Bank Of New York Mellon Corp (BK) — Q4 2018 Earnings Call Transcript

Thank you. Good morning and welcome to the BNY Mellon's fourth quarter 2018 earnings conference call. This morning BNY Mellon released its results for the fourth 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, BNY Mellon's Chief Financial Officer. Following Mike's prepared 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, including 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 16, 2019 and will not be updated. Now, I will turn the call over to Charlie.

Thank you, Scott. Good morning, everyone. Thanks for joining us. As usual, I'll make some comments and then turn it over to Mike. You can see that we reported earnings per share of $0.84, down 22% from last year's fourth quarter. Both this quarter and last year's fourth quarter included a number of notable items that made comparisons difficult, but we will do our best to explain what's included, so you can perform your own analysis of the quarter. Notable items in the fourth quarter of 2018 reduced earnings by $0.16. This includes costs related to the relocation of our corporate headquarters, severance charges, and litigation expenses. Those costs were partially offset by some tax adjustments. As a reminder, our fourth quarter results in 2017 included notable items that increased earnings by $0.17 per share; these items were related to the estimated benefit of U.S. tax legislation, partially offset by some actions we took. On a GAAP basis, our revenues grew 7%, expenses decreased 1%, pretax earnings grew 40% and after-tax earnings decreased 26%. If you were to exclude these notable items in both periods, which you can see in the reconciliation table on the second page of the earnings release. Revenue declined 1%, expenses were essentially flat, pretax earnings decreased 3%, after-tax earnings increased 4%, and earnings per share increased 9%. Mike’s comments will refer to our results, excluding notable items in both periods. Let me run through a few things about the overall results. First, while we aren't happy with the revenue decline of 1%, it's important to note that we saw growth in many of our Investment Services business. In total, Investment Services revenue grew 3% and Investment Management revenue declined by 8%, due to the combination of outflows, currency, and the impact of lower equity markets. And we continue to benefit from the increasing interest rates, albeit at a slower rate than prior quarters. The second thing is that we remain extremely focused on controlling our expenses while we continue to significantly increase our technology and infrastructure investments. Excluding the notable items, our expenses were essentially flat to the prior year. Our technology expenses increased about $100 million versus the prior year while all other expenses decreased a little more than the same amount. I mentioned on last quarter's earnings call that we see meaningful opportunities to become more efficient across the Company. While we're looking to automate many of the manual tasks we perform, we also see broader opportunities to continue to drive efficiency. On last quarter's call, I used the example of a significant opportunity to reduce management layers and increase spans of control. This quarter's GAAP results include a severance charge, which includes these actions, many of which we've already completed. We anticipate that the payback on this severance will be less than one year. These savings and other efficiencies we continue to drive towards will allow us to continue to increase our investment in technology and infrastructure without significantly increasing our expense base. But, as I also said on last quarter's earnings call, while these changes result in lower costs, they help advance our culture by improving decision-making, allowing us to move more quickly, and making sure we have our best people in roles that allow them to grow and contribute more significantly to our growth agenda. The road to increase our organic growth will take time but we do see some progress. The impact on the markets and interest rates will ebb and flow, but we must grow the franchise and we remain focused on methodically building our capabilities to increase our rate of organic growth. As 2019 unfolds, we hope to provide a clearer roadmap of how this is playing out. Let’s go through our businesses starting with Asset Servicing. Asset Servicing revenue was down 2%. Although we continue to have a healthy pipeline, the impact from new business was minimal. There were negative impacts from asset outflows from existing clients. These clients did not leave us, but saw outflows from their accounts. This can shift based on market conditions and investor behavior. The decline, combined with slightly lower foreign exchange and securities lending volumes as well as the negative impact of a stronger U.S. dollar, drove the lower revenue year-over-year. The declines were offset by higher net interest revenue due to higher rates. We are continuing to invest across this business to improve our core custody and accounting service, extend our servicing capabilities for alternative managers including credit managers, middle office and data management. If we turn to Pershing, while revenue was down year-over-year due to the two previously disclosed client losses, revenue was flat sequentially. Excluding the impact of the lost clients, the revenues grew about 4%. In addition, the business has grown in a number of other fronts. The impact of the lost clients has been fully in our run rate since the second quarter of this year and the impact on the year-over-year growth rate for Pershing will abate after the first quarter of 2019. We continue to have a sizeable pipeline of new business that we are onboarding now, which will begin to go live in the second half of 2019 and have a more meaningful impact in 2020. So, we expect Pershing will return to revenue growth as the negative impact of the two client losses abate and we onboard the signed business. We are as confident as ever in our ability to continue building Pershing over the longer term. In Issuer Services, revenue growth of 25% was driven primarily by depository receipts, corporate action activity and higher volumes, although corporate trust also generated a little bit of revenue growth. As we’ve discussed previously, depository receipts revenue is seasonal, and volatility in the market drives cross-border settlement activity. The timing of corporate action events during the quarter drove significant year-over-year growth, and volatility levels were particularly high in Latin America. Corporate trust also had some revenue growth this quarter, albeit small. Our efforts to reposition our corporate trust sales and service teams have helped us to drive incremental growth. In insurance-linked securities and CLOs, our pipeline remained healthy. While market share statistics in this business are imperfect, as I've mentioned before, we're gaining share, particularly in the structured finance space. In Treasury Services, we’re continuing to see modest growth in this business. Payment volume, which is the key driver of our fee revenue growth, was up 5% year-over-year and sequentially, driven by the volume growth from both new and existing clients. Our focus on growing liability balances from our Treasury Services clients has been paying off as we experienced growth in attracting competitively priced interest-bearing operational client deposits to support our clients’ payment activities. In Clearance and Collateral Management, we recorded 10% revenue growth. We again saw strong revenue growth from our historical clients, newly converted government clearing broker-dealer clients, higher clearance volumes related to record issuance levels, strong demand for U.S. government and treasury issuances, and growth in collateral management activity from new business and increased client activity. Our Clearance and Collateral Management capabilities are among the best in the business, and collateral optimization and segregation services go beyond what others can provide. As collateral management becomes an increasingly important part of the investment process, we are major beneficiaries. We’re seeing interest from new entrants to the collateral market, such as alternative asset managers investing their cash in repo. Turning to Investment Management. Asset Management had a difficult quarter with revenues down 11%. The cumulative impact of outflows year-to-date, particularly in our active equity strategies, as well as lower equity markets, the unfavorable impact of a stronger U.S. dollar, and some small divestitures drove the results. We saw strong flows into our liability-driven investment strategies as that business has continued to consistently perform well over a number of years. Performance across some key strategies has been good, evidenced by solid performance fees in the quarter and for the full year. Wealth Management revenues were down 2%, primarily driven by the impact of lower equity markets and lower net interest revenue. We continue to believe that we should be able to drive more growth in this business over time. Shifting to talent. We continue to attract great people. During the quarter, we announced that Lester Owens will be joining our executive committee next month as Head of Operations. Lester's an experienced operations executive who has occupied key roles in large complex financial services organizations. He also has a reputation as a great leader with the passion for efficiency, transformation, controls and working with clients. Lester will join us next month and help us and our clients rethink how we process securities and cash, with the goal of gaining material efficiencies and improved quality. On the capital front, we continue to be keenly focused on intelligently deploying our capital, including returning excess capital to shareholders. Last month, we announced that we received approval to increase our repurchase program of common stock by an additional $830 million and we completed it in the fourth quarter. In the past, our ability to return additional capital to shareholders has been constrained by our internal CCAR models, and we've refined those models. We are pleased to now be in the position to return additional capital to our shareholders. And we're confident that we'll continue to maintain strong capital ratios and will be able to invest in our business going forward with this higher level of capital return. In terms of 2019, while we cannot predict market levels and interest rates, the environment is clearly more difficult today than one quarter ago. At these levels, the markets will not be a significant contributor to our results in 2019. Therefore, we remain focused on building the underlying franchise to drive higher levels of organic growth, and we'll continue to remain disciplined on expenses. Even if the market constrains our short-term growth, our goal is to ensure we drive EPS growth as we benefit from our strong expense disciplines and capital actions. With that, let me turn it over to Mike.

Thanks, Charlie. Let me run through the details of our results for the quarter and the full year and then provide some further thoughts on 2019. Note that all comparisons will be on a year-over-year basis unless otherwise specified. Beginning on page three of the financial highlights document, in the final quarter of 2018, we had earnings of $832 million and EPS of $0.84, down 22%. But, as Charlie mentioned, both the current and prior year reports included a number of notable items that made comparisons difficult. As a reminder, our fourth quarter 2017 results included a $0.17 per share net benefit related to the new U.S. tax legislation and charges related to severance, litigation, and asset impairment and losses on sales of certain securities in our investment portfolio. Our results in the fourth quarter of 2018 included a $0.16 per share related to severance charges, expenses associated with the real estate consolidation, and litigation charges, partially offset by a positive adjustment to provisional estimates for U.S. tax legislation and other changes. The severance expenses, which are a little more than half of the charge, are related to actions we are taking to drive more efficiency across the firm. Many of the actions are already completed, and we expect to see the payback in 2019. As I have noted throughout the year, the remaining $16 million of the costs associated with relocating our corporate headquarters was recorded in the fourth quarter and is included in the notable items. Excluding the notable items, we had earnings of $987 million and EPS of $0.99, up 9%. In terms of shareholder capital return, as Charlie mentioned, we received approval to buy back $830 million of additional common shares and completed it all in the fourth quarter. In total for the quarter, we repurchased approximately 29 million shares for $1.37 billion and paid $278 million in dividends. For the full year of 2018, we returned $4.3 billion or just over 100% of earnings to common shareholders through $3.3 billion of share repurchases and approximately $1.1 billion in dividends. Now, turning to our GAAP financial highlights on page four. Total revenue in the fourth quarter was up 7% year-over-year, pre-tax income up 40%, and net income applicable to common shareholders was down 26%. Page five shows the highlights after excluding the notable items in both quarters, which may help better understand the underlying performance. Total revenue was down 1%, fee revenue was also down 1%. Please note that the impact of notable items on revenue is all in the other segment, so it does not impact the revenue disclosures in either Investment Services or Investment Management. Fourth-quarter net interest revenue increased 4% to $885 million, driven by the impact of higher interest rates on interest-earning assets and a leasing adjustment recorded in Q4 2017. This was partially offset by lower noninterest-bearing deposits. Net interest revenue declined 1% sequentially due to higher deposit rates and the impact of interest rate hedging. This was partially offset by higher deposit balances. Sequentially, the impact of higher interest rates on deposit pricing and other interest-bearing liability rates was greater than the benefit due to the securities portfolio yield and other interest-earning assets. On page eight of our earnings release, you can see that year-over-year, our average interest-bearing deposits increased 9% while our average noninterest-bearing deposits declined 15%. Sequentially, average interest-bearing deposits increased 9% and noninterest-bearing deposits declined 3%. As we have consistently said, for our client base, deposit pricing is continually becoming more competitive with betas increasing as rates rise. The rates on our interest-bearing deposits increased from 63 basis points in the third quarter to 86 basis points this quarter. On the surface, this would imply a positive beta of approximately 82% across all currencies. When you focus on core interest-bearing U.S. dollar client deposits, excluding wholesale funding, betas have been in the mid-80% over the past few rate hikes and closer to 100% in the fourth quarter. The net interest margin increased 10 basis points to 1.24%. Sequentially, the NIM declined 3 basis points. While we focus on NIM, we are seeking to maximize earnings and take advantage of opportunities to use the capacity we have on our balance sheet. For example, we will take on temporary non-operating deposits and reinvest them risk-free at a central bank or government security. We had the opportunity to do that in the fourth quarter. These riskless transactions are accretive to net interest income, but they may have a modest spread that could negatively impact the NIM. Also note that the effects of certain hedging activities are recorded in fee revenue and not reflected in net interest revenue or the NIM. This negatively impacted net interest revenue and the NIM by approximately 1.5 to 2 basis points sequentially. Picking back up on the highlights after excluding the notable items on page five. Our expenses of $2.7 billion were essentially flat as our continued investments in technology were mostly offset by decreases in other expenses. Pretax income was down 3%, net income applicable to common shareholders, which benefited from the lower tax rate in the U.S. was up 4%, and our earnings per share were up 9% when you include the impact of our share repurchases. The full-year results on a GAAP basis are on page six. We had earnings of $4.1 billion or $4.04 per share. Our earnings per share was up 9%. And our return on tangible common equity was 22.5%. On page seven are the full-year results excluding the notable items. We had earnings of $4.3 billion or $4.21 per common share, and our earnings per share was up 18%. Page eight highlights our Investment Services results. Investment Services revenue was $3 billion, up 3%. Within Investment Services, Asset Servicing revenue was down 2% to $1.4 billion, primarily reflecting lower client assets and activity and the impact of a stronger dollar, partially offset by higher net interest revenue. This includes a modest decline in securities lending revenue due to lower U.S. equity and lower U.S. government balances and spreads. Pershing revenue was down 2% to $558 million, due to the impact of previously disclosed lost business, partially offset by higher clearance volumes and net interest income. Excluding the impact of the lost clients, the underlying business grew closer to 4%. Issuer Services revenue was up 25% to $441 million, primarily reflecting higher depository receipts revenue driven by corporate actions and higher volumes in depository receipts, and a smaller volume increase in corporate trust. The sequential decrease reflects seasonality in depository receipts. Treasury Services revenue increased 2% year-over-year to $328 million, primarily reflecting higher payment volumes and net interest revenue. Clearance and Collateral Management revenue was up 10% year-over-year and 5% sequentially to $278 million. Both increases reflect growth in Clearance and Collateral Management and higher net interest revenue. The new clients that we onboarded and other increases in collateral activity drove a 22% increase in average tri-party collateral management balances. Non-interest expense within Investment Services increased 1% year-over-year to $2.1 billion, driven by investments in technology, partially offset by the impact of the notable items. The sequential increase of 4% primarily reflects higher severance expense and investments in technology. Also on the metrics, foreign exchange and other trading revenue was down 3%. Assets under custody and/or new administration declined 1% to $33.1 trillion. And just a reminder that approximately one-third of our assets under custody and/or administration are equities. And average long-term mutual fund assets were down 4%, primarily due to the impact of lost volumes and lower equity markets. The sequential decline was primarily driven by the decline in equity markets in the fourth quarter and other activity. Now turning to page nine for the Investment Management business highlights. Asset Management revenue was down 11% year-over-year and 6% sequentially to $660 million, primarily reflecting the impact of net outflows in prior quarters, lower equity markets, and lost revenue associated with the sale of CenterSquare and the unfavorable impact of a stronger U.S. dollar. Wealth Management revenue was down 2% year-over-year and 3% sequentially to $303 million with both decreases driven by lower market values and lower net interest revenue. Assets under management decreased 9% and 6% sequentially to $1.7 trillion. We had outflows in most asset classes with total net flows of $18 billion. We had $14 billion of inflows into liability-driven investments. As Charlie mentioned, this business continues to perform well. Equity outflows were $8 billion, with a little under half of that coming from lower fee mandates; fixed income outflows were $1 billion; and multi-asset and alternative outflows were $2 billion. Index strategy outflows were $11 billion, primarily from equity index products, and approximately half of that was from one institutional client rotating asset classes. Cash outflows were $10 billion, approximately half of which occurred at year-end, some of which we have seen return within the first week of 2019. Now, turning to our other segment on page 10. Fee revenue increased year-over-year and sequentially, primarily reflecting the negative impact of the U.S. tax legislation on our investments in renewable energy in the fourth quarter of 2017, the benefit of which shows up in the tax line. Non-interest expense increased year-over-year and sequentially, primarily reflecting expenses associated with relocating our corporate headquarters and higher severance. Moving now to capital and liquidity on page 11. Our capital and liquidity ratios remained strong. As of December 31st, our key ratios declined since the end of Q3, primarily due to share repurchases in the quarter. Common Equity Tier 1 capital totaled $17.6 billion at December 31st, and our CET1 ratio was 10.6% under the advanced approach. The supplementary leverage ratio was 6%. Our average LCR or liquidity coverage ratio in the fourth quarter was 118%. Page 12 details our expenses. On a consolidated GAAP basis, expenses of $3 billion were essentially flat, reflecting investments in technology and the expenses associated with relocating our corporate headquarters offset by lower staff expenses, lower bank assessment charges, and the favorable impact from a stronger dollar. Note that technology expenses are included in staff, professional, deal, and other purchase services as well as software and equipment. The 9% sequential increase primarily reflects higher severance expenses, expenses associated with relocating our corporate headquarters, and investments in technology, partially offset by lower bank assessment charges, primarily FDIC expenses. Now, let me spend a few minutes on how we're thinking about 2019. The equity markets and higher interest rates have been key drivers of revenue growth for the last couple of years. If these levels persist, the markets would not be a significant contributor to our results in 2019. While our business model does benefit from economic growth and increasing markets over time, we are focused on organic growth and are adding services, products, and technology, entering new markets, improving the client experience and working to be more solutions-driven on behalf of our clients. Across our Company, we've been making investments and shifting how we operate in support of organic growth. But those actions will take time to show up in our numbers. One note on fee revenue for the first quarter. Investment Management fees will be impacted by the market levels and outflows in the fourth quarter. I would factor that into modeling. With respect to net interest revenue, there are a few variables to consider. At this point in the quarter, interest-bearing deposits are trending in line with the fourth quarter. We would also expect the non-interest-bearing deposits to continue to tick down, but it's still really early in the quarter. Deposit betas are consistent with what I discussed earlier. The yield on our securities portfolio should continue to grind up through 2019. The portfolio yield should benefit from factors including higher short-term rates and reinvestment opportunities. The sequential change in the yield in the first quarter should improve versus the change in the fourth quarter. The change quarter-to-quarter through the reminder of the year will be dependent on rates. Just a reminder that the duration of the portfolio is approximately two years and approximately 30% of it reprices each quarter. If all these assumptions play out for the first quarter, we would expect net interest revenue to be flat to up a little versus the fourth quarter 2018. On the expense front, we expect our technology spend to increase in 2019, reflecting the ramp-up of spend this year, in 2018, which was largely included in the fourth quarter run rate. This spend continues to be focused on our operating platform and the expansion of development resources to extend and enhance our capabilities and to support new business onboarding in support of organic growth. Even with these investments, excluding the notable items, we do not expect to significantly increase our expense base in 2018. With regard to expenses in the first quarter, a reminder about the typical first quarter impact to staff expense from the acceleration of long-term incentive compensation expense for retirement-eligible employees, the impact of which should be similar to last year. Despite that, adjusted for the notable items discussed earlier, we expect expenses to go up around 1% to 2% versus the fourth quarter and the first quarter of 2018. We should see the benefit of actions related to the severance that we booked in the fourth quarter to streamline our organization and boost productivity later in the year. In terms of our tax rate, there were a number of clarifications to new U.S. tax legislation that were published in late November and December. Based on our interpretation of those rules, we currently expect the full-year 2019 effective tax rate to be approximately 21%. As I mentioned, we completed the full $830 million of additional buybacks in the fourth quarter. This coupled with the impact of further capital distribution should be incorporated into your modeling. Assuming the assumptions play out, our goal would be to have reasonable growth in earnings per common share. Before opening the call, I just want to mention one additional thing. We have approximately $160 million of exposure to the California Utility that's been in the press release lately that has plans to potentially file for bankruptcy. We increased our provision on that credit in the quarter a bit, but may have additional impact depending on how the facts and circumstances develop. With that, operator, can you please open the lines for questions.

Thanks. Good morning, guys. Hey, good morning. Just one clarification that I know will come up. When you guys are talking about reasonable EPS growth this year, can you just level set us on your starting point? Is that off of a GAAP basis or is that off of your adjusted basis?

It's off an adjusted basis.

So, off of the $4.21 basis, you'd expect EPS growth?

Well, again, I mean that is what we're shooting for. Obviously, it depends on what the market is but that is absolutely true.

Okay. And secondly, regarding your point about not increasing expenses significantly, is the idea that we should expect expenses to increase by 1% to 2% year-over-year in the first quarter, or will that trajectory change as the benefits from the severance you implemented start to impact future investments?

I don't think we want to provide a full-year number, but your thinking is correct. The benefits from the severance actions we implemented this quarter will start to be realized in the second quarter and continue through the second half of the year, leading to more advantages during that period. Overall, I believe our messaging is clear. While it's still early, we want to emphasize that our primary focus is on driving efficiency within the Company. As I've mentioned before, taking actions clarifies the next steps we need to take. We will continue to pursue this strategy while also increasing our spending in areas where it's necessary. Overall, we are confident in our ability to manage expenses while making essential investments for the coming year.

Okay. And then just to clarify, do you expect the gap between your GAAP expenses and adjusted expenses to narrow? As you move forward, will there be as many of these non-core notable items? Are we going to see significant severance costs every quarter? I guess that’s the question.

No. Certainly, we hope not. These situations eventually need to become part of our process as we adjust the employee base. I mentioned in the last quarter call that we were reassessing how the Company is organized. I referred to the spending, the layers, and the managers with very few direct reports. This was a specific initiative we examined throughout the Company. Our hope is that moving forward, it becomes more routine for managers to make adjustments based on attrition and similar factors, and we anticipate these issues will eventually diminish.

First question, some of the investments that you have been making, and both your comments just on the focus on organic growth, I just wanted to get an update on maybe where you're seeing some of the earlier traction and what we should be focused on as we move through ‘19 and ‘20 to see some of the kind of realizations.

This is Charlie. Thank you for the question. I'll begin, and then Mike will add his thoughts. As we've mentioned, due to the nature of our business, growth does take time. However, there are some sectors that are making progress, and we see a clear trajectory for increased revenue growth; others are still in development. I'll use Pershing as an example. In Pershing's market, we've discussed the opportunity to enhance our offerings and expand in the RIA category, where we've traditionally excelled in broker-dealer services. This remains a significant opportunity for us. Additionally, we're noticing more banks and broker-dealers interested in outsourcing to us. With the rising demands of technology, increasing complexities, and competing priorities, they are looking to us for assistance to improve their product offerings and enable them to focus on value creation. Today, we noted that Pershing's revenue decreased by 2% year-over-year, remaining flat compared to the previous year. A significant part of this decline is attributed to two clients we've mentioned. Excluding those, we experienced a 4% increase. Furthermore, it's important to highlight that we have a substantial pipeline of signed business within Pershing, where we're currently investing to onboard these clients. As I stated earlier, this onboarding will begin in the second quarter of 2019 and extend into 2022. In terms of pipeline size, it's challenging to quantify precisely due to its scale, but it's either the largest or at least bigger than any we've had in the past five years, likely even longer. The opportunities are strong in both the U.S. and Europe. In Europe, we continue to see growth potential as the Wealth Management market matures. There's a lot happening with Pershing, and we're optimistic about the pipeline, even if it may take a bit longer to reflect in revenue. Long-term, Pershing is crucial for our growth strategies in Wealth Management in both the U.S. and Europe. Additionally, regarding our own Wealth Management business, it's still in the early stages. Catherine Keating is currently defining our plans and moving towards implementation. This involves products, banking infrastructure, sales tools, and incentives. We don't anticipate seeing significant results there in the next few quarters, but we believe we can grow at a faster rate than we currently are due to our consistent performance and the progress we've made. Mike, would you like to discuss Treasury Services, Clearance, and Collateral Management?

Sure. I will start with Clearance and Collateral. In that area, a significant factor driving our business is the clients we’re gaining from the competitor in the government clearing sector. The tri-party balance grew by 22%, with approximately two-thirds of that growth coming from clients transitioning from JPMorgan. The remaining third is generated from new clients and activities from our existing client base. We're experiencing positive momentum in products like our margin segregation service, which now requires market participants to maintain segregated margin balances with providers like us. This service was virtually non-existent a couple of years ago, and we're seeing substantial interest, contributing to the growth in collateral balances. There are several initiatives that support this area, and as we onboard these government clearing clients, they are recognizing that our capabilities in the collateral sector are distinct from what they previously encountered. The discussions we're having are becoming increasingly productive. More clients are showing interest in our collateral optimization service and other related offerings. Regarding Treasury Services, we appointed a new CEO over the summer, Paul Camp, who is focused on shifting perceptions about our services. Traditionally, we have been viewed primarily as a receivables bank, concentrating on collecting payments. By placing more emphasis on payments, we're aiming to enhance liquidity balances and foster broader conversations with clients. We've altered our leadership and the focus of our sales team, as well as adjusted incentives. Although it is not visible in our disclosures, Treasury Services deposits have risen by just over 10% since the third quarter. Comparing the third quarter to the fourth quarter, we've seen about a 10% increase. We’re gaining traction across all these businesses, which we believe contributes to our organic growth story. Charlie, would you like to comment on Asset Servicing?

Yes. I know this is a lengthy answer, but it's crucial. Asset Servicing is a vital part of our business. We genuinely believe we have a unique advantage here. We have a data platform, we are willing to collaborate openly with front-end providers, and we are working towards tighter integration for the benefit of our clients. Additionally, we are continuously enhancing our infrastructure and the quality of our services, which may not seem exciting but is really important in our field. This is a long-term endeavor due to the nature of these relationships and the lengthy sales cycle. However, we are making progress. This quarter, we secured $100 billion in fund administration from one client and $400 billion in new custody, ETFs, and mutual funds from another provider. We have numerous examples of our successes. This growth will be gradual given our starting point and the experiences we've had with Pershing and other businesses. I'll leave it there.

Okay. No, thanks for all that. And then, Mike, just a quick one on capital. Just given the decline in the ratios with the buybacks and then what you mentioned on the balance sheet. Just how should we be thinking about managing that going forward, just through the regulatory process and then just some of the opportunities that you're seeing?

Yes. Between now and the second quarter of 2019, our remaining buybacks are already set based on what was approved in CCAR last year. This should be straightforward for the first half of the year. As we prepare for CCAR 2019, much of the effort we put into securing the additional $800 million to $830 million approval will be integrated into the modeling we will conduct as part of that process. That process is beginning now, and over the next few weeks, we will gain a clearer understanding of the inputs involved.

Great. Thanks very much. Maybe just to follow on organic growth. Thanks guys, you covered a lot of that, a couple of additional questions. In terms of the market conditions, obviously, they're challenging right now. But, how would you expect volatility to help your overall revenue, including on the organic growth side? If we have a situation in 2019 where we have choppy markets, maybe flat but much more volatile. Can you talk about the potential benefit for both the collateral management business that you referred to Mike, and FX and other trading? And then, also just quickly on the lag between expenses of the onboarding for Pershing versus clocking that revenue in?

The expenses we're currently incurring to onboard the Pershing business are being spent now, and we don't expect the expense profile to change significantly in 2019. As Charlie mentioned, the revenue from Pershing will begin to come in during the second half of 2019 and will be more substantial in early 2020. Regarding volatility, in Pershing, we anticipate increased transaction volumes during volatile periods. However, most accounts we manage are not retail, self-directed brokerage clients, so the transaction activity won't necessarily reflect the peaks and valleys of volatility. Over the past few months, transaction volumes have increased slightly, but not significantly in that business. In Asset Servicing, if volatility rises in foreign exchange, it will positively impact our revenue. The volume depends on client activity, with about a third of core asset servicing revenue driven by transactions, which will fluctuate with market changes. Additionally, about one third of our assets in custody are equities, so significant movements in equity market volatility may not directly lead to substantial increases in transaction-related revenue.

This is Charlie. I want to add one quick thing. The reasons behind the volatility are very important to us. There is good volatility and less desirable volatility. This quarter, we have observed volatility that moves assets away from the businesses that we benefit from. Understanding the reasons behind this will be crucial as we look ahead to the next year.

That makes sense. Could you elaborate on the expenses? Charlie, please share more about the types of investments currently in the run rate and highlight a few of the most significant ones. In your discussion of the expense rate not significantly increasing, is that based on the assumption that the markets will remain flat or potentially improve? Additionally, can you specify which areas of management were most restructured in relation to the businesses?

So, let me try and remember all three of them. I’ll do backwards. On the third one, it was across the entire Company. As I said before, we really looked at spans, layers and the series of things like that across the entire entity from the staff areas to investment services to our investment management businesses. It was pretty consistent. In addition, ongoing efficiencies through our operations areas on top of that are things that we've seen, and then just tactically, some spots in different places. Overall, I would say, it was consistent. On the second question about expenses relative to the environment, I would characterize it as, we're thinking about what the right level for us to invest in. With a cautious eye towards next year, that's where we plan for. The extent that the environment gets worse, we always have levers we could pull if we thought things were going to really get bad and actually stay there for a period of time, and maybe spend a little bit more if all of a sudden the world changed very dramatically. I don't want to overstate either of those two cases up or down. I think where we're planning for is where we feel the right level of spend for us is within a reasonable range of outcomes for next year. The first...

Can you provide a couple of examples of the most recent technology investments you made and the areas you focused on?

Sure. Mike and I have both mentioned the ongoing efforts at Pershing to onboard these clients. Much of the work involved in this process is not simply about adding clients; it entails a significant amount of time and effort to develop new capabilities. These capabilities must be established to scale and offer services to others. There is a considerable amount of technological work required to onboard these Pershing clients, which is reflected in the overall expenditure figures we've discussed. In the corporate trust sector, we are also continuing to enhance our technology platform for purposes beyond traditional products, which is included in our spending. As we consider asset servicing, we are putting a strong emphasis on automation and on improving our data infrastructure. These are just a few examples.

Hey. Good morning. Thanks for taking the question. I'm sorry, Charlie, were you in the middle of saying something?

Yes. I wanted to mention that one area we haven't talked about is our markets business. When considering where to make investments, we've discussed our progress before. You can see it reflected in the numbers, along with the new products we've introduced. A lot of what is taking place is driven by technology spending.

Okay, Bedell, you owe me one. I just gave you a little overtime on your last question. I'm curious about deposit trends. Mike, I recall you mentioned that deposits have been consistent quarter-to-date compared to the fourth quarter. However, the trends appear mixed beneath the surface, and you've excluded the wholesale or CD prices from your deposit betas. When you discuss deposits, are you referring to the total interest-bearing deposit balance, which averaged 161.7, or are you talking about deposits excluding CDs? Additionally, how should we interpret the growth in CDs? That growth has significantly increased over the last few quarters. What are your thoughts on that as we head into next year?

Yes. My remarks were in total, Brennan. Thanks for the question and for clarifying that. The reason why you need to look through what’s happening with your client deposits is obvious. Wholesale funding is more index-based pricing for the most part. You really want to try to understand what's happening with your clients in those conversations. That’s why we’re trying to give you that color. I think as you think about the wholesale funding, I don't see it moving in any substantial way from current levels.

Okay. All right, great. Thanks for clarifying that. And then, so the second question on issuer services. You guys provided some color in the commentary on the fact that there were some elevated activities, depository receipts, LatAm. Kind of curious about how sustainable you would see this activity level; was this corporate action activity impacted by maybe the volatile markets that we saw in the quarter, or was it also quite a quarter for M&A closing activity? Did that come into play into that line as well? Thanks.

Yes. Regarding M&A closing activity, there hasn't been much, but there is some volatility. In terms of sustainability, particularly in issuer services, which includes corporate trust and depository receipts (DRs), we are seeing some revenue growth in corporate trust. It's not substantial, but it is on the rise, and we hope that will continue based on the steps we've taken. This growth is incremental, and we are optimistic about our outreach efforts and the capabilities we are developing. As for DRs, they tend to be quite volatile and seasonal on a quarterly basis. Reviewing our performance from 2017 to 2018, while individual quarters are significant, the overall yearly performance was largely flat. The same pattern holds for 2018, though we experienced strong performance in the fourth quarter. This was partly due to a particularly weak DR quarter in the previous year's fourth quarter. In summary, while we believe the full-year performance is sustainable, we anticipate volatility on a quarterly basis moving forward.

Yes. We do not disclose the components of corporate trust, as you know. However, the CLO business has shown strong performance for us this year, where we have gained market share. This has contributed to our underlying growth. We have been consistently discussing our investments in technology to better support this business over the past year. We are now seeing the benefits reflected in the market share we have acquired this year, and this has contributed to our success.

Great. Thanks for letting me sneak in one more.

Thanks. Hey, good morning, guys. So, first question is just around the expense trends. I think in the beginning of the year, last year you guys talked about reinvesting the majority of the tax savings, which I think was in kind of the $250 million to $300 million range. Charlie, I think you mentioned 100 in tech spend this year. So, did the investment pace change or some of that is just kind of slipping into next year?

Alex, maybe just to correct that. So, I think what Charlie was referring to was the quarter. So, if you look at the spend on a full-year basis for ‘18, then we spent probably just over $300 million.

Got it. So, that's all in the run rate.

Yes.

Got it, understood. And then, just digging into the issuer services again for a second. If we look at just the fee components, not so excluding the NIR, I think the growth was quite substantial this year, I think 10% plus. Can you help me understand again kind of sustainability of that growth? Because to your point, I mean, it's a fairly mature business; it’s something we haven't seen that type of growth from there in quite some time.

Yes. As Charlie mentioned, if you sort of unpick both corporate trust and DR, Alex, I think the corporate trust fee line is a pretty consistent sort of story, right, where you've seen that tick up sort of gradually over the last number of quarters. Given the trend we're seeing on a full-year basis, we would still expect that to sort of tick up a little in 2019. I think the DR revenue is the place where you've seen a little bit more volatility year-to-year. In ‘17 to ‘18 it was up a little. Given the things that Charlie talked about in terms of some timing of corporate actions that happened, the volatility that we saw that drives transactional volume in some of the different quarters. As we look to 2019, we think that the 2018 numbers, plus or minus a little, look like a good way to think about the full-year story for next year.

Hi. It's Rob Rutschow for Mike. Just a follow-up on the expenses. You've mentioned I think previously that there are 11 layers of management between, Charlie, in the bottom of the organization. What's the right level, and how long does that take to get there and how should we think about that from an expense perspective?

We have eliminated, depending on where you are in the Company, call it 2 to 3, as part of this exercise. The actions, as we said, a bunch of them have already happened in the month of January. Over the next couple of months is when we’ll actually see the impact get into our run rate.

And then, I understand that I guess severance is kind of a recurring or nonrecurring, but what was that in the quarter and how should we think about that going forward?

I answered the question earlier about how to think about it going forward.

Yes. In my remarks, I mentioned that the severance charge accounts for a little over half of the notable expense items for the quarter.

Hi. Thanks. Sorry, it's a day with overlapping calls. So, if I've missed some of the, sorry. Severance is over half, just going to those noncore just so that we can have our numbers correct, as we look forward. Charlie, I missed your comment on how to think about it going forward. But I will go back and talk to IR. $16 million in real estate relocations. So, is the rest all from higher litigation?

Yes. The three components of the notable items, Vivek, this is Mike, obviously are the severance, the real estate charges, and litigation. Correct.

Okay. When you mention a little over half, are you referring to 50% or 60% in that range, but not exceeding that?

That's a good way to think about it.

Okay. Sorry, we’re just trying to…

Yes. We know it’s a busy morning. No worries.

It's a disappointing morning. I will let you go now. Thank you for the clarification. We will connect with IR later.

All right. We're happy to talk later, Vivek if you want. Thanks everyone for joining. We appreciate it.

Could we just double check with the operator that there are no more?

Great. Thank you.

Thank you, everyone.