道富銀行 (STT) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to the Investors Financial Services Corporation first quarter earnings release conference call.

Just as a reminder today's conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joe DeCristofaro (ph).

Please go ahead, sir.

Thank you for joining us on today's call.

We'll be making a number of forward-looking statements, which are based on management's assumptions and predictions as of today.

The company's actual results may differ materially from our current predictions due to any one of a number of factors.

Information regarding the factors that may affect our actual results is set forth in the MD & A section of our most recent 10K filing with the SEC.

I recommend that anyone listening to this call review this report carefully.

Because this call will be archived on our website, www.ibtco.com, I want to emphasize again for anyone listening at a later date that the statements made today are based on our assumptions as of today, April 12, 2004.

These assumptions may change, but the recording of this call will not be updated.

Joining us on today's call are Kevin Sheehan, Chairman and Chief Executive Officer.

Mike Rogers, President and John Spinney, Chief Financial Officer.

I will now turn the call over to Kevin Sheehan.

Thanks.

Good afternoon.

I'll begin by reviewing some of the key points from the first quarter and then John Spinney will discuss our financial results in more detail.

Investors Financial Services recorded extremely impressive results for the first quarter of 2004.

Diluted EPS for the quarter came in at 52 cents, up 79% from quarter one of last year, and up 8% on a link quarter basis.

Our total asset servicing revenue grew by a strong 43% year-over-year, driven by a 34% increase in core services revenue and 175% increase in FX fees.

As of March 31, we processed approximately 1.13 trillion of assets for our clients, up 74 billion from the December 31, 2003.

We converted over 1 billion from the previously announced Charles Schwab Trust Company business as well as a new mandate from Bear Stearns asset management.

We also won approximately 7 billion in assets from numerous existing clients during the quarter, including BGI, Eaton Vance and Goldman Sachs.

In addition we grew our institutional custody business by signing several new advisory clients and family offices in the first quarter.

Market appreciation and client fund flows accounted for approximately 67 billion of the 74 billion increase during the quarter.

Finally, the last billion of the Standish assets have deconverted as of March 31.

Directly related to the growth of our processing business is the growth of our balance sheet, which on an average basis grew 34% from last year's first quarter to this year's first quarter.

Strong client funding drove this balance sheet growth.

The current status of our new business pipeline remains medium, we believe that the sustained upturn in capital markets has driven the closing of new business we have disclosed on this in prior calls.

We continue to maintain a positive outlook on our sales pipeline.

To summarize, we again delivered excellent results for our investors during the first quarter of 2004.

These results were driven by our ability to sell new and existing clients, strong international fund flows, solid equity market performance, a favorable interest rate environment, and our continued cost controls.

I'll now turn the call over to John Spinney, who will review the quarter's financial results in more detail.

Good afternoon.

As Kevin mentioned, first quarter diluted EPS came in at 52 cents a share. 79% increase over our first quarter 2003 diluted operating EPS of 29 cents a share, which excludes the 21-cent recharge described in our press release.

On a linked quarter basis diluted EPS rose by 4 cents or 8%.

On a year-over-year basis, our first quarter net operating revenue increased 34% while operating expenses grew 17%, again exhibiting positive earnings growth and a continued -- continued leverage of our business model.

As we have stated on previous conference calls each of our revenue streams represents a component of our compensation by providing asset processing services to our clients.

Net interest income is one of those components and results from investing the residual cash of our passive processing clients who use our balance sheet as a convenient way to invest their excess cash.

We generate revenues based on assets under administration, the number of transactions generated by our clients and net interest income.

These three revenue components create a natural hedge for our business model.

The breakdown of our revenue stream for the first quarter of 2004 was 50% asset-based, 20% transaction-based and 30% net-interest income based.

I'll now discuss the significant income and expense components of the first quarter in more detail.

Core asset servicing fees for the first quarter increased 34% year-over-year and 9% link quarter due to continued favorable market conditions, wins from new and existing clients, such as BGI, Charles Schwab, Eaton Advance and Goldman Sachs, as well as the ability of our clients to develop and sell product which generates fund flows that have a direct positive impact on our business.

Ancillary services revenue including cash management, foreign exchange and securities lending increased 73% year-over-year, driven by -- primarily by strong increases in FX fees.

On a linked quarter basis ancillary services revenue increased 44%, again primarily as a result of the linked quarter increase in FX fees.

Regarding FX, new clients, further penetration of existing clients, higher volumes, and continued volatility in the currencies traded by our clients during the first quarter of 2004, caused a 76% linked quarter increase in FX revenue.

FX also increased over 175% year-over-year for the same reasons just mentioned.

Despite higher volumes, securities lending fees decreased 2% year-over-year due to narrower spreads.

On a linked quarter basis securities lending fees increased 8% due to the increased size of our lending book.

Net interest income was up 19% on a year-over-year basis and 11% link quarter, primarily due to balance sheet growth driven by high client funding and a steep yield curve.

During the first quarter, we again employed an asset liability strategy to prepay high rate FHLB advance and replace it with lower cost term funding.

We continued to maintain strong net interest margin and spread as a result of strong client funding.

The link quarter net interest margin increased by four basis points to 2.01% while the linked quarter interest rate spread grew by five basis points to 1.92%.

Absent the prepenalty payment of approximately 2.6 million related to the asset liability strategy, our net interest margin would have increased by 16 basis points to 2.13% while interest rates spread would have grown by 17 basis points to 2.04%.

Our investment portfolio is comprised of securities backed by the U.S. government and our triple A rated securities.

We continue to run a closely matched balance sheet with an asset duration of 1.3 years and a liability duration of approximately one year.

A high amount of variable rate securities in our portfolio has allowed us to continue to maintain low asset duration.

Total operating expenses were up 16% linked quarter, compensation of benefits expense was up 27% linked quarter due to increased salaries related to annual merit increases in hiring.

Directly related to compensation were increases in payroll taxes and unemployment insurance.

Finally, higher bonuses that are directly tied to our EPS outperformance were accrued during the quarter compared to lower and capped bonus accruals in the fourth quarter of 2003.

Technology and telecommunications expense increased 4% link quarter due to increased software license and maintenance fees as well as higher contract programming costs.

Transaction processing was up 13% linked quarter due to higher subcustodiansub custodian fees resulting from higher asset values.

Professional fees increased by 41% link quarter primarily driven by higher subadvisorysub advisory fees related to the growth of our advisory revenue.

Our operating philosophy remains the same, we add incremental expense when new business is booked.

Given the status of our pipeline, the level of the capital markets, and the interest rate environment, we are increasing our 2004 earnings per share guidance from $1.86 to a range of $1.90 to $1.95, representing greater than 25% growth over 2003 operating earnings per share of $1.49.

We remain comfortable with our long-term growth rate of 25% in EPS, and I would now like to open the call up to your questions.

Thank you.

The question-and-answer session will be conducted electronically today.

If you would like to ask a question, simply press the star key followed by the digit one on your telephone.

If you are using a speaker phone today, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, it is star one if you do have a question, and we'll pause for just a moment.

We'll take our first question from RBC Capital Markets, Jon Afrstrom.

Good afternoon guys.

Good afternoon.

Good number.

A couple of questions.

Can you go over the new business wins again?

And how material they are, I think you mentioned Bear Stearns was a family office business.

Yeah.

Yeah, the Bear Stearns business is a brand-new loan fund that we won this quarter.

And we'll be converting in.

And we expect similar to other clients that we have that this is just an entree into that company and they've got a lot of other partnerships and other pool types of products, John, that we'll continue to seek to do business with them on.

Okay.

So it's small.

It's one new fund, it isn't the whole complex.

Okay.

And then the family office business, how extensive is that in terms of your assets under administration, is that -- is that a newer business for you.

Well, the whole institutional custody business where this part of the business falls is about 9% or 10% of our assets and we've seen a lot of traction over the last 12 to 24 months in the family office business, and that's why we're talking about it more in the calls.

We've historically let that just flow through fund flows but there's a lot more activity in that business and we wanted to make sure that our investors and analysts knew that.

A couple more on the FX business.

Is that -- is that a sustainable level?

You talked about a strong quarter and a volatile dollar, that 's a big number and it surprised me, do you feel like that's something you can sustain?

Maybe not at that high level, but I think FX revenues have on a five-year (INAUDIBLE) basis have grown about 48% per year.

So I'm comfortable with growth in that number.

Will it come off that number?

Maybe a little bit in the second quarter.

It really depends on whether the volumes stay up and the -- the volatility in the currency remains.

But clearly it was a very strong quarter in that area.

Okay.

And then on the expense, does this feel like a core expense run rate.

As I said, I think we're guiding right now $1.90 to $1.95.

We had, you know, really strong performance in -- in the first quarter.

That was my last question.

I'm trying to figure out if I annualize the 52 cents obviously it’s higher and you may have anticipated the question, but what -- you know, help me think through that.

Yeah.

I think I would revert back to the $1.90 to 95 guidance, the middle that's $1.93, that's 7 cents on the -- on the outperformance of this quarter.

That gets you the $1.93 and there's some upside to that, you know, two pennies up to $1.95.

As we continue to move through the year, if things stay as robust as they were in the first quarter we'll continue to move guidance up from there, Jon.

Okay.

Thank you.

We'll now move on to Jay Cunningham with South Coast Capital.

Good afternoon.

Great quarter.

Thanks, Jay.

Just a couple of things real quick.

On the -- the 64 million that you referenced earlier, was that the -- was that the total contribution from market gains?

That's 64 billion, Jay.

Right.

It was asset flows from clients distributing more product and market value gains, the two of those are lumped in that number.

Okay.

And then just finally, headcount?

Headcount.

For the quarter ending --

It's up 30 people from year-end, that puts us at 2443.

Perfect.

Thank you.

You're welcome.

From Robert W. Baird, Carla Cooper.

Good afternoon.

Very mundane question about the tax rate.

Could you talk about whether you think it will hang in at these levels or it might drop off?

Carla, the tax rate will probably be about 33.5 for the whole year.

And that's driven primarily out of the -- the earnings that we're putting up and our municipal portfolio is just not large enough to create a federal tax benefit to keep the rate down at 31.5.

So --

Okay.

And maybe you characterized the pipeline as medium, Kevin, but any more color there on the types of deals you're seeing?

I guess any change?

And then maybe any color or comment on whether the -- you know, environment that the funds are operating in right now is either a help or a hurt in terms to getting things done.

Yeah.

I think we continue to see more and more opportunities to bid as I said in the past we're starting to get some flow in terms of closing deals here.

We're hoping it gets more robust as we proceed further through the year.

I -- I think from a standpoint of distractions, there continue to be -- whether you -- you have actual problems or you just have to investigate your option, I think there's a lot of effort being put forth by investment managers just looking through their operations, making sure they don't have any exposures there.

I think one of the things you have to look at here, though, in terms of the guidance is we don't have to -- from our perspective, sell anything to make the rest of the guidance.

We feel real strong about where we are right now, so I think any sales that we do complete are additive to this proposition.

I'll just say nice position to be in after the first quarter.

Thanks a lot.

Yep.

We'll take our next question from Kyle Simonairro (ph) with T Row Price (ph).

Hi guys, thanks for taking my call.

Good quarter.

Question on the asset and liability duration, you said the asset was 1.3 years and liability was one year.

How has that changed over the last couple quarters and with the 10-year up a bunch, how much do you expect that to change over the next couple months?

Not materially.

I mean, we saw it last summer and I want to say we came into the -- into the third quarter at one-seven maybe or one-six and we just looked at it last week and we're in that one-six range with a 10-year backing up and I just don't, I don't see our -- our asset liability position being a problem right now.

Sensitivity is really in line, our 200 basis point rate shock analysis is at the 6.17%, and well contained.

Okay.

Great.

And in terms of some of the cross-sale opportunities from your current customer base, you had mentioned a few customers that you once did business with that were probably more material than the Bear Stearns win and was curious, were there any in there that were material and on top of that, what percent of your current customer assets have you penetrated thus far, I think you have thrown out a number something like 8% 9%.

Yeah.

We're still at the 8% penetration at the end of this quarter.

With respect to the clients we mentioned on today's call with respect to continued cross-selling, some of those clients have given us $2 billion in new product during the first quarter, others smaller amounts, but for the most part, that 7 billion of new assets has come from the three or four clients we mentioned.

Okay.

Last question.

On your operating expenses, you know, in conjunction with a pretty steady increase in foreign exchange it seems like your operating expenses were up a bunch, kind of consistent with what you guided in the fourth quarter, where do you see that going from here?

As I said to Jon, I think, you know, this quarter was a very strong quarter of outperformance, and compensations historically has been up in the first quarter and since that's our biggest operating expense, I think, you know, going forward it will probably come off that number.

All right, guys, thanks a lot for taking my call.

Sure.

Once again I'd like to remind our audience it's star one if you do have a question today and we'll now move on to Joel Gomberg with William Blair.

Thanks.

I'm looking at your custody assets and sequentially they're up 7% or 74 billion and the S & P 500's up about 1%.

So I realize you're getting flows from existing customers, but could you maybe drill down a little bit more, what's market value and what is coming from your customer base and what type of products?

I would -- I would -- we don't break out the two together, Joel, but intuitively you're absolutely right, I think one of the things we've said over and over on calls and when we meet one on one is that, we tend to sell the clients that we feel can distribute product and those are the clients that we have in our stable and they're very good clients.

During the first quarter, several of those clients started new products or continued to get flows because their products are then very -- very positively received in the marketplace and I think I mentioned before, Barons (ph) came out when there was a bunch of our clients and Barons top 10 or top 20 of mutual fund company performers and you can see it directly in the fund flows that are coming in to the -- to the bank, BGI is a very strong performer and their iShare product and I think in the first quarter they probably put 20% more in assets in their product alone.

So I think, you know, one of the things that we might not have had 100 billion in new asset sales in the quarter, but our ability for our clients to distribute product certainly has a positive impact on our earnings and our growth.

Okay.

Maybe you can flush out some of the growth in the deposits, was that new cash coming in to your clients as well?

Yep.

It definitely was new cash from existing clients, coming in to the bank as well as some new opportunities that have garnered cash.

Okay.

Thanks.

We'll now move on to Casey Ambrich (ph) from Millennium Partners.

Hi John, thanks for taking the question.

Just a quick question.

The FHLB prepayment, is that running through the interest expense.

Yeah.

It's running through a net interest income, yep.

Okay.

So I know you mentioned that the -- should we expect that to kind of bounce back to 213 then kind of going forward if the old curve stays in this type of shape.

I would say over the 12-month period it would be somewhere around 2%.

Okay.

Great.

Thank you.

And we'll take our next question from Tom Acrowel (ph) with Fulcrum Global Partners.

Hi guys.

Hey, Tom.

Just a quick question I think you already answered it regarding EPS activity from Barclays, is that contributing to the growth nets and the custody?

Definitely so, yes.

All I had, thanks.

You're welcome, Tom.

This does conclude our question-and-answer session.

A replay of the call will be available starting at 8:00 eastern time today.

And run through April 18, at midnight, central time.

To access this replay, please dial 719-457-0820 and enter in the pass code 238764.

Again, that's 719-457-0820, with a pass code of 238764.

This does conclude our conference, thank you for your participation.