紐約梅隆銀行 (BK) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2015 earnings conference call hosted by BNY Mellon.

(Operator Instructions)

Please note that this conference call will be recorded and will consist of copyrighted material.

You may not record or rebroadcast these materials without BNY Mellon's consent.

I'll now turn the call over to Ms. Valerie Haertel.

Ms. Haertel, you may begin.

Thank you, Nicole.

And thank you, everyone, for joining us.

As Nicole mentioned, we are reporting our fourth-quarter and full-year 2015 earnings.

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

Our fourth-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 our 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 made on this call today speak only of today, January 21, 2015, and we will not update forward-looking statements.

As a final note we plan to file our 2015 10-K on February 26.

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

Gerald?

Great, thanks, Valerie.

And welcome, everyone.

Thanks for joining us this morning.

Our fourth-quarter results capped off what I think was a very good year.

We demonstrated that our strategic plan has positioned us well to perform in all operating environments.

Even with geopolitical instability, emerging market weakness, higher regulatory compliance requirements, and low interest rates, we executed on our strategic priorities, and focused on what was within our control.

For the full year EPS was up 19%, total revenue was up 2%, while total expenses were down 2%, resulting in more than 400 basis points of positive operating leverage.

Net interest revenue was up 5%.

And we improved our pretax operating margin to 31%.

And, finally, our return on tangible common equity was a very healthy 21%.

We are on track to achieve our three-year goal, targets which call for healthy earnings growth, not reliant on improved market conditions.

Turning to the fourth quarter itself, adjusted earnings per share was $0.68.

That excludes $0.11 per share for the impact of the previously disclosed impairment charge related to a recent court decision, which Todd will discuss in more detail in a moment, and litigation and restructuring charges.

That puts earnings per share up 17% year over year on an adjusted basis.

For the quarter, again on an adjusted basis, total revenue was up 2%, total expense was down 2%, and we generated over 300 basis points of positive operating leverage mainly driven by our business improvement process.

Net interest revenue was up 7% year over year and our return on tangible common equity was 19% for the quarter.

Now looking at our progress against our strategic priority, as we said in the past, our first priority is driving profitable revenue growth.

We have heightened focus on disciplined revenue growth which means paying particular attention to our clients, profitability and shareholder value versus gross revenues and market share.

During 2015, we made progress on a number of different fronts.

We are focused on deepening our client relationships by leveraging our expertise and determining how we can add further value to them and increase the acceptance rate of our services.

At the same time, we are also examining each business and service that we offer to insure that we are receiving value for what we deliver.

The strategic platform investments we've been making continue to pay off.

We've been able to create efficiencies and savings for us and in many cases for our clients, as well.

We are now in the early stages of rolling out our new platform, Nexen, which will deliver additional functionality and capabilities to all of our clients.

In investment management we extended our liability-driven investment strategy into the US market through our Cutwater acquisition.

Our US retail and wealth management initiatives continue to add to our new business backlog.

This week, we announced plans to acquire Silicon Valley wealth manager Atherton Lane Advisers, which has $2.7 billion of assets under management.

This investment further strengthens our footprint in one of the fastest growing US wealth markets.

And we're also pleased to welcome them to the BNY Mellon team.

And in the US retail space we had success with the Spanish global fixed income strategy, which was the highest growth product in Morningstar's world bond category in 2015.

In the markets group, we continued to enhance our collateral management systems and foreign exchange trading platforms, all to drive efficiencies, capture more volume, and improve the opportunities for future revenue growth.

Our second priority is executing on our business improvement process.

We have been meeting or exceeding our business process goals and are on target to achieve the structural cost reductions that we shared at Investor Day in October of 2014.

During 2015, we simplified and automated global processes, optimized and streamlined our technology infrastructure and shrank our real estate portfolio.

During the fourth quarter we took a number of additional actions to improve the Company's business and financial performance.

Let me give you a couple of examples.

We are implementing robotics and machine learning to eliminate repetitive non value-added work, enabling a quicker automated process while reducing risk and cost.

We completed three proofs of concept, all demonstrating a high degree of accuracy and processing, reducing transactional processing time, and eliminating manual steps, all of which enables us to redeploy resources to activities that create greater value for our clients.

Last quarter I mentioned the new client pricing strategy group that we created to analyze and measure service delivery costs to better align our costs to client pricing.

This group is now reviewing balance sheet related business practices such as overdrafts, as well as manual transaction activities and new strategies around physical securities, as well as standardizing pricing across our business units.

We are also continuing to build out our global delivery centers in lower-cost locations to allow for further expansion and position migration.

We moved over 230 full-time staff positions to global delivery centers during the quarter and more than 1,000 full-time positions in 2015.

We've also begun to implement the bring-your-own-device strategy, reducing the number of data terminals across the Company, and have cut back on redundant pricing fees.

These efforts, large and small, are part of a continuous comprehensive and sustainable process to create efficiencies and savings consistent with our continuous improvement culture.

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

During 2015 we reduced and simplified our counterparty exposures; invested in and focused on compliance, risk management and control functions; examined and enhanced our vendor management practices following the SunGard incident, incorporating lessons learned and sharing those with our clients; and made significant investments in our resolution and recovery plans.

We also introduced a more robust data governance framework that will strengthen our data collection and analytical capabilities, which is important in meeting all of our regulatory requirements globally.

And, lastly, we demonstrated our strong business recovery capability in response to the historic flooding in Chennai, India where we have thousands of employees.

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

We remain focused on maintaining a strong balance sheet as well as capital and liquidity positions, while returning value to our shareholders.

In accordance with our 2015 capital plans, which authorized us to repurchase up to $3.1 billion of our stock, we repurchased $431 million in shares and we distributed $188 million in dividends during the quarter.

For the full year, we repurchased approximately $2.4 billion in shares and distributed more than $760 million in dividends.

Over the last four years, we have reduced our shares outstanding by 13%, which is among the best in the industry.

From a regulatory ratio standpoint, all of our key capital ratios improved as we move toward full compliance.

This quarter, our CET1 ratio under the fully phased in advanced approach improved to 9.5% and we increased our supplementary leverage ratio to 4.9%.

We also remain in full compliance with the liquidity coverage ratio which became effective in 2015 with a full phase-in period that extends through 2017.

We remain very confident that we will be in full compliance with all of the regulatory ratio requirements at the time of or ahead of the required dates.

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

We have continued to focus on investing in our people.

We have refreshed the tools and processes we use to manage, grow and get the most out of our talent, and we are seeing benefits of prioritizing talent, as reflected in our financial performance.

As we look ahead, given the rocky start to the year in the financial markets, we expect our business improvement process to be increasingly critical to our results going forward.

We remain confident that our strategy and relentless focus on the execution of our priorities will enable us to achieve the three-year financial targets we shared on Investor Day and, importantly, deliver value-added services and solutions to our clients.

With that let me turn it over to Todd.

Thanks, Gerald.

And good morning, everyone.

My commentary will follow the financial highlights document and start with slide 7.

Before I walk you through the details of the financial results let me provide you with an overview of the court decision that Gerald noted, which resulted in a fourth-quarter after-tax impairment charge of $0.10.

The charge resulted from the Seventh Circuit Court of Appeals decision related to a $312 million secured loan we had to Sentinel Management Group which filed for bankruptcy in 2007.

Following a favorable December 2014 decision favorable to us by a federal court finding that our lien against Sentinel was valid, we received payment of the outstanding principal and interest on the loan.

Subsequently the bankruptcy trustee appealed the decision and the appellate court invalidated our lien on the collateral that supported the loan.

The impact of this decision is that we will have an unsecured claim in the Sentinel bankruptcy.

As a result, we took an impairment charge in the fourth quarter of $170 million on a pretax basis or $106 million after-tax, representing our estimate of the probable loss.

Turning now to our fourth-quarter results in the financial highlights document, we'll start with slide 7. I'll focus on our non-GAAP or operating results for the quarter and the year-over-year comparisons.

On an operating basis our fourth-quarter EPS was $0.68.

That's up 17% versus year ago.

On a year-over-year basis fourth-quarter revenue was up 2%, expenses down 2%, and we had 308 basis points of positive operating leverage.

As we've noted in prior quarters, the strength of the US dollar continues to impact results negatively for revenue and positively for expense.

Net impact for currency translation is minimal, however, to our overall consolidated financial results.

Adjusted for the dollar, revenue would have been up approximately 3% and expenses a little less than 1%.

However, our Investment management business is impacted more significantly from the strength of the dollar since a significant component of investment management revenue is from non-US dollar sources.

If you reference page 6 of our earnings release you'll see the two currencies that impact Investment management the most.

It's the pound and the euro.

They were down 4% and 12%, respectively, against the US dollar.

Income before taxes was up 10% year over year on an adjusted basis.

On a year-over-year basis our pretax margin increased approximately 200 basis points to 30% in the fourth quarter.

Return on tangible common equity was 19% for the quarter.

Moving to slide 10, that details our operating results for the full year.

You can see the 2% revenue growth and 2% decline year over year in expenses that Gerald mentioned that resulted in 420 basis points of positive operating leverage.

Income before taxes grew 12% and EPS up 19%.

On a constant currency basis, revenue was up 5% and expenses were up 1%.

Slide 11 illustrates key metrics of our performance that demonstrate solid execution of our strategic priorities in 2015.

You can see the four quadrants here -- EPS up 19%, non-interest expense down pretax operating margin expand to nearly 300 basis points, and return on tangible common equities is also up 300 basis points to 21%.

Slide 12 shows our consolidated fee and other revenue.

Asset servicing fees were up 1% year over year, down 2% sequentially.

The year-over-year increase primarily reflects growth in global collateral services, broker-dealer services, and higher securities lending revenue, which is partially offset by the unfavorable impact of a stronger dollar.

The sequential decrease primarily reflects lower client activity.

Clearing service fees were down 2% year over year and sequentially.

Both decrease were primarily driven by industry consolidation as three large clients are transitioning to self-clearing firms.

Partially mitigating this impact is the new businesses we are onboarding from a competitive rate to the business.

And through a combination of net new business and expense control, we expect clearing to be pretax income neutral in 2016.

Issuer service fees were up 3% year over year and down 36% sequentially.

The year-over-year increase primarily reflects net new business and lower money-market fee waivers and corporate trust that was offset a bit by the stronger dollar.

The sequential decrease primarily reflects seasonality in DRs.

As we've noted in prior quarters, our corporate trust performance has been improving.

This quarter it was a positive contributor to our growth.

Treasury service fees were down 6% year over year and flat sequentially.

The year-over-year decrease primarily reflects higher compensating balance credits and lower volumes.

Fourth-quarter investment management and performance fees were down 2% year over year.

That would have been up 1% on a constant currency basis.

That was driven by higher performance fees and a slight reduction of money-market fee waivers, partially offset by lower equity markets.

Sequentially, Investment management and performance fees increased 4%, and that's primarily due to the normal performance fee seasonality.

Performance fees were $55 million and that compares to $40 million a year ago, driven by stronger performance across a wide breadth of strategies, including a sharp increase inequity long-only fees.

FX and other trading revenue on a consolidated basis was up 15% year over year and it was down 3% sequentially.

FX revenue of $165 million was flat year over year, down 8% sequentially.

Year over year we saw lower standing instruction volumes and lower volatility, which were offset by higher volumes in other trading programs.

Also included is the impact of hedging activity of foreign currency placements.

The sequential decrease primarily reflects lower volumes and volatility and seasonally lower deposit receipts-related activity.

That was partially offset by the hedging activity for foreign currency placements.

Other trading revenue increased to $8 million compared with a trading loss of $14 million in the year-ago quarter and loss of $1 million in Q3.

The year-over-year increase primarily reflects the losses on hedging activities in one of the investment management boutiques that we recorded in the fourth quarter of last year.

Financing-related fees increased 19% to $51 million compared, and that's compared to the year-ago quarter, and decreased 28% sequentially.

The year-over-year increase primarily reflects higher fees related to tri-party repo activity.

In the second quarter we noted that some of our clients could moderate their usage or possibly find alternative sources for this financing in the future, and we actually began to see this take place during the fourth quarter.

The sequential decrease primarily reflects lower underwriting fees and the impact of lower fees related to the intraday credit I just mentioned.

Investment and other income of $93 million compared with $78 million in the year-ago quarter and $59 million in the third quarter.

The year-over-year increase primarily reflects higher other income related to termination fees in our clearing business, and that was associated with the client transitions that we mentioned, as well as seed capital gains.

And that's partially offset by lower asset-related gains and lease gains.

The sequential increase in investment and other income primarily reflects higher asset-related gains, income from corporate and bank-owned life insurance, and other income related to clearing termination fees, partially offset by lease residual losses.

Slide 13 shows the drivers of our investment management performance.

That should help explain the underlying business.

Assets under management of $1.63 trillion were down 4% year over year, driven by stronger dollar and lower equity markets.

And they were flat sequentially.

We had long-term outflows of $11 billion, $16 billion out of index funds and $5 billion into active funds.

Additionally, we had $2 billion of short-term cash flows.

For the full year we had long-term outflows of $17 billion, mainly in equity and index investments, partially offset by flows into LPI and alternatives.

Wealth management and US intermediate expansion initiatives continues to show some progress.

Wealth management loans were up 21%.

Deposits were up 6%.

In addition, we announced the acquisition of the Silicon Valley wealth manager.

There's AUM of $2.7 billion and 700 high net worth clients, and an investment that expands our presence in this fast growing market.

In US intermediary we had strong performance in a number of investment strategies.

We experienced organic growth rates that exceeded their Morningstar categories.

Turning to our investment services metrics on slide 14, assets under custody and administration at quarter end were $28.9 trillion, up 1% or $400 billion year over year, reflecting net new business, partially offset by the unfavorable impact of a stronger US dollar and lower market values.

On a constant currency basis year-over-year growth would have been up approximately 3%.

Link quarter AUC/A was also up $400 billion.

We estimate total new assets under custody and administration business wins at $49 billion in the fourth quarter.

And that gives us a total of $1.2 trillion in new business wins for the year.

Fourth-quarter net new business was below average.

Just as a reminder, AUC/A wins are episodic and can vary from quarter to quarter.

Our pipeline continues to look healthy.

And as we've discussed our strategy has been to prioritize organic growth by deepening our existing client relationships and selectively adding new business versus simply growing market share.

Looking at some other metrics for investment services, the market value of securities on loan at period end was down 4%, average loans grew 4%, while average deposits were down slightly, broker-dealer metric of average tri-party repo balances grew 2%.

The clearing metrics were mixed.

DARTS volumes and large long-term mutual fund assets were down while active accounts were up modestly.

The net decline in sponsored DR programs continues to focus on exiting low activity programs.

Turning to net interest revenue on slide 15, you'll see that NIR on a fully tactical equivalent basis was up 7% versus the year-ago quarter, and it was flat from the third quarter.

The year-over-year increase in NIR reflects higher yields due to a shift out of cash into securities and loans, as well as lower interest expense on deposits.

While the volume of earning assets declined 2%, their yield increased 6 basis points year over year.

And the yield on interest-bearing deposits decreased 2 basis points.

Sequentially NIR was flat.

Our net interest margin for the quarter was 99 basis points, 8 basis points higher than the year-ago quarter, and 1 basis point higher than the prior quarter.

Deposits were down $9 billion sequentially, on average.

That was the expected response to the Fed's first rate move.

Our models continue to estimate some additional loss of deposits if the Fed continues to raise rates, as implied by the forward curve at year-end, and an increasing NIM, in line with our Investor Day goals.

Turning to slide 16 you'll see that non-interest expense on an adjusted basis declined 2% year over year and was flat sequentially.

The year-over-year increase in non-interest expense reflects lower expenses in all categories except staff expense.

There are a few expense items that were both positive and negative earnings that I'd like to call out.

I think it will help give you a bit of context.

Staff expenses grew by 4% year over year, and that's reflecting severance costs of approximately $55 million in ongoing support of our business improvement process, and an adjustment of roughly $30 million related to updated information received from an administrator of our healthcare benefits.

All that was partially offset by the impact of [contailing] the US pension plan earlier in the year.

Decrease in other expense primarily reflects adjustments of approximately $35 million to our estimate for bank assessment charges.

And that estimate included the European single resolution fund.

It was partially offset by higher asset-based taxes.

Factoring in these items we once again showed strong expense control.

Turning to capital on slide 17, fully phased in common equity Tier 1 ratio increased by 20 basis points to 950.

And that was driven by lower risk-weighted assets as capital was about flat.

Our supplemental leverage ratio increased to 4.9% this quarter principally due to a reduction in our balance sheet, as well as reduction in off balance sheet exposures.

A couple of other notes about the quarter from our press release -- as you'll see in the release on page 3, the effective tax rate was 20.1%, which is approximately 5% lower than our previous guidance.

The rate is lower approximately 3% due to the impact of the impairment charge that I mentioned at the beginning of my comments, and approximately 2% lower driven by the benefit of a more favorable geographic mix of earnings and a little higher tax-exempt income.

On page 11 you'll see some investment securities portfolio highlights.

At quarter end our net unrealized pretax gain in our portfolio was $357 million.

That compared to $1.05 billion at the end of September.

The difference in value is principally due to the increase in interest rates.

Before I wrap up, let me summarize several items that I discussed in this quarter.

As we'd indicated, the impairment and litigation charges resulted in an $0.11 charge.

And we are negatively impacted by increased compensation costs driven by severance and healthcare cost adjustments that I just spoke of.

That amounted to about 5%.

On the benefit side, we benefited by reduced bank assessment charges, a lower tax rate, and termination fees related to our clearing businesses, which added about $0.06 to earnings.

These items in aggregate had a negative impact of about $0.10 in the fourth quarter to our reported earnings.

Now I'd like to provide you with a few points to factor into your thinking about 2016.

As you know, we have been planning and managing for a flat rate scenario, as outlined at our Investor Day in late 2014.

Now that the Fed has increased rates we are using the forward rate curve assumptions.

The rate increase is obviously a positive for us but we are still facing global economic and geopolitical challenge, as evidenced by the market's sharp decline year to date.

As a result, we are cautious about how this set of challenges will impact the Fed's thinking about future rate increases.

Additionally, we are concerned about the equity market performance impact to our organization.

With that said, let me provide you with our current thinking as we look ahead to the first quarter and the full year.

We expect a modest increase in NIR and NIM in the first quarter.

With respect to the recapture of money-market fee waivers we continue to expect to recover 70%, with a 50 basis point increase in rates.

25 of that increase has already occurred.

On expenses, our goal is to keep expense growth flat in 2016.

However, higher rates will eliminate fee waivers and that will drive higher distribution expense.

Largely as a result of the higher distribution expense, we expect the total expense growth to be in the range of 1% to 2% next year.

In the first quarter we would expect to see a $15 million increase in the bank assessment charges.

And it should run at that for the full year.

And we would expect staff expense to be impacted in the first quarter by the acceleration of long-term incentive compensation expense for retiree-eligible employees that typically takes place in the first quarter.

We expect our tax rate for the full year to be approximately 25% to 26%.

We expect to continue to repurchase shares under our current authorize, both in Q1 and Q2.

Our repurchase for the second half of the year will be contingent upon the Federal Reserve not objecting to our CCAR request later this year.

We think our performance, both in the quarter and throughout 2015, underscores that our strategic plan has positioned us well to perform in some tough operating environments.

We're focused on our strategic priorities, we're executing on them, and we remain on track to achieve our three-year goals.

With that let me hand it back to Gerald.

Thanks, Todd.

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

(Operator Instructions)

Our first question comes from Brennan Hawken from UBS.

Good morning.

Thanks for taking the questions.

On the expense front, thanks, Todd, for walking through some of the one-timers that impacted the results.

How should we think about the go forward or the jumping off point based on some of that noise that we saw here in the fourth quarter?

As I walk you through each one of those, I would take the category run rate down by about the amount that I mentioned.

Okay.

So, the specific numbers you gave, offsets and upward pressure, were the right numbers to rebase and then come up with the baseline starting off point, right?

I think that's a fair start.

Okay, great.

Thanks a lot.

And then thinking about the clearing headwind, how should we think about that rolling into next quarter?

What's the right way to think about the revenue?

Because I think you'd said at a conference that there might be some further headwind here in Q1, maybe the timing of when the clients came off in Q4 might not have been fully reflected in the Q4 run rate.

So, how should we think about that coming into Q1 from here?

Yes I think that's right.

Maybe Brian Shea can take it.

Brian?

Yes, sure.

The clearing revenue fee pressure is really driven by a few large client exits, primarily driven by the exit of Barclays and Credit Suisse from the US wealth management market entirely, which were two large clients.

Barclays exited in the middle of the fourth quarter, and Credit Suisse began their exit in the fourth quarter so they are partially out.

I think you'll see continued pressure on the fee revenue line clearing services for the next few quarters.

I think it will be partially offset by a couple things.

We actually had a really strong new business year in clearing services in 2015.

We were benefited by the exit of a large clearing competitor from the market and picked up quite a few high-quality clients.

Those clients tend to be less fee revenue driven and they tend to be a little bit more balance sheet and lending driven so that the growth they drive will partially offset the fee decline.

But you'll see some of the growth in the NII instead of the fee line.

And we also have pretty strong growth in the RIA custody and the prime business.

And Pershing is also going to benefit immensely from the fee waiver restoration as rates rise, which will help the fee line as the Fed continues to move over whatever period of time they act on.

In the meantime we're focused on strong expense discipline in the clearing business.

And, as Todd mentioned, we think we can keep the PTI flat in 2016 despite pressure on the fee line.

Okay, Brian, thanks for that.

So, basically are you saying that the revenue headwind that we saw, ex-ing out the new business wins just, just focusing on that first, should sustain for another couple quarters, and then you've got the offsets that you highlighted picking up from there?

Yes, partially offsetting that within NII growth and some of the fees from the JPMorgan clients offsetting.

But I think there will be pressure on the fee line specifically for the next couple quarters.

And we will work hard to manage the expense to make sure the PTI impact is neutralized.

Okay, thank you.

We'll take our next question from Alex Blostein from Goldman Sachs.

Great.

Good morning, everybody.

Just picking up on the clearing question, I just want to make sure that we put that question to bed.

Are all the clients or all the transactions in the wealth management space been announced over the second half of 2015 or are they reflected in the guidance, because I think some of them are closing later in 2016?

Should we expect another step down in fees in the second half of 2016?

Or everything is already reflected from the clients that exited in Q4?

It's a good point.

There has been another large US wealth manager that's announced an exit.

It's another global SIFI that's announced their exit from the US wealth management business.

That transition out will probably take place in the fourth quarter of 2016.

So, that's not positive.

On the other side of that, though, we continue to have a strong pipeline of new business in clearing services.

And, frankly, we have a number of self-clearing firms that are considering outsourcing their clearing.

So, I'd hope that we are able to attract some significant new business that offsets that potential loss, or the likely loss in the fourth quarter.

Got it, understand.

Okay, that's very helpful, thanks.

And then, Todd, shifting gears a little bit on to the balance sheet, it looks like, if you look across the buckets on the yield side, it doesn't seem like many of them moved, I guess just because obviously the Fed hiked later in the quarter.

Help us understand maybe just the run rate of what the NIM we should look for starting in 2016, assuming no further rate hikes and your expectations for the balance sheet.

I'm just trying to right size NII outlook for 2016 versus 2015.

Yes, we would expect, Alex, modest growth.

I think one of the frustrating things you've seen, the 25 basis point increase in short rates and long rates have actually come down, so the reinvestment activity is not going to benefit what we would have modeled for some percentage of the reinvestment.

So, we would expect balances to come down a little bit, NIM to widen, and overall net interest revenue to show a little bit of growth.

Got it.

Thanks very much.

Our next question comes from Luke Montgomery from Bernstein Research.

Good morning, guys.

I just wanted to ask about the energy exposure in your C&I loan book.

I think outstandings $500 million but there's another $5 billion unfunded commitments.

I was wondering maybe if you could characterize the customers you're lending to, speak to covenants or other protections against those lenders drawing down on lines of credit if they get stressed.

And then just generally your sense of whether this exposure is something to be concerned about.

Almost all of the exposure in the energy sector is to investment grade names, so a lot of integrated firms.

We do have some pipeline and refiners.

And there is a little bit of EMT, but that is to very high-quality names.

So, at this point, we think it's a pretty solid play.

We might see some transitions in credits but I would not expect to see any losses.

Okay, helpful, thanks.

And then at your Investor Day a little over a year ago I think you laid out the path to SLR compliance.

I think you were targeting year-end 2017.

Since then you've added 30 basis points.

I think the total you're hoping for is 250 to 350 basis points of improvement.

So, I wondered how you're thinking about accelerating the path there as we get closer to the phase-in date.

I think the biggest piece of the plan was deposit reduction.

So, what's the contingency plan given that rates -- you said yourself that you might not expect anymore rate hikes so there's no help there.

What we've seen to date, if you look at the -- you can't really look at the spot balance sheet, you've got to look at the average balance sheet because if you see some noise on year-end in our balance sheet -- but it's average so it drives the ratio.

So, if you look in the quarter, we did see a $9 billion reduction in balances in the quarter.

And that's a pretty quick response to the rate move that we had seen.

In addition, so far this year it's probably down an additional $8 billion.

So, we would have estimated that we would see about a $20 billion reduction in the first move.

And if we see more we've indicated that would be in the $40 billion to $70 billion type of range as we get to a little more normal rate.

If that doesn't happen what we have done is we prioritized the entire balance sheet and we might have to take some actions against that for some of the less valued deposits.

At this point in time we don't think we need to rush into compliance.

We are building capital.

We build about $800 million a year even with 100% payout ratio.

And if the balance sheet does come down, we can do some other things actually to perfect the balance sheet a little bit.

We think we will grow ourselves pretty well into a reasonable rate without doing anything exceptional to our clients.

Okay, thanks so much.

We will take our next question from Brian Bedell from Deutsche Bank.

Hi, good morning, folks.

Just one more on the clearing, just to be clear on that.

I think, Brian or Todd, you were saying you expect pretax profit for the clearing business in total to be flat from 2015 to 2016.

Do I have that right?

That's correct, Brian.

And, Brian, if I can add there, if I can just add something there for you.

The clearing fees are about 12% of our total revenue, so that's what we are talking about.

And it has been a decent grower in the 5% to 6% range.

I think the team has done a good job managing expenses and responding to the consolidation of the industry that we've seen here a little bit.

So, for a year it might pause on its growth.

Right, understood.

And good color from Brian on the fee dynamics there.

But maybe if I can just dovetail into the money-market fee waivers.

Obviously 70% coming off of two hikes.

What percentage do you think you'll get at a full run rate on just the one hike?

And do you really need to wait to get through Q1 and into Q2 to see that?

I think at the beginning here it's fairly linear.

Right now the behaviors we're seeing are consistent with what we had projected, so we're seeing it now.

It didn't show up very much in the fourth quarter yet.

We saw a little bit in the asset management side and a little bit in the corporate trust side.

Pershing tends to lag in the fee waiver abatement.

So, we do think there will be some acceleration into the first quarter.

And maybe just, I know you give out the EPS drag from fee waivers.

If you can give that number for Q4 and what you think it might be for Q1.

We've indicated it's in the $0.06 to $0.08 range.

Brian, I'll let you do the math but we've indicated a 50 basis point move, and I just indicated it was linear, would reduce it by 7%.

So that I don't have to mess it up on the call here, you can figure that out on your own.

Fair enough.

And maybe just then switching to the asset management business.

Maybe if Curtis is there, if he can comment on the acquisition, more broadly on the potential for making more acquisitions for the business given the recent declines in valuations.

And then if you can just also comment on sovereign wealth fund exposure across the ventures.

Hi, Brian, it's Curtis.

First of all, we're very excited about the acquisition that we announced yesterday afternoon of Atherton Lane.

It's consistent with the strategy we've had in wealth management, which is to go into a market.

We actually have a team in San Francisco and in Palo Alto who are BNY Mellon employees that have been there for some time in San Francisco and then about a year ago in Palo Alto.

But then to find a firm that fits culturally, who has a great client base, as Todd said, 700 clients, very fast-growing economy, and have that firm fit culturally with what we're doing, meaning they think about the entire holistic client need, everything from financial plans to how they think about generational wealth transfer using trust insurance, and then obviously investments.

We are going to bring to them the sixth largest asset management firm in the world and all of the banking capabilities of BNY Mellon.

And they are eager -- a big part of what makes this work is that they're eager to transition a firm that they've grown very nicely since 2005 really to the next level and become part of a global franchise.

We did this in Chicago with Talon in 2011, with I(3) in Toronto in 2010, and acquisitions that precede that.

It's pretty much our strategy to get a toehold and then bring the full power of our institution to the clients in that region.

We love that strategy.

And to the extent that we can in other MSAs, other markets, where we think there's a real opportunity for what we can do for clients to grow our capabilities, we would love to continue to look at those acquisitions.

I will tell you that we are extremely thoughtful about not just the terms and conditions of the acquisition but also that the cultural fit is there.

And it takes some time to identify and insure that we have that in place.

It's a pretty methodical process.

Do you see more opportunities given the valuation decline?

Is your pipeline increasing significantly?

I think that we are certainly spending time looking for other opportunities like Atherton Lane.

So, I want to balance this with, yes, we would love to find other opportunities like that in other markets.

We look at them all the time.

One of the great things is we're connected -- Brian talked about Pershing -- and the rest of our Company has a lot of insight into high-quality RIA firms around the country.

So, we're always monitoring it like a scouting report as to who would be a good fit, who culturally is positioned.

Yes, we absolutely would love it.

We also want to make sure we execute because we want to make sure every time we do one of these that it works for both the acquiring party and their clients.

Okay, great.

And just the sovereign wealth fund exposure in the institutional segment?

It's been an interesting year.

You've read, I'm sure, many articles about sovereign wealth funds.

At our Investor Day we described that we were the second largest manager of sovereign wealth fund assets, so we obviously have a lot of clients in this client channel, clients and assets.

I will tell you, and I think we highlighted this at Investor Day, a significant portion of that is index assets.

Todd and Gerald both referenced our flows.

And a big portion of our outflows, both in this quarter and this year, have been in index-related assets where the fees are quite small.

We've absolutely, you can see our outflows in index for the year.

It may not be appropriate to talk about any specific clients or client activity but in line with what you've seen from the industry.

Great, thank you.

We'll take our next question from Ken Usdin from Jefferies.

Hi, good morning.

Todd, on the core businesses, can you just talk about -- I know, ex the market impacts, the servicing business, ex securities lending, was a little soft.

You cited in the press release activity.

The wins this quarter of custody assets were pretty low, also.

Can you just talk as to what do you think, again ex the market impact, what's your outlook for servicing fee core ex securities lending growth?

And how much of a weight was the lower activity on the line this quarter?

Okay.

And you also need to factor in the impact of the currency of the stronger dollar because there are a fair amount of non-dollar revenues.

That's costing us somewhere between 200 and 300 basis points in revenues.

Sequentially, Todd?

Not sequentially.

Sequentially it's almost neutral, so it's not a big impact sequentially.

And I think one way to look at it is revenue growth is a challenge.

Look at everyone across the marketplace -- trying to generate significant revenue growth is a challenge for everybody.

We are winning in the places that we want to.

We would certainly like to deepen our client relationships and provide more services to many of our existing clients.

And we, I think, have a great solution set to offer.

So, that's one of our key priorities, is doing more within the existing client base with great set of value-added services and solutions.

Revenue growth is tough.

That's why we've got to remain incredibly diligent on the expense side, and that remains a focus.

And we still think we have more opportunities there.

That's what's really propelled our earnings growth this year and it's going to be one of the reasons for our success in 2016.

So, yes, it's a bit soft.

We acknowledge that.

We're redoubling our efforts on our client relationships but we've got to pay a lot of attention to the expense base to deliver the earnings that you all are looking for and that we're looking for.

Yes.

And just on that point about operating leverage, again, the market environments going to make this a tough one to answer, but how much additional flexibility do you have on the expense base if the environment doesn't quite pan out?

Can you commit to getting operating leverage?

I know it's tough given where the start of the year is but how much flexibility do you think you have on top of the actions taken to continue to ratchet down expenses further?

Why don't I start that one and Brian you might add.

Brian has really been leading a significant component of our business improvement process.

We still see a number of additional things that can generate some additional cost benefits.

I must admit the fruit is probably a little higher on the tree but there's still a fair amount of fruit.

We're seeing our infrastructure costs continue to come down.

We're using more automation tools.

We've got things like bring your own device, that Gerald alluded to.

Some of these are smaller dollars versus others.

And our real estate strategy I think is paying off.

We got ahead of where we thought we would be this year as we moved out of One Wall Street faster than we could, and that brought our guidance for expenses in the occupancy space down and we reviewed our guidance because of that.

We also see other real estate strategies that could add a bit.

We see opportunity in some of our market data as we probably find cheaper sources of market data and more appropriate sources, and we've got better tools in place that determine who's using what and how we can deliver better services that are less costly.

Brian, do you have anything to add to that?

I would add, Todd -- I think you and Gerald covered many of them already -- but our mentality on this is continuous improvement.

So, we're going to keep driving this business improvement process regardless of the market environment, whether it's worse or better.

Even if rates rose 100 basis points we would still be driving this because we think we can create sustainable shareholder value.

All the things that Todd mentioned, we're excited about the potential from these three pilots in robotics and the ability to start to scale that impact in 2016.

The real estate portfolio, you know what we've done in New York but that's actually a global process so we'll be getting more yield from that over time.

We've insourced a lot of application development.

Our cost per unit for development is better and our capacity has actually increased.

So, we see the opportunity to continue to do more on that.

We've talked about executing the private cloud.

We've moved a significant amount of our legacy servers to a private cloud environment but we have way more to do still, and that will create ongoing structural cost savings.

We continue to reduce our dependency on contract developers and temporary services, and lower our people-related expenses.

And as you can see even from the severance charge Todd took, we're executing a global location strategy.

We moved 1,000 people to global delivery centers last year and I expect we'll do a similar amount in 2016.

We continue to execute every component of this process and I think we have more value to leverage from this franchise.

One other part of this, which is enterprise teamwork, which is that we're really collaborating more effectively between investment management and investment services.

A great example is the private banking partnership between Pershing's broker-dealer and RIA clients and our own wealth management group.

We have established now something like $2.3 billion in credit facilities for the clients, independent RIAs and broker-dealers who are trying to compete in the wealth management market.

That's creating some real lift for the wealth management business and some real leverage for our clients, and is another example of working differently.

Appreciate it.

Our next question comes from Mike Mayo from CLSA.

Hi.

I wasn't sure about the answer to the last question.

Gerald or Todd, do you expect to grow revenues faster than expenses in 2016?

I understand you're doing a lot of different things but when you add it altogether, when you look out, can you commit to having that or can you not commit to it?

I think, Mike, we do expect to grow revenues faster than expenses, but with this market disruption we have to keep that in mind.

The equity markets do have an impact on our business.

We've indicated in the past a 100 basis point move -- 100 point move in the S&P 500 is worth about $0.02 to $0.04 for us.

And that assumes that it moves on average from the beginning, on average it's down 50.

So, that would be, if the market continues to sell off, that could be a headwind.

We will still target trying to generate positive operating leverage but there are market conditions that that will be impossible.

So flat markets, flat rates, you'd expect to have positive operating leverage?

That's correct, Mike.

Yes, Mike.

And then just some of the ins and outs -- on the expense side, I still don't understand why the combination of the custody platforms wouldn't provide you with some expense savings.

Is that simply delayed or I'm thinking about that the wrong way?

And on the negative side, you have the regulatory costs.

That's the expenses.

And then on the revenue side, still with the asset servicing link quarter, third to fourth quarter it was down.

Why is that down?

I guess that's some of the headwinds that you're probably thinking about here?

Mike, if you look at the expenses, almost every single category, with the exception of total compensation, which Todd explained was largely affected by the severance cost in the fourth quarter, every single category our expenses are down.

So, all of the things that we've talked about, whether it's subsidy platform transformations or conversions, whether it's simplifying our operating structure, whether it's taking advantage of technology and robotics, it's showing up in our numbers.

It's showing up in every single line item.

So, I would dispute your claim that it's not showing up in the numbers.

It is.

I think you have to look at it across every single line item, look at the positive operating leverage, the improvement in the operating margin.

It's there, Mike.

And then as far as the regulatory headwinds, which I guess you're managing?

And then on the revenue side?

The regulatory headwinds are included in our expense base.

We're offsetting those regulatory headwind costs with aggressive reductions in the operating expenses in all of the other categories.

So, yes, we're funding investments in resolution and recovery plans, better analytics, better CCAR process, better controls across the Company, improved risk management capability.

All of that is being funded and we're still reducing the operating expenses year over year and improving the operating margin of the Company.

Now, on your question on investment services fees, and asset servicing in particular, yes, it's a tough revenue environment and we have to up our game, engage with our clients even stronger than we have in the past, and really try to put our best solutions and best services in front of them to gain more traction there.

That is one of our objectives and priorities for 2016, is enhancing our client experience and gaining revenue growth.

And then last follow-up -- can you remind us how much asset servicing relates to fixed income versus equities, because shouldn't you be impacted a little bit less than some of your peers?

Yes we believe that we will be less impacted than most of our peers.

We're probably the reciprocal of what they are, somewhere between 35% and 40% equity on the fixed income and money markets.

All right, thank you.

(Operator Instructions)

We'll now move along to Adam Beatty from Bank of America Merrill Lynch.

Good morning.

Thanks for taking my questions.

Maybe just one more on expenses.

I noticed that outside services came down pretty nicely year over year.

If you could give some color on that in terms of how much of that is core services, like outsourcing, basically headcount replacement, versus more traditional pro services like legal and technology, and the trends and the outlook there.

Thanks.

Yes, we are definitely trying to trend away from relying on outside services.

Typically it costs substantially more than what we can do internally.

We've even seen that on the legal side as well as temporary services that are provided in various functions.

We follow it very closely.

Any time an outside service has been around for awhile, the supervisor of that service gets a notification questioning why he's still around and why we haven't internalized it.

Brian, you might want to comment.

You've done a lot in that.

Yes, I think we're just, in general, on our major strategic projects and investments we're relying more on our own team and developing our own team, whenever we think it's a sustainable need and a capability we need rather than rely as much on contractors, consultants.

Part of that is also the ongoing IT application development insourcing, which is reducing contract consultant cost, and, actually, we think improving our speed to market and our actual development productivity at the same time.

It's a variety of things, not one single thing, but we're really focused on every part of these expenses.

So, it sounds like, ex maybe some episodic things, there's room for further reduction there?

Probably a little bit.

Yes.

Okay, that's helpful, thank you.

And then turning to investment management and the flows, specifically wealth management, the outflows came a lot from indexing.

I assume that's somewhat institutional.

In wealth management, you mentioned $5 billion of active inflows.

I'm not sure how much of that was wealth management.

But what are you seeing amongst your clients now, and how are they reacting to the market?

Thanks.

I think it's exactly what you'd expect it to be, which is a mix of the uncertainty.

The volatility has been very significant.

I think August really shocked people and then you got a little bit of recovery and then the first part of this year has been challenging.

People are trying to understand it, understand that this is the beginning of something greater.

We are talking to them a lot about the differences between now and the financial crisis.

Banks have substantially more capital and are a lot less leveraged.

Obviously, the China impact is something we are really trying to understand, with everyone struggling for the data that can really be insightful.

So, trying to help our clients understand what's happening is something they are all interested in.

I will tell you that there are also many who have been, since the financial crisis, under-invested.

There's been a lot of people who have been more in cash.

We stress to them that having a solid investment plan, an overall financial plan, is critical.

Being too conservative is not a good thing, and many of them have been so.

We're seeing some people who are beginning to put money to work.

They are scaling in.

Until volatility settles down I don't think we'll see the dramatic shifts.

I will tell you that close in the industry -- and we, as we are in both investment management and investment services, see so much what's happening -- a lot of clients rebalanced when the equity markets did well.

And I do think that we will see people who reduced their equity exposure earlier, they are absolutely going to rebalance in the other direction as markets decline.

They may wait from a timing perspective for things to settle down a bit and just make sure they understand what's really happening with the economy, the impact of lower energy prices.

I still think there's a pretty significant lag effect on what it will mean for the real economy, which would ultimately be positive.

I think our clients are uncertain but also interested in figuring out whether this is an opportunity to add investment risk to their portfolio.

Excellent, that's great detail.

Thank you very much.

We'll take our final question from Gerard Cassidy from RBC Capital Markets.

Thank you and good morning.

Can you guys share with us -- you've touched on this in past calls, I believe -- the block chain technology, how you're pursuing that, and what the implications are for it longer term should it ever become a reality, one of the opportunities for you with it, and one of the negatives that it could cause your Company?

We are spending a lot of time and energy in different parts of the Company on the block chain technology and where it can be applied.

I think last quarter we commented we have two pilot programs actively engaged internally.

We're a participant in a couple of consortiums among block chain technology.

Interestingly, we're hosting a block chain technology day next Monday with our own technologists and outsiders exploring all of the different opportunities that we see and others see.

So, we're very actively engaged in the dialogue and the concept of where it can be applied.

I think there's some real opportunities for us to be a disruptor to the existing infrastructure.

I think it's going to take quite a bit of time to get there.

But we are not sitting back waiting.

We are actively engaged in the dialogue.

And when you say quite a bit of time to get there, are we thinking three years out, five years out?

Or is it just too hard to say when it inevitably becomes fully functional?

It's too hard to say.

We're all very intrigued with it.

We are.

We are very intrigued with the concept of it and how it could structurally change a lot of the processes we do.

And by the structural change -- IE, reduce costs for us and our clients.

I think it's going to take some time to get there and to become fully functional.

Okay, thank you.

And then just coming back to the sovereign wealth funds, two questions on that -- or, one question, two parts.

The drop in the deposits in the foreign offices, was that attributed to the sovereign wealth funds pulling money out?

And, second, what's the total dollar amount under management in the quant funds with the sovereign wealth business?

The drop in the deposits I don't think had anything to do with the sovereign wealth funds.

The drop in deposits is consistent with what we thought would happen when rates moved and there were better alternatives than staying on our balance sheet with the low yield.

I don't think we can't speak to that.

We don't comment on the size of the assets under management for sovereign wealth funds specifically, but given that we're a significant player we're seeing what the rest of the industry is seeing, and that is certain sovereign wealth funds are liquidating their assets and continuing to follow their social agenda and using money within their own country.

We're no different than the rest of the industry in that regard.

Sure, all right.

Great.

Okay, thank you, guys.

Thank you very much, everyone, for dialing in.

We really appreciate it.

If you have further questions, Valerie and her team look forward to hearing from you.

And I'm sure we'll run into all of you pretty soon.

So thank you very much again, everyone.

Ladies and gentlemen, that does conclude today's conference.

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 the conference.

Thank you for participating.