紐約梅隆銀行 (BK) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the third-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, Anna.

And good morning, everyone.

Welcome to the BNY Mellon third-quarter 2015 earnings conference call.

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

Our third-quarter earnings materials include a financial highlights presentation that will be referred to in the 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 include forward-looking statements.

Actual results may differ materially from those indicated or implied by 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 at BNYMellon.com.

Forward-looking statements in this call speak only as of today, October 20, 2015, and we will not update forward-looking statements.

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

Gerald.

Thanks, Valerie.

Welcome, everyone, and thank you for joining us this morning.

Our results demonstrate our focus on delivering significant value for our clients and shareholders in all market environments.

Given the global market instability, and continued low interest rates, it has been an exceedingly challenging revenue environment.

So we remain laser focused on the key priorities we discussed with you at our investor to a year ago.

We are executing our strategic plan, which is enabling us to deliver solid results in line with our three-year financial goals.

For the quarter, we again controlled our expenses, while continuing to make strategic investments to enhance client service delivery, as well as improving our technology platforms and capabilities to drive future revenue growth.

In addition, we are making ongoing investments in risk management, and regulatory compliance practices.

Turning to earnings, earnings per share were $0.74, up 16% on an adjusted basis, which excludes the third-quarter 2014 sale of our equity investment in Wing Hang Bank, and our One Wall Street headquarters.

That's also net of litigation and restructuring charges.

Now, focusing on the year-over-year comparisons on an adjusted basis, we generated more than 370 basis points of positive operating leverage, and improved our pre-tax operating margin to 31%.

Total revenue was up 1%, as growth in investment services, including contributions from our volume and volatility sensitive businesses, was largely offset by softness in investment management, which was negatively impacted by the strong dollar as well as declines in equity market values globally.

Net interest revenue was up 5%, and total expenses were down 3%, and our return on tangible common equity in the quarter was 21%.

Looking at our progress against our strategic priorities, our first priority is driving profitable revenue growth.

We are working to deepen our client relationships and grow revenues.

But we are also maintaining our pricing discipline when competing in the marketplace.

During the quarter, revenue and investment services again benefited from growth in global collateral services and asset servicing.

We also onboarded nearly 230 new staff during the quarter, an association with the mid-office services of T. Rowe Price that we are taking on.

This strategic relationship further endorses the market demand for our expertise and platform capability.

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

Investment management revenue reflected the reset in the equity markets and the impact of the strong dollar.

That said, the diversity of our investment management business, combined with our growth initiatives and business improvement efforts, helped mitigate the market impact on our financial results.

On a constant currency basis, investment management fees were flat year over year.

Our LDI strategies continue to see strong inflows reflecting continued client demand.

We also saw some good momentum in fixed income, and our alternative strategies.

Our initiatives to align our investment management portfolio with the largest growth pools are delivering results.

Our US retail initiative, which is focused on third-party intermediary advisors and expanding the Dreyfus distribution platform, is contributing to our results.

As is our wealth management sales force expansion, which has built a strong pipeline and is benefiting from the growing synergies with our Pershing business.

Our second broad priority is executing on our business improvement process to leverage our scale and expertise to deliver efficiency benefits to clients, while reducing our structural costs.

Our success on this front is reflected not only in lower expenses in nearly all categories but in our industry leading market positions across all of our businesses.

Some highlights of our business improvement program include the sale of Meriten, our German-based boutique, where we had a marginally profitable business and identified the opportunity to better redeploy our capital.

That closed in the third quarter.

We've realigned our UK transfer agency operating model to improve its profitability.

We've created a new client pricing strategy group to develop, analyze, and measure service delivery costs to better align our costs with our client pricing.

We've implemented an automated process to measure market data usage to identify opportunities to reduce the number of pricing seats and terminals.

And we've created what we call, My Dashboard, which improves employee productivity as part of our digitization strategy.

The My Dashboard provides our managers with a convenient snapshot of key data on their employees, such as expenses, performance measurement status, training, and other key metrics.

The capability was recently named best new digital project for financial services as part of the Gartner Financial Services Cool Business Awards.

And we have also been analyzing our current real estate portfolio to reduce costs.

And we are selecting locations and workplace standards that enable collaboration and innovation.

During the quarter, we completed our exit from One Wall Street ahead of schedule.

And we now occupy our new, more cost-efficient headquarters at 225 Liberty Street.

And we are taking a very similar approach across many of our locations globally which will help reduce our real estate footprint.

Given the more difficult and expected equity markets, it will be critical for us to keep driving efficiencies to meet our Investor Day goal.

To that end, we continue to identify additional opportunities to reduce corporate overhead and to leverage scale and operations technology and distribution in both investment services and investment management, while continuing to deliver a high level of service to our clients.

Many of our efforts are singles and doubles but they've been adding up, helping us fund some of our revenue growth initiatives and increasing regulatory compliance costs.

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

We continue to have among the highest credit ratings in the industry.

This quarter our credit ratings were affirmed at the rating agencies including our A1 rating from Moody's.

During the quarter, we implemented a new system to meet the bulk of reporting requirements and completed a program to measure and monitor intraday credit risk exposure.

We also established a more granular and rigorous CCAR approach that strengthens our capital adequacy process.

Our business improvement process has helped us fund some of these enhancements.

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

We remain focused on maintaining a strong balance sheet, and capital and liquidity position.

With respect to our capital ratios, we are pleased to report progress towards achieving compliance with a supplementary leverage ratio, which increased to 4.8% this quarter.

As a reminder, SLR is expected to be effective at the beginning of 2018, and we are on a good path to meet the requirements by then.

Now, in accordance with our 2015 capital plan, which authorized us to return up to $3.1 billion to our shareholders, we repurchased $690 million in shares and distributed $190 million in dividends during the quarter.

Year to date, we have repurchased more than $1.9 billion in shares, and distributed nearly $575 million in dividends.

Our fifth priority is to attract, develop, and retain top talent.

Across our organization, we have been enhancing our talent strategies and culture to ensure we have the right people in the right jobs.

Great talent enhances our ability to win.

This quarter, we named a new President for our markets group, Michelle Neal, who starts next month.

She exemplifies the kind of talent we've been attracting and developing in our organization.

Michelle has the special combination of experience in electronic trading and settlement and she is well-equipped to continue to drive the markets group strong performance, and we are very pleased to welcome her to our team.

As we look ahead, we remain confident in our ability to achieve the three-year financial targets we shared with you on Investor Day a year ago.

With that, let me turn it over to Todd.

Thanks, Gerald.

And good morning, everyone.

My commentary will follow the financial highlights document starting with page 7 which details our non-GAAP or what we call our operating results for the quarter.

As Gerald noted, EPS was $0.74.

That's up 16% year over year on an adjusted basis.

Adjusted excludes the sale of our equity investment in Wing Hang and the sale of One Wall Street, and is also net of litigation and restructuring charges.

Revenue in the third quarter was up 1% year over year, reflecting strength in asset servicing especially global collateral services, as well as in clearing, foreign exchange, and financing-related activities.

It was offset by the impact of the stronger dollar and lower equity markets especially on our investment management business.

Expenses were down 3% year over year.

Our success in lowering legal and consulting expenses and in bringing savings from our business improvement process, as well as the stronger dollar, are driving lower expenses in almost every category.

The combination of revenue mix and ability to control expenses through the business improvement process resulted in more than 370 basis points of positive operating leverage year over year.

On page 6 of our earnings release you can see the key currencies that impact our business.

The strength of the US dollar against the pound and the euro which were down 7% and 17%, respectively, continue to impact investment management more than our other businesses since 42% of their revenue is from outside the US.

As we have noted in prior quarters, the overall Company impact from currency translation is nominal.

Adjusted for the stronger US dollar, revenue would have been up approximately 4% and expenses up approximately 1%.

Income before taxes was 8% year over year, on an adjusted basis, and is up 10.5% if you exclude the provision for credit losses.

On a year-over-year basis, our pre-tax margin increased approximately 200 basis points to 31% in the third quarter of 2015.

And finally, return on tangible common equity was 21%.

Page 8 shows our consolidated fee and other revenue.

Asset servicing fees were up 3% year over year and flat sequentially.

The year-over-year increase primarily reflects organic growth in global collateral services, our broker-dealer activities and asset servicing, and net new business, partially offset by the unfavorable impact of the stronger US dollar.

Sequentially organic growth and net new business was offset by the typical seasonal step down in securities lending revenue, as well as lower market values.

Clearing services fees were up 2% year over year, down 1% sequentially.

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

Issuer service fees were down 1% year over year and up 34% sequentially.

The year-over-year decrease reflects lower fees in depository receipts and the unfavorable impact of a stronger US dollar and corporate trust.

And that was partially offset by net new business in corporate trust.

The sequential increase primarily reflects seasonal higher fees and depositary receipts versus the second quarter.

Treasury service fees were down 4% year over year and 5% sequentially.

Both the decreases reflect lower payment items as we continue to be highly selective, exiting client relationships that don't meet our risk criteria.

Third-quarter investment management and performance fees were down 6% year over year and sequentially.

On a constant currency basis, investment management and performance fees were down 2%, primarily driven by lower performance fees, lower equity market values and net outflows, partially offset by the impact of the first-quarter Cutwater acquisition and strategic initiatives.

The sequential decline primarily reflects lower equity market values, net outflows, and seasonally lower performance fees.

Both decreases also reflect the sale of Meriten Investment Management in July.

Performance fees were $7 million compared to $22 million a year ago.

FX and other trading revenue on a consolidated basis was up 17% year over year, and down 4% sequentially.

FX revenue of $180 million was up 17% year over year and down 1% sequentially.

The year-over-year increase primarily reflects higher volatility and volume.

Financing-related fees were $71 million compared to $44 million in the year-ago quarter and [$58] million in Q2.

The year-over-year increase primarily reflects higher fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity.

As we noted last quarter, some of our clients may moderate their usage or possibly find alternative sources for this financing.

Importantly, both increases also reflect higher underwriting fees.

Investment and other income of $59 million compared with $890 million in the year-ago quarter and $104 million in the second quarter.

The year-over-year decrease primarily reflects the gains on the sales of our equity investment in Wing Hang and the One Wall Street building.

Those were both recorded in the third quarter of 2014.

There is also a $17 million loss on seed capital investments that's recorded in consolidated investment management funds versus a $16 million gain last year that is not reflected in these numbers given the required separate growth presentation for consolidated funds.

The sequential decrease in investment and other income primarily reflects lower leasing gains and the loss associated with the sale of Meriten Investment Management.

Page 9 shows the drivers of our investment management business that help explain our underlying performance.

You can see AUM was $1.63 trillion unchanged from last year.

Note that assets under management for the current and prior periods have been restated to exclude Meriten.

We had $5 billion of long-term net outflows during the quarter.

Those were primarily in index strategies, active equities and fixed income, offset by continued strength in LDI, where we retain a leadership position.

Our wealth management business expansion initiative is helping to drive an increase in loans and deposits.

Year over year we saw a 19% increase in loans and an 11% increase in deposits.

Turning to the investment services metrics on page 10, you can see that assets under custody and administration at quarter end were $28.5 trillion.

That's up $200 billion year over year, reflecting that new business, partially offset by the unfavorable impact of a stronger dollar and the lower equity market values.

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

Linked quarter AUC/A was essentially flat.

We had estimated total new assets under custody and administration business wins of $84 billion in the third quarter.

Now, while this is relatively low, it's mainly due to the timing of new business wins this year.

In the second quarter we announced a significant new strategic relationship which resulted in an outside win for that quarter.

We continue to see strong demand for our services and we have a solid pipeline of opportunities.

It is important to note that this quarter we changed our methodology for reporting our estimated new business wins, moving from reporting based on the day the mandate was granted to the date that it was actually contracted.

Although it was not significant we have restated our historical new business wins beginning in 2014 through this quarter for better comparative purposes.

Additionally year-to-date new business wins total $1.42 trillion, so we are still trending above our historical average.

Now to turning to a review of other metrics, the market value of securities on loan at year end again was up year over year, increasing by 2%.

Average loans and deposits continued the strong year-over-year growth trend.

Our broker-dealer metric of average tri-party repo balances grew 4%.

All of our clearing metrics were up, with a global DARTS volumes up 18%.

The net decline in sponsored DR programs primarily reflects our continued focus on exiting low activity programs.

Turning to net interest revenue on page 11, you'll see that NIR on a fully taxable equivalent basis was up 5% versus the year-ago quarter and down 3% from Q2.

The overall balance sheet was stable this quarter.

We benefited year over year from higher average deposits and a better asset mix.

The yield on interest-earning assets increased 3 basis points year over year.

And the yield on interest-bearing deposits decreased 4 basis points.

The decline in deposit yield was driven by our efforts to charge for deposits in certain non-US locations to cover our cost where negative interest rates exist.

Sequentially NIR was lower, reflecting lower average securities and the impact of interest rate hedging activities.

The net interest margin for the quarter was 98 basis points, 4 basis points higher than the year-ago quarter and 2 basis points lower than the prior quarter, and in line with our expectations and remain in the range of 95 to 100 basis points, as we noted at our Investor Day last year.

The year-over-year increase reflects the shift out of cash and into investments in securities and loans, the benefit of which was mainly realized in the second quarter.

Turning to page 12, you'll see that noninterest expense on an adjusted basis decline 3% year over year and was flat sequentially.

The year-over-year decrease in non-interest expense reflects lower expenses in all categories, except other expense.

Other expense includes concessions we gave to clients impacted by the system with the SunGard systems outage, to cover out-of-pocket and other incidental expenses they incurred.

Lower expenses compared to a year ago reflect the favorable impact of a stronger dollar, lower legal and consulting expenses and the benefit of our business improvement process.

The third-quarter decrease was partially offset by higher consulting expenses associated with regulatory requirements.

Total staff expense declined 3% year over year, reflecting the favorable impact of a stronger dollar, the impact of curtailing our US defined benefit plan and lower incentive expense, partially offset by our annual employee merit increase effective on July 1, and higher severance expense.

The sequential increase in headcount of 600 employees primarily reflects the onboarding of staff related to two strategic relationships as well as our continued insourcing of technology talent to both reduce costs and retain institutional knowledge in-house.

Sequentially the annual employee merit increase and higher severance and other expenses were almost completely offset by lower incentive business development and self custodian expenses.

Turning to capital on page 13, our fully phased-in advanced approach common equity Tier I ratio decreased by 60 basis points to 9.3%.

That was driven by increases in risk-weighted assets primarily related to credit risk and operational risk.

In addition, we're also no longer assuming use of a methodology that is subject to regulatory approval, which reduced of the ratio by approximately 25 basis points.

As Gerald noted we made good progress on our supplemental leverage ratio and we are at 4.8% this quarter, due to higher capital and a lower average balance sheet.

While our ratio is now 20 basis points below the required 5% minimum we do plan to maintain a cushion above that.

As we have noted previously this ratio is expected to be our binding constraint and we are confident that we will be in compliance when the regulation becomes effective.

To the extent that excess deposits do not runoff as we anticipate with an increase in rates, we have many levers to pull, including the issuance of additional preferred, if necessary, to achieve compliance.

A few final notes about the quarter.

As you'll see in our release our effective tax rate was 25.4%.

Also on page 11 of the earnings release you'll see some investment security portfolio highlights.

At quarter end, our net unrealized pre-tax gain on our portfolio was $1.05 billion.

That compares to $752 million at the end of June, with the difference owing principally to a decline in interest rates.

Now I'd like to discuss a few points to factor into your thinking about the fourth quarter.

We expect to see the typical seasonal decline in depositary receipt fees with a limited offset in expenses.

We estimate the decline in the fourth quarter from the third quarter to be approximately $120 million in revenues.

We expect to generate seasonally higher performance fees in our investment management business in the fourth quarter, approximately in line with last year.

Net interest revenue is expected to be flat.

We expect to see seasonally higher business development expenses.

Additionally, we expected increase in consulting expenses related to our investments in regulatory compliance initiatives.

I would also like to note that the fourth quarter of last year was when we began to see the US dollar strengthen, so you should keep that dynamic in mind as you model us.

We expect total expenses to be relatively flat in the fourth quarter, versus the year-ago period, adjusted for litigation, and lower for the full-year 2015 as compared to the full-year 2014.

We continue to expect our tax rate to be approximately 25%.

I will also remind you that we're going to pay a dividend on the preferred that we issued in the second quarter.

And, finally, we continue to expect to execute on share buybacks in accordance with our plan authorization.

So, in summary, we are executing on our strategic priorities and we are pleased with the progress we are making, even with the relatively challenging market headwinds.

We're continuing to generate significant positive operating leverage, even while we invest in initiatives to drive further growth and absorb higher regulatory compliance costs.

We are focusing on managing our balance sheet, generating capital, and deploying it effectively to deliver value to our shareholders.

And we remain on track to achieve the three-year targets we shared at Investor Day this time last year.

With that, let me had it back to Gerald.

Thanks, Todd.

Operator, I think we're ready to open it up for questions.

(Operator Instructions)

Ashley Serrao, Credit Suisse.

Good morning.

I was just curious, what portion of the $500 million savings that you outlined at Investor Day have been achieved so far.

And also what portion of that has been reinvested in the business.

Ultimately I'm just trying to get a sense of the net savings that have dropped to your bottom line.

And I may have misheard this but it sounds like you've also identified incremental opportunities that you think would be additive.

Any color there would be appreciated.

Yes.

Ashley, let me say -- this is Todd -- first of all, that the $500 million was a number that we put out last year.

And we've been working hard to add to that total figure.

This is a continuous process improvement.

These are structural changes, they're not one-time events.

And we do continue to see increasing opportunities and the number continues to get bigger.

In terms of how much is adding to the bottom line versus what's being reinvested into regulatory or other strategic platforms, I think the best way to look at that is to look at the increase in the operating margin.

Some of that -- the 377 basis points this quarter on a year-over-year basis -- some of that is related to the dollar, probably about 77 or so.

So, even on a constant currency basis we're 300 basis points better.

So, that's what you're seeing drop to the bottom line.

Okay.

Thanks for the color there.

And then the other question was, I noticed cash inter-bank placements ticked up sequentially for, it looks like, the first time in a year.

I know you've practically been trying to shift away from cash so I was curious how we should be interpreting the increase.

Yes.

If you look at the average period, is probably a better way to look at it, and you'll see it's relatively flat.

And actually cash at the central banks is down a little bit.

So, we do get spikes from time to time on quarter ends.

In fact, the period ends have been spiking by about $15 billion or $20 billion, so you could just get noise there.

But, in general, cash at other banks should be flat and central bank deposits is going to be down on a year-over-year basis as we put more in loans as well as in securities.

Okay.

Thanks for taking my questions.

Betsy Graseck, Morgan Stanley.

Hi.

Thank you.

Todd, I wondered if you could give us an update on how you are dealing with negative rates over in Europe, the degree to which your deposit pricing strategy is done in line with an expectation to reduce deposits there.

There is a slight decline, Betsy, in deposits since we initiated that strategy, but not much.

We did up the charge for some of those deposits in the third quarter, late in the third quarter.

And I would say you're just seeing a modest decline, if any.

So, as you think about the size of the balance sheet and this lower-for-longer rate environment, could you talk through thoughts on the SLR and whether or not that includes issuing incremental [press]?

We did get to 480 on the quarter.

We do accumulate, even at 100% payout ratio, somewhere between $600 million and $800 million a year in incremental capital from the amortization of intangibles, as well as equity that's issued for compensation plans.

So, if you take that into consideration, that moves us up a bit over the next couple of years.

We've also gone through -- we've looked at our balance sheet through two lenses, one is in a zero rate environment and one is in a normalizing rate environment that's reflected in the forward curve.

In the normalizing rate environment, as you know, we would expect quite a bit of a deposits to run off and we could probably comply in the normal course with the SLR with a pretty decent cushion.

If it stays in a zero rate environment, we have a team working together with investment services and the treasury group.

We've prioritized all of our balance sheet consumption and where we might either look at interest rates by going even negative on interest rates to discourage deposits or, in other words, pushing off other SLR-related activities.

And we would hold as a last resort, if it makes sense economically, to issue preferreds.

Okay.

And I'm sorry if I missed it but have you given your bank SLR?

I know you talked about the holdco level.

The bank SLR is about 20 basis points below the holdco level right now.

All right.

Okay.

Thanks.

Luke Montgomery, Bernstein Research.

Thanks.

Good morning.

I'd like to know what your thoughts are on the application of blockchain technology to securities settlement and tri-party repo.

I think that there's a number of startups out there that are looking at this.

Do you think the technology would be more likely to disintermediate the settlement infrastructure, which would be maybe the central securities depositories?

Or could it also obviate some of the services that global custodians like you provide?

And then do you see any limitations in the technology or maybe vested interests that would prevent it from being adopted by the securities markets?

And just how closely have you been examining it?

That's a mouthful of questions.

We are studying blockchain technology quite intensively.

It has some very positive attributes.

Clearly, the whole idea of two sides showing up on a public ledger and being able to swap values instantaneously is very appealing.

So, we are looking at it whether it could be deployed in some pilot programs that we have internally, and, therefore, see how the technology can be used to improve our core operations, both on the clearance and settlement said.

We've been trying to engineer our Company for same-day and real-time settlement, regardless.

So, whether it's through blockchain or through other means it's something that we think about a whole lot.

We do have some pilot programs going on in the payment space and our treasury services area, where that's the area most impacted at the moment by third-party technology companies who are going after the payments, particularly small payments, consumer payments.

But anything that happens at the consumer level we assume it's going to happen at the institution level.

As it relates to clearance and tri-party directly, that is an extraordinarily complex operating platform with incredibly complex algorithms built into it.

So, we're not naive to think that technology can't disrupt even that but I think we feel pretty comfortable at the moment there.

And last but not least, for blockchain to work, you need to have everybody on both sides, the buy side and the sell side, to show up simultaneously in volume to have it makes sense.

So, we are looking at the technologies on how it can be applied.

There's a lot of room ahead of us before it's fully implemented but we are studying it very carefully.

Okay.

Thanks.

That's really helpful.

And then I was just hoping you could sketch out in a little more detail what you're attempting to achieve with Dreyfus and retail distributional.

I think I recall one of the possible explanations for the low to mid 30% range operating margins in the asset management business is that the retail platform is expansive but maybe not up to scale.

So, as you execute against that plan do you expect to see operating margins in the asset management business improve?

Yes.

This is Curtis.

Absolutely.

What I would point you to is that, while we're the sixth largest asset manager in the world, in terms of US mutual fund families we are currently 37.

So, we have all of the investment capabilities or a large majority of the investment capabilities in-house that is used by investors that use mutual funds, financial advisors and individuals ultimately as the end users.

But our platform to reach advisors is below where we think it should be and where it could be to really improve our distribution of our investment capabilities through that channel.

It's very important to appreciate the large-scale shift of assets from defined benefit plans ultimately into rollover 401(k) after they go through retirement plans.

So, a major industry shift is assets that had been managed by CIOs of pension plans are now going to be managed again by individual advisors.

So, we want to obviously be in sync with that shift.

The investment that we become over a year ago, we're actually pretty excited about.

US retail, despite a pretty challenging environment for the industry, we've done quite well.

Recent statistics around flows actually have come out and we were 18th in terms of the third quarter in terms of net flows.

If the 37th largest family is 18th in net flows over an extended period of time we should see our market share grow.

It's a very important part of our initiative that we outlined at Investor Day.

I would also highlight that we do reach clients directly through our wealth management business.

Our wealth management business tends to focus on individuals and family offices with higher net worth.

And we've seen through our expansion fantastic growth there.

Todd mentioned the 19% increase we've seen in loans and deposits.

I would share with you that our partnership with Pershing has been a really important contributor to that.

Nearly a quarter of our growth in loans and deposits came from connecting to the financial advisory clients of Pershing.

So, both US retail coverage of advisors and wealth management are important parts of our future investment.

Glenn Schorr, Evercore ISI.

Thanks very much.

Everybody likes the positive operating leverage, even without the currency impact.

A quick question on the delta in the legal and consulting expense year on year.

I don't know if you can give us the dollar amount for each quarter or just the delta.

Just curious how much that was a contributor.

Yes.

The consulting and legal expense did decline on a year-over-year basis a little.

We are seeing some of the dividends from the lower litigation defense charges, as well as lower consulting expenses related to a number of our strategic platforms.

That was offset somewhat by higher consulting expenses related to some of the regulatory compliance efforts, especially around improving the qualitative process in our CCAR, as well as the resolution and recovery planning.

So, on a year-over-year basis, I think it was down about $20 million.

That means the bulk of the 300 basis points year-on-year operating leverage is the structural improvement stuff.

That is correct.

Yes.

It's beyond that.

A lot of it is coming -- obviously the biggest expense is in staff expense, so that's where most of it's coming.

Alex Blostein, Goldman Sachs.

Great.

Good morning, everybody.

I might be a little premature but as we think about 2016 you guys obviously had a great job this year controlling expenses.

Some of it is FX related, as you noted, and a lot of it is just core improvement.

Given the fact that it sounds like you made a lot of progress on the regulatory front and getting those systems in place, where are we in the pace of growth of regulatory-related expenses?

And as we think out into next year is there still enough you guys can do in the core business to keep expenses flattish to down?

I think, Alex, it's a little early in our planning process.

We continue to identify through the business improvement process additional actions that we can take.

We do anticipate, as I'd indicated, in the fourth quarter a bit of a pop on some of the regulatory costs as we further build out some of the compliance and risk functions.

I'd say it's a little early to call it for next year but we do see a number of continued opportunities.

And our goal, as you'll even see in this quarter, the guidance that we gave for the fourth quarter, is to keep things flat on a year-over-year basis.

Depending on the revenue growth and where the revenue comes from, that could be more challenging.

Got it.

And then just one around balance sheet management.

You guys have been charging for deposits in Europe for the last couple of quarters.

Any thoughts in doing the same in the US given the fact that the balance sheet came down a little bit quarter over quarter but overall still pretty elevated?

Any thoughts around charging for deposits here?

Alex, I'll take that.

We do have a team working with our treasury group and our investment services group at the US client base, making sure whatever deposits we do have from them are ideally operational deposits versus non-valuable deposits, and experimenting with certain types of clients and client segments whether they can be priced differently than what they are today, and either they pay for it, pay for the use of the balance sheet or they move the deposits somewhere else.

So, we are doing it on a selective basis.

We have not put through any charges yet but we are having conversations with certain clients and certain client segments.

I think we also benefit from having the ability and the portal to be able to help our clients sweep cash into money market mutual funds, both our own and other providers.

So, we can at least retain some of the distribution fees associated with it.

Ken Usdin, Jefferies.

Thanks.

Good morning.

On the asset servicing said, you were able to keep fees flat quarter to quarter even with that sec lending and equity market declines.

So, I'm just wondering, did you already start to recognize revenue from the T. Rowe contract?

And how do we start to understand how that builds forth over time?

It seems like the underlying core servicing and new business was quite good relative to the market conditions so I was just wondering if you could flush that out for us.

Yes.

This is Brian Shea speaking.

Asset services fees were up 3% year over year, and it's driven by a combination of global collateral services, broker-dealer services and the core asset servicing fees.

So, pretty good performance overall.

I think from a T. Rowe Price perspective we onboarded the T. Rowe price middle office team in August and we began to receive some revenue from middle office operational services from T. Rowe Price in August.

Then we'll be moving toward a fund accounting conversion from their existing fund accounting platform to ours, and then a new middle office platform in stages.

And as we implement each stage we expect to have additional revenue growth from each stage through the execution process.

And, importantly, we see this as a secular trend among investment managers who are looking for much more variable cost, share economies of scale services both from middle office services and technology platforms, as well.

Very little revenues in the third quarter from T. Rowe.

Okay.

So, then what drove the sequential growth ex T. Rowe, then, -- across the businesses, aside from sec lending decline?

Organic growth, global collateral services growth, broker-dealer services growth all contributed to asset servicing year-over-year improvement.

And sequential improvement.

And sequential improvement.

Yes, sure.

Brian Bedell, Deutsche Bank.

Great.

Thanks for taking my question.

Just to maybe zero in on the short-term rate environment, a couple things.

What's your outlook for money market fee waivers into fourth quarter, given just the recent pullback in some of the treasury and repo yields?

And then also on the balance sheet for the quarter, we saw an uptick in securities portfolio yield.

Maybe just talk about the driver of that.

It looks like the rate on the MMDAs went to zero on the liability side so maybe if you can talk about those dynamics.

Okay.

Good morning, Brian, it's Todd.

In terms of fee waivers, there is not a heck of a lot of noise there.

We've given a $0.06 to $0.08 impact overall per quarter and I would expect it's going to be well within that range.

It was in the middle of that range in the third quarter.

So, we are seeing some noise on yields with the potential government shutdown.

And what was your second question, Brian?

On the results in the third quarter on the drivers -- there was an uptick in the government and other securities line in the securities portfolio.

And then also it looks like the MMDA went from 13 basis points to zero and I'm just wondering if that's sustainable.

In terms of -- again you're talking about the securities portfolio, our proprietary portfolio.

It is up from last year at this time fairly substantially and we did get some yields out of it.

Basically, we repositioned cash once we had a full understanding of the LCR and it was acknowledge that we could use the health and maturity account and still have an asset considered as a high-quality liquid assets.

So, at that point in time we took down interbank placements and we increased our securities, increased our duration a little bit in the portfolio, and also increased the yield.

That's been a little bit of change over the past couple of quarters but we think that's relatively stable.

And that's why we're forecasting into the fourth quarter flat NIR relative to the third quarter.

In terms of in the MMDAs going down, I don't know, Curtis, if you have -- I don't see any impact to that degree at this point in time.

And the excess deposits are still in that $50 billion to $70 billion camp?

That's where we would estimate them.

Yes, Brian.

And then just to follow up on asset management, you're clearly benefiting in the LDI side from the close coming out of defined benefit pension plans.

As you think about the revenue capture that you get in LDI versus the stuff that you'd be losing in the index and any active, is that an accretive swap?

It sounds like that could obviously be a longer-term trend.

If you just want to comment on that.

Yes.

Index fees, as you know, are very low and the large majority of our index assets are institutional so they are truly on the low end of the fee range.

LDI has single-digit management fees.

Many of those mandates also have performance fees, so a lot of the performance fees that we earn actually come from LDI mandates.

So, you have to think about it from a blended management and performance fee perspective.

The other thing I would tell you is that when we take on an LDI mandate we are frequently taking on a large majority of a client's total portfolio.

So, they may be reducing their equity and other exposures that are managed by others and moving their portfolio, sometimes their whole portfolio, to us in LDI.

A lot of the LDI growth we have seen have been where pension plans have either taken a portion or, again, in some cases, a large majority of their plan and moved it to us.

Index assets are a pretty interesting flow dynamic to watch.

They have a lot to do with just the overall exposure.

Some very large clients, they use index products to get data exposure to equity markets and fixed income markets.

And given the volatility you see in the outflows we've had in equity index strategies, we've mentioned in the last quarter and I'll say it again this quarter, some of the flows in index are very large flows from single clients.

So, not really as connected to what we're seeing in LDI.

Brennan Hawken, UBS.

Good morning.

Thanks for taking the question.

I understand that what you can say on this might be limited at this point, but is there any way you can help us think about any potential liabilities and other headwinds from this SunGard outage at this point, and how you feel about your ability to pass those liabilities on to SunGard?

Okay, Brennan.

This is Todd.

I'll take some of that and maybe I can turn it over to my colleagues, as well.

In terms of the financial impact, we did incur some incidentals, as you might expect, in the quarter, and those ran through the numbers.

And we did cover the related charges that some of our clients would have experienced.

And we did take that as a charge in the third quarter, as well.

In terms of any differences in making investors whole, we don't see, as we've gone through the reconciling process, we don't see much in the way.

And there certainly could be some of that.

And we, of course, have reserved our right to include SunGard in any recoveries that we'd be looking to make.

So that's about where we are financially.

And just broadly, Brennan, we've been very proactive with our clients, making sure that they have been covered in terms of their out of pockets.

They went through a challenging week so we wanted to make sure we were proactive in covering their costs and taking care of them.

The investors at the end of the day, between the, quote, machine-generated NAVs and the process, the protocol we followed at the time, was miniscule.

So, we felt good about the process that was employed.

We're actively working with the clients, working with their fund boards, making sure that they fully understand what happened and how we recovered, and why the system is stable and safe.

So, we're moving forward.

Okay, great.

And certainly we've talked actually to some of your clients and they've described you as good partners through this.

So, heard that on the other side, as well.

So, thanks for that.

And then just a quick one on capital.

Can you quantify or give us a sense about how much of your advanced RWAs are in op risk at this point?

Yes.

This is Todd again.

It's a very big number.

That may change as the regulators reconsider the standardized approach.

The methodology is informed by external losses or losses at third parties.

And as there have been bigger and bigger losses, that gets filtered into our model, and, as a result, keeps driving up the risk-weighted assets.

So, the number is probably a little over one-third, or right around one-third, of our total risk-weighted assets in the advanced approach.

Mike Mayo, CLSA.

Can I just get a clarification?

Your assets under custody are flat in a down market second quarter to third quarter.

Is that explained by the global collateral services and broker-dealer services or is there something else going on?

It's organic growth.

Mike -- it's Brian Shea -- assets under custody administration are up 1% year over year, flat sequentially, as you mentioned.

Currency and market values had a negative effect.

If you had a constant currency and constant market you'd have seen more like a 3% growth rate in our AUC/A, which is pretty solid.

And, as you know, our focus is not exclusively on AUC/A growth or pure revenue growth or pure market share growth.

But we've shifted our focus towards better profitability and creating more value for clients and shareholders.

The best example of that, which Gerald mentioned earlier, is that we are repositioning our UK TA business and we're actively repositioning it as a global institutional bundled service and reducing the focus on local UK retail TA.

So, we're actually pushing AUC/A out in that environment but we're going to improve our profitability in the process, and that's the goal.

And it was the quarter that we onboard T. Rowe, Mike, so that was a substantial reason for not having any material sequential impact.

Okay, that makes sense.

We've heard a lot about pricing for better profitability for three, four years.

Not just from you but from the whole subsegment.

Are you raising your hurdle rates?

Are you instructing your relationship managers to do something differently?

I know you've mentioned that you've had these pricing conversations with the lower-tier accounts, but can you provide anything else more tangible more than just the UK example?

Sure, Mike.

It's Brian again.

I think you've heard us talk in the past about up-pricing small accounts, raising minimums and forcing minimums, and et cetera.

And we have done quite a bit of that over the past few years and made some progress, for sure.

But now what's happening is a slightly different thing, which is we've formed a client pricing strategy group, and the focus of it is to align the drivers of our costs and our client pricing to drive more rational behavior end to end with the clients.

We believe there's a real opportunity to lower costs end to end with our clients in partnership.

And we are using pricing strategies and data to inform the clients, in a way, and to incent the clients to actually implement low-cost behavior.

For example, we have online systems that clients can use which are more efficient and provide better service, and yet clients are still faxing us things.

So, we're putting incentives in place to move toward the online system and use the more rational service delivery.

That actually lowers the clients' cost, makes them more efficient, as well.

There's a series of things like that we're working on and we'll be consulting with our clients and trying to drive lower end-to-end costs with them in a rational way.

Jim Mitchell, Buckingham Research.

Okay.

Thanks.

Good morning.

Maybe just a quick follow-up on capital.

With the bank SLR at 4.6%, needing to get to 6%, is there anything you can do in terms of shifting around assets from the holding company to the bank to shore that up, because that's obviously more of a constraint than the firmwide SLR?

How do we think about that if we're in a lower-for-longer and higher deposit type environment?

Yes, Jim, that's exactly what we intend to do.

So, I think you hit the point.

We think we can probably downstream capital in a way that bumps up the capital at the bank over the capital at the holding company.

There'll be a little bit of cost to that but it won't be huge.

So, we don't need to execute that right now.

Okay.

And do you have to incorporate -- maybe we don't know yet -- but just thinking about next year's CCAR, it will capture 2018 -- do you need to build a glide path in to next year's CCAR for SLR in any way or do you have time to get there?

Yes, next year's CCAR specifically excludes the SLR so that will go into effect in 2017.

But I think any prudent analysis -- and this gets into the qualitative side of it -- I think that we're going to have to demonstrate that we have a reasonable glide path and that we have a way to get there.

So, I think that will be from the qualitative side, but it's excluded from the actual quantitative side of next year's CCAR.

Adam Beatty, Bank of America.

Thank you.

And good morning.

Just a couple of follow-ups on asset servicing.

Firstly on SunGard, I wanted to close the loop on that.

Have you seen any extended duration of the contracting process, any impact on your discussions with prospective clients due to that?

And then on the cost side, is there any run rate cost that you would expect from maybe additional safeguards or what have you?

Thanks.

It's Brian Shea.

We've been in constant communication with our clients, especially the affected clients, during the period of time that there was an impact.

But actually we've extended our outreach to clients to put this in context and to help them understand the details, and have had meetings and dialogues of well over 1,000 clients to make sure that they understand what's going on.

I would say our clients have been working with us very closely and been very supportive and understanding during the incident, and are getting a tremendous amount of transparency from us and from SunGard around the actual incident and what we're doing about it going forward in terms of ensuring our ability to deliver service on critical activities, and have systems in place that are more reliable and more resilient, both from a vendor management perspective and our own internal system.

So, so we're using every opportunity here to learn from this experience and to actually make us a more resilient, reliable partner.

And I think our clients appreciate that and are getting very good insight from us about that.

In terms of the financial perspective I'll let Todd get in on that.

At this point, we've not identified any material increase in costs as a result of this.

We did incur pretty meaningful cost in the third quarter which we ran through the numbers.

There could be some, to your point, but at least we haven't identified any that would be material at this point.

Appreciate that, thanks.

And then on the T. Rowe relationship it sounds like there's going to be some layering on of costs and revenues.

What is your expected timing given your implementation plan of, number one, achieving a net profit contribution from that, and also in terms of just getting to steady-state in terms of revenues and costs?

Yes.

We're still in the investment stage of the strategic relationship.

As you know, we've on boarded a couple hundred-plus people in August, and we began to receive some revenue, although, as Gerald mentioned, it's on the modest end.

We will do the fund accounting conversion in 2016.

We'll be providing more services and we'll get some more revenue associated with it.

And the final stage will be the middle office platform conversion, which I don't have the timing directly in front of me but let's just say 2017, and at the end of which we expect to have a good strategic relationship that's profitable and beneficial to both parties.

Gerald Cassidy, RBC.

Thank you.

Good morning.

Todd, can you share with us on the deposits that you are assessing a fee on, what percentage of your total deposits are actually in the environments that actually have negative rates?

And of that amount, what percentage are you charging a fee?

And are non-interest-bearing deposits included in that, as well?

Non-interest-bearing deposits could be included in that.

Typically, overseas, you can go either way.

About a third of our deposits are non-dollar.

Of that, the majority are euro.

So, that would be the number that would be at this point in time exposed to a fee.

Any other currencies, like Swiss franc and the Danish currency, it's a pretty small number that doesn't even move the needle.

So, it's really basically the euro where we are assessing anything of any size.

Great.

And then just as a follow-up, I may have missed it, you mentioned about the other operating expenses including the one-time costs associated with the SunGard issue.

What was the dollar amount on those one-time costs?

We didn't disclose the dollar amount, Gerard, but if you look at that number, and you can see the sequential increase in other, a substantial part of that was related to the SunGard matter.

Great.

Thank you.

Okay.

Thank you very much, everyone, for dialing in.

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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.

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