紐約梅隆銀行 (BK) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

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

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

I will now turn the call over to Ms. Valerie Haertel.

Ms Haertel, you may begin.

Thank you.

Good morning and welcome everyone to the BNY Mellon second-quarter 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 second-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 the website, BNYMellon.com.

Forward-looking statements made on this call speak only as of today, July 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, and welcome everyone.

Thank you for joining us to discuss our second-quarter results.

This quarter demonstrated the value of having a well diversified, lower risk business model which provides stability to our revenue base during periods of global market uncertainty and volatility.

We remain focused on the execution of our long-term strategy to drive future growth by continuing to invest in strategic initiatives to support our clients' success while maintaining the safety and soundness of our enterprise.

We continue to aggressively control expenses through our business improvement process which enabled us to maintain a strong adjusted pre-tax operating margin of 33%.

In a challenging revenue environment with a flattening yield curve on an adjusted basis we delivered second-quarter earnings per share of $0.76.

And we achieved an adjusted return on tangible common equity of 21%.

Now I let Todd address some of the market-driven and seasonal revenue dynamics in this quarter as well as our continued progress on reducing expenses.

But first let me discuss our progress against our strategic priorities.

Driving profitable revenue growth remains our first priority.

Growing revenue remained a real challenge across our industry.

And while we were down somewhat year over year, our diversified business model positions us to deliver consistent results regardless of the market and certainly solid risk-adjusted returns.

We continue to believe that our distinctive capabilities in areas such as collateral management and liquidity services, middle office outsourcing and liability-driven investment as well as our efforts to build a digital enterprise will drive revenue growth in the future.

We are growing synergies between wealth management and our Pershing platform.

Wealth management loans are up 20% year over year and our combined banking and brokerage solution have driven over half of this growth.

We're also realizing increased synergies between Investment Services and Dreyfus.

Nearly 60% of the assets under management and our Dreyfus and BNY Mellon money market funds are from our Investment Services clients, evidencing the benefits of our dual focus on Investment Management and Investment Services.

On the technology front last year we created a technology solutions team to accelerate our ability to deliver market-leading solutions through internal development and partnerships with third-party technology companies and content providers.

So for example, we've leveraged NEXEN to build an application to help fund managers manage their expenses more effectively.

It is something we use internally in our mutual fund processing area and we are now making it available directly to our client as an application on the NEXEN platform.

We have also used NEXEN APIs to help a large global fund by integrating a third-party market analytics application where their underlying portfolio holding is providing improved insights and analysis into their investments.

In Investment Management Mitchell Harris has made a number of changes to his organizational structure designed to improve the quality of our execution and prioritize what is most important to our clients.

Now those changes include managing our global distribution organization in two parts: North America and international, in a manner that balances our distribution focus among wealth, institutional and intermediary clients, helping us provide targeted investment solutions for their specific challenges in any given market or region.

Now we've also make changes to strengthen our investment boutiques by further supporting them with market insights, analytics and product information to power their investment success and continue to build out their infrastructure needs.

This new structure will allow us to more quickly adjust our strategy and business priorities to the evolving client needs and market dynamics.

Our second priority is executing on our business improvement process and it has been paying nice dividends for us and our client.

It's creating efficiency and quality benefits for them and reducing technology, operations and top of the house costs for our Company.

These savings are enabling us to fund regulatory change and revenue initiatives.

And we've been meeting or exceeding our business improvement process goals, are on target to achieve the transformational-related structural cost reductions that we stated on Investor Day and are meeting or in some quarters exceeding our operating margin goals.

Now some live examples of actions that we have taken include our procurement and technology teams are driving down our IT vendor expense, we've renegotiated large vendor contracts to our benefit and see more opportunities to do so as contracts come up for renewal.

We've eliminated more than 200 market data terminals for a $13 million in annual savings run rate.

We fully implemented our bring your own device program, eliminating more than 90% of our Company paid handheld devices.

We've been piloting robotics and machine learning processes to automate work and eliminate repetitive manual tasks.

While it's still in the early days, we have put robotics into production in several areas and believe there are excellent prospects to roll this out more broadly and further reduce our costs.

And in our business partner group, we are leveraging our location strategy, negotiating to reduce vendor costs and automating or eliminating low value activity.

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

The UK's decision to exit the EU was and remains an opportunity to demonstrate our ability to navigate through real-life market stresses.

Amidst the market volatility and increased transaction volume in the wake of the referendum vote, we and our clients were able to continue to transact business without incident.

We believe our UK and European legal entity structures, licenses and infrastructure, which includes a passport European bank in Belgium, creates a competitive advantage and positions us well to manage the potential impact of the new arrangements.

Now an exit from the EU is likely to take several years and the final establishment of the terms of the UK market access between the UK and the EU could take much longer.

Throughout this period we will continue to conduct detailed business and risk assessment and we'll work with our clients to respond to any changes in their needs and the market infrastructure.

At least at this very early stage we do not envision a significant impact to our operations and business.

Now our fourth priority involved generating excess capital and deploying it effectively.

During the second quarter we repurchased $509 million in common shares and we distributed $185 million in dividends.

As we mentioned last month, the Federal Reserve did not object to our 2016 capital plan as part of CCAR.

Our Board has approved the repurchase of up to $2.14 billion of common stock over a four-quarter period and that compares to last year's five-quarter authorization of $2.4 billion.

We will begin the buyback program this quarter and continue through the second quarter of 2017.

They have also approved the additional repurchase of up to approximately $560 million of common stock during the period contingent upon us issuing $750 million of preferred stock.

And I'm pleased to report that we have increased our quarterly dividend by approximately 12% beginning in the third quarter of this year.

Now our fifth priority is attracting, developing and retaining top talent through a holistic people strategy that directly supports our business.

Over the last quarter we added several new people to our organization as we increase our bench strength.

Some of these additions include Adam Vos who joined us from Deutsche Bank to head up foreign exchange trading.

Adam is a proven industry leader and will help build out the market's management team under Michelle Neal.

[Bob Colby], an industry veteran in asset management, has joined us as our Global Head of Risk & Compliance for Investment Management, further strengthening our risk and compliance organization.

Michael Santomassimo has joined us from JPMorgan as CFO of Investment Services where one of his charges will center on improving profitability and return on risk-adjusted capital in these businesses.

We have also promoted and stretched a number of our talent leaders internally including Hani Kablawi who has been named head of Investment Services for EMEA, Susan Revell who is now General Counsel and Chief Controls Officer for EMEA as well as a number of leaders in Investment Management related to the organizational changes that I referenced earlier.

So in summary, we are executing against each of our strategic priorities and controlling what we can control.

We are well-positioned to navigate through the uncertain market conditions and the lower for longer interest rate environment while producing strong results for our clients and our shareholders.

Now 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 4 and that's the one the details our non-GAAP or operating results for the quarter.

Our second-quarter adjusted EPS was $0.76.

That's $0.01 lower versus the year-ago quarter but up 3% sequentially.

On a year-over-year basis second-quarter revenues and expenses were each down 2%.

The year-over-year revenue decline was largely driven by the gain on lease sales in the second quarter of last year as well as the impact of the stronger dollar.

Sequentially revenue was up 1% and expenses were flat.

While operating leverage on an adjusted basis was flat on a year-over-year basis we have maintained a long-term trend of generating positive operating leverage, fueled by the success of our business improvement process and we expect to continue this trend.

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

However, the net impact from currency translation is minimal to our consolidated -- excuse me, pre-tax income.

Income before taxes was down 2% year over year on an adjusted basis and up 5% sequentially.

On a year-over-year basis our adjusted pre-tax margin remained at a healthy 33% in the second quarter and return on tangible common equity on an adjusted basis was 21% for the quarter.

Now moving ahead to slide 8 I will discuss our consolidated fee and Other revenue.

Asset servicing fees were up 1% year over year and they were up 3% sequentially.

The year-over-year increase primarily reflects net new business, higher money market fees that were partially offset by lower market values and the unfavorable impact of the strong dollar.

The sequential increase primarily reflects higher market values and net new business.

Clearing services fees were up 1% year over year and flat sequentially.

The year-over-year increase was primarily driven by higher money market fees, partially offset by the impact of lost business.

Sequentially higher average balances and the increase in the number of trading days were offset by lower volumes.

Issuer service fees were unchanged year over year and down 4% sequentially.

Both comparisons reflect lower depositary receipts revenue.

Year over year, issuer service fees also reflect higher money market fees in corporate trust.

Treasury service fees were down 3% year over year and up 6% sequentially.

The year-over-year decrease primarily reflects higher compensating balance credits provided to clients.

What that does is shift revenues from fees to NIR.

The sequential increase primarily reflects higher payment volumes due to an increase in the number of trading days.

Second-quarter Investment Management and performance fees were down 5% year over year or 4% on a constant currency basis.

The year-over-year decrease primarily reflects outflows in 2015, the unfavorable impact of the strong dollar, and lower performance fees.

These were partially offset by higher money market fees and the April 2016 acquisition of the assets of Atherton Lane Advisers.

The sequential increase of 2% primarily reflects higher equity market values and the impact of the Atherton acquisition, partially offset by net outflows.

FX and Other trading on a consolidated basis was down 3% year over year and it was up 4% sequentially.

FX revenue of $166 million was down 8% year over year and up 3% sequentially -- excuse me, it was down 3% sequentially.

The year-over-year decrease primarily reflects lower volume, partially offset by the positive net impact of foreign currency hedging activities.

The sequential decrease primarily reflects the continuing trend of clients migrating to lower margin solutions.

Other trading revenue of $16 million compared with $6 million in the year-ago quarter and $4 million in the first quarter.

The year-over-year increase primarily reflects higher fixed income trading.

The sequential increase primarily reflects the lower losses on hedging activities in the Investment Management business.

Financing-related fees declined 2% to $57 million versus the year-ago quarter and they increased to 6% sequentially.

Distribution and servicing fees were $43 million.

That's 10% higher year over year and sequentially.

Distribution and servicing fees were favorably impacted by higher money market fees.

The year-over-year increase was partially offset by fees paid to introducing brokers.

Investment and Other income of $74 million compared with $104 million in the year-ago quarter and $105 million in the first quarter.

Both decreases primarily reflect lower lease-related gains.

They were partially offset by foreign-currency remeasurement gains.

In summary, our total fee revenue was a little stronger than it appears as the lower lease-related gains, currency translation and hedging activities impacted revenue by about 3%.

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

Assets under management of $1.66 trillion was down 2% year over year, reflecting net outflows primarily in 2015 and the unfavorable impact of a stronger US dollar principally versus the British pound.

That was offset by higher market values.

Sequentially assets under management were up 2%.

Total net outflows were down to $1 billion, continuing the improving trend we have experienced over the last year which is in part a reflection of stronger investment performance in many of our boutiques.

Long-term outflows were $5 billion which included net long-term active inflows of $12 billion, mainly driven by continued strengths in liability-driven investments.

These were offset by $17 billion in index outflows.

Active equity outflows were relatively modest and the lowest in seven quarters, once again helped by stronger investment performance from our active equity managers.

Additionally, we had $4 billion of short-term cash inflows.

Wealth management continued to deliver year-over-year pre-tax earnings growth which is now a multiyear trend.

And our successful banking expansion with Pershing continued to drive strong loan growth.

Investment Management loans and deposits were up 20% and 6% respectively.

Turning to our Investment Services metrics on slide 10, assets under custody and administration at quarter-end were a record $29.5 trillion, that's up 3% or $900 billion year over year, reflecting net new business and higher market values, partially offset by the unfavorable impact of the stronger US dollar.

Linked quarter AUC/A was up $400 billion.

We estimate total new assets under custody or administration wins were $167 billion in the second quarter and we continue to have a solid pipeline of opportunities.

Looking at the other key Investment Services metrics, you can see that most are down year over year.

And that reflects the impact of us proactively managing the balance sheet as well as certain client relationships with a focus on optimizing capital, liquidity and profitability as well as the previously disclosed impact of lost business in clearing.

Turning to net interest revenue on slide 11, you will see that on a fully taxable equivalent basis NIR was down 2% versus the year-ago quarter and flat sequentially.

The year-over-year decrease primarily reflects the negative impact of interest-rate hedging activities and higher premium amortization that was driven by the sharply lower rates we saw at quarter-end.

The yield on interest-earning assets was up 6 basis points year over year and it was down 2 basis points sequentially.

Our net interest margin for the quarter was 98 basis points, 2 basis points lower than the year ago and 3 basis points lower than the prior quarter.

The impact of hedging and the higher premium amortization drove the net interest margin a bit lower than our expectations.

Before I cover expenses let me provide you with an update on our resolution plan.

While we are still evaluating our plan, after receiving the Fed's guidance we believe that changing to a single point of entry strategy rather than a bridge bank strategy will more likely result in a credible plan.

Implementing this SPO strategy will likely result in some additional expense and may require us to issue additional TLAC eligible debt.

Now turning to slide 12, you will see that noninterest expense on an adjusted basis declined 2% year over year.

It was down slightly sequentially.

The year-over-year decrease reflects lower expenses in nearly all categories, primarily driven by the favorable impact of the stronger dollar, lower staff and legal expenses and the benefit of the business improvement process.

And that was partially offset by higher net occupancy and distribution and servicing expenses.

Staff expenses decreased year over year, reflecting lower incentives.

The increase in net occupancy expense reflects the cost to exit leases and that's consistent with our global real estate strategy.

The savings generated by the business improvement process primarily reflect the benefits of our technology in-sourcing strategy as well as the benefit of renegotiating some large vendor contracts.

The sequential decrease in noninterest expense primarily reflects lower staff expense, offset by higher sub custodian, net occupancy, legal, and business development expenses.

The decrease in staff expense primarily reflects incentives.

The increase in sub-custodian expenses primarily reflects higher client activity.

The increase in net occupancy expense reflects that cost to exit certain leases.

The increase in business development expense was driven by the timing of client conferences.

We tend to do those in the second quarter.

Turning to capital on slide 13, our fully phased-in advanced approach under common equity Tier 1 ratio on the non-GAAP basis decreased 30 basis points to 9.5% as capital generation in the second quarter was more than offset by increases in operational risk-weighted assets.

That measure is driven by external loss events that we incorporate into our model.

Our supplemental leverage ratio on a fully phased-in basis was 5%.

Now we expect to see significant improvement in our supplemental leverage ratio in the third quarter as we execute on our balance sheet strategy, which is expected to reduce some of the less LCR friendly deposits and shrink some of our lower yielding repo activity.

Additionally, as Gerald noted our capital plan includes our intent to increase our Tier 1 capital which would also be helpful to the SLR.

A couple of other notes about this quarter.

Our effective tax rate was 24.9% which is roughly in line with our previous guidance.

On page 11 of the release we show some investment security portfolio highlights.

At quarter-end our net unrealized pre-tax gain on our portfolio was $1.6 billion.

That compared to $1.2 billion at the end of the first quarter.

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

Third-quarter earnings are generally impacted by a seasonal slowdown in transaction volumes and market-related revenue, particularly in foreign exchange, collateral services and securities lending, offset by the seasonally higher activity that we usually see in DRs.

We expect NIR for the third quarter to be flat as we implement our balance sheet strategy that I just mentioned to cover both SLR and resolution plan compliance and as we manage through the lower long-term rates.

We expect total expenses as adjusted for the full year to be flat to lower than they were in 2015.

And lastly, our tax guidance for the full year remains unchanged at 25% to 26%.

With that let me hand it back to Gerald.

Thanks, Todd.

Operator, we can now open it up for questions.

(Operator Instructions) Ashley Serrao, Credit Suisse.

Good morning.

Gerald, I was hoping you could elaborate on the potential for robotics across the organization as you look out a few years and then also perhaps touch on the cost of data.

I know you noted a reduction in data, market data terminals but hoping you could give us a sense of how much the firm spends today and how the firm is thinking about procuring data, especially as you strive to deliver more analytical solutions to clients.

Ashley, I think your first question was about Brexit.

Is that correct?

No, sorry, the potential for robotics across the organization.

Robotics.

Sorry, sorry.

Yes, robotics.

So right now we have three bots -- 30, I'm sorry, 30 bots in production right now across six different processes.

We're very encouraged by the results.

It's really taking some of the manual mind-numbing exercises out of the process and doing it at a lower cost.

So we started with a couple of bots in one process and we have since expanded it.

So we're actually pretty encouraged by the upside associated with it.

We think we're in the early stages of it and we see other applications across other processes.

So I'm actually encouraged by it and think it could be a real potential upside for us.

Our market data, as we pointed out in the opening comments we've reduced terminals, we're reducing data feeds.

If you think about our Company we have lots of market data feeds in so many different business areas.

We actually have an effort underway to look across the enterprise to see if we can either reduce the number of feeds, consolidate the number of feeds or certainly negotiate the cost of those feeds a heck of a lot better than we've done on an individual business by business basis.

So, again, we think there's some further upside to reducing those costs associated with market data inputs.

Great.

Thanks for the color there.

And a question for Todd.

It just seems like the typical uplift you see in securities lending was a little bit more muted this year.

I was just hoping you could share any color on what's going on in that business.

Yes, I think on the equity front you're seeing less of the tax arbitrage than what you had seen in previous years.

So that was typically a second-quarter event with dividends.

And if you look at the increase in the spreads that we did see in the quarter, I think there were more specials in government securities so we did benefit a little bit from that.

So if you look at the total securities lent they are down slightly on a year-over-year basis.

But you can see the spreads are improving quite nicely as we, I think, manage down some of the risk-weighted asset implication to it and are a little more selective on what we're lending and generating a little bit higher yield out of what we are lending.

Great, thanks for taking my questions.

Alex Blostein, Goldman Sachs.

Thanks guys.

Good morning.

A question around resolution and the expense outlook that you guys just highlighted.

Todd, can you provide a little more color, I guess, how much more in elevated reg spend getting compliant will cost you guys as you go through this process?

And maybe the timing of that?

I mean it sounds like a lot of that is going to be second half of this year and then it should probably phase out into 2017.

And I guess more importantly, it seems like you're keeping your overall expense guidance in line with what you've said in the past, kind of flat to slightly down.

So what are the areas where you are finding incremental savings to offset the more elevated reg-related spend?

Sure, Alex.

So the guidance we did give, so I'd say it's a little bit improved for what we had previously given and that is on a year-over-year basis we do expect to be flat to perhaps down a bit on total expenses.

And that includes a number of headwinds.

We have the higher distribution fees related to fee waivers, it's kind of a good expense.

So as the fee waivers abate we concur that expense.

The government assessments are going up substantially.

So the Single Resolution Fund in Europe, the bank levies and increased FDIC expense is up substantially.

Then we've mentioned the higher regulatory cost associated with compliance with the resolution plan as well as the demands around CCAR.

So those are all incorporated into the run rate that I just mentioned.

All other expenses should more than offset what I just mentioned.

So our staff expenses are going down for a number of reasons.

Some of the automation, some of the of our location strategies are paying off.

We've been able to manage down our legal expenses substantially.

Some of that is because of the number of matters and some of that is because of some of the actions that our legal team has taken to reduce those costs.

We've been able to manage down, even in front of all of that there's a lot of consulting expenses where you see a lot of the regulatory compliance come in.

But despite that we've been able to manage down some of our consulting expenses.

Our real estate strategy is paying off and we would expect real estate and occupancy expenses to be down for the year.

So it's really almost across the board.

It's no one thing, Alex, it's a number, it is a very large number of small items.

Got you.

And then a cleanup item on the net interest income.

Can you give us what premium amortization was in the quarter?

It sounded like it was a bit of a drag sequentially.

Last quarter you guys had a hedging loss which I think was expected to revert back in 2Q.

So as we're thinking about kind of the headwind that was created by premium amortization can you just give us a number?

Sure.

So there are two things that go on there.

One, the hedging loss.

That is a net gain and so geographically it's a gain in trading and a loss in NIR.

We didn't expect it to happen two quarters in a row but it did and it's related to hedging the Company's debt issuance.

And that and the combination of the increased amortization that was just largely driven by the very sharp drop in rates that we saw right at the end of the quarter when we make that adjustment.

The combination of the year-over-year basis was about $25 million, so it hit the NIM by about 4 basis points.

Got it.

Great.

Thanks very much.

Brennan Hawken, UBS.

Good morning, thanks for taking the question.

The NII guide in the back half, does that -- I know that you had indicated your expense outlook would be reflective of potential headwinds from living will.

But does the NII guide also include the potential headwinds that you flagged on TLAC and [H2OA]?

So what we guided in the third quarter, assuming that the Fed doesn't take any action in the third quarter, that we would expect NIR to be flat with the number that we just posted.

There could be some additional debt issuance that we would incur in the quarter, as well as I had mentioned that we are going to reduce the balance sheet with some of the unfriendly , what we call LCR unfriendly, the liquidity coverage ratio unfriendly deposits as well as some of the lower yielding repo that we have on the books.

That combination should substantially improve the SLR ratio and I think put us in a good position for next year's compliance.

And there's a possibility there could be additional TLAC post that.

Okay, but it's too early to determine, I guess, exactly how that would shake out?

It really is, Brennan, because we have not, we've simply not been able to complete the financial analysis at this time.

And I probably should give you a little more color.

The effectively if we need to issue TLAC to pre-position so that we could support, say, the institutional bank in a time of a crisis, what we would do is we would issue debt and we would probably invest it in a similar duration, high-quality liquid asset.

Let's just say it was treasuries.

That cost us about 100 basis points.

So we end up doing $5 billion of that it's going to cost us about $50 million over the course of a year.

Okay.

That's great.

Thanks for clarifying there.

Then is it possible could you give us in constant dollar operating leverage both quarter over quarter and year over year?

It's possible but I don't have it at my fingertips.

It's almost -- almost not impactful.

There wasn't -- there was more noise within the currencies, so you saw a move between sterling and euro.

But the net impact was relatively modest, less than 100 basis points to revenue or expenses for the entire Company.

So net-net in operating leverage that doesn't do much.

The reported operating leverage numbers will essentially be the are currency adjusted ones.

Okay, great.

So effectively even though you highlighted and included currency translation in the noise impacting your fee revenue, when we think about it on a net bottom-line impact, that really didn't have an operating leverage impact this quarter?

Well, think about it.

It's 1%, it is approximately 1% of both.

So net-net that's not going to do too much to operating leverage.

Yes, yes.

Got it.

Thank you.

Brian Bedell, Deutsche Bank.

Hi, good morning folks.

Just a quickie on expenses.

The lease exit costs I think, Todd, you referenced the increase sequentially to that.

So should we imply of about $10 million of lease exit costs that will that are sort of one-time in nature?

And then also on your expense guidance on flat to possibly down for this year, do you have distribution expenses related to money market fee waivers going up I guess in terms of factoring in when you have the Fed raising rates?

Brian, in terms it's a little less than $10 million but somewhere approximating that and on the lease exit cost.

From time to time you're going to continue to see us do this as we manage our real estate portfolio.

So it just makes sense for us to give back some space to consolidate and just improve our workspace in general.

And in terms of the fee waivers, we do reflect what our projection is throughout the rest of the year and that's incorporated -- excuse me, our distribution fees, that's incorporated into that number.

The assumption that we made in the numbers that there is no additional Fed tightening.

Okay, that's clear.

And then maybe just switching gears, maybe either Gerald or I don't know if Brian is on the call as well, if you could just give us an update on the T. Rowe mid-office contract onboarding?

I think there was some more revenues coming in later this year on that, and then just also the $167 billion of new wins, the timing of that and the client mix there?

Yes, I will let Brian handle that.

Brian is on the call here.

Okay, thanks, Gerald.

So taking the new wins first, new wins tend to be bumpy in asset servicing.

So you see volatility in that number, but we had a pretty good quarter with $167 billion in AUC new wins.

About $100 billion of that was from one large insurance company client that we're excited about bringing on board.

And we still see longer-term secular trends in the asset management space where asset managers really do want to focus on their core value proposition in the investment process and they are looking for lower, more variablized, capital-light solutions.

So we see real opportunities in the middle office space for asset managers, for hedge funds.

We obviously are now signing up our first third-party clients following the lift-out of the Deutsche Bank real estate and private equity admin business last year.

We have actually signed six clients year to date, new clients, so that's going to start to be a source of revenue.

And so overall we feel good about the longer-term prospects for asset servicing growth.

And what was the first part?

(multiple speakers)

On T. Rowe Price we're moving along well with T. Rowe Price.

Last August we actually lifted out their middle office team and we are operating in their middle office and fund accounting services every day and the service levels and the relationship are strong.

And we continue to work through the implementation plan to convert them to our fund accounting technology platform and our middle office services platform.

So we're still moving along nicely.

There are some, there always are some technical things that have to be resolved along the way.

But we are moving along well with T. Rowe Price.

Is there a revenue lift as you implement that through this year --

Yes, I would say there's been some, we obviously are getting revenue from the middle office services since the middle of last year.

I think you should think about that more like in 2017, not any real growth in the revenue this year.

Okay great.

That's helpful.

Thank you.

Ken Usdin, Jefferies.

Thank you.

Good morning everyone.

Thanks.

Todd, I was wondering if you could elaborate more on just the activity side of the business?

The core FX was down a little bit, the less seasonality in sec lending which we know was a little bit more on the changing dynamics in Europe.

And then clearing you mentioned lower volumes.

Can you talk about how the quarter progressed in terms of the activity side?

And did Brexit have an impact at the end and just how do you see the markets behaving now?

Sure.

So in terms of Brexit a little bit frustrating, it was probably a negative for us for the quarter.

So what we saw was a little bit of an increase, a little flurry in FX activity at the end of the quarter.

But that was effectively given back by the hedge that we have on Investment Management because of the very low interest rates.

Then the fact that the amortization of the premium against the NIR was driven by the very low interest rates.

I'd basically say it cost us about $0.01 as we look at back to it.

So far this quarter I think the activity has been a little elevated in FX.

So a pretty good start.

Whether that's going to sustain itself or not we'll have to see.

In terms of activity across the investment service I really, Brian, you're probably better suited to answer that.

Clearing activity I guess was a little bit softer for most of the quarter.

But generally activity is not bad.

Yes, I would say that.

Clearing services as we've said has been affected by some lost clients and some client business exits, particularly from some US wealth management clients.

But overall the clearing services fees were up 1% year over year and 1% sequentially which is pretty strong performance considering the lost business.

It's owed to the fact that we have got a pretty diverse client base and we have got very diverse fee revenue sources.

So we're not as exposed to transactional revenue.

And we're seeing -- we're benefiting from the restoration of fee waivers driven by the December rate increase.

And we had some good retirement fee growth.

And we have benefited from bringing onboard the JPMorgan clearing clients in the second half of last year which is less fee driven but a combination of fee and NII that is helping the clearing services line overall.

And we're focused on growing, particularly in the RIAA market and we continue to see interest from self clearing firms that are trying to lower their cost and variablize their cost and reduce their capital and regulatory change investment.

And I would also mention DRs tend to be a little episodic, so I think there was some softness there when you look at our sequential as well as our year-over-year numbers.

And typically the third quarter will be good for that.

That's pretty much directly hits the bottom line.

So that something where we saw probably a little bit softer activity.

One of the areas that's looking stronger is in collateral management and as we now look at uncleared margin requirements we're right in the middle of benefiting from that and segregating the collateral and acting as custodian of those transactions.

So we're starting to see that activity pick up pretty much in line with the guidance that we had given you for a while.

It's been slower to for the regulations actually to get into place but now that's developing, as well.

Ken, I would just would like to add, when you look across the markets whether it's emerging markets, interest rates, whatever the case may be, our core underlying businesses I think are performing reasonably well.

Issuance in the corporate trust area and DRs has actually been down, but we've had a higher than market share gain in those spaces.

So while it's flat when you look at the overall market activity us being flat is actually a positive.

When you look at asset servicing and you think of some of the things that we've won here I think the core underlying business has got some pretty decent solid momentum.

And clearing services even though we lost businesses on a year-over-year basis to fully recover that, and it shows a little bit of increase, again I think the core underlying business is performing well.

Yes, fair point, Gerald.

Just to follow up on capital and the preferreds, so you've got the preferred aligned with the CCAR as you said and also I think presumably as part of your further SLR build.

So can you talk about just expected timing of when you might get in the market for preferreds?

And bigger picture is should we expect that the preferred as connected with CCAR is an annual thing and now is part of just kind of rightsizing the capital structure?

Or once you get this last one in and get SLR compliant are you done?

I think that we probably when we look at our capital stack and the nature of our risk we probably could do some additional preferred relative to common equity, especially when you think that it's the Tier 1 that drives the SLR ratio which is our binding what I will call spot capital constraint.

I can't really speak to the timing of any issuance, but if you look at what we've disclosed or what was disclosed in the CCAR we did get approval to do $750 million and buy back a substantial part of that but not all of it, so that will generate some additional Tier 1. And with interest rates down as low as they are it's a pretty attractive form of capital.

Thanks, guys.

Glenn Schorr, Evercore ISI.

Hello there.

Todd, could I get a clarification on just two things you mentioned earlier.

One was I'm curious on what external loss events got incorporated in this quarter for the ops risk RWA that would have the capital ratios fall sequentially?

And the other one was within FX trading you talked about clients migrating to lower margin products.

I'm just looking for an example of what that is and if you see that as a sustainable trend.

Okay, I will answer the question on the operating losses.

Effectively what happens is when large losses and a lot of these are settlement types of losses go into an external database it helps to inform our, if you think about this we distribute a potential -- there's a potential distribution of losses, there's a probability of them occurring, that distribution is informed by those large losses.

So I can't identify specifically which one it was but they keep coming, if you will.

They don't fall out of that database for 10 years or so.

So that's what's affecting it, so it keeps picking up on some of these litigations.

There is some consideration to taking a look at how operational risk is computed and it's likely that this will change in the not-too-distant future.

There is some discussions around the regulatory within the regulatory bodies right now.

We do expect that there will probably be some relief coming within the next couple of quarters on how that's computed but I can't really confirm that at this time.

So that's what drives it, and you will see it I don't think it's exclusive to us where you've seen some of that noise around operational risk losses and the addition to risk-weighted assets.

Now it's kind of interesting, Glenn, because if you look at the CCAR test, the CCAR test is not against the advanced approach.

The CCAR test is the advanced approach is the one that includes the model for operating losses.

It's using the standardized approach.

And so if you look at our ratios on a standardized approach they didn't go down in the quarter.

And, in fact, they have a substantial, now a substantial, they're substantially higher than the advanced approach.

So the good news is this is not really constraining issue for us because when we go through the CCAR we're testing against a much higher ratio.

And then, Glenn, the answer on the foreign exchange, as we've commented in the earnings release we continue to see, and it's been a relatively long-term trend, a shift in client activity from either the old standing instruction type of activity to negotiated rates and electronic platforms as the market continues to become more competitive on a price point of view.

And that's been absorbed in our foreign exchange results.

And we, of course, have built out additional options for our clients and they are utilizing those options, but we did want to call out the fact that there's been a shift in the activity.

Got it.

Last quickie, LDI is now 34% of AUM, maybe the best acquisition ever in asset management.

But curious how that progresses when we live in this world of low rates and a flatter curve, like I thought growth was getting tapped out and waiting on higher rates but I guess that's wrong.

This is Mitchell.

The pipeline, the conversations we're having with our clients and prospects, we are still showing a very robust and very healthy pipeline, quite frankly, in the UK.

We are looking to obviously extend that success into the US.

That will be slow but no, the client behavior has not changed at all and the interest is still as high as it's ever been.

Glenn, if you think about it with a lower for longer interest rate environment and pension liabilities not declining these firms need to come up with a better solution to match the liabilities against the returns on the assets.

That's exactly what our firm does, what Insight does.

It really knows and tries to understand the liability structures and develop investment returns to better match it.

Pensions funds all over the world are struggling with it.

Yes, I appreciate it.

Thank you all.

Mike Mayo, CLSA.

Hi, on expenses you're making progress year over year, linked quarter but headcount is still up and if you can reconcile that.

And then separately so you're guiding now for better expense guidance flat to down.

Is that simply reflecting the progress you've made in the first half of the year because it looks like that's where you're headed anyway?

So Mike, on headcount, yes we've added some headcount in the technology sector as we finish in-sourcing the contractors and have application developed largely in-house now.

We've added some folks in the asset servicing and operations areas to support the new business we've taken on and some of the strategic initiatives that we've taken on with clients.

But I think I'd really point you to the fact that the staff expense has been down.

So we're putting people in the right locations at the right levels to offset the increase in headcount.

So we're really trying to manage staff not just purely from a headcount point of view but from an overall cost perspective.

And I think that's the more important way to look at it and, yes, we have additional people doing certain things to match the activity on the client and the initiative side.

And the regulatory side.

And the regulatory side.

We've been sourced and are building a more sustainable capability to deal with the regulatory items that we're being asked to deal with.

So instead of using consultants and a lot of third parties, we are building sustainable teams to be able to handle whether it CCAR, CLAR, resolution plans, whatever the case may be.

And we think we're doing it in a more cost-effective way.

So, Mike, when we have temporary staff, they don't show up in the headcount numbers but they do show up in the salary numbers.

So one of the big things we've been doing is replacing them by more cost-efficient permanent staff, as well as the in-sourcing of some of the developers that has continued.

So the headcount is not necessarily a good reflection.

That's what we keep saying, let's take a look at staff expense.

But we've also got the initiatives that we've had to accommodate with T. Rowe and some of the other ones that we've discussed this morning, as well as significant increases in regulatory and compliance-related staff.

And the final part of your question, we do see an ability to garner additional gains out of our business improvement process to offset these cost increases, to be able to sustain a flat decline in expenses through the course of the year.

And then just one follow-up.

For the business improvement process, can you just summarize like where are you in that process?

Are you one-fourth done, one-half done, three-fourths done, because you're relying on this to navigate a tough environment?

How much more do you have?

My colleague Brian Shea is biting at the bit on this one.

He wants to -- because we will never be done.

We are never done.

Yes, Todd and Gerald said it well.

I echo that.

It's a continuous -- we are calling it a business improvement process on purpose.

It's not a project or a program, it's a process.

So we're going to drive continuous improvement in our operating efficiency, our productivity, our service quality and every aspect of the way we operate.

And so we have a pipeline like other initiatives and other process improvements that we're going to drive across the Company.

So more to do on location strategy, more to do on technology, more opportunity to reduce vendor cost, more opportunity to shift traditional servers to the cloud.

And so we really think we have a sustainable, continuous process improvement approach.

And it's a really a cultural change in the way we're operating.

And I think it's really gaining more traction every day.

I can't help it.

What is the BYOD policy?

Bring your own device.

In other words, all employees buy their own device, it's their choice.

We will reimburse them for Company-driven activity.

But essentially everyone chooses their own device and their own carrier.

And then we put our applications that are Company applications up on it in a secure manner for them to use.

All right.

Thank you.

Geoffrey Elliott, Autonomous Research.

Hello, good morning.

Thank you for taking the question.

On the initiatives around reducing some of those LCR unfriendly deposits, I wonder if you could quantify the scale of deposits that you're looking to reduce?

So there are two elements.

One is we think we can encourage some of our clients rather than to leave the money on our balance sheet, to sweep it into money market funds so that we can continue to earn some margin, maybe a little bit less than what we would've earned on the balance sheet.

But the capital benefits far outweigh that.

And then there are some of the what I will call the hotter money that doesn't get positive LCR treatment which we're -- we still have some on our balance sheet, which we are going to discourage off of the balance sheet.

Then we have some repo activity where occasionally we will basically run what looks like a matched book.

The scale of that, every $10 billion is about 15 basis points to the SLR.

So it wouldn't -- we could do $20 billion or $30 billion relatively easily and fall within the guidance that I gave you on NIRs is our current estimate.

We also generate from intangible amortization and employee compensation issuance of the common stock about 5 basis points a quarter or so.

So that's kind of the scale that we're talking about.

And then just a quick follow-up, money market fee waivers how much of a potential upside is still left from those going away?

We have recovered it's a little bit different in our various businesses but in aggregate for the Company we put probably recovered a little bit over 50% of the fee waivers with the first 25 basis point move.

There wasn't much of a change.

We got it in the first quarter and we got it in the second quarter.

There's really not much of a change quarter to quarter and we had indicated that a 50 basis point move would give us about 70%.

And I'd still stick with that estimate for now.

Great, thank you very much.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

I had a question on money market funds and the transition that's going on in the industry.

We've got prime, nonprime transition happening in October.

Could you talk a little bit about what you've done so far?

I know you've moved some of your funds to govies, but could you talk about what you've done so far, what's left to do if any and if there's any impact that we should be expecting on either gross margins or any other relevant metrics as we go into the third, fourth and first quarter?

It's Mitchell, Betsy.

I think that from a transition point of view we're prepared for the move and we made all the regulatory changes already.

So I don't see any expense or any related issues there.

From a yield perspective we're all trying to continue to increase yields but what you see happening is a couple of things in the market.

First off, prime funds have already started industry-wide to decrease.

There's been about a 28% shift in asset moves from prime to treasury.

In addition to that the overall market is down about 4% where we've been down about 1%.

So we are doing a bit better on that front.

And our prime has also decreased a little less than the industry in that only 24% of our assets have moved.

We still expect about a third to a half of prime assets to move out into treasury funds over the next quarter.

Exactly how much we're not sure, but we've got the products and we are continuing to look carefully at yields in order to make sure that this shift goes into our treasuries.

Alternative products such as insured deposit accounts are also possible where people will move funds to.

It's still a little bit wait and see and, quite frankly, it's going to be this third quarter where we are really going to see how the movements play out.

But I think we're very well-positioned for it.

And you're basically taking liquidity into liquidity.

You're not seeing a trend of investors moving from liquidity product into maybe a bit of a barbell strategy to try to maintain yield?

No.

Not at all.

I think the volatility and uncertainty in the market, there is a lot more cash being held in general.

There's a lot more cash being held and our funds are holding a lot more cash in anticipation of a shift between funds.

Right.

And I guess what I'm surprised that is only a third move.

So you're saying two-thirds of the funds are willing to accept a higher risk associated with the prime fund structure?

I think they are waiting until the last minute.

Betsy, it's Brian.

From a servicing perspective we've invested in the changes we need to make to our systems to support a floating NAV institutional prime money funds and we are on track to be ready to serve our clients in October seamlessly.

Yes, because that's a flip of the switch day of, right?

Yes.

Yes.

Thank you.

Jim Mitchell, Buckingham Research.

Hey, good morning.

Maybe just a quick follow-up if you could help us think through more specifics around the Brexit, if there's shifting you need to do in terms of client assets or people and if we should think is there any material impact on you guys in terms of your UK presence from the declining pound?

Any specifics you can share with us?

Sure.

Great question.

Thank you for it.

We are extremely well-positioned.

We already have in place and have had in place for a long period of time a Belgian Brussels bank.

It is well-established, it is an operating center, it has capital liquidity, governance, management, everything that a European bank is required to have and it's already passportable across all of Europe.

In addition we have a UK bank and we have a branch of our institutional bank in the UK.

We also have a bank in Luxembourg that's also fully registered.

And then we have operations in Ireland, as well.

So we think we have lots of choice for our clients as they go through this and particularly the fund managers when they have to think about the jurisdiction of their funds if they have to move them from the UK to a European passported location we are very well-positioned to help them get there.

So we think we're in good shape operationally to help our clients deal with whatever impact Brexit offers.

So no real incremental expense for you guys.

Do you see any impact on your clients that could be adverse or is it just really just shifting AUM around and no real net outflow?

One, I think it's early to tell.

I think our clients are all going to go through is does it make sense to make the shift.

They are going to go through the process of is there marginal activity that warrants continuing to make the investment and/or shift versus shutting it down.

I think we're very early in the process but we have the expertise and the legal entities and the structures to be able to help our clients navigate those decisions.

And any impact from the pound on you guys that's material?

Not really.

Yes, we have some pound/euro cross exposure but it's not, I don't think it's substantial.

And when we looked at our performance for the second quarter so there was a fair amount of noise in the currencies.

But it all came netted down it was within $1 million of impact.

Okay, great.

Thanks a lot.

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning.

First for Mitchell on the distribution strategy in Investment Services, obviously it's pretty broad topic with your purchases from geographies and market segments.

But just was wondering maybe get some highlights on the strategic thinking behind that, where you would expect the greatest leverage in the relatively near term and how the boutiques will play a role?

Thanks.

Thanks for that.

There's several things.

You have really institutional retail and wealth, so you have several different distribution points.

And then you have with the institutional we've traditionally been focused on the US and I think we've broadened it because we've had opportunities out in Asia.

So we're strengthening Asia where there are more immediate opportunities.

And clearly pockets are growing both on the -- specifically on the sovereign wealth but on the institutional side.

Japan has some terrific opportunities there and we've certainly been focused on those.

On the retail side when you think about the DOL and the changes taking place there I think all we're doing is rebalancing both how we interact with the intermediary side given the changes.

The RIAs and the private banks, we haven't had enough focus particularly on the RIA segment which is the fastest-growing segment from a distribution perspective.

And then on the wealth side we've continued with the buildout of Atherton to focus really on where pockets of wealth in the southern part of the United States and out West have been growing.

We'd been more focused on the traditional I'll call industrial, the industrial belt of Detroit, Chicago and those kind of and Pittsburgh, New York.

So it's where the pockets of wealth are.

It's segmentation of what segments of wealth are growing and that are women and Hispanics, in particular.

So we're looking both geographically and on a segmentation basis.

And with respect to the boutiques, the boutiques are focused primarily on the institutional markets and the center is focused primarily on the retail markets.

So I think we've clarified or cleaned up where each of our responsibilities lie.

Great.

So the boutiques are basically going into the institutional market on a standalone basis somewhat?

Yes, in their home markets.

In Asia we take we're representing all of them.

It's much more efficient to do it that way out in the Asian markets.

And the servicing that they require, particularly the Japanese, it is a very high level of service.

So it's best done on a consolidated basis.

Got it.

That's great.

Thank you.

And then on Pershing I just wanted to step back a little bit, a lot of crosscurrents with some doing self clearing, some competitors exiting.

Probably a net headwind in the recent past but just comparing a multiyear growth trajectory and then looking out would you expect higher growth, lower growth, same and also maybe a comment on some of the RIA price cuts at Schwab?

Thanks.

Yes, I would say a couple of things.

We've had two of our large US wealth management clients owned by FIs exit and we still have one more to go.

We have been obviously offsetting that fee pressure with new business from competitors in transition and pivoting more of our resources toward growth in the RIA market.

We think the Department of Labor fiduciary standard is going to obviously continue to accelerate the secular trend from traditional brokerage commission-based relationships to advisory-based relationships.

And Pershing is well-positioned with managed account platforms, advisory tools and an RIA custody business that's growing high double digits to benefit from that perspective.

We're also continuing to extend the prime services business in a modest controlled way.

And so there's a variety of I think longer-term trends including those self clearing firms that can drive reasonable growth in the clearing services business.

The pressure is on the broker-dealer model overall which is a headwind.

There are 800 fewer broker-dealers in the United States today than there were pre-financial crisis.

And there are still more pressures on their business model.

So that's a headwind, but we're pivoting toward serving larger firms and the RIA market and other services which I think will offset that.

That's great.

And maybe on the competition and competitive action from Schwab?

We focus on professionally managed large advisors.

So our target market in the advisor space tends to be a much larger advisory firm rather than an individual practitioner.

And we tend to focus on also higher net worth investors at the end of the day.

So we've got some differentiating factors.

For example, and this is a combination of Pershing and BNY Mellon at its best, we've integrated a bank and brokerage custody platform that enables us to deliver both those options through a seamless front-end technology solution.

Another example where we're creating distinction is through delivering private banking services to introducing broker-dealers and RIAs.

We've talked about this before, but at the end of the second quarter we've now reached $3 billion in outstanding credit facilities driven from our private bank to those RIA and broker-dealer intermediaries and over $2 billion of those facilities have been drawn and used.

So that's creating a stronger competitive value proposition for those independent advisers and broker-dealers.

And it's also creating another virtual private banking capability for our private bank and it's a great example of enterprise teamwork.

So Schwab's obviously a market leader in what they do.

We're focused on leveraging the best of BNY Mellon to distinguish ourselves in the RIA market.

Gerard Cassidy, RBC.

Thank you.

Good morning, guys.

I had a question regarding, there was a story in this morning's paper about direct repo loans are gaining traction as the large global banks step back.

Is this an opportunity for you guys to get more business from some of your existing clients or create new clients?

Or is it -- or could it work against you?

That's an interesting question.

We always want to maintain great credit standards before jumping into something like this.

We also have to be mindful of the effect of the balance sheet.

And so there is opportunities for us to be direct with certain clients.

And so on a client by client basis we're looking at it carefully.

And then second, as a follow-up Gerald to your comment about the issues with the pension funds around the world with the rate environment the way it is and the unfunded liabilities, have you guys tried to quantify how much you could help them shrink that gap versus having to structurally change the pension fund whether lowering the payout or raising the contributions by the municipality, the corporate or the entity that has it?

I would say in the UK we're very, very active.

We're just beginning in the US and just beginning in other parts of the world.

And we actually have an initiative going on here in the US extending the Insight business model here.

We did a small acquisition last year that's integrated into Insight to address that very issue.

So we're moving around the country and having that dialogue as we speak.

Is it fair to say that your reception is probably very good from who you're talking to?

I would say generally yes.

There's lots of accounting challenges associated with pension liabilities and pension accounting and companies' balance sheets in the US.

So it's not an easy answer.

We want to help manage to the returns the pension funds are looking for.

We don't want to assume the pension liability.

Some insurance companies are actually buying the liabilities.

We don't have an interest in doing that.

But we are interested in working with either the companies or those who are taking on the liabilities to manage or prescribe a return.

Great.

Thank you for the color.

Okay.

Well thank you very much everyone for dialing in.

Sorry we had to cut off the questions but we're over time.

But I know Valerie Haertel and her whole team are available for additional questions, and thank you very much.

Once again, ladies and gentlemen, if there are any additional questions or comments you may contact Ms. Valerie Haertel at 212-635-8529.

Thank you.

This does conclude today's conference call webcast.

Thank you again for participating.