Bank Of New York Mellon Corp (BK) — Q3 2018 Earnings Call Transcript

Thank you. Good morning and welcome to BNY Mellon's Third quarter 2018 earnings conference call. This morning BNY Mellon released the results for the third quarter of 2018. The earnings press release and a financial highlights presentation to accompany this teleconference are both available on our website at bnymellon.com. Charlie Scharf, BNY Mellon’s chairman and chief executive officer will lead this morning's conference call. Also making prepared remarks on the call this morning is Mike Santomassimo, our chief financial officer. Following Mike's remarks there will be a Q&A session. Before we begin please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors. 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 bnymellon.com. Forward-looking statements made on this call speak only as of today, October 18, 2018. We will not update forward-looking statements. With that I will now turn it over to Charlie.

Thank You Scott and good morning everyone. Thanks for joining our third quarter earnings call. Before asking Mike to walk you through the financials, let me frame the quarter with some thoughts on how our businesses are performing. In terms of the headline numbers, earnings per share of $1.06 was up 13% from last year's third quarter. These results included two significant items: approximately $0.05 from litigation charges and a $0.05 benefit in our tax line. Year-over-year revenue grew 1%. Expenses grew 3%, though 2% of that was related to litigation, and we continue to benefit from reduction in our tax rate related to the new tax law in the U.S. and from strong capital return. While we are not pleased with our total revenue growth for this quarter, there are some areas with modest strengths and others that are weaker, several of which we believe will strengthen over time. Our investment services revenue growth was 3%, and investment management revenue growth is 2%. These were partially offset by lower revenue in the other segments. Mike will cover that later. As I said, since joining the company, we are not satisfied with our growth. We have been too reliant historically on the impact of the markets; our focus on organic growth will take time to show up in the revenue line across our businesses, and though small, there continue to be signs of positive momentum in some areas, which we'll cover. With the reality that it will take time to see the impact of our growth activities show up in the revenue growth line, we are disciplined on expenses and will continue to be. Though our expenses increased 3%, I mentioned that 2% of the increase was related to litigation. So excluding litigation charges, we had minimal expense growth. You also know that we've been significantly increasing our investment in technology and infrastructure to get to minimal expense growth. All other expenses in total were lower than the prior year. I will discuss this a little more later, but we will continue to focus on improving our structural operating leverage while continuing to invest for growth. Looking at our businesses, let me first start with asset servicing. Asset servicing revenue growth is 3%, and we had a reasonable fee that interest revenue and FX growth. We again saw steady performance in our core custody, middle office and fund accounting revenues, onboarding more than $450 billion of AUCA across a number of investment managers and other clients. Additionally, we have a mandate to provide middle office outsourcing for significant private credit manager, where we're investing in new capabilities. Securities lending benefited from the increased demand for highly liquid assets primarily U.S. treasuries, and we're benefiting from new clients and expanded business with existing clients. Our global pipeline remains strong across all major assets servicing products. As asset managers continue to look for ways to reduce their costs, we're seeing increasing consolidation of global operations and technology, which is driving demand for outsourcing managed services and data management solutions. In Pershing, while we saw a reduction in revenue last quarter from two previously disclosed client losses, our total revenues were flat to last quarter and up 3% from the prior year. So, this means growth is offsetting these losses. As a reminder, we've been awarded multiple mandates that will begin to positively impact results starting in the second half of next year and more significantly into 2020. Timing aside, we're confident as ever in our ability to continue to build Pershing over the long term. In issuer services, revenue growth of 2% was driven by mid-single digit growth in corporate trusts, partially offset by a decline in depository receipts. Quarter-by-quarter performance in depository receipts is episodic, and several significant client events have been pushed from the third quarter into future quarters. Although the DR markets are weak, we're winning our fair share now while remaining disciplined on structure, and full-year revenue growth should be strong. Corporate trusts revenue growth was driven by the repositioning of our front office sales and relationship management teams and by better coordinating with our firm-wide global client management team to leverage our relationships for deals that our financial institutions and asset management clients are bringing. This is yielding opportunities and mandates, and I should add that our pipeline remains strong, particularly for CLOs and corporate debt. We have had good momentum with clients; although market share stats are imperfect in this business, it appears that we've gained some traction in the first half of the year. We've also started to deliver new digital capabilities that give clients better transparency into their loan positions, compliance data, cash activity and trade information, and it's been well received. In treasury services, Paul Camp joined us this quarter as the new leader for this business. Paul has tremendous experience and has already brought a renewed sense of urgency and has some great ideas for building our business into a stronger growth engine for the company. Having said that, we continue to see growth, albeit less than we'd like, in our payment volumes from existing and new clients, and we are focused on growing the liability balances from our treasury services clients. We're continuing to invest in capabilities such as real-time payments, which should help differentiate our offering. In clearance and collateral management, we reported 8% revenue growth. We again saw strong revenue growth from the onboarding of the remaining former JP Morgan government clearing broker dealer clients, higher clearance volumes related to record issuance levels, strong demand for U.S. government debt and treasury issuances, and growth in collateral management activity from new business and increased client activity. Here we're seeing interest from new entrants to the collateral market such as corporates in alternatives investing their cash in repo as well as the continued rollout of rules requiring segregation of margin related to derivatives. Our capabilities in clearance and collateral management are a clear point of differentiation. Once such point of differentiation is our collateral optimization engine; it has significant growth potential as collateral management business becomes increasingly important part of the investment process. Turning to investment management, the environment continues to be difficult for the industry, and we achieved 2% revenue growth this quarter. We continue to focus on investment performance drive to scaling our business, invest in product development and distribution capabilities and strengthen our wealth management franchise. Net flows returned positive this quarter with $15 billion in net inflows. We saw strong flows in LDI as well as positive flows and fixed income and multi-assets in alternatives, and our U.S. multi-asset manager, which we've rebranded Mellon, has had good activity across a range of asset types, including entering into a new sub-advisory partnership. In our wealth management business, Catherine Keating joined us as CEO and is already identifying opportunities to strengthen this business. We have much more to say about this in the future. In terms of talent, we are continuing to attract great people at all levels of the company. We are working to develop and capitalize on the deep knowledge and specialized expertise that exists across our company and complementing that with new outside perspectives. In addition to appointing Catherine, we added a number of other senior leaders this quarter who are expected to play major roles in increased growth and profitability. These include Roman Regelman, who joined us as head of digital; he will lead and coordinate our thinking as he sets the strategic direction for additional future, including data management, analytics, artificial intelligence, machine learning and robotics. Akash Shah has joined the company in the newly created role of head of strategy. Akash joined us from McKinsey, where he was in the capital markets and investment banking practice, and has a strong background focused on transforming businesses for the future and positioning them to drive organic growth and innovation. Emily Portney joined us as our new head of asset servicing for the Americas and will help drive our business forward in the U.S., Latin America as well as overseeing our interest in the CIBC Mellon Assets Servicing joint venture in Canada. We announced two key technology hires after the quarter-end: Sabet Elias has joined us as chief technology officer, bringing extensive experience in building and operating global high-performance, mission-critical technology environments, and Avi Shua was appointed technology lead for wealth management, helping us build technology platforms to grow our wealth management business, which, as I said, is a key priority. We are thrilled at our ability to attract such an outstanding group from top-tier institutions. So, as we look forward, we will continue to methodically build out our capabilities and teams. We have been investing in technology both to improve our existing operations in infrastructure and to build new capabilities for clients, and we will continue to invest. We will remain keenly focused on expenses. We continue to believe there are meaningful opportunities to become more efficient, which will help fund the technology investments we need to make as well as provide improved service for our clients, and we are highly focused on driving that efficiency in both the short and long term. And I will close by describing how I think you would feel if you were inside the company. As I have said, we are a proud company, we are a strong company with exceptional client relationships, and we have great subject matter expertise inside the company. But we are not performing as well financially as we would like. We believe our franchise is capable of delivering more organic growth than we delivered thus far. And we are focused business-by-business on changing our thinking, developing capabilities, improving the quality of our work, and aligning internal resources to achieve this end. Becoming more efficient is an important part of the puzzle. We believe that increased efficiency improves the quality of our work, allows us to invest in what's important for our clients, and is pro-growth. Importantly, there is a shared understanding that we will hold each other accountable for higher standards of performance and proceed with a strong sense of urgency. Given the nature of our business, all the work we are doing will take time to come through in our numbers, but I want you to know that every day we are challenging ourselves to get there faster. With that let me turn the call over to Mike.

Great. Thanks Charlie. Good morning everyone. Let me run through the details of our results. Then provide some thoughts on the fourth quarter. Note that all comparisons will be on a year-over-year basis unless I specify otherwise. Beginning on page 3 of the financial highlights document, in the third quarter we had earnings of $1.1 billion and earnings per share of $1.06, up 13%. There were two significant items included in the quarter. We incurred litigation charges that increased expenses 2%, which negatively impacted earnings per share by approximately $0.05. The charges related to new developments for the quarter are previously disclosed matters that we anticipate resolving shortly. And we had a net benefit of approximately $0.05 per share resulting from adjustments to our provisional estimates for the impact of the U.S. tax legislation from last year and other tax changes which decreased the effective tax rate by approximately 4.5%. Year-to-date we had earnings of $3.3 billion or $3.20 per share, up 21%. In terms of shareholder capital returned year-to-date, we have returned $2.7 billion to common shareholders through $1.9 billion of share repurchases and approximately $800 million in dividends. That includes actions taken during the third quarter where we repurchased 12 million shares for $602 million and paid $283 million in dividends. Now turning to the third quarter highlights on page 4. During the third quarter total revenue was up 1%. We did have a couple of items that impacted the revenue growth rate. Securities gains in the third quarter of 2017 lowered foreign exchange currency hedging revenue, and the pre-tax impact of our renewable energy investments negatively impacted growth by almost 1.5%. Just a reminder that we get the benefit of our wind investments or renewable energy investments in the tax line but have pre-tax costs that are included in investments in other income. Fee revenue was up 1% to $3.2 billion. Growth in the quarter benefited from higher equity market values, collateral management and clearance volumes, and performance fees. We saw reasonable growth in our assets servicing business including the client-driven foreign exchange fees as well as in our corporate trust and clearance and collateral management businesses. Investment management and performance fees together grew 2%. Fees in Pershing were essentially flat despite the impact of the previously lost clients. Third quarter net interest revenue increased 6% to $891 million driven by higher interest rates, partially offset by lower interest earning deposits and other borrowings. As expected our deposit balances were down year-over-year and sequentially. Year-over-year our average interest-bearing deposits increased 4%, while our average non-interest-bearing deposits declined 14%. As we have consistently said for our clients, the deposit pricing is continually becoming more competitive. With betas increasing as rates rise. On page 7 of our earnings release, you can see that the rates on our interest-bearing deposits increased from 45 basis points in the second quarter to 63 basis points this quarter. On the surface, this would imply deposit beta of approximately 72% globally, but when you get to the underlying data for interest-bearing U.S. dollar client deposits, which excludes wholesale funding, it is really in low to mid-80% range. The net interest margin increased 12 basis points to 1.27%. Sequentially the NIM was up one basis point. Our expenses grew 3% to $2.7 billion, as I mentioned earlier, litigation increased expenses approximately 2%. The remaining growth in the quarter was due to the continued investments we were making in technology, which was partially offset by declines in other areas. As Charlie mentioned, we are focused on delivering on our technology investments and driving efficiency across everything else we do. All these items resulted in a 2% decline in pre-tax income to $1.3 billion. The litigation charges negatively impacted pre-tax income growth by approximately 4%, resulting in a 9% increase in net income applicable to common shareholders to $1.1 billion, which benefited from the lower tax rate. This performance, coupled with the reduction in our share account, translated to a 13% increase in earnings per share to $1.06. Our pre-tax operating margin was 33%, down 1% from the prior year period. Again, the litigation negatively impacted the pre-tax margin by approximately 100 basis points. Our capital position and returns continue to be strong. Our CET1 ratio was 11.2% and our return on tangible common equity was 23%. Before we go deeper into the quarter on page 6 are the year-to-date results which track well with the discussion we had at investor day. Total revenue was up approximately 5%, and expenses were up approximately 3%, generating solid operating leverage. Foreign exchange translation increased the growth rates by about 100 basis points. Net income applicable to common shareholders was up 17%. Earnings per share was up 21%, and return on tangible common equity was up more than 200 basis points to more than 24%. Page 8 highlights our investment services business results. Investment services revenue was $3.1 billion, up 3%. Within investment services, assets servicing revenue grew 3% to $1.5 billion, primarily reflecting higher equity market values, securities lending volumes, net interest revenue and foreign exchange volumes. This includes a reasonable increase in assets servicing fees and a 27% increase in securities lending revenue driven by increased demand for U.S. government securities and some new client activity. Purging revenue was up 3% to $558 million, a result of higher net interest revenue, equity markets, long-term mutual fund balances, partially offset by the impact of previously disclosed lost business. As I mentioned, fees were flat despite the impact of previously disclosed losses. Issuer services revenue was up 2% to $453 million, primarily reflecting higher interest revenue in corporate trusts. Corporate trusts-related revenue was up mid-single digits, offset by declines in depository receipts. The sequential increase of 5% reflects seasonality in depository receipts. Treasury services revenue increased 3% year-over-year to $324 million, primarily reflecting higher net interest revenue and transaction volumes. Clearance and collateral management revenue was up 8% year-over-year and down 2% sequentially to $264 million. The year-over-year increase reflects growth in collateral management clearance volumes and net interest revenues. These increases are primarily due to the onboarding of the new government clearing clients, which was substantially completed in the quarter. As a result of the clients onboarded and other increases in activity, average tri-party collateral manager balances were up 18% and are just under $3 trillion. Non-interest expense within investment services increased 8% year-over-year and 3% sequentially to $2 billion. The litigation charge negatively impacted expenses by approximately 3% year-over-year and sequentially. The remaining expense growth was primarily driven by increased investments in technology, offset by lower staff expense. Also, foreign exchange and other trading revenue increased 5% from higher volumes. Assets under custody and/or administration grew 7% to $34.5 trillion, and in Pershing, despite the lost business, average long-term mutual fund assets were up 5% year-over-year and average clearing accounts were down just 2%. So some key metrics are showing positive momentum that point to higher organic revenue over time. Turning to page 9 for investment management highlights. Asset management revenue increased 2% to $704 million, benefiting from growth in the equity markets and higher performance fees, which were partially offset by the impact of net outflows in prior quarters and by lost revenue associated with the sales center square. Wealth management revenue was up 1% to $311 million and down 2% sequentially, with the sequential decline a result of lowered interest revenue partially offset by higher equity market values. Assets under management increased slightly year-over-year and increased 1% sequentially to $1.8 trillion. Asset flows improved in most asset classes with net flows of $15 billion. Our actively managed strategies experienced $18 billion in net inflows with $16 billion in LDI inflows, $2 billion in multi-asset and alternative inflows, and $2 billion in fixed income flows, partially offset by active equity outflows of $2 billion. Index had outflows of $3 billion primarily due to outflows from clients for whom we supervised on their index strategies. Cash was flat. Turning to our other segments on page 10, fee revenue decreased year-over-year and sequentially, primarily reflecting the pre-tax impact of our investments in renewable energy, as I mentioned before we get the benefit from these investments in the tax line and foreign currency hedging. Non-interest expense decreased primarily reflecting lower staff costs. Turning to capital and liquidity on page 11, our capital and liquidity ratios at September 30, 2018 improved since the end of the second quarter. Common equity tier 1 capital totaled $18.5 billion at September 30, 2018, and our CET1 ratio was 11.2% under the advanced approach. The supplementary leverage ratio was 6.4%, and our average LCR in the third quarter was 121%. Now page 12 details our expenses. On a consolidated basis, expenses of $2.7 billion increased 3%. The litigation charges negatively impacted the expense growth by approximately 2%. The remaining growth is primarily due to investments in technology, partially offset by lower staff expense and lower distribution and servicing expenses. Note that the technology expenses are included in staff, professional, legal, and other purchased services and in software equipment. Expenses were down slightly sequentially, primarily reflecting lower net occupancy, staff, and business development expenses, partially offset by higher litigation. The decrease in net occupancy expense is primarily due to the expenses associated with the relocation of our headquarters that were recorded in the second quarter. Now looking ahead to the fourth quarter, there are a few things to factor into your modeling. As a reminder, our results in the fourth quarter of 2017 included impacts from the U.S. tax bill and severance litigation and other charges. The total cost of relocating our corporate headquarters is estimated to be approximately $75 million, of which $12 million was recorded in the second quarter, and we expect to record the remaining expense in the fourth quarter. Excluding the real estate cost, we would expect the growth rate of our overall expenses in the fourth quarter year-over-year to be directionally similar to what you've seen year-to-date, which implies a modest uptick from the third quarter consistent with prior years. As it relates to net interest revenue, you should factor in the following: At this early point in the quarter, overall deposit levels are slightly higher than the average for the third quarter with non-interest bearing deposits about at the same level. As rates rise, we expect deposit beta to continue to increase, which we think is consistent with what is happening in the market. We are assuming that one month and three month LIBOR are slightly above the current level on average for the quarter, but we have seen some compression in spreads between one month and three months LIBOR and the fed funds rate that will have an impact in the fourth quarter. If these assumptions play out, it should result in net interest revenue being similar to what you saw this quarter. Fourth quarter seasonal performance fees are expected to be in line with the fourth quarter of 2017, and excluding the significant items in the third quarter, we still expect our full-year effective tax rate to be approximately 21%. With that, operator can you please open up the lines for questions.

Thanks. Good morning, guys. On the asset servicing business, I wonder if you can detail a little bit more the flattish kind of results, but you said you had some benefits from the broker-dealer business. Can you walk us through how did collateral management act and just out of the core asset servicing act? You mentioned some pending potential wins, and I'm not sure if you meant that those were converted as well. So just if we can get the flush-out color on what you're seeing currently and what you're expecting out of the core asset servicing. Thanks.

Hey Ken, are you talking about asset servicing or Pershing?

Asset servicing. Didn't the broker dealer clients come in throughout the servicing? Are you saying they came in through clearing on the fee side? Somebody at the income statement.

Asset servicing revenue growth was 3% overall, and when you look at it, the underlying fee growth was reasonable. We had net interest revenue growth and FX growth.

Yes, so I think so let me sort of dig in a little bit, Ken, for you. So obviously I will just pick it apart so tell me if I miss something, but for the new clients that Charlie referenced, we onboarded very little revenue in the quarter from them so far. So, you'll start to see that kick in as you look forward. So that didn't contribute much to this quarter. I think for the where you'll see the new JP Morgan, the clients that converted over from JP Morgan, that'll be in the clearance and collateral business line in our release. And as you sort of think about the asset servicing fee line, as Charlie said, when you sort of dig into the underlying businesses, both in asset servicing and clearance and collateral, we saw some reasonable growth involved quarter-to-quarter.

I got it. Yes, there's a little mixing-matching there between business line and income statement. I think that's where my question was a bit confusing, but thanks for clearing that up, Mike. And then, okay, so then separately just on the balance sheet, the betas can you talk about – you talked about that you expect them to move up from here. Can you do it – would you still anticipate, as long as LIBOR is moving the right way, can the NIM expand from here, or is it going to be more of a function of just what the mix is looking like every quarter because obviously there's pushes and pulls between the dollars and the NIM spread.

Yes, I think on NIM Ken, I don't know that you can expect it's always going to be a straight line up right, but I think you sort of look at the various components of it that were sort of our biggest driver, as you know well, is sort of how we were reinvesting in the securities portfolio, and those deals continue to sort of move up each quarter. So, all the we're seeing probably a 15 basis points sort of increase and sort of pay downs versus where we're reinvesting their votes. So, maybe a little more little less depending on an average depending on sort of where you are. So, I think you can see the NIM sort of grind up over time, but I don’t know that you can always expect it to be sort of a straight line up every quarter. And I think when it goes to LIBOR, as we said in sort of my commentary, we're sort of expecting LIBOR to be slightly above, call it a few basis points above what you see one and three months today, and that all sort of give you the result of which sort of highlighted in the release.

The only thing I'd add is just remembering the timing of the change in days doesn't always align with the timing of the re-pricing of our portfolio.

Thanks guys, I appreciate that.

Next question, please.

Hi guys, good morning and thanks for taking the question. Just picking up on the last discussion. I guess, understanding that quarter-to-quarter the balance sheet could be a little volatile, but as you look out to next couple of years and we continue to go through the rate cycle, how do you expect the balance sheet to perform? Do you think there is any growth there or should we think the balance sheet will continue to kind of shrink? And then in terms of the mix between interest and non-interest bearing deposits, kind of similar, so I guess that has been coming down a little bit; I think you guys have about 29% of non-interest bearing as a percentage of total. So, should we think of that as still kind of reasonable level toward non-interest bearing deposits will go?

Hey Alex, it's Charlie. Let me start with just some broad comments and then I'll hand it over to Mike. I think one of the interesting things is that we have, as we've gone through this rate cycle, as I think we all believe that we can be far more proactive as we deal with our clients in understanding what's going on with deposits and being more proactive about attracting the kind of deposits that we would like to attract. I think it's true in almost all the businesses that we have. So, I think the level of rigor that we have today about thinking about rates, thinking about conversations with clients, and making our desires clear across asset servicing, corporate trust, clearing some collateral management, treasury services, all of them. I think over a period of time, we feel absolutely like we could do a better job at attracting balances as opposed to having balances just be something that happens to us. That obviously takes some period of time, but it's a very different kind of discussion today than we were having six or nine months ago here.

And I would, I'll add a few things. So, I'll just add, and as we sort of grow the underlying client franchise, that's going to bring deposits with us. So, that's another piece where you will see some grow over time. I think as you sort of think about the non-interest bearing deposits in the percentage of the total, I think we've been pretty consistent over the last couple of years that we seem to add that percentage will sort of grind down. But it's been it bumps around a little bit quarter-to-quarter, a little lower last quarter to a little 29%. This quarter you can see that from the release. I will though just remind you a little bit about the nature of our deposit base. We don’t just close non-interest bearing by line of business but when you sort of what we showed at the Investor Day was about half of our deposits in total are from asset servicing. And the rest, the next biggest pieces are corporate trust and treasury services. When you look at the non-interest bearing components of it, the percentage that come from the asset servicing business, that sort of traditional asset managers, hedge fund private equity, the whole mix is far less than 50%. So, the other pieces of the puzzle, namely corporate trust and trading services, drive the bigger piece of the overall non-interest bearing for us. So, that should sort of needs to be factored in as you sort of think about the trajectory of them over time.

Got it. Thanks for that, it's a useful color. And I guess my second question just around clearing fees and those are just the actual fees and not the entire business line item. So, down a little sequentially and I think it's largely a U.S. business for you guys. So, I guess market should have been a little bit of a helper. Is it all due to just lower client activities, lower volumes in the third quarter, or is there something there going on underneath?

I mean, the third quarter typically is a little bit slower than the second quarter, but so there's nothing, there's no underlying trend there at all.

Okay, thank you.

Good morning, and I appreciate your questions. I wanted to follow up on the previous point about non-interest bearers. Thank you for clarifying the various aspects of our business mix, which certainly contributes to a larger share of non-interest deposits.

Wait, see what?

In the past we've heard that there were certain economic incentives provided to clients such as fee credits on some of those non-interest bearers. But that explanation was under the prior management team. So, kind of curious whether you all have sustained some of those incentives or whether the approach to those deposits has changed at all under your guy's plans and your approach.

Now, hi Brennan. I think that where you have earnings credits, which is a pretty normal thing to do for some businesses, has really focused on our Treasury Services business. You don’t see earnings credits at any or not really prevalent than the other businesses. And so, that's how which is a pretty consistent way that us and others provide value for some of those client deposits in treasury services.

Okay, great. Thanks for clarifying that. And then, thinking about the portion of deposits that are in U.S. dollar, is it still around 70% for you all and if so, was there just some kind of noise in the deposit cost this quarter or catch-up or what have you that worked out to about the 80% deposit beta that you referenced Mike earlier? Because when I do the math, I get to a number that's a bit higher than that. So, just curious whether I need to make some adjustments to my calculation.

I believe you do. As highlighted in my commentary, the wholesale funding, which is a very small part of our overall funding mix, influences some of the calculations you mentioned. However, if you look deeper, I refer to the range of around 80%, which is consistent with what we are observing and hearing from clients across the markets.

Great, thanks. Well, I'll follow-up offline for some of the details on that wholesale funding adjustment. Thank you.

Okay.

Hi, good morning. So, I just wanted to dig into your commentary on tax and some of the commentary on deposits but more specific to the impact at QV online. I think the last fulsome update you gave was at 2014 Investor Day. You guided it to about $40 to $70 billion in expected deposits run-off from that balance sheet normalization. And since you gave that guidance, it looks like deposits have come down about $30 billion or so. And now that we do have better visibility in that process, I was hoping you could maybe help us frame how to think about the remaining run-off impact as the Fed continues its process over the next couple of years.

Yes, look Steven, it's Mike. Like you are referring at some guidance that was provided I think back in 2014. It's a lot obviously has evolved since then. But I think when you think about wholesale deposits more generally, they are definitely correlated to what you're seeing in excess reserves as a Fed. And so, as that sort of grinds down, you're going to see liquidity come out of the system. And that all that's equal potentially drives deposits continues to drive deposits down a bit. But as Charlie mentioned, I think we think there's an opportunity to be more proactive, smarter, about how we sort of go after the opportunity with our clients as well as sort of the impact more how this sort of grow line franchise. So, I don’t think you can just take the Fed QV online and sort of think about it in a linear way as you think about our deposit base.

Okay. So, just as a follow-up, is there an expectation that there's enough of it organic growth opportunity where you could actually see the deposit balances increase even with the headwind from Fed QV online only because the impact seems to be fairly pronounced and the correlation quite high around 96% between the two, your deposits and industry excess reserves.

We're not going to predict it at this point. Obviously, time will tell but I think we feel like we could do a better job at gathering deposits in any environment whether it's in an environment with the effects of the unwinding of QV rising performing rates, any of the above, how those two interact, we'll have to see.

Got it. Thanks very much for taking my questions.

You're welcome.

Right, thanks guys. First question is just on the asset servicing and this is just on the fees. When I look at it sequentially, it seems like that was a bit more muted. You've just given what we would have expected just from the market returns. Maybe just a little color if you can provide on what else is included in that line; is there some seasonality from like a transaction standpoint that can limit the growth in like the third quarter?

Yes, I believe we mentioned previously that the asset servicing fee line is influenced by market conditions. It's typically around 25% to 30% affected by overall market levels, which can fluctuate. Additionally, transaction volumes and various other factors can impact it from quarter to quarter.

Okay, that's helpful. And then, just on the expenses, on the legal item, just any color around that and if it was like a one-off versus would be kind of ongoing legal costs. I'm just trying to understand that just in relative to like going forward for a run rate there?

Yes, this is Charlie. Listen, I think we have a fairly clear disclosure about what the litigation we have in progress. This one related to approaching conclusion for two of those items that were mentioned. So, we obviously have the remaining items to go. Some might get results sooner, and some others might go around for a long time, but they were known cases that moved along I would say quicker than we probably would have thought a couple of months ago, and that's what happens when you have settlement discussions in there, or other things going on with others in the industry as well.

Okay, thanks a lot.

Thanks, good morning. Thanks for taking my question. Maybe just go back to fourth quarter seasonality. Maybe, Mike if you could just touch on a couple of different areas. Clearly, we have the performance fees from investment management, but maybe if you can flesh out the deposits where you see them come in and the delay of revenue into fourth quarter from what typically is seasonally strong third quarter. And then, any other areas, clearly, volumes tend to be strong in the fourth quarter, but maybe just to clarify what you think can be the improvement on the Pershing side and then also the contribution from JPM on the clearance and collateral management side.

I’ll address your question, Brian. When considering performance fees, the occurrences that generate larger fees in any particular quarter are not within our control, such as corporate actions like dividends and stock splits. Historically, many of these activities happened in the third quarter. However, some events were postponed from the third quarter to future quarters. Whether they occur in the fourth quarter or within one or two subsequent quarters will depend on the clients finalizing their activities. You’ll see that reflected in our results. There are one or two items, as Charlie mentioned. Looking ahead for Pershing, you probably observed some stabilization over the past two quarters following client losses. Last year, we pointed out there were termination fees due to those losses in the fourth quarter, which will slightly affect the sequential results. Nonetheless, we're experiencing solid and consistent activity in that business over recent months.

JPM clearing.

Yes. So, we did finish the conversion of JPMorgan clients into the business, probably at the later part of the third quarter. So, you will see a little bit of an uptick as we go into the fourth quarter, so you'll see that in the run rate as we go.

And this is Charlie. I just want to just maybe just make a couple of comments about revenue growth beyond next quarter. So, I think first, I guess the way I would characterize it is I think when you just think, I mean look at the businesses and the way they're performing today and our expectations for opportunities are. Within the investment services business, which produced 3% revenue growth this quarter in total, asset servicing was 3% growth. When we sit here and think about the opportunities that sit in front of us versus the pressures, we think there are more opportunities than there are pressures. We think whatever pressures exist will continue, but we have opportunities to grow that business faster than we have. And as I've said, that is a long cycle of business from the sales perspective and it takes time, but we feel very good about our position in the opportunities. Pershing, we've talked about multiple times; we have these, we have two specific losses that we've known about for a long time, it affects the numbers in the short term, we know we have a series of winds that we are in the process of onboarding, which take a long time to do the work. We have the expenses embedded in our results, at least a big part of it to do that, we have no revenues from it, we know they're coming, but more importantly, we love our position in the business. We believe we've got significant opportunity in the RIA space. And so again, we're not going to put time frames around it necessarily, but relative to the quality of the business and the opportunity, we think it's significant. Issuer services space, corporate trust, that is one where you start to see progress more quickly, and that's a little bit locked intact going; it's better technology; it's a better Salesforce; that's better organized; and leveraging the relationships across the franchise, and we're starting to see that impact. DRs, as we said, are very seasonal quarter-to-quarter, lots of volatility year-over-year; I think the numbers will be pretty strong relative to what we saw last year. Treasury services, new leader, meaningful opportunity for us in a much more significant way than we've had in the past. And I put wealth management in that category as well. So I just think I know obviously there is a lot of focus on quarter by quarter; I say this consistently; it's hard to move these businesses in a single quarter. But as we think about what the opportunities are, given the market positions that we have and the type of people that we're bringing in with the ideas that we have, it's we certainly feel good about the opportunity; it's just going to take some time.

That was exactly my second question, Charlie, through we anticipated it. Thanks for that. Maybe just one little area on the middle office that you need to cover. You guys really start to ramp that up when you order the T. Rowe deal, and I think you would to another mandate coming soon. Maybe just talk about your strategy there, obviously stage two is in the big fish in the pond on that one. Do you guys plan on being more aggressive in that space?

Yes. I think middle office is complicated as you all know. It's complicated because there's no one middle office solution out in the marketplace. Historically, they've been very bespoke, generally more complicated than people think when you decide to take something on. And so, I'm not sure when you look at the profitability across the industry, the idea of we don’t look to middle office to be a gigantic profit contributor to the company. Having said that, it is a very paying point for our clients. We think over a period of time we can't help build scale, which means we have to create some more consistency in the industry. And if we can do that for clients, that gives you the opportunity to talk more broadly about other pieces to the equation. So, that's something that we are interested in doing. It has four more important deeper relations for us, and so we'll continue to do that. Longer term, more broadly, we all as an industry, there's opportunities to figure out how do simplify middle office dramatically, and that's something that we're equally focused on over the much longer term. But in the short term, it is an opportunity for us to help our clients.

Great. Thank you for the color.

Next question.

Hi, Mike.

Hi. Charlie, you spent a lot of time on the new hires. Where are you in terms of changing the culture, how long should that take, and what do the new hires bring to the table?

Yes, it's a challenging question to address. I tried to express how it feels to be part of the company on this journey. We are a company of 53,000 people that have operated in certain ways, and change takes time. When I say time is needed, I don't think it's about winning people over; our team is committed to improving for our clients, which should lead to better results for us. The key issue is understanding what that change entails, how we function, and whether we have enough people demonstrating the desired behaviors. If I had to categorize where we are, I would say we are still in the early stages. However, I believe that those within the company would recognize significant progress. From my experience, bringing in outside perspectives is essential. It’s about finding the right balance. Our existing team possesses excellent expertise and genuinely cares about our clients, but we must also be aware of the rapidly changing environment around us. Hiring individuals with diverse experiences who approach business differently creates valuable discussions and adds energy to our team dynamics. I won’t specifically name individuals to avoid unnecessary pressure, but I can mention Paul Camp, who joined us to lead treasury services. We have a strong treasury services division, and I believe there is even more potential to unlock. From what I've seen in Paul’s short time here, he brings enthusiasm and respect for our existing achievements while actively discussing future opportunities, including product development and how to become more aggressive in pursuing our goals. His approach should invigorate our business and enhance the talents we already have. This is not about replacing people with outsiders; rather, it's about a significant number of senior additions who will contribute not only in their specific roles but also influence our overall growth mindset. Growth isn't something we simply declare; it's about understanding how to achieve it through the right organizational strengths, product development, and proper incentives for our teams. Addressing these aspects with experienced individuals who can model these behaviors will be crucial as we continue this transformation. I hope that clarifies things.

All right. Yes, that was very comprehensive, thank you.

Hey, good morning.

Good morning.

Maybe just a question on expense. A question on expense. As you talked about a meaningful opportunity to get more efficient in the short and the long term. Can you maybe give us a little more detail on where you see the biggest opportunities to get more efficient?

Yes, thank you for the question. We often receive inquiries about how we've managed to control expenses over time and whether there's more potential for efficiency. I believe there is still significant room for improvement, not due to any shortcomings on our part, but rather because it's a gradual process, similar to peeling an onion where each layer reveals more opportunities underneath. This applies to both our short-term and long-term strategies, encompassing both tactical and structural changes. For example, we have effectively managed real estate costs by consolidating and relocating to lower-cost locations. While we have made progress, there is still more we can achieve. We recently moved our corporate headquarters to a new building that we believe can accommodate 5,000 to 6,000 people, up from the 3,800 we expect by year-end. This transition will also generate $15 million to $20 million annually through subletting the previous space. Additionally, we are examining the structure of our organization, including the layers between senior management and junior staff. Currently, we have an average of 10 to 11 layers, which is higher than what I have seen in other organizations. We also need to address areas where manual tasks can be automated. In terms of priorities, we are focusing on two dimensions. In the short term, we plan to invest more in technology to enhance our operational infrastructure and develop future products and capabilities. This investment will drive efficiencies that not only support our current needs but also contribute to long-term improvements. Over the longer term, we aim to create capabilities for greater structural efficiency, which will involve multi-year projects aimed at automating currently manual tasks. Overall, we believe there are still ample opportunities ahead as we look into the future.

All right. That's great for the color. And maybe just a quick clarification question on 4Q. On the modestly up expenses, I think you noted that excludes the real estate charge but does that the comparisons include the legal charge in 3Q, or should we pull that out as well? Just want to make sure I'm getting that right.

I would pull it out.

Okay, thank you.

Hello, good morning. Thanks for taking the question. You touched last time on the efforts around CCAR and capital planning. And looking at the mid-cycle resubmission, the mid-cycle DFAST that you submitted, your company run stress capital ratios have improved quite a bit. What does that leave you in terms of any efforts to accelerate the process of getting some of that excess capital out?

I believe we mentioned previously that our primary limitation is our model, not the models used by the Federal Reserve. This is something we have been and will continue to focus on intently. If we have anything to communicate, we will do so.

Okay. I guess we'll leave it at that. Thank you.

Okay, thanks Geoff.

Great, thanks. A quick question on the non-interest bearing deposits. Before you've said that they're historically averaged about 30% of your total deposits. Could you go back much further in time and look at the end of the rate cycles, both in the 90s and the 2000s? So, its non-interest bearing deposits really troughed out around 20% of total deposits. So, is that what we should be thinking about this time? Is that on average over cycle of 30% but really we should be dragging more closer to 20% as they have in the past?

Brian, its Mike. We haven’t said that that's sort of the historical average. I mean, I think that's the experience over the last few years. But as you point out that number was lower or sort of in history. A lot sort of changed since then in terms of the business stakes and stuff so. So, like I think we would stay with sort of what we've been saying consistently right is that they're going to bounce around quarter-to-quarter, but we think that number will sort of grind down a little bit over time. Where it bottoms out we'll see.

Okay. And a separate question on investment management. If you kind of look at the flows year-to-date, and let's exclude LDI, which is still in a strength in the business. I mean, long-term active is flat, you look at your index it's down $23 billion and your cash is down $25 billion. I mean, what it takes to get those to turn it from outflows really to inflows from here? When can we expect to start seeing better traction and close in the business?

Yes. I think when you look at our business, I mean it's hard to put it all together and think about it as one. We have Walter Scott, which is an active asset management company in the equity space which over a period of time with differing performance levels inside the market should differentiate us presumably more in difficult markets than in very strong markets. It is they're long-term holders, not focused on the technology sector, have a great track record, and so again depending on what happens in the markets over a period of time, you should see stronger performance there. In our asset manager here in the U.S. we're going through a restructuring, as you know, of combining the three into one called Mellon. We've been pretty clear that our performance historically hasn’t been great. We are strategically making a significant change and putting serious capabilities there to create a multi-stat asset manager which we have to prove to the market is more attractive than the separately managed firms that didn’t have the appropriate scale inside the market. And so, that hopefully over the next year or so we'll start to see more progress there. So, it's some again, they're all very different that have different drivers to them, but I can assure you when we think about each one we're focused on driving improved performance in each of them, but that too will take time just given the nature of the business.

Okay, thanks.

Thanks everyone for joining. Thank you, I appreciate it.