Q3 2019 Earnings Call
Good morning, and welcome to the 2019 third quarter earnings conference call hosted by being why Mellon.
At this time, all participants are in listen only mode.
Take questions and answers session. Please note that this conference call will be recorded and will consist of copyrighted material you may not recorded or rebroadcast these materials without being why melons consent.
I'd like to turn the call a magnet fortunes could be in my melons Global head of Investor Relations. Please go ahead.
Good morning today be in wind Melin released its results for the third quarter 2019.
Earnings press release, and the financial highlights presentation to accompany this call.
Available on our website I'd be in one melons dot com.
Housekeeping being one Mellon interim CEO would meet the call then Mike sentiments Cmos, our CFO will take you to our earnings presentation.
Following Mike's remarks, there will be a key when they 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, various factors, including those identified in the cautionary statements in the earnings press release, the financial highlights the presentation and in our documents filed with the FCC all available on our way.
Forward looking statements made on this call speak only as of today October 16th 2019, and will not be updated with that I will hand over to talk.
Thank you, Matt good morning, everyone glad to be back with you.
That's my first time speaking to you as CEO I will focus my comments on my immediate priorities as well as my perspective on our business is and will only briefly touch on our third quarter results I'll leave that to Mike.
First let me say, how tremendously excited I am to be leading this great organization. During my long career at B.Y. Mellon I've held leadership roles across risk finance quite management and many of our businesses and I believe that gives me a strong grasp of the fundamentals of our company and water stakeholders need and expect from us.
I'm looking forward to continuing to work with Mike and the rest of the Executive Committee as well as all of our employees to stay on course and positioning our franchise to drive better performance and create sustainable growth.
We've got an ambitious agenda and I strongly believe that we're absolutely on the right path. The improvements we've made to our culture are clear, we're acting with a greater sense of urgency and greater responsiveness and I'm proud of the team's ability to stay focused through leadership change and to continue to deliver great service to our clients.
It's my intention to ensure we maintained a strong performance culture and remain focused on service quality continue investing in technology and innovation and improving every aspect of our operations.
Through that focus we've made significant progress in the last few years, which I believe positions us to improve our results over the longer term.
Now while it was head of global client management as well as a number of our servicing businesses I've had the pleasure working closely with our clients. During this period I've seen us meaningfully improve our services as well as provide the technology and expertise to help them navigate challenges at achieve their goals.
Our investments in our operations and technology are improving and broadening our capabilities and the adjustments we've made to our client coverage model are helping us deepen relationships and identify more opportunities.
Before getting into the quarter, let me run through what I'm seeing in our businesses.
And asset servicing we continue see the opportunity to do more for our clients as changes and the asset management business puts pressure on their operating margins.
These trends should offer more outsourcing opportunities in key segments such as alternatives.
In terms of what we're actually doing we're focused on continuously improving quality, which is fundamental we're also investing and expanding capabilities to serve alternatives such as private equity credit funds real estate and EPS.
For example, we just recently implemented a significant mandate with Goldman Sachs asset management.
Hi, this to deliver a range of asset services for their newly launched European EFS and we're encouraged by our traction in this space.
We are building data and analytic solutions to help clients navigate a changing investment management lift landscape. The basic offerings starts with a powerful aggregation capabilities.
We can then apply analytics around that leveraging our data and analytic solutions technology, when able to large global asset manager to in source $250 billion a value M. Within three months. The client now has a higher level of transparency into cash and positions for the front office trading and has achieved better operational efficiency.
By leveraging their previous investments in our technology.
We think our data and analytics capabilities will be a true differentiator overtime.
The alliances, we're forming will create a more integrated front to back operating model, We recently announced its strategic alliance with Bloomberg to integrate our data analytics and servicing capabilities with Bloomberg portfolio management trading and compliance spot platform. This will allow our comic clients to experience faster onboarding hires.
Great through processing rates and more efficient data exchanges.
As new partnership comes on the back of the one we announced with Blackrocks Aladdin platform earlier this year.
Reception to our partnerships has been positive as it helps him simplify workflows improve efficiency and drive their performance.
In purging, we're focused on helping our clients drive their business and a dynamic industry the pipeline of opportunity remains strong.
And we Onboarded the number of new clients in the broker dealer and registered investment advisors space.
In the high growth wealth and advisory segment, we're investing in technology to improve the client experience as well as investing in talent and strengthening brand awareness.
One of our priorities is to meet emerging client needs as an investor preferences drive firms to transform for example, we're enabling clients to integrate our technology.
And leverage prebuilt business functions, such as trading reporting an asset movement without them, having to make big investments in their own technology. Overall, we're very excited about the potential for Persian.
Moving on to clearance in collateral management is a key differentiator for US Tri Party collateral management balances are up mainly the result of growth from existing clients and new business and to a lesser extend from last year's client conversions.
We're confident in the organic growth prospects of this business. We're currently rebuilding our platform to give our clients the ability to seamlessly move securities globally, as well as offer 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 corporate Trust, we're seeing benefits from the investments, we've made and structure products and we continue to build out capabilities to better serve clients. This is broadening our relationships, especially in the important alternative asset managers segment.
Treasury services, we've been refocusing on higher margin and high growth businesses, such as trade foreign exchange and our liquidity offering.
Our clients consistently tell me our service is excellent which reflects on the quality of our people. In addition, we're looking to build off the investments we've made in real time payments.
And asset management, we feel good about a number of the underlying strategies and continue to invest in the U.S. and build solutions to meet investor demand, we're actively launching new products across a number of areas, including fixed income products ESG enhance beta and multi asset solutions. For example, Alcentra raised 5.5 billion euros.
For its European direct lending fund double the minimum target.
We're investing in rebranding to consistently use the being why melon brand and make it easier to navigate our multi boutique model.
Lastly performance has been solid across many of the largest strategies.
Moving to wealth management, and strengthening our banking investment products and creating a strong foundation by investing in people technology and platform.
Now, let me turn briefly to our results for the third quarter EPS was a dollar seven thats up 1% versus a year ago total revenue was down 5% year over year and that was largely driven by net interest revenue.
A couple of items that impacted both revenue and expense and Mike will walk you through those in some detail.
Investment services fee lines were nearly were up nearly across the board as the investment decisions, we've been making are starting to yield some incremental positive results.
Operating margin was once again resilient to 33% and we continue to deliver strong capital returns to shareholders with that let me turn the call over to Mike.
Thanks, Todd Good morning, everyone. Let me run through the details of the results for the quarter all comparisons will be on a year over year basis, unless I specify otherwise.
Beginning on page three of the financial highlights document.
First the table the bottom of the paid summarizes a couple of notable items in the quarter that had a very small impact on earnings on net basis, but did impact net interest revenue and expenses I will describe later in more detail and as a reminder, the table also includes some items, we highlighted the third quarter of 2018.
This quarter total revenue was down 5% to 3.9 billion. The notable items negatively impacted revenue by a little under 1.5%.
The remaining decline primarily reflected lower net interest revenue the impact of prior outflows in asset management and lower performance fees.
As well as the impact of the stronger us dollar.
Total fee revenue was down 1% year on year investment services fees were up in most categories as Todd mentioned, excluding securities lending.
Net interest revenue was down 18%, partially driven by a 70 million dollar lease related impairment.
The impairment was for our legacy portfolio of leases and decreased net interest revenue by 8% and earnings per share by six cents.
<unk> expenses were down 5%, mainly reflecting $74 million net reduction of reserves that benefited noninterest expenses and increased earnings per share by approximately six cents.
This was related to a pretax charge that was recorded in the second quarter of 2014 in connection with potential tax related exposures of certain investment management funds that we manage.
Excluding this in the impact of lower litigation charges expenses were essentially flat a few other highlights from the page pre tax income declined by 4% to 1.3 billion.
Effective tax rate was 19.1% compared to 16.5% in the year ago quarter.
We generated a 1 billion in net income applicable to common shareholders earnings per share of $1.70 cents was up 1% and our pretax operating margin was 33%.
Now moving to capital and liquidity on page four.
Our capital liquidity ratios remain strong our key ratios were similar to the second quarter.
In equity tier one capital totaled 18.3 billion NRC easy one ratio was 11.1% under the advanced approach.
Our average LCR in the third quarter was 117%.
And our SLR was 6.1%.
Turning to page five.
My comments on the balance sheet will highlight the sequential changes as this is a better comparison for you.
Our average interest, earning assets increase due to client deposits driving our balance sheet higher.
The average rate earned on interest, earning assets declined in the third quarter, primarily as a result of the impairment that I mentioned earlier.
Excluding this the average rate would have been down only slightly.
The average rate was negatively impacted by the fed and SCB lowering interest rates.
This resulted in US short term rates moving lower by 20 to 30 basis points, while the long end was down by around 50 basis points since the second quarter.
Which impacted the yield on our securities portfolio.
This was partially offset by modest benefit from our repo activity.
Loans increased in clearance in collateral management and our trade loans grew with in Treasury services.
However, we continue to see low appetite to leverage in purging, which continues to impact our margin loan balances.
As expected noninterest bearing deposits declined while interest bearing deposits increased.
Deposit betas were broadly in line with our expectations.
And the net interest margin decreased by three basis points to 109 basis points, excluding the impairment.
Page six give you some more detail what the drivers of the net interest revenue declined versus the second quarter.
As I mentioned, we saw continued decline in average non interest bearing deposits, which had a negative impact on net interest revenue.
We had a benefit from the increase in average interest bearing deposits as well as lower deposit pricing due to the rate cuts.
Competitive pressure on deposit rate appears to have stabilized since the second quarter, but remains high.
The yield on the securities portfolio was down by 15 basis points, which more than offset the benefit of higher portfolio balances.
Loan balances were mixed with non margin loans up in margin loans down.
And coupled with lower rates as the assets are typically float floating rate is negatively impacted net interest revenue.
We continue to look for opportunities to deploy our balance sheet and took advantage of higher reverse repo rates, which modestly benefited net interest revenue.
As a reminder, reengage and limited hedging and funding activities that this quarter positively impacted interest revenue.
And our net interest margin by approximately two basis points.
There is an offset to that reflected an FX another trading.
Finally, the leasing related impairment of $70 million reduced net interest revenue book to 730 million.
Now paid seven detailed our expenses.
On a consolidated basis expenses of $2.6 billion were down 5%.
The decrease reflects the reduction of reserves for tax related exposure of certain investment management funds and the lower litigation expenses I mentioned earlier.
Excluding those items expenses were largely flat with our investments being offset by declines and other expenses.
Turning to page eight.
Total investment services revenue was down slightly.
Assets under custody and administration increased 4% year over year to 35.8 trillion, primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger us dollar.
Within asset servicing revenue was down 4% to 1.4 billion.
Primarily reflecting lower client activity securities lending revenue and net interest revenue as well as the unfavorable impact of a stronger us dollar.
As we have set in the task, we have not seen an acceleration in pricing pressure in the business.
Securities lending revenue continues to be negatively impacted by lower balances on the back of weak market demand and tighter spreads.
Foreign exchange other trading revenue was slightly down as FX volumes and volatility remains subdued.
Encouraging revenue was up 2% to 568 million.
Reflecting higher client asset values and accounts together with higher clearing and capacity volumes.
This was partially offset by lower net interest revenue.
Clearing services fees were up 7% as we continue to onboard new clients and we benefit from growth of existing clients, we encouraged by them.
The momentum we are building in the business with both our eyes and broker dealers.
Issuer services benefited from higher activity in depository receipts.
Revenue was up 3% to 466 million with 13% fee growth, mostly offset by lower net interest revenue.
Growth in corporate trust benefited from new business and volumes.
And depositary receipts revenue was up to the timing of fees and higher cross border cell activity.
Treasury services revenue was down 4% to 312 billion with fees up slightly year on year, while net interest revenue was lower.
Deposit balances increase year on year by over 20%.
Clearance in collateral management revenue was up 11% to 293 million due to higher clearance volumes related to heightened levels of U.S treasury issuance.
In recent quarters, a majority of our growth was driven by the client conversion from last year, but in the third quarter. This shifted with more than two thirds of the increase coming from existing and other new clients.
As a reminder of the client conversions were in the run rate starting in the fourth quarter of 2018.
An average Tri party collateral manager bells throughout 19%.
I also want to note that the recent volatility in the repo markets was not a driver of the revenue growth in clear as a collateral management.
Page nine summarizes the key drivers that affected the year over year revenue comparisons for each of our investment services businesses.
Turning to investment management on page 10.
Total investment management revenue was down 12%.
Asset management revenue was down 14% year over year to 605 million, primarily reflecting the cumulative a UN outflows since the third quarter of 2018 as well as lower performance fees the impact of hedging activities and the unfavorable impact of a stronger us dollar principally versus the British pound, which was.
Partially offset by higher market values.
Performance fees decreased due to a particularly strong Europe performance for our LTL.
Strategies last year.
Our largest revenue strategies continued solid performance over both short and longer timeframe.
We had inflows of $1 billion in the quarter, primarily driven by cash inflows an abatement in index outflows.
We had 11 billion of inflows into cash in $2 billion of inflows into fixed income products, while our other strategies outflows of $12 billion.
Overall assets under management of 1.9 trillion are up 3% year over year due to higher markets, partially offset by the unfavorable impact of a stronger us dollar in net outflows.
Wealth management revenue was down 8% year over year to 285 million, primarily reflecting lower net interest revenue, partially offset by higher market values.
Turning to our other segment on page 11.
Total revenue and net interest expense decreased year over year and sequentially, primarily reflecting the lease related impairment and corporate treasury activity.
Looking ahead to the fourth quarter. There are few things to consider with respect to net interest revenue market dynamics are changing quickly, but let me walk you through what we're seeing now which I remind you is very early and you should make your own assumptions as well.
The market appears to be pricing effect cut in October and another in early next year potentially January which impacts the forward curves.
We expect the average non interest bearing deposit balances will continue to come down.
As of now our interest bearing deposits are a little lower than the third quarter.
We do not expect this isn't the repo market to repeat themselves. This will negatively impact in interest revenue by approximately 1% versus the third quarter.
And we expect the portfolio yield to come down versus the third quarter.
If these assumptions persist we would expect the net interest revenue will be down sequentially by approximately 4% to 6% versus the lease adjusted net interest revenue in the third quarter.
In issuer services, we expect full year fees to be around the same as in 2018 give or take a little bit. So we expect a downtick in the fourth quarter.
As we announced during the third quarter, we entered into a definitive agreement to sell our interest in promontory inner financial network with an expected after tax gain of approximately 600 million.
We expect the transaction to close in the fourth quarter subject to approvals.
As we continue to streamline and optimize the company. We may look for opportunities to accelerate actions, which could result in pre tax charges in the fourth quarter in the range of 100 to 200 million.
And a reminder, that we had some notable items in the fourth quarter of 2018 something else the factor into your modeling.
With that operator can you. Please open up the lines for questions.
And so if you'd like to ask a question. Please press star one on your telephone keypad.
As a reminder, we ask that you please limit yourself to one question and one related follow up question.
Your first question comes from the line of Glenn Schorr with Evercore ISI.
Hello, Thanks, a lot.
I know, it's a different client base, but I'm curious if you think the pricing reductions in the broker side in the retail side of the broker land can have an impact on two years.
Having already a clearing business.
Could you help us think through that.
Sure Good morning, Glenn It's Todd.
Our business model was quite a bit different than the traders as you know we are a b to b, we're not at the to see business. So we don't actually charge commissions, we get paid on a number of different.
Different revenue streams like assets as well as the clearing and settlement. So we don't foresee this is having any material impact at this time.
Okay, and then maybe just a quick follow up on the on the and I.
I appreciate I just want make sure I wrote down the and I are down 4% to 6% versus the lease adjusted.
Number in the third quarter.
And could you just repeat that part I just want to make so that we get the right jumping off point.
For Fourq, you and rolling into the next year.
Yes, Hey, Glenn it's Mike if you look at six.
The deck the lease adjusted number for the third quarter was 800, so thats your that's you're jumping off points.
So the 4% to 6% off of that fees and you view.
In my commentary I also mentioned part of part of the decline is related to the modest benefit we saw from the repo activity in the third quarters, that's about as about a percent of it.
And the and the rest is just the cuts we've seen and the.
And the deposit migration.
Correct, yes, it's not net interest bearing deposits coming down a little bit it's the yield on the portfolio continuing to grind down a bit.
And it's and it's based on where we see deposit balances right now, which are a little bit lower than what we saw in the third quarter, but as you know it's very early in the quarter to.
Reject with a high degree of certainly at this point.
Okay, and I just want to make sure.
You saw some extra deposit flight in from from the repo mass in the quarter.
But but unclear.
If they stick around I'm, putting words in your math I just wanted to see what your thoughts on.
Yes, no I think the deposits we saw the incremental deposits. We saw in the third quarter were not necessarily related to the repo volatility that was just underlying client behavior. We made some money by deploying some of our excess liquidity into the repo market during those few days.
At that coupled with our cleared repo program that we've got for clients is where we made the extra money.
During those few days of the volatility.
And that wasn't that wasn't Glenn that wasn't a huge amount of money and we had we have a lot of liquidity. If there is a little bit of a distortion in the market will take advantage of it and we did and had a little bit of help but it didnt impact balances.
Okay I appreciate that thank you.
Your next question comes from the line of Brennan Hawken with.
Okay.
Good morning, guys. Thanks for taking the questions.
Todd first.
Just a quick one that's sort of a high level.
Just wanted to.
Interest in your thoughts on on level setting and very helpful to hear your comments in the beginning of the call but.
Clearly we had.
A bit of a movement on the top here with Dk with with.
Charlie moving on and you stepping in.
And so clearly you are part of the management team you've been at Bank of New York for very very long time to help the plan. So that seems straightforward, but can you help us maybe think about tactical time frames, how does the board thinking about their search at this point.
Most investors assume that youre going to be part of the consideration for that search is that fair.
And could you help us think about.
Just in the near term how there might be some tactical adjustments in strategy or is it going to be very very similar to how were.
How we've been going steady as she goes so to speak.
Okay, Brian there is a lot there, but let me start that with the change at the top the board executed its succession plan and it's going to the due diligence and it has initiated a surge and I have indicated my interest to be a part of that so that's in process and we don't have any.
Strict time frames on that one that'll that'll flow as it flows in terms of my own priorities and things in tactical that we're seeing.
Frankly, I've been in the middle of driving the change agenda, that's been going on that Charlie has led over the past couple of years and I really felt like I'm, an integral part of it actually of I've enjoyed it so what I'm not going to do is revert back to some of the ways that things were so we're going to continue to drive a very strong performance culture.
I see us holding ourselves more accountable we're expecting.
We really expect and demand excellence from each other and I'm not going to let that change. So that's a that's at the high level.
The investments that we're making in technology are going to continue they're going to be focused on a number of things not only that we make our services more resilience that we improves that client experience and where we're having some real success is around improving operational efficiency. So thats continues to be high on my list and I think theres a lot.
More than you would follow my next point here is that will will automate and continue to improve operations I think we've got a lot of tractions. There, we can point to a lot of successes and opportunity to do more.
Got to stay focused on regulatory relations given who we are what we're doing and so that will be a high priority and finally, Mike and I are pouring through the planning process and we've got to make good decisions around our investment opportunities. We have quite a number of them and that's actually that will be that will be funds. So I think it's been a very.
Smooth transition at this point I don't think anything has changed people and I really am quite pleased with the the leadership team how how.
Smoothly, they've they've moved on.
That's a that's great color. Thank you so much talk to that.
One.
A question here from Mike previously you guys had guided to the back half of 2019 being flat for operating expenses versus the back half of 2018 I believe it at the core expenses in the back half of 2018 were 5.4 billion looks like core expenses. This quarter was 2.7 that mean that we should be looking at core expenses for.
Fourth quarter to be roughly flat with core did this quarter is that fair.
Yes, I mean, I think give or take a little bit Brendan so, but yes, I think the guidance. We gave in terms of sort of being flat year on year still give or take a little bit still still holds.
Okay. Do you mean, you obviously laid out the charges, but that would not be core right.
Correct.
Thank you you have to look through that.
Perfect.
Your next question comes from the line of Gerard Cassidy with RBC.
Okay.
Morning drug.
And George you may be on mute.
Oh, Thank you I apologize about the it was on mute. Thank you.
Following up on your comments about the repo disruption and how you had a small benefit.
And I know you don't expect going forward can you guys give us any color is there any benefit of the trade Treasury now where the fed I should say coming back in there not calling a quantitative easing, but we know they're going to come in and start buying securities do you guys see any benefits for your.
Your business from their activities.
Well the fed conducts its open market transactions through repo and they do use our repo platform our Tri party platform for some of those transactions it would be very very modest if any impact.
To our revenue.
So it will obviously impact the rate at which repo trades, but it's a de minimis impact the the good news about the business in the Tri Party business in the collateral management business as it continues to grow. So we've seen we saw significant growth in the past in the past quarter some of that less than us to about a surge.
Or so of that was from the conversions that we had one from last year, but the rest of it is either new clients for additional growth with the existing clients collateral management and repo is it is growing as the unclear in margin rules grow and the and the demand for secured.
Credit grows so we like our position there I can go on more about this because we're one of our biggest investments is than what we call the future of collateral management and making our systems interoperable in a way that just makes it seamless for our clients to move collateral that'll have a huge benefit to them. So.
The key focus for us, but the disruption in the repo market had little if any impact.
Very good and then just as a follow up.
Give us good color on the sequential look into net interest revenue and what the forward curve is saying about future Fed fund rate cuts. If you guys could paints a picture for 2020, what would be in an ideal interest rate environment for you to benefit from from an interest.
Revenue standpoint.
Again I noted.
I want to hold you to it but just curious what would be that ideal environment.
Yes.
I'll take it im looking at like here.
A steeper yield curve and fewer theories is it really isn't a lot more complex than that.
Very good no I appreciate that thank you.
All right. Your next question comes from line of Kevin Houston Jefferies.
Hey, good morning, guys.
Just a couple of follow ups on the and I front on.
Hey, Mike So can you talk a little bit about it seems like if you were in the balance sheet were to be flattish from here even at the NIM. Obviously is still grinding down can you talk us through you mentioned in a little less competitiveness on the deposit side, but the dynamics of the asset portfolio repricing that whole the three three quarters aspect versus what you're seeing.
On the deposit betas can you give us some color on both sides of what you're seeing thanks.
Yes, and the port I'll start of the portfolio can and obviously the what you're seeing in the portfolio is yields continue to grind down as sort of rates have come down is really though.
No more complicated I think given that at about a third of our portfolio Reprices every quarter either through.
Purities maturing and get reinvested or through the floating rate.
Component of it.
And in most cases, you know the the rates on the in the portfolio are moving ahead of.
When the fed moves and so you're going to see a decline in the asset yields first.
And then when the fed moves you are able to move deposit pricing down and so you're going to have that lag and so as rates are declining it's in that it's it's negative as it has a negative impact.
During that during that period I think on the on the pricing side, what I said was pricing remains competitive although it's stabilized over the last 90 days hundred 20 days or so and so we're seeing.
Pretty consistent competition across a whole series of our competitors, but we're not seeing anything that irrational.
Process that right now.
Okay, and I guess as a follow up then so if if we just play it forward and give you look at your Youre looking at your forward curve and you mentioned the October and potentially early 20.
At what point do you see.
The yields on the asset side, starting to level out because of that three quarter.
That three quarter roll through Dec do we get to appoint an early next year, where you just kind of have flushed everything down how do we start to assess like one that bottoming point might happen.
Yes, I mean look I think that's the that's the question I think most people are thinking about and I think the as you sort of look at.
As you look at it it's really going to it starts to stabilize going forward start to stabilize right and I think when you look at forwards right now it's still declining.
As you look out in so I think when forward start to stabilize you'll start to see the portfolio yields stabilize as well.
Okay. Thanks, Mike appreciate it.
Your next question comes on line of Brian Kleinhanzl with KBW.
Great.
Two quick questions. One you mentioned that the promontory sale is going to close this quarter was that.
I mean that gain can be used for additional share repurchase if you decided to do that or was that already included in the seeker plan.
It's something we'll consider as we look forward for our capital plan next year. So so no. It was not included in our C Corp.
So we could put and takes effect.
Yes.
Okay, but you're not going to additional share repurchase this year.
We will we will consider it as part of the plan next year.
And then just focusing on the investment management business I mean negative operating leverage in there.
Year on year, I mean, what does it take to kind of generating positive operating leverage in that segment again.
Okay.
So if you if you look at our investment management business a number of the businesses are doing pretty well our LD business continues to grow our alts and credit business now centre is doing pretty well and in fact, our managers in the UK are doing reasonably well.
Where we are challenged is in our is in our business in the states.
And we've taken some steps to combine those businesses into what we now call Mellon, but but.
Until we see that stabilized it's going to be that's where the challenge really really resides.
So we need to see some improvement in the in the performance we think we.
By combining and there are things that we can do operationally to continue to manage the cost, but that's our focus point.
Okay, great. Thanks.
And next we'll go to Alex Blostein with Goldman Sachs.
Great Hey, good morning, guys.
Question around deposit growth this quarter, obviously pretty nice trends sequentially I know that's been a strategic focus for you guys to get a larger share kind of customers wallets overtime. So maybe talk a little bit about the sources of growth this quarter and sort of the traction you're getting in terms of wallet share gain thanks.
Hey, this is Mike.
As you highlighted we've been focused for the better part of a year or a little over that sort of really driving more share of client deposits.
Through a whole series of initiative that I think I mentioned in my commentary around Treasury services, which is a good example, where.
Deposits are up around 20% and I think Thats a great example, where it's not only about getting deposits. It also brings with it other other activity.
With that as we sort of go after that those relationships and I think that effort that we've got is really across every single one of our businesses with the asset servicing corporate Trust Treasury services wealth management, and I think to varying degrees. We've had success in in growing our share of operating deposits across the different lines.
Yes.
Yes, I would add to that Alex this was not a focus of ours.
Irrs on past, especially in a zero rate environment and with leverage ratios and so forth.
But today Weve established a couple of these campaigns and we've been pretty successful.
And and worry for a very attractive client for departure or counterparty for depositors' and what we can connect it to the businesses. It makes a lot of sense of the more we can get the payments business the more opportunity we've gotten too we've gotten to grow our our deposit base. So it's largely just just increase focus.
And targeted campaigns.
Got it thanks.
And more Cocker My question, I guess with the fat being back in the market buying T bells.
Historically, we kind of view.
The tree base of because banks somewhat correlated with the level of excess reserves and then like system.
What does create a similar dynamics in other words, if the fed becomes again more aggressive in buying back our treasuries and bells without the overall helper to the south bound she has been going forward. Thanks.
I think.
I mean, the deposits have been correlated either in the past two excess reserves, but you sort of you really need to look at it over a period of time.
In any given quarter that may or may not be the case and we'll see how the most recent.
Announcement in activity levels sort of play out and the feds just getting into the market now with this week.
I think some of those trade settle later in the weak for the first time and so I think it's too early to know exactly what impact is going to have.
I think you really need to think about it over some period of time and quarter to quarter. It may not play out exactly as.
The historical trend might indicate.
Okay. Next question comes on line of Brian Patel with Deutsche Bank.
Yes.
Great. Thanks very much.
A question for both Todd and Mike on the expenses, if I think Mike you mentioned, if I have to write this down correctly.
On an estimate of 100 to 200 million of restructuring charges.
In the fourth quarter.
If you can talk about the.
Underlying expense.
That is projected to reduce I guess going into into next year, I guess I'm cognizant of that you'd probably want to guidance for next year, yet, but just to get a sense of that and that gets bigger picture Todd you talked a long time.
For a long time about investing in technology to increasingly automate the business and reduce that operational costs and.
Done a lot over the last several years in making progress on that so just trying to get a sense of as we move forward over the next day one to two years is this.
Do we have a lot more runway in those initiatives to the extent that we can keep the the expenses at least at least flat for the organization.
Or even down.
Okay, Brian what I think though the latter part of that and I'll hand, it over to Mike for the.
Earlier part of the question.
We've got nearly a 100 programs in place. So we do continue to see significant opportunity to automate a lot more.
Things like reconciliations when we look at the accounting platforms in the in the NAV calculations. There are still many manual processes in there that we are that we are targeting so I kind of look at and there are still.
Locations that weekend that we need to we need to manage where there is opportunity and as we look out to 2020 on some of the things that we can accelerate.
Ill call out.
Couple of items number one I think around reconciliations we can increase.
We can increase the scalability and glad we've actually been applying machine learning and creating much much more automated reckons automated reconciliation process doesnt seem like a lot, but if you think about what we do as a company aneurysm. It is a massive undertaking with a huge amount of head to head count dedicated to it.
We're also investing in a client inquiries system, where we'll digitize all of the clients inquiries into us that doesn't sound like a lot either but if you can imagine the millions of transactions that we process. If we can automate how we capture.
Inquiries around it we are also automating our instruction capture and.
And.
As I mentioned earlier theres opportunity for us to do more around the accounting services.
Then striking net asset values. So the so as I look out over the next two or three years. This is not a we're not stopping theres a lot more than I think we can do here.
Yes, I think as you as you think about the the charges and investments we're making it we've got a very disciplined process to look at the ROI is in the payback periods for each of the investments and.
We do that for for all of them. So you should assume we're doing that as we as we look at the investments we're making.
Okay. That's great color and then just a follow up on the asset servicing I think Todd you talked about increasing some of the servicing capabilities for alternatives.
Do you feel that you're the platform that you have for that right now is adequate to do that or or are there potential significant enhancements to come either either organically or through acquisition and I guess could you leverage Blackrocks you front recently acquired you fund platform and he's got the relationship with the lab.
Yes, I mean, the let me go to the beginning of that when we look at the the real estate servicing business.
We're growing that quite rapidly from investments that we've made previously and that just continuing to capture the markets. So we.
We see opportunity there without a whole lot of more investment left obviously keep.
Keep the platform current where we are making some investments more around private equity.
And credits.
Platforms, and we've got potential a couple of potential wins, there and we are not just looking at Blackrock, but others.
Yeah.
Potential partnerships that we might be able to leverage as well. So yes, we think in the all space without a huge amount of investment we can continue to capture.
Some growth and some market share.
Got it.
Thanks very much.
And once again, everyone that a star one if you'd like to ask a question at this time.
Our next question comes from the line of Mike Carrier with Bank of America.
Good morning, Thanks for taking the questions.
Maybe first just given some of the traction you're seeing in permitting and collateral management.
Larry.
They get from today in terms of maybe market share market share and which strategies you put in place to drive additional organic growth in bringing on additional clients.
Okay, well I'll start with collateral management first so if you think about our collateral management business.
It's primarily around Tri party repo, but there are also on cleared margin rules that are going into effect, where the buy side now has declared realize its derivative transactions.
And those are phased in and so that market is actually growing. So we are benefiting from from that where we're investing is to make it seamless for our clients to move collateral around the world on our platforms, which will make them much more efficient effectively what it does for them. It reduces the amount of liquidity and capital is they have to commit to their own business. So.
Average real funding benefits to them. So they are they're quite excited about it. The other thing were doing is we're investing in the automation of the rule set. So if you think about the Tri Party repo two parties have that rules.
And weve automated out rather than making it a manual process, which makes it much much easier for them to.
To initiate transactions. So that's number one number two if you look at the world's repo market only about 25% of that uses Tri party today and as we provide these type of services make it much more attractive for people that are doing things what they qualify laughter.
Bilateral repo is doing a directly so we think we can either use Tri party services or access to custodian. So we think there is growth potential there. So that's one of the things that we're driving for and that'll be a two year process and we're pretty excited about the prospects there there's a lot going on in the space.
The other question was around purging, but same question the.
Pershing, it's a little less impactful on the on the on the collateral management space versions really providing clearance in custody for broker dealers investment advisors.
And to some extent theres, some prime business, there with hedge funds as well and the duty there as that market is growing the advisory businesses growing create quite rapidly we're on the corporate side of that so.
There was some lost business due to consolidations, we've now implemented.
Enough new business to start to offset that I think Mike has made that very clear on previous earnings calls and so we see the we see ourselves and the potential to sort of showing some growth.
All right. That's helpful. And then just a quick cleanup Mike just on the reserve release did you fully exit the exposure on the utility and anything on the tax rate is on the low end any update in terms of the guidance to the Alan.
We did fully.
Those of the exposure for the utility so there is no more left.
On the tax rates.
It's a little noisy just given the ins and outs this year.
But we havent, we haven't given full year guidance, but what we said in the past the sort of 21, plus or minus my guess is will be a little bit below the 21.
Okay. Thanks.
Next question comes from the line of Rob Wild Heck with autonomous research.
Hi, good morning, guys any.
Business can you give us some details are some thoughts on client attrition, how that's performing recently versus prior years, and what you're doing to maybe improve retention.
Rob you your phone like gave out there a little bit which business, you're talking about which business was it.
The core business.
The asset servicing business.
Sure I'll think Sean Todd can add some color in there.
I think as we as we look at the things that we're doing to continue to improve the quality of the service. We have that is directly aimed at.
Continuing to reduce attrition and improve the service levels for for our clients and I think where we have put focus on on that with our largest clients. We're seeing really good traction.
And and results I think so when you look at the impact that client losses or attrition had in the quarter is pretty similar to what you would have seen over over the last number of quarters or a couple of years.
Okay. Thanks, and then.
Todd You mentioned, you know decision, making around upcoming investment opportunities seems like we've talked about a few of them here, but maybe at a higher level can you talk about your priorities and you know any additional color on on the opportunities you're most excited about thank you.
Yeah the.
The priorities earlier in the really continue to basically be continue with the change agenda that I've been part over the past couple of years.
And I look forward to continuing to drive that so we're not going to revert to practices.
That were weaker than where I think we are now that that's for sure in terms of right now right, where I think we're seeing opportunities is in the is in the wealth space around purging in our own wealth management business in the in the.
If you've talked about the claro mid business, probably too much detail at today give you a lot of color there, but asset servicing still has quite a few opportunities we talked a little bit about all but to mikes earlier point around attrition as long as our capabilities are as strong as they are in our services as good as Rick.
It is the attrition rate will go down and I think that.
I think we'll keep moving the needle and you're always going to have some clients leave for some reason or other we've got to make it more and more difficult for them I believe that's why we're pretty keen on these.
On these partnerships that we've had the one that we announced with Bloomberg in the quarter is another another indication of that and by being able to make it much more convenient for them to do business with us by a single sign on through Bloomberg to get at all kinds of custody information makes it more difficult believe and that's that's what we want to do.
Got it thank you.
Thank you Rob.
All right. Thanks, everyone. We'll talk to you next time.
Thank you. This concludes today's conference call a replay of this conference will be available on the be in why melon Investor Relations website at two P.M. Eastern standard time today have a good day.