紐約梅隆銀行 (BK) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the second-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. Valerie Haertel, you may begin.

Thank you, Joey.

Good morning and welcome everyone to BNY Mellon's second-quarter 2015 earnings conference call.

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

Our second-quarter earnings materials include a financial highlights presentation that will be referred to in this discussion of our results and can be found on 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 be 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 on this call speak only as of today July 21, 2015 and we will not update forward-looking statements.

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

Thanks, Valerie, and welcome everyone.

Thanks for joining us this morning.

Our results reflect the successful execution of our strategic priorities to achieve the three-year targets we shared on Investor Day.

We are growing our earnings, investing in next-generation operating platforms and risk management controls, attracting new clients and improving the long-term value of our firm for the benefit of our clients and shareholders.

Turning to earnings, earnings per share were $0.73, or $0.77 per share after adjusting for the previously announced litigation expense and restructuring charges.

On an adjusted basis earnings per share were up 24% year-over-year.

Now focusing on our year-over-year comparisons on an adjusted basis, total revenue was up 3% as we saw strength in Asset Servicing, Global Collateral Services and Clearing and improvement in our market sensitive businesses.

Our Markets group in particular had another excellent quarter helping to drive growth in Investment Services and the improvement in our return on tangible common equity.

Net interest revenue was also strong contributor to results this quarter.

Total expenses were down 1% and we delivered more than 460 basis points of positive operating leverage and improved our pretax operating margin to 33% by executing on our revenue growth initiatives and through continued expense control.

Our return on tangible common equity in the quarter increased to 22%.

And we've continued to deliver significant value to our shareholders by returning more than $1 billion in dividends and share repurchases during the quarter.

Now looking at our progress against our strategic priorities.

Our first priority is driving profitable revenue growth.

We are laser focused on leveraging our firm's capability to strengthen and expand our existing client relationships and selectively building new ones.

Investment Services revenues benefited from the areas where we've been investing: that is Asset Servicing, Global Collateral Services and Clearing.

Now the investments we are making in strategic technologies, platforms and applications are clearly paying off and our solutions are resonating with clients.

We won a significant middle office contract to service $770 billion in assets for a prominent investment manager.

That win was part of a strong new business quarter for Investment Services.

Now while our costs will increase in the short run as we prepare to onboard this new business, our platforms are designed to be leveraged by a broader client base and to take advantage of our economies of scale.

Foreign exchange revenue was also up strongly year-over-year as we continue to benefit from both higher volatility and volumes captured through the expansion of our services.

Now we also strive to deliver a great client experience which is critical to driving revenues.

Third-party recognition of our capabilities continued.

We took the top spot in this year's Global Investor/ISF Global Custody Survey in EMEA and single custody weighted categories.

We also topped the weighted rankings for clients with assets under management greater than $3 billion in the global EMEA and Asia-Pacific categories.

We were named the best ETF service provider in the Americas for the ninth year in a row by exchangetradedfunds.com.

And we were named custodian of the year for Latin America in the Custody Risk Americas Award which recognized the growth and quality of the custody service we launched in Brazil less than three years ago.

Now turning to Investment Management we continue to make progress in several key initiatives.

We're already seeing positive results from expanding our reach to the US retail investors as our investment strategies are becoming more visible on third-party platforms.

In addition, we are connecting with our Pershing financial advisory clients.

In fact, the private banking growth we've seen in wealth management with Pershing clients is a powerful example of our ability to leverage the synergy between Investment Services and Investment Management for the benefit of our clients.

And our initiative to grow our wealth management presence in attractive new locations is beginning to add to our revenue growth there as well.

Now switching to Asset Management, our LDI strategy continues to see strong inflows as do inflows into alternative assets continuing the trend of the last few quarters.

Both are areas where we are working to expand our presence.

Now while we've made significant progress on those fronts, it was not enough to offset the industry-wide impact of active institutional equity outflows.

In fact, while we had a total net long-term outflows of $15 billion, two non-US institutional clients drove $20 billion of the outflows as they liquidated holdings to address cash needs and changes in their investment strategy.

On the investment performance front, during the quarter the strength of our capabilities was recognized through a number of awards.

Insight Investment was named LDI Manager of the Year and Fixed Income Manager of the Year and Newton, the SRI Provider of the Year by the European Pension Awards.

Insight was also named LDI Manager of the Year for the third consecutive year by the CIO European Innovation Awards.

And ARX was named Top Brazilian Manager by the Standard & Poor's for the fifth consecutive year.

Now our second broad priority is executing on our business improvement process.

Our success on this front is reflected in lower expenses in nearly all categories.

We are making continued headway on reducing structural costs and risk while improving the productivity and quality and it is clearly showing up in our results.

From a structural standpoint, we continue to optimize our businesses mix.

We shut down our central securities depository and began to reposition our UK transfer agency business because they simply did not meet our return criteria.

We made progress in streamlining our Investment Management operations in APAC and also made the tough decision to shut down our separately managed account offering for now.

It's a solution that we were really excited about and we're not ruling out the possibility of reestablishing it down the road.

But when we didn't gain the traction in the market that we expected we held to our discipline.

Now during the quarter we renegotiated certain vendor contracts and made progress in reducing data storage cost and our real estate footprint as we continue to improve the profitability of our business.

Now our third priority centers on being a strong, safe, and trusted counterparty.

We have reduced and simplified our counterparty exposure by exiting the derivatives business.

We practically eliminated the intraday credit risk within the US triparty repo market and we submitted our fourth annual global resolution plan to the FDIC and the Fed.

We are one of the few banks that proposed a tried and proven resolution strategy involving the use of a bridge bank run by the FDIC, something we can do because of our inherently smaller and more liquid balance sheet versus other G-SIBs.

Now to be able to deliver on this plan we have made commitments to fund more than 30 initiatives over the next two years.

It's expensive but it will make us an even more resilient Company in the future.

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

We are focused on ensuring our capital ratios are compliant with evolving regulatory requirements.

During the quarter we successfully issued $1 billion in preferred stock which further strengthened our capital position and enabled us to repurchase more than $800 million in shares and distribute almost $200 million in dividends.

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

During the quarter we added talent in corporate trust to position us to capitalize on the increased debt issuance market and regain some momentum there.

We added staff to support our strategic growth initiatives and we also continue to in-source the people who power our technology, productivity, cost and speed to market initiatives.

So as we look ahead, we remain confident in our ability to achieve our three-year Investor Day goal and to deliver even more value to our clients.

With that let me turn it over to Todd.

Thanks, Gerald, and good morning everyone.

As in the past my commentary will follow the financial highlights document.

So if we start with page 7, that details our non-GAAP or what we call our operating results for the quarter.

As Gerald noted EPS was $0.77, up 24% from the year-ago quarter.

Revenue in the second quarter was approximately 3% year-over-year and 2% sequentially.

And that reflected growth across most of our business with particular strength in Asset Servicing, especially Global Collateral Services as well as in Clearing Services, foreign exchange and our financing-related activities.

Expenses were down 1% year-over-year and 1% sequentially as our business improvement process and the stronger US dollar are driving lower expenses in almost every category.

Our ability to grow revenue and control expenses resulted in more than 460 basis points of positive operating leverage year-over-year.

As you can see on page 6 of the earnings release the pound was down 9% and that's on a year-over-year basis versus the dollar and the euro was down 19%.

We've estimated that the stronger US dollar reduced both our revenue and expenses by approximately 300 basis points and had a slightly negative impact on net income.

Now the business that was most impacted was Investment Management while currency has less of an impact on investment services.

We expect the strength of the US dollar to continue to impact Investment Management more than Investment Services since about 43% of Investment Management revenue comes from outside the US and is non-dollar while the impact of the overall Company is expected to be nominal.

Income before income taxes was up 14% year-over-year and 12% sequentially.

On a year-over-year basis our pretax margin increased approximately 300 basis points to 33% and that's from 30% in the second quarter of last year.

Return on tangible common equity was over 22%.

Now page 8 shows consolidated fee and other revenue.

Asset Servicing fees were up 4% year-over-year and 2% sequentially.

The year-over-year increase primarily reflects organic growth, especially in Global Collateral Services and net new business partially offset by a stronger US dollar.

The sequential increase primarily reflects organic growth and seasonally higher securities lending revenue.

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

The increase from the second quarter of 2014 was driven by higher mutual fund and asset-based fees, clearance revenue and custody fees.

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

Both increases reflect higher depositary receipts results, partially offset by lower corporate trust fees.

As we have noted previously, the corporate trust revenue decline has stabilized and we actually are encouraged by the current pipeline.

Treasury Services fees were up 2% year-over-year and 5% sequentially.

The year-over-year increase reflects higher payment volumes while the sequential increase reflects the fact that there were three additional business days in the quarter.

Second-quarter Investment Management and performance fees were down 1% year-over-year but on a constant currency basis they were up 5%.

That was reflecting higher equity market values, the impact of the first-quarter Cutwater acquisition which was partially offset by lower performance fees.

We had performance fees of $20 million compared to a very strong $29 million last year.

FX and other trading revenue on a consolidated basis was up 44% year-over-year and down 18% sequentially.

FX revenue of $181 million is up 40% year-over-year, 17% sequentially.

The year-over-year increase reflects the higher volatility, higher volumes and higher DR-related activity.

The sequential decrease primarily reflects the benefits of unusually high market volatility in the first quarter of this year.

Financing-related fees were $58 million compared to $44 million dollars in the year-ago quarter and $40 million in Q1.

Both increases reflect higher fees related to secured intraday credit provided to dealers in connection with their triparty repo activity.

Now these fees probably won't grow beyond Q3 as we expect clients to moderate their usage or possibly find alternative sources for this financing.

Investment and other income of $104 million was $38 million lower year-over-year and $44 million higher sequentially.

The year-over-year decrease primarily reflects lower other revenue, equity investment revenue and asset-related gains and that was partially offset by higher leasing gains.

The sequential increase reflects the higher lease residual gains, offset by lower seed capital.

Looking ahead to future quarters, given the sale of Wing Hang and some other actions that we've taken we expect investment and other income on average to be in the range of $60 million to $80 million.

However, we would expect there to be some volatility in this particular line item.

Page 9 shows the drivers of our Investment Management business that will help explain our underlying performance.

You can see the 5% year-over-year AUM increase and the $15 billion of long-term outflows during the quarter.

As Gerald noted, while we in the industry have been experiencing outflows in active equities over the last few quarters we have seen a few very large non-US institutional clients both rebalancing and liquidating parts of their portfolio which has magnified the impact this quarter.

Partially offsetting the active equity outflows were flows into higher fee alternative assets and LDI, a trend we've seen for the last few quarters and it's been a continued focus for our business, will be for our business going forward.

At this time the higher proportion of active equity outflows versus the alternative and LDI inflows has resulted in an lower fee mix.

Our Wealth Management business continues to grow, benefiting from our expansion initiative.

We've now completed the investment phase of this initiative and are beginning to see revenue growth as well as an associated increase in loans and deposits.

Turning to our Investment Services metrics on page 10, you can see that assets under custody and administration at quarter end were $28.6 trillion.

That's up $100 billion year-over-year and that's reflecting higher market values, organic growth and it was partially offset by the stronger US dollar.

On a linked quarter AUC/A was in line with last quarter.

Adjusted for currency year-over-year growth would have been roughly 3%.

We had estimated total new assets under custody in our administration business wins in the second quarter of $1 trillion.

Now that does not include a recently announced expansion of services to an existing client that has about $140 billion in assets, a deal which closed after the quarter end.

We are pleased to see that our investments in our services to clients have been paying off and it's being recognized in the marketplace.

The market value of securities on loans at period end was up slightly year-over-year.

Average loans and deposits were both up significantly.

Our key broker-dealer metric of average triparty repo balances grew 8%.

All of our clearing metrics recorded nice gains, DARTS volumes in particular.

And the net decline in sponsored DR program reflects our focus on exiting low activity programs.

If you turn to net interest revenue on page 11 you'll see that NIR in a fully taxable equivalent basis was up 8% versus the year-ago quarter and 7% from Q1.

We benefited year-over-year from a shift out of cash and into loans and securities, an increase in deposits, nice to see a lower interest expense incurred on those deposits and also the impact, positive impact of interest rate hedging activities.

The yield on interest-earning assets decreased 2 basis points year-over-year while the yield on interest-bearing deposits decreased 4 basis points.

The decline in the deposit yield was driven by our efforts to charge clients on euro denominated deposits primarily.

The net interest margin for the quarter was 100 basis points, 2 basis points higher than the year-ago quarter and 3 basis points higher than the prior quarter driven by the reduction in rates paid on interest-bearing deposits.

On page 12 you will see that non-interest expense on an adjusted basis decreased by 1% year-over-year and 1% sequentially.

The year-over-year decrease reflects lower expenses in all categories except business development.

The lower expense primarily reflects the favorable impact of the dollar, of the strong dollar and the benefit of our business improvement process.

Total staff expense is essentially flat year-over-year reflecting the impact of the dollar, lower headcount and the impact of curtailing our US defined-benefit plan partially offset by higher performance driven incentives.

The year-over-year decline in headcount reflect the progress of our business improvement process.

The sequential increase of 200 employees reflects in-sourcing and revenue initiatives as well as new hires to support new business in asset servicing and corporate trust and strategic platform investments in asset manager, alternative asset manager and global wealth programs.

Our occupancy costs have not risen as we expected.

The additional costs such as paying double rent for our move out of 1 Wall Street have been offset by a number of factors including the strength of the dollar, lower utility cost, we sublet more vacant space and the reduction of maintenance cost.

We are on target to vacate 1 Wall Street before the end of the third quarter and expect an improvement in the occupancy line beginning in the first quarter of 2016.

Now turning to capital on page 13, with respect to our capital ratios as we highlighted in our last earnings call we adopted the new consolidations accounting standard during the second quarter which required a retrospective adoption to January 1, thus requiring us to revise our Q1 reported numbers.

The adoption resulted in a benefit to Q1 of about 75 basis points increasing it to 9.9%.

The Q2 2015 ratio is flat at 9.9.

A few notes about the quarter, as you'll see in our release our effective tax rate was 23.7%, 1.4% lower than the income statement presentation of Investment Management funds.

On an adjusted basis our tax rate was 25%.

Also in the earnings release on page 11 are some investment securities portfolio highlights I'm sorry I'm losing my voice here.

You'll see net unrealized pretax gain on the portfolio was $752 million ending up with a hit to capital of about $300 million.

Now I'd like to factor in a few points about the second half of the year.

Third-quarter earnings are generally impacted by seasonal -- I'm going to turn it over to Izzy.

Just following on our third-quarter earnings, as you're aware third-quarter earnings is generally impacted by a seasonal slowdown in transaction volumes and market-related retinas, particularly foreign exchange, Global Collateral Services and securities lending offset by seasonally higher activities in DR. We see expenses coming in flat to slightly down to 2014 for the full year which would entail an increase in the run rate of remaining quarters reflecting investment in our strategic platforms, increased regulatory compliance cost, compliance cost and the annual merit increase with respect to July 1.

Net interest revenue is expected to be slightly down to Q2 assuming no change in monetary policy.

The full year effective tax rate is expected to be approximately 26%.

We anticipate proceeding with our capital plan, enabling us to return up to $3.1 billion to our shareholders through share repurchases and dividend subject to market conditions and other factors.

In summary, we are executing against a strategic priority.

We're continuing to improve our bottom line and generate significant positive operating leverage and we remain confident in our ability to hit our three-year Investor Day targets.

With that on behalf of Todd let me hand it back to Gerald.

Great, thanks, Izzy for finishing up.

Todd is alive and well.

Trust me.

So with that well he's certainly alive.

With that why don't we open it up to questions?

(Operator Instructions) Luke Montgomery, Bernstein Research.

Good morning, guys.

Good morning, Luke

So broadly I'm just wondering how you're feeling about the sustainability of the progress you made on expenses and operating margin?

I think clearly some of that is driven by FX translation but you've now exceeded the high end of the range of your 30% to 32% longer-term operating margin target and that was in a normalized environment.

I'd say the same for your 20% to 22% (technical difficulty) target and we have yet to see rates increase.

So at this point would you feel comfortable revising these targets a bit higher?

Have you considered that at all?

Well, let me start with that.

We do feel good about the progress we're making on our business improvement process and pulling it through into the income statement to the bottom line.

We are onboarding some new clients and there are some upfront costs associated with that.

We do have increased regulatory costs that we're facing in the second half of this year.

I think we're going to stick with our guidance of having expenses essentially flat versus last year.

And we're going to work to continue to improve upon that but we do have some opportunities to bring on some clients that have some upfront costs associated with it.

So we feel good about hitting the targets that we laid out for Investor Day.

We're within the ranges and we're going to keep driving forward on meeting those targets.

Okay, thanks.

And then --

Hey, Luke, I would add one thing.

We've had the benefit of a good revenue mix here, too.

Some of the higher-margin businesses grew faster than we had anticipated at Investor Day.

Okay.

And then maybe if you could give us a rough indication of the additional expenses for the T. Rowe outsourcing mandate you won and then when do you expect that business to convert and be reflected in revenue?

And also maybe talk about whether that deal reflects any change in the trends in the marketplace for fund accounting or was that more of the one-off opportunistic deal?

A couple of questions in there.

We will start to -- we've already started to incur some of the expenses associated with T. Rowe as we speak.

We're taking on board some of their staff which we're delighted to do.

So you're seeing some of the upfront costs associated with the onboarding of that business now and you'll see it through the course of this year.

And then you'll start to see the revenues kick in toward the end of this year, first part of next year as we convert over the assets.

We do actually see it as a long-term trend where investment managers in general are really trying to focus on their investment management process and less focused on doing the mid-office and back office services internally.

So we do see it as a long-term trend but we want to be very thoughtful about which clients we take on and make sure we're leveraging our platforms and driving profitable revenue growth for ourselves rather than just taking on anyone at anytime.

T. Rowe is a fantastic client.

It's a great partnership.

We've worked on this together for well over a year.

And we think we have a good rapport with them in a very similar culture.

So we feel good about this one.

Okay, thanks a lot.

Glenn Schorr, Evercore ISI.

Hi, thank you.

I'm just curious if you can give some sort of summary comment on what happened to asset sensitivity during the quarter?

It's great to see all the growth on the balance sheets, both deposits and loans.

I think you were in the process over the last two quarters of extending duration a little bit but if you could just tie that all together that would be super.

Sure, Glenn.

I'll try to take it.

It's Todd.

The sensitivity, NIR sensitivity is going to be about flat from where we were in the first quarter.

So we had put a fair amount of securities on late in the first quarter and we got the benefit of the NIR mostly in the second quarter.

And actually securities at the end of the period were down slightly.

So I think you'll see the asset sensitivity to be basically unchanged where we were in the first quarter.

There's a lot of things that went on with NIR; actually the duration of our available-for-sale account declined slightly, and we used the held to maturity account that's where most of the duration of the assets now is, about half the risk is in each so that we can protect the capital account.

But we saw a lot of things go on in the quarter.

We saw higher balances.

We did see the loan growth that you talked about.

We saw a sharp drop in the interest that we've paid on deposits.

We also had the benefit that accretion on the non-agency security did not decline as the performance of those securities increased.

So we would have expected that and we had some hedging gains.

So we don't anticipate that NIR has bumped up to this level.

We don't expect to grow.

In fact, we expect it to contract a little bit unless interest rates change.

Okay, that's great.

Thanks.

And then curious on even after the restatement of the capital ratios, let's call it a function of 10% your buffer is now officially 100 basis points.

Even with a very wide 200 basis point AOCI buffer on buffer, that brings you to right about where you're at now.

Do you still feel the 11% to 12% is the right range or could we see that work down over time?

Yes, the binding constraint for us, Glenn, is not the risk-weighted assets, it is the SLR.

So as we build the SLR we would expect CET1 to grow.

So we will stick with the previous guidance.

Got it.

Okay, thanks very much.

Alex Blostein, Goldman Sachs.

Great, good morning everyone.

I'll try to keep this quick, Todd, to save your voice.

So a couple of follow-ups on NII.

A, could you just define the hedging gains to get us a cleaner run rate for NII for the quarter to think of the third quarter?

And then just kind of bigger picture question, when you continue to see growth in your deposits maybe a couple of comments on where do you guys think it's coming from and again do you still think that there's not a ton of room to reinvest them into securities alone so this has a positive mix shift in the balance sheet that we've seen from you guys over the last couple of quarters is probably a full in run rate, is that a fair way to summarize the NII picture?

Yes, I think the answer to your last question is yes.

I think that's a fair way to summarize it.

In terms of the hedging gains you know accretion has been contracting at about $3 million to $5 million a quarter so it didn't.

So the combination of accretion and hedging gains is probably in the $10 million ballpark.

And we expect the balance sheet to be about flat.

Got you.

And then just my follow-up on expenses, just stepping back again when you guys talked about expenses being flat on a year-over-year basis, given the amount of new business you picked up this quarter and the timing of the onboarding is it still fair to think that 2015 expenses are going to be in that $11 billion run rate?

Alex, the guidance we've given I would say is going to be flat to slightly down from our operating expenses in 2014.

That does mean the run rate will pick up in the second half for all the items that we discussed whether it's the merit increase, the onboarding, we're taking on a couple of hundred people soon to the regulatory costs that we've been talking about, all in all we would still for the full-year expect to be flat.

Previously the guidance was maybe flat to slightly up; we're a little more optimistic it might be flat to slightly down.

Great.

Thanks very much.

Ashley Serrao, Credit Suisse.

Good morning.

First question just on Investment Management.

I appreciate all the color you gave on the positive fraction of your various growth initiatives.

But I wanted to get a sense of where you are versus your plan as far as the investment curve goes?

And then how should we be thinking about the payoff to the plan laid out at Investor Day?

Ashley, it's Curtis Arledge.

Could I just ask you what you mean by investment curve?

I want to make sure I understand the question.

The investment of the margins that you outlined.

So at Investor Day we described (technical difficulty) our Wealth Management business in our US intermediary distribution platforms and some other initiatives.

And as Gerald mentioned those are actually going quite well.

Our Wealth Management expansion is now complete.

We've added about a 50% increase in our sales force and we've seen revenues that have actually come in above our original plans.

On the US retail side we've made a number of investments and changes and our sales there are actually pretty attractive.

We've seen a boost of north of 50% in gross sales in our US retail intermediary platforms which includes the real exciting part about being connected to Pershing because Pershing, obviously their relationships with financial advisors is important to that effort as well.

And the private banking piece of our initiative as Gerald also mentioned is really starting to work.

So we feel pretty good about getting the revenues that came with the investments that we were making that we talked about at Investor Day.

Okay, appreciate the color there.

And during the quarter JPMorgan exited its third-party broker-dealer clearing business.

I just wanted to get your sense on how are you thinking about the business, should we expect Pershing to pick up share and then in a similar vein how are you thinking about your stake in ConvergEx?

Brian, why don't you take the JPMorgan Pershing question?

Sure.

So you can see from Pershing metrics overall that we have pretty good momentum in revenue and in terms of new business pipeline we're certainly benefiting from JPMorgan's decision to exit and we're attracting quite a number of those clients to our platform, some of which will be converting quite a few of which will be converting to our platform in the third quarter.

And if we look at the overall metrics the fundamental asset gathering statistics, mutual fund positions, total client assets in custody, prime brokerage lending and margin balances are a custody all the way through we have solid growth in the Pershing business unit.

So we feel good about that business.

And regarding ConvergEx we just have a small equity piece in that firm.

It's something we've had for a long period of time and we just continue to track it.

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

Ken Usdin, Jefferies.

Hi, good morning.

Todd, I was wondering on the capital front now that SLR is pushed out of CCAR for another year and given the potential for rates to go up I was wondering can you talk to us about how much excess deposits you had on hand and then your trade-off of considering your more preferred issuance in the capital structure?

Yes, we would estimate Ken, that there's probably about $50 billion to $70 billion of excess deposits but what ultimately will happen with those deposits is going to depend on the course of monetary policy.

So we are poring through our balance sheet to prioritize where we're most efficient with it and actions that we might take against the balance sheet.

If those deposits, if rates were to rise and those deposits were not to lead we think we would be a heavier issuer of preferred and would get a pretty reasonable return on that preferred.

So we may be in the preferred market as we were this past quarter where we issued $1 billion.

We have a fair amount of space to do more.

It really will depend on how things play out.

It just means that for 2016 the CCAR will not have to consider the SLR but we still have to prove to ourselves a path to compliance because we're still 40 basis points below the 5% target.

We need a cushion above that.

And so where's the fine line between go/no go on that?

Is it a rate of Fed funds, so the earnings capacity on that excess deposit if they stay around?

Like where's your breakeven decision tree on that?

It's a fairly low yield.

If Fed funds go to 60 or 70 basis points and you've got that kind of a margin on it it's a very attractive return on your equity.

Okay, got it.

And then so second follow-up, issuer services.

You mentioned just the stability that you've started to see.

Can you just give us some underlying trends inside those businesses.

And I know we do see the typical seasonality but the last few years have been anything but typical, so just help us understand what kind of lift we should expect to see in the back half.

Yes, this is Brian Shea.

The issuer services business includes both corporate trust and DR as Todd mentioned and we've been signaling for some time that we thought we'd see a moderation in the runoff of high-value securitizations and corporate trust and that the revenue decline that we've experienced in the past few years would sort of moderate and flatten out.

And that's exactly what we're seeing happen at this point.

And on the DR side that business is obviously a capital markets driven business and has volatility associated with it but it's had good year-to-date performance and we expect a similar seasonality possibly in the third quarter this year.

So far so good.

All right.

Thanks guys.

Brian Bedell, Deutsche Bank.

Hi, thanks.

Good morning, folks.

Maybe just to start on the T. Rowe deal, so in looking at that I guess more strategically as you think about the longer-term operating margins on either that deal or that business in general you're obviously starting to bring it revenues by year-end.

When do you expect that particular investment to be or that deal to be operating margin positive and then how do you think about that deal and/or that business from an operating margin perspective longer term versus your overall Asset Servicing business?

Yes, this is Brian Shea.

The transition of the T. Rowe Price team about 225 people to BNY Mellon we expect to take place in August so starting next month.

That will be followed by a fund accounting conversion 9 to 12 months out and then a middle office platform conversion roughly a year after that.

So it's a long-term arrangement and it's the largest middle-office client, asset manager client, that's committed to us.

But you should know that we're driving a shared economy-to-scale model and a much more standardized leveragable platform.

We have about 40 middle-office clients today.

This is the single biggest one we have, and we think it's a real validation of our strategy and the platform that we're putting in place to serve more.

Fundamentally, we feel that there's a way to create shared economies of scale in this model that haven't historically been created by custodians, and we're executing a strategy, a different technology strategy, to create that leverage.

But there's a fundamental trend where asset managers just like other financial institutions in a high regulatory change lower growth environment are getting back to basics, and fundamentally focusing on the investment process as their value proposition and relying more on firms like us to variablize their middle-office costs and actually their front office technology costs.

So we're going to be driving a strategy to drive more end-to-end solutions for investment managers and alternative investment managers, and I think it will be a positive driver of our long-term results.

And we have already a significant pipeline of middle-office clients and we're being careful and selective about which assignments we take on.

The other thing I would add, Brian, is that we're not relying on foreign exchange securities lending other, quote, high-margin business to make this transaction profitable.

We have priced it and we're building the operating platforms such that it is profitable on its own.

Great.

That's really helpful color.

I appreciate that.

And then maybe just on the -- just to verify the expense outlook again, making sure I have the base right, it is $11 billion for the guidance for 2015 for flat expenses?

Well, what we've guided is that our operating expenses last year were about $10.7 billion -- $10.65 billion.

And Brian, what we've guided is that we'd be relatively flat to that number.

Okay, great.

Thanks for taking my questions.

Thank you, Brian

Betsy Graseck, Morgan Stanley.

Hey, thanks, good morning.

A couple of questions.

One on the investment management metrics page, you've got your AUM outflows as well as inflows listed on the page and net currency market and acquisition impact.

I noticed liability driven investments have continue to be positive but maybe a little bit slower pace.

Can you just speak to what's going on there?

And then your market impact was actually better than what I've seen at other shops and maybe could help us understand how much of that was acquisitions versus market?

So Betsy, it's Curtis.

I would say our LDI business still has a very healthy pipeline.

Quarter to quarter there are dynamics around the funded ratio for our clients, so if interest rates rise and equity markets remain stable, then the funding ratio improves and clients are generally compelled to move forward with launching a de-risking of their plan and vice versa.

And so there is some dynamics of how markets are moving in a quarter.

We do have clients occasionally who add to their existing strategies.

They de-risk some portion of our portfolio and they add and it makes some quarters stronger than others and when that doesn't happen it's a bit weaker.

And then clients, we've also had clients who have unhedged portions of their portfolio in the past as well.

So quarter-to-quarter fluctuations are somewhat related to what's happening in the marketplace.

But I can tell you that the pipeline is still very healthy where as funding ratios improve there is continued interest in removing that volatility or that risk from pension plans overall exposure.

So in general the business is very healthy.

In terms of market I think one of the things that it's important to appreciate is that various assets that we have across different markets, and LDI is actually a really good one, it's a very long duration asset, and it's linked not only to interest rates but also to inflation rates.

So as inflation rates and interest rates fall the value of the liability and therefore the value of the asset we manage rises and so that's contributing to some of what you're seeing.

We have a very diversified portfolio of assets that we manage.

When we look at it versus many peers our US and non-US mix is very diversified and if you look at equity markets you also need to appreciate that we have assets.

We're showing AUM on a spot basis and because of what happens in some currency markets our spot rates move right at the end of the quarter based on currency movements.

And we saw a little bit of that in the year-over-year dynamic.

So I would say it's both currency and the duration of some of the assets we manage.

Got it.

Okay, that's helpful color.

Thank you very much.

Just Todd an overall question for you on the FX impact on revenues and expenses and I'm sorry if I missed it.

I noticed throughout the presentation you talked about the impact there but do you have an FX adjusted revenue and expense overall for total BK or how it impacted the growth rates in revenue and expenses?

Yes, I had indicated it's about 3% negative on revenues and so about 3% positive on expenses, meaning lower expenses.

Net-net it was very slightly negative to us, so there's some rounding in those calculations.

And that's about what we would expect going forward, Betsy.

There could be we're pretty well hedged in euro and sterling so there could be -- we are short one or two other currencies.

So if the movements change it could be a little bit different but we would expect if the dollar were to get stronger or weaker from here it shouldn't have a meaningful impact to our pre-tax.

It just might change the geography a bit.

Okay.

The currency you're not hedged to, the biggest is the yen, is that right?

No, it's going to be rupee.

Indian Rupee.

Indian Rupee.

Got it.

Okay, got it.

Okay, that's helpful.

Thanks.

Thank you.

Betsy

Mike Mayo, CLSA.

Hi, just a clarification of what you've said so far.

The results in the first half of the year have exceeded expectations.

You're in your target ranges but it doesn't seem like you're changing your guidance for the full year.

So should we think of these results as simply frontloading some the benefits in the second half of the year or if you can just give us some more color on this?

Well, generally, Mike, we put out three-year targets during Investor Day.

We're sticking to those and we're executing against them.

The first half of the year we've done some level of out-performance.

We want to continue that and not let the targets restrain us but we certainly want to keep performing well.

Yes, the targets weren't meant to be annual targets.

They were compounded growth rates over the three-year period, Mike.

So we certainly have gotten off to a good start.

We've gotten much more market benefit than we would have anticipated at that at point time.

But that's not to say that's going to continue.

Okay, perhaps as a follow-up to that, Gerald you mentioned your three-year targets and your five priorities and I think you guys had a Board meeting in June where you talk about strategy and topics like that.

Can you highlight what was talked about at that Board meeting or any perhaps nuanced changes that you have in the strategy or other areas for additional emphasis that came out from that meeting?

Well, Mike, we have a Board meeting every other month so that's just part of the standard fare.

We share with our Board obviously not only what we share publicly but the ups and downs and the positives and negatives throughout all our businesses.

So we're sticking by our strategy.

We're sticking by our business model and we're sticking by the Investor Day targets we've laid out there.

And I'm pleased to say we're executing against them and we'll continue to drive value for shareholders and clients.

Last follow-up.

We've had a few months since Investor Day.

Now that you've had this period when you've gone back a little bit more aggressively, which areas would you say you're more confident about or perhaps less confident about?

Go ahead.

From a financial perspective I think there are a couple of positives.

As you've seen we've seen probably a little stronger revenue growth especially when you take into consideration currency.

I think our business improvement process continues to work well.

I think the balance sheet growth and the need to retain additional capital may be higher than we had anticipated.

And net-net I think we're still comfortable with the ranges that we have established.

The course to get there will never be the direction that we initially anticipated.

But I think we're still pretty comfortable with the direction we're going.

All right, thanks.

Brennan Hawken, UBS.

Good morning.

So one follow-up on the onboarding expense for the back half of the year.

How much of that should we consider ongoing and how much of that would be one-time charges?

It's Brian.

We signaled at Investor Day that we'd have year-over-year growth and expense as we build out these strategic platforms for asset managers, alternative managers and the global wealth platform.

And that is going to be the case as we suggested.

Obviously then over time the revenue comes on as the clients start to leverage the platform.

And so ultimately we think these are really strategic good strategic investments that are going to create long-term client and shareholder value but there is obviously a drag year-over-year on expense this year and then it moderates next year.

And in 2018 these investments are significantly positive for the shareholder.

I would add it's in our running rate expenses today, those investments.

Okay.

And so I guess what you're saying is they are ongoing but we see the revenue pickup which enhances the returns.

Is that a fair way to paraphrase it?

That is correct.

That's the right way to think about it.

Great, thank you.

And then a quick one on the excess deposits.

So can you help us maybe understand why you would, if we get higher rates and we don't see the behavior you're anticipating, why you wouldn't explore pricing changes as opposed to raising preferred in order to just provide motivation for those $50 billion to $70 billion to move off the balance sheet?

Yes, first of all it's not one or the other.

As you can see in this particular quarter, the second quarter we just finished we actually did manage our deposit rates down, so you can see that we are in fact charging for deposits, particularly in Europe or in Europe I should say and so the cost of our deposits is actually declining.

So we are proactively managing the cost of our deposit base.

But as Todd said earlier, if the return on those deposits in a rising interest rate environment are such with little or no risk associated with them, then we should think about whether additional capital is warranted and making sure we get a good return on that capital.

And there's also you know as our businesses grow we tend to get more deposits, frictional deposits associated with our businesses.

It's going to be interesting to see when rates rise what happens to those excess deposits not only here but in the industry at large.

Thanks for taking the questions.

Thank you, Brian

Gerard Cassidy, RBC.

Thank you.

Follow-up on the deposit commentary that you guys have made, what percentage of your European depositors now are paying you interest for you to hold those deposits?

And the second, how many have decided to leave or take some of the deposits out because they didn't want to pay the fee?

Most of them where we can pass through the fees are paying them.

We did see some behavior when we initially started charging for deposits where there were some outflows and those have come back.

So we're about flat through the beginning of where we are now in the actual volume of European deposits.

Would you say the experience has been a pleasant one for what you had to do to convince folks to pay for you to hold their deposits?

I look around at my relationship people and I'm not sure they feel exactly that way.

Yes, I would say that clients -- it's Karen Peetz.

I would say clients understood it that we weren't going to pay them to keep the money with us.

But it was a series of difficult conversations.

Many of our peers followed suit so we weren't alone.

Good.

And then a technical question, on the buyback you guys were quite successful this quarter in buying back just over 19 million shares and I see the average share count dropped only about I think 4 million shares from 1.126 billion to 1.22 billion.

Could you give us some color why it didn't fall further?

Well average share count is, so you'd start the period and the end of the period so it's just going to be the timing of it, Gerard.

Okay, just a timing issue then?

Great, okay I appreciate it.

Thank you.

Brian Kleinhanzl, KBW.

Great, good morning.

I just had a quick question on the new business wins.

Even if you back out the T. Rowe it still was $254 billion in the quarter.

So can you give us some color on the geography or service that's driving that and that compares to $131 billion last quarter?

Yes, I would say that's an asset servicing metric and we're getting again we're getting a solid pipeline and some solid new business commitments.

And I think it's indicative of the secular trend of asset managers refocusing on the investment process and their core value proposition and leveraging us from more of those core back office, middle office and eventually front office services.

As we said in the past quarter to quarter you can have a couple of sizable new pieces of business.

And so it could be $150 billion, $200 billion one quarter, $250 billion another quarter.

But the pipeline is good and this was a good quarter for new business wins.

And then just a second question on the Wealth Management business, you said that the Wealth Management growth was improving but if you look at the revenues year-over-year they are only up 3%.

So can you give us a little bit more color maybe on AUM or some other metric that shows the improvement and also when you expect those revenues to inflect in the future?

Yes, so Wealth Management also uses some of our mutual funds and when we look at our Wealth Management business it also includes our private banking activities.

So the line that's Wealth Management fees doesn't describe the entirety of our Wealth Management business.

If you look at our loans and deposit growth on the Investment Management page you can see that we're additionally having real success growing our balance sheet.

So the NIR here is up 18% and it's really helping the overall (technical difficulty)

Wealth Management is they're growing not just within our current footprint where we've opened new offices.

And so being able to go into those offices with both investment offerings and private banking offerings is really where our revenue growth is coming from.

Good, thanks.

Adam Beatty, Bank of America.

Good morning.

A question on asset servicing, specifically collateral management which you mentioned a couple of times.

I was wondering if you could maybe size either the contribution to growth or the growth rate of that service line?

And also let us know how far along you are in terms of penetrating your existing client base, what inning are you at with that opportunity?

Thanks.

Kurt, you want to take it?

So on the asset servicing line probably quarter-over-quarter growth we've probably approached 50% of the cloud services benefiting that asset servicing line.

As far as where we're in, we're probably in still the early innings and I mean by the early innings is that the buy side really hasn't yet benefited fully from shifting some of their business to enjoy collateral as a means to either help finance some of what they're trying to take and leverage or fully embrace or fully put in place the collateralization and margin especially in Europe.

So we think we're in early innings still when it comes to collateral business as far as the growth opportunities that exist around it.

And so our product set really fits well with those needs that those buy side clients have as collateral continues to be needed to pledge against obligations.

Excellent.

So it sounds like more to come.

Thank you.

And then on Investment Management you mentioned some perhaps more acute funding needs from some international clients driving some of the outflows.

How much risk do you see of maybe some additional drawdown across your client base?

Thanks.

We've seen through the course of the past several months some clients rebalancing their portfolios.

Equity markets over the past several years obviously did quite well especially in the US.

I think understanding the US, non-US equity performance is important to this when you think about what people are doing with rebalancing.

So we've seen huge growth in our AUM and LDI as clients have reduced their exposure to equities and again I'm drawing an inference that sometimes we actually see clients sell equities and move into fixed income or derisk their pension plans.

So I think an overall drawdown in assets is not what we're seeing at the moment, we're seeing a rebalancing from equities to fixed income, again there's a lot being talked about of the repositioning of investor portfolios towards more risk.

And what I would say, we see really instead is really focusing on getting returns while being thoughtful about risk.

And that's why our alternatives growth, we've had eight straight quarters of growth in alternatives and those have been strategies where clients are either getting uncorrelated exposures or they are getting absolute return or asset allocation strategies that give them a better diversified portfolio exposure.

So I don't think it's an overall drawdown, it's more of a mix shift.

Okay, so it sounds like you're not seeing anything material in terms of funding needs at maybe sovereigns or what have you driving those outflows?

We've seen, I mean I think to Gerald's opening comment we've absolutely seen I think our client base is very significantly global institutions who from time to time do manage their liquidity needs across their portfolio.

And again quarter to quarter we do see that happen.

Got it.

Thank you very much.

I appreciate you taking the questions.

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

If you have additional questions which I'm sure you will please give Valerie Haertel a call.

We'll be happy to engage with you and thank you very much for your attention today.

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.