The Bank of New York Mellon Corporation

Good morning and welcome to the fourth quarter earnings conference call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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'll now turn the call over to Mr. Scott Friedenrich. You may begin.

Thank you. Good morning and welcome to the BNY Mellon 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 Santomasimo, BNY Mellon's Chief Financial Officer. Following Mike's prepared remarks 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 84 cents, down 22% from last year's fourth quarter. Both this quarter and last year's fourth quarter included a number of notable items that make 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 16 cents. 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 17 cents 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%, pre-tax 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, pre-tax earnings decreased 3%, After-tax earnings increased 4% and earnings per share increased 9%. My comments will refer to our results excluding notable items in both periods. Let me mention 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 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 which allow them to grow and contribute more significantly to our growth agenda. And thirdly, as we've said consistently, the road to increase our organic growth will take time, but we do see some progress. The impact of 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 a little 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. We turn to Persian. While revenue is 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 sizable 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 sign 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 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 has helped us to drive incremental growth in insurance-to-link securities and CLOs. Our pipeline remains 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 experience growth in attracting competitively priced interest-bearing operational client deposits to support our client payment activities. In clearance and collateral management, we reported 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 and 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 our 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 a major beneficiary. 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 terrific people. During the quarter, we announced that Lester Owens will be joining our executive committee next month as head of operations. Lester is 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 a 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 had been constrained by our internal CCAR models, and we've refined those models. We are pleased to now be in a position to return additional capital to our shareholders. and we are confident that we will continue to maintain strong capital ratios and 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. And to state the obvious, 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 will continue to remain disciplined on expenses. And even if the market constrains our short-term growth, our goal is to ensure we drive DPS 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 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 quarters included a number of notable items that make comparisons difficult. As a reminder, our fourth quarter 2017 results included $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 $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 were 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 $60 million of the cost 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 fourth 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 gap 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 of 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 non-interest-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 to the securities portfolio yield and other interest-earning assets. On page 8 of our earnings release, you can see that year over year, our average interest-bearing deposits increased 9%, while our average non-interest-bearing deposits declined 15%. Sequentially, average interest-bearing deposits increased 9%, and non-interest-bearing deposits declined 3%. As we have consistently said, for our client base, deposit pricing is continually becoming more competitive and 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 deposit 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 we're closer to 100% in the fourth quarter. The net interest margin increased 10 basis points to 1.24%. Sequentially, the NIM declined three basis points. While we focus on NIM, we are seeking to maximize earnings and take advantage of opportunities to use the capacity we have in our balance sheet. For example, we will take on temporary non-operating deposits and reinvest them risk-free at a central bank or a government security. We had the opportunity to do that in the fourth quarter. These riskless transactions are accreted 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 5. Our expenses of $2.7 billion were essentially flat as our continued investments in technology were mostly offset by decreases in other expenses. Pre-tax 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 gap basis are on page 6. 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 7 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 8 highlights our investment service business 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 advantages revenue. This includes a modest decline in securities lending revenue due to lower U.S. equity and lower U.S. government balances and spreads. Pursuing 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 is down 3%. Assets under custody and or 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 clients and lower equity markets. The sequential decline is 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 Center Square 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. Asset center 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 remain 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 was Our liquidity coverage ratio in the fourth quarter was 118%. Page 12 details our expenses. On a consolidated gap basis, expenses of $3 billion were potentially flat, reflecting investments in technology and the expenses associated with relocating our corporate headquarters, offset by lower staff expense, lower bank assessment charges, and the favorable impact from a stronger dollar. Note that the technology expenses are included in staff, professional, legal, and other purchase services, as well as software and equipment. The 9% sequential increase primarily reflects higher severance expense, the expenses associated with relocating our corporate headquarters, and investments in technology and partially offset by the 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 your 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 would continue to tick down, but it's still really early in the quarter. Deposit phases 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 for the remainder 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 of 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 that we discussed here and back at our investor day. Even with these investments, excluding the notable items, we do not expect to significantly increase our expense base in 2019. With regard to expenses in the first quarter, a reminder about the typical first quarter impact of 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% for 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 lately that has plans to potentially file 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?

If you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and one related follow-up question. If you'd like to ask additional questions, please press star 1 to be re-entered into the queue. Our first question comes from Ken Euston with Jefferies. Please go ahead. Thanks.

Good morning, guys. Hey, good morning. Hey, 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 gap basis or is it off of your adjusted basis?

It's off an adjusted basis.

So off of the 421 basis, you'd expect EPS growth?

Correct. 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. Okay, and secondly, then, to your point also about not increasing expenses by much, is the thought that you have on 1% to 2% year over year in the first quarter the generic way we should be thinking about expenses over the course, or does something change with the trajectory as the severance benefit, the benefits from the severance you took starts to layer in against future investments?

Yeah, I think... I don't think we want to give you a number for the full year. Otherwise, we would have. But I think the way you're thinking about it is right, which is the benefits that we will get on the severance actions that we've taken this quarter will really start second quarter and then in the second half of the year. And so there will be more benefits in that period of time. So overall, again, I think the words are the words that we intended to use. It's obviously early, but I think the point we want to make sure you understand is, number one is we're highly, highly focused on driving efficiency inside the company. We think that, and I've described this before, that when you take actions, the next set of actions become even clearer. And so that is something that in our business we're going to continue to do, and we're going to do it at the same time that we are going to increase the spend where we need to expend it. So all in all, we feel very good about our ability to really control expenses while investing where we think we need to next year. Okay.

And then just to clarify, do you expect the gap between your gap expenses and adjusted expenses to narrow? Do you expect as many of these non-core notable items as you go forward? Are we going to see these big severance things every quarter? I guess that's the question.

No, listen, certainly we hope not. I mean, these things at some point have to become just part of what we do as we right-size the employee base. I mentioned on the last quarter call that we were taking a step back and really thinking about how the company was organized. I talked about the spends and the layers and the managers that have very few direct reports. That was a very specific initiative that we looked at across the entire company. You know, I think, you know, what we would hope is as we go forward, it becomes more ordinary course as managers, you know, manage based upon attrition and things like that. And hopefully those, you know, these things do go away. Okay. Thanks very much.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America. Thanks, guys.

First question, just on some of the investments that you have been making and both your comments just on the focus on organic growth, we 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 realizations.

Yeah, this is Charlie. Thanks for the question. Why don't I start, and then Mike will comment along the way. I guess, as you said, we've talked about the fact that given the nature of what our business is, it does take time. Having said that, there are some businesses that are further along, and we see a clear path towards increasing the rate of revenue growth. Others, it's still evolving. Let me start with Pershing as an example. In the world in which Pershing operates, we've talked about the opportunity to expand our offerings and grow in the RIA category. Historically, we've been very, very strong in the broker-dealer category. So that's still a significant opportunity that we see. And just more generically, there are more banks and broker-dealers that are looking at us for outsourcing. And I just want you to think about The increase in technology needs, the increase in complexity of what's required, other priorities they have, they're looking to us to figure out how to help them both wind up with a better product, but also allow them to focus on what they can actually create value in. Today, you know, we mentioned that in our remarks that Pershing revenue declined 2% year over year, even though it was flat year to year. A big portion of that is driven downward by these two clients that we had mentioned, excluding that we were up 4%. And I think the most important thing beyond that, which we've mentioned, is we have a very significant pipeline of signed business within Pershing where we're actually spending the money today to onboard those clients. As I mentioned in my remarks, that'll start to happen in the second quarter of 2019 and into 2020. But the pipeline as we see it, you know, I asked the question, and it's hard to get the exact answer because, you know, in terms of the size of the pipeline. But it's as big, if not – it's bigger than any pipeline we've had in at least five years and probably more than that. And the wins and the opportunities are in the U.S., and then they're in Europe as well. And in Europe specifically, we see continued – as the wealth management market here develops. So it's a lot on Pershing, but we feel really good about it because of what we actually see in the pipeline, even though we've got to wait a little bit to see it in the revenue line. But longer term, you know, Pershing is a, you know, it's a hugely important platform for us to participate in the growth and wealth management in the U.S. and in Europe. In addition to that, our own wealth management business I've spoken about. This one's early on. Catherine Keating just joined us in the third quarter. She's working on developing exactly what the plans are, and she's starting to move towards implementation of what those are. It's product, it's banking infrastructure, it's sales products, it's incentives. And so that's, you know, not something we would expect to see, you know, in the next couple of quarters. But just given what we know we've done there, as I said, we've been a consistent performer. But, you know, we have more and should be able to grow faster than we're growing. Mike, maybe you want to talk a little about treasury services and clearance and collateral management.

Yeah. Yeah, Mike, maybe I'll start with clearance and collateral first. So, you know, when you look at that business, obviously one of the big drivers of it is the business we're bringing in from the other competitor around the government clearing business. And when you look at the tri-party balance growth of 22%, about two-thirds of it's from the clients coming in from J.P. Morgan. About a third of it is actually other new activity happening, both new clients and activity from our existing clients. And you're seeing good traction in products like our margin segregation product, where market participants now need to hold segregated margin balances with providers like us. And that was a business that was zero just a couple years ago, and we're seeing good traction, and that's contributing significantly. to sort of the growth in the collateral balances you see there. And there's a whole set of another initiative that sort of underlies that business. And as we sort of bring in these government clearing clients, you know, I think they're finding that, you know, our capabilities are a bit differentiated in the collateral space than what they saw and the conversations are happening, you know, are getting better and better and sort of happening real time here. And You know, more people are interested in our collateral optimization service and a whole series of things that we've been trying to do there. On treasury services, again, this is another business where we brought in a new CEO just in the summer. And what Paul Camp has been working on is helping reposition sort of the way people think about us. You know, historically, we've positioned ourselves as more of a receivables bank, i.e., like we'll collect your payments, a collections bank versus a payments bank. And when you start focusing more on the payments piece, that's what brings liquidity balances and a broader set of dialogue that we can have with these clients. So we've changed the leadership and focus of our sales team. We've changed the incentives. We have underneath it, you can't see it from the disclosures, but underneath that, the treasury services deposits are growing just over 10% just from the third quarter. So when you look at third quarter to fourth quarter, You know, they're up about 10%. And so you're seeing sort of the traction in real time. And if I just use sort of one example, I'm not going to give you the client name, but when you look at, you know, there's an international development bank that we've been working with for a number of years in a very small way with Treasury Services. We have a strong relationship across the company with them. And, you know, we've been working to improve a couple very minor changes to some products that we have, that opens up a wallet of billions of dollars of deposit balances that we're mandated on now and are sort of in the process of coming through. So you're seeing good traction in really all of these businesses that I think builds up over time to show sort of that organic growth story. I know, Charlie, you want to talk about asset servicing?

Yeah, maybe I'll just – I know this is a long answer, but obviously this is extraordinarily important. Asset servicing is a hugely important part of business. You know, our belief is we have real differentiation here. We have a data platform. We are willing to work openly with front-end providers. And we're working towards more tight integration to the benefit of our clients. And we're continuing to improve the infrastructure. and the quality of what we do, which isn't a sexy thing to talk about, but in what we do, it really does matter. And so this is more of a long-term bill because of the nature of what these relationships are, how long the sales cycle is. But there's progress in what we're doing. This quarter, we brought in $100 billion of fund administration from just one client specifically. $400 billion of new custody, ETFs and mutual funds from a provider. So we have plenty of examples of places they're winning, but this will be a slower build because of from where we're starting from, from what we've seen in Pershing and some of these other businesses. So why don't I stop there?

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

Yeah, I mean, you know, obviously, Mike, between now and the second quarter of 2019, you know, our remaining, you know, buybacks are, are already sort of defined based on what got approved in CCAR last year. So that should be pretty easy to sort of think about for the first half of the year. And as we look to, you know, CCAR 2018 or 2019, sorry, the, you know, a lot of the work that we put into getting the incremental 800 million, 830 million approved sort of flows right into sort of the modeling that we'll do as part of that process. that process kicks off sort of as we speak. And so over the next couple of weeks, I think we'll all have a better sense of sort of the inputs that go into that. Okay. Thanks a lot.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Great. Thanks very much. Maybe just to follow on the 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 companies? And then also just quickly on the lag between expenses of the onboarding for Pershing versus, you know, clocking that revenue in.

Yeah, I mean, look, the expenses, as we – I'll start the last piece first. So in Pershing, as we said, you know, most of the expenses that, you know, we're incurring to onboard that business are being spent, you know, as we speak. And so the profile of the Persian expense base isn't expected to change substantially in 2019. And as Charlie mentioned, that revenue will start to kick in in the second half of 19 and more substantially in the first part of 2020. So you'll sort of see it come in that trajectory. As you sort of think about volatility, you know, for us and sort of, you know, if I sort of tick through each of the businesses just to give you a sense of, you know, where we see it. So in Pershing, you know, we do see, you know, increased transaction volumes at times during periods of volatility. Having said that, you know, much of the accounts that sort of are underpinned our book of business there, our managed accounts. So they're not, you know, we're not in a, you know, we're not necessarily supporting sort of retail, you know, self-directed retail brokerage type clients. And so you won't necessarily see the peaks and valleys of, you know, transaction activity as sort of volatility spiked up and down. But you will see that sort of positively impacted. And as you look back over the last, you know, few months, you know, transaction volumes were up a little, but they weren't outsized in sort of any way in that business. You know, and then in asset servicing is where you'll, you know, you may see some of it as well. And so that, you know, we give you disclosures around our foreign exchange revenues. So obviously if volatility picks up in foreign exchange, you'll see that come through the revenue line. And then the volumes that we see will be dependent upon underlying client activity. And then in the core asset servicing business, think of that revenue as probably about a third of it is sort of transaction-driven revenue. And so that piece of it will move up and down based on what you see in the market. But keep in mind that, as I said in my remarks, about a third of our assets under custody are equities. So just because you see big spikes in value in sort of the equity markets and volatility there doesn't necessarily mean that's going to translate into, you know, huge upticks in sort of transaction-related revenue.

Mr. Charles, I just want to add one quick thing, which is, and all that's very, you know, that's kind of what should drive some of these stats. you know, more mathematically, but to state the obvious, which is the reasons behind the volatility really matter to us. You know, there's good volatility and there's less good volatility. You know, what we've seen this quarter is, you know, the bad kind of volatility which drives assets away from the businesses that we benefit from. And so, you know, the why will really matter to us as we look out over the next year. All right.

That makes sense. Maybe just to follow on the expenses. Maybe, Charlie, if you can talk a little bit more about the nature of some of the investments that are now in the run rate, maybe just a highlight of a couple, two or three of the most major ones. And then just from that, your discussion of the expense rate, expense base not significantly going up, is that an assumption on the markets remaining flat and, say, the Fed on hold or the markets improving? And then maybe just which management layer areas were most restructured in terms of the businesses?

So let me try and remember all three, and I'll do them backwards. On the third one, it was across the entire company. As I said before, we really looked at, you know, spans, layers, and a series of things like that across the entire entity, from the staff areas to investment services to our – investment management businesses. So I think it's very 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. But overall I would say it was pretty 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. And so I think with a cautious eye towards next year, that's where we plan for. To the extent that the environment gets even worse, we always have levers we could pull up. We thought things were going to really get bad and actually stay there for a period of time. and, you know, maybe spend a little bit more if all of a sudden the world changed very dramatically. But I don't want to overstate, you know, 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. And I'm sorry, the first point again?

Yeah, no, thank you. The first one was just maybe a couple examples of the investments that you made most recently in which areas? Technology investments, I'm sorry.

Sure. So first of all, Mike's referenced and I both referenced the work that's ongoing and purging to onboard these clients. A lot of the work to bring on these clients isn't just bringing – It takes a long time because you have to build a set of capabilities, and you build a set of capabilities that you can then scale and provide to others. So there's a significant amount of technology work that has to go into bringing on those Persian clients, and that's embedded in the overall spend numbers that we talk about. We've talked about in the corporate trust business how we continue to build out our technology platform for things other than just pure traditional products. That's embedded in the spend numbers. As we think about asset servicing, we're highly focused on automation. We're highly focused on figuring out how to continue to build our data infrastructure. So I think those are just some examples.

Great. Thank you so much.

Our next question comes from the line of Brennan Hawken with UBS.

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

Yeah, no, the only thing I just, in my mind, I'm just thinking, you know, I think one area that we haven't mentioned is our markets business. As we think about where we've been making investments, we've talked about this in the past. We've talked about the progress that we've made. You've seen it in the numbers. We've talked about some of the new products that we've offered. And a lot of what's happening there is really based upon technology spending.

Okay. Bedell, you owe me one. I just gave you a little OT on your last question. So there you go. Curious about deposit trends. So I think, Mike, you had commented that you guys see them as a consistent quarter debate with what you saw in the fourth quarter. But deposit trends were a little mixed under the surface, and you excluded the wholesale or the CD market. prices from your deposit betas. So I'm curious, when you comment on deposits, are you talking about the total interest-bearing deposit balance that on average was 161.7? Or are you talking about the deposits excluding the CDs? And how should we think about that CD growth? It's really picked up, the growth in CDs has picked up pretty substantially here the last few quarters. How are you thinking about that into next year?

Yeah, my remarks were in total, Brennan. Thanks for the question to clarify that. And the reason why I think you sort of need to look through into sort of what's happening with your client deposits. Obviously, wholesale funding is more index-based pricing for the most part, and so you really want to try to understand what's happening with your clients in those conversations. That's why we try to give you that color. I think as you sort of 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 for 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, LATAMs. I'm 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 it was also quite a quarter for M&A closing activity? Did that come into play into that line as well?

Thanks. Yeah, so M&A closing activity, no. volatility a little bit, I guess I would say. And I think that, you know, relative to the question of sustainability, I guess the way to think about it is, and we've talked about this, which is within issuer services, that's corporate trust and DR. Corporate trust, we are seeing revenue growth. It's not huge, but it is growing. And based on the actions that we've taken, hopefully that will continue. You know, that is deal by deal, and we feel better about our calling efforts. We feel better about the capabilities that we continue to build. So hopefully that growth will continue. Within DRs, you know this and we've said this, it's quarter by quarter can be very volatile. It can be very, very seasonable. And if you look at our yearly performance from I think it's, you know, 17 to 18, while the quarters, you know, matter a lot, overall, you know, when you look at the full year, you know, relatively, I don't remember exactly, but relatively flat. When we look at 2017 to 2018, same thing is true, albeit within the fourth quarter, we had strong performance. And part of that, by the way, is driven by in the fourth quarter of the prior year, we actually had a very weak DR quarter. So, you know, that's a long way of saying that as we look forward, we would think that the full year performance is sustainable, albeit it's going to be, you know, volatile quarter to quarter.

That's really fair. Thank you. Just, I'm sorry, one follow-up in your comment on corporate trust. How much has the CLO trustee business helped in some of that corporate trust growth recently, and could you walk through a little bit about how sustainable you think that growth might be?

Yeah, look, Brendan, underneath, we don't disclose the components of corporate trust, as you know, but the But the CLO business has been an area of strength for us this year where we have picked up market share. And so it has been a contributor to that underlying growth. And, you know, we've been talking consistently now for the last, you know, year or so where we've been making some investments in some of the underlying technology to better support that business. and we're seeing the benefits of that come through some of the market share that we've been picking up this year, and so that has been a contributor.

Great. Thanks for letting me sneak in one more.

Sure. Thank you. We'll next go to the line of Alex Glostein with Goldman Sachs. Please go ahead.

Hey, thanks. Hey, good morning, guys. The 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 tech savings, which I think was in the $250 to $300 million range. Charlie, I think you mentioned $100 in tech spend. This year or so, did the investment page change or some of that is just kind of slipping into next year?

Hey, Alex, let me just 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, right?

Yep.

Yep.

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.

Yeah, as Charlie mentioned, if you sort of unpick both corporate trust and DR, Alex, I think the corporate trust feline is a pretty consistent sort of story, right, where you've seen that sort of tick up sort of gradually over the last number of quarters. And given the trend we're seeing, you know, on a full year basis, you know, we would still expect that to sort of tick up a little bit, you know, in 2019. I think, you know, the DR revenue I think is the place where, you know, you've seen a little bit more volatility sort of year to year. So in 2017 to 2018, it was up a little, and given some of 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. And so, as he said, as we sort of look to 2019, we think that the 2018 numbers, plus or minus sort of a little, you know, look like a good way to think about the full year story for next year.

Got it. Great. Thank you.

Thank you. We'll next go to Mike Mayo with Wells Fargo.

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

We have eliminated, depending on where you are in the company, call it two to three as part of this exercise. And the actions, as we said, a bunch of them have already happened in the month of January. And so over, you know, the next couple of months is when we'll actually see the impact get into our run rate.

And then, you know, I understand that I guess severance is kind of a recurring, non-recurring, 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.

Yeah, and in my remarks, Rob, I mentioned that the severance charge was a little over half of the notable items, the expense notable items in the quarter.

Okay. Thank you.

Thank you. As a reminder for everyone, that is star 1 on your telephone keypad if you'd like to signal for a question at this time. Our next question comes from the line of Vivek Guninja with J.P. Morgan. Please go ahead.

Hi. Thanks. Sorry. It's... It's a day with overlapping calls, so if I've missed some of this. So severance is over half, just going through those non-cores 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 relocation. So is the rest all from higher litigation?

Yeah, the three components of the notable items, Vivek, Mike, obviously, are the severance, the real estate charges, and litigation, correct?

Okay, so, okay. Okay, and when you're saying little over half, you're talking, you know, we're talking 50, 60% kind of a little over that, in that range, but not above that?

That's a good way to think about it, yeah.

Okay. Sorry, we're just trying to – Yeah, we know it's a busy morning. No worries. No worries, Vivek. It's an unfortunate morning. Okay. I'll just – I'll let you go, and thanks for the clarification. We'll catch up with IR later. Thanks, Vivek.

All right. We're happy to talk later, Vivek, if you want. All right. Thanks, everyone, for – I think that's the last one. So thanks, everyone, for joining. We appreciate it.

If you just double-check with the operator that there are no more –

And that's correct. We have no further questions in the queue at this time.

Great. Thank you.

Thank you, everyone. Thank you. This concludes today's conference call webcast. A replay of this conference call webcast will be available on the BNY Mellon Investor Relations website at 2 p.m. Eastern Standard Time today. Have a good day.