紐約梅隆銀行 (BK) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth 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 Miss Valerie Haertel.

Miss Haertel, you may begin.

Thank you.

Good morning and welcome, everyone, to the BNY Mellon fourth-quarter and full-year 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 fourth-quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results and can be found on the Investor Relations section of our website.

Before Gerald and Todd begin let me take a moment to remind you that our remarks today may include forward-looking statements.

Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors.

These factors include those identified in the cautionary statement in the earnings press release, the financial highlights presentation and 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, January 19, 2017, and we will not update forward-looking statements.

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

Gerald?

Thanks, Valerie, and thank you for joining us to discuss our fourth-quarter and full-year 2016 performance.

Our fourth-quarter results capped off another solid year.

Our financial performance reflects our focus on executing on our strategic priorities, the benefits of our well diversified low risk business model, and our ability to create value through all environments.

Importantly, we continue to prioritize improving the client experience, delivering value today while investing in our people, capabilities and technology to deliver even more in the future.

For the full-year on an adjusted basis earnings per share was up 11%.

Total revenue was up slightly while total expense was down 3% resulting in nearly 300 basis points of positive operating leverage.

Net interest revenue was up 4%.

We improved our pretax operating margin to 33% and our return on tangible common equity of 21%.

So we remain on track to achieve or exceed the three-year goals we set forth in late 2014.

Turning to the fourth quarter, on an adjusted basis we earned $0.77 per share, up 13% year-over-year.

For the quarter total revenue was up 2%.

Total expense was down 2% and we generated approximately 350 basis points of positive operating leverage mainly driven by higher investment services fees and the successful execution of our business improvement process.

And our return on tangible common equity was 21%.

Now let me update you on our progress against some of our key strategic priorities during 2016.

Our top priority is enhancing the client experience and driving profitable revenue growth.

During 2016 we made progress on a number of fronts.

We continue to enhance and introduce distinctive new capability where we see long-term growth opportunity.

In investment services we are investing in collateral optimization technology, derivatives margin solutions, liquidity services, middle office outsourcing for asset managers and institutional asset owners and servicing for real estate and private equity fund managers.

We are also investing in ETF servicing to capitalize on the trend of retail investors increasing allocations to passive investment strategy.

We believe it is a trend that will likely increase post the implementation of the DOL fiduciary rule.

We are also increasing investment in our Pershing advisory solutions platform for RIAs, delivering an integrated bank and brokerage custody service, as well as private banking capabilities to RIAs, a segment which we also expect to grow more rapidly.

Our next-generation ecosystem, NEXEN, is proving to be a value-added marketplace differentiator.

NEXEN will make it easier for clients to access a broad range of solutions from BNY Mellon through a single gateway, delivering a better client experience and driving future growth.

While Investment Management's results were a bit soft in the quarter, primarily due to our exposure to the fixed income markets and the strength of the US dollar, we are encouraged by the progress we have made on a number of fronts.

In 2016 investment management continued to make progress against its strategic priority of repositioning its business to focus on key products, performance and operational and technology inefficiencies to deliver profitable revenue.

We are concentrating on our high-value active strategies.

Part of this effort involves increasing our alternative solutions to meet the demands from clients and flows remain positive in this growing asset class.

A number of businesses are attracting new flows including Alcentra's success in expanding its private debt offering and Insight's continued momentum in growing their absolute return capability.

In each of our areas of focus we have established competitive advantages that position us to capitalize on industry trends.

In some cases we are already seeing a positive impact on our earnings from our focused investments.

In terms of investment performance, on a peer relative basis and against benchmark, we continue to deliver strong medium- and long-term performance in our top strategies.

Our effort to increase our exposure to individual investors is also paying off.

Wealth Management has sustained a multiyear trend of full-year revenue and pretax earnings growth, the result of focusing on the high-growth US markets and on the ultrahigh net worth segment.

Our second priority is executing on our business improvement process.

During 2016 we further reduced our real estate portfolio eliminating 400,000 rentable square footage in the fourth quarter and 700,000 rentable square feet for the full-year.

We drove down vendor expense and eliminated unnecessary demand in spending in areas such as market data and internal travel.

We increased the deployment of robotics with more than 150 bots now in production.

We reduced by 10 the number of locations where our client service delivery teams operate.

We advanced our global location strategy, which has improved our reliability and resiliency while reducing cost and risk.

We reduce manual corporate actions processing by 14 percentage points to 16% of the total volume in 2016, thus improving stay true processing rates, quality and the client experience while reducing operational losses.

We closed several non-strategic low performing businesses and we advanced our technology efforts on many fronts, including substantially completing the move to one custody platform in the US and harnessing robotics and machine learning to reduce costs and free up staff to focus on higher value activities.

Now during the fourth quarter we completed 100% of the client conversions of our new broker-dealer clearing platform.

This new state-of-the-art government clearing platform will enable us to serve the market well and grow responsibly.

And we have a full pipeline of initiatives to drive continuous process improvement forward enabling us to offset regulatory change costs, invest in growth and delivering value to shareholders.

We are encouraged by our progress and we continue to find opportunities for further improvement across all of our activities.

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

During 2016 we invested in and focused on compliance, risk management and control functions, made significant investments in our resolution recovery plan, which included submitting an updated resolution plan that adequately addressed the deficiencies that the federal reserve and FDIC had previously identified in our 2015 submission.

We further rationalized our credit exposure to certain financial institutions and sovereigns, strengthened our risk identification and operational risk control processes, delivered key new capabilities in cyber security and enhanced our capital adequacy process.

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

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

From a regulatory ratio standpoint our supplemental leverage ratio now exceeds the fully phased in requirement.

During the quarter we repurchased $848 million in shares and we distributed $203 million in dividends.

For the full-year we repurchased approximately $2.4 billion in shares and distributed nearly $780 million in common dividends.

So for the year, on a growth basis, we repurchased more than 5% of our shares outstanding and have repurchased more than 19% of our shares over the last five years.

Our fifth priority is attracting, developing and retaining top talent.

People are our ultimate competitive advantage.

During 2016 we continued to strengthen our team by adding key leaders with valuable experience and outside perspective while focusing on providing more growth opportunities for diverse talent within our Company.

In December we welcomed two new independent Board members, Linda Cook, Managing Director of EIG Energy Partners and a former Senior Executive of Royal Dutch Shell.

And Jennifer Morgan who is President of SAP North America.

Linda's distinguished international career as a senior executive is the energy industry and Jennifer's leadership and client experience in the technology sector will provide valuable insights for our global businesses.

Half of our directors have joined in the last three years, evidence of our focus on bringing an outside perspective to supplement the expertise of our existing Board members.

We have also made two significant leadership hires.

Jeff McCarthy has joined us in the newly created role of CEO for Exchange Traded Funds.

Jeff came from NASDAQ where he was Head of Exchange Traded Product Listings and Trading.

We are bullish on the ETF administration business and think the DOL standards will only accelerate its growth.

Jeff's experience strengthens our very capable and management team that is highly focused on executing for our clients and accelerating our growth.

Jeff [Masson] has joined as Chief Administrative Officer for Client Technology Solutions, our technology group.

Jeff has a long career in financial technology having been a chief information officer for capital markets at Deutsche Bank and CIO of fixed income IT at Merrill Lynch, as well as a tech industry startup entrepreneur.

So we see him playing a key role in advancing our digital strategy.

So in summary, another strong quarter of financial performance as we continue to further develop our high performance client centric culture.

By executing on our priorities we are showing a pretty consistent ability to manage what we can control through all environments.

Now this is a New Year, so once again we look forward to continuing to demonstrate our ability to deliver for our valued clients and our shareholders.

With that let me turn it over to Todd.

Thanks, Gerald and good morning, everybody.

Our results demonstrate that we are continuing to execute our strategy and it is working.

When you look at our results for the quarter there are a few things that I think stand out.

First of all, we experienced growth in all investment service business lines with fees up 4% in aggregate.

Secondly, NIR grew nicely.

Third, performance fees and investment management were a little softer than expected and that is reflecting our conservative positioning into the US election.

And finally, we generated significant year-over-year positive operating leverage of approximately 350 basis points.

As we have noted in prior quarters, the strength of the dollar continues to impact results, it's [negatively] for revenue and it's positive for expenses.

However, the net impact from currency translation continues to be minimal to our consolidated pretax line.

Turning to the financial highlights document I will continue my commentary on slide 4 which gives an overview of our non-GAAP for the operating results for the quarter.

Our fourth-quarter earnings per share were $0.77, that is 13% higher than the year ago quarter.

On a year-over-year basis fourth-quarter revenue was up 2%, expenses were down 2% and we generated [about] 350 basis points of operating leverage.

Income before taxes was up 9% year-over-year.

Also on a year-over-year basis our adjusted pretax margin was up 2 percentage points to 32%.

And return on tangible common equity on an adjusted basis was nearly 21% for the quarter and that compares to 19% a year ago.

Moving ahead to slide 11, I will discuss our consolidated fee end other revenue.

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

The year-over-year increase primarily reflects higher money market fees, net new business and higher equity market values that was partially offset by the impact of a stronger dollar as well as the downsizing of our UK retail transfer agency business.

Touring services fees were up 5% year-over-year and 2% sequentially.

The year-over-year increase was primarily driven by higher money market fees.

Issuer services fees were up 6% year-over-year, that is primarily reflecting higher fees and depository receipts and higher money market fees and corporate trust.

The sequential decrease of 37% reflects the typical fourth-quarter seasonality we experience in depository receipts.

Treasury services fees were up 2% year-over-year and sequentially and that is primarily due to higher payment volumes; that is a decent quarter for this business.

As a reminder, as rates increase some of our fee income shifts to net interest revenue.

Fourth-quarter investment management performance fees were down 2% year-over-year and 1% sequentially.

The year-over-year decrease primarily reflects the unfavorable impact of the strong US dollar and it was principally driven by the weaker British pound as well as lower performance fees, and that was partially offset by higher market values and higher money market fees.

The sequential decrease primarily reflects asset outflows, lower fixed income market values and money market fees that were partially offset by higher performance fees.

The lower than expected performance fees resulted mainly from the positioning of our portfolios prior to the US elections.

We were underweight sectors that rallied post election, which led us to narrowly miss the high water marks.

The good news is we are currently close to the high water marks now and as a result we are positioned well to generate future performance fees.

Importantly, we were able to keep our margin relatively stable as we continue to execute our strategy focusing on investment performance, aligning our products and solutions, working to optimize our distribution and infrastructure and centralizing our business functions to reduce costs.

Turning to foreign exchange and other revenue, FX and other trading revenue on a consolidated basis was down 7% year-over-year and 12% sequentially.

FX revenue of $175 million was up 6% year-over-year and flat sequentially.

The year-over-year increase primarily reflects higher volatility as well as higher sales and trading volumes.

Other trading losses of $14 million compared with revenue of $8 million in both the year ago in prior quarters.

Both decreases primarily reflect the impact of interest-rate hedging activities and the impact of that is substantially offset in our net interest income.

Financing related fees of $50 million were down 2% versus the year ago quarter and 14% sequentially.

The sequential decrease primarily reflects lower underwriting fees.

Distribution and servicing fees were $41 million, that is flat year-over-year and it is down 5% sequentially.

The year-over-year decrease primarily reflects higher money market fees partially offset by fees paid to introducing brokers.

Investment and other income of $70 million compared with $93 million in the year ago quarter and [got] $92 million in the third quarter.

The year-over-year decrease reflects lower other income related to termination fees that we received in our clearing business in the year ago quarter.

This was partially offset by higher income from corporate bank owned life insurance.

Year-over-year and sequential decreases in other income also reflect the impact of increased investments in renewable energy.

Those investments generated losses in the other revenue category, but those losses are more than offset by benefits recorded on the tax line.

Slide 13 shows the drivers of our investment management business that helped explain the underlying performance.

Assets under management of $1.65 trillion was up 1% year-over-year.

That is reflecting higher market values offset by the impact of the strong US dollar.

Overall active outflows reverse the recent five quarter inflow trend to in the quarter down $10 billion.

This was driven in part by one significant LDI mandate that was taken in-house by the client.

Long-term outflows of $11 billion included outflows of liability driven investments that I just mentioned, equity and fixed income strategies partially offset by inflows into our actively managed alternative investments.

Outflows from index strategies were $1 billion, the lowest level in 2016, and we had $3 billion of short-term cash outflows.

Excluding the loan-loss provision Wealth Management continued its multiyear trend of full-year revenue and pretax earnings growth as we focused on high-growth US markets.

Additionally, our program to extend banking solutions to Wealth clients through the Pershing channel continue to drive strong loan growth up 17%.

Turning to our investment services metrics on slide 14, assets under custody and administration at quarter end were $29.9 trillion, that is up 3% year-over-year.

That reflects higher market values offset by the [untradable] impact of a stronger dollar.

Linked quarter AUCA was down 2% and that is mainly driven by the dollar impact.

We estimate total new assets under custody [and our] administration wins were $141 billion in the third quarter.

Looking at other key investment services metrics, you will see deposit declined 3% sequentially and 7% year-over-year and that reflects the impact of us proactively managing our balance sheet in the second half of the year.

Lastly, tri-party repo balances grew a healthy 7%.

Turning to net interest revenue on slide 15, you will see that on a fully tax equivalent basis NIR was up 9% versus the year ago quarter and 7% sequentially.

The year-over-year NIR increase was largely driven by an increase in interest rates, partially offset by lower interest earning assets.

Additionally, both increases reflect the positive impact of interest-rate hedging activities which positively impacted the quarter by approximately $25 million.

Substantially all of this impact is offset in foreign exchange and other trading revenue.

NIR also benefited by approximately $15 million due to an amortization adjustment related to premiums for certain mortgage-backed securities.

Effective October 1 we changed our accounting for the amortization of premiums on these mortgage-backed securities from the prepayment method to the contractual method, which has become an industry standard and we believe is better aligned with our asset and liability management practices.

The net interest margin for the quarter was 117 basis points, that is 18 basis points better than the year ago quarter and 11 better than the third quarter.

The NIM was positively impacted by the 5 basis points related to the interest-rate hedging activities and the premium amortization adjustment.

Turning to slide 16 you will see that noninterest expense on an adjusted basis declined 2% year-over-year and was flat sequentially.

The year-over-year decrease primarily reflects lower staff expense and M&I litigation and restructuring charges that were partially offset by higher other and software and equipment expenses.

The decrease in staff expense year-over-year was primarily due to the favorable dollar as well as lower employee benefits and severance expenses.

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

The sequential decrease primarily reflects lower staff expense and M&I litigation or restructuring charges.

And that was partially offset by higher professional, legal and other purchase services that is driven by the CCAR resolution planning as well as higher software and equipment and business development expenses.

The decrease in staff expense was primarily due to lower incentives and lower severance expenses.

As a reminder, we run the cost associated with our business improvement process through our operating P&L on a quarterly basis.

This quarter was no different.

We absorbed the cost of additional actions in the fourth quarter which should continue to benefit us going forward.

Turning to capital on slide 17, the standardized ratios, and those are the ones that are used for the CCAR exam, were flat to up slightly and our fully phased in supplemental leverage ratio fell 10 basis points to 560 as reductions in capital due to the increased buybacks, valuation decreases in our securities portfolio and the impact of the foreign currency were partially offset lower average assets.

We also remain in full compliance with the liquidity coverage ratio.

Two other notes about the quarter.

Our effective tax rate was 24.3% and on page 11 of the release we show some investment securities portfolio highlights.

At quarter end our net unrealized pretax loss on our portfolio was $221 million, that compared to a gain of $1.4 billion at the end of Q3, [which was] changed primarily driven by the sharp increase in market interest rates.

Now let me share with you a few thoughts on themes that have been top of mind with investors: interest rates, industry regulation and taxes.

As we look forward we do expect some impact from the expected rise in interest rates, the net impact of which would be a reduction in the size of our balance sheet, which should be more than offset by a higher NIM.

These changes are expected to be modestly positive to NIR for the first quarter and that would be adjusting the fourth quarter for amortization and hedging gains.

In terms of fee waivers, as we have indicated in the past, we thought with a 50 basis point increase in the fed funds rate we would recover about 70% of our fee waivers and that is about what we have actually seen.

With an additional move from here we would expect to capture nearly all of it.

Our regulatory compliance costs continue to be elevated reflecting the high cost associated with the CCAR process as well as the investment in our resolution and planning process.

With respect to our capital distribution plans, we are working through our CCAR model now assuming that we get regulatory approval.

But we expect to continue our capital management program consistent with our past dividend and common share the purchase goals with a total payout ratio that we would expect to be in the range of 90% to 100%.

As a reminder, we will be paying for the first dividend for the $1 billion August preferred share issuance and it had a yield of 4.625[%].

That is going to be paid in the first quarter so it is important that you include that stub payment in your models.

Regarding taxes, we expect our 2017 effective tax rate to be in the range of 25% to 26%, as we previously disclosed.

It is also important for you to note that tax advantage investments in renewable energy actually generate losses recorded in our investment and other income line, although they're made up for in the tax line.

Therefore in 2017 we do not expect our investment and other income line to be as strong as it was in 2017, but it should be in the range of $60 million to $80 million each quarter as we have previously guided.

There are a couple more factors to include in your modeling of 2017.

As a reminder, staff expense will be impacted by the acceleration of long-term incentive compensation expense for retirement eligible employees that typically takes place in the first quarter.

So the impact that we would expect in the first quarter this year is similar to what we saw last year.

And finally, we expect to once again generate positive operating leverage in 2017.

So with that, let me turn it back to Gerald.

Thanks, Todd, and we can now open it up for questions.

Brennan Hawken, UBS.

Good morning.

One quick one here on the tax advantaged investments and the headwind to the other, Todd, that you referenced.

What geography are those investments in and what kind of duration are we talking about for those investments here?

So, Brennan, they show up in the asset investment and other income line and they can be longer-term investments up to 10 years.

And so, we are not quite fully invested, but we will be through the course of this year.

So we would expect them to generate negative revenue in the asset investment and other income and more than offset by the impact too on the tax line.

So they have an attractive return to us on an after-tax basis, but that is why we wanted to (technical difficulty) out on the call on my comments, that it will be a little bit of a drag on asset investment and other income.

But it is also the reason that we -- part of the reason why we have been able to accomplish a lower than expected effective tax rate.

I am sorry, by geography -- I didn't mean P&L geography, I actually meant like a map of fifth grade geography, like which country.

Hopefully where the wind blows, Brennan, but it is primarily in the United States.

Okay.

The only reason I asked that is just because of the -- can you help us understand about investing in something with long-duration right in front of some uncertainty around corporate tax reform?

Well, we would structure these things so if there was a revision to the tax we would have protection on that.

All right, great.

That is really helpful.

And then my follow-up on asset management and the outflows.

With LDI it is just sort of surprising to see continued outflow there with those strategies.

And interestingly a rather large asset manager reported last week that they had strong indexed bond flows this quarter with liability driven investing driving some of those tailwinds.

So, is there some concern about maybe losing some share?

Do you bump up against Blackrock in any bake offs?

How should we think about the market and how you guys are positioned there?

Yes, Brennan, this is Mitchell.

A couple things.

The outflow, as Todd mentioned, it was really one client.

If you could look underneath it the annualized revenues quarter to quarter continue to be positive.

The pipeline is as strong as it has ever been and it did have $26 billion in inflows over the whole year.

I don't see Blackrock coming up in a lot of bake offs.

Most of our business, as you might know, is not in the US on LDI, it is outside the US.

It is the UK, it is Europe, it is common-law areas, Australia and the like.

We are just starting to move into the US and I think we will have some momentum there.

So a lot of the momentum you are seeing is really non-US LDI business.

I think it will continue to build in Europe as interest rates are moving up a little bit.

And I think with our move into the US we probably will see Blackrock more in a bake off, but the strategies are quite different and I think we will do very well.

So performance is good, the outlook for LDI is strong.

I am as buoyant as I have ever been about the LDI business and our ability to continue to compete with it.

Okay.

Thanks for the color.

Alex Blostein, Goldman Sachs.

First wanted to touch on NIR and just help us understand kind of the right jumping off point given the couple of moving pieces here.

So as you look out is a jumping off point kind of [806], so like including the gain from [pre MM] because it is more consistent or it is closer to [791] which obviously excludes kind of both [gains]?

so just a clear up question there.

And then just bigger picture, as you guys think about into 2017 given how be balance sheet is positioned today what should we think about as a sensitivity from incremental increases in rate and also the size of the balance sheet?

Sure, Alex.

Good morning.

So I think when you look at the fourth-quarter NIR I think the jumping off point is -- I would tap it for the $40 million.

So $20.5 million of that or so was on the hedging activity.

That hedging activity is just a geographic issue for us.

There was a perfectly offsetting loss in the other trading income, so that has no net impact to total earnings, but it does have an impact directly to NIR.

And then the $15 million was an adjustment because of the change in the accounting methodology.

So I think that is the right point.

So if you adjust for those two things the NIM would have been more like [112] versus [117], still up a pretty healthy 6 or 7 basis points from where we were in the third quarter.

And that has had the tailwind of the benefit of higher rates as we have re-priced a fair number of assets.

And we do have deposit betas acting about as we had expected, so we are adjusting a modest portion of our deposit base upward as well.

As we look into next year where interest rates are going to go is anybody's guess and that is why the guidance I really gave was only for the first quarter.

So knowing what we know, we would expect the balance sheet to come down a little bit, which it already has, and we would expect NIM to more than offset the balance sheet move.

So we would expect to continue to see some of the improvement that we saw in the fourth quarter in the first quarter.

Not a huge run-up but a little bit.

(Technical difficulty) Sorry about that, we had some noise over the phone.

But does that answer your question?

No, that makes sense.

And then just -- as far as just the level of exited deposits, I know the balance sheet shrunk quarter over quarter.

So I think last time we talked about $20 billion, $25 billion was still on, the balance sheet shrunk.

So is it still kind of in a $10 billion to $20 billion range right now?

Yes, that would be about where we are.

And so, we are following it very carefully.

We are not seeing any significant change, but it has probably declined slightly from year end.

Got it, great.

Thanks so much.

Ken Usdin, Jefferies.

Good morning.

Excellent job on the full-year on the cost side and clearly with some help else from the FX side.

It is a busy morning, so I'm sorry if I missed it in the release, but can you guys help us understand what the magnitude of impact was to revenue growth, to fees and to expenses on the FX translation as we try to just think about how the core business is acting underneath?

Sure.

For the quarter -- this isn't for the full year, but for the quarter we saw operating revenue growth of about 2%.

I think the impact from currency in it was -- most significantly in our investment management business, was about 200 basis points negatively.

So we would have seen operating revenue growth of about 4%.

And on the expense side it was also good for about a little over 200 basis point.

So we saw it negative.

It would have been probably flat to slightly up on expenses.

And so, we had recorded on an operating basis 350 basis points or so of positive operating leverage.

It probably would have been about 100 basis points less, so around 250.

As we look at the full-year the numbers are not quite so impactful, so still about 2% on revenue, close to zero on expenses.

And our 280 basis points of positive operating leverage probably would have looked more like 220 to 225.

So still a good result.

And my second question is then just as you put forward the rest of your plans and your execution on the cost side, how would you help us think about just expense outlook looking ahead given that benefit that was in the expense side to a modest extent?

And also -- I know you are driving for operating leverage, so with better revenues I know you might not necessarily try to get expenses down again.

But can you just help us think about what your planning thoughts are around expenses?

Sure.

I will probably start at a high level in hand it to Brian to go through some of the key things that we are working on.

But we do, when I had indicated that we do expect positive operating leverage in the full-year for 2017 once again, that does assume some modest revenue growth.

And when you look at -- down at the underlying expenses, comp expenses is our biggest driver, it is more than half of our total expense.

We would expect that to be up slightly looking at the number of programs that we are working on.

Our legal and professional expense probably will be up slightly reflecting the ongoing requirements around compliance.

Basically the rest of the expenses should be relatively flat.

A little -- probably a little higher software amortization as we put together a number of -- as we implement a number of the applications that we have invested in, but everything else looking pretty flat.

I don't know, Brian, do you want to get into some of the detail on the business improvement process maybe?

Yes, I would say that the business improvement process continues to yield the results we want, which is helping offset the global regulatory change cost enabling us to invest in long-term strategic growth areas and create operating margin improvement.

So a long list of accomplishments this year, but still a robust pipeline of activity because we are driving this like a process, not a project, so we expect this to drive continuous value.

Some of the areas to focus on in 2017 are continued work around the business portfolio, but also the product service solution portfolio and eliminating or reducing subscale or non-profitable activities or things that don't hit our margin expectations.

We continue to have a pipeline of client pricing initiatives that could align our interest with our clients in terms of driving efficiency and productivity end to end for both the client and for us.

We have a number of initiatives to automate and drive straight through processing through traditional workflow and better technology and also through robotics process automation, which was our first year last year.

But we are scaling that and getting more -- we expect to get more benefit from that process over time.

We are making progress on our technology strategy and exposing more APIs, which not only make it easier for us to work with clients but they improve developer productivity.

And we are sharing common technologies services which also gives us a higher yield on our technology investment.

And we continue to do more around the global location strategy, the global real estate portfolio and reducing the number of locations we serve clients from, all of which are chipping away at helping us drive continuous improvement in this area.

One other thing I would add to that, Ken, is we are making investments to improve our efficiencies and we are absorbing that in our run rate.

And I noted in this particular quarter we made some -- we absorbed into this earnings some additional investments to position us well for next year.

So the whole point Brian has made that we have a list of items that we think we can still execute and we are absorbing the cost to executing those through our regular run rate.

Got it.

Okay, thanks a lot, guys.

Glenn Schorr, Evercore ISI.

This is Mike Mayo.

So look, you are controlling what you can control with expenses and buybacks and it sounds like you have more of that.

On the other hand revenue growth was flat for the year.

And I just want to know what about -- you said modest revenue growth this year, but just a little bit more color I would say in three areas.

Number one, the custody business has not seen much growth for you or for the industry.

Are you seeing an impact because you have more fixed income-related assets than peer?

It's been a tougher fixed income market from a valuation standpoint?

Number two, as it relates to investment services, are you seeing risk on or risk off?

And our thought was when there is more risk on and higher risk custody assets would generate more fees.

And then number three, as it relates to investment management, you said that ETFs are in their infancy, you have outflows in actively managed funds.

Are you able to turn the tide there?

Mike, there was about 100 questions in there, but I will start and try to give an overview and then perhaps ask my colleagues to jump in here as well.

I think you saw in the fourth quarter every single one of our investment services businesses actually showed positive revenue growth.

And that is even after taking into consideration that about 30% or so of our asset servicing revenues are tied to the fixed income market, so 30%, 40%.

So we are still seeing growth in asset servicing and clearing services, treasury services, issuer across the board.

Would we all like it to grow faster?

Yes.

And we are very focused, as I said in my opening comments, about profitable revenue growth and really making sure we are constantly improving that client experience to give them good reason to do more business with us.

So we think the pipelines in the investment services and asset servicing areas are strong and good and so we are encouraged by our growth rates there.

The strength of the dollar also did have a dampening effect on our revenues overall, both in investment services and in asset servicing.

And when you factor all those things in I think it is above that 2% that you just cited.

In investment management we are repositioning some of the portfolio and strengthening some of the strategies.

We are close to the high water mark which would have allowed for higher performance fees.

Didn't occur in the fourth quarter but we are encouraged by our performance relative to our peers and relative to our benchmarks.

And some of the strategies that we have invested in are gaining traction.

So, clearly revenue growth is one of our key priorities and we would like to try to accelerate it.

But 2016 was a tough revenue environment, but we are encouraged by our performance in the fourth quarter.

And your guidance for positive operating leverage in 2017, how many rate hikes are you assuming?

Right now what we typically do, Mike, is we look at the forward yield curve and we factor that into our plan.

And when we struck it on December 31 there were two assumed hikes in those numbers.

So one in June and one in September.

Okay.

And then lastly, the risk on our risk off, are you seeing animal spirits filter through into your business or is that still more hope?

Well, I think any time there is more optimism and more confidence in the market there is more trading activity.

More trading activity and higher levels of volatility help our business model.

So we are seeing early signs of it now.

Mike, just to give a little more clarity around what asset servicing revenues look like, remember that we are exiting our UK TA business, so those are revenues that are declining and the dollar impact was quite substantial in this particular quarter.

So if you actually adjust for the fact that we are exiting a business that was not profitable and giving up the revenues on that and that is part of what is helping our margin expansion and the dollar impact, asset servicing revenues would have been up 6% on a year-over-year basis.

All right, thank you.

Glenn Schorr, Evercore ISI.

Hello.

Sorry about that.

This might be oversimplified, but I am watching your asset yields go up every quarter as rates went up.

And you still have a slight negative rate on your interest-bearing deposits and that is an issue of geography, which is great for you guys.

So I am curious, what exactly are you hedging when you are hedging?

And I am assuming the accounting for it is just that is what the accounting rules are.

It would be nice if it was just inside the net interest income line and a clean hedge.

But the question is what exactly are you hedging when you are hedging?

So there is something called the overnight [OIS], which is an overnight rate, when you secure an interest-rate swap.

So what we do is we would take our debt and we would swap it to floating to LIBOR, but that is not a perfectly hedged swap, so we actually need to hedge based on the overnight collateral rate effectively.

That basis swap -- so we are now adding another swap hedging the LIBOR rate into an overnight rate.

That does not get hedge accounting treatment.

So it gets mark-to-market through the trading account, whereas the offset to that is in the net interest account.

It is a perfect offset.

So effectively what we are doing is we are converting some of our debt into an overnight rate and then managing it accordingly.

But the move from three-month LIBOR to overnight does not get hedge accounting treatment.

And that is what is creating that (technical difficulty) on a quarter-to-quarter basis.

No problem.

This is not a new line item but just piqued my curiosity this quarter.

In the securities portfolio you have like $16 billion of sovereign debt, 20% of it is BBB.

What BBB sovereign debt paper are you sitting on in the securities portfolio?

I appreciate that market value is over its cost, but just a curious question.

Yeah, Glenn, I don't have that off the top of my head, but most of the sovereign debt that would be in there would be very high grade.

So I will have to take a look at that and get back to you.

Okay, no problem.

Sorry for the phone troubles.

Thanks.

Brian Bedell, Deutsche Bank.

Great, good morning.

Just maybe back on expenses.

Todd, that was great color as you went through the lines.

Maybe if you could just clarify a little bit; you were talking about 75% of the cost base being up slightly if you go through the buckets.

Should we interpret that as maybe the total expense base on the plan being up say 1% or 2% based on your sort of up slightly comment?

And then maybe if you can talk about your flexibility on that in different type of revenue environments.

Whether you are able to trim that obviously if revenue is more challenging and whether you would actually look to accelerate some spending on growth initiatives if revenue is more favorable?

I think I will let you judge what I mean by up slightly, but I do mean positive operating leverage.

And in terms of our ability to adjust, I think the fourth quarter was a reflection of that.

So based on the revenue mix we can make some adjustments, but we can only do so much on a short-term.

The key is that we continue to progress with our sustainable cost reductions that Brian just laid out.

We just need to keep executing on the opportunities that we see.

Okay, great.

Thanks.

And then maybe for Brian.

Two initiatives that Gerald mentioned in his opening remarks, maybe you can shed a little bit more color on them.

The ETF servicing initiative, obviously the trends are very positive for ETF.

What are you exactly doing there to grow that business and attract ETF issuers?

And then also on the RIA side of the business, encouraging looking at some of the bigger competitors like Fidelity, Schwab and Ameritrade in terms of servicing RAs.

Do you expect -- I guess what are you doing to try to compete more aggressively with those players or is that not quite the goal?

Sure.

So ETFs first.

Really Gerald mentioned it.

We are just trying to take advantage of the shift from active to passive and the expected continued growth in the ETF space.

We are a significant ETF service provider today and we have relationships -- strategic relationships with many of the big financial institutions that are the growers in that space.

And so we are hopeful that we can extend those relationships and do servicing over time.

We are investing in the technology to make it more scalable and to deliver a better client experience.

And we are obviously investing in the talent as well to make sure that we have really the top team and the top solution in the industry.

So that is really what we are doing in the ETF space.

And we have a serious effort on the relationship team side to cover those opportunities more assertively.

On the Pershing front or the RIA side, again, just like ETFs will be advantaged by the DOL fiduciary standard, we think the RIA business model will definitely be advantaged by the DOL fiduciary standard as well.

It has been a long-term secular trend shifting from brokerage to advisory model in the industry.

Pershing Advisor Solutions has had double-digit revenue growth and AUC growth for the last few years and we expect to continue to drive significant growth.

We focus on larger sort of more professionally managed RIA firms, so groups of RIAs, not individual practitioners, so we tend to have less new clients than the others, but our clients tend to be bigger, more substantial, more managed companies in the advisory space.

And so, we like the profile of the clients we serve.

Our value proposition is I think getting stronger in that space.

Gerald has mentioned the integration of bank brokerage custody, that is really important.

Many advisors want to have a bank custodian and we are really the only provider in the marketplace that can deliver an integrated bank and brokerage custody experience.

We also talked about the private banking services, RIAs compete with major financial institutions that have a banking capability or a private banking capability.

What we are doing leveraging our partnership with the Wealth Management team is delivering private banking services to the customers of the RIAs we serve.

And that has actually been a hugely successful process.

We have now $4.5 billion in credit facilities outstanding -- credit facilities in place with our broker-dealer and RIA clients and about $2.8 million of those credit facilities have been drawn and used by the investors of RIAs in introducing broker-dealers.

So, we are investing in managed account solutions, digital advice solutions and other technology solutions to continue to grow our share in the RIA space.

And the initiatives that you have done in terms of consolidating that onto one platform, do you expect that to really improve the results coming into 1Q in Pershing given that you (multiple speakers) this quarter?

Well, I think unlike large broker-dealers -- when you convert a large broker-dealer you convert thousands of advisors at a time.

In the RIA space, while we are doing larger firms it's a slower process, but we have a strong pipeline of firms coming on.

And we spent most of 2016 getting the platform integrated and converting the existing clients we had between our bank custody and brokerage custody teams.

But now we are actually beginning to take on new clients onto the platform.

And we took our first new -- absolutely new client on in the fourth quarter, so I expect that momentum to continue throughout 2017 and beyond.

Great.

Thanks very much for the color.

Brian Kleinhanzl, KBW.

Good morning.

I had a quick question on the investment management, if you could clarify what you were saying about the positioning going into the US election?

I got that you were positioned one way ahead of the election.

But how does that change in positioning post-election?

What does that mean for both AUM growth rates as well as the fee rates?

Is that going to offset and are you going to see a snap back in the fee rates as a result of this and it was more of a timing issue?

Could you just clarify that please?

This is Mitchell.

I think that what we were saying is short-term performance was negatively impacted by the US election.

As the equities rallied and sectors like financials took off, we were positioned in the first three quarters really more for slower growth, which we significantly benefited by.

We are not changing our overall position; we don't react to specific events.

But we do see that overall performance is good.

It was a one quarter related issue; overall performance is actually still very strong.

As just an example, on a one-year basis six of our 10 top strategies by revenues are still in the top two quartiles and even stronger on a three-year basis.

So performance on a long-term basis is strong, but some of our strategies were caught out at the change in market sentiment given the election.

I don't think it is going to impact overall momentum given our one-, three- and five-year performance is actually very strong.

And I think we are positioned fine for the new year.

Okay.

And then just a quick question following on the kind of branching out into the -- more into the ETF space.

Does that give you, do you reconsider the multi-boutique model and whether or not -- I know you like the model, but is there additional efficiencies you think you could pull out of that model?

There are always efficiencies that we are looking at from the model.

Anything we can do at leverage and scale.

We are continuing to push through anything we can do with the Company more broadly.

Brian's group on ops and tech we are looking and we think there is more particularly on the ops and tech side.

And there is always tweaks as the markets change where we can continue to leverage the organization and we will continue to do so.

Broadly asset management, like other businesses, scale is going to matter.

And we do want to use the scale benefits of the entire Company for the benefit of our asset management boutiques, help lower their structural costs and still have them focus on their investment performance and their distribution strategies.

So we think there is opportunities to apply scale benefits to our asset management boutiques and still keep it in the boutique structure.

Brian has mentioned in the past that asset managers in general, be at a multi-boutique or any model, need to focus more on their core competency, which is asset management and other things that are not directly related to the investment process.

We want to give to third-party providers.

In our case the third-party provider is in-house and we will continue to do that.

Okay, thanks.

Gerard Cassidy, RBC.

Thank you, good morning, guys.

Recently there was a story, Gerald, about the baby boom generation is going to be entering this year for the first time the forced disbursements from defined contribution plans.

And that is obviously going to accelerate as more baby boomers hit this 70.5-year-old age.

What are some of the challenges?

Or have you guys started to look at that and how it might affect your business?

And what are some of the challenges and opportunities that might present itself for both the custody side of the business but also Wealth Management?

That is a great question.

We look at it in a variety of different angles, one starting with supporting the advisors on a Pershing platform because they are in the midst of it on a direct basis every single day of the week.

So giving them the tool sets and utilizing our platforms and technology to help the advisors capture that wealth transfer is one of the important elements.

Our own Wealth Management area spends a lot of time thinking about this and making sure the multi-generational shift is one that they continue to service and service well.

And on the asset management side making sure we have strategies in place on third-party distribution platforms to help capture that asset shift in flows is also one of the areas of opportunity.

So, it is a big shift.

It is one of the reasons why we like our platform businesses and our wealth businesses as much as we do, because it is going to be a very significant transfer of wealth and assets into new hands and we have to be all over it.

So we do think about it a lot.

Thank you, and then maybe a quick question for Todd.

On the negative rates that you guys are still experiencing in the foreign deposits, how has that moved since the election?

I know the negative rate went down by 1 basis point, but are you seeing any acceleration where it may turn positive later this year in that category of deposits?

Yes, if you look at the total rate feed on deposits, on average it was slightly negative.

About 15% to 20% of our deposit base is in non-dollars, a smaller percentage of that is in Euro which is mostly what is driving that.

So in some instances there are some pretty substantial negative rates.

The US deposits are slightly positive and we do have deposit betas.

And what that means is as interest rates go up we will pass on some of the benefit of those rising rates to our clients.

So the initial moves are probably a bit compressed and then our clients will start to get more of the benefit.

So that is kind of how the betas work.

So we would expect to see that crossover into a positive rate in the next quarter or two.

Thank you.

Appreciate it.

Great, thank you very much.

And everyone, thank you for dialing in this morning.

And if you have additional questions, please give Valerie Haertel a call and we look forward to engaging with you and thanks for your participation today.

If there are any additional questions or comments you may contact Miss Valerie Haertel at 212-635-8529.

Thank you, ladies and gentlemen.

This concludes today's conference call webcast.

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