Bank Of New York Mellon Corp (BK) — Q2 2017 Earnings Call Transcript

Thank you. Good morning, and welcome everyone to the BNY Mellon second quarter 2017 earnings conference call. With us today are Gerald Hassell, our Chairman; Charlie Scharf, our CEO; Todd Gibbons, our CFO and members of our executive leadership team. Our second quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results, and can be found on the Investor Relations section of our website. Before Gerald and Todd discuss our results, let me take a moment to remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement in the earnings press release, the financial highlights presentation and those identified in our documents filed with the SEC that are available on the website, bnymellon.com. Forward-looking statements made on this call today speak only as of today, July 20, 2017, and we will not update forward-looking statements. Now I would like to turn the call over to Gerald Hassell. Gerald?

Thank you, Valerie, and thanks everyone for joining us to discuss our second quarter performance. As Valerie mentioned, Charlie is here with us today along with Todd and members of our leadership team. Now, I'll be taking you through the highlights for the quarter for one final time and then invite Charlie to make some remarks after we've given you some color for the quarter. Next quarter, you'll be in Charlie's very capable hands. Now turning to our release, as you may have seen, we again delivered double digit EPS growth for the quarter. Hence, we achieved healthy revenue growth in both our Investment Management and Investment Services businesses. We benefited from a more favorable rate environment. We earned $0.88 per share, up 17% year-over-year. Total revenue grew 5%, driven by 6% growth in Investment Management and performance fees, 4% growth in Investment Services fees and 8% growth in net interest revenue. Total noninterest expense was up 1% and we generated more than 340 basis points of positive operating leverage. Our pretax margin increased to 33% and 35% on an adjusted basis. We're continuing to deliver high returns on tangible common equity, this quarter achieving a strong adjusted return of 22%. This is now our tenth straight quarter of solid performance against the EPS goals we shared at the October 2014 Investor Day, reinforcing how well our diversified lower risk business model is positioned to deliver consistent results in all our market environments. So now let me update you on some progress against our strategic priorities. As you know, our top priority is driving profitable revenue growth. Investment Services revenue reflected nice growth across virtually all business lines. Notable items include, strong performance in our clearing business, net new business including collateral management solutions and of course higher equity market values. For the quarter, we had $152 billion in estimated new AUC/A business win, that includes the $33 billion prudential fund administration win that we disclosed in early April. We continue to remain encouraged by the strength of our new business pipeline. We're benefiting from investments in cutting-edge collateral management and US government securities clearance capabilities and market-leading technology to meet client and market demand in these areas. Tri-party balances grew, reinforcing our multi quarter growth trend and reflecting a high level of client uptake. This year we've onboarded a number of new repo and collateral management clients, and the demand for our solutions remains high. While the initial revenue impact is relatively small, we would expect these programs to build over time. We've also begun onboarding clients affected by JP Morgan's decision to exit the US government securities clearance business. The revenue impact in 2017 will be modest as many of the largest revenue-producing relationships will not be coming on board until 2018. We expect to see the full revenue impact in 2019. Our other clearing business remains strong as well, benefiting from the restoration of money market fee waivers and another quarter of strong growth in the mutual fund balances. The mutual fund consolidations driven by the DOL fiduciary standard rule is contributing to increased clearing activity. We had an 11% increase in the long-term mutual fund assets and solid growth in our subaccounting services and asset servicing. During the quarter we became one of the first banks to go live as an intermediary for US dollar payments with the first phase of the SWIFT global payments innovation or GPI. That's a service that improves the speed and predictability of cross-border business-to-business payments. BNY Mellon clients will benefit from quicker and faster use of funds, greater transparency of fees, and payments tracking. Turning to Investment Management, it also had a strong quarter with revenue up 5% year-over-year and pretax income excluding intangibles up 20%. Pretax operating margins rose to 34%, up 4% year-over-year, benefiting from the increased revenue and the margin expansion efforts that we've taken over the last year to focus on strengthening our core business performance. We achieved a record high of assets under management of $1.77 trillion, supported by $14 billion in increased flows with long-term active flows of $16 billion, which includes LDI and flows from our cash business of $11 billion, and that was partially offset by index outflows of $13 billion. In terms of investment performance against a backdrop of relatively strong quarter for global markets, our long-term active strategies performed well with 72% and 84% of the assets above their three and five-year benchmarks respectively. Our investments in other initiatives are continuing to gain traction as well. For example, we're seeing strong interest in our newest boutique and capital, where we've been strengthening our alternatives offering that is part of our public and private real estate investment strategies. Our wealth management business also had a strong quarter delivering record levels of revenue to pretax income as a result of positive flows and higher net new business. The organic investment in expanding our wealth management sales teams has now turned profitable. In summary, the diversity of our investment management business mix combined with a strategy of meeting the growing client demand for high value active solutions and ongoing expense control continues to drive improved financial performance in this sector. Our second priority is executing on our business improvement process to create efficiency and quality benefits for our clients and reduce technology operations and structural costs for us. During the quarter, we expanded our cognitive technology functionality to deploy optical intelligent character recognition to processing functions. We believe our use of cognitive technologies is leading edge. During the quarter, we were recognized at the Blue Prism World Awards for best use of robotics process automation to deliver overall business value. We also signed additional clients to our collateralized optimization technology application. It helps our broker-dealer services clients achieve the optimal use of their assets and maximize capital efficiencies. It's one example of how our business improvement process is contributing to revenue growth. Our third priority centers on being a strong, safe, trusted counterparty. The results of the 2017 CCAR stress test demonstrate the high quality of our balance sheet. Of the US T-cent, we had the lowest drawdown of our CET1 ratios to the supervisory severely adverse scenario. The stress scenario benefits from our fee-based recurring revenue stream, which delivers consistent earnings and strong capital generation. Additionally, we have a very high-quality credit and investment portfolio and a low-risk business model. From a regulatory ratio standpoint, our fully phased-in SLR is now 6%. We established a separate legal entity for our operational aspects of our U.S. Government Security Clearance and U.S. Tri-Party Repo business to make us more resilient, transparent, and resolvable. We also simplified our legal entity structure in Europe and across the globe, eliminating a number of entities and all of the regulatory requirements that go with them. Our fourth priority involves generating excess capital and deploying it effectively. During the quarter, we returned more than $700 million in value to shift to our shareholders, repurchasing $506 million in shares and distributing $199 million in dividends. As we announced last month, the Federal Reserve did not object to our 2017 capital plan as part of CCAR. Our board has approved the repurchase of up to $3.1 billion of common stock including the repurchase of $500 million of common stock contingent on a preferred stock issuance. This is over the next four quarters. I'm pleased that we've been able to increase our quarterly dividend by approximately 26% beginning in the third quarter of this year. Our fifth priority is attracting, developing, and retaining top talent. The executive appointments we have made during the quarter demonstrate our ongoing focus on tapping into great talent and fresh perspectives in the marketplace while also providing growth opportunities for our top contributors from within our ranks. You know all about Charlie and the strong leadership experience he brings to our team. We spoke to many of you about that on Monday. If you heard, I'm thrilled with his selection and he is absolutely the right person to lead the company into the next phase of growth. In addition, last month we welcomed Bridget Engle, a proven high-impact IT executive with more than 30 years of experience spanning AT&T, Lehman Brothers, Barclays, and most recently Bank of America. She is focused on advancing our technology strategy. We promoted Michelle Neal, the CEO of our markets business to our executive committee, which speaks to our confidence in her ability to evolve and grow our markets business and to leverage the broad expanse of our trading, financing, and liquidity capabilities across our entire client base. Frank La Salla was named CEO of corporate trust after a highly successful run leading our alternative investment services business. He is working to further build out our corporate trust platform and sales and leadership team to deliver superior solutions for clients and extend our position in this important business. Chandresh Iyer succeeded Frank as CEO of Alternative Investment Services. Chandresh, who helped drive significant improvement to our asset manager, asset owner, and hedge fund middle office solutions business, will continue to build the company's real estate administration and EPS services by extending middle office solutions to our hedge fund administration clients. Joining Chandresh's team is Peter Salvage, our new Global Head of Hedge Fund Services. Peter is a veteran leader of the hedge fund middle office back-office services, innovation and technology space. Peter and his team are focused on expanding our client base of hedge, credits, and hybrid private equity funds. Finally, we named Rohan Singh, Asia Pacific Head of Assets Servicing. He has nearly three decades of leadership in client-facing experience in the business. His hire demonstrates our continued investment in delivering our full capabilities in APAC. As you can see, we continue to develop, promote, and invest in the best talent in the world. In summary, we delivered strong EPS growth, nice revenue growth, and significant positive operating leverage. We and our clients are just beginning to capitalize on the benefits of our strategy and our investments in growth. We have a proven ability to execute and we have distinctive capabilities in areas of growing demand where we can help alleviate environmental and regulatory pressures on our clients and make it easier for them to access the insights and information they need to succeed. We believe our early commitment to an open-source digital platform sets us up nicely to continue to differentiate ourselves in the global marketplace. With that, let me turn it over to Todd.

Thanks, Gerald and good morning everyone. It was a good quarter as we continue to execute our strategy and build a foundation for future growth. When you look at the results for the earlier quarter, a few things stand out. First, we experienced solid revenue growth in both segments with investment management and performance fees of 6% and investment services fees of 4%. Second, we grew total revenue by 5% and that's at a time when FX is under a bit of pressure due to low volatility and I think that demonstrates our well-diversified lower risk model is positioned to create increased value through the most environments that we face. Third, our net interest revenue and our net interest margin benefited from the rate increases. Finally, expenses were a little higher, yet we still generated excellent positive operating leverage and increased our operating margins. If you turn to our financial highlights document, I'll continue my commentary starting on Slide 5, which gives an overview of our results for the quarter. Our second quarter EPS was $0.88, 17% higher than a year ago. If you look at the underlying performance on a year-over-year basis, the second quarter fee revenue was up 5%. Expenses were up 1%, and we generated more than 340 basis points of positive operating leverage. Our adjusted pretax operating margin was up 2 percentage points to 35%. Net interest revenue also increased a strong 8%, driven by higher interest rates. As we've noted in prior quarters, the strength of the U.S. dollar continues to impact the results negatively for revenue and positively for expenses. On a consolidated basis, however, the net impact from currency translation was essentially neutral once again. Income before taxes was up 12%, and our adjusted return on tangible common equity was 22% for the quarter, compared to 20% in the year-ago quarter. Moving ahead to Slide 7, I'll discuss our consolidated fee and other revenue primarily on a year-over-year basis. Total investment services fees were up 4%. Asset servicing was up 1% year-over-year and 2% sequentially. Both increases reflect net new business including the continued growth of our collateral management solutions and businesses, as well as higher equity market values. The year-over-year increase was partially offset by the unfavorable impact of a stronger dollar and the impact of downsizing the retail U.K. transfer agency business. Clearing services fees increased 13% year-over-year and they were up 5% sequentially, driven primarily by higher money market fees and growth in our long-term mutual fund assets on the platform. Issuer service fees were up 3% year-over-year, reflecting higher depository receipt fees. On a sequential basis, issuer service fees were down 4%, primarily due to seasonality in depositary receipt revenue. Treasury services fees increased 1% year-over-year and sequentially, reflecting higher payment volumes, while that's partially offset by higher compensating balance credits. If you adjust for the compensating balance credits, treasury service fee revenue would have been an additional 4% higher. Investment management and performance fees increased 6% year-over-year and 4% sequentially, reflecting higher market values, money market fees, and performance fees. The year-over-year increase was partially offset by the unfavorable impact of a stronger U.S. dollar, principally driven by the British pound. On a constant-currency basis, investment management and performance fees increased 9% year-over-year. Investment management's focused approach delivering profitable revenue growth that centers on expanding our product offering to meet the evolving client demand and high-value active strategies, coupled with ongoing improvements to business processes as well as increased efficiencies, have resulted in an adjusted pretax operating margin for the quarter that increased 397 basis points to 34% year-over-year. Foreign exchange and other trading revenue on a consolidated basis was down 9% year-over-year and it was up 1% sequentially. FX revenue of $151 million was 9% lower and 2% lower sequentially, reflecting the lower volatility that we saw in both periods. The year-over-year decrease was partially offset by increases in volumes. Investment and other income of $122 million compared with $74 million in the year-ago quarter and $77 million in the prior quarter, both of those comparisons primarily relate to lease-related gains in the second quarter. Slide 8 shows the driver of our investment management business, and I think it will help explain some of the underlying performance. We achieved record assets under management of $1.77 trillion, up 6% year-over-year, benefiting from higher market values and net inflows that were offset by the unfavorable impact of the stronger dollar, for the most part. Long-term active flows were $16 billion, driven by the second consecutive quarter of positive LDI inflows with $15 billion in Q2, showing continued momentum in fixed income flows where we saw $2 billion of inflows. While we experienced outflows of $2 billion in active equities, outflows this quarter were among the lowest we've seen over the past few years. We had index outflows of $13 billion, primarily due to portfolio rebalancing from several large international clients. In contrast to the industry trend, we experienced cash inflows of $11 billion, benefitting from our strong performance from core money market funds. Off-note client assets in wealth management reached record levels this quarter, which is up 10% year-on-year. Turning to our investment services metrics on Slide 9, we achieved record assets under custody and/or administration of $31.1 trillion, up 5% year-over-year and 2% sequentially, mostly driven by higher market values. We estimate total new assets under custody and/or administration business wins were $152 billion in the second quarter, marking another solid result. Looking at other key investment metrics, you'll see average deposits declined 10% year-over-year, reflecting the impact of the rate increase, as well as our efforts to proactively manage our balance sheet to meet current liquidity and capital requirements. Given strengths in our capital ratios, we were able to accommodate some additional client deposits this quarter and our average deposit balance has actually increased 1% sequentially, contributing a bit to our net interest income. Tri-party balances grew a strong 19% year-over-year and they were up 5% sequentially, with volumes increasing due to additional businesses we are onboarding. Turning to net interest revenue on Slide 10, on a fully taxable equivalent basis, NIR was at $838 million, up 7% versus the year-ago quarter and 4% sequentially. Both increases primarily reflect the benefit of higher interest rates. The year-over-year increase also reflects lower premium amortization, partially offset by lower interest-earning assets and higher average long-term debt. The sequential increase reflects an additional interest-earning day, as well as a modest increase in interest-earning assets. Turning to Slide 11, adjusted non-interest expense increased 1% year-over-year and was up slightly sequentially. Expenses were a little higher in the second quarter than we had guided in our first quarter earnings call. About half of that increase was due to the weakening of the U.S. dollar in the quarter. Although it's up on a year-over-year basis, it was actually weaker in the quarter. The other half was due to higher incentive expense, both due to business performance as well as the impact of a higher share price and the mark-to-market impact on the variable compensation component of incentives. The year-over-year increase primarily reflects higher professional, legal, and other purchase services, partially offset by the stronger U.S. dollar as well as lower net occupancy expenses. The increase in professional, legal, and other purchase services is primarily related to regulatory and compliance costs, especially the 2017 resolution plan. Earlier this month, we delivered that plan, which we believe makes us more resilient and resolvable. We incurred significant costs due to the construction of the plan itself, which has made us more resolvable, and we continue to expect some of these expenses to be phased out over the coming quarters. Net occupancy expense decreased as we continue to benefit from the savings we generated from the execution of the business improvement process, and sequentially lower staff expense was offset by higher other business development and software and equipment expenses. The decrease in staff expense was driven by the impact of investing in long-term stock awards for retirement-eligible employees that we recorded in the first quarter as we've done in previous years. Turning to capital on Slide 12, our fully phased-in supplemental leverage ratio increased to 6%, meeting the upcoming 2018 regulatory requirements, plus it has what we now believe is a very reasonable buffer. We also remain in full compliance with the liquidity coverage ratio. A few additional notes about the quarter: our effective cash rate of 25.4% is in line with guidance. On Page 9 of our press release, we show investment securities portfolio highlights. At quarter end, our net unrealized pretax gain on our portfolio was $151 million, compared with a pretax loss of $23 million in the last quarter, with the improvement primarily driven by the decrease in market interest rates for the period, in summary, a strong quarter performance as we continue to execute well against our three-year goals. Now, let me provide you with some color on how we are thinking about the next quarter and the full year to assist you with your modeling. Third quarter earnings are typically impacted by a seasonal slowdown in transaction volumes and market-related revenue, particularly things like foreign exchange, collateral services, and securities lending. That is often offset by the seasonally higher activity that we see in depositary receipts. However, for this coming quarter we would expect the seasonal bump to be about half of what it was last year, around $50 million, reflecting a somewhat less favorable market environment. During our first quarter call, we indicated that our net interest revenue should be up in the range of 2% to 4% for the second quarter. We came in at the high end of that range. We had also indicated at that time that we expected to be in the 4% to 6% range for the full year. NIR would be up in that range. Given the performance we've seen in the second quarter, as well as our outlook now for NIR, it has improved, and we think we should be at the high end of that 4% to 6% range. Another item back in January, I told you that investment and other income should be in the range of $60 million to $80 million each quarter. In this quarter, it was elevated quite a bit because of the lease-related gains that I mentioned earlier. As you've seen over many quarters, this line does tend to be a little bumpy, but for the full year, we still expect the average to be at the high end of the $60 million to $80 million range per quarter. On expenses, as we noted last quarter, we expect to see a $10 million decline and each of the last two quarters were about $20 million in total, mainly from reduced consulting fees related to the resolution plan. For the full year, we expect our total adjusted expenses to be up around 1%, although the improved revenue performance and the recent decline of the dollar may make this a bit more challenging. Regarding taxes, we expect our 2017 effective tax rate to be in the range of 25% to 26%, along the lines of what we've previously guided. Finally, we expect to generate positive operating leverage for the entire year of 2017. With that, let me turn it over to Charlie to say a few words.

Thanks, Todd. It's great to see that Gerald and the team were able to deliver more solid results in Gerald's last quarter as CEO and that he and the team have been able to create momentum. I know I said a few days ago that I have tremendous respect for what Gerald has accomplished during his 44-year career and six-year tenure as CEO here at BNY Mellon. We're working very well together and look forward to his continuing advice and counsel. We will continue to build on all that he and the team have accomplished and the focus on both efficiency and growth. We understand that short-term results give us the credibility and resources to invest for the long-term. We will sustain a strong, trusted, and well-respected company with real long-term sustainable growth. Gerald and Todd are in the best position to comment on the quarter, so I'll hand it back to them, and I look forward to speaking with you more after I'm settled. Gerald?

Charlie, thank you very much for those kind remarks. And Operator, we're now able to open it up for questions. Operator, can we open it up for questions? Yes, thank you.

Thanks. Good morning. Gerald, congratulations also on a great career at BNY and Charlie, best of luck. If I could just ask on NII, Todd, regarding your point on the good progression, just as far as your outlook. I was wondering if you could help us understand just the on and off, what's coming on, what's coming off, and any changes that you're seeing in terms of just the environment and how you're able to invest there. It seems like the benefits you got were more in the cash deposits and in the loan book, and the securities yields were flat. So just wondering if you can help us understand the movements there and how that looks forward.

Sure, Ken. Good morning. So, the securities book has about 30% of it that is floating, so that reprices regularly and it is a little bit of a lag to that, but we see that reflected in the numbers over the past couple of quarters. The other 70% is being reinvested in similar duration securities, and there's a flat yield curve, so those rates really haven't gone up much. It's not really benefiting from a change in the rate environment. As we look forward, we would expect to see those yields continue to increase as they follow the forward yield curve. You could probably see the entire securities portfolio continue to grind up maybe in the range of six or seven basis points a quarter.

Got it, great. Thank you for that. And secondly, just on the - if you can provide a little color on that issuer services commentary, is this an environmental point about the seasonality being different? Or are you seeing some structural changes to either the usage of DRs or the way that market is moving around nowadays?

Okay. The comment I made was that we typically see in the second quarter a fairly substantial bump. We expect to see that in this quarter, but not as large as what we've seen in the past. I think Brian can point out the factors driving that.

Yeah. Sure, Todd. I think the reason the growth in the third quarter wouldn't be as high as last year is really driven by three different factors. One is just market and economic conditions have driven the decline in DRs outstanding in a couple of large emerging markets. Second, there were some non-recurring M&A activity and privatization activity last year in the second quarter that won't repeat itself this year, creating a year-over-year difference. Lastly, we are seeing pretty aggressive competitive pricing in the marketplace, and we've been sticking to our discipline around profitable growth. As a result, we've lost a couple of clients in the DR space, which is another factor. Those are the three factors. But honestly, we think our profitable growth strategy is the right one long-term for the shareholders, and in terms of our market share of new issuance, we still remain market-leading and solid.

Corporate actions in the space tend to be episodic anyway, so you're going to get some swings there from period to period.

Understood. Alright. Thanks, guys.

Thanks, Ken.

Hey, guys. Good morning, everybody. You continue to become fixated on the whole rebook clearing collateral management issues. So, maybe taking another step at this, anyway you guys can help advise how much this contributes to the revenues today, and I guess more importantly the opportunity you see from JP Morgan exiting this business. I guess a couple of years ago, I heard you talking about onboarding some clients, but anyway you can help us and I think that will be helpful. More importantly, taking a step back to the treasury's suggestion on the SLR relief, if that does come into fruition, it should be pretty positive for the repo markets broadly. Again, maybe taking a step back, you can help us think through how this could impact BNY Mellon's revenue as a whole.

Okay. Alex, you're layering a lot of questions for us. Let's see how we can handle them. I'll start with the clearance topic and ask Brian to pitch in. When we look at collateral management, it's another form of custody. So, we're acting as a custodian as do many of our competitors, and that falls under the asset servicing line. It's a relatively small component of the total asset servicing line, but it is the fastest-growing component. We're starting to see it actually move the needle a little bit. We look at the growth from the quarter and the underlying growth rate. Probably about half of that was contributed by improvements in collateral management. Now, Brian, do you have anything to add to that with the new clearance clients coming on?

Yeah. I mean JP Morgan, as you said, announced the exit for the government clearing business last year, but we're only now beginning to transition them after putting in place an enhanced governance model and enhanced resolvability model that Gerald talked about. We actually converted our first small JP Morgan client in the second quarter and we'll be converting now over the course of the rest of this year and into '18, the rest of those clients, as well as some other clients and new market entrants into this space. We think that U.S. government clearing and tri-party and global collateral services will be an increasing driver of growth over the next 18 months, and we're all aligned to drive that growth responsibly.

I think, Alex, the related question you had is about the impact of the treasury paper on regulatory change. A component of that was to exclude things like treasuries and central bank cash and perhaps new treasury repo out of the denominator of the leverage ratio and the SLR. As you look out to the binding constraints for the big broker-dealer, that is their binding constraint. I would assume that they've got some relief as the matched books that they had run in the past could probably grow, and we would benefit from more activity. We would be very welcoming to that change. We think it would be healthy for the treasury market itself because it would add greater liquidity, tighten up spreads, and we also think there would be more transaction volume flowing through us.

Got it. Thanks. That's very helpful. And then the second question around the NIR dynamic and just deposit beta you guys have seen in the quarter. Any meaningful change from the last hike given client behavior you’ve observed, I guess post the June hike? And specifically with respect to noninterest bearing deposit, it seems like that's been fairly stable for you guys, but any sign you are seeing that customers in that bucket are starting to look around for places of a little more yield?

Yeah. I want to talk to a couple of points here. If you look at Page 8 of our earnings release, we disclosed what the cost of our interest-bearing deposits was and the change in the quarter. You can see in this quarter it went from three basis points to nine basis points. So, we had about a 29 basis point increase on average in the interest on excess reserves. If you take into consideration about 75% of our deposits are US dollar-denominated, that equates core to somewhere between 25% and 30% beta. We do think that beta with future rate increases will increase, but it will continue to add positively to our NIM. We do anticipate this moving up above the 50% range with the next few movements. In terms of deposit behaviors, they've probably performed our expectations a little bit in the second quarter. In terms of total deposits, they are up a little bit. US deposits are just about dead flat on a sequential basis in both the noninterest-bearing and the interest-bearing. We believe depending on how the Fed does its tapering that we might continue to see some modest runoff in noninterest-bearing deposits. I think what goes on in the interest-bearing side is just related to the beta. There’s no reason we should have to see that kind of runoff. But the net impact is still a positive one with our NIM increasing more than the impact of the runoff; that's what we are currently modeling.

Maybe I can add to something Alex, and that is we have a very, very good process internally by business segment around seeing the deposit flows. That's why the benefits of enhanced data by business line enable them to work with our treasury area, ensuring we are pricing the deposits correctly for the best outcome for the firm and clients, and that process is working very smoothly.

Got it. Thanks, guys, very much.

Hi, thanks very much. A question on asset servicing. We try to get at this once in a while, and there's a lot of moving parts, but the markets are up a lot, your assets are up a lot, and asset servicing was up just 1%. I wonder if you could parse out what's mix shift, what's price break, what's currency, what's the U.K. TA business impact. It just came up lighter, and I think there's a bunch of moving parts in there.

Sure. How about if I start and Brian? One of the things that I want to make clear is, if you look at the asset servicing line for the enterprise, that does include some fee revenue that's generated in the investment management and some fee revenue that's generated — most of it obviously is generated in the Investment Services business. On the Investment Management side, we have seen in our boutiques a little lower securities lending and in that kind of custody-related business, and wealth management, it's been relatively flat. The remainder of it is running through investment services and Brian can speak to that.

From an investment services perspective, the revenue growth was up 2% year-over-year. If you adjust that for the impact of currency and the impact of our repositioning of the U.K. retail TA business, the growth rate is more like 3.5%. It's a reasonably solid growth rate. We still think that this business is positioned well for long-term growth, as asset managers face secular trends that are putting pressure on their cost base, and we really are part of that solution in terms of extending variable cost shared economies of scale solution. There are significant growth opportunities ahead in the middle office space and in the real estate private and equity funded administration space. We are strengthening our team in the ETF services space and we sort of have a life cycle approach to ETF services, not just the core servicing, but we're authorized participants, and we have a platform for gathering — and a new no-transaction fee ETF asset-gathering platform approaching. The foundational things we need to enhance growth are continuing. Collateral management, which is core to asset servicing, is one of those drivers going forward.

Just as a reminder our business mix is a little bit different, so we are much more fixed income-oriented, as you know. Fixed income is actually down a little bit year-over-year, but we're benefiting from the expertise we have in the collateral management side of that. We do get a market bump. There’s no question about it, but probably not as high as you might see as somebody that was more oriented toward equities.

Fair and all, guys, I appreciate that. Just one little follow-up and not sure if I missed it. You mentioned what you thought you won in the quarter. Do you have a number for what is won but not yet funded pipeline?

We don't have that number handy, but it's not a huge number at this point.

Okay. I appreciate it. Thank you.

Hi, good morning folks. Maybe just back on the balance sheet. Todd, if you can comment on how you would potentially envision the balance sheet size if some of the recommendations by treasury do come to fruition in terms of releasing cash and traded securities from the SLR denominator, how that might — I know it's very early, of course, but how you might think about that shaping your balance sheet size strategy over the next couple of years. And then just also quick on the other securities portfolio line that you just put down, I was just wondering if there was any premium amortization increase in that in 2Q?

Brian, I'll have to follow up to your second question. But as to the balance size, if we get relief from the treasury recommendations, we're going to have to think through what to do. That would relieve a fair amount of our capital requirements. We've been disciplined in the past and I expect we will be in the future. If growing the balance sheet makes sense, we will do that. If not, we will buy back our shares. That activity would have to be contingent on our making a decent return because ultimately it's freed-up capital. We have to do something with it. That's how we're thinking about it.

Okay, thanks. And just for Brian on the client adoption of NEXEN, I know he has been talking a lot about client usage of a number of different services and beginning to see a little bit of an incremental revenue impact. You did note that impact asset servicing positively this quarter, and are you seeing that as a potential revenue impact in the second half? And then just maybe — I know Charlie is going to comment a lot more next quarter, but in terms of the technology initiatives you’ve been putting in place, should we be thinking of any type of strategic change to the priority with Charlie in the CEO seat?

Yeah. As for NEXEN, we continue to see increasing adoption of the platform, and we continue to build our capabilities and add more enhancements to enhance the client experience and their ability to operate effectively. We have now crossed the threshold of over 100,000 client and internal users on the NEXEN platform. In terms of revenue generation, there will be some fee revenue growth from core services like API access and processing and from our premium services. It is not yet a meaningful contributor to the revenue base, but we expect that revenue, and at this point, we don't want to provide specific guidance on that. We want to continue to build the platform out and see increased adoption. I would say that the client impact is growing and we have more proof points and case studies. Access to real-time data through APIs is making a meaningful difference in our clients' business and enabling them — for example, one major financial institution is able to manage their collateral and liquidity more effectively, saving our clients millions of dollars. We're getting more and more value through various case studies, and that will continue to grow. In terms of the business improvement process, I will comment on, and if Charlie wants to add to it, I'm sure he will. The business improvement process is going to continue. It's critical to our performance. The market environment requires us to continuously optimize our existing investments to fund strategic growth investments and reward shareholders. I see this as a process, not a project, and something we will continuously do as part of the continuous improvement culture. We have a pipeline of initiatives already underway that will continue to drive momentum in that space. I hope and expect Charlie will agree with that, and he's going to have a chance to share his thoughts right now. Go ahead, Charlie.

It looks like mother and apple pie. I agree completely with what Brian said, and I just look forward to getting into details and understanding the specifics a little more.

Great, great. Thanks very much for the color.

Good morning. Thanks for taking the question. I just want to follow up on the deposit growth trends. We saw the foreign office deposit growth pick up, and I think you referenced that US deposits were stable. So, it seems like all that deposit growth came from foreign offices. At the same time, we saw the cost of those shift from negative to positive. So number one, I guess what drove that cost, and was there any particular region driving that, or was there a mixed shift there in that line item?

We're mixing apples and oranges here. The deposits booked do not reflect the underlying currency. We saw quite a bit of our deposits booked at foreign branches. With that said, the mix of US dollar and non-US dollar deposits changed slightly because we saw our US dollar deposits flat and our non-US dollar deposits increase slightly. As we go through the pickup in our interest-earning deposits, the cost moved from negative numbers to positive, all attributed to the dollar impact. The result takes into consideration that a significant percentage of our deposits is non-dollar, and changes in costs reflect those variations.

Okay, got it. So, regardless of domicile currency, the driver was all USD and no real change in the non-US dollar-based deposit.

That's correct. It was flat from period to period on average.

Got it, okay great, thanks. That's very helpful. Then when we think about revenue growth in Investment Services, I want to say that that drove — that was a pretty strong component that we saw here this quarter. When we think about durability, I know you had some decent growth in the cash products as far as flows go. Is this just a catch-up there, and therefore, we should think about this as the right jumping-off point for that line item? It's tough because we can’t see the exact AUM in the disclosures yet.

So one, I take a stab at this across our major sectors. First on the clearing side, the further consolidation of mutual fund assets under our platforms is increasing, and it's gratifying to see that our platforms are being used more extensively. That consolidation process occurs; we are winning business from brokers and accelerating at pace, and more importantly, advisors are utilizing our platform to capture assets, thus, seeing an uptick in our clearing metrics. The second part of your question is that we are seeing and capturing more cash through our various portals and platforms. Whether it’s purging platform or liquidity services platform, we are internalizing that cash flow, which is why we're seeing a performance increase in our money market area. Additionally, we've been competitive with returns in the money market, which contributes to our overall performance.

Perfect. Thanks for all the color.

Thank you. I had technical difficulties on the call on Monday, so my first question goes to the panel — congratulations, Gerald, for your great career, and welcome Charlie. Charlie, can you share with us—I know you got the tactical background from Visa and how that will help probably in the Investment Services area, but when you look at Slide 3 of today's handout, you see that the Investment Management revenues have been pretty much flat for now in two and half years. What's your view about the Investment Management business when you look forward?

Well, if I think generically, the underlying business dynamics are something that fits very well into what we do. I obviously have a lot to learn about our boutique model. What drives the performance, and I honestly have spent just a little bit of time with Mitchell, but we're going to spend a bunch of more time going through the plans. When there is more to talk about, we will certainly do so, which I would say by the end of the quarter and at Investor Day.

Yeah, Gerard, one slight correction to your commentary: the revenue growth in Investment Management was up very nicely and the pretax income was up even more. So I just want to correct that a little bit. The performance in the Investment Management area has been quite robust this year.

Thank you. And then Todd, can you give us an update? In 2014, at the Investor Day, you talked about the balance sheet shrinking by maybe $40 billion to $70 billion over time. Where are you on that number when you track all your big deposits to where they are today? How much are you down?

If you look at it on average, interest-bearing deposits on a year-over-year basis are down about $25 billion, so we are pretty far along the way. Most of that is in dollars. Now when we gave that indication, we assumed a parallel shift in all currencies. We haven't seen that, so we are not seeing any decline in the non-dollar deposits at this point. I think we tracked along our expectations fairly closely, and we could see a modest additional decline. That all being said, the markets are growing and so with growth, the natural underlying growth may offset some of what the interest impact and Fed tapering would otherwise have.

Thank you.

Thank you.

Thanks, guys. First question just on Investment Management, anything to note on trends you guys mentioned on performance in the flows, revenues, and margin? Everything was pretty good. Just two items I had a quick question on. One is the other line — it looks like there was a loss there. I think that's usually seed, but markets are pretty strong, so I don't know if there was something. It's a little unusual. And then I think you guys mentioned on the high net worth side deposit balances declining for net interest income. I think we are seeing that across the industry, but is there any color on how much that tax-related versus client being more engaged in the market versus sitting on cash?

Yeah. I'll make a brief comment, and Mitchell can jump in. We're seeing a little decline in the wealth deposits, and I don't know if I can comment on that. Mitchell Harris just on the wealth deposits, you have a couple of things, I think going on. You have seasonality that happens in the second quarter with tax payments, and with interest rates moving up, private clients are moving into other products right now. With respect to the other revenue, it's primarily an abatement of the cash waivers that we pay to Investment Services. So, it's more of an internal transfer from us to Investment Services.

Okay, thanks.

And Michael, were you referring to the segment line or the enterprise line for other investment, other income?

It was the segment.

Okay, alright. Thank you.

And then just a quick follow-up just on the investment gain, you just mentioned in terms of the full year that 60 to 80 properties; I just want to make sure we’re thinking about that right, meaning that 60 to 80 for the remaining two quarters, or do we take the elevated level like this quarter and the rest of the year would be lower?

Yeah, you would adjust taking the number on average. For the aggregate for the year, it should be on the high end of that 60 to 80 range, so four times 80 is 320.

There's your number.

Alright, guys, thanks a lot.

Thank you.

Hi, good morning. Thank you for taking the question. Back to the deposits, firstly, can you remind us why your clients leave noninterest-bearing deposits with you? You've got over $70 billion of them. It's a very sophisticated client base; I'm sure they do not earn interest if they could. So why do clients leave those noninterest-bearing deposits at BNY Mellon?

Well, there's a substantial amount of those that are non-dollar, so right now, in the non-dollar category, interest rates are extraordinarily low or negative in some instances. In US dollars, it tends to be frictional cash; most of us leave a little money in our checking accounts. It looks a lot like a retail business when you have many thousands of accounts, and clients are trying to avoid overdrafts in those accounts, leaving a cushion for that frictional activity. Finally, in some of our payments businesses, we give earnings credit, so we don't pay interest on the account, but we credit fees for the account. So that's still denominated as a noninterest-bearing account, but it effectively offsets fees for the services provided. This quarter alone, we saw a healthy payments business—only up 1%, but reflected by the credits from noninterest-bearing balances, which would have added another 4%, so the underlying activity was up significantly.

And then just to follow up on that: noninterest-bearing is obviously a much higher percentage of liabilities or earning assets or however you want to look at it than it was before the crisis. Is there anything structural that's changed that means that it should be higher other than the interest rates environment?

I wouldn't say that. There is obviously a value in managing that tighter and tighter as rates go up, which is why we would expect in our models and we've reflected that this is probably going to be the case. If you kind of look back at us prior to the crisis, we're running those numbers somewhere around 16% of the balance sheet. It's probably a little higher than that now, but I believe the non-dollar component has contributed a fair amount as well.

Great, thank you very much.

Okay, thank you, Geoffrey.

Thank you very much, Geoffrey, and thanks everyone for dialing in. We really appreciate it. I'm sure you’ll follow up with Valerie and our team on further questions.