The Bank of New York Mellon Corporation (BK) Q1 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Earnings Conference Call hosted by BNY Mellon. [Operator Instructions] Please note that this conference call webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Mr. Andy Clark. Mr. Clark, you may begin.

Thanks, Wendy, and welcome, everyone. With us today are Bob Kelly, our Chairman and CEO; Todd Gibbons, our CFO; as well as several members of our executive management team. Before we begin, let me remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement on Page 12 of the press release and those identified in our documents filed with the SEC that are available on our website, bnymellon.com. Forward-looking statements in this call speak only as of today, April 19, 2011, and we will not update forward-looking statements. This morning's press release provides the highlights of our results. We also have the Quarterly Earnings Review document available on our website, which provides a quarterly review of the total company and individual businesses. We will be using the Quarterly Earnings Review document to discuss our results. Now I'd like to turn the call over to Bob. Bob?

Thanks, Andy. Good morning, everyone. EPS was $0.50 or $625 million in the first quarter. Given the seasonality of our business model, it's probably most useful to focus on year-over-year comparisons. That's because we're coming off the fourth quarter when performance fees from investment management and corporate action fees and DRs are seasonally at their absolute peak, so sequential comparisons are less valuable, frankly. Total revenue grew 9% year-over-year, primarily due to acquisitions, but not entirely. We'll come back to that. We continued to grow faster outside of the U.S. Non-U.S. revenue was 37% in the first quarter. That's up 200 basis points from a year ago. We're continuing to see good growth in investment management fees. They're up 12% year-over-year. And AUM was up 11% in Q1 to a new high of $1.2 trillion. Fee growth in our investment management -- or Investment Services businesses was 27%. And even excluding the impact of acquisitions last year, it was still up a good 9%. Clearing had perhaps our strongest quarter, up 27% year-over-year and up 5% sequentially. Asset Servicing continued to benefit from new business and acquisitions. Assets under custody was $25.5 trillion, a new record, up 14% year-over-year. Net interest revenue does indeed remain constrained due to short -- very low short-term interest rates, and our hope is we may have seen the low point of the year in Q1. And despite 25% higher volumes in FX and other trading, this category was negatively impacted by very, very low volatility this quarter. It was down 22% from the previous quarter and down about -- and it's currently, I think, at the lowest rate since 2007. And that is the primary driver of our FX revenue. On the new business front, we had 6 -- this will be our sixth consecutive quarter of positive long-term asset inflows for investment management. We actually had $31 billion for the quarter, almost double what we saw in the first quarter of 2010. Wealth Management had a record level of client assets and has a strong pipeline and the Depositary Receipts business continues at a very strong win rate. You may have noticed that our provision was 0, so this will be the third quarter in a row it was 0 or negative. Expenses were up sharply, but roughly half of that was due to acquisitions, and litigation expenses increased as well. Expenses actually declined 2% sequentially, which includes the impact of litigation expenses as well. We're kind of viewing litigation as core at the moment and a reflection of the environment we're operating in. I see this as the last phase of the financial crisis with plaintiffs seeking to recover losses. It's a sad reality of the U.S. legal system, and it's a fact that the entire industry is facing, including us, and will continue to be somewhat of a risk. In the end, we'll navigate through it. The fundamental strength of our business model is our ability to rapidly grow capital and generate a high return on it. This quarter, we generated almost $800 million of Tier 1 common, up 7% from last quarter or 28% annualized. Tier 1 common equity is really our key regulatory capital and are constrained until Basel III is implemented. So we really focus on our return on Tier 1 common. In Q1, we earned a 21% return on it, and we did so with a top quartile capital ratio versus the top 10 banks. And after the most recent regulatory review and approval process, we've begun executing on our plans to return capital to shareholders. We increased our quarterly dividend by 44% to $0.13 per quarter. And you may have noted that during the quarter, we repurchased 1.1 million shares of common stock, and we expect to continue that program in the second quarter. So to sum up, I would view revenue growth at this point in the mid-single digit range when you strip away everything in terms of acquisitions and unusual items. New business trends and pipelines are in good shape. We continued to deliver revenue growth in this environment, although, of course, we have to remember it is constrained by the low interest rates and low FX volatility. If volatility picks up, so will revenues in those categories. We're focused on keeping expense growth down, and we're going to do more to mute it. But we do have somewhat higher costs in the first quarter for reasons that Todd will spend a little bit more detail on. We are generating lots of capital, and we make a very strong return on it. And we are returning capital to shareholders. So with that, why don't I turn it over to Todd to go through the numbers in more detail, and then we'll open it up for questions. Todd?

Thanks, Bob. Before getting into the numbers, I'd like to highlight the changes that we've made to our business line reporting. I think you'll find that this adds focus to our principal businesses. Investment Management now includes the former Asset Management and Wealth Management businesses. Investment Services includes the former Asset Servicing, Issuer and Clearing Services as well as the Cash Management business previously included in Treasury Services. The credit-related activities previously included in Treasury Services are now included in Other. And we've reclassified all of our prior periods accordingly. These changes are consistent with our internal reporting structure. They're consistent with how we evaluate performance and decide on resource allocations, and they should make it easier to understand our company and how it's performing. With that said, let's go through the numbers. And we'll begin with Page 3 of the Quarterly Earnings Review where we present some of the highlights of the quarter. I will focus primarily on year-over-year comparisons, given the seasonality in our business model that Bob just mentioned. On a year-over-year basis, earnings for the quarter of $0.50 were up 2% versus the year-ago quarter. Total revenue of $3.6 billion was up 9%. Fee revenue was up 12%, principally reflecting the acquisitions in Investment Services, as well as higher market values and net new business in our Investment Management and Investment Services businesses. FX and other trading results were down, primarily due to lower fixed income and derivatives trading revenue. Net interest revenue was down 9% due to the continued impact of the low rate environment. Noninterest expenses increased 11%, primarily driven by the acquisitions, and was down 2% sequentially and that includes the $47 million in litigation expenses during the quarter. Turning to Page 5, you'll see a new page we've added to the earnings review to call out some of the business metrics that will help you understand our underlying performance. Assets under management and assets under custody reached record levels in the quarter, reflecting higher market values and net new business. Assets under management were up 11% year-over-year, 5% sequentially, to a record level of $1.2 trillion. First quarter long-term inflows were $31 billion. This is the highest level of inflows since our merger, and it more than offsets the short-term outflows of $5 billion. For perspective here, consider that for all of 2010, we had a $48 billion in long term flows, which itself was a record. Long-term inflows benefited from strength in fixed income and equity indexed products. Assets under custody was up 14% year-over-year to a record level of $25.5 trillion, benefiting from the acquisitions, higher market values and new business. The other investment service metrics continue to show positive trends with the exception of corporate trust, where the environment continues to be challenging. DR programs increased, all clearing metrics improved and the broker-dealer tri-party book continues to grow. Turning to Page 7 of the earnings review, which shows fee growth. On a year-over-year basis, our fee revenue was up 12%, which would be about 2% if you excluded the acquisitions. That increase also reflects very high other trading income in the first quarter of last year, as well as gains on the disposition of leases and a large translation gain in the first quarter of last year. If you adjust for these, our core underlying fee revenue growth grew at about 8%. Investment service fees were up 20% year-over-year and down 2% quarter-over-quarter, primarily reflecting the impact of the acquisitions, as well as new business, improved market values and seasonality. We continue to benefit from the acquisitions made last year. During the first quarter, Asset Servicing picked up a large piece of transfer agency business from an existing client because of the new GIS capabilities. Pershing also had some nice revenue synergy wins from GIS. The BHF acquisition helped us win new asset management, asset servicing, Pershing and broker-dealer services businesses in Germany, as we now have a meaningful presence there. These are all pieces of business we would have never won without the acquisitions. Asset Servicing fees year-over-year benefited from the acquisitions as well as higher market values and net new business. During the quarter, we won an incremental $500 billion in new Asset Servicing Custody business, our strongest new business quarter and year, and we have approximately $740 billion in new assets to be converted. Issuer Service fees were up 5% year-over-year due to higher DR revenue, reflecting higher corporate action in issuance and cancellation fees. Fees were down 14% sequentially, primarily reflecting seasonally lower DR revenue. Corporate trust fees were relatively flat to both periods as new business was offset by a continuing decline in revenue from structured products. Clearing fees were up 20% and 27% year-over-year and up 5% sequentially due to strong growth in mutual fund assets and positions, increased daily average revenue trades, higher market values and new business. As we've mentioned in January, we've been converting some significant Clearing business and expect to see a positive impact from those wins in the second quarter. The year-over-year increase also reflects the impact of the GIS acquisition. Investment Management had a strong quarter, reflecting the benefit of new business, higher equity values, improved investor performance, but was also impacted by performance fees seasonality. Adjusting for performance fees, investment management fees were up 11% year-over-year and up 3% sequentially, reflecting higher period-end market values and the impact of net new business driven by strong investment performance. Also reflecting our strong investment performance was the 31% year-over-year increase in performance fees. FX and other trading was down 24% year-over-year and 23% sequentially. FX revenue totaled $173 million. That's a decrease of 1% year-over-year and 16% sequentially, with both decreases primarily due to a decline in volatility. I should add that volumes were up each period, so our clients are doing more trading with us. We measure volatility quarterly based on the profile of currencies that we trade, and volatility in the first quarter of 2011 was at the lowest level since 2007. Other trading revenue for the quarter was $25 million, and that compares to $52 million in the fourth quarter, reflecting lower fixed income and derivatives trading. Turning to Page 8 of the earnings review. NIR and the related margin continue to be impacted by low short-term interest rates globally and our risk reduction strategy, the latter negatively affecting NII but also lowering credit charges. NIR was down 9% year-over-year and 3% sequentially. On a sequential basis, NII was down approximately $15 million due primarily to timing difference on hedges and day count in the first quarter. It is also being impacted by our defensive position on duration and credit. However, at the end of the first quarter, we started putting some of our excess liquidity to work in a secured loan program and the purchase of high-quality asset-backed securities. These actions, along with the recent rate increase announced by the ECB, will allow us to maintain NII closer to the fourth quarter levels going forward until we see a movement in U.S. interest rates. The net interest margin was 1.49% compared with 1.54% in the prior quarter, reflecting the same factors that I just mentioned and a much larger-than-expected balance sheet. The balance sheet was larger for most of the quarter and actually spiked at quarter end in a flight to quality given the events in North Africa and Japan. Turning to Page 9 on expenses. Non-interest expense increased 11% year-over-year and decreased 4% sequentially. The year-over-year increase reflects higher expenses associated with the acquisitions, our revenue mix and higher employee benefits expense. Adjusting for the acquisitions and litigation, core expenses are up about 8%. And if you recall, that's in line with our core fee revenue growth rate of about 8%. The sequential decrease reflects seasonality, which was offset somewhat by higher litigation, pension and health care expenses. On Page 10, which shows the distribution of our investment securities portfolio, you can see that the pretax net unrealized gain in our securities portfolio increased by $216 million to $569 million, reflecting a continued trend of tighter spreads on residential mortgage-backed securities. I would also point out that our economic decision to hold the securities in the grantor trust has paid off as these securities have now got an unrealized gain of $823 million, up almost $250 million over the quarter. Also on Page 10, you can see that we continued to generate significant capital during the quarter. Tier 1 common was up approximately $800 million or 7% over the fourth quarter, and we generated a 21% return on Tier 1 common. As a result of capital growth and lower risk-weighted assets, our key regulatory capital ratios increased significantly. Tier 1 was up 60 basis points to 14%, and Tier 1 common also increased 60 basis points to 12.4%. As Bob noted, we're now able to return capital to our shareholders, and we've increased the dividend 44% to $0.13 per share, and we've also started to buy back our shares. We continue to expect to exceed the Tier 1 common Basel III 2013 requirement by the end of this year, and we won't be constrained in terms of pursuing any opportunities for growth, though we expect significantly less M&A activity as we focus on our integrations and cost reductions. Looking at our loan portfolio, there was no provision for credit losses in the quarter compared to a credit of $22 million in the fourth quarter and a charge of $35 million in the first quarter of 2010. NPAs, which were already low at $399 million at the end of 2010, declined to $386 million. The allowance for credit losses decreased $17 million as a result of net charge-offs of $17 million. The effective tax rate in the first quarter was 29.3%. That's up 200 basis points compared to 27.3% last quarter and was relatively flat to the year-ago quarter. We continue to expect our tax rate for the full year to be approximately 30%. Before I comment on the outlook, I'd like to bring your attention to Page 14. Here, we have provided a new metric, as you can see in the middle of the page. As you can see, investment services fees as a percentage of noninterest expense grew from 91% a year ago to 94% this quarter. And it would have been 97% except for the litigation expenses. Our goal is to increase this ratio as we get more efficient and we rely less on capital markets income to drive our performance in this business and more on trust fees. Looking ahead, we are cautiously optimistic that the revenue momentum will continue in the coming quarters based on our investment performance and the strength in our Asset Servicing and Clearing businesses. We also continue to benefit from the acquisitions, both in terms of increased revenue, as well as cross-selling our other capabilities to new clients and selling our new capabilities to the rest of our clients. DR should benefit from seasonality in the second quarter. FX will fluctuate based on volumes, volatility and competition. The outlook on volumes is a reflection of the continuing growth of our Investment Services business. Volatility is obviously market-based, and we expect that the business will be increasingly competitive. Both NIR and fees continue to be impacted by the persistently low interest rate environment but should benefit from our investment program and improve to the fourth quarter levels. On the expense front, we're continuing to work on bringing down the cost of delivering our services while keeping quality high, including through process reengineering and automation, rationalizing systems and our technology infrastructure, reducing occupancy costs, maximizing our purchasing power to supplier consolidation and continuing to shift positions to lower cost growth centers. As you're looking ahead to the second quarter, note that we awarded our annual company-wide merit increase of approximately 2% on April 1, so that will come into our numbers. Litigation will continue to be a risk. And finally, we expect to continue to benefit from our risk management strategies as the quarterly provision should be in the range of $0 to $20 million. With that, let me turn it back to Bob.

Thanks, Todd. Why don't we open it up to questions?

[Operator Instructions] Our first question today is from Glenn Schorr with Nomura.

Thank you. So you keep putting up good business wins, and let's just focus on assets under custody right now -- or Asset Servicing. Can you tell us what's won but not yet funded? I appreciate the line that shows us what's won on the quarter, but sometimes it's hard to know what's in the funded base.

It's Tim Keaney. We've won in the last 4 quarters about $1.5 trillion, and about $740 million has yet to convert. And that's probably over the next 2-plus quarters or so.

And I know this is going to be a massive generalization, but what type of -- it's been pretty consistent in the $300 billion to $500 billion a quarter. What type of business is that?

I think you see a pretty good mix, Glenn. It's mostly bundled business. Although I would say, If you looked over the last 4 quarters, we've seen a notable uptick in kind of outsourcing generally, mostly in the Asset Management segment and the insurance segment, which we think plays to a real strength for us. And one of the questions, I guess, was asked the last time we were together was how much of this is new flow. About 63% of the $500 billion we won during the quarter, we took from competition and 37% is what I would characterize as new flow for our industry, like outsourcing.

And then you or Todd, you were kind enough to give us a comment on half the expense rise was related to acquisitions. Would you be able to tell us how much it contribute on the revenue line and/or the assets under custody line? The GIS and BAS?

Sure. Let me start with the revenue side of it. If you adjust for about $270 million on a year-over-year basis, that would bring us down after acquisitions total revenues to about 2.3% year-over-year. And Glenn, before -- what I'd like to add to that is in the first quarter of last year, we had very high investment income. So we had a translation adjustment that went in our favor, and we also had the benefit of disposal of a number of leases. And we also had unusually high trading income in our derivatives book. So if you adjust for those two things, the core underlying fee revenue was about 8%. And you had a follow-up question, Glenn.

I got it, yes. No, thank you. Yes, last one, sorry. So FX has gotten a lot of attention lately. I know it's just one quarter. You're down 16% sequentially. And I think that the press release attribute it to just decline in volatility. Can you just give us a blanket statement on what's going on in terms of the existing suits, the other inquiries from customers and what you see the outlook for how that business is both priced and executed?

Why don't -- Glenn, why don't I talk to that for a minute and then maybe Jim Palermo can talk to it, because it reports up to him. But frankly, the reporting on this issue just isn't accurate, and in many ways, it's actually misleading. We continue to enjoy very strong use of our standing instruction program, which, really, everyone does in our industry. And why do they do it? Why do we still have very strong usage? It's because it's very valuable to clients. The facts are volumes were way up in the quarter. It's actually 25% up year-over-year. Volatility, which is the biggest driver of FX revenue -- traders can't make money unless there's volatility. It was down 22% linked quarter and the lowest level since 2007. When volatility's low, it's really hard to make money. Pricing has always been really competitive, and I would say due to this recent attention, it's even more so today. We're being really responsive to the needs of our clients, and we're going to continue to be. What I would also say though is we're only capturing a small percentage of our clients' FX flow because it is so competitive. And we actually view this as a fantastic opportunity over time to gain a lot more business. So that's kind of the big picture. This is actually a good business, and we think we can grow it over time. Jim, what would you add to that?

Yes, Bob. All good points, and clearly, it is a competitive environment, but we're doing a number of things in discussions with clients that we've had. In fact, just last week, we met with our client advisory board, which is top clients from all around the globe, and they're very supportive of the program that we have in place. As a matter of fact, we began to introduce some of our enhanced technology that we're applying to the FX execution world, and that will enable us to offer a broader array of options for clients and their investment managers to execute their activities. And our anticipation is that will capture some of that flow that Bob just described.

Okay. Thanks very much, all.

Our next question is from Alex Blostein with Goldman Sachs.

Great. Thanks. Just want to follow up on expenses one more time. So it seems like new business for Mellon continues to be fairly strong, both Asset Management and Asset Servicing. Can you give us a little more color on how you can leverage that a little bit better and specifically, as you go on through your expense management, what -- how much can you actually take out from the run rate here for us to start to see some margin impression aside from rates going up?

You want to take that, Tim?

Yes, sure. If you look at our expenses on a -- if we look at it on a year-over-year basis, Alex, I would say we're pretty much in line adjusting for inflation and -- excuse me, not inflation, the acquisitions and the litigation, it increased at about the same level of -- that we saw the increase in our core fee revenues, probably around 8%. Our benefits expenses were quite a bit higher in the first quarter, as we had indicated previously that they would be. And that's largely medical and pension. And now that that's embedded into our run rate, if you back that off, there's probably about 100 basis points of positive operating leverage that we're seeing in our core business. And if you look at the number that we described on Page 14, you can see that we continue to get more and more efficient because our expenses are decreasing as a function of our core revenues. In a very soft, what we call our "capital markets" environment, that is the low volatility that we saw in the first quarter, relatively low interest rates and softer sec lending, our growth rate when we're not growing in those areas, but we are growing our core fees, we would estimate our core growth rate probably to be in the mid-single digits. And we're not going to generate a whole lot of positive operating leverage. We think we can generate a modest amount of positive operating leverage at that kind of expense run. However, we do have a number of longer-term programs that we think will continue to help. We have a number of systems that we need to sunset and take that expense run rate out. We do have a number of programs to reduce our technology infrastructure costs. We're starting to see some of the early benefits of the consolidation of our consulting expenses, and you can see that in our run rate as we've negotiated better terms and we're doing more of our activity with fewer providers as we continue to improve our procurement activities. In the little longer run, we're not -- we don't have any anticipation of taking any significant charges. We're doing this all through our P&L today. But we also see opportunities to reduce occupancy expense as we consolidate into fewer locations around the globe. So I think we will generate, in this kind of weak type of revenue environment for the capital market stuff, we'll generate moderate operating leverage where we'll really see it come once we see a little more on the capital markets side and some of the benefits from our long-term expense reductions.

Okay, that's helpful. And then maybe just one more follow-up on FX. Is there a way for us to -- for you guys to size for us how much of your FX business comes from really standby -- standing instructions versus negotiated trades, just to get -- to help us kind of size that bucket that -- obviously it's been a lot in the press?

Yes, why don't I give you kind of a bigger picture on it. This is Todd. In our total transactions that we do with our clients, 75% of that business is done away from us and 25% is done with us. Of that 25%, we have not disclosed the split between standing instruction versus negotiated activity that we perform. But standing instruction is just a part of the total, and it is a pretty small percentage of the total transactions that are done with us. And if you -- to look even more broadly, you're talking about 6% of our total revenues. So standing instructions are just a part of that 6% of the total revenues for the company.

Got it, thanks.

Our next question is from Betsy Graseck with Morgan Stanley.

Thanks. So, Todd, when you were talking about modest positive operating leverage, could you just comment on what do you mean by modest?

For us, we'd say 50 to 100 basis points is pretty modest rate, Betsy.

Okay. And that's on an annual basis.

Yes. We have a little more seasonality than a number of our competitors, as you know. So from a quarter-to-quarter basis, you're going to see some noise one way or the other.

Sure. And then within that, you're expecting that some of the reinvestments and cost saves that you're going to be getting will drop to the bottom line.

Well, what we've been doing and what we've been running through the P&L is we've been reinvesting those cost savings into other things. For example, our global growth strategies have prevented -- have presented quite a bit to us this year, which we've been reinvesting in the reengineering efforts that we're doing around the globe.

So the positive operating leverage is coming from more increased top line efficiencies are affecting this as opposed to dropping any of that to the bottom line.

Yes, ideally we would like to be able to reinvest the savings probably for a year or two that these efforts are creating without taking any single charge related to them.

Betsy, this is Bob. One of the things -- one of the realities of consolidating premises in different geographies and sunsetting systems is some of those plans take 3 to 4 years to execute. So we have short-term plans and we have medium-term plans, and this isn't a short-term program. This is a long-term program. And to date, as Todd said, we've been reinvesting all our savings. And it's going to make -- over the medium term, it's going to make for a much stronger franchise and with better client service and a lower cost base. But it's going to take time.

Right. But to the degree you're not getting the operating leverage that you wanted, would you consider dropping it to the bottom line? Or not for another couple years?

No, we certainly would, but I think we're going to give you a metric now, Betsy. On Page 14, when you're looking at the investment services, you're going to be able to follow how we're doing there.

Okay. And then lastly, on capital and buybacks, you indicated what the plan was and you were approved for a dividend hike, obviously, plus the buybacks. Can you give us any sense as to when you would start that buyback program? And is it all related to pre or post the SIFI buffer designation?

Sure. I'd love to take this one, Betsy. We actually started the buybacks last month before we got too close to the earnings release. So in terms of the share buybacks, we will continue as soon as we can.

Okay. And that's what, after the next couple of days?

Yes.

And Betsy, we just don't know what the SIFI buffer is going to be at this point. Whereas 6 months ago, we were hearing it could be 25 to 100 basis points, we're also hearing other stories from Basel where it could be 3 buckets of 100 basis points to 200 basis points. We just don't know the rules yet, and I understand we're not going to hear the rules for some months to come yet.

Right, but your capital plan wasn't approved with any expectation for a SIFI buffer.

No, I mean, the capital plan really was not a Basel III capital plan. They did want to see our road map, if you will, to complying with Basel III. But it was really a Tier 1 common Basel I capital ratio. And we do -- obviously, we do well, just because of the nature of our business and the low risk balance sheet that we have. I think the other good news is we generate an awful lot, as you can see in this first quarter, an awful lot of both Basel I and even more Basel III capital in the first quarter. So ahead of what our estimates had been.

Okay, great. Thank you.

Our next question is from Jeff Hopson with Stifel, Nicolaus. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: Just a question on pricing. If there's more, I guess, scrutiny of FX rates, et cetera, it's maybe limited your ability to get full pricing. So in terms of the pricing environment, with rates low, how do we know, I guess, that you're getting the appropriate -- how are you getting the appropriate pricing for the new business that's coming in the door?

Jeff, it's Tim Keaney here. I think it's really very straightforward much more of the goal for pricing new business and frankly, when current clients renew pricing, we're seeing more of our total revenues and fees. And we're being very, very, very conservative kind of the new reality in terms of what we expect over the term of a contract for NII, FX and securities lending. And I think over a cycle, whether that's 3 or 4 years, we're going to see a larger percentage of our revenues coming in the form of fees. And so the good news is, Todd mentioned the win rates; we're not seeing that impact our new business win rates because we're talking been very openly about these issues with our clients. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: Okay. And other competitors obviously face the same issues. Is there a sense that they are moving in the same direction?

Absolutely. And certainly for about a year now, I haven't seen anyone doing what I would have characterized as silly pricing, so I think all of our competitors are doing the same thing. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: Okay, great. Thank you.

Our next question is from Howard Chen with Credit Suisse. Howard Chen - Crédit Suisse AG: On the recent clearing wins and the healthy pipeline you spoke to, is that new business? Or are you winning it from others? And who are you winning it from?

Howard, it's Brian Shea. The most -- as you know, we've been talking in the last couple quarters about the investment we've been making in a large global wealth management firm that was self-clearing, and we converted that client and other new business in the first quarter. So we will see the full -- the first full quarter impact of that new revenue in the second quarter, and it's been a successful transition.

And maybe, Brian, on my side in Asset Servicing, we have the best new business pipeline we've had in 6 quarters. Pipeline's gone up almost 60% year-on-year largely driven by outsourcing. And one of the things we are looking at is kind of the giveaway-takeaway ratio for the $500 billion new business wins in Asset Servicing for the quarter. We won 5.5x more than we lost in assets, and we won 7x more than we lost in revenue terms. So at least for this quarter, we've been a clear net winner. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: Thanks, that's really helpful color. And then switching gears, Bob, I was hoping to get your thoughts on litigation costs going forward. In your annual letter, you touched on dealing with post-crisis litigation as a priority for the year. I mean, does what happened today largely take care of that? Or should we anticipate some more?

Well, the way I kind of think about it is -- I've been very open about just talking about the U.S. environment and how unique it is in the Western world. Sadly, it's not a good thing for American business. And it's not a good thing for -- it's the #1 problem in the health care industry and it's certainly a big problem for the financial services industry. And we're going to see, I would expect, for our industry going forward, that it's going to continue to be at risk. Certainly, we record it as soon as we feel that it's probable and estimate-able, and that's how we do it. And we try to be conservative in how we account for things. Todd, is there anything you'd add?

No, I mean, I just -- it continues to be a risk for us and for the industry. And as soon as we can figure out that there is a probability of something going to happen, we're going to -- we'll do something about it. And we think that we've put ourselves -- we're adequately reserved for what we know at this time. Howard Chen - Crédit Suisse AG: Okay, thanks. And then final one for me, just follow-up on Basel III, realizing we don't know the final rule set yet. But any updated thoughts from either of you on leverage and liquidity proposals that are out there as it impacts the business model.

Sure. I think the long-term liquidity ratio that we really haven't spent that much time with yet, so I think that's still more in a developmental phase. But it looks like the liquidity coverage ratio, the LCR is starting to hone in on what we would expect to see with a couple of elements of uncertainty. Given our business model and the huge amount of excess liquidity we maintain, I don't see that as a particular constraining issue for us, Howard. In terms of the leverage ratio, I really haven't been overly focused on it at this point. I don't think it will be the constraining ratio for us. There is some question on how you would treat a number of different asset types. But we think the more -- the ratio that we're going to be more focused on, that the world will be more focused on is the Tier 1 common. I don't it's going to change business behavior at this point as I look at it.

And I would just add to that, Howard, that I had the impression in speaking to regulators that they're being very careful on liquidity ratios. They want to study it and understand it better, and they're feeling much more comfortable with the whole capital side. But of course, liquidity was just as important, in fact, more important than capital during the actual crisis, the financial crisis back in the fourth quarter of '08. So we have to get that one right. I am a little surprised just on the capital side when we only set the global Basel III capital ratio in November to be talking about very different buffers over and above 7%. And not surprisingly, that would be a pretty high number in Europe because their financial system in many of those countries is so much bigger than the size of their economies. It'll be interesting to see how this plays out in the coming 6 months. But my worry would be not so much for us, but just generally if everyone, all the regulators in the world, put together their list of all the things that they want to solve and ensure never happens again, there have to be impacts in terms of customer product pricing, availability of credit, returns on the products. And my worry would be that it would actually decrease availability of credit and perhaps even worse, increase the pricing of it. There would have to be impacts from this if it ends up being excessive. And so the key to it is to say what is an appropriate buffer, and let's go with it. Howard Chen - Crédit Suisse AG: That makes a lot of sense. Thanks for all the thoughts.

Our next question is from Ken Usdin with Jefferies. Kenneth Usdin - Jefferies & Company, Inc.: Thanks. Bob, I just wanted to ask you to expand a little bit. You mentioned that, obviously, with the focus this year on getting the capital ratios back above the Basel levels and then also making room for the dividend increase and some buybacks, that M&A would be a much lower priority. How much of that is just an internal decision to kind of just work on some of the expense stuff and just kind of get the house in order versus what you see as being available in the marketplace?

I guess -- it's a good question, Ken. I guess I would say, pretty simplistically, I think '09 was an incredibly unusual year in that a number of our peers decided to -- who are in our business lines decided to exit businesses in '10 that we were interested in. So I view '10 as being a very unusual year in that over the course of 18 months, i.e., the second half of '09 and through '10, we had 4 transactions. That was largely driven by people wanting to exit the businesses because it was either non-core or they wanted to raise capital. I'm not seeing that now in the U.S. And frankly, last year, we didn't have the opportunity to buy back stock or to raise the dividend either. So I just think it's a natural transition of both things that there's less availability, plus we did things that we have to integrate and we have a very effective way of returning capital to shareholders and ensuring a good return for our shareholders over time. So that's what we're focused on. So for both reasons, I see acquisitions being a pretty low priority. The only thing I would probably put a caveat to that is that we continue to invest in our Wealth Management business, and Larry's getting very good returns on the business and seeing nice growth in revenues and AUM. And there's still a number of things that we want to build out. And we're encouraging Larry to do that. But anything like that would be pretty small prices quite frankly, $10 million here and there or maybe a small multiple of that. So nothing really material. Kenneth Usdin - Jefferies & Company, Inc.: Got it. And my second question is understanding well you had great business momentum both in the quarter and yet good business still to come on board in Asset Servicing, just wondering that revenue line was only up about $9 million on the income statement sequentially. So with the good comps, with the new business wins, what's holding that line back from growing faster? And I guess should we eventually see an acceleration in revenue growth on that Asset Servicing line specifically?

Ken, it's Tim here. I think what you don't see is we converted actually a very low amount for the quarter. We only converted about $273 billion. So I think it's really a story about what's left to convert. That's probably about a third lower than we've converted the last few quarters. So I think that's really what you're seeing is the pace with which to do business is going from being won to actually showing up in the run rate. Kenneth Usdin - Jefferies & Company, Inc.: So we should naturally see a better revenue growth rate in the next 2 quarters if we presume better conversion activity and decent markets.

Yes, and I think the fact that about half of what we've won over the last 12 months is still left to convert, and we just did a couple of very big conversions in April, I think that's a fair statement to make. Kenneth Usdin - Jefferies & Company, Inc.: Okay. Great. And then the last question just maybe this is for Todd. Todd, just in speaking about the FX business, you mentioned that volatility was down meaningfully on average over the course of the quarter. I was just wondering how much, if at all, did the Japan spike actually help revenues this quarter? Because it seem -- typically, in the past, when you've had a couple of really good days of volatility spikes, you can make a lot of money. I'm just wondering how concentrated the revenue was within that week or so time where volatility really spiked to your point that volatility is the key driver.

Yes, we did see a little modest impact there for a couple of days, Ken, but it was relatively short lived. I mean, risk premiums in the first -- and I think that volatility is another form of a risk premium, and it affects our sec lending as well. Risk premiums in the first quarter have gone all the way back to predate the crisis itself. The more impactful thing from the crisis events, both in the Middle East and in Asia, was we just saw a lot more securities converted to cash and stick on our balance sheet. Kenneth Usdin - Jefferies & Company, Inc.: Yes, and hence the larger balance sheet.

Yes, we saw about $10 billion right at the end. Yes. Kenneth Usdin - Jefferies & Company, Inc.: Yes. Great. Thanks very much.

Our next question is from Brian Bedell with ISI Group.

Just a -- maybe we could start off with a question for Tim on the Asset Servicing business. You converted the $273 billion in the quarter and the assets under servicing went up by about just $500 million -- or $500 billion rather. To what extent is the outflow of business -- maybe you can talk about sort of the business that you're passing on in terms of the fee realization rate and whether we should expect an increase in the basic fee realization rate for assets under custody going forward in terms of winning business that you view as more lucrative.

Yes, Brian, at the risk of maybe repeating myself a little bit here, I do think it's a very much a good news story looking forward about the business left to convert. The win rate's high. We're winning very good business. When we lose business, it's not for quality or for price. We had one of our largest losses over the quarter. A competitor insourcing what they had outsourced to us for their own asset management business would be an example of that. So I think it is very much a story about getting these wins converted.

Do you think you'll see a better fee realization rate on the new business or on the overall business going forward versus [indiscernible]?

I do, and I go back to the point about the new pricing paradigm and making sure that when we price business now, it reflects an extremely conservative view on capital markets related revenue. And of the deals we won in the quarter, I think it would be absolutely fair to suggest you'd see a large proportion of total revenue showing up in hard dollar fees. And even with that new pricing discipline, we continue to have a very, very, very high win rate. The clients [ph] forget the fact that the world's changed.

Right. That's great. Quick comment on the long-term flows and what portion of that was equity versus fixed income.

In Asset Management?

Yes, in the Asset Management. Yes, I'm sorry. Yes, in the Asset Management, long-term flow, is it $31 billion?

Most of it was in equity indexing. We had about $13 billion. But we had significant fixed income flows as well. We had about $6 billion in active and we had another $12 billion in LDI type of activity. So what you see is indexing LDI active fixed and a little bit in active equity is the way that the long term flows came in.

Okay. Great. And then just on the comments before on the expenses in terms of sunsetting the systems and changing some of the infrastructure. I think, Bob, you mentioned this is a long-term plan. Do you expect or should we expect as we model this out over the next couple years that you'll reinvest the most of those savings? Or do you think there is a possibility of dropping some of that to the bottom line?

Why don't you go ahead, Todd?

Yes, right now I would say for the next year or two, as we plan our forecast and budgeting, we would expect to be reinvesting the savings because we do see some pretty good low-lying fruit out there that we'd like to grasp. I think beyond that, 2 to 3 years, then you'll really start seeing some of it fall to the bottom line. But as Betsy had asked and mentioned earlier, we always have the option to do a little less and let a little more fall to the bottom line.

You guys are definitely going to like what we're doing. It's just that it's not visible yet because we keep investing. And we have to think short term, and we have to think long term.

Right. And Bob, you mentioned Wealth Management is one area where you're reinvesting. Can you talk about a couple other areas of major focus?

That is -- wealth is definitely one. We're always looking at Asset Management as well, not in terms of new acquisitions per se, but making sure we have the right mix of products. Our performance is very good. Clearing, we're definitely -- and Pershing, we're definitely investing in that because we're seeing more and more clients that want to outsource middle and back office activity and make it so that they can focus on their clients rather than focusing on things where they don't really add value. And we are by far the biggest player in that. And we continue to invest in overseas markets, in non-U.S. markets. And you think back, if our firms had been together 10 years ago, we would have had only 19% of our earnings coming from outside of the U.S. At the time of the merger, it was 32%. Now we're at 37%. It's not at all impossible to imagine us having over half of our revenue coming outside of the U.S. by the end of this decade. And a key on that is being very, very focused on which countries and which products we want to grow in. And we spend a lot of time thinking about that because geography is just as important as the products.

Great. That's very helpful. Thanks so much.

Our next question is from Rob Burchell [ph] with CLSA.

I guess I wanted to ask first on custody. U.S. assets under custody appear to be down about 1% sequentially. So is that a mix issue? And is the takeaway there that most of the new business is coming from outside the U.S.?

Yes, Rob [ph], it's Tim here. Yes, I would say for this -- maybe the last couple of quarters, more of the new business is coming from outside. I think it would also be reflective of the fact that the fixed income markets have been a bit soft, and as we've talked about before, we tend to have a little bit more fixed income assets under custody. And also the third component would be the mix. I think Todd mentioned very well the contribution of the acquisitions that we've done in about 25% to 27% of the new business wins for the quarter are related to the acquisitions we've done. Transfer agency would be an example of a couple of very good wins that just take a little bit of time to convert and aren't measured in assets under custody. The same thing with middle office outsourcing. So you've just got to be careful if there's a mix there. And of course, we also saw, for the Asset Servicing business, cash balances up significantly, up about 11% because of the wins that we had in the quarter. So I think it's a combination of those things, Rob [ph].

Rob [ph], the other reality is that we should bear in mind, if you think about our various regions around the world, U.S. is probably one of our lowest growth markets now. And the other major geographies we continue to invest in just because we see longer term much better opportunities in other geographies and we have -- let's face it, our main competitors are U.S.-based and that is U.S.-based. And those markets are already largely dominated here.

Okay. If I could follow up with a question on FX. Historically, that's been one of your highest margin businesses. With what's going on, should we expect the pretax margin on that business to come down towards sort of the level of the rest of the firm?

Rob [ph], I would say it's probably early to tell. Right now, our behaviors and the revenues are consistent with the drivers that we've seen historically. Given the increased attention, we would expect the competitiveness of FX to -- it's been competitive. It will continue to be competitive. And there is some potential there for margin compression. It's unfortunate. I can't deny that, but I think we are in the process of taking a number of actions to increase, for example, the volumes that is done with us to mitigate that. Right now, 75% of the transactions, FX transactions that our clients execute are done away from us. So there's a real opportunity for us to capture more of that business that's done away. In terms of the operating margin on FX, the actual standing instructions have higher costs associated with them. So I don't think the margin implication is going to be that high. Jim, do you have anything to add to that?

Yes, I completely agree with you, Todd, that likely going forward, the heightened awareness will add to the competitive nature that we're seeing. But there's a lot of opportunity there, and in our discussions, as I said, that we had just last week with our clients, they're very supportive of the approach that we've taken. And they're even more supportive of some of the technology enhancements that we're about to embark upon. And so our expectation is that we will catch more of that flow.

So I guess a lot more activity is going electronic as opposed to voice-brokered. Can you give us an idea of what your overall dollar volumes are and how much of that's electronic?

Yes, I don't think that we have, nor do I have it at my fingertips, Rob [ph], that we've disclosed that. But the volumes continue to increase just about every quarter.

Okay. Thank you.

Our final question today is from Gerard Cassidy with RBC.

Thank you. On your comments about secured lending, Todd, can you share with us what types of loans you guys are making and what the yields are that you're seeing and how large could this portfolio grow to? And then, Bob, is this a shift in strategy moving more into lending? Or is it more just a temporary kind of to carry you through this low interest rate environment and we shouldn't really see it as a change in strategy? Thank you.

Well, why don't I start with the second one, and then Todd can finish on the first one. We've been pretty focused for about 3 years in taking out risks where we thought they were excessive in terms of credit risk. We had a program internally called "tall trees" where we had single-name exposures that we just felt were too large or they really didn't support our Investment Management and our Investment Services businesses. They were kind of outliers from the past from previous activity where we were no longer in those types -- they were no longer supporting businesses that we were in. And so we worked pretty hard on that. And frankly, we finished it in about the fall -- the summer or the fall of last year. At the margin, we want to help our clients be more profitable and more successful over time. So these servicing businesses and these services businesses are really important as is Asset Management. And for certain clients, we will help them from a credit perspective, as long as the risk is pretty low for us. And we're starting to see more opportunities to create liquidity lines and to term out some of their liabilities. And we'll support them on it. And we -- it is one of the new realities of -- under Basel III that certain of our clients are looking for more term liquidity. And I think we can provide that at very low risk to our shareholders. Todd?

Yes, what I'd add to that, this is part of the fallout, if you will, Gerard, from the Basel III and the liquidity management. I mean, we're a winner there because we have a lot of excess liquidity, which we've traditionally kept a fair amount of that in the interbank placement market. There are a number of counter-parties that need to extend the duration. They're on the other side of this equation. So we can do, for example, term repo where you get daily margining, very low risk. You get good margin. You control the margin on a daily basis. And since it's a term, so they're guaranteed to have the cash for an extended period. And what I mean by that is maybe a year or as far out as 2 years. That really hits our sweet spot for the excess liquidity that we've got, and it fulfills a need for our clients. So we're pretty excited about that program. We could probably see as much as $10-or-more billion of that. We're only about 20% of the way to funding that fully. And the other thing here is we actually think it's a favorable risk strategy to interbank placements. So we would like to decrease our exposure to interbank placements and find alternatives for this. So this is, I would say, a natural progression and one of the benefits, if you will, of the fallout from the liquidity management required under Basel III.

And I would just add to that, Gerard, is that it's also a sweet spot for us because no one understands this business better than us in the world because we dominate it here in the U.S. So at this point, I'd like to thank everyone and wish you all the best, and have a good day. Thank you. Goodbye.

Thank you. If there are any additional questions or comments, you may contact Mr. Andy Clark at (212) 635-1803. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating.