The Bank of New York Mellon Corporation

Please stand by. We're about to begin. Good morning and welcome to the second quarter 2019 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 Magda Pulchinska, BNY Mellon's Global Head of Investor Relations. Please go ahead.

Good morning. Today, BNY Mellon released its results for the second quarter of 2019. The earnings press release and a financial highlights presentation to accompany this call are both available on our website at bnymellon.com. Charlie Scharf, BNY Mellon's chairman and CEO, will lead the call. Then, Mike Santomasimo, our CFO, will take you through our earnings presentation. Following Mark's prepared remarks, there will be a Q&A session. As a reminder, please limit yourself to two questions. 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 as of today, July 17, 2019, and will not be updated. With that, I will hand over to Charlie.

Thank you, Magda. Good morning, everyone. Thanks for joining us. I'll share some overall thoughts about our second quarter performance. Then I'll hand off to Mike, who will then take you through the financials in more detail. We reported earnings per share of $1.01, down 2% versus a year ago. Total revenue was down 5% year on year. As we anticipated, the level and shape of the yield curve negatively impacted our results through lower NII. In addition, continued low levels of volatility and overall muted market activity negatively impacted our foreign exchange and securities lending activities in asset servicing. And our asset management business suffered from the impact of lower assets under management and the impact of divestitures. Against that backdrop, we continue to maintain strong expense discipline without sacrificing investments for the future of our franchise. Total expenses were down 4%. This includes a significant increase in our technology investment, which was more than offset by savings in other areas. So we're being very judicious and ruthlessly prioritizing investments while also benefiting from our continued progress in increasing our underlying efficiency. On the capital front, return on tangible common equity was 21%. Our capital ratios remain strong and we continue to return a substantial amount of capital back to our shareholders. We're increasing our quarterly common stock dividend by 11% to 31 cents per share starting in Q3. We also plan to repurchase up to $3.94 billion of common stock through the second quarter of 2020, an increase of around 20%. The significant impact of lower NII on our business certainly impacts our thinking of how we manage the company in the short term, but it does not change our longer-term focus and our work to build out our franchises. Our business mix is unique, our market positions are strong, and we see opportunities across the company to build out a stronger, longer-term growth profile. Pershing is a great example. We occupy a great position serving the wealth community and continue to invest in our market-leading platform to serve independent broker-dealers, but we also continue to invest significantly to capture more of the fast-growing RIA segment. We held our annual client event this quarter with attendance by a couple of thousand of our clients and partners. At that meeting, we announced a series of initiatives aimed at improving our clients' experiences. We're streamlining and digitizing customer onboarding for our clients to enable them to spend more time with what they do best. We're also rolling out a new capability that will allow firms and advisors to use net asset flows and KPIs to measure their overall business performance and identify trends in their business more quickly. We've also just released a new technology assessment tool to help advisory firms pinpoint their technology needs, identify the right technology stacks, and drive better returns on technology investments at a time when clients are increasingly struggling with those topics. And as we said over the last few quarters, we're moving beyond the impact of the client losses that impacted our results over the last year, and expect to see continued improvement in our revenue growth as we onboard a series of new mandates later this year. In addition, our sales pipeline continues to be strong. In clearance and collateral management, you see another example where we have distinct competitive advantages and are seeing continued strong performance. Given our role in servicing both the buy and sell side and our status as the sole provider of U.S. government clearing, we can help clients optimize their funding needs in a way that others just can't. We continue to generate additional revenue through collateral optimization services as well as attracting incremental balances. In addition, client activity and market demand is driving increased security settlement volumes and growth in collateral management balances. We continue to see strong U.S. government security settlement volumes driven by elevated levels of U.S. Treasury issuance and secondary market trading. This business should continue to be a source of strong organic growth. Both banks as well as non-banks are seeking access to our government security settlement platforms and access to U.S. dollar funding market through TriParty and other repo clearing capabilities. As we increase the coordination of our government securities clearance platform and our global collateral management capabilities, we expect to provide enhanced capabilities across regions, especially as we develop interoperability across those regions and assets. We're currently working to build a next generation global collateral platform to support these capabilities, as well as enhanced resiliency and data and analytic capabilities not currently available in the market. We think it will significantly boost our ability to attract new market participants, as well as additional business from our existing clients. In addition, the business remains focused on technology enabled solutions for our clients, facilitating optimization of collateral across our platform, as well as for collateral held away from us and the ability to monitor intraday liquidity and credit usage on demand with our proprietary APIs. We're also seeing progress in issuer services. Our reduced CLO platform has been received well by clients and should provide the foundation for us to compete more effectively. We continue to see good business momentum in corporate trust as we gain market share in a number of our key debt products. In treasury services, while we're challenged by the impact of the yield curve, We do see some success in our focus on expanding our client relationships, which has resulted in higher deposit balances. While these are interest-bearing deposits predominantly, they are from strong relationships across multiple geographies, and we think strengthens our business over the long term. We remain focused on building our liquidity, trade finance, and payments businesses as well. In asset servicing, although equity markets, particularly in the U.S., have been strong, reduced client activity and the impact of the yield curve has negatively impacted our financial results, but we continue to experience important new wins across client segments and geographies. Just to highlight two of them, we were recently awarded mandates by ATP, Denmark's largest pension fund. And in the U.S., we renamed Microsoft's new global custodian for their treasury operations, the first time in nearly a decade that Microsoft has switched custodians. And we continue to expand our servicing capabilities for higher growth asset classes, such as alternatives and ETFs. In fact, assets under custody related to ETF servicing are up roughly 50% versus a year ago, a sign of our traction in the marketplace. client response to our commitment to work with third parties to more closely integrate the front-to-back operating model has been positive. Our alliance with BlackRock has also been well-received, and we're in the process of enabling our integrated functionality to several joint clients and continue to have extensive discussions across existing and potentially new clients. And as I mentioned, and Mike will cover in more detail, low levels of volatility and market activity have significantly impacted our foreign exchange and securities lending activities. While we haven't seen a change in these trends just yet, they can and will change very quickly at some point. We will be the beneficiary of that. In our asset management business, though our performance in asset management was negatively impacted from cumulative outflows over the past year, The level of outflows in our higher margin products has slowed, and we're seeing continued improvement in investment performance, particularly in some of our larger equity strategies. In our wealth business, we were negatively impacted by the interest rate environment, but our assets under management flows, where we get paid for investment advice, continue to be positive. On the expense side, you see the impact of our continued focus on using our resources wisely. We have not announced a special program to reduce expenses, but as I think you can see in our results and will continue to see, we're embedding quality improvement and a clear focus on increasing efficiency into the BNY Mellon culture and how we manage the company. This includes eliminating unnecessary management layers across every area of the firm, from staff to sales to operations, automating processes, which are today manual, and rethinking the flow of activity between us and our clients. Just a reminder, while these activities will result in lower expenses, it's actually more important that they will increase the quality of the work we do for our clients. While it sounds more strategic to discuss new capabilities we are building, which we are, there's a meaningful opportunity to improve our growth trajectory by differentiating our firm through the quality of the work we deliver day in and day out. We're far from done here. This is a multi-year journey. and the ability to continue to drive benefits for both our clients and ourselves continues to be extremely meaningful. And as I mentioned earlier, though our expenses decline this quarter, they continue to include a significant increase in technology and product development investments. While some of these expenses are discretionary to some extent, we remain committed to these investments to build the business for the future. We will continue to keep an eye on the impact of the environment and our business and know that we have this lever and others to pull if we choose to reduce the expense base even more significantly. But we believe we should protect these investments as much as we can, as they will drive much of the future success of the company. Having said that, we remain confident that our ability to continue to drive improved quality and drive efficiency will offset these investments for the next couple of quarters. We also continue to bring in and elevate exceptional talent to help us accelerate our progress. There have been a couple of talent changes worth highlighting. Bill Daley has joined as vice chairman and will be responsible for overseeing our government affairs, philanthropy, and corporate and social responsibility efforts. I've known Bill for many years and couldn't be more excited to attract someone with his reputation, abilities, experience, and judgment. Jim Crowley has become CEO of Pershing. Jim has spent his career at Pershing and has overseen a broad range of responsibilities from sales to operations, most recently serving as the Chief Operating Officer. He knows our clients, systems, and organization, so it's been a quick and seamless transition. Most importantly, Jim understands the importance of not missing a beat with our business while thinking through where we can go to play an even bigger role in the support of the growing wealth business. And we just announced that JoLynn Anderson will be joining in September as head of human resources. I've known and worked with JoLynn and know how important she will be in our journey of creating a high-performance culture that can support the growth of our business. So in closing, we in the industry will have to continue navigating market challenges as the yield curve creates headwinds in the shorter term, but believe that we will be beneficiaries of central bank actions as we are confident they will ultimately result in stronger global economic growth and stronger market activity. We have not changed our belief that opportunities across the franchise to drive higher growth exist, and we continue to remain focused on balancing our short-term performance with building our company for the longer term. With that, let me turn the call over to Mike.

Thanks, Charlie. Let me run through the details of our results for the quarter. All comparisons will be on year-over-year basis, unless I specify otherwise. Beginning on page four of the financial highlights document, in the second quarter, total revenue was down 5% to $3.9 billion. This mainly reflected lower net interest income, the impact of prior year outflows in divestitures and asset management, and reductions in foreign exchange and securities lending, which were driven in part by market factors. Total fee revenue was down 3% year-on-year. Within investment services, we saw fees grow across a number of our businesses. Then interest revenue was down 12% and expenses were down 4%. This resulted in an 8% decline in pre-tax income to $1.3 billion, $969 million in net income applicable to common shareholders, and a 2% decrease in earnings per share to $1.01, which was helped by our common stock repurchases. and our pre-tax operating margin was 33%. Moving now to capital and liquidity on page 5. Our capital and liquidity ratios remain strong. As of June 30th, our key ratios were stable or up since the end of the first quarter. Common equity Tier 1 capital totaled $18.5 billion, and our CET1 ratio was 11.2% under the advanced approach. Our average LCR in the second quarter was 117%. The SLR was 6.3%, and as Charlie indicated, we were pleased with the significant capital return that we announced a few weeks ago. Now looking at net interest revenue on page six. As I mentioned, net interest revenue was down 12% year-over-year and 5% sequentially. Total average deposits were up both year-over-year and sequentially. This was driven by higher interest-bearing deposits partially offset by the expected decline in non-interest-bearing deposits. The rates paid on interest-bearing deposits increased from 99 basis points in the first quarter of 2019 to 104 basis points in the second quarter. Despite the expectations for lower rates, pricing has continued to be competitive throughout the second quarter, but appears to have stabilized. Loan balances declined in Pershing in clearance and collateral management, primarily driven by lower client demand for leverage. The net interest margin decreased eight basis points sequentially, driven by the impact of higher deposit rates and lower market rates impacting our reinvestment yield. On page seven, we'll go into more detail about how our net interest revenue changed versus the first quarter. As I said, net interest revenue was down 5% sequentially, which was at the low end of the range we provided with our first quarter results. At that time, I said that we expected that average non-interest bearing deposits would continue to come down, and that the rate paid on interest-bearing deposits would continue to increase due to competition. Both of these happened as expected. At that point, we also expected the yield on our securities portfolio to be relatively flat to the first quarter. Given the downturn in rates since then, the yield on the securities portfolio was actually down approximately five basis points. U.S. short-term rates moved five to 20 basis points lower during the quarter, impacting our loans and floating rate securities. The longer end of the curve is lower by between 30 and 40 basis points, impacting our fixed-rate securities portfolio reinvestment yields. European government securities yields are also lower. As a reminder, about one-third of our portfolio reprices every quarter. Included in the lower yield on the securities portfolio is a negative impact from higher premium amortization. These reductions were partially offset by the higher interest-bearing deposit balances and we took advantage of short-term investment opportunities. We're taking action to increase NII while maintaining our current risk profile. For example, we sold low-yielding munis in the quarter and reinvested in high-grade CLOs and other asset-backed securities. We also took advantage of attractive pricing in the reverse repo market and are selectively investing in short-term loan assets, as well as optimizing funding and long-term debt issuance. Now, page 8 details our expenses. On a consolidated basis, expenses of $2.65 billion were down 4%. Approximately 1% of the decrease was driven by the favorable impact of the stronger U.S. dollar. The remaining decrease reflects lower staff expense and our continued expense discipline, which resulted in decreases in most other expense categories while absorbing a significant increase in technology investment. which is reflected in staff, professional, legal, and other purchase services, as well as software and equipment lines. As discussed over the last couple quarters, we have executed a number of efficiency initiatives, including organization streamlining, which helped drive the expense improvement of the quarter. We remain confident that we can become significantly more efficient in the future. Turning to page nine, total investment service revenue was down 3%. Assets under custody and administration increased 6% year-over-year to $35.5 trillion, primarily reflecting higher market values in net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. Within asset servicing, revenue was down 8% to $1.4 billion, primarily reflecting lower net interest revenue, foreign exchange and securities lending, lower client activity, and the unfavorable impact of the stronger dollar. As you can see, foreign exchange and other trading revenue was down 11%. In foreign exchange, client activity was modestly lower, and volatility has been historically low for some time. Securities lending has also been negatively impacted by lower demand and tighter spreads. Although revenue was down, the securities available to lend increased 15%, which should position us well as the markets change. Consistent with the last number of quarters, we don't see an acceleration in pricing headwinds in the business, just a continuation of what we have seen in recent years. In Pershing, revenue was up 1% to $564 million and up 2% sequentially, reflecting the impact of higher client assets and growth in accounts and clearing volumes, partially offset by lower net interest revenue. The sequential increase includes a small piece of the new business pipeline that we've been talking about, which we expect to impact a result later in the year and have a more meaningful impact next year. Issuer services had a good quarter. Revenue was up 3% to $446 million, benefiting from higher depository receipts fees and higher volumes in corporate trust, partially offset by lower net interest revenue in corporate trust. The 13% sequential increase primarily reflects higher fees in both businesses. The sequential increase in depository receipts was primarily driven by timing of corporate actions and a little increased transaction volume. We continue to see good business momentum in corporate trust. In treasury services, revenue was down 4% to $317 million, reflecting lower net interest revenue. Although total Treasury services deposits are up, we are seeing the impact of the shift from non-interest-bearing to interest-bearing deposits and higher cost of the interest-bearing deposits. Clearance and collateral management revenue was up 6% to $284 million due to growth in clearance volumes and collateral management due to the new government clearing clients that we converted last year and other new clients as well as higher clearance volumes related to heightened levels of U.S. Treasury issuances. Average tri-party collateral management balances were up 21%, approximately two-thirds is from the client conversions, and the remainder is from new business and more activity from existing clients. Page 10 summarizes the key drivers that affected the year-over-year revenue comparisons for each of the investment services business. Now, turning to investment management on page 11, total investment management revenue was down 10%, asset management revenue was down 12%, year-over-year to $618 million, primarily reflecting the change in AUM, which was impacted by the cumulative outflow since the second quarter of 2018, partially offset by higher market values. It also reflects the unfavorable impact of a stronger U.S. dollar, principally versus the British pound, and the impact to vestitures and hedging activities. Just a reminder, Performance fees can vary based on client anniversary dates and were lower compared to significant outperformance last year, particularly in LDI. We had outflows of $24 billion in the quarter, primarily driven by $22 billion in outflows from low fee index strategies, with two-thirds of that from a single client that took assets in-house. We had equity outflows of $2 billion for the quarter. Despite the outflows, we had strong investment performance in our largest equity strategies. We had $4 billion of outflows from fixed income products, and multi-asset and alternative inflows turned positive at $1 billion. We had $1 billion in LDI inflows and $2 billion in cash inflows, and overall assets under management of $1.8 trillion, which were up 2% year-over-year due to higher markets, partially offset by the impact of the stronger dollar and net outflows. Wealth management revenue was down 5% year-over-year and 1% sequentially at $299 million. with both decreases primarily reflecting lowered interest revenue, partially offset by higher market values. Within wealth management, client assets increased 1% and were up sequentially, 2%, to $257 billion. Turning to our other segment on page 12, non-interest expense decreased year-over-year, reflecting lower staff and occupancy expense related to consolidating our real estate that was recorded in the second quarter of 2018. Now looking ahead to the third quarter, there are a few things you should consider. With respect to net interest revenue, let me walk you through some assumptions, but as always, you should make your own assumptions as well. Based on what we see today, our interest-bearing deposits would be similar to the second quarter. We expect that average non-interest-bearing deposits will continue to come down. The rate environment has been changing quickly, and the forward curve is currently pricing in at least two cuts this year, And as a result, we expect the securities portfolio yield will decline in the third quarter. The competition for deposits remains high, and deposit repricing is difficult to predict with a high degree of certainty, but we expect that betas on the back of the Fed rate cuts will be close to 100% for some parts of the deposit book, but the overall beta will be less than 100%. Given these assumptions, we would expect the sequential percentage decline in net interest revenue to be similar to what we saw in the second quarter, depending on the yield curve, deposit pricing, and non-interest-bearing deposit volumes. Keep in mind that depending on the balance sheet and market dynamics, there may be shifts of revenue between net interest income and FX and the other trading line. And I would continue to caution you that it's very early in the quarter and the environment has been dynamic. Although equity markets have been rising, a little less than a third of our AUM is correlated to the equity markets. So you should factor that into your expectations for Q3 investment management fees. And a reminder that we had some notable items in the third quarter of 2018, which you should factor into your modeling. And lastly, while we remain committed to continue to invest more in technology and product development, we will continue to monitor the impact of the environment on our businesses and know that we have leveraged the poll if necessary to further reduce our expense base. With that, operator, can you please open up the lines for questions?

Thank you. And if you'd like to ask a question, please press star 1 on your telephone keypad. Our first question comes from the line of Ken Houston with Jefferies. Please go ahead.

Thanks. Good morning, guys. I just have to ask on that race part of the outlook, Mike. You said a third of the book reprices every quarter, and I'm just wondering if you can elaborate further on just the pace of change, what that means for investment yields, just presuming this curve environment. I'm assuming that then means then if we even stay here, we'll have continued pressure past the third quarter. Can you elaborate on that and also just how that magnitude of change in duration, where the duration stands today? Thanks.

Hey, Ken. Thanks for the question. So as you would expect, I'll make sure I cover all pieces of it there and pick it apart. But on the duration, as you would expect, given the downtick in rates, the durations come down just naturally as prepays have gone up in the mortgage-backed book. You know, as we continue to take action on the maturities that come through the portfolio, we add a little bit of duration back. But overall, it's ticked down slightly sort of sequentially in the quarter. As you sort of think about the impact of lower rates, you know, there is a lag as that sort of kind of bakes into the book if a third of it's repricing every quarter. So I think that you should be able to model that pretty easily, I think.

Okay. My quick follow-up is then just you mentioned, I guess, trading rate risk for credit risk. Can you just talk about the philosophy at this point in the economic cycle of making that move in your confidence from a risk management perspective? Thanks, Mike.

Yeah, I think you're talking about some of the changes we've made in the securities portfolio with the munis and CLOs, et cetera, that I mentioned. Is that what your question is about?

Yeah, that's it. Thanks. Yep.

Yeah, look, I mean, I think when you look at what we did, one, it's not a major sort of driver in the book, but the munis we sold were yielding below IOER. And so all we did was sort of redeploy those in some very high-quality asset packs and CLOs. And so I wouldn't take this as a bet or a big change in direction of the book.

No, this is Charlie. The only thing I would add is I would just take it as we're going through everything that impacts NII to figure out what we can and should do on the margin that can be additive without changing the risk profile in a real material way.

Okay. Understood. Thanks, guys. Yep.

Thanks.

Thank you. Our next question comes from the line of Betsy Grasick from Morgan Stanley.

Hi. Good morning.

Good morning.

Hey, a couple questions. So on the expense side this quarter, you know, really good results. Wanted to understand. I know you gave, you know, some basic information. explanation on where that came from, but maybe you could drill down a little bit on how much more, you know, expense cuts you could continue to do that are not touching the investment spend. Because, you know, we get the message on NII's, you know, coming down, but I think, you know, part of the story this quarter was you were able to offset that with the expense cuts.

Yeah. Hey, Betsy, it's Charlie. Listen, you know, I've been very, very consistent, I think, since the day I got here about what we say on this, and nothing is different, which we continue to believe that there are meaningful opportunities to reduce expenses, and that'll continue for a relatively long period of time, meaning beyond what we actually even think about at this point. It cuts across a whole series of initiatives. Everything, as I've talked about, from reducing layers, location of employees, automation of things like reconciliations, instructions with clients, corporate actions, NAV automation. We can go through the long list of things that we're constantly looking at. And what I'd say is in an environment like this, you get even more focused on figuring out what you can do more quickly to have it actually impact our results. Again, we do it because it drives quality. The byproduct of that, quite frankly, is that we've become more efficient out of it. And so as time goes on, I think we get more and more confident that there continues to be more opportunity for us, which is why I made the comments relative to the efficiencies relative to the size of the investments we have to make. We think, as I said, for the remaining couple of quarters, the efficiencies will more than offset the increases. But if You know, we think the environment warrants a change in the level of investment. We can do that. But we feel, you know, very, very positive about where we're going with the expense trajectory of the company in a way which is positive for our clients.

Okay. Thank you.

Thank you. Our next question comes from the line of Stephen Chubek with Wolf Research. Please go ahead.

Hey, good morning. So I wanted to dig in a little bit to the securities book and some of the NII disclosure. You spoke of some changes to the securities mix and maybe reinvesting in CLOs. You also talked about potential to optimize some of the higher cost funding sources. I'm just wondering whether some of those changes or some of those actions are contemplated as part of the NII guide.

Yeah, I mean, look, all of it is contemplated, Steve, as we sort of look at it. And as Charlie mentioned, sort of we're going through every, you know, every last piece of it that sort of, you know, builds up to drive NII. And, you know, we're going to continue to work to optimize it as best we can without substantially changing sort of the risk profile that we've got.

Got it. And just one for my follow-up, I wanted to ask about capital ratios and maybe more specifically, try to get a sense as to, you know, as you look out over the next couple of years, just given the strength of your CCAR track record, how are you thinking about managing or determining what's the appropriate capital target, especially in anticipation of the fact that the SCB could potentially be deployed or implemented as early as 2020?

Yeah, look, Steve, I think we've got to kind of let the capital rules get finalized, right? And hopefully that will happen sooner rather than later, but we've been waiting for a while for that. So I think that's got to happen sort of first. And as you know, we've been sort of constrained – you know, based on sort of the leverage ratio in CCAR for the last number of years. And so we don't see that sort of changing as being the constraint for us going forward at this point. And, you know, we're, as you can see over the last couple of years, we've been very active to both optimize sort of how we think about our modeling that goes into, stress testing and CCAR. And I think you've seen that as we've sort of increased our capital return over the last couple years. And I think we'll continue to sort of do that as things evolve.

Great. Thanks for taking my questions.

Thank you. Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please go ahead.

Good morning and thanks for taking the questions. First question, just on purging, so that showed some growth in the quarter. You guys mentioned some of the onboarding with clients. Can you provide an update on the timing and the impact ahead of some of that new business, as well as what drove the lower margin balances in the quarter? It seemed a little, I would say, counterintuitive from what we're seeing with the peers.

Yeah. Hey, Mike, it's Mike. I'll take that. So as we've said over the last few quarters, I think on the new business side, we would We're in the middle of onboarding a number of those clients now, and we would expect to start seeing that more meaningfully towards the end of the year and into the first part of next year. On the margin balances, there's really no story other than we've seen a lack of demand from clients. right now, and that could turn pretty meaningfully pretty quickly, but it's really just been muted activity from the existing clients.

Yeah, but it has nothing to do with just the clients, net changes in clients in our business. It's actual activity of the existing clients that we have, and it's just the impact of the way they think about the risk they want to take in the market today.

Okay, and then just as a follow-up, Maybe Charlie, just based on the investments, you guys mentioned the Pershing wins. You pointed to some of the asset servicing wins. You have traction on the collateral and the clearing management. So it seems like some of the organic growth initiatives that you guys have been putting in place are starting to gain some traction. Just wanted to get an update on your view on more of the strategic repositioning and outlook. because obviously there's a lot of folks on NII and the RAID headwinds, but it seems like you're making some of the traction on some of the business areas.

Yeah, listen, I think it's very early, and so just because we have some businesses which have seen some growth doesn't mean that internally we feel better about it than we should. But we do have some businesses that have continually shown some organic growth, and others where it's still slow, predominantly because of the time it takes for us to build up our capabilities and the long sales cycles. We highlighted those where you're seeing growth in the business, and those are, you know, they're real, they're consistent, they relate to both our execution and the market positions that we have. And on the longer tail businesses, such as asset servicing, That continues to be a work in progress, but we feel as good as we have felt that the opportunities are there. It just will continue to play itself out over time. Okay, thanks a lot.

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

Good morning, Charlie and Mike. Thanks for taking the questions. Mike, you referenced, I think, a high beta expectation in a rate cut environment. And I just was curious to get some color on what drives the confidence that it'll be high. You know, this quarter we saw market rates begin to fall, and yet interest-bearing deposit yields went up. It looks like the policy, if we get a policy cut, it'll be viewed as an insurance cut. And in the past, those haven't had as high beta. So just kind of curious about what it is that you're seeing in the market and what you're hearing from the folks closer to those deposit markets and what would give you the confidence that those betas would be high.

Yeah, I mean, Brendan, look, I mean, obviously, we'll see how things play out over the next coming weeks. But we've got a very disciplined process where we go business by business, segment by segment within those businesses. and try to be realistic about, you know, what the beta is going to look like for each of those segments. And that's sort of how we go about the process of trying to understand, you know, what's possible. And, you know, some of those segments are more competitive than others and will have lower beta than others, and there's dynamics that we sort of take into account. And so we're going to continue to do that and work through that as sort of rates sort of come down.

The only thing I'd add, Brent, and I know you know this, but we don't sit here and pretend to be able to forecast how many rate cuts there will be. What we've said is we're just taking what's in the implieds and saying if that holds true, here's what we would expect. To the extent that it's something less than that and it's something more insurance-like, you might be right, but then that also changes the outlook for NII in a more positive way than it otherwise would have been for some of the out-quarters. But if it is a series of cuts, then, you know, the rate at which we and others will be willing to move is impacted by that. So, you know, a lot will have to do with, you know, what the actions are and what the words are around it and what the expectations are beyond that first cut.

Yeah, that's all really, really fair and helpful. Thanks for that color. My next question is on expenses. You guys have talked about how this quarter is a reflection of the discipline and how you have the ability to step up when you need to and show the impact of the efficiency efforts you've been making. As we think about tuning up our models here, should we think about this as the right jumping off point for the rest of the year? Or are there some factors that we might be missing that we should consider when we consider the back half here?

Yeah, I think, Brennan, I think you really got to sort of look at it year on year because there's dynamics that sort of change as you sort of look at individual quarters. And so I think you could sort of take the the view that both Charlie and I gave in terms of the efficiency is offsetting all the investments and sort of think about that on a year-on-year basis for each of the quarters going forward.

Okay, thanks for the call.

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

Hi, thanks very much. Hello. A quick follow-up on your comments on ETF servicing up like 50% versus last year. I'm curious if you can help us with thoughts on what kind of base are we talking about and maybe just talk a little bit more towards overall positioning, winning new clients. Are the revenues coming from current clients and their organic growth? I'm just curious.

Yeah, this is Charlie. I'll take that. Listen, we don't disclose the individual pieces, but when you look at who services the biggest ETFs out there – We have not historically been one of the large ETF providers. So that's just a way of saying relative to what you see in the world, it's from a small base. But it's also just very clear for us relative to the focus that we have on it. We have one, I would describe it as a significant piece of business from a strong name in the market that wants to grow in the ETF space. and we're very, very focused on growing it in a more material way than what you've even seen in the past. So that's the reason why we wanted to highlight it. Not a huge revenue impact in the short term, but important strategically for us.

Understood. And maybe I could go over to the asset management side. Last quarter, I think you pointed out some of the investments you're making in passives, oil, smart beta, LDIs. Maybe you could provide a little bit more color on, I know these are longer tail investments, but curious on what you're working on right now.

It's exactly the same set of, you know, a list as you point out. It doesn't change quarter on quarter. When you looked at the results in the quarter, obviously you saw the flow information. Mike talked about it. You know, big piece driven by one very specific client that took something in the index space in-house. We are focused on on the things that we spoke about. It's not the easiest environment, but what we're focused on in our existing platform is ensuring we have the right products and focused on performance. And we walked you through some of the things on the performance side which should, over a period of time, drive flows and drive our own financial performance.

Okay, thanks, Charles.

Thank you. Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Thank you. Good morning. In view of the pressure that everyone is seeing on the margin because of the rate environment, have you guys considered, you know, obviously your loan book is not as big as your securities book, but is there any consideration of trying to focus on maybe growing the loan book to offset some of these pressures that you're seeing on the margin?

Listen, I think... I think we are, as Mike said, we are focused on looking at every component of NII, but not rethinking the risk profile of who we are and what we are. When you look at what we do in the lending space, for the most part, what we do in the lending space supports the rest of the businesses that we're in. It's slightly more than an accommodation is the way I would think about it. It's an important component of what we do and what we provide for clients. But we don't have the infrastructure, we don't have the diversification, we don't have the size lending platform that some of the others have. And our view is if you just enter that just for the sake of creating NII to solve a short-term problem, that probably won't end well for us if we went down that road. So we're trying to be far more selective about where we can pick up some yield without putting ourselves in a position, especially at this point in the credit cycle, that we will regret later on.

Very good. And then following up on your assets under management comments, recognizing that equity is not a material part of your assets under management, But can you share with us the trend, obviously, that many of the active managers, both in fixed income and equity, are seeing is the pressure from the passives, of course. Can you share with us, are you guys seeing that same kind of pressure in your active part of the assets under management, and what are you trying to do to offset it?

Yeah, I mean, in terms, Mike, certainly in some strategies, we're seeing more pressure than others And I think what we're trying to do is make sure that where we have differentiation, that we're focused on performance. And as you sort of look at our larger strategies, they are differentiated. They're not sort of like index-hugging kind of strategies. And I think we've seen good performance. We've seen a slowdown in outflows and, in some cases, a return to inflows in a few of them. And so we're focused on those differentiated strategies, which I think will help us over the long run.

And I guess what I would add is, you know, I break it into two parts. There are, you know, flows and, you know, just the fee environment. You know, I would say, you know, the pressure that we've seen on fees, while it hasn't gone away, it hasn't increased. And it's probably, you know, we've probably had more filtered through than less at this point. So that's, on a relative basis, a negative going away for us, which is certainly a good thing. And as I said, we're focused on, in our equity businesses, whether it's in the Walter Scott business or any of the others, focused on performance. And the performance has been quite good. And when you see better performance, you see better impact on flows. It's early, but It certainly feels better when you've got the stronger performance than when you don't.

Charlie, Mike, thank you.

Thanks a lot. Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Hey guys, thanks. Just hoping to follow up on a couple of specifics here. So I think, Mike, you mentioned that data on rate cuts will be close to 100% on a portion of your deposit base. What percentage of your interest-bearing deposits will have that kind of 100% beta on the rate cut, which assuming is more contractual, which is why you kind of have that level of confidence?

Yeah, I mean, Alex, I mean, that's not something that we disclose in that level of detail. But as I said, you should assume It's not just where we've got contractual rights to do that. We're being very disciplined about how we go through the segment by segment review of the book.

And then lots of color around expenses, you know, more on the qualitative side, but I was hoping we'd think through the rest of the year and maybe into 2020. If I hear you guys correctly, it sounds like the efficiencies are more than offsetting technology spend. So should the expense run rate be down versus kind of the first half of the year for the back half of the year?

Yeah, as I said, Alex, you should sort of think about it sort of year over year, right, for the third and fourth quarter, just given some of the dynamics as you sort of look at, you know, the way the P&L sort of works out. And, you know, you should assume that the efficiencies offset any investments we're making in the third and fourth quarter year on year. So sort of flattish year on year.

Got it. Thank you.

Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi. Morning. So I heard you're controlling what you can control with the expenses, but I'm just wondering about the pricing environment. So assets under custody are up 5% year over year, but servicing fees are only flat. You said the pricing pressure is the same as it has been, so should we think about that relationship as the pricing pressure or not? How should we think about it?

Yeah, Mike, I would just remind you that as sort of the markets go up, so in particular, the U.S. markets have sort of gone up year on year, right? So that does have an impact on AUCA. And as if it's just markets sort of driving AUCA up, you don't get paid the same you know, for that increase than you do for bringing in sort of new clients, right? Because clients have sort of graduated fee schedules. So there's a little bit of that you see in there. And then, you know, we'll go back to what we said on the pricing. Like, we really see no discernible difference at this point relative to what we've seen over the last number of years.

I will say the following thing, Mike, which won't satisfy you, but it's just the reality. We don't spend a lot of time looking at that ratio. There's assets under custody are not directly related to that line. We get paid for different things, not just the level of AUCA that exists. Sometimes it's based on transactions, sometimes it's based upon the activities that we have. So we would expect that number to grow over time at a faster rate, but that doesn't mean that we won't see benefits in the net interest I'm sorry, in the operating margin of the company over a period of time. That's the way we think about it and what we look at.

Well, that's helpful. So maybe just a more specific question. When you talk about pricing pressure, what is pricing pressure? Like if you say it's kind of similar to the way it's been the last few years, is it 1%, 2%, 3%, half a percent? How would you quantify that?

We don't talk about the specifics. It's obviously embedded in the overall number. On a percentage basis relative to just when you look at our revenue growth number, the negative impact is not a hugely significant number.

Okay. And then last follow-up. Some of your peers that reported so far, the money center banks, have shown servicing fees up 5%, whereas yours was down 5%. I'm sorry. It was much different on a core basis. So yours... Anyway, no matter how you slice it, the money center banks did a lot better this quarter. Is there anything unique to them or unique to you or, like you said, new business flows on later this year? Maybe that changes then.

Listen, we're not going to spend a lot of time talking about our competitors, and there's a lot that's hard to understand when you just look at the overall press releases relative to these businesses. What we've looked at for our competitors, for comparable businesses, doesn't agree exactly with what you said, but we can certainly follow up with you later on that.

Okay, thanks a lot.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Great, thanks. Good morning, folks. The first question, Mike, just you talked about issuer services and some of the differences on the DR timing. We've had some shifts between the second and third quarters in the timing of that seasonality. Maybe we can just talk about the impact of that in 2Q on a sequential basis, and then sort of given that timing, what the outlook on the ADR side might be for 3Q in terms of seasonality.

Yeah. Hey, Brian. So, you know, as I said, I think a couple of quarters ago, you really sort of need to look at issuer services over, you know, the full year and not focus too much quarter to quarter. And I think when you do that, you sort of see actually more stability over the last, you know, few years than you sort of look at, as you might guess, looking at a quarter to quarter. So I would just encourage you to sort of look at it that way and go back to sort of what we what we sort of printed in 2018 and used that as a base to sort of think about the whole year.

Okay, fair enough. And maybe just a question on the organic growth. Obviously, both you guys talked about some of the progress you're making, especially in clearance and collateral and within Pershing. I mean, I guess at this stage, do you have a sense of how you would characterize that organic revenue growth, parsing that out from the market impact and at least those areas where you are growing. And then in conjunction with that, you've made some new hires, obviously, while you're still reducing the expense base on the comp side. So maybe if you can talk about whether you still plan on making out some other senior new hires to accelerate that organic growth in other businesses.

So let me start with the second piece first. First of all, I want to point out we didn't just highlight hires from the outside, we highlighted promotions from within. And so because there are a series of very big jobs here which we promote from within and are thrilled with the talent that exists here. Listen, I think we're a, you know, we highlight it in this earnings release because we do think the jobs that we've talked about are important to continuing to further our progress inside the company. Over a period of time, we should talk less and less about that as we create more stability in the senior management ranks. But the positions that we've added, that we've talked about, we think are meaningfully additive to our ability to think differently about these businesses and grow them. first question was? The significance of the organic growth. Yeah, listen, I think it's a hard question. I think, you know, we would, you know, I think if you just ask, like, what's the tone that we want to set relative to the way we're thinking about it is we are very early on in our journey to build a company which has a higher rate of growth than it had in the past. The fact that we have some businesses that are showing underlying organic growth is certainly a good thing. It's real. We think it's, you know, while there might be some volatility, it's sustainable, both because of the work we're doing and the quality of the franchise that we have. It's not everywhere. We have a lot more work to do. So the trends are mildly positive with still a lot more to do.

Okay, great. That's good, Cody. Thank you.

All righty. Thank you. And ladies and gentlemen, as a reminder, that's star one on your telephone keypad to signal for a question. Our next question comes from the line of Robert Wildhack with Autonomous Research. Please go ahead.

Hi, guys. One on the balance sheet. I think in the past you said that the Fed's normalization was going to lead to deposit runoff of $40 to $70 billion, but that was from a while ago. Any way you can help us quantify the impact that process has been having and how that will change once the Fed stops?

Yeah, look, hey, Robert, it's Mike. You know, as I said in my remarks, you know, we sort of expect interest-bearing positives at this point in the quarter to be about where they were last quarter and then not interest-bearing to keep coming down a little bit. You know, and I think post, you know, QE stopping and the Fed reducing its balance sheet, you know, that should be a net positive going forward, but we'll see how it plays out.

Okay, thanks. And then can you just give a quick update on the BlackRock-Aladdin partnership and how that has progressed and what the client uptake has been like on the additional capabilities you've built out?

Yeah. I think what we've seen is a very, very high degree of interest from both existing clients that we have and potential clients. We're in the process of onboarding of the existing common clients we have, a meaningful portion of those, to give them access to the new capabilities, and most of the remaining ones are extremely interested, and we're just in the process of going through that discussion. So all in all, I think we just feel very good about what we've done there, and continuing to talk to other third parties about being able to do the same.

Great. Thanks a lot.

All righty. Thank you. Our next question comes from the line of Brian Klein-Hansel with KBW.

Yeah, morning. Just a quick question. You're still seeing good growth in the tri-party collateral balances. How much of that is still coming from the onboarding from JPM, or is that fully done at this point in time?

The onboarding finished in the late third quarter last year, so you're still seeing the annualization of that, Brian. So roughly two-thirds of it from the conversion and the remaining from either new clients or growth from the rest of the client base.

Okay, and then you keep mentioning on the expenses that the tech spend was going to be offset by efficiency saves, but when should we see the tech spend slow? I was assuming there was some accelerated expense to get the platform as you want it to be, but should we see it slow in 2020, or is this just an ongoing rate of spend that we should expect for the near term?

Yeah, I don't know the answer to that is the short way to think, is the succinct answer. I think we've certainly thought about it in detail through the end of the year. We're at the beginning part of our process for thinking through next year in detail. There's no doubt that the tech spend should become more efficient as time goes on. There's still a lot to do. So relative to the way we think about overall expenses, obviously that'll be governed by the way we're thinking about what our requirements are and what the environment is. So we're very conscious of the world that we live in. but I think we'll defer the answer, you know, the question until we think about it some more through our process. Okay, thanks.

And gentlemen, it appears we have no further questions at this time.

All righty, thanks everyone for the time. Take care.

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 time today. Have a good day.