紐約梅隆銀行 (BK) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2016 earnings conference call hosted by BNY Mellon.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

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 will now turn the conference over to Ms. Valerie Haertel.

Ms. Haertel, you may begin.

Thank you.

Good morning and welcome everyone to the BNY Mellon first-quarter 2016 earnings conference call.

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

Our first-quarter earnings materials include a financial highlight 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 speak only as of today, April 21, 2016, and we will not update forward-looking statements.

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

Gerald?

Thanks, Valerie.

Good morning, everyone, and thanks for joining us to discuss our first-quarter performance and our progress in driving our long-term growth strategy.

Now in difficult market conditions actually more so than reflected in our underlying assumptions of our Investor Day targets, we again delivered what I think would be considered healthy results in almost any environment.

Year-over-year earnings per share were $0.73, up 9%.

Adjusted for the roughly $0.01 of litigation and restructuring charges, we had operating earnings of $0.74 per share, up 10%.

Now focusing on year-over-year comparisons on an adjusted basis, total revenue declined 1% reflecting both the challenging revenue environment and our focus on driving profitable and disciplined revenue growth.

Net interest revenue rose 5% as we benefited from the first full-year impact of the December rate increase.

Fee revenue was positively affected in some of our businesses as we recaptured some of the money market fee waivers.

Total expenses were down 3% driven by our business improvement process.

We generated roughly 250 basis points of positive operating leverage, we increased our pretax operating margin by approximately 150 basis points to 31%, and our return on tangible common equity in the quarter was 21%.

Now looking at our progress against our strategic priorities.

Driving profitable revenue growth remains our first priority.

Growing revenue has been a challenge across the industry.

We have a heightened focus on profitable and disciplined revenue growth.

We are not just driving gross revenue, we are expanding market share at any cost.

We are leveraging our scale and expertise to create new sources of value for our clients and we are delivering innovative strategic solutions in areas with strong potential upside and we are investing in technology to revolutionize the client experience and create a digital enterprise.

We also have numerous long-term growth initiatives underway at different stages of maturity.

Our collateral management solutions are a great example of where we are investing in capabilities with upside potential and where our business model gives us a competitive advantage.

We have been providing collateral services to the sell side for decades and we have leveraged these capabilities to assist the buy side.

We now have a complete and mature product to help buy side and sell side clients solve pressing issues and we believe offer unique value in the process.

We view foreign exchange capabilities as an essential client offering, adding value to the multiple business lines across our enterprise.

As you recall, we recently added a new executive to head our markets team, Michelle Neal, who is reporting directly to me to ensure that we are fully optimizing the strategic long-term growth opportunities we see in this business.

We are also investing in electronic trading infrastructure to price and trade FX for our clients on a single platform as well as multi-dealer trading venues all for the purpose of capturing more client driven flows.

We expect our NEXEN next-generation ecosystem to increase our technological edge and revolutionize our client experience.

NEXEN will provide a consistent client experience across our businesses enabling our clients access to all of our services through one portal offering them increased flexibility and new opportunities to leverage services and data from us and third-party providers who are integrated into our platform.

We began rolling out NEXEN to our clients in asset servicing, liquidity services, global markets and corporate trust and we are collaborating with clients to deliver an enhanced experience.

Based on early client feedback, we are convinced this will be a real game changer and solidify our position as a technology leader and we will share more of this important strategic initiative as we continue to expand functionality and bring more clients onto the NEXEN ecosystem.

We also have a number of initiatives focused on harnessing blockchain in distributed ledger technologies.

We see this as a potentially transformative technology and we are fully engaged.

Blockchain has a broad range of possible applications for our business and we are working closely with fintech firms actively participating in consortiums and running various pilot programs internally.

Investment Management under Mitchell Harris; we are focused on executing the investment management strategy we have already laid out.

During the first quarter, our focus on improving investment performance drove strong benchmark and peer relative performance in a number of our equity strategies.

We have a number of initiatives in flight to align our capabilities with the largest growth tools and deliver high-value investment solutions.

The key initiatives include expanding our alternative and multi-asset strategies and enhancing our distribution capabilities to our core institutional client base and building out our retail strategy.

On the institutional side, our focus is on extending our LDI strategies to the US markets and we have launched a new US multi-strategy fund that replicates the strategy that works so well in Europe.

With respect to retail initiatives, our focus on third-party intermediary advisors and expanding the Dreyfus distribution platform in the US has led to solid organic growth.

During the quarter, we were one of a handful of firms that saw positive flows into US retail mutual funds.

The growing synergies between wealth management and Pershing have also help drive loans and deposits to record levels.

The 50% expansion of our wealth management sales force is now complete and it's generating healthy new revenue is backed by a strong pipeline.

Earlier this month we closed on our acquisitions of a Silicon Valley wealth manager called Atherton Lane Advisors strengthening our footprint to one of the fastest-growing US wealth markets.

As these examples demonstrate, we are investing for today and tomorrow, helping our clients achieve their goals.

Now executing on our business improvement process has been a huge focus for us.

We are leveraging our scale and expertise to deliver efficiency benefits to our clients and improved results for our Company.

We are on target to achieve the structural cost reductions we shared at Investor Day.

Let me share a few examples of our progress.

We have reduced rentable square footage by 1.3 million square feet and are moving forward on significant opportunities to further rationalize our real estate footprint globally.

We have built out our global delivery center for further migration.

During the quarter, we relocated more than 225 positions to low-cost locations to balance our workforce globally.

We have now migrated more than 3300 positions since the inception of our program.

We also implemented an initiative to drive more corporate action instructions through our electronic means.

The SEP rates are increasing, efficiencies are being realized by us and our clients and operational risk is declining.

That is a real win for all of us.

Now our third priority centers on being a strong space trusted counterparty.

We have made significant investments to enhance our resolvabilities by substantially reducing risk, taking painful steps to prepare for multiple resolution contingencies, simplifying our legal entity structure, significantly improving our operational and financial resiliency, and increasing our financial strength.

Clearly we have more work to do on our living wills and we are committed to addressing the issues raised and meeting our regulator's expectations within the required time frame.

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

During the first quarter, we repurchased $577 million in shares and we distributed $185 million in dividends.

From a regulatory ratio standpoint, our key capital ratios again improved.

This quarter our CET1 ratio under the fully phased in advanced approach increased by 30 basis points to 9.8% and we increased our supplementary leverage ratio by 20 basis points to 5.1%.

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

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

Last but not least, people are our ultimate competitive advantage.

Attracting, developing and retaining top talent is also a strategic priority.

Within Pershing during the quarter, we announced two appointments.

Lisa Dolly, who has been with Pershing for over 25 years and was previously the Chief Operating Officer, was promoted to the CEO demonstrating our deep leadership talent bench.

Lisa's former role was filled by Lori Hardwick, a successful and highly qualified leader with lots of investments, technology and advisory expertise and an extensive track record of success and business growth most recently with Envestnet.

In addition, Piers Murray, who is joining us leader this quarter as Chief Operating Officer of our markets business.

He comes from Deutsche Bank and brings a proven history and global market products and solutions.

He will work with Michelle in strengthening our markets business.

Together these moves are evidence of our ability to attract and develop truly outstanding talent which is something we showcase in our first-ever digital People Report posted on our website.

Our People Report tells the story of how we are invested in our people and building a winning culture.

I encourage you to take a look at it.

Now the bottom line is this; we are executing against each of our strategic priorities and it is coming through in our results.

Our strategy is designed to produce client and shareholder value and perform well through all environments.

We have shown you that we can do just that and our goal is to continue that trend.

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 slide seven that details our non-GAAP or operating results for the quarter.

First-quarter EPS was $0.74, up 10% versus the year-ago quarter.

On a year-over-year basis, first-quarter revenue was down 1%, expenses down 3%, and we generated 250 basis points of positive operating leverage.

As we have noted in prior quarters, the strength of the dollar continues to impact results negatively for revenues and positively for expense.

However, the net impact of currency translation is minimal to our consolidated pretax income.

Income before income taxes was up 4% year-over-year on an adjusted basis and on a year-over-year basis, our pretax margin increased approximately 150 basis points to 31%.

Return on tangible common equity was 21% for the quarter.

Our results reflected the benefit of higher money market fees.

Now we previously indicated that we expected to recover roughly 70% of the fee waivers with a 50 basis point increase in the fed funds rate.

As expected with the first 25 basis point increase in December, we were able to recover nearly 50% of the waivers.

As you can see, the recovery is not necessarily linear, therefore, additional rate increases are not expected to be quite as impactful is the first.

Note that money market fees primarily affect clearing, investment management, issuer services and asset servicing.

Slide eight shows our consolidated fee and other revenue.

Asset servicing fees were flat year-over-year and up 1% sequentially.

Both comparisons reflect net new business and higher securities lending revenue offset by lower market values.

The year-over-year comparison was also impacted by the unfavorable impact of a stronger US dollar.

Clearing services fees were up 2% year-over-year and 3% sequentially.

Both increases primarily reflects higher money market fees partially offset by the impact of lost business.

The sequential increase also reflects higher volume.

Issuer services fees were up 5% year-over-year and 23% sequentially.

Both the year-over-year and sequential increases primarily reflect higher money market fees in corporate trust and higher dividend fees in depository receipts.

Treasury services fees were 4% lower both year-over-year and sequentially and that reflects higher compensating balance credits related to clients which shifts revenues from fees to NIR.

First-quarter investment management and performance fees were down 6% year-over-year and that was 4% on a constant currency basis.

The year-over-year decrease on a constant currency basis primarily reflects the headwinds of lower equity market values and net outflows in 2015 partially offset by higher money market fees.

The sequential decline of 6% reflects those items and additional seasonally lower performance fees.

FX and other trading revenue on a consolidated basis was down 24% year-over-year and 1% sequentially.

FX revenue of $171 million was down 21% year-over-year primarily reflecting lower volumes relative to the unusually robust activity that we enjoyed last year.

The 4% sequential increase primarily reflects higher volatility and that was partially offset by the impact of foreign currency hedging activity.

If you exclude the hedging, the sequential increase would have been 12%.

Financing related fees grew 35% to $54 million versus the year-ago quarter and increased 6% sequentially.

The year-over-year increase primarily reflects higher fees related to the extension of secured intraday credit to clients.

The sequential increase primarily reflects higher underwriting fees.

Distribution and servicing fees were $39 million, 5% lower year-over-year and sequentially as the favorable impact of lower money market fee waivers was more than offset by certain fees paid to introducing brokers.

Investment and other income of $105 million compared with $60 million in the year-ago quarter and $93 million in the fourth quarter.

Both increases primarily reflect higher lease related gains.

The sequential increase was partially offset by lower other income resulting from clearing service to termination fees that we recorded in the fourth quarter and lower income from corporate bank and owned life insurance.

Slide nine shows the drivers of our investment management business and help explain our underlying performance.

Assets under management of $1.64 trillion were down 5% year-over-year, reflecting net outflows in 2015 and the unfavorable impact of a stronger US dollar, principally against the British pound.

Sequentially assets under management were up 1%.

We had long-term net inflows of $1 billion that was driven by $14 billion in liability driven investment inflows where strong client demand is tracking more than $40 billion in assets over the past 12 months and we also saw flows into alternative investment strategies.

Long-term net outflows were mainly driven by passive investment strategies totaling $11 billion which were recognized in index investments.

Active equity outflows declined to $3 million signaling a slower decline and may indicate that the industry is starting to see equity flows stabilize following one of the worst years on record in 2015.

Additionally we had $9 billion of short-term cash outflows.

Our wealth management business and US intermediary expansion initiatives continue to show progress.

Wealth management delivered the 20th consecutive year-over-year earnings growth and we are seeing above market share inflows in many of our intermediary channels.

Investment management loans and deposits both reached record levels of 23% and 5% respectively.

Turning to our investment services metrics on slide 10, I want to point out that in the first quarter of 2016 we reclassified the results of our credit related activities that were previously reported in the other segment to investment services.

This reclassification to investment services better reflects where the client relationships and services reside.

The reclassifications did not impact the consolidated results.

Also concurrent with this reclassification, the provision for credit losses associated with the respective credit portfolio is now reflected in these business segments.

All prior periods have been restated to reflect that.

Assets under custody and administration at quarter end were $29.1 trillion, up 2% or $600 billion year-over-year reflecting net new business and the favorable impact of a weaker US dollar on a period end basis principally against the euro which was partially offset by lower market values.

Linked quarter AUCA was up $200 billion.

We estimate total new assets under custody in our administration business wins were $40 billion in the first quarter.

In the last couple of quarters, we have seen slower than historic growth rates reflecting our strategy of selectively adding new business versus simply growing market share.

Looking at the other key investment services metrics, the market value to securities on loan at period end was up 3% year-over-year.

Average rent loans were flat year-over-year while average deposits were down 8%.

Our broker-dealer metric of average tri-party repo balances were down 2%.

Our clearing metrics are lower and we again recorded a net decline in sponsored DR programs as we continued to focus on exiting low activity programs at the lower end of our client base and programs that did not meet our profitability criteria.

Turning to net interest revenue on slide 11, you will see that net interest revenue on a fully taxable equivalent basis was up 5% versus the year-ago quarter and 1% from the fourth quarter.

Both increases in NIR reflect higher yields in interest-earning assets partially offset by higher rates paid on interest-bearing liabilities and the impact of interest-rate hedging activity which are primarily offset in FX and other trading at the revenue line.

The yield on interest-earning assets was up 9 basis points year-over-year and 8 basis points sequentially.

Our net interest margin for the quarter was 101 basis points, that is a 4 basis point improvement from the year-ago quarter and 2 basis points higher than the prior quarter.

If not for the impact of the hedging activity I previously mentioned, the net interest margin would have been 4 basis points higher for the quarter.

Turning to slide 12, you will see that noninterest expense on an adjusted basis declined 3% year-over-year and 2% sequentially as we drove expenses lower in nearly all categories.

The year-over-year decrease reflects the favorable impact of a stronger US dollar, lower staff and legal expenses and the benefit of our business improvement process.

The savings generated by the business improvement process primarily reflect the benefits of our technology in-sourcing strategy and the implementation of our global real estate strategy.

This was partially offset by higher distribution and servicing expenses related to fee waivers.

Staff expenses decreased year-over-year primarily reflecting lower estimated 2016 incentives and a higher adjustment for the finalization of the annual incentive awards.

That was partially offset by the curtailment gain related to the US pension plan that we recorded in the first quarter of 2015 and higher severance expense and ongoing support of our business improvement process.

The sequential decrease in noninterest expense reflects lower expenses in all categories except other and distribution and servicing expenses.

The sequential decrease in staff expense primarily reflects lower compensation and employee benefit expenses partially offset by higher incentives, primarily due to the vesting of long-term stock awards for retirement eligible employees.

The increase in other expense primarily reflects the adjustments to bank assessment charges recorded in the fourth quarter of 2015.

The increase in distribution servicing expense is due to higher money market fees.

The sequential increase in headcount reflects our campus technology recruiting effort to attract the best technologists.

We expect a large recruiting class to account for anticipated turnover.

In addition, the year-over-year increase also reflects the on-boarding of employees to support strategic growth initiatives and risk-related activities.

Our location strategy has helped us to increase our headcount to support strategic initiatives while we have been able to reduce total staff expense.

Turning to capital on slide 13, our fully phased in advanced approach common equity Tier 1 ratio increase by approximately 30 basis points to 980.

That was primarily driven by increased capital generation.

Our supplemental leverage ratio increased to 5.1% this quarter primarily due to increased capital and a reduction in our balance sheet and off-balance sheet exposures.

A couple of other notes about the quarter.

As you will see in the release on page three, our effective tax rate was 25.9% which is in line with our previous guidance.

On page 11, you will see some investment securities portfolio highlights.

At quarter end, our unrealized pretax gain on our portfolio was $1.2 billion.

That compared to $357 million at year-end.

The difference in value is primarily due to a decline in market rates.

Now let me share a few thoughts to factor into your thinking about the second quarter and the rest of 2016.

Money market fee waivers appear to be recovering in line with our previous guidance.

We would expect investment and other income to be in the range of $60 million to $80 million going forward.

Staff expense should decline sequentially in the second quarter as a result of the acceleration that took place in the first quarter.

We expect to see an increase in resolution planning expenses as we work to address the issues raised regarding our living will.

Given these pluses and minuses this year, we expect expenses to be flat in the second quarter versus the first quarter.

We expect our effective tax rate for the year to be approximately 25% to 26% and finally, we expect to continue to repurchase shares under our current authorization in the second quarter.

To sum up, we delivered a solid quarter in spite of difficult market conditions as we continued to execute on our strategic priorities.

With that, let me hand it back to Gerald.

Thanks, Todd.

We can now open it up for questions.

(Operator Instructions).

Alex Blostein, Goldman Sachs.

Good morning everybody.

So, Todd, just picking up on the NII discussion, I think you answered part of that already in the prepared remarks with the hedging headwind I guess about 2 basis point incremental to what you reported.

But just thinking through the puts and takes where we are in the rate cycle, the size of the balance sheet, so how should we think about the rest of the year from a NII perspective assuming rates don't really change?

And again, the starting off point on the NIM I guess would have been 2 basis points higher versus what you have reported, right?

Yes, that is correct, Alex.

I would expect you would see a couple of basis points higher on the NIM and that would be reflective of a little bit higher NIR going forward.

The balance sheet is relatively stable.

It acted about as we had expected it would with the rate increase that we saw at the end of the fourth quarter so client deposits were down a bit.

So it looks to be very stable.

We have adjusted further the negative interest rates with the move in the ECB and the euro.

The thing that is a bit of a headwind with the flattening of the yield curve, the re-investment rates are a little bit less than we would have liked.

But net net, the hedging should normalize and we would expect to see a couple of basis points of expansion if rates don't change from here.

Got it.

Thanks.

Gerald, a question for you along the lines of some of the new initiatives that you outlined in the prepared remarks.

Particularly on the investment servicing front, you highlighted collateral management, FX, NEXEN, which all seem to be in various stages of development.

But taking a step back, can you help us contextualize that a little bit better what it means for the servicing businesses organic growth kind of over the next year to two years versus what we have seen over the next couple of years?

Just trying to put some numbers around these initiatives.

Sure, Alex, appreciate the question.

I would say the one that has the most immediate greatest upside is in the collateral services side.

As we talked about over the last year or so, we really design the collateral services business for these sell side and for firms like yours to be able to finance their positions and to be able to segregate collateral and to try to optimize the collateral for capital purposes.

We are also seeing increasing interest on the buy side and we are adjusting our algorithms to help the buy side better utilize our capabilities as they have to post collateral and also as they invest in tri-party repo programs.

So we see a pretty significant opportunity for us to do this not only in the US but around the world and so whether it is segregation, optimization, transformation of the collateral and help reduce the capital cost for different firms, we think that has some real upside potential.

So I would say that is first and foremost at the top of the list.

In our foreign exchange and markets business, we think we have greater opportunities to utilize the [chronic] infrastructure that we are building to capture more order flow and do more netting across our businesses and improve the margins for us and improve the execution for our client.

So those are two areas that I cited in my opening comments that we think have some real upside to them.

Okay, great.

Thanks for taking the question, guys.

Ashley Serrao, Credit Suisse.

Good morning.

Gerald, on asset management and -- investment management and the margin profile there, I appreciate this quarter was tough macro wise but hoping you could provide an update on how you feel the plan to drive margins higher there is going versus the goals outlined at Investor Day?

I will leave it at that.

Thanks, Ashley.

We said at Investor Day and recently and our last annual meeting last week that we think we have some more work to do in improving the operating margins with the investment management area without sacrificing the investment strategies and without sacrificing or actually adding to the strength of our portfolio managers.

We think a lot of those costs can be dealt with at the center of investment management and also trying to better rationalize or make more efficient our distribution costs.

So we think there is opportunities to apply the same discipline to the rest of our businesses to the running of the business of investment management and improve the ability for the boutiques to continue to drive their investment performance.

So it is one of our goals and we are on track and we still have some work to do there.

Okay.

Todd, on deposit costs, I was curious how you are thinking about passing on the benefit from higher rates to clients.

It looks like the deposit betas are fairly low so far.

But how should we be thinking about the next 25 basis points of high or sustainable?

Actually I would say that our deposit betas are probably a little lower than we had anticipated so that is the good news.

We would have expected that we would have recovered most of the first 25 basis points which is the case although there is some deposit attrition that I mentioned.

And right now as we forecast looking out, we are adjusting our betas slightly favorably.

Great.

Thanks for taking my question and congrats on the quarter.

Betsy Graseck, Morgan Stanley.

A couple of questions.

You mentioned early on in the conversation around blockchain.

And the question I have is how are you determining how to make those investments and what kind of timeframe to return on investments are you anticipating?

I noticed that you are a member both of R3 and also the Hyperledger Project and I know there is dual tracks in many cases on competing asset classes.

So I'm just trying to understand how you are allocating your resources?

Sure, no, you hit it right on.

We are members of a variety of different consortiums and so we are participating in helping set the standards for the industry.

I think that is one of the keys to success of blockchain technology is the standardization of the processes.

We are also looking at it in our payments area, in our corporate trust area and our broker-dealer clearance business, particularly applied to repos.

We think blockchain can be transformative.

We also can see it as being an ability to increase the resiliency of our capabilities.

I think it is going to take time to fully materialize and it does require in all cases a trusted counterparty and we think that is one of the roles that we can play which is what we play today, the trusted counterparty that everyone can show up on both sides of the ledger and trust that it will be executed well and we plan to play a role in the middle of that.

So we are making investments, it is already in our run rates in terms of either the expense or the investments which aren't really that big in terms of the R3 and Hyperledger and those sorts of investments.

But we are spending a lot of time and energy on it.

I think it is going to take some time to see it play out in a full, meaningful way.

Okay.

But the question I'm getting is -- is it like Betamax or VHS, does it matter, can we have a dual track of standard?

In other words, can some asset classes be on one backbone and other asset classes be on a different backbone?

That is going to be one of the questions, is it Betamax or is it VHS or what is it?

And that is why you are seeing so many different initiatives occur in the marketplace and why we are participating in a variety of them.

We think trying to get to a better common standard at least for certain asset classes will be the way to go and that is why we want to be a leader in helping drive that (inaudible).

Ultimately, Betsy, in order to get the network effect, you are going to have to have standardization and also we think that there will be a trusted counterparty because the proof of work costs are so high and there are going to be regulatory issues associated with it.

So that is why we think there is a great role for us.

So I think there is an opportunity for this to either reduce operating costs but it will require significant standardization and is likely to start in smaller markets where those standards can be addressed.

Okay.

Thank you.

Brian Bedell, Deutsche Bank.

Good morning, folks.

Maybe just, Todd, on the expense outlook, good clarity on the second quarter and excellent expense control of course in the first quarter.

But as we look out to the rest of the year, it looks like you would be on track to reduce expenses at least another 2% or potentially more.

I know there are seasonally high expenses into the back end of the year.

But maybe if you could just give us some color on what you are seeing for project spend coming into the back half of the year and whether you think you can do another 2% down in expenses this year?

Yes, I think we are a little ahead of where we had expected to be frankly, Brian.

We did see -- I just want to remind you -- the first quarter we do tend to see seasonally lower legal expense also a little bit seasonally lower business development and consulting.

The other thing we saw is revenues were down in our higher comps business lines.

So when the market moves, we would expect revenues to pick up in those lines and the associated expenses with them.

We do think that around both the resolution plan we are going to have to accelerate some of the investments that we had intended to make.

We had committed last year to invest $140 million over the next 18 months or so in order to build resilience and approve the probability of success in our plan.

We may have to accelerate that a bit.

So there are some headwinds we are facing but I think we have got some -- we are basing it off of a lower base than we would have expected to be at this time so we are probably a little bit ahead of the guidance that we had previously given.

Okay, great.

Thanks for that.

And then maybe either for Brian or Gerald I guess, you can talk about the dynamics in clearing, the previously announced client loss versus the impact of the money market fee waivers and client wins.

And then maybe, Brian, if you want to comment a little bit about development of NEXEN in terms of the investment, outlook for this year and how you are seeing which stage of development you are in in terms of bringing on new clients whether you think there is a revenue generation component coming this year or next year?

Sure.

Happy to.

It is Brian Shea.

Claim services actually is suffering a bit from the loss of those clients that we talked about and shared with you in advance.

But we are benefiting from the reduction in fee waivers driven by the December rate increase.

So that is offset with really the loss of the client business in the short term and we have also benefited from taking on a number of clients in the third and fourth quarters as a result of JPMorgan's exit.

And we continue to seeing interest from self-clearing firms who are looking to outsource and we converted another self-clearing firm in the first quarter.

So overall, the clearing services picture is solid and they are executing very strong expense discipline so we think we will have modest year-over-year growth from clearing services.

The other dynamic in clearing services is that the RIA custody business is growing and the DOL fiduciary standard is likely to help accelerate that growth over time so we feel good about our position there.

And the leverage of the private banking services of our wealth management group into that RIA and broker-dealer market is also a very positive long-term development for clearing services.

Turning to the NEXEN question, NEXEN is no longer an idea or a vision, it is really a reality.

It is in production and we now have 3600 client users across 950 clients exercising and using NEXEN in production every day.

It cuts across now AIS clients, asset servicing clients, broker-dealer services, liquidity direct and corporate trust, as Gerald mentioned, and we expect to have more functionality and more capabilities, more APIs, more third-party fintech applications embedded in the platform over time and we expect to roll this out to our entire client base over time.

So we are getting real momentum and take-up and the reaction from the clients is actually quite positive.

The client experience is just better.

And so the revenue expense dynamic, it sounds like you are through all lot of the investment phase and now you are closer to realizing potential revenue gains from this.

Yes.

I guess what I would say is part of a business improvement process, we are actually self funding the development of NEXEN so we continue to shift as we in-source technology developers and we simplify our infrastructure, we are able to shift technology investment firm redundant lights on type investment to strategic investment.

So that is enabling us to fund NEXEN and other market-leading solutions for clients without actually increasing our technology investment or expense.

Glenn Schorr, Evercore.

A question about some of the balance sheet remixing.

Some of this just happened, some of it is purposeful bit securities down 4% year-on-year, loans up 6%.

I noticed the 23% growth on the investment management loan so curious what those are?

And if that is what the big driver is driving the 21, 22 basis point jump in average loan yields year on year?

Sure, Glenn.

One of the strategies we have had is to grow the wealth management business and so that is where those loans are booked.

So those are either margin style loans or mortgages to high net worth individuals and we have had some meaningful success in expanding that mortgage portfolio.

Most of those are jumbo mortgages, ARMs, some of them would be floating and that has helped drive the mix that you talked about and that has been planned.

Another area of loan growth that we have enjoyed is in our secured financing transactions.

I would expect the rate of that growth to slow somewhat from what we have enjoyed to date and the mix now I think will be more stable as we look out the next 12 months or so.

Got it.

Okay, that is perfect.

I know the jump up really happened last quarter but I am looking at the year-on-year increase in nonperforming loans and the decrease in the allowance and I know it was stable quarter on quarter.

So I guess the real question is just a quick comment on what you see credit wise for your mix -- hidden within there is an energy question but really just overall credit.

Glenn, that was just one loan that had to do with the Sentinel reversal of a court decision and that became a nonperforming loan.

We took the provision against it to market to the current value so that is done.

The rest of the portfolio is absolutely stable.

And right coverage ratio?

Yes.

I mean you did see us increase our provision in the first quarter to $10 million but the credit portfolio continues to be strong.

We do have some exposure to energy which we explained on the call in the last quarter and there will be some migration even though that is almost entirely investment-grade.

There is some modest migration and we would expect some provisioning associated with that portfolio but we don't expect it to be material.

Okay, thanks.

Ken Usdin, Jefferies.

Thanks, good morning.

Can you give us a little more color?

You mentioned that on the fee waiver side you got about 50% back and the next hike won't be as incremental.

But, Todd, maybe you can just help us understand given that there are some of the expenses that come back in, what is the current existing drag still on a per-share basis that you got from fee waivers and how many more hikes would it take to get the rest of it back?

We had indicated that we thought there was about a $0.06 to $0.08 drag to EPS driven by fee waivers and so we are getting about 50% of that back.

So we got about $0.035 in these numbers relative to the fee waivers is our best estimate.

That is probably a little bit better than we had anticipated.

We did expect it not to be exactly linear.

The first move was the best one, the second move will be not quite as great.

But having had the experience in this, I would expect we would recover a little bit better than our previous guidance of 70% with a 50 basis point move and I would expect at 100 basis point move, we'd recover all of it.

Okay, great.

Second question just on the core asset servicing business.

After a really great run of big, big business wins the last couple of quarters have been decent but in kind of the $50 billion-ish range.

Can you talk to us about the pipeline for just core wins and your outlook for growth in that segment of the servicing business?

Yes, this is Brian Shea.

The new business signed number can vary reasonably significantly quarter to quarter and we have had a couple of soft quarters.

I would say it reflects a couple of things.

Our focus on profitable client relationships over sort of just pure revenue and market share, we are being extremely disciplined and selective about the new business assignments we take on.

And that is actually part of the reason you are seeing improved operating margins and you are seeing our fee to expense ratio improve significantly.

But in terms of the pipeline, the pipeline remains actually pretty strong.

It is up significantly on a sequential basis and we still believe that this is a strong growth driver for the Company going forward.

The secular trend toward asset managers wanting to outsource and refocus their energy on the investment process itself we think is continuing and that is why we have invested in things like the real estate and private equity administration business.

In 2016, after lifting out the Deutsche Bank team and serving Deutsche Bank, we will now be starting to take on third-party clients.

And in addition, we have a strong pipeline of new office services from asset managers and demand for the Eagle technology platform.

So we still believe that we can drive long-term growth and we are confident in that.

Okay, thank you.

Mike Mayo, CLSA.

So in aggregate, expenses are down, the pretax margin is up from 30% to 31%.

So in aggregate, that is moving the right direction but when I look at the investment management adjusted pretax operating margin of 30%, I am not sure the last time it was that low at least going back several years.

And so I will ask the same question that I asked at last week's annual meeting and that is under what scenario would you consider more aggressive dispositions part of your asset management business?

And along the lines of that question, I guess at the meeting, you now have a new lead director after the meeting and so what is his role, what is your interaction with him in the first week and what do you expect that role to be and do you talk to him about things like maybe the investment management business should be restructured more aggressively to help improve what is a margin way below peer?

A lot of questions and there, Mike.

But I always appreciate them.

First of all, we have a lot of confidence in our investment management business.

It has been a tough quarter and we saw a lot of outflows not only in our firm but across the industry last year.

2015 was probably one of the biggest outflow years in traditional active equity and as you know, that is one of the highest fee realization products across the industry.

We feel better that the active equity flows have stemmed the tide.

We saw some outflows in index but our LDI strategy, our alternative strategy continues to pick up and so we ended up with positive net long-term flows for this quarter which I think fares pretty well against our competitors.

We do have work to do on improving the operating margin in the business, no question about it.

I said it last week when you asked the question.

I will say it again.

We have some work to do there.

But I think some of the outsized margin performance by our peers are really -- because they tend to be more active equity oriented and they have higher fee realization to begin with.

But we still have work to do there.

We have a lot of confidence in the business.

Mitchell Harris is here with me today and I think Mitchell is the right person to improve the business and improve the performance overall.

So we remain very confident in that and being a critical part of our Company.

Regarding Lead Director, yes, we announced a new Lead Director.

Every Company goes through a change in its Director make up.

He like all of our directors are very active.

We have an ongoing dialogue with them.

The Lead Director's role is to interface actively with management which he has already begun to do and represent the directors and communicating well with management.

We are off to a great start and I have no concerns about how we are interacting with our Board.

And then as a short follow-up, just earlier you said you might reduce distribution costs to help out investment management.

Could you elaborate on that or any other details on where you see the greatest potential?

Yes, what I referred to was making sure we are getting the bang for our buck for our distribution expense and make sure it is targeted in the right places where we are getting good results.

And so maybe, Mitchell, you want to comment a little bit?

Thank you.

What I would like to actually comment on is if you really look at our core business, Mike, it is actually pretty strong and moving up.

The other revenue line is what is confusing things a little bit and I think you have to keep in mind the first quarter of last year was very strong especially on the C capital front and even when you look at -- and it wasn't as strong obviously in this quarter.

You also have the issue of internal payments that we have given to investment services on fee waiver abatements that is in that line.

That stays within the Company so it is not really a weakness per se.

And as Gerald did mention, investment performance has been good, flows are abating.

The first two months were weak.

March was actually much better and we are getting it in the right category.

So you only had $3 billion down in equities which was on average it was $8 million down per quarter last year.

Alternatives are still improving.

Our initiatives in terms of the retail which was mentioned earlier, distribution, we had $300 million in positive flows, we were the eighth best-performing retail out of 30.

So I think our distribution is improving.

Our performance is improving.

The money market fee waivers help all of us.

Flows are becoming less negative.

And on the expense management side, we are looking at where there is overlaps between the boutiques, between the IM center and we will cut those out.

So I think we are going to continue to drive both expenses down and I think there is significant revenue opportunities going into the year.

And we have taken a hard look at the corporate overheads and those are coming down related to investment management as well.

So I think there's opportunity for both scale as well as other actions we can take.

Thank you.

Brennan Hawken, UBS.

Good morning.

Thanks for taking the questions.

First, nice tip of the cap to Hamilton in your deck by the way on the back of the $10 bill brouhaha.

Good to see that.

We had a lot of emotional attachment to that one and we are very, very pleased with the Secretary Treasury's decision there.

No doubt.

So on expenses, can you quantify -- I don't think Todd, you did in your prepared remarks.

How much was severance in comp this quarter and maybe how would that compare to last year in the fourth quarter?

I think there's a couple of things.

One is when we finalize our actual incentive payouts, oftentimes there is either adjustment one way or the other.

That adjustment was favorable and it actually approximately offset the severance.

So on a year-over-year basis, the net of that was basically zero.

So when you look at our -- I think a way to look at our expenses on a year-over-year basis and from the staff expense, I will give it to you very specifically.

The acceleration was $9 million higher and last year we had a pension curtailment when we curtailed our defined-benefit plan and that was a $30 million benefit.

So we had a $39 million headwind if you will going into this year's first quarter from those two events.

Plenty of that was offset with effectively the benefit of curtailing the pension last year so it wasn't frozen.

We took the gain when we announced it but it wasn't actually frozen until the third quarter so we got the benefit of that so there is about a $20 million headwind on a year-over-year basis from those various categories.

Great.

Thanks for walking me through that.

And then issuer services, you guys called out depository receipt business and the strength there.

Given the continued rally in the EM, should we assume that that is sustainable and is that still a reasonably good indicator for that business?

Yes, DR is definitely tied to emerging market activity and issuance and so a pickup in emerging market issuance will be helpful to DRs for sure.

The other driver there is corporate actions tend to be helpful so if you have a pickup in banking activity or merger activity, that tends to be a positive driver for DRs as well.

On the corporate trust side of issuer, we have signaled that the fee decline we experienced for the prior few years would moderate and level off which it has done.

They are benefiting now from the restoration of some of the fee waivers.

And while bond issuance was down pretty significantly industrywide in the first quarter, our market share in corporate trust is picking up and we think that will be one of the drivers of growth in the future for investment services.

Great.

Thanks for the color.

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning.

A question on asset management, particularly the positive US retail flows.

You mentioned multi-strat in alternatives.

Is that what is driving the positive flows or are there other products that are working?

Thanks.

Well, this is Mitchell.

You have LDI that you had $14 billion of positive flows so that has contributed to it and fixed is flat meaning core fixed but it is primarily on LDI and on alternatives.

Thank you.

And then maybe a broader question about the outlook for wealth management particularly the retirement business, as the retiree population grows, are you seeing -- I mean LDI has been strong kind of the institutional side.

On the retail wealth management side, are you seeing people do a similar kind of individual LDI where they are moving to fixed income and trying to immunize their savings?

Or given some shortfalls in people's retirement savings, are they kind of going more toward equity and swinging for the fences in terms of building capital?

Which trend is more dominant in your wealth management business?

They are definitely not swinging for the fences.

It is more of a balance.

People are confused, most people don't have enough.

The wealth obviously do but they are looking for solutions in this market, are interest rates going up?

What is going to happen to fixed income?

The equity markets have been very volatile so they are looking at a more conservative balanced type of approach quite frankly.

So equities remain a significant element but probably has come down a little bit and they are looking more at corporate credit, munis have performed well and how to balance out their fixed income portfolios.

Very helpful.

Thanks, Mitchell.

Geoffrey Elliott, Autonomous Research.

Hello, good morning.

Thank you for taking the question.

Very interested to hear you highlighting blockchain technology so much.

How do you think about the possibility that all of this innovation kind of removes some of your technological modes and ultimately reduces the pool of revenues that could be available to the whole [cost] and custody industry?

We actually see ourselves as one of the major participants and using the technology to improve the efficiency of our operations and the resiliency of our operations.

And as I said earlier, the fact that no matter what technology is used, a trusted counterparty intermediary is required, we see ourselves playing in that role.

So while certain efficiencies and certain revenues may lessen the revenues, we think we are going to pick up that in the cost side as the technology gets improved and rolled out.

So we see ourselves as being a critical player in the middle of this.

As I said, we have pilot programs going on in the payments business, in corporate trust and our broker-dealer business and particularly around repos.

So where we are watching it carefully, we are participating actively, it is really hard to tell exactly how it is going to roll out but we do see ourselves as being a major participant in it.

I would just add that we are executing a NEXEN ecosystem strategy which includes an app store and part of the reason for being immersed in this fintech world is to find solutions that can really add value to clients.

Clients are obviously interested in getting the value of new applications and innovative technology.

But they frankly in many cases do not want to integrate it, do not want to do the work of managing that.

And so our ecosystem will enable us to embed third-party solutions in a much more easy streamlined way which will reduce the client's and our management cost.

So we think NEXEN enables us to leverage these companies and these innovative solutions and it also enables us to actually help drive revenue growth and more value for clients.

And another example would be on NEXEN, we have a digital pulse big data solution and we have invented client optimization technologies, securities lending optimization technology, liquidity management optimization technology, all of which are sources of improving our client's profitability and sources of revenue for the Company in the future.

So there is real opportunity here as well as some risks and we are immersing ourselves to try to make sure that the opportunities outweigh the risks.

Great.

Just a very quick numbers question, the expenses, what would the year-on-year change have been on a constant currency basis?

It is about 100 basis point benefit.

So it would have been about 100 basis points more, rather than down 3, it would have been down 2.

Perfect.

Thank you.

Brian Kleinhanzl, KBW.

Great.

Thanks.

I just had a quick question on the balance sheet.

I know you gave kind of guidance as to what the margin would do if rates were flat over 2016.

But if we do get another rate increase in 2016, would you expect a similar drop in deposits like you saw this quarter or are you expecting stability over the deposit base as rates increase from here?

Thanks.

We expect that there will be further run off with additional rate increases.

We think that that deposit runoff, that attrition is probably a little bit less than we had previously guided.

So back at our Investor Day, we had guided that the normalization of rates -- and let's say that is 100 basis points or so -- we would expect to see about $40 million to $70 million in runoff.

I think we will see something to the lower end of that so we have seen in the first 25, we have seen about $13 billion or so.

I think we would stick with that guidance.

We do think the margin expansion will more than offset any loss of deposits which will lead to higher NIR in a rising rate environment.

When we model that and report that in our financials, we are reflecting the runoff that comes, our estimated runoff that comes with the movement in interest rates.

Okay, thanks.

Gerard Cassidy, RBC.

Thank you.

I apologize if you addressed these questions.

I had to jump on and off of your call.

But, Gerald, can you share with us, there is a lot of disruption going on in the capital markets and many of the European and UK capital market players have downsized and are exiting specific businesses in the capital markets such as FIC trading or equity trading.

Are you seeing any opportunities to gain market share in your business lines in those markets due to the disruption that some of those companies are going through?

The companies that are going through that are in many cases some of our largest clients.

So some of their reduced activity is part of the challenges that we are trying to overcome in terms of the market activity.

That being said, we are seeing some of the shift of that activity to smaller firms who also happen to be more rapidly growing clients.

And we do see ourselves in being able to extend our service model to some of those firms who are picking up some of the trading slack or need the collateral services that I talked about earlier.

We do have what we refer to as prime custody, prime services solutions so some of the activity we see ourselves being able to pick up on a direct basis without taking on the risks associated with normal prime brokerage activity.

So we try to do it in a conservative thoughtful way but we do see ourselves being able to expand a little bit more in that space.

That I would add to that, Gerard, we are not interested in becoming a large fixed income trading operation.

That is not what we are looking.

We do make markets for some of our clients, for Pershing clients and so forth but it is a relatively modest combination business for us and we don't expect that to change.

Great.

As a follow-up on CCAR, obviously this year we had a negative interest rate environment and I think most banks probably quantitatively will come out of it okay.

But from a qualitative standpoint from a systems standpoint, are you guys comfortable with what you are able to submit to the regulators?

I know many banks have addressed that their systems are going to be using manual overrides to handle that negative rate environment.

Are you guys -- is yours similar to that or are you fully automated and you can do it without any manual overrides and negative rate environment here in the US?

I think one of the benefits is we are mostly an institutional company and so that we have had the experience of passing on negative interest rates through our systems in Europe and a number of jurisdictions and now in Japan as well.

So we think that is something that we could operationally manage.

Great, I appreciate it.

Thank you.

Great.

Thank you very much everybody for joining us this morning.

Additional questions can be directed to Valerie Haertel and our investor relations team and we look forward to engaging with you and thank you very much for dialing in.

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.

Thank you for participating.