紐約梅隆銀行 (BK) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the first-quarter 2015 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 BNY Mellon's first-quarter 2015 earnings conference call.

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

Our first-quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results and can be found in the Investor Relations section of our website.

Before Gerald and Todd begin, 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 the documents filed with the SEC that are available on our website, bnymellon.com.

Forward-looking statements on this call speak only as of today April 22, 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 welcome everyone and thanks for joining us this morning.

As you can see we're achieving the results consistent with the goals that we shared on Investor Day.

For the first quarter earnings per share were $0.67 which was up 18% year over year.

Now focusing on our year-over-year comparisons on an adjusted basis total revenue was up 4%, total expenses were down 2%, so we generated more than 500 basis points of positive operating leverage.

Now the stronger US dollar reduced both our revenue and expenses but had a limited effect on net income.

And Todd will cover that more in a moment.

Our return on tangible common equity in the quarter was 20%.

Now we also returned significant value to our shareholders in the form of dividends and share repurchases during the quarter.

Simply put we're executing against our strategic priorities and it's showing up in our numbers.

Let me remind you of what those priorities are and how we're doing against them.

Now our first priority is driving revenue growth.

During the quarter revenue in Investment Services benefited from continued growth in both clearing and global collateral services.

As we've been saying we're investing in both of these areas to deliver enhanced capabilities to our clients.

Across Investment Services and in asset servicing in particular we've been quite targeted about the business we are taking on versus going after market share.

We're focusing on deepening our client relationships, delivering the highest value to our clients and growing profitably.

And I think our results are showing just that.

Now you also recall that late last year we created the markets group to bring together existing capabilities from a number of different areas.

We've been repositioning the business by exiting various activities that no longer fit our strategy while investing in foreign exchange, securities lending, collateral management solutions for our clients.

Now these initiatives are already improving our performance and reducing our costs.

So for example, our enhanced electronic foreign exchange platforms are capturing more client-driven volumes and when volatility increases as we saw in the first quarter we clearly benefit.

So the markets group had stronger foreign exchange results, stronger collateral management and securities financing activity while simultaneously exiting derivative positions and reducing the capital and cost associated with it.

Good overall results that helped improve the Company's operating margin.

Turning to Investment Management, to further diversify our assets under management, we're building out our retail distribution capabilities and investing and expanding our wealth management platform.

The inflows from these retail distribution initiatives are in fact improving but not yet at the point of being able to offset the active institutional equity outflows that we and the entire industry have been experiencing.

Now after quarter-end we reached an agreement to sell our Meriten boutique which is our German-based boutique.

Now this is part of our business portfolio review process to identify opportunities to better redeploy our capital.

The sale will allow us to focus on those boutiques with global scale that most benefit from being part of BNY Mellon and where we see the greatest growth opportunities.

And we expect the sale to close at the end of the second quarter and our Investment Management operating margin should improve with this divestiture.

On the investment performance front, during the quarter we strengthened our capabilities and they were recognized through two rankings.

In the first quarter as a testament to its continued growth and success the Dreyfus/Standish Global Fixed Income Fund hit the number one ranking in the world bond category for long-term investors and has been consistently a top performer.

And our wealth management business was named the 2015 Top National Private Asset Manager and Top Private Bank Offering for Family Offices by the Family Wealth Report.

Now our second priority is executing on our business improvement processes where we have been taking action from top to bottom, transforming our Company through a continuous improvement process.

It is reducing structural cost and risk and improving client productivity and service quality.

Now let me share some examples.

We are simplifying and automating our global processes.

We are continuing to optimize and streamline our technology infrastructure, particularly in asset servicing, leveraging a common architecture to reduce our cost and increase our agility so we are delivering new solutions to our clients even faster.

We mentioned last week that we're succeeding in reducing our annual infrastructure spend and that share on trend continued in the first quarter.

We're also shrinking our real estate portfolio and consolidating locations.

And we've been able to accelerate some of our efforts which allowed us to come in better than expected on our net occupancy expense line.

Now also as part of our business improvement process we're improving our return on technology investment.

Today we have best-of-breed applications in most of our important business activities such as tri-party, clearing, payments, settlements and collateral management.

Our technology is well regarded by industry professionals and we are particularly proud of our most recent acknowledgments.

One of which was the Anita Borg Institute recently named us as the Top Company for Women Technologists for achieving the highest overall score for all companies evaluated.

This recognition helps us attract and retain top talent in the industry.

Our third priority centers on being a strong, safe, trusted counterparty.

The results of the 2015 CCAR demonstrated that under severely adverse scenario our projected minimum Tier 1 common ratio and our common equity Tier 1 ratio under stress were the most resilient among all of the 14 advanced approach bank holding companies.

So we are well-positioned for all stress scenarios and feel confident that we can continue to execute on our capital plans going forward.

Now we also fully recognize the importance of our organization to the financial marketplace and that our reputation is an asset that we must uphold every day.

To further protect and enhance our safety and soundness we are investing and focusing on compliance, risk management and control functions.

We've recently resolved some very important issues on that front and the actions we've taken will significantly reduce the probability of future issues.

Our fourth priority involves generating excess capital and deploying our capital effectively.

So during the quarter we repurchased 10.3 million shares for $400 million and our capital plan calls for the repurchase of up to $3.1 billion of common stock over a five-quarter period.

And finally our fifth priority is to attract and retain top talent.

We've been executing against an integrated talent management strategy across the entire Company and have been focused on developing talent from within as well as infusing expertise with key strategic hires in areas where we benefit from new perspectives and capabilities.

We recently promoted several individuals identified through our talent management process to greater responsibilities including our newly formed BNY Mellon technology solutions group, global fund accounting, middle office solutions and our European bank.

Additionally we added key external talent including a new chief auditor and a new Board member who is our fourth new director in less than a year.

Fresh perspectives, ideas and the right team composition make us stronger.

So in summary, we're executing against our priorities and firmly believe we are on track to achieve the earnings, expense and operating leverage goals we outlined for you on Investor Day.

So with that let me turn it over to Todd.

Thanks, Gerald, and good morning everyone.

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

As Gerald noted EPS was $0.67.

That's up 18% versus the year ago.

Revenue in the first quarter was up approximately 4% year over year and 3% sequentially reflecting growth across all of our key businesses with particular strength in asset servicing, clearing services and foreign exchange.

Expenses were down 2% year over year and 1% sequentially as the business improvement processes helped to increase efficiency and reduce our cost.

Our ability to drive revenue growth and control expenses resulted in a little more than 500 basis points of positive operating leverage year over year.

Now let me point out that we've estimated that the stronger US dollar reduced our revenue by approximately 200 basis points and it reduced our expenses by approximately 300 basis points and had a slightly negative impact on total net income.

The business most impacted was Investment Management while currency had less of an impact on our Investment Services business' net results.

We've added new foreign exchange metrics on page 6 of the news release and that's going to help you capture the impact of the two currencies.

If you look at that you'll see that the pound was down approximately 9% year over year and the euro was down 18%.

So I'll discuss briefly the estimated impact of each of our business unit as I cover the segment results.

Income before taxes was up 16% year over year and 11% sequentially.

On a year-over-year basis our pretax margin increased approximately 300 basis points to 30% and that's up from 27% in the first quarter of 2014.

Return on tangible common equity was 20%.

Page 7 shows the drivers of our Investment Management business that help explain our underlying performance.

We had 7% year-over-year AUM growth and $17 billion of new net inflows during the quarter.

You will also note that we experienced net outflows in equities in the quarter while our LDI business continued its rapid growth.

Our wealth management business also is performing well benefiting from our investments in promoting our brand and the expansion of our sales force.

Average loans and deposits continued to trend up.

Turning to page 8 you can see our financial results for Investment Management.

As I previously noted Investment Management was most impacted by currency translation since we have a large number of our boutiques outside of the US and it results in about 42% of our revenue actually being non-US.

First-quarter Investment Management performance fees were $850 million.

Investment Management fees were up 1% year over year or 7% on a constant currency basis reflecting the higher equity market values, the impact of the Cutwater acquisition and strategic initiatives.

We had performance fees of $15 million.

That compares to $20 million in the year-ago quarter.

Other Revenue was $47 million in the first quarter up from $16 million in the first quarter of last year and $7 million in the fourth quarter.

Both increases primarily reflect higher seed capital gains.

The sequential increase also reflects reduced losses on hedging activities within one of the boutiques.

Net interest revenue increased 6% year over year and 7% sequentially reflecting the higher loan and deposit levels mostly at the private bank.

Revenue growth on a year-over-year basis was up 4% in Investment Management but adjusted for the currency translation we estimate it would have been up about 9%.

Earnings were also negatively impacted.

Income before taxes excluding amortization of intangible assets was up 6% year over year and 7% sequentially.

Turning to our Investment Services metrics on page 9 you can see that assets under custody and administration at quarter-end were $28.5 trillion.

That's up 2% year over year and that's really driven by higher market values, net new business and partially offset by the stronger US dollar.

Linked quarter AUC/A was flat; adjusted for currency effects year over year growth would have been roughly 5%.

The market value of securities on loan at period end showed strong growth on a year-over-year basis.

Securities on loan were up 10%, they are now at $291 billion and that's due to the expansion and the receipt of securities as potential collateral as well as the impact of new clients joining our lending program and existing clients increasing their lending activity.

Average loans and deposits were both up significantly here as well.

The key broker-dealer metric of tri-party repo balances grew 9%.

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

Moving on to depository receipts metric we've had a focus on exiting some of the low activity programs, the ones that are at the lower end of our client base, as well as programs that do not meet our profitability criteria.

This continued with the routine closure of programs due to corporate actions has resulted in a net decline in the number of sponsored DR programs in the portfolio.

On page 10 you can see detailed segment reporting for Investment Services.

The key variances are reflected in Fee and Other Revenue on our consolidated results on page 11, so let's move to that page where you will see that asset servicing fees were up 3% year over year and 2% sequentially.

The year-over-year increase primarily reflects net new business largely driven by global collateral services and securities lending as well as the increase in market values.

The sequential increase primarily reflects higher client expense reimbursements and higher security and lending revenue and global collateral services fees.

Both increases were partially offset by the stronger dollar.

Clearing fees were up 6% year over year and down 1% sequentially.

The increase from the first quarter of 2014 was primarily driven by higher mutual fund and asset-based fees and higher clearance revenue driven by higher DARTS volume.

The sequential decrease primarily reflects fewer trading days in the first quarter.

Issuer service fees were up 1% year over year and 20% sequentially.

Both increases reflect higher corporate actions and DRs.

Additionally corporate trust fees seem to have stabilized.

Treasury services fees were up 1% year over year and they are down 6% sequentially.

The sequential decrease primarily reflects seasonally lower payment volumes.

FX and other trading revenue on a consolidated basis was up 68% year over year and it is up 52% sequentially.

For this line item you can also refer to the table at the top of page 8 in the news release to see the details I'm discussing.

FX revenue of $217 million was up 67% year over year.

That's 32% sequentially, reflecting higher volumes and volatility as well as DR related activity.

Other trading revenue was $12 million and that compares with revenue of $6 million in the year-ago quarter and a loss of $14 million in the fourth quarter.

Both increases reflect higher fixed income trading revenues.

The sequential increase also reflects reduced losses from the hedging activity by one of our investment boutiques.

Investment and other income of $63 million was $39 million lower year over year and that was driven by lower leasing gains.

One final impact on the currency impact on our Investment Services business, while less impact than we see in Investment Management we estimate that both revenues and expenses would have been up roughly 2% on a constant currency basis, would have been up by an additional 2% on a constant currency basis.

Pretax income was not meaningfully impacted.

Turning to net interest revenue on page 12 of the financial highlights you'll see that NIR on a fully tax equivalent basis was unchanged versus the year-ago quarter and up 2% from the fourth quarter.

Year over year the increase in deposits drove growth in our securities portfolio and offset the impact of lower yields.

The sequential improvement reflects the benefit of putting more cash to work as you can see in loans and securities which also increased our margin for the first time in years.

The net interest margin for the quarter was 97 basis points, 8 lower than the year ago and 6 from the sequential quarter.

On page 13 you'll see that noninterest expense decreased by 2% year over year and 1% sequentially.

The year-over-year decrease reflects lower expenses in all categories except the sub-custodian expense which is volume related and other expense.

And I should point out that other expense includes the impact of the new European Union Single Resolution Fund as we're accruing our estimated annual contribution requirement.

The lower expenses primarily reflect the favorable impact of the stronger dollar and we're seeing the impact of our business improvement process here as well.

Total staff expense decreased 2% year over year.

As you might have seen in our annual report we elected to freeze the defined benefit plan and we replaced it with a defined contribution plan.

In the first quarter we recognized a $30 million benefit related to the curtailment of the defined benefit plan.

For the full-year we expect to have a positive benefit to the DB plan itself resulting in a $10 million net credit and that includes the curtailment gain we just received.

In addition we expect to have about $12 million of additional expense in the back half of the year for the participants that were formerly in the defined benefit plan.

As a result you can expect benefits to increase about $30 million in the second quarter.

Our headcount was 900 lower year over year.

There was a sequential increase of 200.

That reflects the onboarding of employees related to the January Cutwater acquisition, the liftout of the Deutsche Bank private equity and real estate administration business and new hires to support several large client onboarding initiatives.

The decrease in total staff expense was partially offset by higher incentives reflecting better performance as well as a lower adjustment related to finalization of the annual incentive awards and the impact of long-term stock awards vesting for retirement eligible employees.

Both of these last two items typically occur in the first quarter.

As a reminder, the first quarter usually has a spike related to long-term awards and we would expect incentives to decline in the second quarter by somewhere in the vicinity of $65 million based on performance.

On our last earnings call I told you that our occupancy costs should rise related to the sale of One Wall Street as we move into our new facility which would result in double rent in 2015.

This increase was not reflected in the first quarter because it was offset by the outsourcing of maintenance costs, a stronger dollar and the subletting of some vacant space.

For the full-year we still expect occupancy costs to increase as we've previously indicated as we take further actions in our real estate portfolio.

Turning to capital on page 14 with respect to our capital ratios this quarter the fully phased-in common equity Tier 1 ratio under the advanced approach declined from 9.8% to 9.1% and that was driven by an increase in risk-weighted assets primarily related to operational risk.

Now as we've highlighted in previous periods our operational risk model is impacted by external losses incurred by other financial institutions.

This quarter one notable external loss in the payment space flowed through our model and added approximately $11 billion of risk-weighted assets and therefore negatively impacted our ratio.

I might want to add here and let you know that in the second quarter we expect to have a benefit to our risk-weighted assets as we believe we will be deconsolidating many of our investment management funds as we intend to be an early adopter of the recently issued consolidated accounting standard.

So we effectively expect to reverse the impact of what we saw in the first quarter.

Our estimated supplemental leverage ratio increased to 4.5% as we generated capital and reduced the average balance sheet size slightly.

Our estimated LCR is already over 100% and compliant with the fully phased-in requirements which is 80% and will step up to 100% over the next couple of years.

Now a few final notes about the quarter.

As you'll see in our release, our effective tax rate was 24.4% but that includes 2% benefit related to income with the variable interest entities which if you included it in the in-line -- excuse me if you included that in our numbers our tax rate would be in line with the guidance of about 26% so I think that's the appropriate way to look at it.

I'll also point out that we have increased our tax-advantaged investments including energy credits which are now having the effect of reducing our tax rating but also reducing our pretax income and therefore our operating margin.

So if we were to gross up the revenue from the tax credits and report the impact on the tax equivalent basis, our pretax income would have been higher by about $64 million and our operating margin would have increased by approximately 120 basis points.

We have elected to disclose this impact in a footnote on page 25 of our news release rather than include it in our financials.

But we think it is important as we make these investments and you see a reduction in some of the pretax.

Also in the earnings release on page 11 are some investment securities portfolio highlights.

You will see that the net unrealized gain on our portfolio was $1.7 billion at quarter-end.

That's up from $1.3 billion at the end of December.

During the quarter we transferred $11.6 billion of available-for-sale securities to held-to-maturity securities and we also purchased additional held-to-maturity securities during the quarter.

Our strategy is designed to reduce the volatility of our capital account from interest rate fluctuations.

Now I'd like to discuss a few points to factor into your thinking about the second quarter and the year as we look ahead.

Net interest revenue is expected to be slightly higher in the second quarter as compared to the first quarter of 2015 as we benefit from the change in the asset mix and day count.

We would expect incentives to decline in the second quarter from the first quarter as they did last year.

We expect Investment Management to continue to be impacted by the strength of the US dollar due to its non-US presence while the impact of the overall Company is expected to be nominal.

The effective tax rate is expected to be in the range of 25% to 26% and we anticipate proceeding with our capital plan subject to market conditions and any other factors.

To summarize we are achieving results consistent with the goals we shared at Investment Day, executing against our strategic priorities and on track to continue to hit our Investor Day targets.

With that let me hand it back to Gerald.

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

(Operator Instructions) Ashley Serrao, Credit Suisse.

Good morning.

Gerald, a two-part question on headcount.

One, I was hoping you could help me just reconcile your commentary from the shareholder meeting where you noted that the Company looked good on a revenue per employee metric but then at the same time you've reduced headcount by over 1,000 positions over the course of last year.

And two, as we think about the potential for you to leverage technology across the franchise why shouldn't this decline in headcount continue?

Well as you know last year we took increasingly aggressive action on the headcount side and were able to get some structural changes to our headcount.

We saw actually a continued positive trend in the first quarter of this year except for the fact we've acquired a couple of pieces of business and we've been building out some capabilities for some new clients in certain key areas.

Clearly our goal as part of our business improvement process is to drive down the labor component of our Company and use technology as a strategic asset.

So one of our goals is to get the revenue per employee up, the employee expense down and use technology as a strategic asset to get there.

So that's clearly part of our plan is to reduce that employee headcount per revenue.

Great.

And my follow-up is for Todd.

On the balance sheet and reinvestment of cash how much more runway do you have there and then can you give us a sense of the duration and reinvestment yields here?

Thank you.

Sure, Ashley.

Why don't we start with duration.

So what we've effectively done is we've got about half of the duration of the portfolio or call it half of the rate sensitivity of the portfolio in the held-to-maturity and about half in the available-for-sale account and the duration of the total portfolio is probably around 2.5.

So we've softened the -- dampened the volatility pretty substantially to our OCI movements in interest rates.

We still are structured to see some pretty significant benefit from a rise in interest rates -- so if we wanted to -- in our net interest income as well with some fee waivers in other parts of our portfolio.

So if we wanted to we could probably continue to increase the portfolio a bit.

LCR is not necessarily a limiting factor here because we can increase the duration of our HQLA assets which is effectively what we've done here.

So I would say there is a little bit of room there, Ashley, but not a lot.

Great, thanks for taking my questions and congrats on the strong quarter.

Luke Montgomery, Bernstein Research.

Good morning, guys.

Just another stab at the headcount question.

Investors are claiming that your firm has too many employees relative to comparable peers and the difference isn't explained by business mix.

I think, though, if you adjust for the sale gains you had last year it looks like the comp to revenue ratio has been tracking just a couple percentage points higher than your closest peers.

So maybe there's a little work to do there, you acknowledge the plan.

But I think the sensible question is whether there are underlying explanations like lower-cost offshore support or outsourcing by others that you don't do, maybe labor intensity of the businesses you had that they don't.

So I just wanted to give you an opportunity to speak to that.

Luke, thanks.

There's a couple of things that you should factor into your thinking on a comparable basis.

One, we've been insourcing our application developers where others have been either outsourcing it or moderating it but we're actually getting more capacity for less dollars in our technology applications by insourcing those capabilities and we laid out some of those numbers for you last week and in prior weeks.

The second issue is we do internally transfer agency businesses both in the US and in Europe whereas our principal competitor actually does it through a joint venture or outsources it.

Transfer agency services are very labor-intensive and therefore if you were to combine the outsourcing or joint venture arrangement with our competitor you'd probably find a larger headcount on a percentage basis than we may experience.

Last but not least we do have things like corporate trust and clearing services, treasury services that some of our competitors do not have.

They do have a labor component associated with it but they are also good operating margin businesses.

So I think that's where the comparable basis starts to bring into question the headcount versus revenues.

That's why we're focused on the revenue per employee and I think we compare very favorably to other institutions.

Our goal is still to improve in that category and our goal is to still improve the operating leverage of our Company.

That's what we laid out at Investor Day, that's what we're committed to delivering.

Great, thanks for that.

And then as a follow-up I wonder if you might take a stab at breaking out employees by business or maybe consider adding some disclosure to that in the future?

Okay, we'll give it some thought.

Thanks.

All right.

Thank you very much.

Brennan Hawken, UBS.

Good morning.

A quick question on FX.

Pretty solid this quarter, nice bounce back from last quarter.

Was DR switching to a tailwind here this quarter or was that neutral and did some of the adjustments that you made to that business that you reference in your prepared remarks help to make that -- help to impact that revenue line here this quarter?

You had a couple of questions there, Brennan.

In terms of DRs, DRs were a little stronger in the first quarter and some of that was timing from things that we've seen in the fourth quarter.

So we did get a benefit of that and there are some FX related to corporate actions in DRs and so we did get a pickup there.

Then some of the FX was substantial increases in volumes which is somewhat market related as well as us trying to capture on the systems more of the volumes.

Then the remainder of the pickup was market driven with some of the events in the Swiss and the higher volatility that we saw in the first quarter.

Okay, thanks for that.

Then I know you referenced that you expect asset management margins to improve on the German divestiture but is it possible to quantify the impact to the margins there?

Curtis, do you want to --

The Meriten business was not a huge contributor to our overall pretax and was a modest contributor to both revenues and expenses.

But the strategy around our divestiture ended up being that we really do have strong fixed income capabilities in Europe and other boutiques and the business didn't drive a significant amount of pretax such that it made sense to continue to have as much of an offering in Germany as we had there.

So it's not going to be a dramatic impact on margins but absolutely positive.

Okay, thanks very much.

Alex Blostein, Goldman Sachs.

Great, good morning everyone.

Todd, a question for you on the balance sheet, actually a couple questions there.

So your comment earlier around putting some of the excess cash to work I was wondering if you guys could quantify that.

We obviously see the mix of the balance sheet moving out of the cash and cash sitting at the Fed into securities portfolio.

How much I guess of the excess deposits you guys could consider moving over time?

And should we I guess take that maybe as a sign of confidence that you guys are starting to see some of that non-operational cash becoming operational in your view and that's why you're doing that?

Yes, I think A there's greater clarity or there is perfect clarity now around the -- I shouldn't call it perfect.

There's better clarity around the LCR, Alex, which gives us some confidence in how the HTM account would be traded under the LCR.

So we have put prudency limits around how far we would go with that.

So if you can see in the quarter I think cash declined by about the size of the increase in the securities portfolio.

We do have a very stable core deposit base, well in excess of the amount of cash that we or securities that we have in the high-quality liquid assets that are in the HTM account.

There is probably a little bit more room for that.

I think most of what you'll see us do now is work on both the assets in the non-HQLA to see if we can bump up the yields a little bit and the assets in the HQLA with the same push.

But we're sticking we're at 97 basis points of NIM.

Our guidance was 95 to 100 in a zero rate environment and I'm going to try to stick with that, Alex.

I think that's probably the best estimate of where we're going to be.

Got you.

And then a follow-up on just the overall size of the balance sheet.

So this is the first decline in average earning assets of this size we've seen from you guys in a while.

Just curious I guess where is the decline in deposits coming from, what kind of client base is that and where is it going just to get some better sense of the moving pieces there.

It is not -- as you look into the details Alex you will see it's not in our deposit base.

Our deposit base was about flat to up slightly.

Where you see it is in other borrowed funds and occasionally we do put securities out on repo and we'll take advantage of some interest earning opportunities.

There were less of them so we brought down the balance sheet by $10 billion.

So that was self-induced by our treasury team.

Got you.

Great, thanks so much.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

Couple of questions.

One on just on SLR.

You made a little bit of progress this quarter, just wanted to understand how much of a benefit the deconsolidation of those investments you mentioned earlier were going to have?

If you could refresh our memory on that as well as opportunity to improve maybe sooner rather than later with pref issuance.

Go ahead.

In terms of the deconsolidation we think it's probably in the ballpark of about 2% of the assets, so if it's 2% we've got a 4.5% ratio.

You can do the arithmetic, about 9 or 10 more basis points there, Betsy.

It's not a huge mover but every little bit helps and there's obviously there's no cost to doing that.

As we disclosed in our CCAR we are giving some consideration to doing a preferred and preferred could be an additional it's a cheaper source of capital obviously than common and it may be something that we could do on our path to compliance if we felt it was appropriate, based on what we see happening to the deposit base.

The deposit base is relatively stable.

It might be up a little bit since the end of quantitative easing.

But I think there's going to be some shifting around and the future of the deposit base is going to be a function of how the Fed actually conducts its monetary policy.

Okay, and then just separately on clearing we had heard from JP that things get tougher there's the possibility they might fade the clearing business.

How do think about that?

How do you think about the future of clearing?

Is there any efforts to potentially put clearing into a shared entity industry shared entity?

Why don't take part of it and then I'll turn it over to Brian Shea.

So Betsy as you know we have two forms of clearing businesses.

One is the institutional side, the broker dealer clearance business where we have a very significant market share.

It's always been the basis for some of our tri-party collateral management capabilities.

It's allowed us to build our collateral management and enhance it on a global basis so it's been a core business for us and it's a differentiator for us in the marketplace.

As you may know the Federal Reserve is our client in that space as well on the reverse repo program so we see it as an important activity.

We're mindful of the fact that central clearinghouses and other market participants want to utilitize some of those activities but today it's a good earner for us.

We're investing in it and it's allowing us to bring to market new capabilities.

At our other clearing business which is really a financial advisory solutions platform, i.e., Pershing, we see that as an incredibly strategic asset for the Company growing very, very nicely.

Wealth managers, private banks, advisors around the world want to utilize that platform to serve the end investor.

That's a strategic growth asset of our Company and Brian you may want to add some to it.

I think you've did a terrific job, Gerald.

Nothing to add.

Okay.

Okay, thanks.

Ken Usdin, Jefferies.

Thanks, good morning guys.

Hey, I was wondering if you could talk about we've gotten to the point where it seems like we may have seen that turn in professional, legal and other services, you guys have taken care of a bunch of the litigation and I'm just wondering if you can give us a line of sight there.

That's been the second biggest category, that's been a pressure on earnings for quite a while.

Are we at an inflection point there?

Are you at the point where you can at least feel confident that we've peaked or are starting to turn down?

Yes, I think, Ken, there are a couple of items there.

A lot of our purchased services are things like data sources and information that we use to run our business.

Our procurement activities are actually helping us drive some of those services down.

We think there actually is a little bit more room there.

In terms of the management consulting and some of the consulting expenses that we are incurring related to some of our major platform initiatives, those will probably be running at the rate that we're seeing now or in the ballpark.

There was quite a spike in the fourth quarter.

We wouldn't expect that to recur, but they could be in the same level that they are at today.

Legal is a little bit early to call.

There should be a piece dividend with our settlement, so we might see some benefit out of that for some of our litigation defenses which also fall on that line.

So I think in the short-term, I'd look for it to stay down at this level that we saw it come from, come down from in the fourth quarter.

There might be some room going out, but at this point I don't think I'd really give guidance to a big number yet.

Okay.

And my second question, maybe one for Curtis just on, in the Investment Management business, Todd, hearing your points on the effect of FX.

But the growth rates even adjusted for the three individual investment management lines are somewhat subdued, meaning it implies that the fee capture rates look like they are still under some pressure with your mixing still into LDI and out of active equity.

Just wondering if you can shed some additional light on just continued optimization there and what should we expect as far as the outlook for fee capture?

Yes, so fee capture when you blend assets we have fees that are very different in each asset class and so what we have seen is the fee capture declines really have been a result of the success of our rapidly growing LDI business.

So LDI, again the US LDI and European UK specifically LDI businesses are somewhat different.

The biggest part of our LDI business is in the UK and Europe through Insight and they have continued to garner assets as pension plans are de-risking.

The business that business is actually quite active business.

You're trying not just to manage against an interest rate liability but also an inflation liability.

They earn both base fees and performance fees.

So when they perform well their fee realization is actually meaningfully higher but again what's happening on the total fee capture is that the declines, we covered this at Investor Day you may remember, Ken, that it really has a lot to do with the fact that our LDI business is growing so rapidly.

But again it's not a passive business, it's very much an active business and much of our performance fees over the past many quarters have been from our LDI business.

Okay, thank you guys.

Mike Mayo, CLSA.

Hi.

I have one question with three parts.

At the annual meeting new Director Ed Garden said that Bank of New York is focused on being best-in-class in everything we do.

So first are you benchmarking versus best-in-class?

Second, what is the best-in-class number for ROTCE and the margins for Investment Management and Investment Services?

And third when you look at best-in-class wouldn't it be more appropriate instead of looking at revenue per employee to look at net income per employee and on that measure it seems like you rank below peer?

Thanks.

Thanks, Mike.

We certainly aspire to be best-in-class in everything we do and to be recognized as the industry leader in the areas we operate in.

We do metric ourselves against a variety of different institutions and a variety of different metrics to try to achieve those goals.

We've challenged our teams across the Company to aspire to those metrics.

For the public consumption we give you broad metrics.

It's tough to give you every single metric that we are operating the Company within and so things like fee-to-expense ratio across Investment Services we see continuous improvement there.

The revenue per employee is admittedly a broad metric but it's an indicative metric of one of the things we're trying to work towards.

We look at client surveys, client satisfaction surveys.

We measure those.

Those that we shared with you at the shareholder meeting last week are extremely high scores.

We want to get to 100%.

I'm not sure we'll ever get there but those are some of the things we're trying to work towards, things like straight-through-processing rates, accuracy rates are all things that we measure in Investment Services.

On the Investment Management side we look at the investment performance of the boutiques and the asset classes versus their fee realization.

So we have a lot of metrics across the Company where we're aspiring to be the best in everything we do.

Will we always get there?

It will be a challenge to get there in every single category but that's certainly our aspiration.

One follow-up then because last week you did mention the revenue per employee and after getting back to my desk and looking at net income per employee you didn't look quite as good or underperformed peer.

So why is revenue per employee the right metric to look at instead of net income per employee and also when you sell your German boutique will that help that metric and can you elaborate on that sale because that seems new?

Mike, whether it's revenue per employee or net income per employee I think they are a metric.

But I think the metric ultimately that you need to follow is what is happening to our operating margin and how are we performing because if we insource or outsource whichever way you go there's good reasons for one company to do it one way versus another doing it another way.

Ultimately it's got to drop to the bottom line.

And I think what you've seen in our performance this quarter a 300 basis point increase in our operating margin is pretty substantial and we continue to focus on driving the margin.

We think the strategies ultimately will pay off.

We think the insourcing of our application developers not only do we have the intellectual property close to our clients which can make us the best-in-class in terms of providing technology solutions we also have it at a lower cost because we own it and that's being reflected in our technology costs which are declining.

So I think that's how ultimately you have to measure us because it's just too hard to tell exactly what's going on with headcount and how people compute it and whether they've got contractors in versus full-time employees and so forth.

In terms of Meriten I'll turn it over to Curtis.

Yes, thanks Todd.

One thing I would want to make sure that we highlight is that we in addition to selling Meriten we also acquired Cutwater.

There is actually a net reduction in staff as a result of that but it's not going to meaningfully change any of the metrics that you're looking at, Mike.

So that really was a strategic repositioning of our portfolio.

Again we had more fixed income capability in Europe than we felt like we needed and we also want to grow Insight's terrific LDI capabilities in the US.

So partnering them with an excellent firm at Cutwater really was we thought a fantastic move.

So I just want to make sure we capture both of those.

Yes and I think Meriten is part by itself it's not going to move the needle a lot.

But as we pore over the portfolio, as we change our derivatives business, as we streamline our capital markets activities, as we exited the futures clearing margin, as we exited two corporate trust activities in Japan and Mexico, now throw Meriten into that, as we continue to pore over what makes sense in aggregate they are starting to move the needle.

All right.

Thank you.

Brian Bedell, Deutsche Bank

Hi, good morning folks.

Maybe just following along that path on the actual cost saves from strategic actions and maybe if you can just update us on the aggregate level of cost saves on a year-over-year basis that you expect from consolidating some of the back office platforms in asset servicing like moving to the one platform in custody?

So Brian, this is Brian Shea.

We continue to drive forward with our business improvement process which you know is transforming for success and as Gerald mentioned earlier we're going across the board.

So from a business excellence perspective Todd just talked about the business portfolio review actions.

Meriten was the latest in a series.

We continue to drive more leverage across the franchise in terms of enterprise teamwork.

We're executing on a global location strategy to reposition people to lower cost locations.

We've talked about the insourcing of technology development which not only improves our speed to market and intellectual capital leverage but it also reduces our cost and reduces our dependency on contractors and the consultants.

We are moving forward with platform consolidations.

In the latest quarter or in the last month we've completed the final stage of our corporate trust re-platforming to our target platform and that will enable us to retire another large historical legacy platform of the Company.

So there's lots going on but the key message I'd say is one, we gave you a target at Investor Day.

We're going to meet that target and we're on track to meet that target.

And the work that we're doing is not one-time cost driven, it's sustainable continuous improvement.

And so we believe we can continue to drive improvement in this process over the long term.

And Brian, I would just add that we've learned the lesson of announcing a big program and then delivering on the program.

And unless it shows up in the operating margin and the operating leverage it doesn't count and it's showing up in the operating leverage and in the operating margin.

So our margin went up by 300 basis points from the first quarter of last year.

Our fee to expense ratio has improved in Investment Services and we produced over 500 basis points of operating leverage.

Those are the facts.

And I would add to that, Brian, all the actions that we're taking to streamline the organization and the transformation that Brian just talked about make us a little simpler, a little less risky.

But there are also continue to be significant regulatory requirements for us, the resolution planning, meeting some of the data requirements that are substantial.

So the regulators continue to increase the bar and we need to be prepared to be able to fund those investments and some of this will drop to the bottom line and some of it will enable us to fund the increasing demands from the regulators.

Right.

So that remains the wildcard on the regulatory front from an expense perspective it sounds like.

Yes it does.

And then just to follow up this might be too early to try to figure but you talked a little bit about the NEXEN platform at the shareholder meeting.

Maybe if you could is there a way to quantify the competitive advantages you think you will be able to get from that from new product rollout, some of the internal sourcing that you just mentioned say over a two- or three-year period from a revenue perspective?

I wouldn't want to give you a specific revenue target but I can say that we're committed to be the investment industry technology leader.

Part of the insourcing strategy that we mentioned is not just around being more cost-effective, it's about transferring domain business knowledge into the technology development team in a way that creates a competitive advantage.

NEXEN will be a visible manifestation of that to our clients.

It's the sort of next-generation technology platform that's going to allow us to connect the various applications across the various businesses and deliver a more seamless and state-of-the-art intuitive platform to BNY Mellon's clients.

It is based on a secure cloud-based, private cloud-based platform which accelerates our speed to market for new capabilities and actually reduces our cost of infrastructure.

It has an API marketplace essentially allowing seamless integration with our clients and so we'll be an easier firm to do business with and integrate with from a technology perspective.

It will be completely mobile in a way that we deliver, so any mobile device anywhere any time people will able to connect through NEXEN.

It has the equivalent of an app store which means that we're going to be able to easily integrate third-party providers of choice into the platform so that we reduce our clients' vendor management and integration cost.

And ultimately it will be the delivery vehicle for our big data solutions which we're already developing and delivering to clients in the area of liquidity management, collateral management but will allow us to deliver insights to our clients.

So we're rolling this out internally beginning this quarter and we will start rolling it out to customers in the second half of the year for selected businesses.

And over the course of 2016 we'll roll it out more broadly to the broader client base.

I hope that helps.

Yes, that's good color.

Thank you.

Glenn Schorr, Evercore ISI.

Hi, thanks very much.

Question in money market land, I'm curious if you feel like you have the product offering set where you wanted to be as we transition next year?

And what kind of sensitivities you think you're looking at in terms of client balance migration prime funds to treasury funds and what kind of fee give up and fee waiver give up that we're thinking gets recaptured that might not be based on how clients migrate?

Hey, Glenn, it's Curtis.

Let me give you the view from the Investment Management perspective and then maybe Todd or Brian can talk about it on the other side.

So first of all you are seeing people reposition their money market offerings as we get closer to next year's floating-rate NAV for institutional prime funds and we've actually been spending a lot of time on that as well and so not ready to announce anything just yet but I think it's fair to say that the industry will position itself for what we do believe will be a shift in assets.

There are a lot of people who currently institutional clients that use fixed NAV prime funds that will not be able to have them be in a floating status.

So we know assets are likely to move.

We continuously survey our clients and not just across Investment Management but the whole Company.

We're obviously a very large player here and we do believe that between the third and 50% of clients will shift to treasury funds.

And so to answer your question about what that means from a fee waiver perspective it's very significant where interest rates are when that occurs.

Fee waivers are more challenging in treasury funds so if in October 2016 interest rates haven't moved there will be a negative impact from fee waivers from that activity.

One of the other things that is somewhat offsetting to, though, and you've seen some banks begin as SLR is having an impact changing their views on deposits.

So we have absolutely seen hedge funds and other clients who would have left deposits on bank balance sheets move those to money market funds.

And so we're actually in the first quarter across our platform and within the Investment Management we saw balances remain relatively stable.

The seasonality would have suggested that they would have been down somewhat, so there's a growth in money market funds occurring as a result of regulation, so there's some countervailing forces at play here.

So I think, Glenn, for the Company as a whole that if interest rates were to stay at zero and you did see a movement from prime again what Curtis just indicated is the movement you're seeing into treasury funds is not necessarily coming from prime right now it's coming from bank deposits.

But in the event as we move forward with money market fund reform we would expect prime to go more toward treasury.

And if interest rates stayed at zero that would be a negative for us because there's lower yield in treasury and therefore there are going to be a modest increase in fee waivers as a result of that.

If interest rates normalize then the recovery track of fee waivers would be as we've described it.

Got it.

Okay, I appreciate it.

And then just one little catch up on occupancy cost.

You mentioned that we couldn't see the double occupancy cost in first quarter.

I just want to make sure they were there but they were offsetting items because I just want to make sure we're modeling second, third and fourth quarter correctly.

Yes, let me clarify that and make it absolutely clear.

So yes, we are paying the double rent.

We had a little benefit from currency translation.

We also had a little benefit from our outsourcing of maintenance which falls through that occupancy expense line.

And in addition some of the costs associated with the move have not been reflected in that line.

So I think the best guidance I could give we had indicated that we thought the line would be up about $30 million for the full-year.

It's probably best to think of it at about that amount.

Okay, I appreciate it.

Thank you.

Jim Mitchell, Buckingham Research.

Yes, good morning.

Maybe just a quick follow-up on the deposit discussion.

Obviously given leverage constraints across the industry it's sort of a difficult problem for everybody.

How do we think about it long term?

Is it more of that hey, we can't really tell our clients what to do because we don't want to lose relationships and push deposits down like a JPMorgan and longer term the economics with higher rates you kind of get to a crossover point where you actually earn your cost of capital on those deposits?

Is that sort of the strategy that or is there something more proactive you can do to push down leverage and move into money markets?

Just wondering if there's any kind of constraints on money markets for a lot of corporate treasurers if they have a risk of being locked up for 30 days and things like that?

Well why don't I start and I'll turn it over to Todd.

One, it's a very dynamic situation.

As supplemental leverage phases in and we work our way towards it obviously the level of the balance sheet becomes increasingly more important.

We'd like to earn some money on those deposits in the short run.

We're watching our deposit base and our client activity.

We clearly want to try to drive the deposit base towards operational deposits which have a more favorable treatment.

We're educating all of our teams around the Company around client activity whether it's operational deposits or not and therefore the value associated with them.

That helps us engage with our clients better and really drive better outcomes for our clients and ourselves.

So it's a very dynamic situation.

We're very engaged with our clients on it.

Where we think it's appropriate as we've done in Europe where we're charging for deposits we are but we're modeling this and watching it very carefully.

Yes, Jim, I would just add to that that it's hard to predict how deposits are going to move until you are clear about what the Fed monetary policy is going to be.

So if they are drained in a traditional way which would be through reverse repo then we would think deposits would run off and it would be price based.

Another alternative is literally just to price them.

So there are going to be nonoperational deposits which mean they aren't very attractive under the LCR and I think banks will be not willing to pay a lot for them especially if they are somewhat constrained by the SLR ratio.

In the event that interest rates rise and those deposits want to stick with institutions that are very strong institutions, there will be a crossover at 60 or 70 basis points that looks pretty attractive as a return on capital even just leaving it at the Fed.

So there might be a point where you'd probably raise some preferred or capital just to keep the balance sheet, keep them on the balance sheet and make a very -- actually a zero risk return but a decent return on regulatory capital.

Okay, thanks for that.

That's very helpful.

Then maybe a quickie on the net share count.

I think you last year's buyback net of employee stock issuance was about I guess 35%, 40% dilution.

Is that the way to think about it going forward or should we think about the employee issuance is more of a fixed cost and as the buyback increases the net share count reduction improves?

It's relatively stable so you'll see a little bit of a higher one as the buyback increases but not a lot.

So you should still think in the same terms that you just mentioned that there will be share issuance with the employees, in that kind of a ballpark.

Okay, great.

Thanks a lot.

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning.

A couple of questions on Investment Management.

Specifically on the multi-affiliate model I appreciate your comments so far on Meriten and Cutwater and Insight.

Just more broadly across the affiliate portfolio, is there additional streamlining that you're thinking about?

Are there capabilities that you're looking to add or maybe some affiliates that are subscale?

Just more broadly how are you thinking about the affiliate portfolio?

Thanks.

Yes, so one of the things that we announced recently was the formation of actually a new investment boutique from start with the state of Texas as a cornerstone investor.

We actually launched a firm called Amherst Capital and it's designed in many ways to benefit from a lot of regulatory changes that we're talking about where banks are having to hold more capital.

Much of the changes in real estate finance have been impacted by that and so that boutique will actually manage funds in real estate finance as a result of this change.

So that's an example of the kind of thing where we are continuously looking for places where we believe our clients can earn some very attractive returns relative to their liabilities and relative to their needs.

And so one way that we manage our portfolio is by starting new things, launching new things and it was a great thing to have a very well-known, sizable institutional client launch that with us.

On the other hand the Meriten sale very much was looking at our portfolio and seeing the great growth that we've seen from other investment firms in our mix so both Insight, Standish, Alcentra, Newton even has some very good European fixed income capabilities.

So when we feel like our capabilities get to the point that there is a more attractive owner of the firm we have sold it.

In the past we've closed firms that became subscale or didn't deliver the investment performance.

We're always looking to find those investment capabilities that we think are excellent that fit needs that we think our clients have and that are in line with market trends such as the one I describe around Amherst.

It's a continuous process.

I will tell you that we are not traders of our investment boutiques.

I want to make sure that we don't send that message because the truth of the matter is we are trying to have an investment lineup that satisfies the complete solution for our vast global client base.

And again the Meriten enterprise by itself is not a core strategy of ours to sell firms but really just make more sense to do something different.

The Cutwater acquisition again expanding pension de-risking capabilities into the US is a major market trend and that's why we made that acquisition.

Makes sense.

Thank you for the color.

Then just turning to the equity capability which stands out a little bit from an otherwise strong franchise on those terms are there product gaps that maybe you're looking to fill?

Is it a question of current products maybe being out-of-favor or mainly a performance issue?

I know you've done some work on distribution and how is that coming to fruition?

Yes, so thanks for that question.

It's a good one.

Again most of the assets under management that we have are with institutional clients who are very disciplined around rebalancing.

And so as equity markets have performed well the client base that we have is very thoughtful about managing their overall asset allocation.

And so rebalancing has absolutely been a big part of the trends we see not just this quarter but in previous quarters.

We look across the industry and some of what we see in retirement channels and in the retail channels there has been less volatility.

There are absolutely inflows into some equity products and a lot of the investment we've been making in our wealth management business and in our US retail intermediary business have been around being able to capture those flows.

And just year over year I can tell you US retail across all products had a very nice uptick about 60% increase in sales and our wealth management business is also showing some very nice growth.

In active equity we have seen some impact at the institutional level where clients have moved from active to passive.

I'd tell you that about a third of what we've seen in our business this quarter was a move from active to passive so that's a dynamic at play as well.

That's very helpful.

Thank you for taking my questions.

Geoffrey Elliott, Autonomous Research.

Good morning, thank you for taking the question.

At the Investor Day you talked about 11% to 12% range for the Basel III Tier 1 common ratio.

Clearly even with the reversal of the operational risk hit you're going to be a bit below that.

Are you still thinking about that 11% to 12% range as the right number or do you think it has shifted down?

No, Geoff, I think as I had mentioned in my prepared remarks the impact of the increase in the operational risk capital will be offset by the deconsolidation of certain assets as we believe we're going to be an early adopter of the consolidation standard.

So that will bring us back closer to the 10% range and then there will be some natural accretion of capital as we both increase our SLR requirement.

And we'd like to be about I think being optimal is being about 2X so if we have 5.5% of SLR based capital, leverage capital that would probably put us at about an 11% or so for our common equity Tier 1. So I'd still keep it pretty close to the range of 11% to 12%.

And then just a quick question on the numbers.

There was a big increase in noncontrolling interest to $90 million and there was also a big step up in the income from consolidated investment management funds.

It sounded like you were saying there was some sort of hedging effect that drove that but I just wanted to make sure I understood what was going on.

Yes, this refers back to the consolidation of the variable interest entities that we were just talking about for the balance sheet.

So effectively what happens where we have a small interest in a fund we have to consolidate the entire fund.

And as we consolidate that we recognize the revenue not only of our own small interest but of our clients.

Then we take that -- so in the first quarter it did very well so it went up substantially and our clients saw much more in the form of revenue than we have typically seen.

And if you go through the balance sheet you'll see there is a deduction on an after-tax basis of that minority interest.

So what it looks like is we have a large pretax income and therefore have a very low tax rate and that's not our income.

It doesn't get included in the tax rate but in effect it's best just to take the way we report our numbers on an adjusted basis, that's why we didn't say our revenue grew 6% which is what the GAAP number was.

It actually grew 4% because we took the client revenue out of the revenue line.

As we adopt the new standard we'll get a lot less noise from that because it will eliminate most of what you see coming through there.

Great, thank you very much.

Okay, thank you very much everyone and we really appreciate you dialing in.

If you have further questions please give Valerie Haertel a call.

And we look forward to catching up with you soon.

Thank you.

If there are any additional questions or comments you may contact Ms. Valerie Haertel at 212-635-8529.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.