Bank Of New York Mellon Corp (BK) — Q4 2017 Earnings Call Transcript

Good morning, and welcome to the BNY Mellon Fourth Quarter and Full Year 2017 Earnings Conference Call. With us today are Charlie Scharf, our CEO; Mike Santomassimo, our CFO; and members of our executive leadership team. Our fourth 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 Charlie and Mike 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 in our documents filed with the SEC available on our website. Forward-looking statements made on this call speak only as of today, January 18, 2018. We will not update forward-looking statements. Now I would like to turn the call over to Charlie.

Thank you, Valerie. Good morning, everyone, and thank you for joining us. Let me cover a few items before turning it over to Mike, and then we will open it up for questions. As you can see, the quarter was impacted by two significant events: first, the new U.S. tax legislation added $0.41 per share this quarter; and second, a series of actions we took reduced earnings by $0.24 in the quarter. I'll talk more about this in a second. If you look beyond those items, our underlying results benefited from the strong equity markets, and we continued to show modest underlying growth in revenues and reasonable profit growth across the firm. I'll let Mike walk you through the detailed financial impact of the tax legislation and our other actions when he takes you through the financials, but I do want to make a few comments, first regarding the new tax legislation. In addition to the favorable impact this quarter, we expect to see our effective tax rate go from approximately 25% to approximately 21% in 2018. We expect to reinvest the vast majority of the tax benefit into our employees and our businesses in 2018. I will discuss this more later. In addition, we're hopeful that the increased competitiveness of corporations due to the lower effective tax rates and related investments those companies are making will result in a continued strong business environment both in the U.S. and outside of the U.S., which should prove beneficial to us. I've already mentioned the $246 million, or $0.24, in significant items impacting our net income. The biggest piece of this was severance, which is part of a broad-based effort to improve efficiency and effectiveness across the company. This includes the two significant actions we took since we last spoke: the senior management leadership changes and the changes in our U.S. asset management business. The leadership changes and organizational realignment are going very well. We've reduced layers, aligned more closely around our clients, and created more business representation on our executive committee. I'm confident that these actions will enable us to serve our clients more effectively and holistically, but this is a work in progress. We also consolidated our three largest asset management firms in the U.S., Mellon Capital Management, Standish Mellon Asset Management, and The Boston Company, and announced the launch of a specialist multi-asset investment management firm with $560 billion of assets under management, which combines the best of these companies. This combined business will improve our positioning in the marketplace with our clients and the consulting community. Secondarily, the combination will enable us to drive efficiencies by consolidating non-investment functions such as trading and operations to continue the improvement in our margin over time. Aside from the tax impact and these significant items, our underlying business performance in 2017 reflected continued consistent and steady improvement, and most importantly, our client franchises continue to grow. On a segment basis, we have strong performance. Investment Management revenues grew 9%. This includes 12% in investment management fees and strong performance fees for the quarter. We were clearly beneficiaries from the strong equity markets, but we also saw some benefit from flows this quarter with net positive flows of $12 billion, including strong performance from our LDI strategy. On a full year basis, flows were up $64 billion compared to last year's outflows of $23 billion, marking a significant turnaround for this business. Our performance continues to improve across our active strategies with 87% of active assets under management above their 3-year benchmarks and 77% above their 5-year benchmarks for the fourth quarter. We ended the year with record assets under management of $1.9 trillion. Our full year adjusted pretax operating margin continues to improve, adjusting for the significant items. In order to maintain momentum, we will continue to develop client solutions in alternative and passive strategies to meet our clients' needs. Our wealth management business also performed well and also benefited from the strong markets and investments we made to grow our client-facing teams. To further our progress in wealth management, we will continue to grow our client-facing teams and continue to improve our technology platform to provide a better client interface and analytics, including mobile capabilities. Let me now move on to talk about Investment Services. The segment grew revenues 8%. This includes 5% growth in investment services fees. Asset servicing results were helped by the strong markets and new business, particularly in collateral management. As I've interacted with our clients, I continue to believe we have more opportunity to partner with our clients across the many services we offer. We had strong estimated new business wins this quarter of $575 billion in assets under custody administration. Clearing services got the benefit of rising interest rates through additional money market funds and, at the same time, grew long-term mutual fund balances by 16%, some of which was market-driven. Although we lost a couple of clients recently, the pipeline is strong. While our Depositary Receipts revenue was lower due to volumes and the timing of corporate actions, our offer remains competitive, and we're continuing to win our fair share of new issues coming to the market. Consistent with last quarter, total revenues in our Corporate Trust business were up mid-single digits. We're continuing to invest in the business to regain our share and are seeing some green shoots to progress. Lastly, in treasury services, the fees are just part of the story. We're seeing steady, consistent growth in total revenues in the business, which includes both fees and net interest revenue, up low double digits this quarter. All in all, while it takes some work to parse through the quarter, we feel good about our underlying business results and remain very focused on driving longer-term franchise growth. As I've said on the third quarter call, we've undertaken a review of the company timed around the annual planning process with the goal of prioritizing opportunities to strengthen the firm. Some of the charges in our significant items this quarter are a result of that work, but we expect there to be more in 2018. We are at the tail end of our review, and we'll provide an update at our March 8 Investor Day. We would expect to be in a position to provide more commentary around our growth opportunities then as well. As you've seen, we've had consistent revenue growth but aspire to increase the rate of growth over time while maintaining a consistent risk profile. When we meet in March, we intend to review how the parts of our company work together to provide a unique value to our clients, how we will use technology to drive our business forward, what we intend to do to continue our drive for efficiency, as well as actions we will take to strengthen and streamline our infrastructure. I do want to remind you there are no silver bullets here when it comes to revenue growth, meaning any improvement in increasing the growth rate will take place over multiple years. We're focused on building our client franchise, supported by strong and innovative products, and our business is categorized by long sales cycles with relationships that last multiple years. And I do want to reiterate an important comment I made last quarter: we like the businesses that we're in. Now over to Mike.

Thank you, Charlie. Good morning, everyone. Before I begin my prepared remarks, I would like to congratulate Todd Gibbons on his new role as CEO of Clearing, Markets and Client Management and thank him for all his hard work and accomplishments as CFO. I can attest that Todd is an aspiring leader, and I think all of us here at BNY Mellon agree the Clearing, Markets and Global Client Management business is in very capable hands. Turning to the quarter. It was a busy quarter on many fronts. In mid-December, we were pleased to receive a positive response to our Title I resolution plan submission from the FDIC and the Fed. The regulators acknowledged the important steps we have taken to enhance the firm's resolvability and facilitate our orderly resolution in bankruptcy. The agencies found no deficiencies or shortcomings in BNY Mellon's 2017 plan which validates the enormous efforts we have made to enhance our resolvability. As we move forward, we will continue to maintain our focus on resolvability and resiliency. During the quarter, the macro environment continued to improve, and as expected, the Federal Reserve increased interest rates by 25 basis points, which slightly improved our fourth quarter net interest revenue. Additionally, the strong global equity market performance helped to drive a record quarter for AUC/A and AUM. Also, as you are aware, the tax legislation was passed in late December. The bill is complex and will take some time to fully implement. The amounts reflected in the earnings release represent our best estimates of the impact from the legislation to date. With that, let me run through the details of our fourth quarter results. All comparisons will be on a year-over-year basis unless I note otherwise. Consistent with previous quarters, the impact from foreign currency translation had an essentially neutral impact on net income on a total company basis. Beginning on Slide 3. In the fourth quarter, we reported earnings per common share of $1.08. There were two significant items recorded in the quarter that impacted the results. First, we recorded a $427 million after-tax or $0.41 per common share gain related to the new U.S. tax legislation. And second, we also recorded a $246 million after-tax or $0.24 per share negative impact related to severance, litigation and asset impairment and the sale of certain securities in our investment portfolio, the majority of which will better position us for the future, as Charlie noted. Revenue of $3.7 billion was down 2%. This included a $320 million negative impact from the U.S. tax legislation and other charges, which decreased total revenue by 8%. In addition, each of our segments saw growth in revenue with investment management and performance fees increasing 13% and investment services fees up 5%. Expenses of $3 billion were up 14%. This included a $282 million pretax impact for severance, litigation and other charges, which increased expense by 11%. For the full year 2017, we reported earnings of $3.9 billion or $3.72 per common share, up 18%. The results included revenues of $15.5 billion, which were up 2% and noninterest expenses of $11 billion, up 4%. The significant items in the quarter decreased revenue by 2% and increased expenses by 3% full year and earning and increased earnings per share by 5%. In addition, in the fourth quarter, we returned $900 million to shareholders via share repurchases and dividend payments and $3.6 billion in the full year 2017. Moving to Slide 5. We will discuss the impact of the new tax legislation. The table summarizes the financial impact. I'll start there. There was a $1.2 billion tax benefit to net income associated with the remeasurement of our net deferred tax liabilities at a lower statutory corporate tax rate of 21%. The net deferred tax liabilities were primarily associated with goodwill and intangible assets. The estimated repatriation tax on foreign earnings amounted to $723 million. The impact on our renewable energy investments was negligible to net income as the pretax accounting resulted in a reduction of $279 million recorded in investment and other income, which was offset by the tax benefit from remeasurement of associated tax-deferred liabilities. The new tax legislation also reduced our regulatory capital by $551 million, driven by the repatriation tax offset by the tax benefit related to the remeasurement of certain deferred tax liabilities. Turning to how this will impact us going forward. As Charlie mentioned, we are hopeful that the new legislation will help stimulate economic activity, which has proved to be beneficial to us and our clients over time. Our effective tax rate for 2018 is expected to be approximately 21%. We do not expect the BEAT or the Base Erosion Anti-abuse Tax to have an impact in 2018. The impact beyond 2018 is uncertain, but based on what we know today, we expect it to be immaterial. We expect to repatriate a limited amount of cash from our non-U.S. entities due to the capital and liquidity requirements of those entities. And lastly, our capital distributions in the first half of 2018 will not be impacted. The remainder of the year's buybacks will be subject to the CCAR process. Turning to Slide 7. The consolidated fee and other revenue was $2.9 billion, down 3% year-over-year and 10% sequentially. The U.S. tax legislation and the losses related to the sale of certain investment securities reduced fee and other revenue by 11% year-over-year. Asset servicing fees increased 6% year-over-year and 2% sequentially. The year-over-year increase primarily reflects higher equity market values, net new business, including growth in collateral management, and the favorable impact of a weaker U.S. dollar. The sequential increase was primarily driven by net new business, securities lending, equity market values, and money market fees. Clearing services fees increased 13% year-over-year and 4% sequentially. The year-over-year increase primarily reflects higher money market fees and growth in long-term mutual fund assets. Both periods also reflect the impact of termination fees due to lost business recorded in the fourth quarter of 2017. Issuer services fees decreased 7% year-over-year, primarily reflecting lower volumes, fewer corporate actions, lower fees due to reduction in shares outstanding in certain Depositary Receipt programs, primarily offset by higher Corporate Trust revenue. The 32% sequential decrease primarily reflects seasonality in Depositary Receipts revenue. Treasury services fees decreased 2% year-over-year and 3% sequentially, primarily reflecting higher compensating balance credits provided to clients that reduce fee revenue and increase net interest revenue, partially offset by higher payment volumes. Investment management and performance fees increased 13% year-over-year and 7% sequentially, primarily reflecting higher equity market values, money market fees, and performance fees. The year-over-year increase also reflects the favorable impact of a weaker U.S. dollar principally against the British pound. On a constant-currency basis, investment management and performance fees increased 11% compared with the fourth quarter of 2016. Foreign exchange and other trading revenue increased 3% year-over-year and decreased 4% sequentially. FX revenue of $175 million was unchanged year-over-year and up 11% sequentially. Year-over-year, higher volumes were offset by lower volatility. The sequential increase was driven by higher volumes. Investment and other income decreased $278 million year-over-year, primarily reflecting the impact of U.S. tax legislation on our investments in renewable energy. As I mentioned, the net impact of U.S. tax legislation on our renewable energy investments was offset in the tax line. Now on Slide 8, Investment Management achieved record assets under management of $1.9 trillion, up 15% year-over-year, primarily reflecting higher equity market values, the favorable impact of a weaker U.S. dollar, and net inflows. We experienced total long-term active inflows of $17 billion, driven by $23 billion of flows into our liability-driven investment strategies due to high demand from clients and $2 billion of inflows into multi-asset and alternative investments. These inflows were offset by outflows of $6 billion from active equities and $2 billion from fixed income strategies. Additionally, we had $1 billion in outflows from index products. We experienced cash outflows of $4 billion in the quarter. If you recall, we had cash inflows in the first three quarters. And our U.S. money market funds, the largest segment of our cash business, have grown 22% for the full year 2017. Our wealth management business continued its positive trend with fees up 9% year-over-year and 4% sequentially. Higher net new business, continued loan growth, which was 7% higher year-over-year, helped to drive performance this quarter. Investment Management's adjusted pretax operating margin was 31%. The significant items in the quarter impacted the margin by just over 300 basis points. Now turning to Slide 9. Investment Services achieved record assets under custody and/or administration of $33.3 trillion this quarter, up 11% year-over-year and 3% sequentially, reflecting higher market values. We estimate total new assets under custody and/or administration business wins were $575 billion in the fourth quarter. Average loan balances declined 15% year-over-year, driven by higher interest rates and increased 2% sequentially. Average deposits declined 4% year-over-year, mainly the result of actively managing our deposits lower to meet regulatory ratio requirements, and increased 3% sequentially. Lastly, average tri-party repo balances grew 13% year-over-year and 3% sequentially, mainly the result of organic growth from existing clients and the onboarding of new clients. Turning to net interest revenue on Slide 10. You will see that on a fully taxable equivalent basis, net interest revenue of $862 million was up 2% from the year-ago period and up 1% from the third quarter. This resulted in a NIM of 116 basis points. This quarter included a $15 million negative impact of lease-related adjustments, including $4 million related to the new tax legislation. These items reduced the NIM by 2 basis points. As a reminder, the fourth quarter of 2016 was positively impacted by $25 million of interest hedging activities and a $15 million premium amortization adjustment. The impact of these items in both quarters negatively impacted the growth in NIR by 7% or the NIR would have been up 9% if you adjusted for those items discussed. We experienced moderate noninterest-bearing deposit runoff in line with our expectations following the rate increase. Interest-bearing deposits increased sequentially. Turning to Slide 11, you will see that noninterest expense increased 14% year-over-year and 13% sequentially. This includes $282 million pretax for severance, litigation, and other charges, which increased total expense by 11%. Let me highlight a few of the year-over-year changes in the table. The sequential increase in staff expense was primarily related to higher severance expense. The year-over-year change was also impacted by higher incentive compensation expenses, driven by stronger underlying performance. The increase in software and equipment and professional, legal, and other purchase service expenses was primarily the result of an asset impairment in the quarter. Lastly, turning to our capital and liquidity ratios on Slide 12. Our capital ratios were modestly lower due to the impact of the new tax legislation. The fully phased-in supplementary leverage ratio was 5.9%, which meets the 2018 regulatory requirement of 5% with a reasonable buffer. We also remained in full compliance with the U.S. liquidity coverage ratio requirements. Our LCR was 118% in the fourth quarter. Before turning to Q&A, in addition to Charlie's comments, there are a few things to factor in your models for 2018. We expect net interest revenue and the NIM to continue to benefit from higher rates and the small securities portfolio repositioning, and that the benefit may be offset slightly by lower balances if noninterest-bearing deposits contract as expected. Net-net, NIR should continue to grow. The quarterly investment and other income line is expected to be in the range of $40 million to $60 million for 2018. In the first quarter, we expect to be at the higher end of the range due to the gain on the sale of our investment boutique, CenterSquare. Also, in the first quarter, I would like to remind you that staff expense will be impacted by the acceleration of long-term incentive compensation expense for retirement-eligible employees that typically takes place, the impact of which should be similar to last year. And as I mentioned, we expect our full year 2018 effective tax rate to be approximately 21%. With that, Charlie wants to make a few more comments about 2018.

Thanks, Mike. As we look forward to 2018, we think about our performance in three distinct pieces. First, any additional charges resulting from the review underway that I've spoken about; second, the impact of tax reform and the effect of investments we will make in our employees and businesses as a result of the tax reform; and third, the core underlying franchise performance excluding these two items. While we aren't giving forecast or guidance, I thought it would be helpful to put some specificity around our thoughts for 2018 by talking about these items individually. First, regarding additional charges, as we finish our review of the businesses, we would expect to have additional charges during 2018. These can include severance, real estate, the impact of programs to bring more automation to our activities, and other items. As of today, our expectation is that it would be something similar to the charges we reported in the fourth quarter, but this, of course, could change. Second, regarding the impact of tax reform, we are anticipating that the impact of the lower tax rate would be almost entirely offset by the actions we will take to reinvest this benefit in our employees and our businesses. I believe we've been prudent in how we've thought about our excess capital generation. We believe that the first call should be on building the appropriate capital base for the company; second should be on organically investing inside the company when those investments meet the appropriate hurdles; thirdly, acquisitions if they meet the same criteria; and lastly, return to shareholders through dividends and buybacks. We think we have done this and have returned in excess of $9.8 billion to our shareholders over the last three years. We still intend to return substantial capital to our shareholders this year, subject to approval through the CCAR process, but we've thought about how best to use this additional ongoing benefit from the change in tax law. We believe that we've got a responsibility to our employees to share the benefit as well as to invest as much as we intelligently can to build the company for the future so we can serve all of our clients, communities, and shareholders for the long term. We believe these investments are the right thing to do and good for all. This includes increasing minimum wages for all employees to $15 per hour in the U.S. and other actions we're currently contemplating. In addition, we intend to meaningfully increase the amount we spend on technology. We know we're a bank and are proud of it, but we're different from other banks. Seventy-five percent of our company is a technology-based processing business, and 25% is investment management, where technology will continue to become a more important tool for success. Our technology will define our future, and we need to ensure we're investing to create the highest quality infrastructure and a platform that allows us to both drive significant efficiencies in the future as well as be agile enough to allow us to move quickly as we expand our product offerings. We are well into this journey and seek to accelerate the effort. The third item is how we think about our performance excluding these items and also excluding the significant items in 2017. As an illustration, if you were to use the revenue growth included in your models, which is roughly between 3.5% to 4%, and our expectation that all other non-technology expenses would grow at a very low rate, this would result in EPS growth of low to mid-double digits, which is consistent with our actual performance over the last few years. Now I know this is high level, but we thought it would be helpful to give you some context. As I've said several times, we hope to answer all your questions on March 8, and we'll do the best job we can. But for now, we'd love to answer whatever questions you have, especially about this quarter.

Operator?

Just a quick one here on comments initially on the tax benefit. I believe you said that your intention is to spend the 2018 benefit on investments and sharing with employees. So just wanted to tease out, does that mean that, once we get through the next 12 months, there will be less pressure on investment and, therefore, more benefit from taxes? And then on top of that, maybe the payout rate begins to kick in from those investments, and we should see improved returns. Is that the right way to think about this? Or am I reading too much into your comments, Charlie?

Thank you, Brennan, for your question. The way we view this is that we are experiencing a significant increase in our technology spending. As we look ahead to 2019, we don’t anticipate seeing spending at this level again. We plan to manage our expenses as we typically do, with a focus on prudence, but it won't be at this scale. There are several reasons for our technology investments; we want to ensure we have the appropriate infrastructure and risk resilience, and importantly, we aim to develop products and enhance efficiencies. We will have more detailed discussions about this on March 8 when we have more time. However, we do expect to see some benefits after 2018, whether in terms of revenue or reduced expenses, due to our investments. At this time, it's challenging to quantify those expected benefits.

Sure. That's fair. And not trying to front run your big day here in March, just was curious about that, whether or not that distinction was an important one, which sounds like it was. And then my follow-up, can you expand on the kind of competition for talent that you're seeing, which is compelling you to share the benefit with employees? And when you use that term sharing the benefit with employees, maybe can you expand on that a little bit? Are we talking about increases in bonus and incentive comp? Are we talking about base salary increases, which prove more durable? Just if you could frame that a little bit, that would be really helpful.

Sure. I would place less emphasis on the financial aspect of our spending and focus more on the importance of technology. It is essential to consider what is fair and just for our employees, especially given the recent changes and their intended goals. Moving the minimum wage to $15 is a step that others have taken, and while I wish we could say we are leading the way, that isn't the reality. We will strive to do what feels right, and we believe that sharing this change with our employees is the appropriate response to the tax law alteration. In the grand scheme, this is a minor change, and we are contemplating other factors as well. I would encourage you to consider this in relation to our entire compensation structure and benefits. Therefore, I wouldn't anticipate any major developments from our end, but the actions we take are intended to be appreciated by our employees.

Just a little follow-up on the spending commentary and without running the risk of front-running March 8. Could you talk at a high level about the money that you have earmarked? Is it technology and investments for expanding and improving your current mix of businesses? You mentioned things like alternatives and passive strategies earlier in asset management, but what I'm trying to get at is how much is current line of businesses? And is there anything in there for what we would just call white space businesses that BNY Mellon is not in today?

I want to say almost all of it, if not all of it, is for the existing businesses that we have here as opposed to businesses that we're not in. But I would think about it in several different categories. I think about it in terms of infrastructure, I think about it in terms of cyber, and I think about it in terms of just technology development work to expand the product set that we have here or to electronify things that are done manually, and that can be both in operations functions or in businesses where we create electronic products. The focus that we have is on continuing to build the quality of the businesses that we have and build adjacencies where we can, and that's where the money is intended to go.

I think we've seen a lot of operating leverage and operating efficiency improvement over time. And a lot of these investments that companies in the industry have made, I think the big challenge has been getting discrete pricing on something new. It's a business where clients just take, take, take, and thank you very much. Within these investments, are there things that you think in the future you'll be able to price explicitly for?

Yes, I'll provide a high-level overview. Mike and Todd might want to add their thoughts. I believe it's a mix of different factors. When we consider expanding our product offerings, whether through enhancements or new additions, sometimes these efforts support our pricing in the market and help us remain competitive with clients. Other times, they place us in a market where we previously had no presence. Additionally, there are instances where we can implement charges because clients clearly recognize the value and are willing to pay for it, and we have examples of each situation. Mike and Todd, feel free to share your insights on this.

Yes. Glenn, it's Mike. And while it's still pretty small in the scheme of the overall revenue base, we are seeing examples in some of the products, like collateral management, where we have been investing in more sort of innovative adjacent products to help clients optimize their collateral across the globe, and we have been able to expressly charge for that product. So I think, as Charlie said, I think it would be a mix where part of it is making sure we stay competitive to keep growing and service the clients we've got, and then part of it will be things that we can expressly charge for. And we're seeing some real examples of that now. Anything to add, Todd?

I would like to add a few points. There are exciting opportunities emerging. Mike mentioned one regarding collateral management. We are developing an automated rules engine for our tri-party operations, allowing both buy-side and sell-side clients to adjust margins on collateral more easily, which we believe will encourage greater collaboration with us. This should contribute to our growth without necessarily altering pricing. We are also focused on enhancing the connection between our domestic and global collateral systems, enabling clients to move collateral worldwide smoothly and seamlessly, which would provide us with a distinctive advantage and drive increased adoption. Additionally, we are investing in improved FX trading platforms and already seeing positive outcomes in volume. We are also investing in real-time payments. We have several options to consider, and the key challenge will be selecting the most beneficial ones.

I have a follow-up regarding spending and Charlie's comments about low to mid-single-digit EPS growth. First, in terms of expense flexibility, if the environment becomes more challenging—given that we've had a strong equity market last year and this year—how should we consider the ability to reduce some initiatives or cut back on our core expenses to ensure positive operating leverage next year? That's the first part. For the second part, regarding EPS growth, should we view 2017 as the fundamental number excluding all charges, serving as the basis for layering on low to mid-single-digit, or perhaps low to mid-double-digit EPS growth?

There are a few key points to address. First, we do not simply decide on budgets and planning and then inform everyone to carry out their tasks until we regroup next December. We maintain a significant level of flexibility with a large portion of our technology expenditures. I am eager to maximize our efforts. If we didn't intend to pursue a particular initiative, we wouldn't be doing it; we are not merely looking to spend in response to a tax benefit. While some aspects are connected, many are independent. We have been conducting a review to determine our future needs, and we have decided that we can wisely allocate this amount of money. However, it's not just a single large expenditure; there are numerous specific items within this that we could either delay or proceed with according to our planning timeline. Regarding our overall expense base, we will remain very cautious about our expenditures. If necessary, there could be additional measures we could implement, but that requires careful consideration. I believe that if managed effectively, this business can generate operating leverage, which is crucial for both our relevance in pricing and for delivering our products and services. As we approach 2018, it feels like we are at the controls of an airplane, ready to adjust our strategy as needed. The way I envision 2018 unfolding is based on what we currently know, but we are prepared to reassess if conditions change. This reflects what we view as prudent at this moment. Concerning your second question about the base, you captured it correctly; it’s 2017 adjusted for tax and the significant items we discussed. Additionally, I feel confident in our operating model, even without the forthcoming tax benefit. Our ability to spend more on technology next year and still achieve nearly double-digit EPS growth indicates a lot about our model and the company. Looking ahead, we expect to return to a more typical year-over-year growth rate.

I want to clarify the growth in expenses. Considering the tax benefit, it seems to suggest that there will be a bit more than $250 million in additional reinvestment spending. Is this consistent with your expectations? Would this mean you're anticipating mid-single-digit expense growth compared to your core 2017 baseline? Or do the efficiency gains achieved from your fourth quarter 2017 actions, like reducing management layers and improving asset management through consolidation, suggest a more modest low single-digit core expense growth for 2018, similar to what you've been experiencing?

Yes. To clarify, year-over-year, there may have been some increase in technology spending. However, the impact of the minimum wage increase is relatively small in this context. Your estimate of reducing from 25% to 21% translates to just under $250 million, which provides a useful perspective on the anticipated increase in technology expenses. Beyond that, we expect very minimal growth in other expenses for now.

Okay, that's helpful. Just to clarify, the additional spending does not include the severance you mentioned for 2018, which you explained well. The extra technology spending is separate from the severance charges for 2018. Is that correct?

Yes.

Yes, great. Looking at the bigger picture as you invest in the business, I know we'll gain more clarity on Investor Day, but how are you considering your positioning compared to your trust bank peers? They are currently implementing spending programs. Do you believe this will lead to increased spending among your peers, putting you on the same level? Or do you see yourself enhancing your capabilities relative to your peers and potentially gaining market share over time?

Yes. I cannot predict what our peers will do or what they are currently doing beyond what is reported. As we prepare for Investor Day, we hope to dedicate significant time to discussing the distinctiveness of the Bank of New York Mellon franchise. The term "trust bank" can be misleading; it doesn't fully capture the size, scope, and range of our operations. While we offer services similar to some competitors, we also have unique offerings that allow for more meaningful conversations with clients. On March 8, we plan to detail how we differentiate ourselves from those you typically consider our competitors. More information will be shared then.

It makes a lot of sense to reinvest in technology, so I appreciate what you're doing in that area. I have a question about the capital return aspect. Are you considering aligning the dividend payout ratio with your expected earnings trajectory? Or will you be looking to maintain the current dividend level and invest that as well?

Betsy, it's Mike. Obviously, as you know, we need to work through the whole CCAR process to sort of get that all approved and worked through. I think the only thing I would say is there's no need to sort of stay within sort of 100% payout as we look forward that we're aware of. And so I think we're sort of thinking through that now as we go through the CCAR process.

Let me clarify that we have returned a significant amount through dividends and buybacks. As we consider the future, this approach will remain unchanged. In terms of our core incremental capital generation, we expect to continue the trends in dividends and buybacks that have been consistent in the past, subject to CCAR. This should ideally result in increased dividends along with the appropriate adjustments for buybacks. Regarding the capital required for additional spending, our current perspective is clear on this matter.

Just some clarifications. What is your annual technology budget?

I think, Mike, this is Mike. What we said last quarter was we spend a little over $2 billion a year on technology. So that's the disclosure we've given.

And so you'll be spending an extra $250 million this year in terms of reinvesting the tax benefits. So should we think of that as 10% of...

Fairly close, I guess. Yes.

Okay. I guess the $250 million would be more of the investment spend. Or how should we think of that?

I believe that the $2 billion covers all the centralized spending as well as our estimate of the decentralized spending occurring within the company. We would anticipate that it’s slightly under $250 million, which would include additional spending on infrastructure, cybersecurity, and core development at the company. Please let me know if I’m not fully addressing your question.

No, it sounds like you're investing in a wide range of areas, as you said. You said 100 discrete projects. So that's helpful. Mike, main question is just the combination of the three largest asset managers. I think you said Mellon Capital, Standish, and Boston Company. So I'm not sure we've heard much about that. What will be the name of the new combined entity? And what's the structure of the new entity? Anything else you can elaborate on?

Mike, we will decide on the name toward the end of the year once the consolidation is complete. Currently, we are consolidating the trading activities, back office operations, technology, compliance, HR, and finance functions. All of these activities are being merged into one. The firm has excellent products throughout its platform, with Mellon Capital being known for its passive strategies and The Boston Company excelling in equities, providing great synergy. We have likely not invested enough in the multi-asset space where clients are increasingly focused. This consolidation will allow us to develop more multi-asset and solution-oriented products. Ultimately, our goal is to maintain the best in equity, fixed income, and passive products while enhancing our multi-asset capabilities.

What I would like to add, Mike, is that regarding our brand, you might wonder why we haven't settled on a specific one. We have numerous brand-related initiatives happening across the company, so consolidating these three entities will take some time. Our goal is to approach this thoughtfully and determine what will be most beneficial for the brand in the long run, rather than just making a quick decision that feels right at the moment. I want to note that Mitchell was already making progress on this before I joined, and it makes perfect sense to me. We have three relatively small entities where we believe we can achieve significant benefits by creating greater scale, both in terms of internal efficiencies and how we present ourselves to clients in the consulting sector. We have a year of consolidation ahead of us, which can be challenging in these types of businesses. However, in the long term, I firmly believe this approach is the best course of action.

Just a couple of more clarifications. On this tech spend that you all talked about, somewhere in the $200 million to $250 million extra in 2018, is that the amount that will be the annual amortization of the tech spend so that will continue at that rate? Or is it just all being expensed in '18 and we are done with that? Can you give a little more clarity on how to think about it? Because your software and equipment line jumped up quite a bit this quarter, and Mike, is that the new run rate?

Let me start with the last piece, Vivek. The software and equipment line jumped up as a result of the charges we took, with an asset impairment there. So don't think of the fourth quarter number as the new run rate for that line.

Regarding the first part of your question, we would assume that the $250 million pertains to profit and loss, and it can be considered as a way to think about ongoing profit and loss at this time.

Okay, very helpful. Shifting gears slightly. Issuer services were down $90 million this quarter compared to the last quarter, which is a bit more than anticipated. Even the increase in Q3 was less than expected. Are you still losing market share? Can you provide more details on that business? What's your strategy for that business, Charlie, considering all of this?

Vivek, I'll start. It's Mike. I think the main reason for the linked-quarter decline, as you probably know, is the seasonality we experience in the third quarter. The volumes we saw in the core issuance, cancellation, and cross-border settlement areas were somewhat lower than we anticipated, which contributed to the further decline.

Okay. And so given that, what's your thinking on the business just given that you're losing share? Is that just price competition still continuing? Or maybe, Charlie, from your perspective, as you're relooking at all of this, what's your thinking at the moment?

Yes. Again, so issuer services is two different businesses.

Yes. And I guess I should clarify, DR really.

Yes. I believe these individuals have a better understanding of it than I do. I am dedicating more time to this matter. Last quarter, we discussed several large transactions that we did not win, which we were all aware of and, to be honest, we are fine with not winning them, whether it was due to pricing or terms. This quarter, as we analyze the business levels, it appears that we have not lost anything substantial. It looks like we have maintained our market share, and the situation seems to be more about business activity. I hope that clarifies things.

Charlie, you mentioned CCAR and your plans for returning significant capital, indicating that 100% shouldn't be a constraint. However, in your remarks, you prioritized acquisitions over returning dividends and share buybacks. I want to clarify your perspective on this. Are you viewing this in terms of incremental returns or prioritizing M&A over buybacks? How are you balancing these considerations?

That's a great question, and I may not have been as clear as I should have been. When we consider our investments both inside and outside the company, I've expressed both criticism and support for various initiatives. I can say we have a strong analytical framework for guiding our investment decisions. When I referred to the criteria for these investments, including hurdles, I meant we are clearly deciding between investing in the company, pursuing acquisitions, or repurchasing our stock. All these choices are investment decisions, and we evaluate the returns on behalf of our shareholders over the long term. Our goal is to build the company for the future, and we see significant opportunities ahead. We are willing to invest in growth if the returns are favorable, but those returns must exceed what shareholders might achieve from receiving that capital directly. Thus, considering returns to shareholders is a key factor in how we assess our options compared to other uses of capital.

I would like to seek clarification regarding your comments on positive operating leverage for 2018. You mentioned this includes the tech investment spend, but does it also account for all targets? From our perspective, the expense base could increase by 5% when considering those additional charges, including the reinvestment of taxes. Are you indicating that expenses may rise by 5% and you still anticipate positive operating leverage?

I'm excluding the significant charges that we had in 2017 and whatever we could have in 2018 when I say that.

And that excludes the reinvestment or just the additional charges?

That includes the full incremental technology spend and what we expect the growth to be in the rest of our expense base.

Okay. You mentioned wanting to increase market share in the Corporate Trust business. Can you provide insight into your current view of the market share, how it compares to previous levels, and what potential you see for future growth?

Yes, Brian, obtaining precise market share numbers, especially for specific components of Corporate Trust, is quite challenging. However, when examining the structured product market, particularly CLOs, we have observed a significant decrease in market share over the past 3 to 5 years, likely down by about 30% to 40%. Therefore, we are concentrating on making the necessary investments to recover some of that lost share in specific products. At the same time, there are segments of the Corporate Trust business where our market share has remained stable or even grown during that period. This effort is specifically targeted at certain product categories within that business.

Todd has been very clear about our actions in Corporate Trust over the years. Corporate Trust is a vital and robust component of our business. Several years ago, we evaluated its position within the company and ultimately decided it should remain a part of our operations because it is critical to our future. However, we faced challenges in the marketplace and within the company. We acted swiftly to reestablish our presence in this area, but we did lose some salespeople and did not invest where it was necessary, leading to a decrease in our market share. Currently, we have new leadership in place with Frank La Salla, who is focused on essential improvements, including rehiring sales personnel and developing the right product structure. We aim to leverage all our relationships with decision-makers regarding trustee appointments. This is a key part of our investment strategy and discussions within Todd's GCM organization.

This is actually Sean Kelman on for Mike. How should we think about the impact of the renewable energy credits going forward now that tax reform is completed?

Yes. Currently, we will continue to benefit from renewable credits. Our tax rate is expected to align with the statutory rate of 21%. However, we also account for state and local taxes, which would increase this rate if not for the benefits from renewables. We invest in life insurance banks and have some tax-exempt elements as well. This combination helps keep our tax rate down. Additionally, there was a slight restructuring in the valuation of these investments, which will have a minor impact on our investment and other income. The overall negative effect on these areas will be slightly less than it could have been. Nonetheless, the credits are still beneficial, and we will continue to gain from them.

When you're thinking about these tech investments, what sort of back is acceptable? How far out are you willing to look?

Yes, there’s no straightforward answer to that question as it varies based on the type of investment. We are increasing our spending on cybersecurity by over 50%. We don’t focus much on payback in those terms; instead, we emphasize strengthening our company’s defenses and improving our internal monitoring and protection processes. We are investing significantly more in infrastructure, much of which allows us to enhance efficiencies and develop a different range of products than we currently offer. Therefore, when discussing infrastructure spending, it's challenging to provide specific details. Regarding product development spending, it varies significantly depending on the strategic importance of the investment. We may provide more clarity on this when we reach March 8.

And then just a quick follow-up to clarify. On the low to mid-double-digit EPS growth, you're talking about the base for that being the $3.72 GAAP full year 2017 EPS? Or is it something else? I'm just getting a bit confused on all the discussions about charges and what's in and what's out.

Yes. We said before, think about it as the GAAP number adjusted for the fourth quarter impact of tax and the other significant items that we disclosed.

This is Steven Duong in for Gerard. Just two questions. First, on the regulatory front. With regulation continuing to loosen up, what regulation are you guys most focused on for regulators to review? And then on the second question, just more on the HR front. How competitive is it in attracting tech talent? And is there a region or area that you guys are focused on in attracting those talents?

Sure. I think if you asked people in this room, you might get a range of answers. My perspective is primarily centered on CCAR. It's a significant initiative within the company, and while it may not be very transparent, its outcomes are crucial for our business operations and capital management, which is a major responsibility for our management team. There has been a lot of positive discussion about retaining the beneficial aspects of CCAR and enhancing it as a useful tool for regulators, our customers, and their clients, as well as for us. What was the second question?

Tech talent.

Yes. I believe one of our advantages in technology is our diverse geographical presence. We have technology resources located in Pittsburgh, New York, India, and various parts of Europe. I must mention that the competition for tech talent isn't currently a barrier for us. While it certainly exists, the more engaging and significant initiatives we undertake as a company, the more we demonstrate how technology impacts our business, making us a more attractive workplace. Our turnover rates are not excessively high, which gives me confidence in our current position.

Could you briefly discuss your market assumptions for the low to mid-double-digit EPS growth in 2018? Specifically, how do the continued rise in equity markets and the anticipated Fed rate hikes influence this outlook? Additionally, when considering GAAP, based on the $3.72 and including the mentioned charges of approximately $0.25 for 2018, do we still expect to see positive EPS growth on a GAAP basis in 2018? I'd like to understand how this relates to the projected adjusted EPS growth.

Yes. So on the first point, just a point of clarification. We're not assuming is using your estimates for revenue growth when you look at the analyst estimates for revenue growth. We haven't told you what we think revenue growth will exactly be or what our embedded assumptions are within that. But I would say just, if you were to characterize it, it's a continuing relatively strong business environment for the places where we operate, not worse, not substantially better from today, but looking very much like where we are. That's the way we're just internally thinking about it. The second...

On a GAAP basis, yes. In 2017, we had $3.72 of GAAP EPS, and it appears there will be an additional $0.25 in charges for 2018. Will we still see positive EPS growth on a GAAP basis in 2018? I want to connect that to the adjusted EPS growth. Brian, I see that what Charlie explained is that the figure is not $3.72 because it includes both the tax benefit and the significant charges we mentioned. So if you consider that combination, it's about $0.17. That's the starting point for those numbers to be accurate. You'll be able to work through all that information without needing to calculate it further.

Okay. Thank you, everyone. Appreciate you joining the call today. If you have any questions, please feel free to call Investor Relations. Thank you so much.