紐約梅隆銀行 (BK) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2017 Earnings Conference Call hosted by BNY Mellon.

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

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

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

Ms. Haertel, you may begin.

Thank you.

Good morning, and welcome to the BNY Mellon Third Quarter 2017 Earnings Conference Call.

With us today are: Charlie Scharf, our CEO; and Todd Gibbons, our CFO; as well as members of our executive leadership team.

Our third quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results and can be found on the Investor Relations section of our website.

Before Charlie and Todd discuss the results, 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 available on our website, bnymellon.com.

Forward-looking statements made on this call speak only as of today, October 19, 2017.

We will not update forward-looking statements.

Now I would like to turn the call over to Charlie.

Thanks so much, and good morning, and thank you all for joining us.

I'd like to cover a series of items before I turn it over to Todd, and then we'll open it up for questions.

I'm going to be making some brief remarks about the quarter.

I'm going to talk about the transition, share some views on our businesses, our challenges and our opportunities.

Let me start with the third quarter performance versus the prior year.

Revenue grew 2%.

Expenses were flat year-over-year and were flat from last quarter.

EPS grew 4%.

Looking at revenue in more detail, fees grew 1%, but DRs decreased by $54 million, which reduced growth by 2%.

FX and other trading revenues were down $10 million.

The remainder of Investment Services grew 5%, and Investment Management fees grew 5%.

Todd will discuss this in more detail, but we saw some reasonable growth in some areas that are core to our franchise.

This includes asset servicing, clearing fees, asset management and performance fees, and treasury services fees.

Net interest grew 8%.

On a segment basis, Investment Services grew revenue 2%.

Again, DRs reduced this growth rate by about 2%, and FX and other trading revenues reduced this by 1%.

Investment Management grew revenue at 4%.

When we look at pretax, Investment Services pretax grew 4%, and Investment Management pretax grew 17%.

We also continue to strengthen our capital position, which Todd will cover, and I'll discuss my thoughts in more detail.

But while the quarter showed consistent performance and some of our core businesses showed reasonable growth, we believe we can continue to build our franchise and ultimately increase our rate of revenue and EPS growth.

Now a few comments about the transition.

First, I want to take a few minutes and thank Gerald.

He has been a terrific partner through the transition, and I'm grateful to have access to his advice and counsel.

I also want to recognize the progress he has made and the foundation he has created during his tenure as CEO.

When I talk about the opportunities that we have for the future, we all know they are possible because of what he's accomplished here.

Also, a few words about the broader group of employees here at the Bank of New York Mellon.

While Gerald provided the necessary leadership, the results have been driven by a large group of employees here.

The effort has been tremendous.

Changing the profit profile of the company at the same time as dealing with all of the post-crisis requirements is an extraordinary achievement.

We're a much stronger company today, and our future is bright because of what you've all accomplished, so thank you.

Having said that, we're at the beginning of a new journey.

We're proud of our progress, but we're not necessarily satisfied with our performance.

We want to continue to build stronger underlying margins, which we might or might not use to reinvest in the business, and we seek higher levels of growth.

And we will continue to be focused on keeping a strong capital base and high returns.

For me, personally, it's been a busy 3 months.

I've spent most of my time listening and learning.

I've seen 42 of our top 50 clients around the world.

I've met with many of our regulators globally.

And I've had extensive internal discussions focusing on both our business and our people.

Todd and I have conducted systematic business reviews to review our business strategies, performance, competitive environment, strengths and opportunities.

I've also done my best to meet with as many people as possible in both small and larger groups.

People have been generous with their time and patience, and I found my discussions invaluable thus far.

Now let me make some observations about our company.

There are many things which excite me about this company which I have seen.

First, there are so many pieces of our culture which anyone would envy.

We love working for this company.

We love serving our clients.

We take a long-term view of those relationships.

We're extremely objective about our own performance, and we genuinely enjoy working as a team.

In addition to these strong elements of our culture, we play an important role in the global financial system.

We've got deep relationships with our clients, which have been built over decades.

We talk about their needs before our needs.

So many people here have great subject matter expertise as well.

And we understand the importance of technology to our future.

But I also see meaningful opportunities for us to improve our business going forward.

With all the progress that we've made at generating strong results, I still believe we can improve our performance by changing how we manage the company.

We're not demanding enough of each other, and this can stand in the way of disciplined management, which can drive us to stronger results.

We do strive to be a high-performing company, and that requires crisper processes, streamlined decision-making, a clearer sense of responsibility, and most importantly, we're beginning to drive a meaningfully different sense of urgency and clear accountability.

Ultimately, I firmly believe this will drive better execution, better decision-making, and ultimately, better results.

As we think about our future, there's nothing more important than ensuring we've got the best operating environment and core technology platform to build from.

It's important that everyone understands that this is a multiyear effort that has been in place.

We've made significant investments in improving our core platforms, but this is a journey, and significant continued investment is necessary.

With Bridget Engle joining us, we now have a new set of eyes to look at the priorities, and we have a clear agenda here.

We spend over $2 billion today a year on technology, and we will continue to devote an outsized amount of our resources here.

We've eliminated redundant platforms over the past several years, but still have more work to do.

The continued platform integration is critical.

Our operating environment is still too complex.

As we continue to invest, we will ultimately become more efficient, but more importantly, we will have a better platform to serve our clients.

And our investments in technology go beyond core platform improvement.

You've heard us talk about NEXEN.

NEXEN is not one system or one platform, but a discrete set of activities which are important for our ability to deliver our company as a platform.

It includes the following.

We're simplifying the ways clients access our technology by providing a common integrated portal rather than siloed solutions.

Our APIs will allow clients a simplified and more streamlined way to access our capabilities.

Our efforts to more holistically manage our data across the enterprise will continue to create meaningful ways for us to provide differentiated insights and capabilities for our clients.

And this year, we launched our third-generation, container-based private cloud.

Our private cloud platform hosts a growing portion of our non-mainframe applications and has significantly improved software delivery times from months to hours.

Here, too, we are committed to this journey as we sharpen our focus on our priorities and our implementation.

And while we've made great progress reducing our expense base, we're not done.

We need to continue to drive efficiency throughout the company.

This includes developing a multi-year plan to automate much of the manual work that exists today.

I've talked about the strong client orientation that exists inside the company.

But here, I think we do have substantial opportunity to take this strong piece of our culture a step forward.

Our client focus by itself doesn't ensure that we consistently deliver great solutions to our clients.

We become too product-centric in some cases and, at times, have not worked as well across our organization.

Simply said, we see a significant opportunity to do a better job delivering all of BNY Mellon to our clients in a clear and coordinated way.

We are now engaged in sessions where we develop detailed client plans, looking across the company at our current business relationships, their wallet, our competitive position, our solutions, where they're taking their company and put these all together to develop a coordinated plan to serve each client.

These sessions will drive management strategies for our clients, but also will drive us to create new solutions based on a deeper understanding of where we can help our clients grow.

These tools then form the basis for process to manage our business with clients truly at the center of our thoughts and activities.

Now let me make a few specific comments about our businesses.

First of all, we like the businesses that we're in.

Like most businesses, some have more challenges and some have more opportunities.

Let me start by talking about our Investment Services businesses, and I'll start specifically with our asset servicing and clearing businesses.

Our positions are strong.

These are core services for our clients where we have true global scale.

We have high-quality businesses which are real competitive differentiators for us.

The business environment is competitive for sure, and our growth has been impacted in some of these businesses by conversions and related issues over the past few years.

But our asset servicing revenues grew 4% this quarter, and our clearing revenues grew 10%.

We believe that we still have an opportunity to improve our performance.

Pershing is a great brand, has created a great place for itself in the market and is very well-run.

Our government clearance business is also one of our great strengths and should continue to be an asset for us going forward.

And we are in a unique position in that we connect the buy side and the sell side here.

Our technology has been a differentiator, and we continue to have opportunities to do even more with both the technology and the data we have.

And remember, these businesses are very often the anchors in our client relationship, and we see opportunities to create even more leverage going forward.

Our Corporate Trust business is a meaningful part of the company.

Our results have been disappointing over the last few years as we've not committed the required resources, but we did see mid-single-digit revenue growth this quarter.

We now have a new leadership team in place and are focused on regaining our position as the high-quality growing trustee.

In our treasury services businesses, we're a top-tier U.S. dollar clearer, U.S. treasury management solutions provider and the payment services provider to the rest of the BNY Mellon enterprise.

We see steady growth here, low double-digit revenue growth this quarter, and is driven by service quality and GDP growth.

It also produces healthy margins and high-quality LCR-friendly deposit balances.

In our DR business, we have significant share and are winning our fair share of new programs.

Pricing has become more competitive, but we remain disciplined on that and also on structure and terms.

Growth here is dependent upon emerging market equity issuances and episodic corporate actions and other issuance and cancellation activity.

Let me make some comments about our markets business.

Our markets business is a very important part of our offering.

Our goal here is to capture flows generated from the strong relationships elsewhere in the company.

We've always been highly focused on core FX and other low-risk products, and we'll continue to do so.

We have some of the best securities lending and collateral management capabilities in the world, important differentiators where we believe we can provide more liquidity, lower funding cost and lower capital requirements for clients.

This business benefits hugely from our scale, but also from our use of data and technology.

Now let me move on to our Investment Management business.

As you know, we have multiple brands and investment strategies, and there are pluses and minuses to the structure.

There can be different points of view on the value of multiple brands, but some of our brands are clear differentiators for us.

But the way we run the core of our business is actually not different from many other active managers out there.

We have highly focused investment teams.

They have their own clear and unique investment processes.

And they've got the drive, the focus and the incentive system based on their own performance to deliver the strongest results that they can.

Where we've fallen short historically is that we've not achieved the benefits of common platforms.

Mitchell is very focused on doing this where it makes sense.

And you're seeing it in our results with significant margin expansion and profit growth.

And I do believe that there are real benefits to asset management, investment services and markets, all being part of Bank of New York Mellon.

Distributors of asset management products are some of our biggest clients.

And as I visited many of our boutique CEOs, they've told me of the value they're beginning to see as we create access they would not be able to achieve on their own.

Again, we have deep global relationships.

Our Pershing platform is another important partner of the business.

And lastly, asset management is an important component of one of our best and least well-understood assets, which is our position servicing and managing cash.

Along with markets and investment services, we have a fairly unique set of capabilities which give us a unique set of offerings for both broker dealers and asset owners.

Having said this, our asset management and asset servicing close today are clearly suffering from not having scale in ETFs.

This is a topic for another day.

For now, our focus is creating value by continuing to improve the profit profile of our business by leveraging BNY Mellon and common platforms.

These are just a few thoughts based on what I've seen and learned over the past 3 months.

We're currently deep into our planning process, and we're using the process to dig deep into our businesses and develop a clear plan, which is both operational, financial, but also strategic for the next several years.

We plan on providing a detailed review of our findings and plans at an Investor Day, which we're now planning to hold on March 8.

With that, let me turn it over to Todd.

Thanks, Charlie, and good morning, everyone.

I'll review the details of our third quarter financial results on a year-over-year basis, unless I note otherwise.

In the quarter, global equity market strength resulted in record AUC/A and AUM for us.

The revenue increased 2%; investment management fees were up 5%; investment services, 1%.

As Charlie noted, our Investment Services revenue performance was impacted by a 34% decline in DR revenue, and that also impacted our FX trading revenue on a year-over-year basis.

We experienced a little bit lower volatility in our FX results on a year-over-year basis, as you can see in the report.

It's now about 20% volatility is, and that's in line with the -- that's where the market averages were, and somewhat offset by higher average trading volume.

NIR increased as we recognized a full quarter benefit from the June rate increase and did experience a modest decline in deposits and lower loan volume as we reduced some of our lower-yielding loans.

Finally, from a currency translation perspective, the fluctuations had an essentially neutral impact on revenues as well as on our expenses and the net income for the company on a total company basis.

But it did have a slightly higher impact on revenues and expenses sequentially.

Charlie walked you through the highlights of the quarter, so I'll move ahead to Slide 8 to discuss our consolidated fee and other revenue.

Asset servicing fees were up 4% year-over-year and 2% sequentially.

The year-over-year change reflects higher equity market values and net new business, including growth in collateral management, and that was partially offset by the impact of downsizing the U.K. transfer agency business.

The sequential increase was driven by currency and higher equity market values.

Clearing service fees increased 10% year-over-year, and that's primarily reflecting higher money market fees and growth in our long-term mutual fund assets.

On a sequential basis, clearing fees declined, and that's driven by lower volumes that we saw in the third quarter.

Issuer services fees declined 15% year-over-year, and that's reflecting the lower Depositary Receipt fees.

And we experienced fewer corporate actions, some lost business due to pricing and structure and also had lower program shares outstanding.

In aggregate, those items reduced the fees relative for last year by over $50 million.

On a sequential basis, issuer services fees were up 20%, and that's primarily due to seasonality in DRs as well as higher Corporate Trust revenues.

Treasury service fees increased 3% year-over-year and 1% sequentially, and that's reflecting the higher payment volumes that was partially offset by compensating balance credits that we provide to clients.

So if you adjust for those credits, the fee revenue growth would have been an additional 3% higher or 6% total.

On a sequential basis, revenue would have been an additional 1% to 2% greater.

Investment management and performance fees increased 5% year-over-year and 3% sequentially.

Unlike most quarters, the net impact from higher currency translation on investment management and performance fees was less than 1% this quarter.

This quarter, as part of our ongoing portfolio rationalization, we announced the sale of our real estate-focused investment boutique called CenterSquare.

We expect the transaction to close in the fourth quarter or perhaps early next year, and that sale will have no material impact on our overall financial results.

Also, as a result of the improvements made over the last year to the cost structure of the business, our adjusted pretax operating margin for Investment Management continued to improve to 35%.

This is an increase of 265 basis points year-over-year.

Foreign exchange and other trading revenue on a consolidated basis decreased 5% year-over-year and increased 5% sequentially.

FX revenue was $158 million, that's 10% lower year-over-year and is 5% higher sequentially.

The year-over-year decrease was driven by lower volatility as well as lower DR-related FX activity, and that's partially offset by higher volumes.

The sequential increase reflects those higher volumes as well.

Investment and other income declined to $63 million from $92 million in the year-ago quarter and $122 million in the prior quarter.

The year-over-year decrease primarily reflects lower other income, driven by the impact of our investments in renewable energy as well as lower seed capital gains.

The sequential decline reflects lease-related gains recorded in the second quarter, which did not recur in the third quarter, as well as lower income from the corporate/bank-owned life insurance.

Slide 9 shows the drivers of our Investment Management business, which helps to explain underlying performance.

We achieved record assets under management of $1.8 trillion.

That's up 6% year-over-year, and it reflects the higher market values as well as net inflows and the favorable impact of a weaker dollar, and that's principally against the pound.

In terms of investment performance against the backdrop of a relatively strong quarter for global markets, our active strategies performed pretty well with 75% and 74% of assets above their 3- and 5-year benchmarks.

We also experienced net inflows into our actively managed strategies.

We had long-term active inflows of $3 billion.

That was driven by continued demand for our fixed income, multi-asset and alternative strategies.

These inflows were offset by outflows in active equities and LDI strategy, which actually totaled $4 billion.

We saw inflows of $4 billion into fixed income, inflows of $3 billion into multi-asset and alternative investment strategies.

And those are key areas that we're looking to grow that have benefited from strong demand.

This quarter, active equity outflows of $2 billion was about the lowest we've seen over the last few years.

And it was helped in part by a strong equity market as well as improved investment performance and pricing.

LDI outflows of $2 billion were driven by one significant LDI client that chose to take the business in-house.

Additionally, we had $3 billion in outflows from low fee index products, and that's again driven by a few large clients.

Similar to last quarter, we experienced cash inflows of $10 billion this quarter.

U.S. money market funds, the largest segment of our cash business, have now grown 19% year-to-date, and that compares favorably to the industry trend of 1% organic growth this year.

Our ability to maintain good performance in core money market funds and grow our customer base through synergies with Investment Services has been key to the outperformance here.

This is a business where we have scale, we've got a strong reputation and we've demonstrated good performance and where we continue to see growth opportunities as the sector solidifies around firms that share on these traits.

Our wealth management business continued its positive trends, with wealth management fees up 4% year-over-year and up 2% sequentially.

Higher net new business from U.S. expansion initiative and continued loan growth, which was 9% higher year-over-year, helped to drive performance.

And that was offset by a reduction in deposits that was primarily driven by a single client.

Turning to our Investment Services metrics on Slide 10.

We achieved record AUC/A of $32.2 trillion this quarter, that's up 6% year-over-year and 4% sequentially, reflecting the stronger market values.

We estimate total new assets under custody and/or administration business wins were about $166 billion in the third quarter.

Looking at other key Investment Services metrics, you'll see average deposits declined 10% year-over-year and 1% sequentially, and that reflects the impact of the June rate increase.

Average loan balances declined 14% year-over-year and 7% sequentially.

Lastly, average tri-party repo balances grew 15% year-over-year and 1% sequentially, as volume increased with the additional business we are on-boarding.

Turning to net interest revenue on Slide 11.

You'll see that on a fully tax equivalent basis, NIR of $851 million was up 8% versus the year-ago quarter and up 2% versus the second quarter.

Both increases primarily reflect higher interest rates, and that's partially offset by lower average deposits and loans.

The sequential increase also reflects an additional interest-earning day in the quarter.

We experienced some moderate deposit runoff in interest-bearing and non-interest-bearing deposits.

Average non-interest-bearing deposits declined 14% year-over-year and 5% sequentially, and interest-bearing declined 8% year-over-year but were flat sequentially.

This was about in line with expectations following the June rate increase.

And deposits, toward the end of the quarter, were above the quarterly average.

Turning to Slide 12.

You'll see that adjusted noninterest expense was up slightly year-over-year and flat sequentially.

The year-over-year increase primarily reflects higher software and professional, legal and other purchased services, and that was partially offset by lower litigation expense and bank assessment charges.

Sequentially, higher staff expense was offset by lower other professional, legal and other purchased services and lower business development expenses as well as lower bank assessment charges.

The increase in staff expense was driven by higher incentives, and that's just reflecting the stronger performance, as well as by the annual employee merit increase that comes -- takes place in July.

The decrease in professional, legal and other purchased services was driven by lower consulting fees related to our resolution planning, which we submitted at the end of the second quarter.

Turning to capital on Slide 13.

Our fully phased-in supplemental leverage ratio increased to 6.1%, and that now meets the upcoming 2018 regulatory requirements, plus a reasonable buffer.

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

Our LCR was 119% in the third quarter.

All of our ratios are at or above our internal targets, reflecting our continued capital generation.

And given prospects for the relief of the SLR, we no longer see a need to issue preferred equity.

And now that we are at our targets, it positions us well to increase buybacks in future years.

A few additional notes about the quarter.

On Page 9 of our press release, we show our Investment Securities portfolio highlights.

At the quarter-end, our unrealized pretax gain in our portfolio was $257 million.

That compares to $151 million in the last quarter, and that's primarily driven by a slight decrease in long-term interest rates.

And our effective tax rate was 25.4%.

Turning now to tax reform.

We currently support comprehensive tax reform as an important step both to achieve economic growth targets as well as to improve the competitiveness of U.S. businesses.

We're encouraged by recent progress of the Big Six to define key parameters of tax reform.

But because the details of the reform are still -- remain unknown and uncertain, it is difficult to estimate our effective tax rate post reform.

However, based on the available information that we have, as we currently understand it, we'd expect our effective tax rate to approximate the U.S. statutory tax rate post reform.

Otherwise, we expect our effective tax rate may rise approximately 100 basis points in 2018, given our expected revenue growth as well as the mix of earnings we project for next year.

Before turning to Q&A, I'd like to provide you with some color on how we are thinking about the next quarter and the full year to assist you with your modeling.

Fourth quarter earnings are typically impacted by the seasonal decline in DR revenue with a limited offset in expenses.

We estimate that decline in the fourth quarter from the third quarter to be approximately $80 million.

We expect performance fees in our Investment Management business in the fourth quarter to be similar to that of the fourth quarter of 2016.

Full year NIR is still expected to be at the high end of the 4% to 6% range that we've given you previously.

Investment and other income for the fourth quarter and beyond is expected to be in the $40 million to $60 million range, reflecting lower leasing gains as well as the impact of our investments in renewable energy.

We expect total adjusted expenses for the full year to be in line with our prior guidance or approximately 1% higher than last year.

As I noted last quarter, there is -- it could be impacted by improved revenue performance or higher stock price as well as the continuing weakness in the U.S. dollar.

Our 2017 effective tax rate is still expected to be in the range of 25% to 26%.

And finally, we expect to generate positive operating leverage for the full year.

With that, let me hand it over to the operator to take your questions.

(Operator Instructions) Our first question comes from the line Brennan Hawken with UBS.

Just a quick question for you on the funding cost side.

You walked through some of the specifics on deposits, which was really, really helpful.

I guess the question would be, it seem like you said that non-interest-bearing deposits ticked down this quarter, which is what you said was in line with expectations.

So if we see a December hike, does that mean we should count on a bit more runoff on the non-interest-bearing side and maybe even on the interest-bearing side as well?

Yes, Brennan, it's Todd.

A couple of comments there.

Number one, just as a reminder, on a year-over-year basis, last year is when we took the proactive actions around the deposits, and we took them down about $20 billion to $25 billion, and that hit both the interest-bearing as well as the non-interest-bearing.

As far as the quarter itself, we saw a little dip in the non-interest-bearing.

Most of that took place in the month of August when there is a relatively slow behavior, and some of that recovered toward the end of the quarter.

Our expectation is that we would continue to see moderate runoff in non-interest-bearing, especially if we see further rate increases.

And just to give you a sense of it, we went back and we looked historically.

Non-interest-bearing have averaged historically in much higher tax and much higher interest rate environments around 30% of our total deposits, and they're around 33% now.

So if it retraces historical behaviors and that seems to make sense to us, we could expect a modest further decline.

That's great, and that's very helpful historical content -- context.

And then on the interest-bearing side, it looks like betas increased probably about what most might would have expected.

What do you see in the marketplace?

What are your expectations for betas if we do end up getting another rate hike?

How is the competition for deposits out there in the market?

Okay.

Well, the betas did tick up a little bit, and we had pretty much forecasted that on the interest-bearing side as well.

And we would expect with each future rate increase that you will see an increase in the betas as well.

I don't think competition has really changed too much.

But our expectation and what we forecasted as we gave you guidance around the net interest income for the full year is that we will see, if there is another move, we will see more -- higher beta with that move.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

So Charlie, maybe I'll try this one, and thanks for all the kind of initial thoughts around the business.

But BK is obviously a bit different and unique versus your pure-play peers, just given kind of the diversity of the business.

So taking a step back, as you look across everything that the firm does, what businesses do you think can deliver the most needle-moving kind of organic growth going forward relative to what you guys have done in the past?

And I understand it's still early, but given you named a lot of things, let's just hope we do get a sense of kind of where the incremental focus is going to be.

Yes.

I don't think I'm going to say much more at this point than I said in the prepared remarks.

I think if there were things that we were doing, which we were particularly concerned about or didn't think had the same kind of profile that we would wind up going forward, at this point, I think we would have said something about it.

And so as I said in the remarks, we're spending a fair amount of time going through our planning process.

The assumption is that we should -- that we're in a position to grow the businesses that we have today, what those look like relatively to each other.

Honestly, I think that's something which we'll look forward to sharing more about when we get together for our Investor Day.

Got it.

Fair enough.

And then just a follow-up for Todd.

There's been some consolidation in the broker-dealer space.

Some firms going self-clearing recently, maybe there'll be more.

But help us understand, I guess, kind of how that impacts the clearing revenues for you guys and kind of any more explicit guidance would be helpful there.

Sure.

I think that's probably better for Brian Shea to take.

Brian?

Sure, happy to take it.

I think the headwind in the broker-dealer market generally is that there's been consolidation in the broker-dealer market.

And pressure on the broker-dealer revenue and business model as a result of the DOL fiduciary standard.

We actually -- there may be some firms going self-clearing, but we actually see the opposite.

We see more firms actually considering lowering their structural cost, lowering their capital investment and actually outsourcing their clearing.

We actually converted a pretty meaningful-sized self-clearing firm to Pershing's platform in the third quarter.

And we have a pipeline of a few others that we're in discussions with, which can't tell for sure how it will turn out.

But it shows a higher level of interest, and self-clearing firms are actually lowering and variablizing their costs.

So the market overall is condensing.

But we're actually holding our own and gaining share and growing into a little bit smaller market.

The other big dynamic, which is accelerated by DOL but it's a long-term secular trend, is that there's been a shift from the traditional brokerage model to an advisory model.

And we're growing our RIA custody business pretty significantly, and it's had double-digit growth and continues to have double-digit growth on a consistent basis.

So we're seeing more of the growth in the adviser model.

That's offsetting some of the pressure in the broker-dealer model.

Our next question comes from the line of Glenn Schorr with Evercore.

A question on issuer services, so down 15%.

You mentioned 3 things in the text, through corporate actions, lost business and DR fees.

So the DR part, we totally get; and the corporate actions, we get.

I wonder if you could explain a little bit on the lost business and just maybe bigger picture, think about the linkage or should there be a linkage?

The big banks all had great debt underwriting quarters.

And years past, that would be great for Bank of New York as servicer.

So just if you could help unpackage that.

Okay.

So Glenn, just for clarity, the issuer service line actually contains 2 of our businesses: one is the Depositary Receipts business and the other is the Corporate Trust business.

So as we noted, DRs was down 34%.

That's the entire -- in fact, it's more than the entire decline in that line.

The Corporate Trust business actually saw an uptick in revenues.

And I'll let Brian get into some of the -- if there's any detail you want to add to that, Brian?

No, I think you have most of it.

I think the single biggest driver of the decline in DRs was fewer corporate actions, which are episodic and spiky, and they always have been.

The lost clients were probably the second largest factor, and there were really 2 large clients: one really pricing and the other pricing is sort of model-driven.

And we've been trying really hard to maintain our pricing discipline and deliver solid margins in that business.

So that's reality.

So that's going to be in our run rate for a little while longer.

But -- and the other stuff was really more lower shares outstanding and slightly lower transaction volumes, which is more circular, we think, than secular, but it all depends on the market forces.

But in terms of new business and DRs, the issuance market is a little bit better than it was last year, although it's not frothy.

And we are still gaining and winning more than our fair share while maintaining our pricing discipline.

So we're still the market leader in signing the new client opportunities when they come to the market.

And we're encouraged, as Todd said, by the Corporate Trust fee turnaround.

We had fee growth in Corporate Trust sequentially and year-over-year.

And so that's a good sign in terms of the longer-term picture for issuer services.

Okay, I appreciate that.

One little quick follow-up in Investment Management.

I apologize if I missed it.

But average deposits down, call it, 20% quarter-on-quarter and year-on-year.

Yes, Glenn, there is one large client attributed to almost all of that move in the quarter.

It was not unexpected for us as they repatriated funds for their own reasons.

So we don't necessarily see that as a trend.

I mean, there is a trend, that it's declining a little bit, but not to that extent.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Charlie, also thanks very much for the run-through of the businesses.

That was really helpful.

Maybe just your view on -- you mentioned NEXEN a little bit, maybe your view on that platform.

Obviously, Bank of New York had sort of made a differentiated move in that effort versus some peers.

And obviously, the customers have all been moving towards a digitized platform.

But maybe just your perspective on how you see that differentiator versus peers, whether you think that was the sort of the right architecture or you want to change anything in that architecture in a major way?

Or is it just more like leveraging the power of that platform to grow revenues.

Yes.

I guess, first, let me start just by broadening the topic a little bit, which is because I've spent a bunch of time going through the historical context, not just of NEXEN but our entire technology investment.

And I just think it's -- I mentioned in my remarks, we spent over $2 billion on technology.

If you look at the resources that Bank of New York Mellon has dedicated to technology, both core infrastructure as well as the different technologies that we're looking at towards the future, that's been aided by the insourcing of a tremendous numbers of people, meaning thousands of people over the past 3 or 4 years.

Our net resources are up in the technology space, and those resources are in multiple locations across the world with different sets of talents, focusing on a whole range of things.

So the focus on technology has been -- it's been deep and it's been broad at the company.

So I hope what you took away from my remarks is that the focus that, that if we all continue to have is to focus on both pieces and to continue to dedicate this outside amount of our resources to the technology space.

Specifically for the things that we described as NEXEN, again, in my prepared remarks, I did go through the specific pieces of because I honestly just struggle talking very generically about NEXEN in its entirety.

What's important is when you look at the individual pieces, absolutely, those are things that we're doing, which will help us do a better job not just providing service for clients, but it will enable us to move much more quickly in the marketplace, allow them to access additional capabilities that we're developing or third parties are developing in a way, which looks across the company at a common architectural solution.

So it's kind of hard to look at that and say that, that's anything other than something that makes sense.

The work that we're continuing to do is the work that's been ongoing, which is to consistently peel back the onion and ask the question, are we putting all the resources in the right place, are we prioritizing things.

And that's ongoing work that we'll do.

So again, I put this in the category of directionally absolutely supportive of everything that's been done.

Absolutely, we believe that technology has to be a differentiator as time goes forward.

And we'll talk more about it again when we get together in March.

Okay great.

That's great color.

And then maybe just on your comments on improving operating performance.

The Bank of New York has already been in the last 3 years, I'd argue, sort of the best achiever in terms of improving that performance from where legacy Bank of New York has been versus peers.

It's certainly an expense reduction.

I guess, I always ask Todd about how much more is there to go.

And I know, Todd, you've been fairly bullish on continued opportunities even though we had a lot of low hanging fruit already.

So maybe if you can talk about, and Charlie, you mentioned some more platform consolidation, maybe you can talk about which platforms?

And then continued automation and maybe just a little bit more color on your comments about investing you may or may not invest in more growth opportunities.

No, I didn't question whether we're going to invest in growth opportunities.

What I was -- what my remarks meant to say is, as we find more efficiencies in the company, the question is whether we'll take those additional efficiencies and invest them or not.

So we're investing a tremendous amount in the business today.

That's going to continue.

What I was trying to point out there was as we figure out how to become more efficient over time, that creates additional capacity for us.

So with that just want to make sure I'm clear about that.

Listen, I think when you look at the results that we've delivered over, I'm not sure how, I look back, I guess, going back to 2013 and I don't know if it goes back prior to that.

But the expense control that's taken place within the company is extraordinary in an environment where we're spending substantially more in technology, substantially more on regulatory requirements and kind of regenning up the investments that have to take place to build the business.

And so that's a lot of money that gets spent on those things.

And so yes, there's been a tremendous effort to reduce the things that don't make as much sense to free up capacity to spend money on those things.

Having said that, I think that -- I put into maybe 2 different categories.

Number one, is, there's always more efficiency to be had in any company.

Even the most efficient companies walk in the next day and say, okay, how are we going to get more efficient in what we do separately from volumes growing and additional money to invest.

So I think that's just even if we were the best in class at everything that we did, we would say, that's what we would come in and strive to do as we go through our planning process and our forecasting process to push ourselves.

I did go through some specifics in my remarks, which would suggest that I do think that there are still a series of things that will allow us to create more efficiencies, that will then create the decision point for us about whether to invest in additional things or to do some other things with that.

And it relates to just basic blocking and tackling of reducing some of the process and bureaucracy and the layers that exist within companies like this.

And the more you do, the more exposure you get to the next level of things.

So I think it's a very natural progression from what's been done.

But you also mentioned something, which really should be much more substantial, which will take -- which is a multiyear project, which is to figure out how we take the -- or I say, we have a tremendous amount of manual processes around the company.

We have 52-or-some-odd thousand people.

I think, we all believe that given the tools that are available today, we can create more automation, which will not just reduce the expense base that we can then figure out what to do with it but it also improves the quality of our results.

So part of the efforts that we've got going on and that we're going deep on is what does that multiyear effort look like.

What does it take for us to get from here to there over what period of time.

It's not a 1 quarter, 1 year exercise.

But it's something that we want to build into the long-term plans.

And we know the opportunities are there.

We just don't know the specifics yet.

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

So I wanted to just dig in on 2 things.

One, Charlie, you came from Visa Global Payments Consumer that also has some corporate elements to it.

You're here at BNY Mellon, which has a part of the business is global payments, institutional investor, corporate governments.

What are some of the similarities there that may have interested you in this?

And what are some of the opportunities on the payment side that you could speak to?

Sure.

Betsy, so let's just start with the basics first, which is when you look at our client base across the globe, huge part of the client base are common clients that someone like Visa would've suggest.

As I walk in the door in terms of understanding who your client base is, how they think about things, what the priorities are and just who the individuals are.

There's a high degree of commonality there.

When we look at the opportunities that we have here, we see a tremendous amount of flows, both on the security side as well as on the cash side.

Figuring out how you could do that as efficiently as you can, and then continue to add value-added services around it with both, additional capabilities but also capabilities focused on data and analytics.

It's exactly the way Visa thinks about its business.

Visa, honestly, has a leg up because there's -- they're a step ahead in terms of automation because that's just the way the business was originally built.

So we've got a lot of work to do here to put us in a position to be able to not just get those efficiencies but to create everything on a common platform in a way where it's digital where you can do something with it.

So the things that we can do with that are very, very interesting.

And here, too, there's a lot that we're starting to do with it, whether it's in our collateral management business where we're using the information that we have to do a better job for clients that they get elsewhere because of the things that we see in the marketplace, and the work that we can do to help them reduce their funding cost and reduce their capital requirements.

But just the opportunity to think more broadly about it is pretty extensive.

And payments, honestly, I've actually spent less time on our payments franchise here than I have on our asset servicing businesses, our Corporate Trust businesses, the markets business, et cetera, et cetera.

So not -- I just -- I'd chose to defer that a little bit till next quarter, if that's okay.

I get that.

And just the follow-up is on how you think about the competition that's based from new entrant perspective, in particular, as I'm sure you're well aware, the blockchain debate is alive and well and lots proof of concepts but no golden ticket yet.

That said, there are several POCs that are getting a lot of attention like the ASX platform down in Australia.

So wondered what your thoughts are on blockchain as a threat versus blockchain as a solution for -- that you could leverage.

Yes.

I think, my point of view is the same as the company here has had, which is blockchain is very real.

But like any new technology, it has to solve a problem in order for it to make a meaningful difference, right?

When I was at Visa, people used to talk about all of those things that are going to do something to change the payment experience at the point of sale.

And there's always talk about mobile and all these other things, and everyone sits and wonders why mobile phones haven't dominated the payment space in the developed part of the world.

And the reality is because what exists today works.

Same thing relative to the networks infrastructure versus the blockchain structure.

It's effectively real time.

It's real global interconnectivity with a high degree of transparency where it's required.

So not that it won't have an impact over time but that's not where those solutions should initially go.

There are other places where your processes that are highly inefficient or -- and there's very little lack of transparency or there are resiliency issues that these things can solve.

So as we think about our business, we do have a fair amount of work going on inside the company that are focused on blockchain.

Specifically, we actually have a solution built, which I'm sure Brian or Todd can talk about in more detail in our government securities clearance business, where we're really using it as a -- we've built it as a treasury backup.

So that we would both understand the technology but also potentially be in a position to expose it to the Fed as well as our clients at a point in time that we're comfortable with it.

But the idea is that a distributed ledger would be available with all the relevant information for the relevant counterparties if we had issues elsewhere.

So I think, just on something like that though, in order for us to actually move it from treasury into some kind of production environment, forget about all the testing and all the things that you need to do to be comfortable with the platform.

You just have to believe that it's a better solution than what you have today.

And not just better for us but better for clients.

So as we look across the business, that's the way we're thinking about it.

And our view is, as I said, it's real.

But all these solutions as you do, as you know, do need trusted counterparties.

That is what we do for living in addition to providing the technology that we provide.

And the only thing I'd add, Betsy, is that when you think about what we do in all of our businesses, each little service we provide is not something that's standalone, which is very easily disaggregated.

When we provide core custody with clients, that gives us the opportunity to do a series of things, which we call part of asset servicing.

But there are a series of other services that we provide there.

When you have the securities, it puts you in a position to talk about collateral and cash and all those things.

And so the ability to show up as a firm with the reputation and the relationships like us and provide those solutions, not that we have our head in the sand, but those integrated relationships mean a lot.

And again, what we do is -- it is mission critical for our clients.

So it's not a light thing for them, not just to switch between material providers but to think about going to something by a much smaller third party who they don't really know stands behind it.

Okay.

That's helpful color.

Just last quick question on the expense ratio side.

You're indicating lots of opportunity to improve efficiencies.

Do you feel like the current pace that BK has been able to generate is sustainable?

Or you need to invest a little bit upfront to get a much larger expense reduction in the future?

What's your sense of the cadence there?

Again, I think we'll stay away from any kind of forecasting on stuff like that until we finish going through the detailed plans and that's obviously something we'll talk about.

Our next question comes from the line of Ken Usdin from Jefferies.

Can I ask about the asset servicing business?

It's nice to see the year-over-year growth rate up to 4%, obviously, helped by the nearly 6% growth in AUC/A.

But I was just wondering, could you break up the components a little bit and just talk about how core servicing is growing versus collateral versus the Broker-Dealer?

And help us understand kind of how those 3 parts are trajecting underneath?

Yes.

It's Brian Shea.

Happy to take it.

I mean, I think it's a combination of all those factors, right?

We're getting some growth from the collateral management for sure.

We're getting some core underlying growth.

We're getting some lift from the market.

And all those things are contributing to fee revenue growth.

And we're also still pruning some businesses, which is pushing some revenue out where we don't think it's appropriate, for example, we're working through the final stages of the U.K. retail TA repositioning, which is otherwise lowering the fee revenue growth but improving the operating margins and the profitability.

So...

And, this is Charlie.

The only thing I want to add is that in my remarks, I did talk -- I did break out that our asset servicing revenues, meaning our asset servicing revenue in the business grew 4% ex-clearing, which grew 10%.

No.

Right, Charlie.

I'm talking about specifically the investor services.

So when we go forward then, to your point, Brian, about the -- is the U.K. transfer agency, is that affect now past and can also remind us when the JPMorgan brokerage revenue start a clearing revenue start to come into that line?

Yes.

So the U.K. retail transfer agency process is almost completed by the end of the year, substantially completed.

And then the revenue run rate will stabilize.

And of course, we're still committed to the institutional and global TA business in the U.K. and in Europe.

And so that's a growing opportunity for us.

And we're actually getting new clients in that sense.

From a Broker-Dealer clearing perspective, we're -- we've invested heavily in the tri-party repo reform and technology, and again, we've replatformed our entire client base to a new state-of-the-art Broker-Dealer clearing platform and that's positioned us well to bring on new clients.

So we have begun the transitions of the former JPMorgan government clearing and tri-party repo clients.

We've started with the smaller clients but we've already converted about 7 of those clients so far this year.

And we have more to do this year, and we will be completing those conversions throughout the course of 2018.

In addition, we've onboarded some new entrants to the marketplace, and we continue to add new clients.

So we see the Broker-Dealer clearing and domestic and global collateral services business as a core growth driver over the next couple of years.

Okay, got it.

And then just one quick one.

Todd, you mentioned no need to do the preferred given the potential for SLR reform.

Just wondering, does that also mean that you won't do the contingent share repurchase at least in this CCAR?

You did mention, obviously, the ability to go do more in future CCARs.

But can you just kind of level set us on what you're thinking about that and the potential for the reform?

Yes, Ken.

That is exactly the point.

So that authorization was contingent on additional issuance.

We didn't think it would make sense for us to issue and then actually not need that form of tier 1 capital a year from now.

What and -- just put us in a better position to do just pure buybacks next year and beyond.

So that's our thinking there.

Our next question comes from the line of Mike Carrier with Bank of America.

Todd, just one on the balance sheet and capital.

So there was a bit of growth on this quarter despite, I think, on interest-bearing side.

Deposits were relatively steady.

So just wanted to get a sense, you guys are active on the buyback side, capital ratios are fine.

Just in terms of the balance sheet when you're seeing client demand, it seems on the deposit side, we could continue to see that roll off.

But any demand out there that we could actually see the balance sheet grow?

Or should we expect it to be in this range?

Yes.

I think it's kind of into -- it's fallen into about a normalized range, and we would see it grow as we see the businesses grow but probably in line.

And maybe a little less than in line with the fee revenue growth, just for the balance sheet size itself.

I mean, one of the other things that we did is, we did reduce some of our loan outstandings.

Some of those loans that were a little less productive than we wanted to.

And we actually will use that portion of the balance sheet to try to generate some more productive loans.

So we do have a little bit of -- we certainly have room for growth.

And if the growth doesn't come, we're going to have excess capital.

Okay.

And then just a quick follow-up on MiFID II, so just wanted to get a sense on any of the impact from the asset management side.

But then, I guess probably more importantly, just given that a lot of your clients are going through that process.

Are you seeing, one, much pushback from like pricing and like concessions as their business is under more pressure?

I mean, two, any services that you guys can offer to either help manage some of these regulatory changes for the clients?

So Mike, you're asking from a servicing perspective.

So I think Brian would probably be best to handle that.

Sure.

We have a whole cross enterprise team, including investment Services and Investment management working on, not only helping ourselves comply but helping our clients comply with MiFID II.

I think, depending on the asset manager, there's no question that MiFID II puts pressure, not only on the cost of compliance but the -- some pressure on the business model in terms of the elimination of sort of soft dollar commission-based research.

So with that -- depending on the fund company, that has more or less impact on their margins.

I think -- so that does put some pressure on the core fees and the core cost structure for asset managers.

I don't -- I wouldn't say that we -- there is always some pressure on the core, and what we're trying to do is extend the solutions and create new source of revenue.

A great example would be, we have a growing pipeline of middle office solution clients.

And that's because asset managers increasingly want to lower their structural cost, variablize their cost structure and focus more of their time and energy on the investment process.

And to Charles's point about NEXEN, the ability to have a platform that can easily integrate third-party solutions, which help asset managers and other clients, reduce the amount of time, energy and investment they make on vendor management, data integration, vendor integration, is also helpful in terms of helping them lower their structural cost in connection with MiFID and other pressures that are a secular trends in the asset management marketplace.

That's what I would say.

And if Mitchell wants to add?

Yes.

Just from our own asset management perspective, while we will clearly have to absorb research costs and that's a headwind, we actually see it as an opportunity, since we are one of the largest global financial institutions, both from an asset management and servicing perspective.

It gives us an opportunity to do more proprietary research rather than rely on the Street.

So I see it actually as a positive.

It's the transaction side that I think Brian is also referring to, which is an issue.

We have to have more transparency, and I think that's an opportunity on the servicing side.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities.

I probably heard your comments saying that you'd like to have the company accelerate revenue growth.

And I guess it's a lot tougher than at Visa.

Maybe you can compare and contrast the revenue opportunity overall.

But more specifically, any thoughts about changing the mix from servicing fixed income assets BNY Mellon has higher percentage of fixed income plus [. stake] Second would be acquisitions and third would be non-U.

S.

Let me do the -- Valerie, you might have to remind me of all the piece of the question.

So on the first piece, listen, I mean, the profile of the Visa businesses versus what we do is, it's different, right?

Visa is in a business where there is this continued secular movement from physical cash to electronic payment.

So you come in, in the morning and you've got that to give you a tailwind as well as changes in GDP.

And then you've got the question of what are you doing to take your fair share, not just from the other big competitors but from all the other payment mechanisms that exist out here.

In our business, we don't have that material secular shift.

We do partake in the change in GDP and change in market levels across most of our businesses.

But ultimately, the real differentiator has to be, are you going to continue to provide increasing value to your clients.

And so that's the focus here.

That was the focus there.

You don't just come in and sit and just kind of watch the cash register ring.

It's you come in everyday and ask the question of how can you do more that's better.

And the differences are, in terms of growth rates, just are what they are.

I did say in my remarks, I think there is a -- what we -- I guess let me start with, we do have areas that have, and I'm not sure what the right word is.

I use the word reasonable, you can all it good, we don't call it great but it's not bad just in terms of the revenue growth that we're seeing.

Part of it's the market, part of it's the things that we're doing.

I don't think I've been in 50 yards aside for a second because, again, I think that is -- there are material changes in things that drive that business that are somewhat out of our control as you've seen this quarter.

And all the other businesses, we believe there are things that we continue to do to increase the rate of revenue growth.

But you know as well as I that, not just this is a big company and it takes time to move a big company.

But the things that we do generally have longer lead times on them.

They're longer discussions.

They can be RFPs.

They could be things that you work on for 1 year, 2 or 3 even more.

So

again, I think, when we spend more time together in March, I think, it's incumbent upon us to lay out where we see those opportunities and how they can look somewhat different than they've looked in the past.

But again, I want to emphasize that we're not exactly starting from scratch here.

We're starting from a fair amount of momentum.

Valerie, then it was -- yes, listen, M&A, I think first of all our -- we come in every day and ask the question how do we grow this business and invest in what we do.

And so to the extent that there are things that add value to the core of the franchise, those are things that we've always looked at, and we'll always continue to look at.

And right now, that's the focus that we continue to have.

And U.S., non-U.

S. The majority of the business is U.S. I've spent a little time in Europe.

I'm going back -- actually, going back tonight and then on through the Middle East.

And we have -- I think, we continue to have as big an opportunity there as we have in any part of the world.

We've got core global capabilities that are as good as any one.

We're very focused on using our structure that we're lucky enough to have where we have a meaningful presence in the U.K. and a meaningful presence on the continent to do the best job that we can at feeling as local as we possibly can.

And so as we look forward, hopefully, that'll be something which we'll be able to talk more about.

Did I answer everything, Mike?

Our next question comes from the line of Geoff Elliott with Autonomous Research.

You touched on ETFs as a shortcoming.

And I guess you said how you address that is a topic for another day.

But could you elaborate a little bit on how the lack of a big ETF platform is kind of holding you back?

Where has that been a disadvantage for the business, which businesses in particular?

Yes.

So I guess -- let me just start, and then Mitchell and Brian and Todd can pipe in.

I think, the point of the comment that I made was, listen, it's just a fact of life, which is, we do not have a sizable ETF business.

My comment was specifically around the flows that people see.

Not around the profit profile of our business necessarily or anything else like that.

So just when you look at our flows versus others, you're not going to see the same kind of flow growth that we see elsewhere.

And we do have the same issue on the asset servicing side where our competitor has a much more sizable business themselves, but some other business that they have out there as well.

So that is a fact of life that we have to deal with.

On the asset management side, it's -- frankly, I think it's a more complex issue than it is on the asset servicing side.

Because on the asset servicing side, it's not as if we're not in the business, it's not as if we don't have a continue to build capabilities over a period of time.

And that's kind of on us to do it.

The asset management question is a much more broader, strategic question, which is a little bit of so what.

It's something we are where we are.

We do remind everyone I think, Mitchell, are we #6 in passives?

Yes.

In general, not ETFs, but in passives.

But the question is, what does that ultimately mean for your business?

What's the future of the actives versus passives?

And we have a point of view on here that we've had on that, but that's also something, I think, we should talk in more detail about in March.

Any of you guys want to...

No, I think you covered it really well.

Vanguard and BlackRock own that business.

So it's not like anybody else is getting into it in reality.

But we do service ETFs, both on -- even from an asset management, we supply some of the intellectual content to some of the ETF providers.

And in addition to that, we are in smart beta, we are in indexing, we are in the other elements of passive that are also growing and that's what we'll continue to do.

Yes.

And I will just add that while the ETF market is concentrated in a few top providers, which drive most of the flow, there are more providers coming in.

They're not massive yet but we are focused on servicing them, and we're trying to deliver enterprise solutions.

So we combine ETF servicing, the authorized participant services, which we provide for markets.

And we have the Pershing no transaction fee ETF platform that's a differentiator in terms of asset gathering.

So we have a more sort of holistic solutions strategy that, we hope, will create some momentum in the marketplace.

And then lastly, I'd say that while the ETF business in the U.S. is pretty well-developed, in Europe and in Asia, there's really good developing opportunities over time, and I think we are positioning ourselves to capture more of that going forward.

Our next question comes from the line of Gerard Cassidy with RBC.

Todd, you touched on the SLR issue, not issuing a preferred because the changes that could be coming and the benefits that Bank of New York would see.

Aside from better positioning you for maybe stock repurchases if the SLR calculations are changed, are there any other strategies you would use to lower the SLR ratio whether that's a relevering of the balance sheet with other types of assets or something else?

Yes.

If you look at our capital ratios and what our internal targets are and why they are there, internal targets are established to make sure they're adequate both for BAU and also through stress testing.

They're pretty well-balanced.

So anything that we would grow would have to -- we'd be happy to grow it if it would achieve our targeted returns on capital.

Otherwise, the best use of that capital, if we can achieve the targeted returns, is to do buybacks or pay it out in the form of dividends.

So that's the discipline that we've applied.

And right now, my point here is we're pretty balanced.

There's no one ratio.

I mean, the SLR would give us a little bit of relief in kind of BAU.

But there's no one real ratio that is becoming a major constraint.

I kind of like how balanced we are across the capital stack.

Very good.

And then a follow-up question on the move to the issue that will be coming to hit here in January.

Maybe this is for Mitchell.

You talked about how you could build out your internal research, proprietary research and reduce the cost of the research that you pay for from the Street.

I know technically, the SEC rules don't allow us in the U.S. to sell research like was going to be the case in Europe.

Can you share with us, Mitchell, any strategies you could implement though to get the leverage to lower your research costs from the U.S.-based providers of U.S. research?

Well, I think there's a couple.

I mean, we're a multi-boutique model, but the more we coordinate some of our trading activities, we could clearly drive down our cost of research.

Secondly, it's kind of an intriguing one to me because we're kind of lazy.

We take a lot of research from a lot of brokers, sometimes up to 50 different ones and do we really need it or were we taking soft dollars because they were free.

It's creating just a much stronger discipline and as such a large asset manager with so much data available to us, we really should be doing our own.

So in many respects, I don't see it being a significant cost, but I genuinely believe it's an opportunity.

The data we have in this organization is unbelievable.

And we don't leverage it.

We use The Street instead.

So I think it inverts things in actually a positive way for large asset managers.

I think it's -- and that's the other thing.

Smaller asset managers are going to pay the price.

The large ones, the big ones have an opportunity here.

So again, I think it's going to concentrate opportunity in the top few asset managers.

(Operator Instructions) We'll take our final question from the line of Brian Kleinhanzl with KBW.

First question was on investment management.

You called out there was outflows in the LDI business this quarter, but I think it was also in the fourth quarter that there was LDI outflows, and that was related also to in-housing of the LDI.

I mean, is that an ongoing risk?

Is it an increasing risk as rates are increasing?

No.

We don't see it as a -- it's Mitchell.

We don't see it as a risk.

When you look at the average of our flows in the LDI business, we do have 1 or 2 or maybe 3 extremely large LDI clients that actually naturally should take it in-house.

They're just incredibly dominant.

You're talking at over $5 billion in assets.

So it's not a trend that you're seeing at all.

If you look at our average, we're averaging about $9 billion quarter in positive flows.

That's slightly better than 2016.

It's better than '15, and it's better than '14.

So the trend has been actually quite consistent, our $7 billion, $8 billion, $9 billion for the last few years.

We don't see that trend changing.

We still see significant opportunity.

I'd like to just to point out that, to state the obvious, which is the types of accounts that Mitchell is referring to, where they're big enough to take it in-house.

The fee profile is very different than ...

It's extremely low.

It's extremely low.

Okay, great.

And then the second one is on the margin.

I mean, this quarter you're actually liability sensitive, and you had 3 rate increases since the end of '16, but yet the margins have been relatively flat.

I mean, do you have levers that you can pull to get the margin expanding again from here, both either on the asset side or on the liability side?

Yes.

So Brian, you talked about the net interest margin.

It has expanded a few basis points over the course of the year.

We would expect it to continue to improve modestly.

So the answer to that is, yes.

I think that ends the session for today.

If you have any questions, please feel free to call me, Valerie Haertel, (212) 635-8529.

Thanks, everyone.

And as a reminder if there are any additional questions or comments, you may contact Ms. Valerie Haertel at (212) 635-8529.

Thank you, ladies and gentlemen.

This concludes today's conference call and webcast.

Thank you for participating.