紐約梅隆銀行 (BK) 2019 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 2019 Earnings Conference Call hosted by BNY Mellon.

(Operator Instructions)

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

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

I will now turn the call over to Magda Palczynska, BNY Mellon's Global Head of Investor Relations.

Please go ahead.

Good morning.

Today, BNY Mellon released its results for the fourth quarter of 2019.

The earnings press release and the financial highlights presentation to accompany this call are both available on our website at bnymellon.com.

Todd Gibbons, BNY Mellon's Interim CEO, will lead the call.

Then Mike Santomassimo, our CFO, will take you through our earnings presentation.

Following Mike's prepared remarks, there will be a Q&A session.

(Operator Instructions)

Before we begin, please note 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, including those identified in the cautionary statement in the earnings press release, the financial highlights presentation and in our documents filed with the SEC, all available on our website.

Forward-looking statements made on this call speak only as of today, January 16, 2020, and will not be updated.

With that, I will hand over to Todd.

Thank you, Magda, and good morning, everyone.

I'll briefly highlight the fourth quarter and the full year financial results and then focus most of my comments highlighting the progress we made in 2019 as well as outlining our priorities for 2020.

Mike will then go through the financials in much more detail.

For the fourth quarter, we reported earnings of $1.4 billion and earnings per share of $1.52.

This includes a positive impact of $0.50 per share from notable items, which Mike will discuss.

For the full year, on an adjusted basis, EPS of $4.02 on revenues of $15.7 billion.

Full year expenses were down slightly as we identified and implemented efficiencies to more than offset the increase in technology investments.

What that means is we actually delivered hundreds of millions of dollars of real productivity, and we had solid operating margins of approximately 32%.

We generated over $5 billion of capital in 2019, returning more than 100% of earnings to shareholders through dividends and buybacks, while at the same time maintaining a strong capital position, investing for growth and achieving a solid return on tangible common equity of greater than 20%.

This year was not without its challenges, however, and notably, those included interest rate cuts in the U.S. and while some equity markets hit new highs, client activity levels were constrained in many of our business.

Despite this, fees in Investment Services were resilient and we saw some modest organic revenue growth.

We also delivered strong operating margins and capital returns for our shareholders.

We built a solid foundation in 2019, including substantial investment in technology and talent, while operations executed a significant number of strategic programs in 2019 that will drive efficiency, reduce risk and enhance the client experience.

Looking at our progress across our business portfolio, let's start with Asset Servicing.

We're taking action to ensure we consistently provide excellent service quality.

The pipeline is growing, and we announced important new wins in 2019 across different geographies in both Asset Owner and Asset Manager segments.

We created some exciting partnerships with leading front-office system providers, namely Aladdin, Bloomberg and, most recently, SimCorp, and these will provide our clients with open architecture that gives them choice and flexibility.

While still early, these partnerships are strengthening our offering and are helping us win new business.

We enhanced our capabilities in alternatives and ETFs, which have strong growth prospects, and we're expanding the range of data and analytical applications available to our clients where our strong position in data management, accounting, performance and distribution analytics position us to deepen our relationships.

We've made good progress in monitoring and measuring client relationships and improving the quality of work and services we provide day in and day out for our clients.

This is already driving improved client satisfaction and lower attrition rates.

In Pershing, we are seeing fee growth coming through and are excited about the future for this business.

The industry is evolving, and we are confident that our market leadership and strategy will position us well going forward.

We ended the year with the strongest pipeline in many years with both institutional broker-dealers and in the RIA space.

We continue to onboard these new clients each quarter and to build the future pipeline.

Across the industry, consolidation is helping make Pershing's open architecture increasingly attractive to our clients.

We're accelerating investments in the advisory segment, strengthening market leadership in the Broker-Dealer segment and continuing the development of front-end technology, including integration with third-party providers to deliver state-of-the-art experiences and analytics to advisers and their investors.

All of these are making us an even better partner to our clients.

In Clearance and Collateral Management, where we are the clear leader, we delivered strong financial performance in 2019.

We saw organic fee growth over the course of the year driven by existing clients and new business as well as clients onboarded in 2018 who increased their business with us.

We see continued growth opportunity in this business from structural and regulatory changes, the provision of services to bilateral repos and from modernizing our platform to give our clients the ability to seamlessly move their collateral globally.

We're enhancing our platform to allow clients to have access to more real-time data and self-service tools.

We also continue to automate manual processes to reduce risk and improve operational efficiencies, and we are improving the client experience by introducing new digitally enhanced capabilities.

In Issuer Services, we're building out capabilities, which is broadening our relationships.

We gained market share in Corporate Trust and drove new business across a number of our key products, such as structured and muni debt as well as insurance-linked securities.

Our ongoing rollout of the new loan servicing platform is enabling us to be more responsive to our clients and deliver them more functionality.

We're investing in automating capabilities and digitizing workflow tools to offer clients simplified access to services and data to help them minimize risk, increase control and gain efficiency.

Our Treasury Service business has scale and reputation for excellent service and relationship coverage, which are the result of the investments we've made in talent and our product offering.

With over $2 trillion of institutional payments per day, we are very meaningful partners to our clients.

In 2019, we successfully refocused on higher-margin businesses such as liquidity and payments.

Our deposit initiative grew high-quality, stable balances by around 18% in 2019.

Our technology investments in Treasury Services have been centered on advancements in real-time solutions and operational efficiency to increase straight-through processing rates, both of which further enhance the client experience.

In Asset Management, the financial results were negatively impacted by outflows over the last year.

Performance, however, has been solid across many of the larger strategies, including equities and multiasset classes.

That, combined with the investment in new products across the platform, is helping to improve the pipeline.

We have seen improved performance in Newton, Walter Scott and Alcentra, and we continue to believe that there is an important role for active strategies, including LDI going forward.

Our Wealth Management business will benefit over the long term from our increased investments as well as strong leadership.

We are expanding our sales force, strengthening our banking and investment product set and delivering digital tools to benefit both our advisers and clients and create a leading experience.

So overarching all of our businesses is our consistent investment in technology.

Our technology priorities center on improving quality, developing innovative products and services and enhancing efficiency for our clients which, in turn, creates cost savings for us as well as for them.

We are transforming our infrastructure and expanding our data and analytics solutions and the use of APIs to continue to create an open platform.

We're deploying artificial intelligence and machine learning to simplify processes and proactively deliver additional insights to clients, such as improved analytics to increase distribution of their own products.

We're embracing partnerships.

In November, for example, we hosted a well-received inaugural Fintech Connect conference.

We have recently announced new collaborations with a number of fintechs to expand our capabilities, including one this week that will enable us to deliver a new suite of oversight and contingent net asset value calculation solutions for clients.

This is just the beginning.

In operations, we have numerous initiatives in place across the businesses that are already yielding efficiencies that we are able to reinvest to support new business initiatives and further efficiency and automation efforts.

For example, in corporate action elections, increased automation has significantly reduced the number of transactions that we process manually while offering our clients best-in-class cutoff times.

In the payments space, we continue to enhance our straight-through processing rate.

We reached a record 97% in the month of December.

That's up from 94% a year ago.

And in fund accounting, we've deployed self-service capabilities for reporting and we've automated over 2,000 client reports; one of the recently announced partnerships enabling us to launch an AI-based reconciliation and data control solution aimed at better serving our clients' complex data needs.

Other partnerships are helping us do things such as reimagine the billing process and employ AI to resolve client inquiries faster.

Across the company, we've been disciplined about the investments we're making and are focused on driving efficiency in our technology spend.

As an example, we're simplifying our infrastructure, and we're reducing the number of applications, which are now down 10% over the past 18 months or so.

In the next 12 months, it will be reduced by another 10% plus, so a total reduction of 20% plus in applications over a 2- to 3-year period.

So to summarize 2019, while we have more work to do, we're on the right path.

We're beginning to see the benefits of the investments made over recent years, and we'll continue to invest.

And we've made progress on a host of initiatives while maintaining strong operating margins and capital returns.

As we look to 2020, our priorities are unchanged.

They are centered on: one, driving sustainable revenue growth through a strong performance culture focused on improving service quality as well as fostering faster innovation; two, improving every aspect that we can within our operations.

Maintaining our investment in technology is key to this.

Our overall technology spend for 2020 is expected to exceed the $3 billion we spent in 2019.

Three, we're continuing to drive efficiency throughout the organization through automation as well as good expense discipline; and four, ensuring we continue to deliver strong capital returns to shareholders.

In closing, we are confident in our plans and our ability to execute on them while always looking for opportunities to improve.

We have a great team and a great foundation, and we're excited about the future prospects for the firm.

With that, I'll turn it over to Mike to review the financial results in more detail.

Thanks, Todd, and good morning, everyone.

Let me run through the details of the results for the quarter.

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

Beginning on Page 4 of the financial highlights document.

In the final quarter of 2019, net earnings of $1.4 billion and earnings per share of $1.52 in both the current and prior year quarters included a number of notable items.

The notable items in the fourth quarter of 2018 were costs related to severance, the relocation of our corporate headquarters, and litigation expenses, partially offset by some tax adjustments, reducing our earnings by $0.16 per share.

And in the fourth quarter of 2019, we benefited by $0.50 per share from the gain on the sale of an equity investment, partially offset by severance, net of security losses and litigation expenses.

Total revenue was $4.8 billion.

Fee revenue increased 26%, with nearly all of that from the gain on the sale of the equity investment.

Underlying that, Investment Services fees were up, foreign exchange and other trading was down, and most other line items were relatively flat.

Net interest revenue declined 8% to $815 million.

Expenses were down slightly, but excluding the notable items were up 2%, with the increase driven by technology.

We generated $1.4 billion in net income applicable to common shareholders or $934 million excluding the notable items.

We continue to have a strong return on tangible common equity and maintain a solid pretax margin.

In terms of shareholder capital returns, we repurchased approximately 22 million shares for just over $1 billion and paid $286 million in dividends in the fourth quarter.

We have reduced the number of shares outstanding by a little over 6% since the beginning of 2019.

For the full year of 2019, we returned $4.4 billion to common shareholders, which is over 100% of earnings, through $3.3 billion of share repurchases and approximately $1.1 billion in dividends.

Moving now to capital and liquidity on Page 6. Our capital and liquidity ratios remained strong.

All of our key ratios were strengthened since the third quarter.

Common Equity Tier 1 capital totaled $18.5 billion at the end of the year, and our CET1 ratio was 11.5% under the advanced approach.

Our average LCR in the fourth quarter was 120%, and our SLR was 6.1%.

Including the impact of the recent change to the rule, our SLR would have been approximately 120 basis points higher.

Turning to Page 7. My comments on the balance sheet will highlight the sequential changes.

Net interest revenue was $815 million, up almost 2% versus the lease-adjusted net interest revenue in the third quarter.

As we have mentioned previously, we have been focused on growing and optimizing our deposit base for the last 18 months or so.

For example, we've been working with Wealth Management clients to convert their cash from off-balance-sheet investments to on-balance-sheet deposits.

Our sales teams have been focused on attracting additional client deposits in other businesses, and we've been targeting escrow and other opportunities while being disciplined about pricing.

All of these initiatives and some of the macro factors contributed to the result.

The activity that drove the outperformance versus our expectations came in the last few weeks of the year and some of it was episodic.

Now as you look at the drivers, both noninterest-bearing and interest-bearing deposits increased across our businesses.

Some of the noninterest-bearing and interest-bearing deposits related to some targeted activity, including episodic corporate actions and other activities, which we do not expect to repeat in Q1.

Margin and nonmargin loans in our securities portfolio balance increased modestly.

The loan balances were driven by increased client demand.

The yield on interest-earning assets continued to decline as expected due to the decline in short-term rates as the Fed cut rates at the end of the third quarter and again in October.

The increase in intermediate and long-term interest rates was helpful, but the overall yield on the securities portfolio loans and other interest-earning assets declined as short-term rates had a bigger impact sequentially.

We also made minor adjustments to our securities portfolio that should modestly enhance the yield going forward.

The reduction in asset yields was partially offset by lower deposit rates and other funding costs.

Lastly, at the end of December, we did benefit modestly from higher spreads and activity levels in our cleared repo business and from the money we deployed in reverse repo at year-end.

Although repo rates over year-end ultimately normalized, we were able to lock in some trades and reverse repos of between 3% and 4%.

We don't expect year-end pricing to repeat again in Q1.

All of this activity resulted in our net interest margin remaining flat at 109 basis points versus the lease-adjusted NIM in the third quarter.

As we've said in the past, we're focused on driving higher net interest revenue, and we will continue to take advantage of low-risk opportunities even if they're not NIM accretive.

Page 8 gives some more detail about the drivers of the net interest revenue increase versus the third quarter.

You can see how the increased client deposit volumes, higher interest-earning assets and lower funding costs benefited our net interest revenue.

This more than offset the decline in interest-earning asset yields.

Page 9 details our expenses.

On a consolidated basis, expenses of $3 billion were down slightly.

The decrease is mostly due to the impact of expenses associated with the relocation of our headquarters in the fourth quarter of 2018 and lower litigation.

And excluding notable items, expenses were up 2% primarily reflecting the continued investments in technology.

Turning to Page 10.

Total Investment Services revenue was down 2%.

Assets under custody and/or administration increased 12% year-over-year to $37.1 trillion primarily reflecting higher market values and client inflows.

Although the higher market levels were a bigger driver, we did see good organic AUC/A growth throughout the course of the year.

Within Asset Servicing, revenue was down 3% to $1.4 billion primarily reflecting lower net interest revenue and volatility impacting foreign exchange revenue, partially offset by the impact of higher equity markets.

Asset Servicing fees in this business were up slightly.

Foreign exchange and other trading revenue was down 7% due to lower foreign exchange volatility and volumes.

The pipeline continues to remain healthy.

Dialogue with clients remains active, and we're not seeing an acceleration in pricing pressure.

In Pershing, total revenue was up 2% to $570 million.

Clearing fees were up 6%, reflecting growth in client assets and accounts for new business onboarded and from existing clients, which was partially offset by lower net interest revenue.

Issuer Services was down 6% to $415 million on lower Depositary Receipts revenue, which was partially offset by higher client activity in Corporate Trust.

The decline in Depositary Receipts revenue was due to the timing of fees and cross-border settlement activity as well as lower net interest revenue.

Treasury Services revenue was flat at $329 million as higher client activity and payment fees were offset by lower net interest revenue.

Fees were up 6%.

Sequentially, Treasury Services revenue was up 5%, driven by higher net interest revenue.

Clearance and Collateral Management revenue was up 1% to $280 million, reflecting growth in collateral management and clearance volumes, which were mostly offset by lower net interest revenue.

Average tri-party collateral management balances were up 12%.

Page 11 summarizes the key drivers that affected the year-over-year revenue comparisons for each of our Investment Services business.

Now turning to Page 12 for Investment Management.

Total Investment Management revenue was up 1%.

Asset Management revenue was up 4% year-over-year to $688 million primarily reflecting higher market values and the impact of hedging activities, partially offset by the cumulative AUM outflows since the fourth quarter of 2018.

Performance fees of $48 million were down from the fourth quarter of 2018, which was one of our stronger quarters in a while.

We had outflows of $13 billion in the quarter, and overall assets under management of $1.9 trillion were up 11% year-over-year due to higher markets and the favorable impact of the weaker U.S. dollar, partially offset by net outflows.

The sequential market impact is negative due to lower U.K. fixed income market values, which more than offset the impact of the increased equity market values on managed assets.

Wealth Management revenue is down 5% year-over-year to $287 million primarily reflecting lower interest revenue, partially offset by slightly higher fees that benefited from higher market values, and client assets grew 11% year-on-year.

Turning to our Other segment on Page 13.

Total revenue increased, reflecting the previously referenced gain on sale of the equity investment, partially offset by the net securities losses that were due to a small portfolio rebalancing.

Now before we open it to questions, I'll spend just a few minutes on how we're thinking about the first quarter in 2020.

As I mentioned earlier, net interest rate in the fourth quarter was better than we expected, in part due to some episodic balances.

So at this point in the quarter, both interest-bearing and noninterest-bearing deposit volumes are lower than the elevated levels in December.

We expect that the yields on our securities portfolio will continue to grind down with lower reinvestment yields, and therefore, we expect net interest revenue to be down a little less than 5% sequentially in the first quarter.

We expect that net interest revenue would stabilize later in the year if the forward curves remain stable and steepen a little, the mix of deposits don't change significantly and as the impact of lower rates on the balance sheet become more fully incorporated into the results.

And just a reminder that approximately 30% of the securities portfolio reprices each quarter.

We will continue to actively focus on growing deposits, optimizing the mix between on- and off-balance-sheet offerings and being disciplined about pricing.

The Fed actions to increase excess reserves should be helpful as they've been historically correlated to the level of our deposits.

Just keep in mind that the relationship may not hold in the short run or in any given quarter.

We would expect that investment and other income would be between $25 million to $35 million per quarter for the year.

With regard to expenses, Todd spoke about the importance of consistently investing in technology.

We expect that the level of technology investment will be up from 2019.

We can calibrate the pace of that investment if we need to.

This will lead our overall expenses for the full year of 2020 to increase by up to 2% year-on-year excluding the notable items.

Included is approximately 50 basis point impact from accounting related to higher pension expense.

Now keep in mind that the charge we took in the fourth quarter for severance reflects the actions that will take place over the year so we won't see the full run rate impact until 2021.

And note that in the first quarter, staff expenses will be impacted by the acceleration of long-term incentive compensation expense for the retirement-eligible employees, the impact of which will be similar to last year and will affect sequential expense growth.

At this point, we currently expect the full year 2020 effective tax rate will be approximately 21%.

And lastly, on the regulatory front, we are quickly entering this year's CCAR process and are awaiting next steps in the capital reform proposals.

We continue to be encouraged by the direction of the proposals being discussed, but we'll all see the final outcome and impact when they are complete.

With that, operator, can you please open up the lines for questions?

(Operator Instructions) Our first question comes from the line of Brian Bedell with Deutsche Bank.

Great.

Just -- maybe just back on the expense real quick.

If you -- I didn't see it in the press release, the bifurcation between severance and litigation in the fourth quarter.

And then as we think about the expense trajectory into 2020 and even '21, can you just talk about the investments in technology and how you expect that to reduce the structural cost base over the next couple of years?

You want to take...

Yes.

Brian, it's Mike.

So on the first piece, we didn't disclose the exact number and the split between the 2. I think you can get a pretty good sense of the magnitude of the severance by looking at the staff expense and the difference versus the third quarter.

So that will probably give you a good sense of the magnitude there.

The bigger piece by far was severance in the number.

As you sort of think about overall expenses, as both Todd and I mentioned, we would expect to invest even more this year than we did in 2019.

And really, it's across a range of items, both continuing to build out our -- the infrastructure that is important for operating our businesses.

We're building new capabilities, and you're seeing some of those get announced and released even over the last couple of weeks.

And then there's a large chunk that's going into sort of the efficiency agenda on the cost side, as you've sort of suggested there.

And I think working with Lester Owens, our Head of Operations, we've got a very long list of those programs that we're just clicking down the list and executing.

And as you can imagine, the benefits of those continue to come in the P&L over a period of time.

So we'll get some of them in 2020, and we'll get some of them as we sort of exit '20 into '21.

And I'll just sort of reinforce what Todd said in his remarks.

You can see the benefits of those investments and efficiency agenda coming through the P&L already, as we've sort of increased the technology spend significantly in '19 and overall expenses are down, and that's a result of that focus.

Okay.

That's helpful.

And then on clearing, just on the actual clearing service fees of $421 million, just given the way the markets have moved in DARTS and the online brokerage industry at least have been pretty strong, if you want to just -- I would have expected that line to be a little bit stronger in the fourth quarter on a sequential basis, so if there's anything that you can call out what maybe depressed that?

And then maybe longer term, you talked about within Pershing and the RIA strategy.

Maybe what are your expectations of potentially picking up market share given the industry consolidation that's upon us here?

Look, I'll take some of it.

In terms of the -- yes, why don't I take the second piece?

In terms of the industry consolidation and how we kind of look at that, I mean we're a little different because Pershing is more B2B and we serve broker-dealers and corporate IRAs.

And we've also kind of differentiated ourselves because we provide a choice, whether that's related to the open investment platform that we've got or the ability to integrate best-in-class kind of front-office system.

So our clients have the choice as far as that goes, and I think that will, in the long term, be the preference.

Right now, the desire for choice seems to make it more of an opportunity.

What I mean by that is just the consolidation probably, as we look at it, makes it more of an opportunity.

There's a lot of interest in alternative providers, and that just puts us in a better position.

As to the revenue growth, I think we're seeing some pretty decent positives there as we have won some meaningful new business that we are implementing.

Mike, I don't know if you have any...

Yes.

And I would just -- yes, Brian, on our revenue stream, we're not a commission-based revenue stream.

And so most of the revenue that we see come through the clearing services fee line is not based on the number of transactions that are getting executed.

It's actually a very small piece of the puzzle there.

So you won't see the same correlation between transaction activity and our revenue stream as you might with some of the online brokers.

But we've got a pretty strong pipeline there.

We continue to win new business.

We are differentiated on the institutional side with some of our capabilities.

And we're investing on the adviser side, both in the sales as well as -- the sales team, the branding as well as the technology that we're deploying.

So we feel pretty good about the business.

Our next question comes from the line of Brennan Hawken with UBS.

I just wanted to ask a couple, first on expenses.

You guys guided to an expense growth of 2% or less.

So is the expectation that you're going to be able to deliver operating leverage and, therefore, you expect there to be a revenue growth picture that's going to be at least 2%, maybe a little greater?

And can you help us understand why there's such a big delay on the severance benefit?

Yes.

Thanks, Brennan.

I'll take the start of that, and then Mike can provide a little more color.

In terms of the environment, delivering positive operating leverage is really going to be driven by revenue mix as much as anything right now as we continue to make investments in the technology that we think will have longer-term benefits to us.

So I think it would be -- it's certainly not impossible but challenged in the very near term.

I don't know, Mike if you had...

Yes.

Look -- and I do think though, Brennan, once you sort of get through the NIR stabilization, we feel very confident still sort of in sort of the model where a little bit of revenue growth drives a significant amount of earnings growth.

And so we think that's still -- we feel very confident that that still holds.

And once NIR stabilized, which, as I mentioned, we think is -- under the assumptions I sort of gave you, we think that happens later this year, then you should start to see some of that come back into the picture.

Great.

That's fair.

And on that point, Mike, there were some encouraging signs here on the noninterest-bearing deposits.

Can you talk a little bit, give us a little more color on trends there in that line this quarter?

And how sustainable should we -- I know you -- I think you said that they're down from December levels, which is probably pretty seasonally typical, but like with the interest rates coming down in the market, should -- is that -- are those trends now like more durable, some stability there and maybe even some growth?

And do you have some deposit efforts specifically intended to help support growth in that line as well?

Yes.

Look, I think I'll start on the last piece and sort of try to make sure I hit all your points.

But we've been -- as I said in my script, we've been sort of focused on this for a while now, and that includes going after opportunities where there's noninterest-bearing deposits.

And part of the episodic activity that we saw in the fourth quarter was very targeted activity that we go after related to escrow, as an example, where there's some significant sort of transactions there.

It's hard to predict when they're going to come and how they're going to come, but it's not -- but it's an intentional act on our part to go out and target those opportunities.

As you sort of think about the path forward, I think the macro environment certainly should be helpful, and we're encouraged by sort of the level of dialogue and the activity we're seeing.

And we'll have to let it play out a little bit longer to sort of call a sustainable trend, I think.

Yes.

You guys have picked up on the correlation to the Fed's balance sheet and the impact that it's likely to have on us.

So that could be somewhat of a positive.

And then the rest of it is going to be also rate-driven.

So if there's a change in the rate environment, it would -- it could potentially move in that category as well.

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

Todd, at the beginning you highlighted a variety of areas that should be able to deliver growth.

I wondered if you could give us a sense as to what is the most important 1 or 2 areas that you're looking for to deliver growth this year?

And I'm asking the question in part to understand the context for the investment spend and where it's most critical for you.

Okay.

Well, I think the investment spend is kind of coming across the board.

So we're spending -- Mike talked a little bit about just building stronger and stronger infrastructure for resiliency which just provides an increase in the quality of our services.

We are investing in integrating third-party capabilities, which I think is a bit of a differentiator.

We are investing in improving operations, and we're starting to see the positive feedback from that in the scorecards that our clients keep on us.

The most important thing is to retain business, and by providing great service and covering -- and increasingly better capabilities around that service, it's difficult for clients to leave.

In terms of initiatives that might drive future revenues, there are really kind of 3 areas -- 3 or 4 areas where I'm most focused.

One is the things that we've talked about in the Clearing and Collateral Management.

So we are building an interoperable tri-party system, which we think will make our clients much more effective in managing their collateral globally.

And as a result, we can pick up some of the global market share and also provide some of those services to what have traditionally been in the bilat space.

That's a -- that's probably another year or 2 before I think that really -- that kicks in, but we're starting to see some of the benefits from that now.

One of our other focus areas is around data and analytics.

And I think this is going to be an increasingly competitive advantage for us.

As we build -- we currently with the -- under Eagle have approximately $24 trillion of assets under management.

Eagle is the old brand name of our data and analytics capability.

As we've built on that platform what we call a data vault, we think we've got an exciting capability where we will see growth this year and will provide the ability to do -- for our clients to do deep analysis around the structured data that's on our platform.

We're investing in our Wealth Management platform.

That's more long term as well.

And we've already talked a little bit about the investments that we're making at Pershing.

So I'd say those 4 are -- in terms of business growth are where my key focus is.

Yes.

No, I think I'd echo what Todd said on the bigger priorities.

But I think the good part is that each of the -- we really do feel that each of the businesses still have some opportunity to grow.

Some of them require bigger investment, some of them require smaller investment.

And so I think we're focused really on each of them to make sure we get -- we take advantage of those opportunities.

Okay.

And then Mike, for you specifically, or Todd can chime in too, but on the capital, you highlighted that the SLR under the new will be up I think to what, 7.3% or 7.2% or something like that.

I know I've asked on this call many times about pref and what your intentions are there.

Now that we have the final rule set in, maybe you could speak to what opportunities you have to become a little bit more capital-efficient there.

And I'm not sure if it has to wait until the CCAR given where the SLR came in.

Look, I think that's a large, Betsy, sort of one piece of the puzzle in terms of the rules that are sort of being discussed and contemplated.

And so I think we really do need to look at all of the rules that are still a work in process around stress capital buffer and all the related pieces of it before we have a complete picture on how we're going to optimize the capital stack.

And is it better to...

It's too early.

Yes.

And is it better to do a call of the pref?

Or is it better to utilize the full capital stack you have in increasing the balance sheet size, for example, for sponsored repo?

Well, for sponsored repo, that doesn't have any impact on the size of our balance sheet.

And so to take advantage of opportunities like that, we don't need to -- we don't need capital to do that.

So if you can build on...

So I think -- look, I think we're going to look at all of the options to figure out what our opportunity is on the revenue side to sort of grow and keep the balance sheet where it is or grow the balance sheet, and we're going to look at sort of our opportunities given sort of the new capital rules.

And I think you'll hear more from us on that as CCAR and stress capital stuff comes into focus hopefully over the next few months.

Yes.

It's a little bit challenging because we just don't know exactly what the rules are going to be.

We hear lots of different things and we obviously follow all the discussions, but at this point, we just don't have enough precision to say what the actual impact is going to be to us.

Okay.

All right.

Do you think you're going to get that at CCAR rule set or you have to wait for...

Who knows?

I think that's the honest answer.

I think the -- I think we're all going to find out when the rules come out on CCAR how much of it's clear.

And then we'll see as they finalize the notice of rule -- the NPRs that they've got out there, so.

They've got a lot to get done in a short period of time.

Yes.

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

So just a couple of follow-ups.

So one, I guess on expenses, Mike, maybe just to clarify.

The base of what you guys are talking about 2020 expense growth is about $10.8 billion, kind of the core number that you reported in 2019?

Yes.

Yes, it's what's in the press release on Page 3.

Yes.

And then when you talk about the tech spend, you guys had $3 billion or so in 2019.

I just want to make sure -- is that all running through the income statement?

And again, it sounded like that was a 10% growth in 2019.

How much of a growth rate do you guys expect to see there for 2020?

Basically, just kind of trying to get a flavor for how much you need to reach in your -- in savings to keep the overall expenses below the 2% range.

Yes.

I think most of it's running through the P&L already, Alex, so -- for 2019.

So most of it's going through the P&L.

So I think we're not -- I don't think we've given you the exact percentage increase that's going to go up, but we're continuing to deliver consistent sort of efficiency gains as we go.

And as you and I and others have sort of talked about over time, like we still think there's a long road ahead of efficiencies that we can generate through these investments we're making.

So we feel pretty confident that we're really going to be able to get at those over the next couple of years.

Right.

And my second question around the Asset Management business.

So when I look at the flow dynamics, fixed income, LDI was a little light this quarter again, despite what has been a really strong trend in the industry.

And then cash management also I think had some outflows.

Can you provide a little bit of color kind of what's been driving that?

And then the market performance, also a sizably negative number, which obviously is surprising given what the markets had done.

And so maybe kind of help flesh out what's driven both the flows and the market delta this quarter.

Yes.

Look, I think on LDI, it isn't a -- it's not going to be a straight line sort of up as you sort of think about flows in that business.

And there's been lots happening in sort of the U.K. pension market that sort of made people sort of make sure they were sort of thinking about sort of how to manage their liabilities in the right way.

And we feel really good still about the pipeline and the unfunded commitments that we've got in that business in the U.K. Plus they've been continuing to invest in bringing their capabilities outside of that -- of their core market.

So I think we still feel good about the LDI space.

We feel good about what they're doing.

Performance has been good.

And so we don't really have any concerns in the LDI space really at all.

And as you know, just more broadly about our Asset Management business, it's largely an institutional set of clients.

And so you're going to have some chunky, chunky flows from time to time for various reasons as you sort of look at any given quarter.

And so there's nothing underneath the fixed income side that I would sort of point to that is a core issue or a core trend that we're concerned about.

Well then, you also had a question around market.

And I think one of the things to keep in mind, we have a fairly substantial exposure to the U.K., where there were -- I mean the currency impacts and the equity impacts are a little bit different than they would have been domestically.

So that's one thing I would throw in there.

In terms of the cash, I would say that's a little disappointing, and I think we need to work to do a little better there.

(Operator Instructions) We'll next go to the line of Brian Kleinhanzl with KBW.

Quick question on the deposit optimization that you talked about.

Just trying to get a sense of how far along you are in that process.

It sounds like you did that over the course of 2019.

Or is it like there's still a long runway to deposit optimization from here?

Look, I think Brian, it's a -- we're continuing to optimize.

So I think the -- this is a dialogue that is a very granular conversation with clients, and it's a client-by-client sort of dialogue.

And so I think we've made some progress, but we've got more to go to continue to make sure that we're optimizing sort of the pricing and footprint we've got there, so...

Okay.

And then separately, is there any way to kind of give an update on how the Aladdin offering is moving forward?

Still some concern across the industry whether or not proprietary versus third-party solutions is the way it's moving.

Do you have any update there?

Sure.

We've been building on a number of partnerships over the past 6 to 9 months, and I'd say they're really coming in 2 flavors.

The first is where -- one of the ones that you're referring to, is where we've connected with some of the leading order management systems, Aladdin, Bloomberg and SimCorp.

Many of our mutual clients already have signed up, and many are in the process of signing up.

So we've had a very high success rate where we've got common clients.

The other thing that is doing for us is it's opening doors for other conversations where we see our clients able to gain efficiencies because of this.

So I think it's got -- right now, the benefits that we're seeing is it's initiating discussions, opening doors and giving us more opportunities to bid on new business.

And secondly, it's strengthening the relationships with the businesses that we've already got.

Because it is integrated, it is single sign-on, the client is able to look down into their custody activity near real time.

It's the -- I think there's the real benefits to our clients that are paying off.

And I mentioned that there were really -- as we think through the partnerships, they're really coming in 2 flavors.

The other type is everything that we are doing with fintechs.

And so we've announced quite a few.

Just this week, we announced one, where we're working with the fintechs to provide independent alternative NAVs for funds.

So this provides both an oversight function as well as -- and it enhances the control.

And in addition, it serves as a contingency if there were a problem in construction of the NAV.

So we've partnered with them.

So some of our clients have actually looked to use them, but they found the implementation would have been too difficult.

And so by partnering with them, implementing, we gain scale from doing that as well as providing it as a service rather than just as a piece of software.

So we're pretty excited.

That's already attracted quite a bit of attention this week.

Our next question comes from the line of Robert Wildhack with Autonomous Research.

Just wanted to ask a question on the balance sheet and the impact of the Fed injecting reserves into the system.

Are you seeing significant impacts there?

And either way, how long until we can kind of see that help the numbers?

Let me take that piece.

It's so difficult, Robert, for us to be able to identify any single particular incident on a day-to-day basis or even -- but if you just look back at historical trends and you look at the balance sheet and -- you look at the Fed's balance sheet and you look at our balance sheet related to deposits, you'll see that there is a correlation.

But depicting why that took place, whether it was a money market fund that decided to leave a little extra cash in its account or anything like that is very, very hard to determine.

We're still out of it.

Is there anything to add to that, Mike?

No.

And our next question comes from the line of Vivek Juneja with JPMorgan Chase.

Which businesses need the most tech catch-up?

If you can aim at -- talking from a business standpoint.

I know you're spending in a lot of different areas, a lot of businesses, but where do you think you need to do so more, either from a competitive standpoint or a business need?

Can you give some sense of -- because you've got obviously a lot of businesses.

Yes.

I actually think we are in pretty good shape.

What we're trying to do, Vivek, is kind of get ahead of the game.

And if you think about some of the things that we're going to -- I just walked through a whole list of partnerships and kind of differentiated capabilities and this willingness to integrate with best in class, we're not always going to be able to deliver the best application.

And we want to provide our clients flexibility.

So that holds when we look at Pershing.

It holds when we look at Asset Servicing.

We've made some very good investments in our Corporate Trust business, and we're able -- we're starting to gain back market share.

We had lost a little market share over the years.

We continue -- I like where we are in Wealth Management.

I think we can continue to do better there.

So I think we're -- I think this is a matter of trying to break out, not cash out.

Yes.

Is there room to improve the efficiency of tech spend?

What we hear from others is they're trying to flatten it, shift the mix of what they're spending on.

We're hearing that from competitors and peers of yours.

Is there room for you to do that?

And if not, when can we start to see that flatten out?

Yes.

Vivek, it's Mike.

I think Todd highlighted a little bit of that in his scripts, where we are as focused about driving efficiency in our technology spend as we are anywhere else in the company.

And we've reduced the number of apps by 10%.

There's another 10% coming, so it's over a 20% reduction of our apps.

And as we sort of make these investments in the underlying infrastructure and application, it makes the next set of investments we want to make that much more efficient, cheaper, faster.

And so it's something you're already seeing in the spend that we're making.

So do you have a range or something on the operating margin where you think you can get to with all of this tech spend as we look out a year or 2?

Yes.

Look, we haven't given you a view on go-forward operating margins, Vivek.

But as I said earlier, I think as we sort of get through to -- through the short term and medium term on net interest revenue, we do feel confident that the model still holds, where we'll be able to deliver for a little bit of revenue growth a pretty significant amount of earnings growth.

And I think that implies expansion in operating margin at that point.

So I think I would just sort of model it that way.

I think the guide we gave you a while ago now, at Investor Day a couple of years ago is probably a good way to think about it still.

One last one for you, Mike.

Your reverse repo yields fell pretty sharply, the one that -- the way you have it on the balance sheet, the lowest level we've seen in 5 quarters.

How should we think about that?

Is that -- (inaudible) that drop?

Yes.

The Fed reduced rates and the September -- the peak in reverse repo spread in September didn't happen again, those 2 drivers.

I know you like to do the arithmetic there, Vivek.

But we look at that -- since it's no way but down, the size matters, the spread matters and then the overall rate matters.

But ultimately, we're generating a spread that's been (inaudible) weighted down, and that spread has been reasonably consistent.

But in the third quarter, we saw the spike with an unusual activity in the repo market.

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

You mentioned retiring apps.

You've retired 10%, 10% more to go.

What's the total number of apps that you have?

And I don't think this is completely related, but what percent of apps on desktops are web-based versus having old versions of code support them?

I'm going to turn this one over to Mike, Mike.

But in terms of the -- we don't disclose the total number of apps.

I don't believe we've disclosed total number of apps that we've got, but we've obviously got a pretty careful inventory of those apps.

And part of what we're doing in our resiliency build-out in infrastructure investment is also making ourselves more efficient by really the sunsetting of some of those applications.

And so I'm pleased that we're down 10%, probably closer to 12% now, and we've got another 10% or so that we'd probably take out over the course of the next 12 to 18 months.

So I can't really get into the specifics of where those apps are.

In terms of web-based--.

Yes.

I'm not -- I think that I'm not sure that's the right way to think about it.

Not all modern apps are web-based apps.

But I think you should assume that many of the tools that our folks are using are continued -- are always getting better and we're always investing in those.

And that gets -- we have -- every weekend of the year, there's something that's being rolled out across our product suite to either internal folks or external folks, and that improves the way they work, so I think that...

Yes.

In terms of productivity tools, we are rolling out the most -- the Office -- I mean the cloud version as Microsoft Office 365.

And one of the things that we're also doing is our operations -- we get over 1 million client e-mail inquiries each year.

And we are developing AI around making that much more productive and responsive in responding to it.

So we're continuing to invest a lot in productivity, and the infrastructure build that we have -- that we're making, I think, will help us do that as well.

And then just one follow-up.

So just generally speaking, you said you're spending more in technology.

What was that, $3 billion going up to what number?

I'm not sure if you said that, if you are willing to do so.

And where -- when do you think that turns?

Like if you -- if we think of it going down the J-curve, when do you come up the other side with these investments?

Is that like a year or 3 years or 5 years?

Let me make one comment and Mike might get you more of the details.

As we've really picked up the tech spend over the past 3 years, I would say the rate has come down slightly, although the total amount continues to go up because it's on a little bit of a bigger base.

But the rate of growth has probably come down.

I don't know, Mike, if you want to simulate the J-curve is, meaning think through how quickly we amortize infrastructure...

Yes, I mean look, Mike, I think the way we think about the tech spend is it's not a we're shooting to spend a certain number.

What we're doing each year is looking at how much can we actually execute, what are the business cases, how do we think about like the return we're going to get on them and, most importantly, like can we successfully sort of execute it and do we have people in place to do it?

And I think that's driving -- and that's going to be the constraint that we've got in most years, is making sure that we can execute it well.

And I think right now, we feel it's important to continue to make those investments because that's what's going to differentiate us going forward.

And keeping in mind that we've got to deliver bottom line -- on the bottom line as well, and so we're trying to find the balance there to make sure that we're doing the right thing by all of our stakeholders.

And so that's the way we sort of go about how much we're going to spend in any given year.

Yes.

So the -- so it's a really good plan.

So as we look out to next year, I don't want to predict this.

If there's not an ROI on the spend, we'll bring it down.

But right now, we believe there is.

All right.

It looks like that was the last question.

Thank you, everyone.

We'll talk to you next time.

Thank you.

Thank you.

This concludes today's conference call webcast.

A replay of this conference call webcast will be available on the BNY Mellon Investor Relations website at 2:00 p.m.

Eastern Standard time today.

Have a good day.