Bank Of New York Mellon Corp (BK) — Q2 2015 Earnings Call Transcript

Thank you, Joey. Good morning and welcome, everyone, to the BNY Mellon second quarter 2015 earnings conference call. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as other members of our executive management team. Our second quarter earnings materials include a financial highlights presentation that will be referred to in a discussion of our results and can be found in the Investor Relations section of our website. Before Gerald and Todd begin, let me take a moment to remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement in the earnings press release, the financial highlights presentation, and those identified in the documents filed with the SEC that are available on our website. Forward-looking statements on this call speak only as of today, July 21, 2015, and we will not update forward-looking statements. Now I would like to turn the call over to Gerald.

Thanks, Valerie, and welcome everyone. Thanks for joining us this morning. Our results reflect the successful execution of our strategic priorities to achieve the three-year target we shared on Investor Day. We are growing our earnings, investing in next-generation operating platforms and risk management controls, attracting new clients, and improving the long-term value of our firm for the benefit of our clients and shareholders. Now turning to earnings, earnings per share were $0.73, or $0.77 per share after adjusting for the previously announced litigation expense and restructuring charges. On an adjusted basis, earnings per share were up 24% year-over-year. Now focusing on our year-over-year comparisons on an adjusted basis. Total revenue was up 3%, as we saw strength in Asset Servicing, Global Collateral Services and Clearing and improvement in our market-sensitive businesses. Our markets group in particular had another excellent quarter, helping to drive growth in investment services and the improvement in our return on tangible common equity. Net interest revenue was also a strong contributor to results this quarter. Total expenses were down 1% and we delivered more than 460 basis points of positive operating leverage and improved our pre-tax operating margin to 33% by executing on our revenue growth initiatives and through continued expense control. Our return on tangible common equity in the quarter increased to 22%, and we continued to deliver significant value to our shareholders by returning more than $1 billion in dividends and share repurchases during the quarter. Now looking at our progress against certain strategic priorities. Our first priority is driving profitable revenue growth. We are laser-focused on leveraging our firm’s capabilities to strengthen and expand our existing client relationships and selectively building new ones. Investment Services revenues benefited from the areas where we’ve been investing, that is Asset Servicing, Global Collateral Services, and clearing. Now, the investments we are making in strategic technology, platforms, and applications are clearly paying off and our solutions are resonating with clients. We won a significant middle office contract to service $770 billion in assets for a prominent investment manager. That win was part of a strong new business quarter for Investment Services. Now, while our costs will increase in the short run as we prepare to onboard this new business, our platforms are designed to be leveraged by a broader client base and to take advantage of our economies of scale. Foreign exchange revenue was also up strongly year-over-year, as we continue to benefit from both higher volatility and volumes captured through the expansion of our services. Now we also strive to deliver a great client experience, which is critical to driving revenues. Third-party recognition of our capabilities continued. We took the top spot in this year’s Global Investor ISF Global Custody Survey in EMEA and single custody weighted categories. We also topped the weighted rankings for clients with assets under management greater than $3 billion in the Global EMEA and Asia Pacific categories. We were named the best ETF service provider in the Americas for the ninth year in a row by Exchangetradedfunds.com. And we were named custodian of the year for Latin America in the Custody Risk Americas Award which recognized the growth in quality of the custody service we launched in Brazil less than three years ago. Now turning to Investment Management, we continue to make progress on several key initiatives. We are already seeing positive results from expanding our reach to the US retail investors as our investment strategies are becoming more visible on third party platforms. In addition, we are connecting with our Pershing financial advisory clients. In fact, the private banking growth we’ve seen in Wealth Management with Pershing clients is a powerful example of our ability to leverage the synergy between investment services and Investment Management for the benefit of our clients. Our initiative to grow our Wealth Management presence in attractive new locations is beginning to add to our revenue growth there as well. Now switching to Asset Management, our LDI strategies continue to see strong inflows as do inflows into alternative assets, continuing the trend of the last few quarters. Both are areas where we are working to expand our presence. Now, while we’ve made significant progress on those fronts, it was not enough to offset the industry-wide impact of active institutional equity outflows. In fact, while we had a total net long-term outflows of $15 billion, two non-US institutional clients drove $20 billion of the outflows as they liquidated holdings to address cash needs and changes in their investment strategies. On the investment performance front, during the quarter, the strength of our capabilities was recognized through a number of awards. Insight Investment was named LDI Manager of the Year and Fixed Income Manager of the Year and Newton the SRI Provider of the Year by the European Pension Awards. Insight was also named LDI manager of the year for the third consecutive year by the CIO European Innovation Awards. And ARX was named Top Brazilian Managers by Standard & Poor’s for the fifth consecutive year. Now, our second broad priority is executing on our business improvement process. Our success on this front is reflected in lower expenses in nearly all categories. We are making continued headway on reducing structural costs and risks while improving the productivity and quality and it’s clearly showing up in our results. From a structural standpoint, we continue to optimize our business mix. We shut down our central securities depository and began to reposition our UK transfer agency business because they simply did not meet our return criteria. We made progress in streamlining our Investment Management operations in APAC and also made a tough decision to shut down our separately managed account offering for now. It’s a solution that we were really excited about and we are not ruling out the possibility of re-establishing it down the road. But when we didn’t gain the traction in the market that we expected, we adhered to our discipline. During the quarter, we renegotiated certain vendor contracts and made progress in reducing data storage costs in our real estate footprint as we continue to improve the profitability of our business. Now our third priority centers on being a strong, safe, and trusted counterparty. We’ve reduced and simplified our counterparty exposure by exiting the derivatives business. We practically eliminated intra-day credit risk within the US tri-party repo market and we submitted our fourth annual global resolution plan to the FDIC and the Fed. Now, we are one of the few banks that propose a tried and proven resolution strategy involving the use of a bridge bank run by the FDIC, something we can do because of our inherently smaller and more liquid balance sheet versus other G-SIBs. Now, to be able to deliver on this plan, we have made commitments to fund more than 30 initiatives over the next two years. It’s expensive, but it will make us an even more resilient company in the future. Our fourth priority involves generating excess capital and deploying it effectively. We are focused on ensuring our capital ratios are compliant with evolving regulatory requirements. During the quarter, we successfully issued $1 billion in preferred stock, which further strengthened our capital position and enabled us to repurchase more than $800 million in shares and distribute almost $200 million in dividends. Our fifth priority is to attract, retain, and develop top talent. During the quarter, we had a talent and corporate trust to position us to capitalize on the increased debt issuance market and regain some momentum there. We added staff to support our strategic growth initiatives, and we also continued to insource the people who power our technology, productivity, cost, and speed to market initiatives. As we look ahead, we are confident in our ability to achieve our three-year investor day goals and to deliver even more value to our clients. With that, let me turn it over to Todd.

Thanks, everyone, and good morning. I will begin with our operating results for the quarter. EPS increased to $0.77, reflecting a 24% rise from the same quarter last year. Revenue grew about 3% year-over-year and 2% sequentially, driven by strength in asset servicing, particularly in global collateral services, as well as in clearing services, foreign exchange, and financing-related activities. We saw a 1% decline in expenses from last year and sequentially, thanks to our business improvement initiatives and the stronger US dollar which helped reduce costs across nearly all categories. This ability to grow revenue while managing expenses led to a positive operating leverage of over 460 basis points year-over-year. Notably, the pound depreciated by 9% against the dollar, and the euro fell by 19%, with the stronger dollar having an estimated negative impact of about 300 basis points on both revenue and expenses, particularly affecting Investment Management. However, we expect this dollar strength to have minimal overall impact on the company. Income before taxes rose 14% year-over-year and 12% sequentially, contributing to a pretax margin increase of about 300 basis points to 33%. Return on tangible common equity surpassed 22%. Reviewing consolidated fee and other revenue, asset servicing fees climbed 4% year-over-year and 2% sequentially, primarily due to organic growth in Global Collateral Services and new business, although slightly affected by the stronger dollar. Sequentially, we saw growth largely driven by seasonal rises in securities lending revenue. Clearing services fees were up 6% year-over-year and 1% sequentially, fueled by increases in mutual fund fees and clearance revenue. Issuer service fees rose by 1% year-over-year and sequentially, mainly due to enhanced depository receipt outcomes, though this was counterbalanced by decreased Corporate Trust fees. Treasury services fees increased by 2% year-over-year and 5% sequentially, with the yearly rise reflecting higher payment volumes and the sequential rise linked to additional business days in the quarter. For Investment Management, performance fees fell 1% year-over-year but increased 5% on a constant currency basis, driven by higher equity markets, partly offset by lower performance fees, totaling $20 million compared to $29 million last year. FX and other trading revenue grew 44% year-over-year but decreased 18% sequentially. FX revenue of $181 million was up 40% from the previous year due to heightened volatility and trading activity, though it faced a sequential decline from exceptionally high volatility in Q1. Financing-related fees increased to $58 million from $44 million in the prior year and $40 million in Q1, reflecting higher fees for intra-day credit to dealers. However, we anticipate these fees may not continue to grow beyond Q3. Investment and other income was $104 million, down $38 million year-over-year but up $44 million sequentially, attributable to reductions in various revenue streams despite higher leasing gains. We project investment income to average between $60 million to $80 million moving forward, with expected volatility. Addressing Investment Management, we observed a 5% increase in AUM year-over-year alongside $15 billion in long-term outflows, driven by large non-US institutional clients liquidating parts of their portfolios. Nonetheless, inflows into alternative assets and LDI partially countered these outflows. Our Wealth Management segment continues to grow, now reflecting revenue increases as the investment phase of our initiatives has concluded. In terms of Investment Services metrics, assets under custody and administration reached $28.6 trillion, up $100 billion year-over-year due to increased market values, although impacted by the dollar's strength. New business wins in this sector totaled $1 trillion in Q2. The market value of securities on loans slightly rose year-over-year, and average loans and deposits increased significantly. Our average tri-party repo balances rose by 8%. Clearing metrics showed improvements, with particularly strong gains in DARTS volumes. Regarding net interest revenue, it rose 8% year-over-year and 7% from Q1, driven by a shift from cash into loans and securities and a rise in deposits. Our net interest margin for the quarter was 100 basis points, reflecting an increase as rates paid on interest-earning deposits decreased. Non-interest expenses fell 1% year-over-year and sequentially, with reductions seen across most categories, aided by a strong dollar and our business improvement efforts. Staff expenses remained flat year-over-year, and while headcount decreased overall, we did add 200 employees to bolster new business and strategic initiatives. Occupancy costs have stabilized due to various factors, and we aim to vacate One Wall Street by the end of Q3, with expectations for occupancy expenses to improve afterward. In terms of capital ratios, we adopted a new accounting standard which slightly revised our capital ratios. Our effective tax rate stood at 23.7%, with an adjusted rate of 25%. We ended with a net unrealized pre-tax gain on our investment portfolio of $752 million, reflecting a capital impact of around $300 million. Lastly, we anticipate our third quarter earnings will be subject to seasonal influences. I will now pass it over to Izzy.

Following on our third quarter earnings. As you are aware, third quarter earnings are generally impacted by a seasonal slowdown in transaction volumes and market-related revenues, particularly foreign exchange, Global Collateral Services, and securities lending, offset by seasonally higher activities in DR. We see expenses coming in flat to slightly down to 2014 for the full year, which will entail an increase in the run rate in the remaining quarters, reflecting the investment in our strategic platforms, increased regulatory compliance costs, and the annual merit increase with respect to July 1. Net interest revenue is expected to be slightly down to Q2, assuming no change in monetary policy. The full year effective tax rate is expected to be approximately 26%. We anticipate proceeding with our capital plan, enabling us to return up to $3.1 billion to our shareholders through share repurchases and dividends subject to market conditions and other factors. In summary, we are executing against our strategic priorities. We’re continuing to improve our bottom line and generate significant positive operating leverage and we remain confident in our ability to hit our three-year investor day target. With that, on behalf of Todd, let me hand it back to Gerald.

Great. Thanks, Izzy, for finishing up. Todd is alive and well, trust me. With that, why don’t we open it up to questions?

Good morning, guys. So broadly I'm just wondering how you're feeling about the sustainability of the progress you’ve made on expenses in operating margin. I think clearly some of that is driven by FX translation, but you've now exceeded the high end of the range of your 30% to 32% longer-term operating margin target and that was in a normalized environment. I'd say the same for your 20% to 22% target and we have yet to see rates increase. At this point would you feel comfortable revising these targets a bit higher? Have you considered that at all?

Let me start with that. We do feel good about the progress we are making on our business improvement process and pulling it through into the income statement to the bottom line. We are onboarding some new clients and there’s some upfront cost associated with that. We do have increased regulatory costs that we are facing in the second half of this year. I think we are going to stick with our guidance of having expenses essentially flat versus last year. And we are going to work to continue to improve upon that, but we do have some opportunities to bring on some clients that have some upfront costs associated with it. We feel good about hitting the targets that we laid out for investor day. We are within the ranges and we are going to keep driving forward on meeting those targets.

Okay, thanks.

Hey Luke, I would add one thing. We’ve had the benefit of a good revenue mix here. So, some higher-margin businesses improved faster than we had anticipated at investor day.

Okay. And then maybe if you could give us a rough indication of the additional expenses for the T. Rowe outsourcing mandate you won and then when do you expect that business to convert and be reflected in revenue? Also maybe talk about whether that deal reflects any change in the trends in the marketplace for fund accounting or was it more of a one-off opportunistic deal?

We have started to take on some expenses related to T. Rowe already. We are in the process of onboarding some of their staff, which we are pleased about. You are currently seeing the initial costs tied to this onboarding, and these costs will continue throughout the year. The revenues are expected to begin towards the end of this year and into the beginning of next year as we transition the assets. We see this as part of a long-term trend where investment managers are focusing more on their investment management processes and less on internal mid-office and back-office services. It’s important for us to be selective about the clients we accept to ensure we are effectively using our platforms and achieving profitable revenue growth rather than just taking on clients indiscriminately. T. Rowe is an excellent client, and we have developed a strong partnership over the past year, sharing a good rapport and similar culture. We are optimistic about this collaboration.

Okay, thanks a lot.

Hi. Thank you. I'm just curious if you can give some sort of summary comment on what happened to asset sensitivity during the quarter. It's great to see all the growth on balance sheets, both deposits and loans. I think you were in the process over the last two quarters of extending duration a little bit, but if you could just tie that all together, that would be super.

Sure, Glenn. I’ll try to take it. It’s Todd. The sensitivity, NIR sensitivity is going to be about flat from where we were in the first quarter. We had put a fair amount of securities on late in the first quarter and we got the benefit of the NIR mostly in the second quarter, and actually securities at the end of the period were down slightly. I think you’ll see the asset sensitivity to be basically unchanged where we were in the first quarter. There’s a lot of things that went on with NIR. Actually the duration of our available-for-sale accounts declined slightly and we’ve used the held-to-maturity account. That’s where most of the duration of the assets now is. About half the risk is in each so that we can protect the capital account. But we saw a lot of things go on in the quarter. We saw higher balances. We did see the loan growth that you talked about. We saw a sharp drop in the interest that we paid on deposits. We also had the benefit that accretion on the non-agency securities did not decline as the performance of those securities increased, so we would have expected that. We had some hedging gains. So we don’t anticipate that NIR is going to bump up to this level. We don’t expect to grow. In fact, we expect it to contract a little bit unless interest rates change.

Okay, that's great. Thanks. And then curious on even after the restatement of the capital ratios, let's call it a function of 10%, your buffer is now officially 100 basis points. Even with a very wide 200 basis point AOCI buffer on buffer, that brings you to right about where you're at now. Do you still feel the 11% to 12% is the right range or could we see that work down over time?

Yeah. The binding constraint for us, Glenn, is not the risk-weighted assets. It is the SLR. So as we build the SLR, we would expect the CET1 to grow. We will stick with the previous guidance.

I'll try to keep this quick, Todd, to save your voice. A couple of follow-ups on NII. A, could you just define the hedging gains to get us a cleaner run rate for NII for the quarter to think for the third quarter? And then just kind of bigger picture question, when you continue to see growth in your deposits, maybe a couple of comments on where do you guys think it's coming from, and again do you still think that there's not a ton of room to reinvest them into securities alone. So this has a positive mix shift in the balance sheet that we've seen from you guys over the last couple of quarters is probably a full in run rate. Is that a fair way to summarize the NII picture?

Yeah. I think the answer to your last question is yes. I think that’s a fair way to summarize it. In terms of the hedging gains, accretion had been contracting at about $3 million to $5 million a quarter, so it didn’t. So the combination of accretion and hedging gains is probably in the $10 million ballpark and we expect the balance sheet to be about flat.

Got you. And then just my follow-up on expenses, just to step back again, when you guys talked about expenses being flat on a year-over-year basis, given the amount of new business you picked up this quarter and the timing of the onboarding, is it still fair to think that 2015 expenses are going to be in that $11 billion run rate?

Alex, the guidance we’ve given, I would say it’s going to be flat to slightly down from our operating expenses in 2014. That does mean the run rate will pick up in the second half for all the items that we discussed, whether it’s the merit increase, the onboarding. We are taking on a couple of hundred people soon, to the regulatory costs that we’ve been talking about. All in all, we would still for the full year expect to be flat. Previously guidance was made flat to slightly up. We are a little more optimistic it might be flat to slightly down.

Good morning. First question just on Investment Management, I appreciate all the color you gave on the positive attraction of your various growth initiatives. But wanted to get a sense of where you are versus your plan as far as the investment curve goes. And then how should we be thinking about the payoff to the plan laid out at Investor Day?

Ashley, it’s Curtis Arledge. Can I just ask you what you mean by investment curve? I want to make sure I understand the question.

That would be the investment of the margins that you outlined.

Yeah, okay. At Investor Day we described our Wealth Management business in our US intermediary distribution platform and some other initiatives. And as Gerald mentioned, those are actually going quite well. Our Wealth Management expansion is now complete. We’ve added about a 50% increase in our sales force and we’ve seen revenues that have actually come in above our original plans. On the US retail side we’ve made a number of investments and changes and our sales there are actually pretty attractive. We’ve seen a boost north of 50% in growth sales in our US retail intermediary platforms, which includes the really exciting part about being connected to Pershing, because Pershing obviously their relationships with financial advisors is important to that effort as well. The private banking piece of our initiative, as Gerald also mentioned, is really starting to work. We feel pretty good about getting the revenues that came with the investments that we were making that we talked about at Investor Day.

Okay, appreciate the color there. And then during the quarter JPMorgan exited its third-party broker-dealer clearing business. I just wanted to get your sense on how are you thinking about the business. Should we expect Pershing to pick up share? And then in a similar vein, how are you thinking about your stake in ConvergEx?

Okay, sure. You can see from Pershing’s metrics overall that we have pretty good momentum in revenue. In terms of our new business pipeline, we are certainly benefiting from JPMorgan’s decision to exit, and we are attracting quite a number of those clients to our platform, some of which we’ll be converting, quite a few of which we’ll be converting to our platform in the third quarter. If you look at the overall metrics, the fundamental asset gathering statistics, mutual fund positions, total client assets in custody, prime brokerage lending, and margin balances, are a custody all the way through. We have solid growth in the Pershing business unit, so we feel good about that business.

Regarding ConvergEx, we just have a small equity piece in that firm and it’s something we’ve had for a long period of time, and we just continue to track it.

Okay, thanks for taking my questions and congrats on the quarter.

Hi, good morning. Todd, I was wondering on the capital front now that SLR is pushed out of CCAR for another year and given the potential for rates to go up, I was wondering can you talk to us about how much excess deposits you had on hand and then your trade-off of considering your more preferred issuance in the capital structure.

We estimate that there are likely between $50 billion and $70 billion in excess deposits. The future of these deposits will depend on monetary policy. We are analyzing our balance sheet to determine how to use this capital most effectively and what actions we may take. If interest rates increase and these deposits remain, we anticipate issuing more preferred stock and expect a reasonable return from it. We might enter the preferred market as we did last quarter when we issued $1 billion. We have the capacity to issue more, but it will depend on future developments. For this year, the CCAR will not need to consider the SLR, but we must still demonstrate a path to compliance, as we are currently 40 basis points below the 5% target and require a buffer above that.

And so where's the fine line between go, no go on that? Is it a rate of Fed funds, so like the earnings capacity on that excess deposit if they stay around? Like where's your break-even decision tree on that?

Yeah, it’s a fairly low yield. Fed funds go to six-year 70 basis points and you’ve got that kind of a margin it’s a very attractive return on your equity.

Okay, got it. And then second follow-up, issuer services. You mentioned just the stability that you've started to see. Can you just give us some underlying trends inside those businesses? And I know we do see the typical seasonality, but the last few years have been anything but typical. So just help us understand what kind of lift we should expect to see in the back half.

Yeah, this is Brian Shea. The issuer services business includes both corporate trust and DR. As Todd mentioned and we’ve been signaling for some time that we thought we see a moderation in the runoff of high-value securitizations and corporate trust and that the revenue decline that we’ve experienced over the past few years would moderate and flatten out and that’s exactly what we are seeing happen at this point. On the DR side, that business is obviously a capital markets-driven business and it has volatility associated with it, but it’s had good year-to-date performance and we expect a similar seasonality possibly in the third quarter this year. So far, so good.

All right. Thanks, guys.

Hi, thanks. Good morning, folks. Maybe just to start on the T. Rowe deal. In looking at that I guess more strategically as you think about the longer-term operating margins on either that deal or that business in general, you’re obviously starting to bring revenues by year-end. When do you expect that that particular investment to be, or that deal to be operating margin positive? And then how do you think about that deal and/or that business from an operating margin perspective, longer-term versus your overall Asset Servicing business?

This is Brian Shea. The transition of the T. Rowe Price team, about 225 people to BNY Mellon we expect to take place in August, so starting next month. That will be followed by a fund accounting conversion nine to 12 months out and then a middle office platform conversion roughly a year after that. It’s a long-term arrangement and it’s the largest middle office client, asset manager client that’s committed to us. But you should know that we are driving a shared economy to scale model and a much more standardized leverageable platform. We have about 40 middle office clients today. This is the single biggest one we have, and we think it’s a real validation of our strategy in the platform that we are putting in place to serve more. Fundamentally, we feel that there is a way to create shared economies of scale in this model that haven’t historically been created by custodians and we are executing a strategy to bring technology strategy to create that leverage. But there is a fundamental trend where asset managers, just like other financial institutions in a high regulatory change and lower growth environment, are getting back to basics and fundamentally focusing on the investment process as their value proposition and relying more on firms like us to verbalize their middle office costs and actually their front office technology cost. We are going to be driving a strategy to drive more end-to-end solutions for investment managers and alternative investment managers and I think it will be a positive driver of our long-term results and we have a very significant pipeline of middle office clients and we’re being careful and selective about which assignments we take on.

The other thing I would add, Brian, is that we’re not relying on foreign exchange securities lending and other quote-high margin business to make this transaction profitable. We have priced it and we’re building the operating platforms such that it is profitable on its own.

Great, that’s really helpful information. I appreciate that. I just want to confirm the expense outlook again to ensure I have the base correct: is the guidance for 2015 $11 billion for flat expenses?

What we’ve guided is that our operating expenses last year were about $10.7 billion, $10.65 billion. And Brian, what we’ve guided is that we’ll be relatively flat to that number.

Okay, great. Thanks for taking my questions.

Hey, thanks, good morning. A couple of questions, one on the Investment Management metrics page. You’ve got your AUM outflows as well as inflows listed on the page and net currency market and acquisition impact. I noticed liability-driven investments have continued to be positive, but maybe a little bit slower paced. Can you just speak to what's going on there? And then your market impact was actually better than what I've seen at other shops and maybe could help us understand how much of that was acquisitions versus market.

Betsy, it’s Curtis. I want to highlight that our LDI business still has a strong pipeline. The dynamics around the funded ratio for our clients can vary from quarter to quarter. When interest rates rise and equity markets stay stable, the funding ratio typically improves, prompting clients to pursue de-risking strategies for their plans. Conversely, when conditions aren't favorable, this momentum can stall. Sometimes clients choose to enhance their existing strategies, possibly by de-risking parts of their portfolios, which can lead to stronger quarterly results. However, when such actions do not occur, results can be weaker. We also have clients that have previously maintained unhedged portions of their portfolios. Thus, fluctuations from quarter to quarter are often tied to marketplace conditions. Nevertheless, the pipeline remains robust, as improving funding ratios continue to drive interest in reducing volatility and risk in pension plans. Overall, the business remains in a healthy state. In terms of marketing, it's crucial to note the variety of assets we manage across different markets, particularly LDI, which excels as a long-duration asset linked to both interest and inflation rates. As these rates decrease, the value of the liabilities rises, boosting the value of our managed assets. This trend is part of what you’re observing. Our portfolio is well-diversified compared to peers, with a balanced mix between US and non-US assets. It's also important to consider that our AUM is reported on a spot basis. Currency market fluctuations can influence these figures significantly at the end of the quarter, which affected this year's year-over-year comparisons. Therefore, both currency impacts and the duration of our managed assets play a role in our performance.

Got it. Okay, that's helpful color. Thanks very much. Just Todd, just an overall question for you on the FX impact on revenues and expenses and I'm sorry if I missed it. I noticed throughout the presentation you talked about the impact there, but do you have an FX-adjusted revenue and expense overall for total BK or how it impacted the growth rates in revenue and expenses?

I mentioned earlier that revenues are down about 3% while expenses are down around 3% as well. Overall, this results in a very slight negative effect for us, acknowledging some rounding in those figures. This is about what we anticipate will continue moving forward. We have a solid hedge in Euro and Sterling, but we are somewhat exposed in one or two other currencies. If exchange rates change, it could affect our situation a bit differently. However, we expect that changes in the dollar, whether it strengthens or weakens, shouldn't have a significant effect on our pre-tax figures, though it may alter the geographic distribution slightly.

Okay. The currency you're not hedged to, the biggest is the yen, is that right or?

No, it’s going to be the Rupee.

No, with Indian Rupee.

Got it. Okay, got it. Okay, that's helpful. Thanks.

Hi, just a clarification of what you've said so far. The results in the first half of the year have exceeded expectations and you're in your target ranges, but it doesn't seem like you're changing your guidance for the full year. So should we think of these results as simply frontloading some of the benefits in the second half of the year or if you can just give us some more color on this?

Generally, Mike, we put out three-year investment targets during Investor Day. We’re sticking to those and we’re executing against them. The first half of the year, we’ve done some level of outperformance. We want to continue that and not let the targets restrain us, but we certainly want to keep performing well.

The targets weren’t meant to be annual targets. They were compounded growth rates over the three-year period, Mike. And so we’ve certainly gotten off to a good start. We’ve gotten much more market benefit than we would have anticipated at that point in time. But that’s not to say that’s going to continue.

Okay. Perhaps as a follow-up to that, Gerald, you mentioned your three-year targets and your five priorities and I think you guys had a board meeting in June where you talked about strategy and topics like that. Can you highlight what was talked about at that board meeting or any perhaps nuanced changes that you have in the strategy or other areas for additional emphasis that came out from that meeting?

Mike, we have a board meeting every other month, so that’s just part of the standard fare. We share with our board obviously not only what we share publicly, but the ups and downs and the positives and negatives throughout all our businesses. So we’re sticking by our strategy. We’re sticking by our business model, and we’re sticking by the Investor Day targets we laid out there, and I would say we’re executing against them and we’ll continue to drive value for shareholders and clients.

Last follow-up. We've had a few months since Investor Day. Now that you've had this period and you've gone back a little bit more aggressively, which areas would you say you're more confident about or perhaps less confident about?

From a financial perspective, I think there are a couple of positives. As you’ve seen, we’ve seen probably a little stronger revenue growth, especially when you take into consideration currency. I think our business improvement process continues to work well. I think the balance sheet grows and the need to retain additional capital may be higher than we had anticipated. And net-net I think we’re still comfortable with the ranges that we had established. The course to get there will never be the direction that we initially anticipated, but I think we’re still pretty comfortable with the direction we’re going.

Good morning. So one follow-up on the onboarding expense for the back half of the year. How much of that should we consider ongoing and how much of that would be one-time charges?

It's Brian. We indicated at Investor Day that we're experiencing year-over-year growth in expenses as we develop these strategic platforms for asset managers, alternative managers, and the Global Wealth platform. This will continue as we mentioned. Over time, revenue will increase as clients begin to use the platform. We believe these are truly strategic and beneficial investments that will generate long-term value for clients and shareholders. However, there will be a noticeable increase in expenses this year, which will ease next year, and by 2018, these investments will be significantly beneficial for shareholders.

I would add it's in our running rate expenses today, those investments.

Okay. I guess what you're saying is they are ongoing but we see the revenue pickup which enhances the returns. Is that a fair way to paraphrase it?

Yeah. That’s the right way to think about it.

Great, thank you. Then a quick one on the excess deposits. So can you help us maybe understand why you would, if we get higher rates and we don't see the behavior anticipating, why you wouldn't explore pricing changes as opposed to raising preferred in order to just provide motivation for those $50 billion to $70 billion to move off the balance sheet?

First of all, it's not one or the other. As you can see, in this particular quarter, the second quarter we just finished, we actually did manage our deposit rates down. You can see that we are in fact charging for deposit, particularly in Europe or in Europe I should say. And so the cost of our deposits is actually declining. We are proactively managing the cost of our deposit base. But as Todd said earlier, if the return on those deposits in a rising interest rate environment are such with little or no risk associated with them, then we should think about whether additional capital is warranted and making sure we get good return on that capital. There’s also as you know as our businesses grow, we tend to get more deposits, frictional deposits associated with our businesses. It's going to be interesting to see when rate rises what happens to those excess deposits, not only here but in the industry at large.

Thanks for taking the questions.

Thank you. As a follow-up on the deposit commentary that you guys have made, what percentage of your European depositors now are paying you interest for you to hold those deposits? The second, how many have decided to leave or take some of the deposits out because they didn't want to pay the fee?

Most of them where we can pass through the fees are paying them. We did see some behavior when we initially started charging for deposits where there were some outflows and those have come back, so we are about flat through the beginning to where we are now in the actual volume of European deposits.

Would you say the experience has been a pleasant one for what you had to do to convince folks to pay for you to hold their deposits?

I look around at my relationship people, I'm not sure they feel exactly that way.

Yeah, it's Karen Peetz. I would say clients understood that we weren’t going to pay them to keep their money with us, but it involved a series of difficult conversations. Many of our peers did the same, so we weren’t alone.

Good. And then a technical question. On the buyback, you guys were quite successful this quarter in buying back just over 19 million shares. I see the average share count dropped only about, I think 4 million shares from 1.126 billion to 1.22 billion. Could you give us some color why it didn't fall further?

The average share count is influenced by when you start and finish the period, so it relates to the timing of it.

Okay, just a timing issue then?

Yeah.

Great, okay. I appreciate it. Thank you.

Great, good morning. I just had a quick question on the new business wins. Even if you back out the T. Rowe, it still was $254 billion in the quarter. Can you give us some color on the geography or service that's driving that and that compares to $131 billion last quarter?

I would say that’s an asset, which is a servicing metric. We are experiencing a solid pipeline and strong new business commitments. This reflects the ongoing trend of asset managers refocusing on the investment process and their core value proposition, while leveraging us for more of those essential back office, middle office, and eventually front office services.

As we’ve said in the past, quarter to quarter we can have a couple of sizeable new pieces of business. And so it could be $150 billion, $200 billion one quarter, $250 billion another quarter but the pipeline is good and this was a good quarter for our new business wins.

Then just a second question on the Wealth Management business. You said that the Wealth Management growth was improving, but if you look at the revenues year-over-year they are only up 3%. Can you give us a little bit more color maybe on an AUM or some other metric that shows the improvement and also when you expect those revenues to inflect in the future?

Yes, Wealth Management also utilizes some of our mutual funds, and when we examine our Wealth Management operations, it encompasses our private banking activities as well. The Wealth Management fees do not fully represent our entire Wealth Management business. If you refer to our loans and deposit growth on the investment management section, you will notice that we are experiencing substantial success in expanding our balance sheet. The NIR has increased by 18%, which is positively impacting the overall performance. Wealth Management is growing not just in our existing locations; we have opened new offices, and the ability to offer both investment and private banking services in those locations is driving our revenue growth.

Good. Thanks.

Good morning. A question on asset servicing, specifically collateral management, which you mentioned a couple of times. I was wondering if you could maybe size out of the contribution to growth or the growth rate of that service line and also let us know how far along you are in terms of penetrating your existing client base? What inning are you at with that opportunity? Thanks.

Curtis, you want to take it?

Yes, so on the active servicing line, probably quarter over quarter growth, we probably approached 50% of the cloud services benefiting that after servicing lines. As far as where we are in, we are probably in still the early innings, and I mean by the early innings is that the buy side really hasn’t yet benefited fully from shifting some of their business to enjoy collateral as a means to help finance some of what they’re trying to take and leverage or fully embrace or fully put in place the collateralization of margins, especially in Europe. We think we are in early innings still when it comes to collateral business and as far as the growth opportunities that exist around it. And so and our product set really fits well with those needs that those buy-side clients have as collateral continues to be needed to pledge against obligation.

Excellent. It sounds like more to come. Thank you. Then on Investment Management, you mentioned some perhaps more acute funding needs from some international clients driving some of the outflows. How much risk do you see of maybe some additional drawdowns across your client base? Thanks.

We’ve seen through the course of the past several months some clients re-balancing their portfolios. Equity markets over the past couple of years obviously did quite well, especially in the US. I think understanding the US, non-US equity performance is important to this when you think about what people are doing with re-balancing. We’ve seen huge growth in our AUM and LDI as clients have reduced their exposure to equities. And I’m drawing an inference that sometimes we actually see clients sell equities and move into fixed income or de-risk their pension plans. I think it’s been overall a drawdown in assets is not what we are seeing at the moment. We are seeing a re-balancing from equity to fixed income. Again, there’s a lot being talked about the repositioning of investor portfolios towards more risk and what I would say, we see really instead is really focusing on getting returns while being thoughtful about risk and that’s why our alternatives growth – we’ve had eight straight quarters of growth in alternatives and those have been strategies where clients are either getting uncorrelated exposures or they are getting absolute returns on asset allocations strategies that give them better diversified portfolios exposure. I don’t think it’s an overall drawdown. It’s more of a mix shift.

Okay. So it sounds like you're not seeing anything material in terms of funding needs that may be sovereigns or what have you driving those outflows?

We’ve definitely observed that our client base primarily consists of global institutions that occasionally manage their liquidity needs across their portfolios. We see this happen from quarter to quarter.

Got it. Thank you very much. I appreciate you taking the questions.

Okay. Thank you very much, everyone for dialing in. If you have additional questions, which I’m sure you will, please give Valerie Haertel a call. We’d be happy to engage with you, and thank you very much for your attention today.