporate actions has resulted in a net decline in the number of DR programs in our portfolio.

On page 13 you can see detailed segment reporting for investment services.

The key variances are reflected in fee and other revenue in our consolidated results on page 14.

Moving to that page you will see that asset servicing fees were up 4% year-over-year and down 1% sequentially.

The year-over-year increase primarily reflects organic growth and net new business partially offset by the unfavorable impact of a stronger US dollar.

The sequential decrease primarily reflects the impact of the dollar.

It was also offset a little bit by new business.

Clearing services fees were up 7% year-over-year and up 3% sequentially.

Both increases were driven by higher clearance revenue reflecting higher DARTS volume.

The year-over-year increase also reflects higher mutual fund and asset-based fees.

Issuer service fees were down 19% year-over-year and 39% sequentially.

The year-over-year decrease reflects lower corporate actions and dividend fees and depositary receipts.

The sequential decrease is primarily related to seasonality in depositary receipts but that was partially offset by slightly higher corporate trust fees.

We are pleased to see signs that corporate trust revenue is stabilizing as expected.

Treasury services fees were up 6% year-over-year and 2% sequentially as we saw higher payment volumes.

FX and other trading was up 3% year-over-year and down slightly sequentially.

For this line item you can also refer to the table at the top of page 8 in the earnings press release to see the details I'm going to go through right now.

FX revenue of $165 million was up 31% year-over-year and up 7% sequentially and that reflected higher volumes and volatility in both periods.

In the fourth quarter we did see a seasonal drop in DR-related activity that offset some of the effect of the higher volatility.

In other trading we had a loss of $14 million, which compared with revenue of $20 million in the year-ago quarter and a loss of $1 million sequentially.

Both period comparison decreases in other trading revenue primarily reflect lower fixed income derivatives trading since we are exiting our derivative sales and trading businesses as well as losses on hedging activities within one of the investment management boutiques that I discussed earlier.

Partially offsetting this was the favorable impact of interest-rate hedging activity, which was offset elsewhere in net interest revenue.

Turning to the net interest revenue on page 15 of the financial highlights, you will see that NIR on a fully taxable equivalent basis was down 7% versus the year-ago quarter and down slightly from Q3.

The year-over-year decrease primarily resulted from lower asset yields and higher premium amortization on agency mortgage-backed securities.

As you may recall in the fourth quarter last year a sharp rise in interest rates temporarily slowed the amortization of premium mortgage-backed securities.

The year-over-year decrease also reflects lower accretion and the impact of interest-rate hedging, which is primarily offset in other trading.

The decrease was partially offset by a change in the mix of assets and the higher average interest earning assets driven by higher deposits, so we did see a little bit of growth in deposits.

The sequential decrease in NIR was driven by the impact of the interest-rate hedging of approximately $13 million and that is offset in the other trading revenue.

In the fourth quarter we completed our plan to reduce interbank placements and increase our high-quality liquid assets in the securities portfolio to better and more efficiently comply with the evolving liquidity requirements.

On page 16 you will see that non-interest expense decreased by 5% year-over-year and 1% sequentially.

Both comparisons reflect lower staff expense, lower asset-based taxes and the favorable impact of a stronger dollar.

That was partially offset by higher professional, legal and other purchase service expenses.

The increase in that line item was primarily related to the implementation of strategic platforms to support future revenue growth.

Both comparisons also reflect the fluctuations in business development expenses which was higher quarter over quarter and lower year-over-year.

Turning to capital on page 17, capital ratios were flat.

That is largely driven by an adjustment in the other comprehensive income related to pension liabilities, reflected changes in the discount rate as well as the mortality assumptions there.

Our estimated supplemental leverage ratio declined by 10 basis points to 450 and that was driven by a modest increase in quarterly average total assets.

One final note about the quarter, as you will see in our release our effective tax rate was 9.4% which includes the 16.5% benefit related to the previously disclosed approval of a tax carryback claim and the impact of a consolidated investment management fund.

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

We would expect total staff expense to increase sequentially by approximately $100 million from the fourth quarter and that is driven primarily by the acceleration of long-term incentive compensation expense.

As you recall that typically takes place in the first quarter of each year.

Occupancy costs should rise by about $7.5 million related to the sale of One Wall Street as we are planning to move into our new headquarters.

That will result in double rent in 2015.

That will more than reverse itself in 2016 when we begin to see the quarterly benefit from consolidating our New York space.

We also need to note that we are subject to the European resolution fund in 2015, although we are not certain of the actual expense that might create.

We believe the impact of all of these items offset somewhat by our expense management efforts should result in expenses up around 1% to 2% in the first quarter of 2015 versus the first quarter of 2014.

This is as expected and well within our Investor Day guidelines.

Net interest revenue should be about at the level we saw in the third quarter.

The effective tax rate should be around 26% to 27%.

So to summarize we had a good quarter.

Overall, we are pleased to see the results of the expense control efforts falling to the bottom line and creating significant positive operating leverage.

As we look ahead we are focused on creating value for our clients and shareholders by driving organic revenue growth and by continuing to be relentless in the pursuit of additional efficiencies and the savings as we execute on the strategic plan that we discussed at Investor Day.

We are also focused on maintaining our expense discipline to reduce costs and maintaining our strong capital position.

With that let me hand it back to Gerald.

Great, Todd.

Thanks a lot.

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

Thank you.

(Operator Instructions) Glenn Schorr, Evercore.

So looking through all the disclosure I'm not sure I missed it yet, but have you disclosed what you think your TLAC ratio is and where you need to be?

Yes, we have not, Glenn.

We would estimate that we are probably around 20%.

We do have a fair amount of debt at the holding company, as you can see.

I think the talk out there -- the ranges are 16% to 20%.

At this time there is a proposal but I don't think it is adequately defined to really go much beyond that.

Just making sure, the 20% does not exclude the buffers, which for you guys isn't as big as most, but that's another 3.5 off?

Okay, the bottom line is you are in a reasonably comfortable range is the bottom line?

From what we can tell at this point.

Okay.

And then I apologize, I missed all the commentary on the $14 million loss and other trading related to the fixed income trading.

So one, if you could just repeat what was it specifically related to and then two, am I reading too much into -- exiting the business, that should not repeat.

Is the balance sheet related to that business all closed out?

Just curious on where we are at in that process.

Okay, there are really three unusual items in there Glenn.

One is that the exit did and certainly on a year-over-year basis had an impact because we had pretty decent revenues there in the fourth quarter of last year.

We did incur some losses in the exit process.

We could see some little impact on a go-forward basis.

We wouldn't expect it to be much one way or the other.

Obviously we're not going to see an increase in revenues as we exit.

To answer the second question there, it has had some modest reduction in our trading assets at this point and we will continue to see that reduce going forward.

So A, it was the derivatives exit.

The second thing that went on in there is we had a hedge in one of our boutiques against fee revenues.

That hedge actually had a loss.

And those two things were partially offset by gains on our interest-rate hedging which actually was a negative to [net interest revenue] (corrected by company after the call) but a positive to other trading.

That's where the minus $14 million came from.

Okay.

I appreciate it.

That's my one and one.

Ken Usdin, Jefferies.

I was wondering if you could give us a little bit more detail in terms of magnitude when we try to separate what the impact on investment management fees and servicing fees is from the FX translation and then the underlying growth that we don't quite see on the surface because of it?

Yes, so if you look at it, Ken, it's about probably a little bit over 1% on the overall revenue growth rate and a little bit over that on the expense rate.

So that puts you you're talking around $40 million or so in the quarter.

On total revenues?

Yes.

So if you really look at the drivers of the revenues in the quarter it is a combination of that and what we saw in issuer services.

So issuer services was down substantially both sequentially on a year-over-year basis.

That's almost all DRs.

That tends to be episodic.

And so last year we saw quite a few transactions that fell -- or we saw some transactions that fell into the fourth quarter.

We didn't see any of that in this fourth quarter.

So that is our most capital markets transactions-like business that is a little bit less predictable.

Okay, got it.

And then my second question is just you guys did a really good job certainly relative to how you had talked about expenses at the third-quarter conference call and adjusting to the revenue environment here, but Gerald I was wondering if you can just take us a step further?

I know expenses will be up 1% to 2% year-over-year.

Are there other things that you are contemplating now from an expense control perspective that we might not have heard at Analyst Day in terms of your view of the overall revenue environment and any incremental need to just tighten things up even more?

Ken, it's a great question.

I think that the continuous process improvement program, if you want to call it that, that we have all throughout the Company in every expense category it is really taking hold.

And it is an operations, it's in technology, it's in business partners, it's in every single line item in the Company and we see further opportunities to continue to ratchet those expenses down as we get more efficient and more productive.

And so that's why we are very confident that our expense control environment is very sustainable going into the future.

A lot of the regulatory costs that continue to rise, the rate of rise is slowing down, so we've gotten a lot of that in the run rate.

So I think we feel very good about the ability to continue to control and manage expenses into the future, certainly within the guidelines that we gave you at Investor Day.

That being said, we are very cognizant that it is a very tough revenue environment.

And so we are going to be even more diligent on the expense side to offset any potential slowness in the revenue side.

Understood.

Thanks, Gerald.

Brennan Hawken, UBS.

Couple quick questions on the revenue side, just a follow-up on one of Glenn's questions and thinking about the derivatives, the bond derivatives trading.

That $34 million year-over-year revenue delta, is that the sort of run rate we should be looking for for a headwind for the next three quarters as that rolls off, or was that comp particularly difficult?

Can you give us an idea about what kind of run rate we should look to reduce?

Brennan, I think that comp was a particularly difficult one.

We weren't making a whole lot of money in the derivatives business.

As we went through the course of the year there was probably one good quarter and it was a little bit of softness and some of the unwinding in the fourth quarter.

So I think that is not something that I would factor into your model.

Okay, great.

Thank you.

And then, what do you think drove -- FX was certainly good versus history but when we look at what State Street and Northern printed this quarter you came in comparably a little weaker.

Is there something that happened in FX that prevented you from capitalizing on the environment to the same extent that competitors appear to, or can you help us maybe understand the delta there?

Sure.

I think we outperformed a bit in the third quarter.

That's not unusual for us because we have a lot of ADR activity in the third quarter that we don't see in the fourth quarter.

And in fact we saw almost zero ADR activity in the fourth quarter, so that is probably the differentiator for us.

If you look at us on a year-over-year basis we are up strongly.

Terrific.

Thanks very much.

Betsy Graseck, Morgan Stanley.

I don't know if I missed it but I know you went through the SLR ratio at yearend at 4.5%.

Could you just give us the plan to get to 5% and can you get there without a rate rise meaning does getting to 5% require some of the excess deposits to come out?

Yes.

It would certainly be easier to get us, Betsy, if the excess deposits ran off.

We think that could generate as much as 100 basis points on its own.

We will have to be a little more aggressive, so the downside is if we don't see any rate movement we will probably have to generate 20 or 25 basis points or so on the way we manage deposits.

We mentioned on Investor Day that one of the things that we would be doing is if we are in the 90% to 100% on our payout ratio we still get pretty significant capital retention, as you saw this year.

That generates about 70 to 80 basis points by the time this gets implemented.

We have a matched book that is run out of treasury that is consuming about 25 basis points or so that we could unwind.

That would come with a little bit of expense, not much, we do earn a little bit on that matchbook.

But that would be something that we might be able to take down.

We do think that we are going to be able to deconsolidate our variable interest entities.

That is another 10 basis points or so.

The trading book that we have talked about, that is coming down.

That is probably going to create another 10 basis points.

So there is a lot of things that are underlying this that will slowly grind its way up to the 6% to 7% where we think we will be.

We also have the ability to issue preferred, which would be a lower cost of capital.

We haven't made a decision around that but those are the steps.

We printed them in the Investor Day and we are going to move along that course.

Okay.

And they just on the managed deposits point there, can you give us some color on how you are thinking about that especially given what is going on in Europe recently with the Swissies going to negative 75%, etc.?

Sure.

With the negative interest rates, as you know, not only in Europe but Swiss and Denmark, we are passing that impact on through charging for those deposits and we will adjust as the markets adjust.

We saw a little bit of a decline in euro deposits over the course of the quarter, not much but a little.

So there was -- and I'm not sure that's directly in reaction to that.

But we can get more aggressive as we feel -- as we might need to be in order to charge for the use of the balance sheet.

Right.

And even with you charging for the use of the balance sheet directly like that you really haven't seen that much movement in deposit as a result?

We did see some.

Some.

Okay.

Thank you.

Brian Bedell, Deutsche Bank.

Just a little bit more on the balance sheet.

Can you talk about what you view as your excess deposits -- I'm sorry if I missed this -- the excess deposits level and trends coming into 2015 I guess in conjunction, Todd, with being able to pass through the lower central bank rates and just how you think that might play out as we move through the year?

We probably see it if we look at what happened to us mostly in dollars from the quantitative easing in the US, most of that came through institutional depositors so the trust banks were big recipients of that.

Our estimate that that is probably in the $50 billion to $70 billion range, Brian, so if we were to see a normal drain that we would see that money go away.

Consistent with what you have outlined on Investor Day still?

Yes.

I don't think that has changed.

Now the mechanism for the monetary policy change is still a bit uncertain, so it might have to be done through pricing.

Right.

Okay.

As we move through 2015 you are expecting only part of that to move through, this is more of a two- to three-year evolution, is that correct?

Well it would actually depend on the course of monetary policy.

If nothing happens we wouldn't expect any of it to move.

And eventually we will start to, like I had mentioned earlier, we will just start to charge more and more and drive some of the deposits away based on the cost.

Brian, we are managing the Company assuming that there is no rate rise and therefore both on the revenue and the expense side and the balance sheet we are really trying to make sure the expenses are in line with a slow revenue growth environment.

And if we need to be more aggressive on the deposit side to make sure we achieved the capital ratios that are expected of us we will be more aggressive there, too.

Okay.

That's great color.

And then just on a couple of revenue items, maybe just the outlook into 2015 within issuer services the DR side, it looks like the corporate trust, like you said, is beginning to inflect.

So maybe what your view is on depository receipts coming into 2015 on a year-over-year basis versus 2014.

And then also on the collateral service side it sounds like you are gaining good traction, in there any kind of color on revenue growth in collateral services?

Brian, why don't I ask Brian Shea to take that one.

The depository receipts business, as Todd mentioned, tends to be volatile, high-margin revenue for us.

And what you saw in the year-over-year comparison is we had a large corporate action activity last year and not this year.

So it didn't repeat itself in the fourth quarter this year and the rest of it in the sequential quarter is really the seasonality.

The third quarter tends to be a high dividend quarter.

And the fourth quarter in falls off, so that is pretty typical.

But overall we are still winning more than our fair share of new depository receipts assignments.

I think we had a significant increase in new programs year-over-year and the net issuance in the fourth quarter was up.

So I would say that while it is seasonal/cyclical, we don't have any structural concerns about the DR business and we feel like the year-over-year comparison will be solid in 2015.

Mike Mayo, CLSA.

I'm looking at third quarter to fourth quarter and the expenses didn't decline quite as much as the revenue declined.

So on the expense side you had a $67 million increase in professional fees and I am guessing that is somehow related to retiring one of your platforms and if so shouldn't a retiring of a platform help to reduce expenses?

And on the revenue side, I hear what you are saying corporate trust is at an inflection point, you are winning more than your fair share in the DR business but the issuer services line, the revenues look like the worst since 2007, so what can you say?

It seems like you are confident yet the results are down, so can you talk about the backlog?

What do you think about the first quarter for that business, so just I think those two items would help with this expense to revenue relationship.

You asked two questions, so I am not sure we will give you a follow-up here.

But the first question on the quarter to quarter, so from the third quarter to the fourth quarter, we typically see exactly that because there is a very sharp decline in DR revenue.

And DR revenue is the cost of basically fixed associated with that.

It gets offset somewhat by the increase in performance fees that we -- the seasonal increase that we see in performance fees but that comes with quite a bit of compensation expense attached to it.

So that's not unexpected.

Your point around us being at the lowest level since 2007, I haven't looked that up but it sounds accurate.

As we have been pointing out since the crisis, corporate trust has been contracting but it has been contracting at a slower rate.

It has been painful and it has been a differentiator for us.

We now see and actually saw it flat to slightly up from Q3 to Q4.

We actually now see corporate trust turning the tide.

So rather than contracting at a 5% to 10% type of level it is actually going to be flat to showing some growth.

DRs, I think Brian just gave you -- DRs tends to be a cyclical business.

As you see flight to risk, that is a good thing.

If you see a flight to quality it is typically not a good thing but we have been through that cycle and I don't think there is anything structurally different in that business.

I think your other question was related to the increase and where did the increase in consulting and professional services and legal.

We did see a sharp increase -- we do typically see a seasonal increase in the fourth quarter in that line.

Some of that is in the business partner.

Some of that is investment in our risk and finance systems.

Most of it is related to the buildout of our platforms that we have discussed at Investor Day and then some of that is related to higher legal costs.

We would expect that run rate to decline somewhat in the first quarter.

Actually, it should decline substantially in the first quarter but all within the rates -- the growth rates -- that I had mentioned to you in my comments that is that I think we will be up 1% or 2%, primarily because of the acceleration we have.

We are going to have a little more cost to do the acceleration of long-term incentives in the first quarter of this year than we did last year.

And the last point was the custody platform, did you actually retire a custody platform and when do you see the benefits from that and can you talk about headcount reductions in the recent quarter?

Mike as you know, we had three custody platforms.

We have consolidated that down to two.

We completed that over the summer by the end of the third quarter of 2014.

And we are now working on consolidating the remaining two to one and we are deep into that process and that will carry us into early 2016.

And as we've mentioned at Investor Day, we are in the process of simplifying our technology infrastructure overall so we have other platform consolidations under way.

Overall we have retired a couple of hundred applications in the last couple of years and we have a roadmap to do more.

And that is why, I think Todd and Gerald have said, we are not only managing discretionary expenses carefully, which are kind of short-term things, the transformation process that we laid out at our Investor Day includes technology simplification, insourcing, real estate and facilities actions and other actions which are long-term contributors to the structural costs -- reductions -- which is why we have confidence that we can sustain good expense discipline over the long term.

And Mike, in terms of headcount we were able to manage headcount down for the year.

As you know we took some actions in the second quarter and that helped us to do that.

I think you'll see the headcount is down about 800 for the full year.

That also includes the fact that we were insourcing into our technology, our application development team.

So that insourcing process is now over or pretty much completed and so on a sequential basis you also saw a decline in headcount.

Part of that is because we are no longer insourcing the other heads that were offsetting some of the benefit from reductions we had made elsewhere as we make ourselves a bit more efficient.

All right.

Thank you.

Alex Blostein, Goldman Sachs.

So a couple of quick follow-ups here.

So I guess on NIR as we kind of take a look at in 2015 the moves and rates we are obviously seeing this year are pretty onerous.

I was just curious how you guys think about the prospects for NII into 2015 and if we do not see much move in rate until kind of the end of the year, maybe an update on where you guys are in terms of remixing the composition of the balance sheet out of cash into securities to help sustain the same level of net interest income.

Our estimate for that is that we will see a little bit of growth in net interest income for the year even with this difficult backdrop.

It is not great in Europe and it is not great in the US either.

We have moved a fair amount of cash into the securities portfolio so it has grown by about $20 billion over the past six months or so and we expect to see some additional growth over the next few months in that as well, so we are putting more cash to work.

We discussed at Investor Day how we are going to work through the HQLA, so you are seeing a continued growth in our HQLA assets.

And that will I think be able to offset some of the lower rate environment.

So we think the fourth quarter was a bit of an anomaly because of the way the hedging worked itself out.

But we think that we are running at about 725, 730 and we should be able to see a little bit of growth to that.

Got you.

That's very helpful.

Thanks.

Another follow-up on the DR business and understanding the seasonality and the choppiness of it, but if we take a step back can you guys help us understand the impact of just maybe a structurally stronger dollar and maybe a little bit of weaker emerging markets on that business over the course of the cycle?

So if US dollar continues to strengthen does that matter for the issuance?

Yes, I think for all of our businesses if we see continued flight to quality, less transaction, less cross-border transactions, that is not good for us, Alex.

It reduces volumes.

It moves things into treasuries and banks rather than in the capital markets.

We went to see capital market activity.

Where that is displayed somewhat is in the ADR business.

The ADR business has a fairly large energy component to it and there's a lot of action there and that is somewhat helpful.

It has actually been kind of interesting, we have seen interest in it and some growth in issuance rather than contraction.

So with prices and the dollar down it is actually brought -- in some ways it has made it more attractive.

And again Alex, DRs in some ways a lot of the revenue growth is around corporate actions and episodic events.

So if you see or believe there is going to be increasing either merger and acquisition activity, particularly in the energy sector, that could actually be beneficial to the business.

Yes, understood.

Thank you so much for the color.

Adam Beatty, Bank of America Merrill Lynch.

Question on wealth management.

You are good enough to give the overall flows for the asset management business, just wondering if what you are seeing in wealth management is similar suggestive of maybe a risk off and how your clients are reacting?

Are they spooked by volatility, or encouraged by what is still at least domestically a rising market year-over-year?

Thanks.

Our wealth management experience has been that low rates have had an impact on the amount of income that clients are getting from their portfolios.

And some clients are absolutely looking for ways to increase the overall return on their portfolios but within the framework of definitely aware of the risk environment being challenging.

I would tell you that we -- I think our wealth clients have generally had a view of the US equity markets being reasonably positive and have not been afraid of risk in the US equity markets generally.

But as you think about expanding portfolios and making them were global, some of the things that they are reading and hearing about they have definitely taken a bent to be biased away from it.

So it is hard to describe an entire client base all in one answer but generally I would say that there definitely is still sensitivity about volatility in markets in those portfolios overall.

But a search for income too, yes?

The search for income is real and it's one of the great things about the business we have is the breadth of clients that we are dealing with.

As rates are falling there continues to be -- income continues to be the thing that people are increasing their search for whether they are sovereign wealth funds or wealth clients or any other array of our client base.

And Adam, just as a reminder as a business, it's a terrific business.

We like it a lot.

The fees are growing nicely.

Loans are up.

Deposits are up.

We are utilizing the Pershing platform and the advisory network to source business.

It's a terrific business and that's why we're investing in it.

So it's very good margins, very good growth rates on a relative basis and while the clients may have different investment strategies and concerns, as a business overall it is very attractive.

Agreed.

Thanks for a much.

And then just a quick follow-up on collateral management and where that stands.

Is it living up to your expectations so far?

As regulations get layered on are clients kind of holding off to a steady-state or are they trying to get out in front of it?

Just where you see that and what inning you are in right now?

Thanks.

I think I will have Kurt Woetzel answer that, who is running our markets group now.

Great question.

The business still is performing as we outlined in the Investor Day.

We are actually at all-time highs in our balances in our program.

It is really being driven by three factors.

One is equity financing is still a strong business in the sell side; secondly, as you pointed out a little about regulation, regulation continues to drive the fact that synthetic structures need to be collateralized; and the third component of that really is that the OTC derivatives market is now a market that you need to segregate, if you will, the initial margin and we're the likely place for that to occur.

So those factors really continue to drive the business.

And I would say a fourth component -- again, this goes back to regulation -- is that there is a shifting of the sell side's books around to places that may be more efficient from a capital structure standpoint.

That shifting is also playing well into our global program as we have a program that is very much global in nature and allows us to take advantage of where that shifting may happen.

So not just collateral but capital efficiency?

That is correct.

Excellent.

Thank you very much.

I really appreciate it.

Ashley Serrao, Credit Suisse.

Sorry to come back to DR activity but I thought in your prepared remarks you said that you were proactively exiting certain portfolios that didn't meet your profitability thresholds.

I was wondering if you could size that and if both on the revenue side and also the expense benefit?

Yes Ashley, that's why we point out to the number of programs.

It's really not very material on either the revenue or the expense side.

It is just the fact that we are having to carry the positions and actually have some staff or people looking at them.

It's really not material to the overall business.

We are generally just focused on the profitable business and making sure we are applying the best resources to the profit end of it.

So I wouldn't look at it as a material event for DRs.

Okay.

Just one other comment.

We have struggled to find a metric that is helpful to project where you might be able to expect performance to be because it just is so episodic.

But ultimately if you look at issuance and cancellations and you kind of look at the number of programs you've got, that is some basis but it's not greatly correlated to revenue.

Okay.

I think just one quick one on expenses.

So what is your outlook for pension expense next year -- this year, I mean?

We do expect pension expenses.

We had talked about on Investor Day to increase could be by as much as $60 million or so.

And in directions that I gave you around the expense increased for the first quarter that would reflect that as well.

Okay, thank you.

Gerard Cassidy, RBC.

Question on the strength of the US dollar.

Is it right to assume obviously it's a negative drag on revenue but you get the positive benefit on expenses, so the net of it is it is not a negative for the bottom line?

And if that assumption is accurate, is there any environment of the dollar going forward by strengthening even further as it has since the first of the year that concerns you?

Well your first statement is pretty accurate.

Net net it really didn't have a tremendous bottom-line impact because as you suggest, the strengthening of the dollar had negative impact on revenues and positive impact on expense.

So the net net was pretty marginal for the Company broadly but the further strengthening, Todd, that's you.

So almost all of the impact from the dollar took place in the fourth quarter.

When we talk about the impact on revenues and expenses, so when you look at the full year it is about the same -- not exactly -- but it is about the same number.

So we talked about a 1% move and for the fourth quarter so you can figure it is not too meaningful for the full year.

I guess there is a correlation to the strengthening of the dollar as a flight to quality and less transactions, something I had mentioned on one of the earlier questions.

That would be my concern.

My concern is that there is less issuance, less cross-border transactions other than flight to something like US treasuries.

That's not great for our business model, if that were to persist.

And in this strengthening is it primarily against the euro that you are referring to, or is it a basket of currencies?

I would say it's a basket of currencies.

One offset to that, Gerard, is this is coming with quite a bit of volatility and volatility has always been healthy for us.

So we are seeing the benefits of that in the first quarter.

Great.

And as a follow-up, Gerald, you mentioned in your opening remarks about the inflection point for improved revenues in the corporate services area, can you share with us some of the improvement -- what type of products are doing better now?

What are some of the actual numbers that you are seeing that gives you that comfort to say that it is working?

Sure.

In corporate trust, as you know, we've suffered the last few years from the high-value securitization has been rolling off, that is coming closer to an end so that is one step in the process.

Secondly, we are seeing new issuance.

With low interest rates you are seeing traditional new issues on the debt side.

We have seen growth in the CLO marketplace again.

We are not seeing as much traditional securitizations although some asset-backed securitizations are starting to reemerge, plain vanilla ones.

So we are starting to see that, we are getting our fair share.

I will say that for a good part of 2014 with the rumored sale of corporate trust in the marketplace we were not getting as much revenue as we would like.

Now that that is over and done with I think people realize that corporate trust is a key component of our business and we are back in the growth mode.

So I feel pretty good about both the new issuance market, the decline in the old business and us being able to get back into business is giving us the feeling that we are at that inflection point.

And I would say Europe continues to see more debt issuance and as bank balance sheets can't support whatever development occurs, and bank balance sheets have to come down, the securitization market is the place to go.

So all of those factors are giving us a lot more confidence that we are reaching that inflection point sooner than we perhaps said to you earlier in the year -- earlier last year.

Luke Montgomery, Sanford Bernstein.

So just a quick question on the money market fee waivers.

I think you said the impact is roughly $0.06 to $0.07 per quarter split 50-50 between asset management and clearing?

So maybe an update on those estimates.

And then do you calculate that against the contractual rate or some effective rate before you start waiving fees?

And along with that has there been any change to your thinking about possible competitive pressures as rates rise and you try to recapture those fees?

Why don't I take some of this, and then I'll ask Curtis to fill in some of the other color.

So the net relationship it is not quite 50-50 between investment services and investment management.

It's a little bit more in investment services, Luke.

In the year-over-year and the sequential it really hasn't changed.

We have been running at about the same rate, so we have indicated the net income hit to us is about $0.06 to $0.07.

What is going to happen competitively from here, Curtis, maybe you can answer?

Yes, I will make a couple of comments and then I know Brian Shea also has the view from all the business at Pershing and across investment services as well.

We have talked about this a lot.

There is no question that there are actually are now lower fee money market funds in the market and they are typically delinked from the intermediaries and the sources of a lot of the cash.

So remember a lot of money market fund assets actually are connected to client accounts where there are significant other services being provided and distribution fees are a component of the overall fees that are earned in the money market fund business.

So a lot of these products that exist now with lower fees actually don't gather assets in any significant way as a percentage of market share.

So I completely understand your question.

We are in a world where passive products and lower fee products and asset management across many asset classes are growing in more the norm, so the question makes sense.

But I do think that understanding the distribution and the relationships with distribution partners to gather assets is a really important component of this.

Brian, I don't know if you would add anything to that?

I would add, we still see significant cash balances in money market funds and FDIC in short sweeps-type products.

So I think particularly in the fourth quarter there was a little increase in cash management balances on the Pershing platform, for example.

Having said that, as Gerald mentioned, we are running the business as if the rates aren't going to rise.

But we do think eventually there will be some increase in short-term rates which will help restore yield and fees in the money market fund business.

So I guess my one comment -- summary -- is the fundamental agreements and structures of the arrangements have not really changed between the money market providers and the distribution platforms and so my expectation, which is not 100% necessarily right, but it's my expectation is that since the fundamental structure hasn't changed and everyone has shared in the fee waivers on the way down that I think you'll see a sharing of the restoration of fees and yields on the way up.

And so we feel pretty good about -- that we will have some improvement as rates rise.

Great, thanks.

Very helpful.

I think I'm going to leave it there.

Geoffrey Elliott, Autonomous Research.

The shift within the investment management business towards liability driven investment continues for another quarter.

So could you discuss as that mix shift takes place how it impacts profitability, how the profitability of LDI compares with the other major elements of AUM on the investment management side?

So first of all let me tell you that one of the things that is happening -- one of the most significant trends that is happening in the investment landscape is the de-risking of pension plans globally.

And so the growth of our LDI business has a lot to do with the fact that pensions -- changes in accounting, substantially lower tolerance for pension surplus volatility has caused pension plans, again on a global basis, to look to de-risk and there are cases where they are hedging that through LDI strategies.

And actually as you may have seen, there have been an increasing number of pension risk transfer transactions where pension plans have actually purchased risk insurance and effectively eliminated their pension risk from a market perspective.

And that is a major trend that BNY Mellon was very early on playing a pretty important role in, Insight specifically an investment firm that was acquired several years ago is a market leader there.

We have other LDI products at Standish and Mellon Capital and really work closely with pensions globally on this.

I like the way you asked the question about the profitability.

It's a very profitable business.

Sometimes in the marketplace people use the fee and the word fee and the word margin interchangeably.

The fees are generally lower but the margins are attractive.

It's a great business.

Also in the fact that you are not just providing a product to a client, you are actually evaluating their entire asset liability framework and truly the word solution that gets used too much I think in the marketplace.

You do help them with the overall portfolio solution.

So for the portion of their portfolio that they don't hedge you still have to help them think about how that should be invested and that has actually led to follow-on capabilities that we have being used by those clients.

And so it has been a great springboard into other businesses with those clients.

So it's a very large trend.

As you are seeing with falling rates, pensions are once again experiencing falling funding ratios.

Funding ratios had gotten into the mid-90s.

They are kind of back into the high 80s, sort of on average.

And it is just continuing to be one of the things that private corporate plans are very focused on and increasingly public plans also.

So if we think about it as basis point fees then it is lower than some of the other products.

But if you kind of look at the overall profitability of the relationship it's something you think is very attractive?

Yes, it's very attractive.

Again, the fees per AUM are lower.

The AUM is quite large, generally.

We are talking about some clients will actually hedge the majority of their plan and then again it also leads to a broader relationship.

I will tell you that some of the -- some clients will pay a slightly higher fee and others want to pay a lower fee and have a performance element to it, and some of our performance fees actually come from that.

So the management fee is not always the entire fee.

You have to look at the total fee dynamic.

And it is a scale business, so therefore as a business it is a very nice one and it's growing very healthy.

And so we like it a lot and the team does a fantastic job in servicing our clients.

Great.

Thank you very much.

Okay, well thank you very much, everyone for dialing in to our call.

If you have any further questions please give Valerie Haertel a call and we look forward to catching up with you real soon.

Take care, everybody.

Thank you.

If there are any additional questions or comments you may contact Mrs.

Valerie Haertel at 212-635-8529.

Thank you, ladies and gentlemen, this concludes today's conference call.

Thank you for participating.