紐約梅隆銀行 (BK) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 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.

Good morning, and welcome to the BNY Mellon First Quarter 2018 Earnings Conference Call.

With us today are Charlie Scharf, BNY Mellon's Chairman and CEO; and Mike Santomassimo, BNY Mellon's CFO.

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

Please note 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 our earnings release, the financial highlights presentation and our documents filed with the SEC, which are available on our website bnymellon.com Forward-looking statements made on this call speak only as of today, April 19, 2018, and we will not update forward-looking statements.

Before I turn the call over to Charlie and Mike, I would like to highlight a few changes to our earnings materials.

Beginning this quarter, we are presenting total revenue for each of our primary lines of business within our 2 business segments.

The change in presentation table on Page 13 of the earnings release summarizes the primary products and services and types of revenue generated in each line of business.

Within Investment Services, the lines of business include Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management.

Within Investment Management, the lines of business include Asset Management and Wealth Management.

In addition, the reporting of the following expenses has been changed.

First, the M&I litigation and restructuring charges are no longer separately disclosed on the income statement.

Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense.

Second, clearing expense, previously included in other expense, has been reclassified to sub-custodian expense and renamed sub-custodian and clearing expense.

Additionally, the adjusted pretax operating margin and non-GAAP measure for the Investment Management business no longer excludes amortization of intangible assets and provision for credit losses.

Please note that the prior period through the expense reporting changes and the Investment Management pretax operating margin calculation have been reclassified to be on a comparable basis.

These changes, our previous reporting view and financial trends can be found in our financial supplement.

We believe that the updated presentation provides more complete picture of our financial performance and will enable you to view revenue on a basis consistent with management.

All of our earnings documents are complementary, and we recommend they be viewed together.

With that, I will now turn the call over to Charlie.

Thank you, Valerie.

Good morning, everyone, and thank you for joining us.

I've got a few comments I'll make.

I will try and keep them brief since we covered a great deal of ground at our Investor Day recently.

I'll then turn it over to Mike, who'll talk about the changes we made to our reporting to provide more insight into our business performance, run through our first quarter financials, and then, we'll open it up for questions.

First of all, we reported earnings per share of $1.10, up 33% from last year's first quarter.

Revenue grew 9%, up 2 points by weaker dollar, and expenses grew 4%, 3 points of which were due to the impact of the weaker U.S. dollar.

Pretax income increased 20% and after-tax income increased 29%.

Strong equity markets, higher interest rates and lower tax rate all helped drive our strong results in this quarter.

The major global equity market indices were up significantly versus the first quarter of 2017, helping drive higher AUC/A and AUMs.

The return of volumes and volatility was also positive for us this quarter.

And we saw benefits in Pershing and FX.

In fact, Pershing matched their highest U.S. daily trade volume ever on February 6.

As our results show this quarter, benefiting from the markets is an important part of our business model.

But we also discussed at our Investor Day that we look beyond the markets and focused on driving our underlying franchise growth.

And whilst it's early, we do see a progress.

Specifically, we saw growth in parts of the franchise, including deposit balances, FX trading, tri-party repo activity, collateral management activity, increased securities lending activity and stronger demand for liquidity services.

In Asset Servicing, we onboarded new business from a key global investment manager and expanded our relationships with several sovereign wealth clients, which have added significantly to our assets under custody in the Asia Pacific region during the quarter.

And as we discussed at Investor Day, we continue to invest in our markets capabilities in the form of people, technology and ultimately, additional capabilities.

While early days, we see signs that our investments are just beginning to pay off.

I mentioned that we saw increased activity in FX, and we believe that the investments we've been making are allowing us to see increased volume from existing clients and are beginning to attract new clients.

Within the Collateral Management space, we continue to expand capabilities.

In the first quarter, we were the first to market to support offshore Chinese assets as collateral.

This offering enables us to allow clients to mobilize new asset classes and asset types to collateralize trade exposures in our tri-party program.

We were also the first to launch a new API that helps dealers improve funding efficiency.

What this means is that the assets can be custodied anywhere, so optimization can occur irrespective of the location of assets.

Given the scarcity of high-quality liquid assets, clients wanted a way to optimally allocate collateral, which in high-volume trade environments can't be done by hand.

A sophisticated algorithm was needed, and we delivered it.

In Pershing, we continue to see large complex financial services firms choosing Pershing to either outsource functions to achieve greater scalability, to support growth or determined that clearing and custody, while critical, are not core to their unique value proposition.

One example is a mandate we received this quarter from a large regional bank to outsource the support for their private wealth and capital markets businesses, which we will be onboarding over the next 12 to 18 months.

As we discussed at Investor Day, Pershing has been accelerating its investments in global advisory solutions to further differentiate its capabilities such as bank custody where we have a unique advantage in the marketplace.

As a result, Pershing signed 4 relationships seeking bank and brokerage custody in the first quarter and expects to sign a total of 7 over the course of 2018.

This is a good example of how we're working across the firm to bring our diverse capabilities to the advantage of our clients.

Turning to Corporate Trust for a second.

As we've discussed, we continue to invest in improving the client experience and our capabilities in targeted areas.

And while it's early, we're just beginning to see improved results.

This quarter, we saw organic fee growth for the first time in a while following a change to the leadership strategy and investments we're making in technology.

While early, we see improved execution, and we will look to build upon the success in the coming quarters.

In Treasury Services, we continue to see growth in our payment volumes from existing clients driving higher banking transaction services fees.

Our private label outsourcing business continues to be in demand.

And this quarter, we had some new business wins.

As previously announced, we've been expanding our payment transformation efforts in partnership with real-time payments in Zelle providing links to other banks and financial institutions, who don't want to invest in direct connections.

This is an important part of our strategy to provide value-added services to our clients and a growth area for us.

The pipeline remains strong reflecting significant opportunities.

Now let me talk for a second about Clearance and Collateral Management.

We're benefiting from monetary policy easing and the increase in U.S. government debt issuances.

U.S. Treasury issuances for the first quarter were strong, resulting in higher domestic clearance volumes.

Based on current trends and expectations for further quantitative easing, we expect to see continued strength in our clearing volumes.

Additionally, the migration of the JPMorgan clients to our platforms continues to progress well.

We completed many client conversions, but the largest conversions are expected to begin in the second quarter and be completed by the end of the year.

In Investment Management, we've been focused on our performance, and we've been consolidating funds as well as launching new ones to meet the marketplace demands for the nontraditional investments, which, as we talked about in Investor Day, are core to our strategy.

This quarter, our investment performance continued to be positive for us, with 89% and 88% of AUMs above benchmark over 3 and 5 years, respectively.

This contributed to a strong performance fee quarter relative to recent first quarters with broad-based fees from LDI, fixed income, equity and alternative strategies.

Additionally, we saw improved active equity flows, which benefited from new targeted products, particularly in the mobility innovation fund, which raised about $3 billion during the quarter.

Our fixed income flows were strong, especially in European and global credit as well as secured finance.

Finally, the consolidation of our North American businesses, we announced last November, is going well.

And both client and consultant reaction has been positive.

We're also investing in new talents to help grow the business, including key hires during the quarter to oversee investment strategy, consultant relations and trading.

And now before I turn it over to Mike, I don't want to be repetitive of comments I made at Investor Day, but I do want to mention a few things again.

We are focused on building our franchise for the long term because we are confident in our future.

We will continue to focus on delivering strong results in the short term.

And we believe we have a very financially attractive business model with unique collection of assets, which work together to give us competitive advantage.

We're focused on increasing our rate of revenue growth.

And while this will happen over time, we continue to believe we can do this without sacrificing operating margin.

And we will do this while investing in technology, operations and in our people, both in infrastructure and new solutions, particularly focused on those that are data driven and digital.

In fact, we said we believe that we will still generate positive operating leverage, and you saw this quarter our continued discipline in controlling the total expense base of the company.

We're lucky enough to have great and unique franchises, great assets, and we're operating from position of strength.

Over to Mike.

Thanks, Charlie.

Good morning, everyone.

Before I walk you through the results for the first quarter, I'd like to touch upon the reporting changes Valerie noted earlier, which are intended to give you a better picture of our business performance.

We're now reporting our revenue in a way that is consistent with how we think about evaluating our business performance.

It should complement the previous format, which can be still found in our financial supplement.

This should be additive to our disclosures.

You can find the details of the changes on Page 13 of both the first quarter earnings press release and the financial highlights presentation.

Turning to the first quarter results.

As Charlie mentioned, growth in earnings for the quarter was largely due to the increase in interest rates in equity markets versus the first quarter of 2017.

Although the U.S. dollar has significantly weakened over the past year against key currencies in which we conduct business, the impact was essentially neutral on net income on a total company basis, consistent with previous quarters.

With that, let me run through the details of the first quarter results.

All comparisons will be on a year-over-year basis unless I note otherwise.

Beginning on Page 3 of the financial highlights presentation, total revenue increased 9%, primarily driven by a 10% increase in fee revenue due to stronger markets and a 16% increase in net interest revenue due to higher interest rates and to a lesser degree, higher deposit balances.

Also contributing to the growth in fee revenue was higher foreign exchange revenue and growth in collateral management.

A weaker U.S. dollar favorably impacted the revenue growth rate by approximately 2 percentage points.

Our expenses grew 4% primarily due to a weaker U.S. dollar, which unfavorably impacted the expense growth rate by approximately 3% higher staff expense, partially offset by lower consulting expenses.

When factoring in the significance of the unfavorable impact of the weaker dollar on our expense growth, you can see that while we're making important investments for the future, we continue to remain disciplined in controlling our expenses.

We generated significant positive operating leverage and increased our pretax operating margin to 35%, up from 31% in the prior period.

In the first quarter, the company repurchased 11 million common shares for $644 million and paid $246 million in dividends to common shareholders.

All of this resulted in an increase in pretax income of 20% and an increase in net income applicable to common shareholders of 29%, which benefited from a lower U.S. tax rate.

This, coupled with the reduction in share count, increased earnings per share by 33% to $1.10.

Our risk-adjusted returns continue to be strong.

Our CET1 ratio increased to 10.7%, and the return on tangible common equity improved to 26%.

Page 5 highlights our Investment Services business results.

Total Investment Services revenue increased 11% on a year-over-year basis and 5% on a sequential basis.

Within the business, Asset Servicing revenue increased 13% on a year-over-year basis and 4% sequentially.

Both increases primarily reflect higher interest rates and deposit balances, which drove the growth in net interest revenue.

These also increased due to higher volumes, market values and foreign exchange volumes.

We also benefit from favorable impact of a weaker U.S. dollar.

Pershing continued to perform well, up 11% with performance driven mainly by an increase in net interest revenue as a result of higher interest rates as well as fees from growth in long-term mutual fund balances and higher clearance volumes.

Issuer Services revenue, which includes our Corporate Trust and Depositary Receipts businesses increased 6%, primarily reflecting higher net interest revenue in Corporate Trust as well as the favorable impact of a weaker U.S. dollar.

On a sequential basis, the increase primarily reflects seasonally higher Depositary Receipts revenue.

Treasury Services revenue increased 6%, primarily reflecting higher net interest revenue driven by higher interest rates and payment volumes.

Clearance and Collateral Management, which includes U.S. government clearing, U.S. tri-party activity and global collateral management was up 13%, primarily reflecting growth in collateral management, higher clearance volumes and net interest revenue.

Additionally, average tri-party balances were up 14%.

Noninterest expense within Investment Services increased 5% year-over-year and decreased 7% sequentially.

Both periods also reflect higher technology costs, consistent with, what we discussed during our Investor Day, this unfavorable impact of a weaker U.S. dollar and higher volume-related sub-custodian and clearing expenses.

The year-over-year increase was partially offset by lower consulting expense.

The sequential decrease was primarily due to severance litigation and an asset impairment recorded in the fourth quarter of 2017.

Now a few additional comments on the Investment Services business.

Foreign exchange revenue increased 10% due to higher volumes across most of our FX products.

Securities lending revenue increased 20%, primarily driven by increased demand for U.S. government securities and equities.

Average loans were 8% lower year-over-year.

However, on a sequential basis, they were up slightly.

Assets under custody and administration grew to $33.5 trillion, reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business.

Pershing's average long-term mutual fund assets are up due to higher equity markets and from clients consolidating assets on our platform.

Turning to Page 6 for Investment Management business highlights.

Total Investment management revenue increased 13% year-over-year.

On a sequential basis, revenue increased 4%.

Asset Management revenue increased 16%, reflecting higher equity market values, the favorable impact of a weaker U.S. dollar, principally versus the British pound and higher performance fees.

The quarter also benefit from a gain on the sale of CenterSquare.

Performance fees increased from $12 million to $48 million, primarily due to strong investment performance in our LDI and alternative strategies.

And as Charlie mentioned, our long-term active investment strategies performed well with 89% and 88% of our assets above their 3- and 5-year benchmarks, respectively.

Wealth Management revenue increased 5%, reflecting higher equity market values and net new business, partially offset by lower net interest revenue from lower deposit balances.

Sequentially, deposits were up 15% in Wealth Management.

Assets under management increased 8% year-over-year, but declined 1% sequentially to $1.9 trillion.

Turning to the flows.

We experienced another quarter of net inflows into our long-term actively managed strategies with $17 billion of inflows during the quarter.

The LDI strategy had strong inflows of $13 billion and fixed income had flows of $7 billion, which were partially offset by multi -- by outflows in our multi-asset and alternative strategies of $3 billion.

Additionally, active equity flows were flat following a multi-quarter trend of outflows.

As we continue to look for ways to differentiate our equity strategies, and as a result, benefited from the new fund launches that Charlie mentioned in the quarter.

The inflows into long-term active strategies were partially offset with $13 billion of index outflows, resulting in $4 billion of total long-term inflows.

Index outflows primarily resulted from clients rebalancing and funds tracking underperforming international equity indices in both Europe and Japan.

We experienced short-term cash outflows of $14 billion, mainly drawn from government money market funds, which were in net outflows across the industry during the first quarter.

Further increases in interest rates as well as competitive yields from select peers also contributed to our net outflows in these funds over the quarter.

Together, total long and short net flows were $10 billion in the quarter.

Lastly, the impact of the sale of CenterSquare and other changes are included in the divestiture and other line in the flows table.

Turning to the Other segment on Page 7 briefly.

Fee revenue increased sequentially, primarily reflecting the impact in the fourth quarter of 2017 of the enactment of the U.S. tax legislation.

Additionally, we recorded a $49 million of net securities losses related to the sale of approximately $1 billion of debt securities, which represents less than 1% of our portfolio.

Additionally, noninterest expense declined year-over-year, reflecting lower professional, legal and other purchase services, partially offset by higher incentives.

Now turning to Page 8 on capital and liquidity.

The capital and liquidity ratios at March -- as of March 31, 2018, remained above the regulatory minimums with the appropriate buffers and most of them increased since December 31, 2017, on a fully phased-in basis.

Common equity Tier 1 capital totaled $18.3 billion, an increase of $496 million compared with the fully phased-in basis of December 31.

The increase primarily reflects capital generated through earnings and additional paid-in capital resulting from stock awards, partially offset by capital deployed through common stock repurchases and dividends paid.

The fully phased-in supplementary leverage ratio remains stable at 5.9%, which exceeds the 2018 regulatory requirement of 5% with reasonable buffer.

We also remained at full compliance with the U.S. liquidity coverage ratio requirements.

Our average LCR was 116% in the first quarter.

Now on Page 9. Net interest revenue increased 16% year-over-year and 8% sequentially, primarily reflecting both higher interest rates and deposit balances, partially offset by higher average long-term debt.

Year-over-year, our average interest-bearing deposits increased 11%, while our average noninterest-bearing deposits declined 3%.

Year-over-year, our net interest margin increased 9 basis points to 1.22%.

On Page 10, on expenses.

I'd like to note we also made a few expense reporting changes this quarter to simplify our reporting and give you better insight into our expense categories.

Merger and integration, litigation and restructuring charges are no longer separately disclosed in the income statement.

We had very little M&I and restructuring expense in recent years, and these expenses previously reported in this line have been reclassified primarily to other expenses and prior periods have been restated.

Clearing expense, which was previously included in other expenses, has been reclassified to sub-custodian expense and renamed sub-custodian and clearing.

This should help you better understand our market- and volume-based expenses.

On a consolidated basis, expenses increased 4%, primarily reflecting the weaker U.S. dollar, which unfavorably impacted expense growth rate by approximately 3% and higher staff expense partially offset by lower consulting expenses.

The sequential decline reflects lower expenses in nearly all categories.

Looking ahead to the second quarter, there are a few things to factor in your modeling.

While it's still too early to predict how the quarter will play out, we expect on an average, rates will be higher in the second quarter than in the first, and as of today, our deposit balances are lower than the average deposits in the first quarter.

Additionally, the yield curve has flattened in recent weeks, which negatively impacts our reinvestment opportunities.

The quarterly investment and other income line is expected to be in the range of $40 million to $60 million per quarter for the remainder of 2018.

Additionally, performance fees should be in line with the second quarter average over the last couple of years.

We expect total expense growth in the quarter to be similar to what we saw in the first quarter versus a year ago.

And we still expect our full year 2018 effective tax rate to be approximately 21%.

Now before turning to Q&A, I'd like to make just a few comments on the recent regulatory developments regarding capital requirements.

So earlier this month, we completed the CCAR process for 2018.

While we can't discuss the details, the supervisory severely adverse scenario was noticeably more stringent than in prior years.

This variability in the scenarios year-over-year may cause fluctuations in the payout ratios.

With regard to the SLR, we welcome any attempts to revise the leverage-based standards.

And based on the draft, it would appear that the requirements will decline and that would be positive for us.

With respect to CCAR, it's way too early to know the impact of the stress capital buffer framework given that it may change year to year based on the Federal reserves, severely adverse scenarios and supervisory models.

The proposal indicates that a minimum Tier 1 leverage ratio plus a prescribed stress capital buffer must be maintained at all times.

This is consistent with the way we manage our capital already.

Given the high quality of our balance sheet, it's possible that the impact of this rule change would be positive, but it will depend on the outcome of the final rule and it's too early to draw any conclusions either way.

Additionally, the new framework's increased emphasis on stress capital buffers, which are based on the Fed's severely adverse scenario and supervisory model raises the potential for more volatility and unpredictability year to year.

We're hopeful that the potential volatility and unpredictability year to year will be mitigated by the Fed providing more visibility into the stress scenarios and supervisory models and refinement of this methodology during the common period.

We look forward to engaging with the Fed in this common period as they finalize the rules.

Now with that, Charlie and I would be happy to take your questions.

Operator?

(Operator Instructions) Our first question comes from Glenn Schorr with Evercore ISI.

So I noticed in the prepared remarks, in disclosure, you noted net interest revenue growth in every single business, obviously, rates were up, but it's also balanced growth.

So we noted high deposit betas.

I'm assuming that's going to stay given your mix of clients and business.

So the question I have is, how much balance sheet growth is possible as you continue to have like really good capital return?

Because that's what's -- that's going to help continuing to drive net interest revenue, right?

Yes, Glenn, it's Mike.

Let me just give you a couple thoughts there, and then, hopefully, I'll answer the question.

But as you sort of think about the first quarter, and we said this at Investor Day as well, so -- we saw deposit balances a little higher than we expected in the beginning part of the -- our first quarter and this has come back down to kind of where we expected them to be.

And as we sort of think about the second quarter, all things considered, we still expect NIM to increase, and we would expect that even with the lower deposit balances, the rate of growth of NIR will be a little lower than the first quarter, but we still expect to be -- it to be pretty healthy versus the second quarter of 2017.

So we still expect to see both of that happening.

And I think as we build -- as we continue to build the franchise and bring on new clients, we would hope that our -- any of the decline we see in our balances as a result of rates rising would be more than offset or offset partially at least by new business coming in, and we have the room on the balance sheet to continue to do that.

Okay.

I appreciate that.

You mentioned the business wins, obviously, in tri-party and collateral management claiming as the balances grow.

Business wins and losses in Asset Servicing, are we not going to get that anymore?

Well, yes -- no, we took that stat out because -- and we did -- and this came up a little bit at the Investor Day.

And we agreed with the view that it just really wasn't a particularly worthwhile statistic.

It's a gross number, not a net number.

Our belief the way different people talk about it across the industry is very different, relative to timing, relative to -- is it custody, is it fund accounting, middle office, how you account it?

And so our view is there just wasn't a whole lot of value in it, which we agreed with.

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

I wanted to follow up on the discussion related to capital and the NPRs put out by the Fed.

So in terms of, I guess, the excess capital dynamic, obviously, too early to really tell.

But I was wondering if you guys think through the impact it could have on the business, particularly in the repo markets, which, I guess, has partially been somewhat constrained by the leverage requirement at the banks.

A, I guess, do you think some of that could come back?

To what extent you think that could help your tri-party repo business and if possible, I guess, break out how much of revenues you guys generated in tri-party repo to help us kind of calibrate what the upside could be?

Yes, Alex, this is Mike.

I think the impact on -- you'll get a better sense from the other banks in terms of exactly what the impact they think they will have, but you would think that given the constraints they are all under now, that you would see that have a positive impact on the repo market, which would then come back to us from a servicing perspective.

To what extent?

It's hard to know right now.

Any sense how much you guys generated in tri-party repo revenues currently?

That's not something we disclose, but it's included in the Clearance and Collateral Management line that you see in the disclosure.

Got you.

And then, just my follow-up secondly, just kind of going back to the Investor Day, you guys outlined a longer-term NIM guidance of 125 to 140.

You're at 123 now.

So seems like you're kind of there.

Any additional clarity you guys can provide on the assumptions, I guess, underpinning the 125 to 140 in terms of the rate backdrop, the size of the balance sheet, the time frame of how you guys think you'll get to those levels?

Yes.

As you noted, we're pretty much on the bottom of that range as we speak.

And so if rates continue to way the -- to increase the way the market expects, we would be getting into that range as we go out through the rest of the year.

And as you know, there is a lot of dynamics that sort of play into exactly what the NIM will be in terms of deposit mix, the level and rates as you mentioned, but we would expect to begin to get into that range as we go out through the rest of the year.

Got it.

I mean, I guess, like there is a scenario where it will be above 140, just given there's still seems to be some runway on the rate side?

Yes.

I mean, it's possible...

There's always a scenario, but who knows.

Yes.

It's possible.

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

Maybe if we can just go back into Asset Servicing, looking at it through the old way on the fee line of Asset Servicing, a very strong 10% growth year-over-year.

Maybe, if you can just bifurcate that a little bit because if -- you're pulling the clearing and collateral out of that separately on the clearing and the Treasury Business.

And if you can talk about -- maybe sort of qualitatively about the pipeline in Asset Servicing.

I think you mentioned you're onboarding a new business from a large customer.

If that's -- can you give a little more clarity on that and the timing of that?

Yes.

So as you sort of look at the Asset Servicing line back in the supplement, it's up 10% year-over-year as you sort of noted, Brian.

So again, as you sort of think about the drivers of that, very consistent with what we talked about in general, about what's happening.

So the market levels and currency sort of helped aid that as well as growth in our collateral businesses and then organic sort of flows into our existing client portfolios.

So and then there is a little bit of seasonality that you see in the first quarter as you look at the sequential results from a few items.

But for the most part, you're seeing the same drivers that we talked about in general across the firm.

And just keep in mind with business, there are different things that go into the revenue flow.

The core custody, core fee-based business, obviously, is impacted by the level of the markets.

Wins and losses, it's a slow, steady set of changes that happen based on what the trends are on wins and losses, so you're not going to see dramatic shifts there.

And so one client coming on doesn't materially change the number in a quarter.

But it does give you a point of view of what we're seeing in terms of wins and losses.

Yes.

And I think, as you think about the new business wins, we feel if we were to report a number, it would be pretty consistent with what we've seen over the last number of quarters.

I mean, it was a little outsized at the end of last year, but otherwise, if you looked at the average across the previous quarters, it was pretty similar, and the pipeline still feels good.

And we have more conversion from the T. Rowe Price deal still -- yet to come, and I think you mentioned the JPMorgan treasury business is still -- the majority of that yet is still to be transitioned.

Is that correct?

Yes.

Yes.

Yes.

A good number of the clients from JPMorgan have been converted already, but it's the -- a few of the bigger ones are coming between now and the end of the year.

Okay.

And just on the expense control, very solid, obviously, in the quarter, better than expectations.

As we think about, Charlie, your comments on investing in the business in the rest of the quarters, this year, do you think this type of expense level is sustainable for the rest of the year given that you still have some improvements in the cost base to make as well?

Yes, well, I'm not going to give you a forecast on expenses beyond what we said at Investor Day, but what you saw this quarter was very consistent with our points of view on what we think we can produce.

And so this quarter includes a fair amount of the additional technology investments, not all of it will be growing throughout the year.

But we're very, very focused on continuing to build and increasing the operating margin, which means we should continue to see a tight control on expense.

What that means for the actual number, again, away from the effect of currency, we're focused on it.

And so I think everything I said there we continue to play out throughout the year.

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

Charlie, at Investor Day, we talked a lot about organic fee growth rates, and I think you mentioned -- or was it organic revenue growth rates?

I think you mentioned that the old days of 1% going to 1.5%.

Maybe you could talk a little bit about how much of the revenue growth this quarter was organic?

Yes.

I'm not going to talk about that.

It's not something we're going to talk about every single quarter.

We did that in Investor Day just to give you a sense of the way we look at it internally and what we are focused on driving.

I think -- but you -- but when you look at some of the results that we see, whether it's security lending loans, what we saw in FX, what you see in the levels of AUC/A, and just our comments on growing the underlying client base and franchise, I think directionally what you see across the businesses is headed in the right direction.

And I guess the -- and the last thing that I would say is, when we went through Investor Day, it was a very interesting experience quite frankly to watch people's reactions to us being very open and honest and disclosing things that I don't think anyone else has disclosed in the business.

So that, again, you have the lens into how we're thinking about it, which from our perspective is a positive because we're focused on the things that we want to do better at and think we can do better.

But overall, you'll see it in the actual operating metrics over a period of time.

So directionally in the businesses, which have more -- quicker paybacks, a series of the markets-related businesses, liquidity and security lending, you saw franchise growth, and we're focused on delivering it in the other businesses, which have longer lead times as well.

Got it.

Okay.

And just obviously, revenue growth is very strong this quarter.

It seems like you outperformed the 1.5% long-term average that you were talking to at Investor Day.

I don't know if that's a fair conclusion from your perspective?

Yes.

I think directionally, it's fair to say that there was higher organic revenue growth than we've seen in the past.

We're not pounding our chests that we've declared victory here.

I mean, this is the very beginning.

And as I said, most -- the important parts of our business, Corporate Trust, Asset Servicing, continuing to build stronger flows in our Asset Management business, client assets in the Wealth Management business, those take time to build.

And you're not going to see big movements several months into a process here.

But directionally, we do feel very good about it.

Okay.

And then, just separately, during the quarter, obviously, a lot of false story in the market, so if you could speak to, outlook -- if volatility pulls back a little bit and then separately on LIBOR, there was a lot of discussion on how you are positioned for the LIBOR moves that happened in the quarter and maybe you could speak to the impacts that had this quarter, so going forward is either the 1 and 3 months -- revert to the basis risk that had before or continue to widen out from here, we can get a sense of the impact on you guys?

Yes, Betsy, this is Mike.

So on the first part, on the volatility question.

So in the first quarter, some of the volatility did impact and helped some of the volumes that we saw, particularly in Pershing, as Charlie sort of noted in terms of having one of our peak days in that business.

So in some ways, volatility will be helpful, right, but there could be negative effects of that as well depending on how that impacts the overall market.

So we'll see.

I think on the second part of the question, in terms of how we're positioned vis-à-vis sort of LIBOR, we are weighted more towards -- we have more LIBOR-based assets -- short-term LIBOR-based assets than we do liability.

So as LIBOR starts to move up, whether it's 1 or 3 month, it is sort of helpful for us relative to how we're positioned.

Okay.

And then, just lastly, you mentioned Zelle and some of the things you're doing to help connect people to that.

Without having to directly invest in the Zelle backbone, I think that's what I heard, but can you give us some color as to, not only what you're doing but where you think the market is for that?

Yes.

I think, obviously, if I'm -- I presume everyone understands what Zelle is, which is the group that is owned by a series of banks that are building out the capabilities to leverage a real-time payments network.

In order to participate in those capabilities, the institutions have to do a fair amount of work to integrate their technologies with those platforms.

Not every bank wants to do that.

Not every bank actually controls their own capabilities because some of it's outsourced.

We -- those -- many of those banks are clients of ours in our Treasury Services business.

So we have the ability to step in and provide a series of those services to help them get access to those networks.

The real question over a period of time relative to what those capabilities mean is, will banks and others build out solutions that access the capabilities of these real-time networks so that product offerings become more attractive versus using ACH and other methods of payment today.

That's something we and other financial institutions are very focused on.

That will take -- that's not weeks or months, that'll evolve over the next couple of years, but those capabilities are better than what exists in the marketplace.

And we're -- think of us as a facilitator for the financial institutions that don't have the infrastructure or can't spend on it to do their own direct integrations.

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

First question, I'd like to ask you about, seems like the Issuer Services business seems to be flattening out.

Can you just talk about the 2 different pieces of that and whether or not you're seeing either better activity or just better new business start to come through?

Is that a turn in that?

Ken, it's Mike.

Thanks for the question.

In the corporate -- in the Corporate Trust business, Charlie sort of highlighted a little bit in his remarks, but that -- we have seen some green shoots of organic growth there in the quarter.

And as Charlie mentioned, that's a good positive trend that we're sort of hoping to build upon.

I think on the DR space, we'll see sort of how it goes.

I think there's lots of seasonality in those numbers, and lots of timing around when certain corporate actions and other activities sort of happening in that business.

We're hopeful that we'll continue to have -- manage it as best as we can, and we still have a very strong market share in that business and continue to sort of win our fair share of things that come to the market, but it can move around quite a bit quarter-to-quarter.

There's no doubt.

Listen to me, we talked last year about not winning several large deals, which I described and, I think, we described and that were very conscious on our part.

So you wind up with the lapping effects of those.

And the only thing I'd just go back and say on Corporate Trust for a second, again, we talked about this at Investor Day.

When we say we're starting to see some -- these green shoots of growth, just to be clear, this is -- I mean, there is a very focused effort in Corporate Trust to -- for us to -- which we went through with new management placed to understand why we weren't being as successful in the business as we think we could have been.

And so we made a series of changes there.

I'd say we're extremely focused on the business, and we see a very heightened focus on our coverage, on our sales efforts with our -- some of our most important partners across the globe that actually help generate that business.

And we're working on continuing to build our technology.

So again, it will -- hopefully, if we're as successful as we think we can be, it will build over time.

But it's a very conscious effort.

It's not just us watching what's going on in the marketplace and feeling good in good times and bad in bad times.

Understood.

And if I can ask a second one.

Just mix of deposits that are denominated in non-U.

S. dollars.

Can you update us on like the size of that?

And I know we're in a U.S. rate cycle, but with the balance sheet still also be rate -- positively rate sensitive, should we start to see non-U.

S. Central Banks start to raise rates?

Yes.

On the latter part of the question first, euros becoming nonnegative, I think, would be helpful.

So that would be a positive impact.

I think there is a high probability that the Bank of England raises rates shortly.

And so that will be sort of marginally positive.

But the overall mix of the balance sheet hasn't changed much with still around 70% of it still in U.S. dollars with the remainder being outside the U.S.

(Operator Instructions) And we'll take our next question with Brennan Hawken (sic) [Brennan Mc Hawken] with UBS.

Just a follow-up on that, the 70% deposits in U.S. dollar and the increase that we saw here this quarter, at least that came through on the average balance sheet.

What sort of deposit beta would you say we saw here with the last Fed hike?

And do you have any expectations for where that's going to continue to go from here?

Brennan, it's Mike.

See, as we've said a number of times over the last year or so, we would expect that betas continue to increase as rates increase, right, and sort of that's what you see happening.

It's largely happening as we expect it across the different businesses.

And again, you saw you got the full impact of a rate rise in December in those numbers and you got a little piece of one in March as well.

And so I think you can kind of read into the numbers and see what you think sort of the average beta is there, and you're probably not that far off.

Okay.

The second part of the question, I guess, implied with your lead-in that could continue to see some width from that imputed beta as well?

Sorry, say it again.

Some, what?

Sorry.

I'm saying that it seems like what you said from the lead-in from your preface that you think that betas probably could continue to see some upward pressure.

That's all, I was just clarifying that.

Yes.

As rates rise, we would expect betas to continue to increase.

Excellent.

Okay.

And then for my follow-up here.

It looks like some really nice trends in consulting expenses.

It's my recollection, but I'm not 100% sure here, that maybe some CCAR and regulatory expenses were flowing through that line.

Are we finally reaching the point where we're getting some relief on the regulatory expense front?

Does that mean that -- that would mean and imply to me at least that, that's sustainable or should be given where everything that you guys have built up from a capabilities perspective plus the environment that we're in, is that true and you think that, that's a fair conclusion to come to?

Let me take a stab, Mike, and you tell me whether you agree.

How's that?

I think the answer is predominantly, yes, but I'd just make a couple of comments on that.

I think the very significant amounts that we spent on consulting for those specific things you talked about, for the most part, what will not continue at the levels that you've seen and you see the benefits of that running through our results.

I will say, and I have got the thing like the newcomer -- relative newcomer, and I'm sure, you'll appreciate this.

There's a hugely significant amount of regulatory expense and bettered in the other lines that's just the reality of what the regulatory environment is today versus what it was years ago.

So we spent a tremendous amount on regulatory.

It's just not specifically in the consulting line and that's not going to go down for what we see at this point in time.

And we continue to spend a significant amount of money outside the U.S., specifically for GDPR and MiFID II inside Europe.

So just think about it as it's a little bit of a reallocation from consulting to us doing a bunch of the work, whether it's the headcount expense, technology expense and things like that.

Yes, and I'll just add one thing.

So as we've said a number of times to you, the decline you see in consulting, we had -- this time last year, we were still working on sort of the resolution plan, and so a big chunk of that decline was related to that activity that we're working on last year.

But Charlie is right.

There's a -- there may be a little bit of a pause in the short run, but -- in the U.S., but there's plenty of effort that is going into a number of initiatives across the globe.

That's what we're currently spending on.

That's currently in the numbers, yes.

Yes.

No.

For sure, just we got to take our victories where we can on the regulatory spent front.

Thanks.

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

One question on Investment Management.

I don't know if you had the gain on the sale that entity and then also on the performance fees, stronger-than-expected, you guys mentioned, some of the drivers.

I just want to get a sense, has anything changed in terms of the recognition by quarter that we should expect things to be different than what we've seen historically?

No, I mean, there's nothing that would change sort of the normal seasonality that you see in lines like performance fees.

The gain -- we haven't disclosed the number, but the gain on CenterSquare is embedded in the numbers.

It's not a material game changer or mover for the overall results, but it is in the number.

Okay.

And then follow-up on the Investment Services business.

If I just look at the, I guess, quarter-over-quarter or year-over-year, just the revenue growth versus the asset growth, that came in stronger and typically we are not seeing that, but it seems like under the new disclosure, that can be either activity with volatility or rate with net interest income, so just wanted to get a sense.

And then in terms of predicting that line, you guys give a lot of metrics.

I know you're not giving that -- the win metrics, but is there anything else that we should be thinking about to try to think about either forecasting that line item going forward?

Yes, I think in the Asset Servicing business, when you look at it in the earnings release, just keep in mind, what's also in there is net interest revenue.

And so net interest revenue was, as we mentioned, a significant driver of sort of the overall business results.

And I think that's true in Asset Servicing as well.

You also have the impact of the market and FX and so forth.

So just keep that in mind as you sort of look at that overall number.

In terms of metrics to look at in terms of forecasting, I don't think there is anything necessarily new to sort of add to that conversation.

The only thing I would add is, again, it was a very good quarter relative to asset values, the impacts in volatility on us and rates.

And so we were clearly beneficiaries of that.

That was a -- it was an important driver as we've said in our comments of the results.

We also had significant balance growth that we saw.

So as we look forward to next quarter, it's -- sitting here today, it's not as strong as it was, but on a year-over-year basis, still should look -- I would say we still feel good about what we're going to see.

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

It looks like the first quarter expenses came in a bit lower than you'd been pointing to even given, if anything, the currency was moving in the wrong direction.

So can you talk about what changed there as you went through the quarter?

Where you were able to eke out those expense saves that maybe you didn't have budgeted in initially?

I don't know why you say that.

I mean, exactly, I think you had a -- Let me clarify.

So at Investor Day, we said expenses will be up 4% to 5% in the quarter and they're up 4%.

So they're about right where we expected -- where we expected them to be.

So I got to more like up 3.6% and you said 2% of growth driven by foreign currency translation and then the actual foreign currency translation was 3%.

So it kind of feels like you did a little bit better than you were pointing to back then.

Just trying to understand where the extra saves or extra benefits on the expense side came from?

Yes.

There's no single like big thing driving it.

As Charlie mentioned a couple times this morning, we are very focused on looking at like the whole place and making sure that we're being as efficient and effective in sort of spending as we can.

And so little singles and doubles sort of add up over time.

And so we are focused on all of it, but there is no single thing to point to you.

And we don't obsess about a half point or a point in any given quarter.

Sure, sure, understood.

And I guess, thinking about the full year, is there anything that kind of gives you more confidence that you can do better on the expense side given what you've seen in the first quarter?

Yes.

I don't -- we're not going to give you a number for the full year, but as we've said in a bunch of different ways, we're coming in everyday focused on making sure that we're doing the best we can to keep the expense base where it needs to be, while making the investments we need to make.

Our next question comes from the line of Brian Kleinhanzl with KBW.

Just had a quick question.

One on your comments around the deposits.

Thought it was a little early in the quarter to be calling out the runoff that you're seeing.

Can you just identify whether that was going to be interest bearing, noninterest bearing or I mean, was it a significant magnitude of deposit outflow that you saw?

Well, I think what -- we were kind of calling out as what we mentioned in March as well at Investor Day is that we saw higher balances in Jan and Feb, January and February, than we thought we would see.

So now balances are sort of back down to about where we thought they would be.

And there's no single driver of that sort of -- it sort of normalized to where we expected, so.

(inaudible) interest bearing – go ahead.

I'm sorry, yes, yes, you saw both noninterest bearing and interest bearing come down.

Okay.

And then, you did have some securities sales in the quarter.

Was that just slightly repositioning the book?

Or is there something like you're seeing with rising rates, you're looking to get more shorter duration overall?

It was a very minor repositioning that we're able to do due to the adoption of a new accounting standard that allowed us to reclassify some of our HDM bonds, so very minor in scheme of the portfolio.

It is just one time in?

Yes.

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

You guys have talked about at Investor Day and today about the emphasis on technology, investing and spending.

When you look at it from a line of business standpoint, is there 1 or 2 lines that have a greater focus of this spending?

So you mean, which business?

Which?

Between Asset Servicing and Investment Management.

Correct.

Exactly.

Is there an area that you guys think that you need to put more effort and money versus another area within the organization?

It's probably skewed somewhat towards Investment Services versus Investment Management, but that's not to say that there aren't a significant amount of opportunities for us that we're focused on to use technology in the Investment Management business, whether it's Wealth Management or in the Asset Management side.

When it comes to the core, we talked about the investments that we're making in infrastructure, I would say the majority of those comments relate to the Investment Services business and the work that we're doing there.

Very good.

And then as a follow-up, I know there is a lot of moving parts with the capital, notice of proposed rulemaking that have come out recently from the Fed.

Hopefully, it will settle down.

But when you guys look longer term, there was -- it looks like a lift in the dividend payout ratio.

There used to be a soft line at 30%.

When you guys look out longer term, do you have a sense of where you think the dividend payout ratio will go relative to stock buybacks and stuff that you use for return of capital?

No, I think sitting here today, I don't think anything is different than -- I don't think we're thinking about it any differently than what we've said at Investor Day relative to the dividend.

All righty, well, thank you all very much for the time.

Take care.

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.