The Bank of New York Mellon Corporation

Good morning and welcome to the first 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 will now turn the call over to BNY Mellon. You may begin.

Good morning. This is Magda Pauczynska, Head of Investor Relations. Today, BNY Mellon released its results for the first quarter of 2019. The earnings press release and the financial highlights presentation to accompany this teleconference are both available on our website at BNYMellon.com. Charlie Sharp, BNY Mellon's chairman and CEO, will lead this morning's conference call. Then, Mike Santomasimo, our CFO, will take you through our earnings presentation. Following Mike's prepared remarks, there will be a Q&A session. Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in the cautionary statement in the earnings press release, the financial highlights presentation, and in our documents filed with the SEC, all available on our website. Forward-looking statements made on this call speak only out of today, April 17th, 2019, and will not be updated. With that, I will hand over to Charlie.

Thanks, Magda. Good morning, everyone, and thanks for joining us. Before turning it over to Mike to take you through the first quarter financials in more detail, let me share some high-level thoughts about our performance. Reported earnings per share were 94 cents, down from $1.10 a year ago. Revenue was down 7%. Both fees and net interest income declined. Expenses were down 1%, and after-tax earnings decreased 20%. Return on tangible common equity was 21%. A few thoughts on our results. Our performance this quarter was mixed. Several of our fee-based metrics in investment services were consistent with recent results. while we experienced weakness in investment management and net interest income. The year-over-year declines in revenue and earnings per share were primarily driven by the changing mix and cost of our deposits and the impact of the prior year asset management outflows. We also saw lower foreign exchange volumes and volatility, volume reductions and spread compression in securities lending, and lower clearance volumes in purging. In addition, the impact of divestitures and asset gains and particularly strong markets and deposit balances in last year's first quarter also made the year-over-year comparison more difficult. Last quarter, we said that if our rate assumptions played out, we would expect net interest revenue to be flat to a little up versus the fourth quarter. As you'll see, it was down 5%. Subsequent to our last earnings call, rates across the entire yield curve declined versus our assumptions, deposit balances declined, and we saw changes to the mix between interest and non-interest bearing deposits. We see significant competitive pressure for deposits. I'll let Mike discuss that in more detail. As we've said, we remain focused on our expense base and our overall expenses remained well controlled while we continued to significantly increase our investment in technology and infrastructure. Our assets under custody and or administration reached $34.5 trillion, up 3%, reflecting higher market values and net new business, partially offset by a change in foreign currency translation rates. Let's go through our businesses, starting with asset servicing. Asset servicing fees were down year over year, largely due to lower foreign exchange and securities lending volumes and lower activity from existing clients. On a linked quarter basis, fee-based metrics were generally consistent. We continued to see growth in alternatives with recent wins and a strong pipeline in real estate, credit funds, private debt, and private equity. Let me make a few additional comments about our BlackRock Strategic Alliance. We have said we will work with third parties to more closely integrate the front-to-back operating model, and this is one meaningful example of how we will use data and tools to benefit our clients, working on our own solutions and with third parties. For the past few years, we've been working with BlackRock to transform the investment manager operating model. Through our collaboration, we've driven increased quality and efficiency with high straight-through processing rates, increased transparency throughout the investment lifecycle, accelerated information delivery, and synchronized data that supports core functions for asset managers. Those benefits are available to our common clients, in addition to benefits related to our new integration. By integrating our data insight, accounting, and servicing tools into Aladdin, we offer seamless connectivity, transparency, and near real-time insight to our common clients through a single platform. These joint capabilities bring immediate benefits across the investment lifecycle by helping clients simplify workflows, improve efficiency, and drive performance. In addition, we're working closely with BlackRock to bring more tools and functionality to the market soon. This is the beginning of us offering additional value added services ourselves and working with third parties. In Pershing, revenue was down year over year, primarily due to the impact of the two previously disclosed client losses, which will no longer impact year over year growth after the first quarter. We also experienced lower clearance volumes than a year ago quarter when they were particularly strong. This was partially offset by growth in total client assets. We have been successful in converting our broker-dealer pipeline into signed business and are currently onboarding more new business than we have in many years. This will start to show up in our results in the latter part of the year and will have a more meaningful impact next year. In addition, the pipeline remains strong. In issuer services, revenue is down, reflecting lower fees in depository receipts. The corporate trust business continued to grow despite a slower debt issuance market. We are acting with a greater sense of urgency, and our work in repositioning our sales and service teams has yielded incremental growth in rising asset classes like insurance-linked securities and CLOs. We're continuing to focus on the structured finance market, where we are capturing additional market share and will benefit when issuance volumes recover. We have begun converting clients onto our new CLO platform, which we got up and running in less than six months. Clients are already benefiting from our loan reporting platform, which provides them with access to high quality loan and CLO compliance data. The combination of the two platforms will allow us to automate a number of functions and become more scalable. In treasury services, revenue is down slightly due to lower net interest revenue. While total client deposits continued their upward trend, The benefit was offset by the change in mix between non-interest bearing and higher cost interest bearing deposits as clients more actively managed their balances. We're focusing our relationship and sales teams on growing higher margin areas of our business, including electronic payments, liquidity and trade, and associated deposits from our global clients. We have seen some very positive results year to date in terms of client wins in these higher margin areas. Our focus on FX payments is showing early signs of progress with a growing pipeline. In clearance and collateral management, we reported 8% revenue growth. We again benefited from the full run rate of the newly converted government clearing broker-dealer clients, higher clearance volumes related to the heightened level of U.S. Treasury issuances and increased market volatility, and growth in collateral management activity from new clients as well as increased activity from existing clients. We're investing to extend the service to market participants, help clients optimize their funding needs, and provide more options for our clients. As part of those investments, we've been developing capabilities to help market participants with new margin requirements for derivative transactions not cleared with the Central Counterparty Clearinghouse. Since 2016, we've been providing services to over half of institutions that are currently affected, and we'll start to assist smaller institutions that are coming into scope later this year. Turning to investment management, it was another tough quarter for asset management with revenues down 17% reflecting the impact of divestitures and of cumulative assets under management outflows over the last 12 months. On the positive side, outflows have slowed significantly from the fourth quarter and investment performance across some key strategies has been strong, which contributed to the improvement in flows and generated solid performance fees. To further abate outflows, we're developing multi-asset capabilities at Mellon, where we're realizing savings in support and back office functions and reinvesting in developing enhanced capabilities that deliver solutions for our clients. Wealth management fee revenue was mainly impacted by lower net interest revenue and lower fees. While still small, we have seen positive flows over the last few quarters. In terms of talent, last month we announced that Senthil Kumar will be joining our executive committee as chief risk officer in July. Senthil is an accomplished risk executive with extensive experience. He knows the global financial markets. He has a deep understanding of the regulatory agenda, and he's the right leader to continue to strengthen our risk culture and capabilities while partnering with our business to support our growth agenda. Lester Owens has joined us as head of operations and is beginning to revisit how we process securities and cash with the goal of gaining material efficiencies and improving service quality. And we made several important hires in the digital area to focus on building and launching new digital offerings and reimagining the end-to-end client journey. As we look ahead, while the current expectations for the yield curve will likely negatively impact our revenue growth for the next several quarters, We will remain disciplined on expenses and continue to build out capabilities which should eventually enable stronger growth. As you can see on page three of the financial highlights document, we're adding new capabilities and unique functionality to help our clients become more efficient and make better investment decisions. We're building and upgrading platforms in many of our businesses to better support our clients, attract new clients, and capture market share. and we're investing in technology and digitization to drive a more efficient and complete product set than we have today. While we certainly aren't happy with this level of performance, we remain focused on building the franchise and remain confident in the actions we're taking. With that, let me turn the call over to Mike.

Thanks, Charlie. Let me run through the details of our results for the quarter. Note that all comparisons will be on a year-over-year basis unless otherwise specified. Beginning on page four of the financial highlights document, In the first quarter, total revenue was down 7% to $3.9 billion. Total fee revenue was down 9% year-on-year, with just over a third of that driven by adverse currency translation due to a stronger dollar, the impact of divestitures in asset management, and asset gains in the first quarter of 2018. I will cover the other drivers later in my commentary. Sequentially, many of the investment services fee-based metrics were consistent with or had small variations versus the fourth quarter, with the exception of issuer services where volatility quarter to quarter is normal. Within investment management, fees were down due to the timing of performance fees and lower investment management fees. Net interest revenue was down 8% driven by lower non-interest-bearing deposits and loan balances, higher deposit rates, and the impact of hedging activities. This was partially offset by higher yields in the securities and loan portfolios. The lower day count is a revenue drag of approximately 1% versus the fourth quarter. Non-interest expense was down 1%, the stronger US dollar had a favorable impact of approximately 1%, and sequentially expenses were down slightly, excluding the notable items booked in the fourth quarter of 2018. This resulted in a 17% decline in pre-tax income to $1.2 billion, $910 million in net income applicable to common shareholders, a 15% decrease in earnings per share to $0.94, which was helped by our common stock repurchases, which reduced the share count and partially offset decline in net income. And our pre-tax operating margin was 31%. Now moving to capital and liquidity on page five. our capital and liquidity ratios remain strong. As of March 31, our key ratios increased since year end, primarily due to earnings, unrealized gains on our investment securities portfolio, and capital related to stock awards offset by capital distributions. Common equity Tier 1 capital totaled $18.2 billion as of March 31, and our CET1 ratio was 11% under the advanced approach. Our average LTR in the first quarter was 118%, and the SLR was 6.3%. In response to legislation passed last year, the U.S. agencies released a proposal at the end of March that would exclude central bank placements with some limitations from the denominator in the SLR for us and a couple of our peers. As written, this proposed change would add about 130 to 140 basis points to our SLR While we support this proposal and it adds flexibility to our day-to-day balance sheet management, our binding capital constraint remains the Tier 1 leverage ratio in CCAR. Looking at net interest revenue on page six. First quarter net interest revenue was down 8% to $841 million and was down 5% sequentially. Sequentially, the day count accounted for approximately 1% of the decline in net interest revenue. Year over year, our deposit balances decreased. As discussed last year, our deposits in the first quarter of 2018 were higher than expected. Given the elevated deposits last year, it might be more helpful to look at the sequential change in deposits. Noninterest-bearing deposits continued to decline as clients redeployed balances to higher-yielding alternatives or used the cash for other needs. Our interest-bearing deposits were also down slightly versus the fourth quarter. As I've mentioned each quarter over the last year, pricing continues to be competitive and betas are high. The rates on interest-bearing deposits increased from 86 basis points in the fourth quarter of 2018 to 99 basis points this quarter. On the surface, this would imply a deposit beta of approximately 50% across all currencies. When you focus on core interest-bearing U.S. dollar client deposits, excluding wholesale funding, betas have been, on average, a little lower than 100%. Although the rate curve has flattened and expectations for future hikes have lessened, we have not yet seen a decline in the competitive pressure for deposits. Higher yields in our securities and loan portfolios were the primary driver in the increase of the yield on our interest-earning assets, which was partially offset by the impact of lower deposits and loans and higher deposit pricing. Loan balances decline year over year and sequentially driven by lower margin loans and purging due to lower client activity and lower volumes in other areas due in part to normal pay downs. The net interest margin increased two basis points to 1.2%. Sequentially, the NIN declined four basis points. Also note that the effects of certain hedging activities are recorded in fee revenue and not reflected in net interest revenue or the net interest margin. This negatively impacted net interest revenue by a little more than 1% and the NIM by approximately two basis points against both comparative periods. The offsetting benefit is reflected in FX and other trading and is not included in the net interest margin. Page 7 details our expenses. On a consolidated basis, expenses of $2.7 billion were down 1%. The stronger U.S. dollar had a favorable impact of approximately 1%. We remained vigilant on managing expenses and funded our increased investment in technology with ongoing efficiency efforts and other decreases in expenses, including lower incentive expense, volume-related expenses, and lower bank assessment charges. Please note that the technology expenses are included in staff, professional legal and other purchase services, and software and equipment expenses. We continue to believe we have opportunity to drive more efficiency across the organization in the coming quarters. Now turning to page 8. Total investment services revenue was down 5%. Asset servicing revenue was down 7% to $1.4 billion, primarily reflecting lower foreign exchange activity, lower net interest revenue due to lower deposits, lower client activity, and the unfavorable impact of a stronger U.S. dollar. We are asked a lot about pricing pressure and asset servicing. While there continues to be pricing headwinds, the pressure has been consistent with recent years. We haven't seen a meaningful uptick from the trend. Purging revenue was down 5% to $554 million. Previously disclosed lost business impacted growth by approximately 3%. The remaining decline was primarily related to lower clearance volumes compared to the first quarter of 2018, when volumes were particularly strong. The decline was partially offset by growth in client assets and good growth in the RIA servicing business. Although RIA servicing is a smaller piece of the revenue, it grew roughly 10% year-over-year. The sequential decrease reflects lower net interest revenue, primarily due to lower margin loans, which was a result of lower client activity. As discussed previously, the new business that we are onboarding will start to show up in our results in the latter part of the year and have a more meaningful impact in 2020. Issuer services revenue is down 5% to $396 million, primarily reflecting lower fees in depository receipts and lower net interest revenue due to lower deposits in corporate trust, partially offset by slightly higher volumes. Given that the timing of fees in depository receipts can vary quarter to quarter based on client activity, it's more meaningful to focus on fees over the full year versus one single quarter. The sequential decrease primarily reflects lower depository receipt fees, volumes, and in-interest revenue in corporate trust. Treasury services revenue is down slightly to $317 million, primarily reflecting lower in-interest revenue. Although total deposits are up in this business, with the greatest traction coming from clients in Asia, we are seeing the impact of lower non-interest-bearing deposits and higher competitive pressure on pricing for interest-bearing deposits. Clearance and collateral management revenue was up 8% to $276 million, primarily reflecting growth in collateral management and clearance volumes. While the majority of the growth in this business was driven by the conversion of new clients due to a competitor exiting the U.S. government clearing business, we are seeing growth from other new clients and also increased activity, particularly in the U.S. Average tri-party collateral management balances were up 21%, reflecting the strong growth. A few additional items of note. As you can see, foreign exchange and other trading revenue was down 7%. Within that, foreign exchange revenue within the segment was down 18%, driven by lower client volumes and lower volatility. And securities lending revenue was down 8%. Assets under custody under administration increased 3% year-over-year to $34.5 trillion, primarily reflecting higher market values and net new business offset by the impact of the stronger U.S. dollar. which negatively impacted assets under custody administration growth by approximately 2%. Turning to page 9. Although we have already covered all the details for investment services, hopefully this will be an easy reference page for you. It summarizes the key drivers that affected revenue versus the first quarter of 2018 for each of the investment services businesses. Now turning to page 10 for the investment management business highlights. Total investment management revenue was down 14%. Asset management revenue was down 17% year-over-year and 3% sequentially to $637 million. Almost half of the year-over-year decrease resulted from the impact of the 2018 divestitures and the unfavorable impact of a stronger U.S. dollar, principally versus the British pound. The rest of the decrease primarily reflects the cumulative impact of assets under management outflows over the last year and lower performance fees. The sequential decrease primarily reflects the timing of performance fees and the impact of outflows partially offset by higher equity market values. Our overall flows were flat in the quarter. We had $4 billion of outflows from equities driven in part by lower performing strategies and a shift to passives, and $2 billion of outflows from index products primarily driven by two clients withdrawing assets. Multi-asset and alternative outflows were $4 billion. Fixed income and cash turned to inflows with $3 billion and $2 billion respectively. Our liability-driven investment strategies had $5 billion in inflows after strong inflows in the second half of last year, and the pipeline for LDI remained strong. Overall assets under management of $1.8 trillion is up 7% versus the end of the fourth quarter, primarily due to higher markets. Wealth management revenue was down 5% year-over-year and essentially flat sequentially to $302 million. with the year-over-year decrease primarily reflecting lower net interest revenue and fees. Within wealth management, client assets decreased 1% and were up sequentially to $253 billion. Wealth management client deposits grew both year-over-year and sequentially. However, net interest revenue overall declined due to lower loans and higher deposit pricing. Now, turning to our other segment on page 11. The revenue decreased year-over-year, primarily reflecting asset-related gains recorded in the first quarter of 2018. Also, just a reminder that last year we recorded $49 million of net securities losses related to the sale of approximately $1 billion of debt securities. Non-interest expense decreased year-over-year, reflecting lower incentive expense. The sequential decrease primarily reflects the expenses associated with severance and relocating our corporate headquarters, both recorded in 4Q 2018. Looking ahead to the second quarter, there are a few things to consider for your modeling. With respect to the net interest revenue, I'll walk you through the assumptions for the key variables impacting NIR. As of today, our total deposit balances and non-interest-bearing deposits are a little lower than the average deposits in the first quarter. We are expecting that average non-interest-bearing deposits will continue to come down. Short-term rates have declined since the first quarter and the yield curve has flattened. As a result, we expect the yield on our securities portfolio to be relatively flat to the first quarter. As I mentioned earlier, competition for deposits is still high, and thus we expect that the rate paid on interest-bearing deposits will increase a little. Given these assumptions, we would expect net interest revenue to decline between 3% and 5% in the second quarter versus the first quarter. Given the levels of assets under management, we should benefit modestly versus the first quarter in investment management fees. And lastly, we continue to expect the full year 2019 effective tax rate to be approximately 21%. With that, operator, can you please open the lines for questions?

Thank you. And if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, we do ask that you please limit yourself to one question and one related follow-up question. If you would like to ask additional questions, please press star 1 to be re-entered into the queue. Our first question comes from the line of Betsy Gracek with Morgan Stanley. Please go ahead.

Hi, good morning.

Good morning, Betsy.

A couple of questions, one on the deposit – the NIR guidance that you just laid out. I know you gave us a lot of detail around 2Q, and I guess I'm just wondering, as we think forward from there, do you anticipate that the deposit competition would slow and then really it's a function of yield curve? Or is there anything that you expect you'd be doing in the balance sheet to shift the trajectory of NIR if this current rate environment held?

Hey, Betsy, it's Mike. I'll take a shot, and Charlie can add if he wants. You know, I think, you know, if rates sort of stay where they are, you know, we would expect over time that pricing sort of stabilizes. As I said in my remarks, we haven't quite seen that yet, but we would expect pricing to stabilize as we go. And as you sort of think about the new rate environment and, you know, things we can do on the balance sheet, you know, we're doing all the things you would sort of expect us to do as we sort of look to optimize as we look forward, both on the funding side and how we sort of manage, you know, the securities portfolio primarily.

Okay. Anything on like bringing down other wholesale cost of funds or shifting the liability structure at all that might help out here?

Yeah, we're looking at all of that, and I think there's things we can do both on our long-term debt that we've got, both on Tenor and Quantum, as well as sort of all of the funding sources that we're sort of looking at.

Okay, thanks. All right, and then a separate topic on the efficiency improvements that you outlined. Maybe give us a sense as to – the quantum of that and kind of the timeframe that you think that that would occur over?

Sure. Hey, Betsy. It's Charlie. So, you know, when we talked last quarter, what we said was we're continuing to significantly increase our investment in technology, and we wouldn't expect to see a meaningful change in expenses this year. So, obviously, embedded in there are a whole series of efficiency improvements that we expect to get throughout the year, and we're We feel very good about our ability to deliver that. I'll say that we are in the early stages of figuring out kind of what's next, taking it to the next level. We have several new people who've joined us. And as I mentioned, Lester, who runs over 20,000 of the 50,000 people. And I think we all have, we all believe that there's continued meaningful opportunity to become more efficient and improve the quality. And so, We would expect there to be more, but not quite sure on the timing yet. Okay, and then just lastly on – I was going to say, but you can assume that we're pushing as hard as we can.

Okay, and then just lastly on the announcement that you made with BlackRock regarding the Aladdin functionality that you're enabling your clients to benefit from, could you give us a sense as to – how much you think that is going to help out either on your efficiency or your client's efficiency. And I know in the press release you highlighted this was the first of many enhancements that you're anticipating. Maybe you have some color on the roadmap that you're expecting with this strategic alliance.

Yeah, so I put it into two different categories. There are a series of things that we've been working with, with BlackRock for a long period of time on that relate to the processing environment that we have between what Aladdin does and what our capabilities are. And as we have gone through that journey with them, and by the way, just to be clear, a lot of it is them. I'm not saying this is just us. We've just taken the efficiency with which we process our transactions to an extraordinarily high level that we... haven't seen in many other places. And so that's an opportunity which benefits us because we've become more efficient, but it obviously benefits the asset manager as well because they see efficiencies on their side as well as quality improvement with the extraordinarily high rates of straight-through processing that we ultimately have. So those are opportunities that common clients have. And then in addition to that, we've introduced a series of analytical capabilities that benefit both operations professionals and investment managers embedded in the Aladdin technology that we think provides further benefits. So I think as we look at it, it benefits us for sure, but it also creates additional capabilities for clients that are available in the marketplace today. This isn't something that we're dreaming of. This isn't an idea that we have. It's there today. And, you know, our goal is to continue to expand the integration and to think about other third parties that are important for our clients who are non-Aladdin clients.

Got it. Okay, that's very helpful. Thank you so much, Troy.

Thank you. Our next question comes from the line of Glenn Shore with Evercore ISI. Please go ahead.

Hi. Thanks so much. Looking for a little more color on the comments around the significant deposit pressure. We all know it's real and ongoing, but I'm curious on how it manifests itself, how the dialogue happens, and more importantly, if you have metrics around overall client profitability that you can price per client. I'm just looking for a little bit behind the scenes, if I could.

Hey, Glenn. It's Mike. Sure. As you know, most of what we do operates in a pretty competitive marketplace right across lots of strong competitors both here in the U.S. and outside the U.S., and so you know, our clients are, and many of our clients are doing business with multiple providers, both in the asset servicing space and the treasury services space. So, so the, you know, the, the price transparency around deposits is, is, is there, you know, for clients. And so they're, they're very well informed and in dialogue with all of those, all those competitors. And so it happens, you know, naturally in sort of the conversations around, what am I getting paid on my deposits? And, you know, here's what so-and-so is sort of offering. And so very natural conversations sort of with clients. And as I said, that transparency is very much there in the marketplace. Now, just keep in mind, you know, as you know, most of our deposits are linked to operational activities, but there is, you know, ability for clients to sort of move deposits on the margin to take advantage of, you know, where there are differences and what clients are sort of paying. So I think that's the nature of that. What was the second part of the question? Our client profitability. Oh, client profitability, sorry. Yeah, so we do very detailed client profitability for our clients and have a very good sense of what's driving that and can be smart about pricing and both deposits as well as sort of the overall relationship in a way that optimizes it, you know, by client. So we feel pretty good about that.

Yeah, and I'll just add to it. I think it's a strong discipline that exists, not just in how much we make on NII with the client, but it's a relationship view where we see all the activity that we do with the client across the entire firm. And I think we, you know, we try and be smart about, you know, maximizing you know, profit and returns relative to what the relationship looks like.

I appreciate that. Just one other quick one, and we can stay high level, but the notion of non-transparent ETFs obviously is on display with the SEC's recent comments. So the question is from both asset management, asset servicing, I would think from asset management standpoint, I'm curious on your thoughts on how much of a benefit and how much product design you might have in motion? And on the flip side, is there risk on the asset servicing side simply because I think of it generically of, look, these products, if they succeed in the future, succeed because they bring a lower cost and lower cost investment management fee, lower cost on the servicing side. So how much of an impact is that there for you guys?

You know, Glenn, we're looking at that now. As you know, it's not a big piece of, you know, the pie now, nor do I personally think it'll be a big piece anytime soon. But, you know, we're spending some time looking at it now, both on the asset management side and asset servicing to make sure we understand it fully.

Okay. I appreciate it, guys. Thanks.

Thanks. Thank you. We'll next go to Brian Bedell with Doinger Bank.

Great. Thanks. Good morning, guys. Just to go back to the deposit questions, Charlie and Mike, can you talk a little bit about some of your organic growth initiatives, the progress and the priorities that you highlighted in the presentation in terms of the ability to grow deposits organically? and then, you know, potentially stabilize the net interest revenue profile and even regrow it maybe later in the year, or is that longer term?

Yeah, I think, you know, as you sort of think about the organic growth initiatives, I mean, Charlie sort of highlighted a bunch of them, you know, by business. And as we said, this will take some time to really be meaningful across the, you know, any of the businesses or sort of in totals. But we're seeing good traction in a lot of it. Charlie highlighted the corporate trust activity that we're seeing. We're seeing some green shoots in sort of that business as we sort of build out the capabilities. Compersion continues to be strong and getting stronger in terms of the pipeline. Asset management's been doing a good job building out some differentiated strategies like risk parity and a whole bunch of other items that will build over time. We've also seen some good performance in some of the key strategies in that business as well. And so I think, you know, we feel confident sort of in our ability to sort of execute on these. But as we've said, it'll take some time to see it come into the picture. I think, anyone add anything?

No, the only thing, listen, I just, you know, we're not going to hide behind, you know, the facts of the quarter, right? They are what they are. NII is disappointing. That's obviously... clear when you look at the results. But when we look at the underlying metrics of the progress that we're making, which is what will drive the long-term performance, within the asset servicing business, we feel very good about the pipelines and the types of things that we're seeing. The things that we've announced with BlackRock and other things we're working on are what's going to drive the success in the future, both in fees and ultimately in our ability to track deposits, which come with that business. We've talked about purging extensively, about getting through these couple of losses that we've had, but we've got a lot more coming, which we feel great about the pipeline there. Issuer services, we talked about the share that we're taking, or I should say winning back in some respects. In the corporate trust business, treasury services, We feel very good about the way we're building the business and what the opportunities are there. Clearance and collateral management has done extremely well, not just because of the conversions from JP Morgan, but just the underlying growth that we've been able to generate there. Investment management, we had the outflows last year, but performance is coming back. I just, you know, we do have to get through the reality of the interest rate environment, but the things that we're doing to drive growth over a period of time, we don't feel any worse about. And I think, you know, on the margin, we feel slightly better, and we're continuing to drive it. But it'll take time to show up in the numbers.

Yep, no, that's super helpful. And then just on the – back to the BlackRock – I think it's 40 or so clients that I think we saw in the press in terms of common clients between BlackRock and Peckinor. Can you just talk about the timing of the integration of their services on the two platforms and then the organic growth potential from that combined offering as you look to your other BNY clients? that are not using Aladdin right now, but maybe could either switch and sort of how you think about that in a long-term paradigm of integrating the front through back office, given the sort of industry shift in that direction.

Yeah, as I said before, the additional capabilities and, you know, the widgets and the apps that we have created to be integrated into Aladdin are available immediately. and our ability to integrate data in a more seamless way to help drive the more efficient operational process, that's available today. So we made the announcement. We're in conversation with the common clients that we have to make sure they understand what the capabilities are. And so we'll see over the next couple of months what the uptake is. Again, we feel very good about the value add that's there. And as I said, we're continuing to – The capabilities that we announced aren't the end of the road. We're continuing to build new capabilities, which will be integrated. Beyond Aladdin, as I said, we believe that we should be an open platform. In fact, most asset managers use more than one provider. To the extent they want to use Aladdin, we're obviously there to support them today, but we also want to be where our clients are. and so there are a lot of very strong platforms out there that our clients use. You can assume that we're having lots of discussions, and the benefits that we've been able to bring to Aladdin, we would assume we would be able to bring to other providers as well so we can help a much broader set of our clients.

Thank you very much. Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Go ahead.

Thanks, guys. Maybe just a two-part question. You gave a lot of guidance on the net interest income. Just wanted to get sense, given the rebound in the markets, can you provide some context on how you see that benefiting some of the fee revenues ahead and then Have you seen any improvement on the transaction side across some of your businesses throughout the quarter, given the weak start that we saw across the capital markets at the beginning of the quarter?

I'll start on the second part first, Mike. I think transaction volumes were pretty muted all quarter. So we didn't see really any big uptick in the second part as we sort of came out of the quarter. So it was pretty consistent. And if you recall last year, last year's volumes were very high, particularly in the first half of the first quarter of 2018. So we certainly didn't see, even as the market rallied in the first quarter, at least in the U.S., we didn't see that transaction volume sort of follow with it. So I think that's the case. I think on just the overall market impact, I think you can see in our disclosures in asset management what the AUM looks like. So that'll give you a good sense of how we're entering the quarter by asset class and how to think about that. And then on the asset services side in particular, just if you recall, you know, roughly the two-thirds or a little less of our AUCA is fixed income, and so we get the benefit of the market impact on the rest of other pieces of the AUCA, so you get a sense of how to model that as you go into the second quarter. Okay. Thanks a lot.

Thank you. Our next question comes from the line of Brennan Hawking with UBS. Please go ahead.

Thank you, and good morning. This is Adam Beattie in for Brennan. I just want to step back for a sec and talk about EPS growth. You guys had earlier outlined being able to grow adjusted EPS off the 2018 base. Could you just outline for us what are the key building blocks or drivers of that and where you expect to have that growth? Thanks.

Well, just to be clear, as we've laid out in here, it's a different environment today than when we made those remarks. And so our ability to you know, fulfill exactly those words is certainly far more challenging. And, you know, I'm not sure I'd answer the question other than revenues and expenses, right? I mean, we have the pressures that we've seen in NII, which we've laid out. Fees, you know, presumably will continue to grow, both with the net wins that we are seeing in our businesses, the improved flows in asset management, and the market levels. And as we've talked about, we're going to continue to be very disciplined on expenses and continue to see what else is available.

Understood. Thank you. Then just to hone in on deposits, particularly non-interest-bearing deposits, they were down a fair bit, and you've talked a bit about that. How much of that do you view as seasonal versus the yield-seeking that you identified? And what's the outlook? Should we expect stabilization from here?

I wouldn't think of the decline as seasonal. I don't know that that would be the right way to think about it. And, look, I think, you know, as we've said for a while and as I've said in my remarks, we would expect those to come down a little bit more in the second quarter, and I wouldn't go any further than that at this point. Great.

Thank you for taking our questions. Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Thanks. Hey, guys. Good morning. So first question, just looking for a little bit more color on an AR beyond sort of second quarter commentary, and specifically as the yield curve has flattened out here, can you help us think through the repricing risk on the fixed side of the securities portfolio? So kind of where are you reinvested today? What's sort of rolling on versus what's rolling off? And if the curve kind of stays at its current state, sort of what sort of the spread pressure we should anticipate over the next coming quarters?

Yeah, so Alex and Mike, so I think what we've said in the past, which is still the case, call it a third of the securities portfolio reprices every quarter, roughly, roughly a third. So that's either maturing securities or floating. That's sort of coming into what the current rate, what yield curve looks like. So I think you can sort of use that as the basis to do your modeling. And then I think As I said, for the second quarter, we would expect pricing to inch up a little bit on interest-bearing deposits, and so that will give you a sense of how to think about the compression there.

Okay, and then on the expense outlook, I don't know if I heard you guys update the guidance there, but I think on the last call you talked about sort of flattish, maybe slightly higher expenses for the year, which I think off of the, call it $10.9 billion expense base last year. You know, obviously the environment has changed where you guys are doing what you can on that front, so a nice reduction in the headcount this quarter. But I guess as you look beyond, does the expense guide hold, so kind of flattish expenses for the year, or should we anticipate slightly lower costs?

I think I answered this earlier. I think we are still very comfortable with what we said, which is we're continuing to significantly increase the investment in technology and offset it with efficiencies that we're getting elsewhere. And so our ability to deliver on that I think we still feel very, very good about. We've got some new people in some big jobs here that are continuing to dive in and figure out what comes next. We all feel like we've got a lot more opportunity than we've currently addressed, but not exactly sure what the timing is. So more to come as the year unfolds.

Thank you. Our next question comes from Vivek Junesha with J.P. Morgan. Please go ahead.

Hi. Thanks. Charlie, I just wanted to follow up on something you mentioned earlier. You said the widgets were all ready for the Aladdin to be able to roll that out to all your clients. But you also talked about developing stuff for the others. Are you already ready with developing products for other providers like Aladdin, or is that something in process? Where are you in that?

Yes, that's a good question. And so just to be clear, the capabilities that we have in these applications and widgets can be integrated into – into countless operating environments elsewhere as long as they can accept them. So these weren't built necessarily for one specific environment. And so we're going full speed with others.

Okay. Okay, great. And so is the next step now just sort of going out and offering this to your asset servicing clients and Is this something you'd get paid for, Charlie, a separate fee, or does it roll into the overall fee rate? Can you walk through sort of what it means from a revenue and business standpoint now that you have this and can provide this?

Yeah, so for the things that we have rolled out now, these are actually capabilities that existing clients currently have in our asset servicing space. And so whatever we get paid for, the business we have with them, they have access to those capabilities. What the integration with Aladdin does is it makes it far, far easier to actually access our capabilities at the same time they're accessing all of the information and capabilities that lead up to the time we get involved in the trade. So just think of the ability to have one screen with your front end on one part of the screen, your back end on the other, and being able to answer questions real time effectively on one screen. And so to the extent that we build out additional capabilities, just like we would in our typical business, those are things that we might or might not charge for. But what we're doing today is what we're getting paid for. But I would say that there is relatively little uptake on the things that we have created because it's hard to use them in concert with the front end. And what we've done with Aladdin solves that problem.

Okay, great. Now, if we compare this with what State Street did by buying CRD, do you feel this sort of completely fills – that without you having to do the acquisition, or is there more stuff that you need to add or build from a capability standpoint?

Yeah, listen, I think we've been very, very clear that we don't believe that owning a front end is necessary or even the right thing, certainly given what our business is. As I said before, many... Most asset managers use multiple providers. Staying at the forefront of building capabilities on the front end is an entire business unto its own that has changed and will continue to change dramatically. That's not our sweet spot, but there are others that do nothing but this that focus on that, and some of them are really good at it. You know, what we want to do is make sure that we're working as closely together as we can, not just on integrating capabilities, but working on common data sets and a whole series of things that do make the process much more seamless than it's been. And so that's the journey that we're on, and we think that's, you know, will be extremely attractive to asset managers and asset owners.

Great. Thank you very much.

Thank you. And ladies and gentlemen, once again, that is star one to signal for a question at this time. We'll next go to the line of Ken Euston with Jefferies. Please go ahead.

Hi. Thanks. Good morning, guys. Just a big-picture question on just the activity levels. I think for the last couple quarters, we've been understanding just how good the year ago was and getting down to some different level now. Can you just characterize – what do you think of the activity that we saw across the businesses in the first quarter? And if you're getting any sense that you're feeling that this is either a baseline or more stable or just in trying to put it into perspective, how you would think about a kind of a normal environment.

Hey, Ken, it's Mike. You know, I think given sort of the moves in the market that you've seen over the last couple of quarters, I think the activity is definitely a little more muted than what we would have expected. in terms of just pure transaction activity across the different businesses. Is it a new normal? It's hard to say, right? I think that could change tomorrow depending on sort of how investors are sort of feeling and the activity levels that are sort of coming off the back of that. But I would definitely say it's a little more muted than what we would have thought just given the moves that are happening in the market.

Okay. Follow up on the deposit competition that you mentioned. Last quarter, you talked about 100% betas. Obviously, with rates stopping, we can't really measure beta anymore. But when you talk about competition for those deposits, how do you gauge when that starts to abate? What do you think is driving that pressure? And do you have a feel for the magnitude of deposit cost increase you're still expecting?

Yeah, look, I think it's... You know, I think the way we're going to know it's abating is based on the client dialogue that we're having, right, which is happening every day, right, across, you know, different teams. So we get real-time information about sort of what we're seeing in the marketplace. And so I think that'll be the best judge as we start to see those dialogues change a bit. But you would expect as as we discussed earlier, that if rates sort of stay here for a while, that that pressure would abate at some point.

Yeah, and just I was going to add to that is the way we know is we sit in a room with the business leaders and we go through exactly what they're seeing in the marketplace as they talk to clients, because it's not like we just sit and look at a bunch of reports and see numbers go up or down. There's conversations. Where's the money coming from? Where's the money going to? and exactly what rates are we paying, what rates are others paying. And I just echo what Mike said, is I think as you've gone through a period of change, people have done some different things in the marketplace, but as rates stabilize, you would expect to deposit the rates that people pay to do the same as well.

Okay, thanks. Can I just add, I think if you looked across the folks we compete with every day in our businesses, and you could actually see into those businesses, you would see the same dynamic. It's just more transparent here.

Okay. Last quick one just on CCAR. Obviously, we know you just submitted. You guys did a nice job asking for that re-up for last year. Capital ratios continue to build. Can you help us frame just how you're thinking about capital return in the context of still being in a really strong position and versus still waiting for some of the things from the Fed to swing one way or the other?

Listen, I think we've said what we have to say on capital, which is to the extent that we're not going to be using it to grow. We believe we should return it, and we feel good about our position, and the process is the process.

Okay, very good. Thank you, guys.

All right, again, thank you. Thank you. Our next question comes from the line of Gerard Cassidy of RBC. Please go ahead.

Thank you. Good morning. Following up on the deposit commentary that you guys had this morning, have you been able to determine from your customers, the customers that are taking the deposits out of non-interest bearing, which ones are putting it into interest bearing versus putting it into their own businesses? Have you been able to decipher How much is going into their own business versus them just moving it over for higher-yielding deposits?

Yeah, you know, Drew, I think it's almost an impossible question to answer with any degree of, like, certainty by client. But I think as you sort of look at the themes, like, it's clear, you know, people are managing their cash well. more, they're trying to optimize the yield they get on their cash and being a little, having more urgency around that. And some, you know, some are, you know, some asset managers are put into work, some companies that we deal, other corporates that we deal with may be investing, but it's hard to say that with any degree of real certainty.

I see. Okay, thanks. And then second, if Powell, if Chairman Powell pivots similar to what Federal Reserve Chairman Greenspan did following the 94-95 tightening cycle where they were raising rates in the spring of 95 and cut by July. If we see rate cuts and some of the futures markets is calling that the Fed funds rate will be cut this year, how quickly do you think your deposit betas could fall in that kind of environment?

You know, I think it's... I mean, obviously, we'll have to see what's happening at that time, but if rates start to decline, we would expect that we would recapture that pretty quickly.

Great. Thank you.

Thanks, Troy. Thank you. Our next question comes from the line of Brian Klonheinzel with KBW. Please go ahead.

Great. Good morning. Quick question on the loans. You mentioned that there was lower client activity Driving down the balances in the lending, can you just maybe highlight or give a little bit more color as to what the client activity was that was decreasing and is that expected to increase at any point?

Loans are a really small driver for us, as you know from our balance sheet. But just to give you a sense of a little bit of color, we have margin loan activity or other securities-based lending activity in Pershing as an example. And we saw that come down. We don't think that's a permanent decline, but we saw that come down based on activity in the quarter. That's just an example. But it's a pretty small driver overall for the results.

Okay. And then just a separate question on asset service. You mentioned you saw growth in the alternatives. Was that new or was it alternative clients new to outsourcing or was it just winning relationships from clients that were already outsourced? The next question. Both. Okay, thanks.

Okay, I think that's the last one. Thanks. We appreciate everyone dialing in. Thanks for the time. We'll talk soon. Thanks, 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.