Q4 2019 Earnings Call
Please standby we're about to begin.
Good morning, and welcome to de fourth quarter 2019 earnings Conference call hosted by being my knowledge. At this time all participants are in a listen only mode. Later, we will conduct a question answer session. Please note that this conference call webcast will be recorded and will consist of copyrighted material you may not record or read.
Broadcast these materials without being my melons consent.
I'll turn the call over to magnet poaching SCO feeling melons global head of Investor Relations. Please go ahead.
Good morning today being one that when we need its itself so the fourth quarter 2019.
Our country needs and the financial highlights presentation to accompany this call.
On the website in one that was so.
Oh, good thing being one another's interim see.
Cool then like something of a female our CFO will take you through our earnings presentation.
So in my prepared remarks.
Your next question as a reminder to please limit yourself that you question.
Once again, please note that our remarks today may include forward looking statement.
Actual results may differ materially indicated or implied or forward looking statements I've been very structured including those identified in the cautionary statement <unk> earnings press release.
Financial highlights the presentation and you know documents filed with the FCC all available on our website.
Looking statements made on this call speak only as of today January 16th 2020 I will not be updated.
I will hand over to talk.
Thank you Brenda and good morning, everyone.
I'll briefly highlight the fourth quarter and the full year financial results and then focus most of my comments highlighting the progress we made in 2019.
As well as outlined in our priorities for 2020 Michael.
Yeah financials, and a much more detail.
Fourth quarter, we reported earnings of $1.4 billion and earnings per share a dollar [laughter] true. This includes the positive impact 50 cents per share from notable items, which Mike will discuss.
For the full year on an adjusted basis. He P. S $4.02 on revenues of 15.7 billion.
<unk> expenses were down slightly it's we identified and implemented efficiencies to more than offset the increase in technology investments.
What that means is we actually delivered hundreds of millions of dollars a real productivity and we had solid solid operating margins of approximately 32%.
We generated over $5 billion of capital in 2019, returning more than 100% of earnings to shareholders through dividends and buybacks.
While at the same time, maintaining a strong capital position.
Thing for growth and achieving a solid return on tangible common equity that's greater than 20 person.
What's your thought without its challenges, however, and notably those included interest rate cuts or the U.S. and while some equity markets hit new highs client activity levels were constrained in many of our business.
Despite this season investment services were resilient and we saw some modest organic revenue growth.
We also delivered strong operating margins in capital returns for our shareholders.
We built a solid foundation in 2019, including substantial investment in technology and talent well operations executed a significant number of strategic programs in 2019.
That will drive efficiency reduce risk and enhance the client experience.
Looking at our progress across our business portfolio, let's start with asset servicing we're taking action to ensure we consistently provide excellent service quality. The pipeline is growing and we announced important new wins in 2019 across different geography is both asset older asset manager sectors.
We created some exciting partnerships with leading front often system providers, namely Aladdin Bloomberg and most recently some core.
I need to provide our clients would open architecture that gives them choice and flexibility.
Well, it's still early these partnerships are strengthening our offering and they're helping us win new business.
We enhanced our capabilities and alternatives and <unk>, which have strong growth prospects.
And we're expanding the range of data analytical applications available to our clients, where our strong position in data management accounting performance and distribution analytics position us to deepen our relationships.
We've made good progress and monitoring and nurturing client relationships and improving the quality of work in services. We provide day in day out for our clients. This is already in driving improved client satisfaction and lower attrition rates.
In purging, we're seeing fee growth coming through and are excited about the future to this business.
The industry is evolving and we're confident that our market leadership and strategy will position us well going forward.
We ended the year strongest pipeline in many years with institutional broker dealers and in the are a space.
We continue to onboard these new plants, each quarter and to add to build the future pipeline.
Across the industry consolidation is helping make Persians open architecture increasingly attractive to our clients.
We're accelerating investments and the advisory segment strengthening market leadership, and the broker dealer segment and continuing to develop at the front end technology, including integration with third party providers to deliver state of the art experiences and analytics to advisors and their investors.
All these are making I couldn't even better partner to our clients.
And clearance in Cairo management, where we are the clear leader, we delivered strong financial performance in 2019.
We saw organic fee growth over the course of the year driven by existing clients and new business as well as clients Onboarded in 2018, who increased their business with us.
We see continued growth opportunity in this business from structural and regulatory changes.
The provision services to bilateral repos and for modernizing our platform to give our clients the ability to seamlessly move their collateral.
Fair enhancing our platform to allow clients have access to more real time data and self service schools.
We also continue to automate manual processes to reduce risk and improve operational efficiencies and we are improving the client experience by introducing new digitally enhanced capabilities.
Yeah sure services, we're building out capabilities, which is broadening our relationships, we gain market share and corporate trust and drove new business across a number of our key products, such as structured and really Doug as well as insurance linked securities.
Our ongoing roll out of the new loan servicing platform is enabling us to be more responsive to our clients and deliver that more functionality.
Investing in automated capabilities in digitizing workflows tools to offer clients simplified access to services and data to help and minimize risk increase control and gain efficiency. Our treasury service business had scale at a reputation for excellence service that relationship coverage, which are the result of the investments we've made in talent and our.
Product offerings.
With over $2 billion of institutional payments per day, we're a very meaningful partner for clients in 2019, we successfully refocused on higher margin business, such as liquidity and payments our deposit initiative grew high quality stable balances by around 18% in 2019.
Our technology investments and Treasury services have been centered on advancements in real time solutions and operational efficiency to increase the straight through processing rates, both of which further enhances the client experience.
In asset management, the financial results were negatively impacted by outflows over the last year.
Formans, however has been solid across many of the largest strategies, including equities and multi asset classes that combined with the investment new products across the platform is helping to improve the pipeline.
We have seen improved performance and new Walter's God and Alcentra and we continue to believe that there is an important role for active strategies, including LDR going forward.
Our wealth management business will benefit over the long term from our increased investments as well as strong leadership.
We are expanding our salesforce strike their banking investment product set and delivering digital tools to benefit both our advisors and clients and create a leading experience.
No overarching all of our business is our consistent investment in technology, our technology priority center on improving quality developing innovative products and services and enhancing efficiency for our clients, which in turn creates cost savings for us as well as for them.
We're transforming our infrastructure and expanding our data and analytic solutions and the use of Npis to continue to create an open platform.
Flooring artificial intelligence and machine learning to simplify processes and proactively deliver additional insights to clients such as improved analytics to increased distribution of their own products.
We're embracing partnerships in November for example, we hosted a well received inaugural Fintech connect conference.
We recently announced new collaborations with a number of <unk> tax to expand our capabilities, including one this week that will enable us to deliver a new suite of oversight and contingent net asset value calculation solutions for clients.
This is just the beginning.
It operations, we had numerous initiatives in place across the businesses that are already yielding efficiencies that we are able to reinvest to support new business initiatives and further efficiency and automation efforts.
For example, a corporate action elections increased automation has significantly reduced the number of transactions that we process manually while offering our clients and best in class cut off guys.
In the payment space, we continue to enhance our straight through processing rate, we reached a record 97% lumpy December that's up from 94% year ago.
And then fund accounting, we've deployed self service capabilities for reporting.
Automated over 2000 client reports.
One of the recently announced partnerships, enabling us to launch in AI based reconciliation and data control solution aimed at better serving our clients complex data needs.
Other partnerships are helping us do things such as Reimagine, the billing process and employee AI to resolve client inquiries faster.
Across the company, we've been disappointed about the investments, we're making and are focused on driving efficiency in our technology spend.
As an example would simplify our infrastructure and we're reducing the number of applications, which are now down 10% over the past 18 months or so in the next 12 months will be reduced by another 10% plus.
Total reduction of 20% plus an applications over two to three year period.
So to summarize 2019, while we have more work to do where on the right path. We're beginning to see the benefits of the investments made over recent years and we'll continue to invest and we've made progress and a host of emissions, while maintaining strong operating margins in capital returns.
As we look to 2020, our priorities are unchanged.
They are centered on one driving sustainable revenue growth through a strong performance culture.
Focused on improving service quality as well as fostering faster innovation.
To improving every aspect that we can within our operations maintain our investment in technology is key to this overall technology spend for 2020 is expected to exceed the $3 billion. We spent in 2019.
Three were continuing to drive efficiency throughout the organization through automation as well as good expense discipline.
And for ensuring we continued to deliver strong capital returns to shareholders.
In closing, we're confident in our plans and our ability to execute on them, while always looking for opportunities to improve.
We have a great team and a great Foundation and we're excited about the future prospects for the for.
With that I'll turn it over to Mike to review the financial results in more detail.
Thanks, Todd and 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.
Hi, otherwise.
Beginning on page four of the financial highlights document.
The final quarter of 2018 net earnings of 1.4 billion and earnings per share of $1.52.
The current and prior year quarters included a number of notable items.
The notable items for the fourth quarter of 2018 or costs related to severance the relocation of our corporate headquarters and litigation expenses, partially offset by some tax adjustments reducing earnings by 16 cents per share.
The fourth quarter 2018, we benefited by 50 cents per share for the gain on the sale of an equity investment, partially offset by severance that security losses and litigation expenses.
Total revenue was four point Dan.
<unk> revenue increased 26% with all that from the gain on the sale the equity investment.
Other line that investment services fees were up.
Foreign exchange other trading was down in most other why that is relatively flat.
Net interest revenue declined 8% to 815 million.
Expenses were down slightly but excluding the notable items are up 2%.
The increase driven by technology.
We generated 1.4 billion in net income for common shareholders or 934 million excluding notable items.
We continue to have a strong return on tangible common equity and maintain a solid pre tax margin.
In terms of shareholder capital returns, we repurchased approximately 22 million shares were just over a billion dollars and paid 286 million dividends in the fourth quarter.
We reduced the number of shares outstanding by a little over 6% since beginning of 2019.
For the full year 2018 were returned 4.4 billion to common shareholders.
Which is over 100% of earnings through 3.3 billion of share repurchases and approximately 1.1 billion in dividends.
Moving now to capital liquidity at age sex.
Our capital liquidity ratios remained strong.
All of our key ratios were strengthening since the third quarter.
Common equity tier one capital totaled 18.5 billion at at the end of the year at our Cetone ratio was 11.5% or the advanced approach.
Our average LCR the fourth quarter was 120%.
Our SLR with 6.1%.
Could any impact to the recent change to the rule RSR would've been approximately 120 basis points higher.
Turning to page seven.
My comments on the balance sheet will highlight the sequential changes.
Net interest revenue was 815 million up almost 2% versus the leases adjusted net interest revenue in the third quarter.
As we had mentioned previously we had been focused on growing and optimizing our deposit base for the last 18 months or so.
For example, we've been working with wealth management clients to convert their Castro off balance sheet investments to on balance sheet deposits.
Our sales teams have been focused on attracting additional quite deposits and other businesses and we've been targeting escrow and other opportunities while being disciplined about pricing.
All these initiatives in some of the macro factors contributed to the result.
The activity that drove the outperformance versus our expectations came in the last few weeks the year and some of it was episodic.
Now as you look at the drivers or non interest bearing an interest bearing deposits increased across our businesses.
Non interest bearing an interest bearing deposits related to some targeted activity.
Including episodic corporate actions and other activities.
We do not expect to repeat in Q1.
Margin in non larger loans and our securities portfolio balance increased modestly.
The loan balances were driven by increased quite tomorrow.
The yield that interest, earning assets continued to decline as expected due to the decline in short term rates as the fed cut rates at the end of third quarter and again in October .
The increase in intermediate and long term interest rates was helpful. But the overall yield on the securities portfolio loans that other interest, earning assets declined the short term rates had a bigger impact sequentially.
We also made minor adjustments to our securities portfolio, it should modestly enhance the yield going forward.
The reduction that asset yields was partially offset by lower deposit rates and other selling costs.
Lastly at the end of December we did benefit modestly from higher spreads activity level, when I put in retail business and for the money we deployed anniversary go yearend.
Although we believe the over here and hopefully normalize we were able to lock in countries in reverse repos were between three and 4%.
We expect your pricing to repeat again in Q1.
All this activity resulted in our net interest margin remained flat at 109 basis points versus the lease adjusted NIM in the third quarter.
As we've said in the past we're focused on driving higher net interest revenue and we will continue to take advantage of low risk opportunities, if they're not NIM accretive.
Page eight give some more detail about the drivers of that interest revenue increase versus the third quarter.
You can see how to increase Clyde auto volumes higher interest, earning assets lower funding costs benefited our that it's just rather than this more than offset the decline and interest earning asset yields.
Page nine detailed our expenses.
Our consolidated basis expenses, a three day were down slightly.
The decrease was mostly due to the impact of expenses associated with the relocation of our headquarters.
For 2018 and lower litigation.
Excluding notable items expenses are up 2%, primarily reflecting the continued investments in technology.
Turning to page 10.
Total investment services revenue was down 2%.
Assets under custody and administration increased 12% year over year to 37.1 trillion.
I really reflecting higher market values and client inflows.
Although the higher market levels were a bigger driver you did see good organic you see a growth throughout the course of the or.
Within asset servicing revenue was down 3% to 1.4 billion.
Primarily reflecting lower that interest revenue and volatility impacting foreign exchange revenue, partially offset by the impact of higher equity markets.
Asset servicing fees in this business were up slightly.
Foreign exchange other trading revenue was down 7% due to lower foreign exchange volatility and volumes.
The pipeline continues or a healthy dialogue with clients remains active and we're not seeing an acceleration pricing pressure.
Encouraging total revenue was up 2% to 570 million.
Clearing fees were up 6%, reflecting growth in quite assets and accounts from new business Onboarded and from existing clients, which was partially offset by lower net interest revenue.
It's your services was down 6% to 450 million on lower depository receipt revenue, which was partially offset by higher client activity in corporate trust.
The decline in depository receipts, rather there was due to the timing of fees and cross border saw that activity as well as lower that it's just really.
Treasury services revenue was flat at very informative as higher client activity a payment these were offset by lower net interest revenue.
Into up 6%.
Sequentially Treasury services revenue was up 5% driven by higher net interest revenue.
Clearance in cloud and their revenue was up 1% to 280 million.
Reflecting growth in collateral management and clarify ends.
Which were mostly offset by lower net interest revenue.
Average Tri party carve out hit balances were up 12%.
Page 11 summarizes the key drivers that affected the year over year revenue comparisons for each of our investment services business.
Now turning to page 12 for investment management.
Total lesson management revenue was up 1%.
Asset manager revenue was up 4% year over year to 688 million, primarily reflecting higher market values and the impact of hedging activities, partially offset by the people that you have outflows since the fourth quarter of 2018.
Performance fees of 48 million were down from the fourth quarter two other than team, which was one of our stronger quarters in a while.
We had outflows of 13 during the quarter.
Overall assets under management of 1.9 trillion were up 11% year over year due to higher markets in the favorable impact to the weaker U.S. dollar partially offset by net outflows.
The sequential market impact is negative due to lower in UK fixed income market values, which more than offset.
The impact will be increased equity market values, a managed assets.
Wealth management revenues down 5% year over year to 287 million.
Primarily reflecting lower interest revenue, partially offset by slightly higher fees that benefited from higher market values.
Hi assets grew 11% year on year.
Turning to our other segment on page 13.
Total rather increase reflecting the previously referenced gain on sale of the equity investment.
Actually offset for the net securities losses that are due to a small portfolio rebalancing.
Now before we open to questions I'll spend just a few minutes on how we're thinking about the first quarter in 2020.
As I mentioned earlier that its shut in the fourth quarter was better than expected in part due to some episodic balances so.
As part of the quarter, both interest bearing noninterest bearing deposits volumes are lower than the elevated levels in December .
We expect to the yield on our securities portfolio in two new grind down with lower reinvestment yields.
And therefore, we expect that it's just revenue to be down a little less than 5% sequentially the first quarter.
We expect that net interest revenue would stabilize later in the here at the forward curve remained stable and Steve, but a little the mix of deposits don't change significantly and at the impact of lower rates on the balance sheet become more fully incorporated into the results.
And just a reminder, that approximately 30% of securities portfolio Reprices each quarter.
We will continue to actively focused on growing deposits optimizing the mix between on and off balance sheet offerings and being disciplined about pricing.
The fed actions to increase excess reserves should be helpful. As they've been historically correlated to the level or of our deposit is.
Just to keep in mind that relationship made a hole in the short laws or at any given quarter.
We would expect that investment in other income to be between 25 to 35 million per quarter for the year with regard to expenses Todd spoke about the importance of consistently investing in technology.
We expect that the level of technology investment will be up from 2018.
We can calibrate the pace of that investment if we need to.
This will lead our overall expenses for the full year of 2020 to increase by up to 2% year on year, excluding notable items.
Included is approximately 50 basis point impact from accounting related to higher pension expense.
Now keep in mind that charge, we took in the fourth quarter for severance reflects the actions that will take place over the year. So we won't see the full run rate impact until 2021.
And no set in the first quarter staff expenses will be impacted by the acceleration of long term incentive compensation expense.
The retirement eligible employees the impact of which will be similar to last year. It will affect sequential extensive.
At this point, we currently expect the full year 2020 effective tax rate will be approximately 21%.
And lastly on the regulatory front, we are quickly entering this year see CCAR process and are waiting next steps in the capital reform proposals, we continue to be encouraged by the direction other proposals being discussed, but we'll all see the final outcome at impact when they are complete.
With that operator can you. Please open the lines for questions.
Thank you if you'd like to asking a question. Please press star one on your telephone keypad.
Our first question comes from a line of Brian but dealt with Deutsche Bank. Please go ahead.
Great. Thanks, Good morning, guys I'm, just come and maybe just back on the since real quick if you and feeding press release, the application between severance and litigation in the fourth quarter.
And as we think about the expense trajectory.
Into 2020, and even 21, you just talk about and investments in technology, how you expect that to reduce the structural cost space over the next couple of years.
Yeah, Hey, Brian It's Mike I'm sort of the first piece, we didnt disclose the exact number in the split between the two you get a pretty good sense of the magnitude as evidenced by looking at staff expense and the difference versus the third quarter. So I'll give you Gibson.
They're.
Peter piece by far with severance.
In a number.
As you sort of thinking about overall expenses at both on and I mentioned, we expect to invest.
More this year than we did in 2019.
It really is it's across a range of items, both you know continuing to.
Build out our infrastructure.
We're operating or businesses were building new capabilities, and you're seeing some of those get announced and used.
Even though the last.
Couple of weeks and then there was a you know there's a a large chunk of that's going into sort of the efficiency agenda cost side as you sort of.
Adjusted there.
You know working with.
Less around government of operations, you got a very long list of those.
Programs that were just tweaking down the list and executing and as you as you can imagine.
The benefits of those continue to come in you know over over good times, we'll get some of them in 2020, and we'll get some of them as we sort of exit.
On the engine into 21.
And not just sort of reports, which Hans is in his remarks.
You can see the benefits of those investments and efficiency agenda, I mean, do you know already.
As we sort of increase the technology spend significantly and 19 in overall you know expenses are down and that's the results of that that that focus.
Okay. That's helpful events, and then and clearing I'm just from the actual clearing.
Service fees for 21.
Just given where the markets have you been dirts and young on brokerage industry and we've been pretty strong. If you wanted just I would've expected Atlanta, you little bit stronger in the fourth quarter on sequential basis, if there's anything.
You can call I wouldn't you be depressed that and then maybe longer term you talked about would be pursuing in your age strategy.
Maybe what are your expectation to potentially picking 'em market share given the industry consolidation that's a that's.
Thats opponents here.
Okay. Thanks.
I will take some of it in terms of the yeah. One I think the second piece turns of the of the industry consolidation and how we kind of looked at that I mean, we're a little different because pricing is more either the and lease or broker dealers and corporate lotteries.
And we've also kind of differentiated ourselves because we provided choice whether that's related to the open investment platform that we've got.
For the ability to integrate best in class Kinda front end front office and system. So so the our clients have the situation as far as that goes I think back in the long term people preference.
Right now the desire for choice seems to make it more of an opportunity when I mean by that.
Nation, probably.
As we look at it makes it more of an awful lot of interest.
Turning to providers and that's it puts us in a better position has to be as to the revenue growth I think were seems.
Pretty decent positive.
One something meaningful business that we are.
Oh, My Gosh, I mean, yeah.
System, you have run on our aren't revenues you were not a commission be you know.
The stream. So most of the revenue that you know we see computing reserves. You line is not based on number of transactions that are getting executed.
She is very small piece of the modular so you won't see the scene.
Seem correlation between.
Auction activity on revenue stream as you might.
But we got a pretty strong pipeline there we continue to win new business differentiated on the institutional side. So we're lucky.
And and we're investing on the advisory side, both in the sales as well as.
The sales team and branding as well as the technology that we're deploying so we feel pretty good about business.
Yeah, Thanks very much.
Thank you. Our next question comes from the liner Brennan Hawken with U.S. Please go ahead.
Hi, Good morning, Thanks for taking my questions I'm just wanted to ask a couple for Sun on expenses, you guys guided to and expense north of 2% unless so you use the expectation that you're going to be able to deliver operating leverage and therefore, you expect there to be.
Revenue growth picture, that's going to be you know at least 2% maybe you would have greater and can you help us understand why there's such a big away on the severance benefits. Thanks.
Thanks, Brent I'll I'll take that started that doesn't like and provide a little more color.
In terms of the environment delivering positive operating leverage.
Bye.
As much as anything right now as we continue to make investments in the technology, but we think longer term benefits to us. So I think it would be certainly not impossible that challenged me Barry.
Oh.
Yeah, and you think the run in your one sort of get through you know the and I are a stabilization we feel very confident still sort of in sort of the model, where you know a little bit of revenue growth driver you know a significant amount of earnings growth and so we think that still we feel great.
That's doable.
And once and I are stabilizes as I mentioned, we do you know under.
The assumptions and sort of gave you do that happens later this year.
You know you should start to see some of that come back in.
Sure.
Great that's fair and on that point Mike.
You know, we there were some encouraging.
Signs here on the non interest bearing deposits can you talk a little bit give us a little more color on trends there in that line. This quarter and you know how sustainable should we I know you think you said that they're down from December levels.
Which is probably pretty seasonally typical but.
Like with the interest rates coming down in the market should just that Oh, those trends now like more durable some stability there and maybe even some growth and do you have some deposit efforts specifically intended to help support gross in that line as well.
Yeah.
You know I'll turn the last seasons are trying to meet your Italy points, but.
You mean.
This in my script, you we've been sort of you know focused on this for a while now and that includes going after opportunities, whether there's noninterest bearing deposits and.
Part of the episodic.
He was on the fourth quarter was very targeted activity that you asked are related to escrow and as an example, where there were some you may begin sort of transactions. There you know, it's hard to predict when they're going to calm and how they're going to calm, but it's not enough intentional locked on our parts or go out and target you know those offer offer.
Communities.
As you sort of thinking about the path forward I think the macro environment certainly should be helpful. And we're encouraged by sort of the level of dialogue in the MTV we're seeing.
And we'll have to lay out a little bit longer to sort of call. They you know a sustainable trend.
Yeah, you guys have you guys have picked up on the correlations with its balance sheet impact.
Well, that's about it could be somewhat positive.
And then the you know the rest of it is gonna be also rate driven so there's a change in rate environment.
Because essentially.
As well.
Okay. Thanks to the talk.
Thank you. Our next question comes from the line Betsy Graseck with Morgan Stanley . Please go ahead.
Hi, good morning.
[noise] when investing.
Part at the beginning you highlighted a variety of areas that should be able to deliver growth I wondered if you could give us a sensors to what is the most important one or two areas that you're looking for to deliver growth since here and I'm asking the question part to understand the contacts for the investment spending.
Where where it's most critical for you.
Okay, well I think the investment spend is kind of coming across the board.
So we're spending my talk a little bit about just doing.
Longer and stronger infrastructure for resiliency was just provides an increasing the quality of our services.
We are investing in integrating third party capabilities, which I think.
And shooter.
We are investing in improving operations and we're starting to see positive feedback from that in this for cars that are clients coupon bonds.
The most important thing is to retain business.
Bonnie Raitt service.
Covering and increasingly better capabilities around that service, it's difficult for clients.
The lead.
In terms of initiatives that might drive future revenues are really.
For four areas, where almost four programs.
One is the thing that we've talked about in the Purion collateral management. So we are building into operable Tri Party system, which we think will make our clients much more effective in managing their collateral.
And as a result, we can pick up some of the global market share and also provide some of those services to weather traditionally been why launch phase that's a long that's probably another you're watching but really.
Thank you said, but we're starting to see the but some of the benefits from that.
One or other focus areas around data and analytics.
And I think this is going to be increasingly.
Competitive advantage for us as we build we currently with the Eagle have approximately 24 trillion dollars.
Assets under management. He goes the the old brand name of our data and analytics capability.
As we have as Weve.
Built on that platform.
What we call it either but we think we've got an exciting.
Where we will she wrote.
This year and and will provide the ability to do.
Our clients deep analysis around unstructured data that's on our platform.
We're investing in our wealth management platform, that's more long term as well and we've already talked a little bit about the investments that we're making.
Persian so I'd say those four.
In terms of.
And ER.
Or where like he focuses.
Got it kind of tough.
No I think I think the Knickerbocker Tyson on that on the bigger priorities, but I think the good news a good part is at each of the we really do feel that each of the businesses still have some opportunity to grow some of them required bigger investments and require smaller investment and so I think we're focused really on each of them make sure we get 'em, we take advantage of those opportunities.
Okay. Thanks, and then like for you on specifically are you know touching chime in too but on the capital you highlighted that the SLR under the new well would be up seen I think to Watson three or 17% like that I know, that's that's called many times about craft and what your intentions are there.
Now do we have a final rule set and maybe you can speak to what opportunities do you have you know to become a little bit more capital efficient there and.
Not sure if it has to wait until you know the C car, given given where the SLR came in.
Yes, I think you know how large you know passing through one piece of the puzzle in terms of letters are being disgusting contemplated and so I think really do you need to look at you know all of the.
We will that are still work in process around stress capital buffer and all the related pieces of it.
Before we have a complete picture on how we're going to optimize the examples that.
And is it better too.
Yeah and is it better to do you know.
I call it the prep or is it better to utilize the phone capital stack you haven't you know increasing the balance sheet size for example for sponsor at retail.
Well for sponsored retail that doesn't that doesn't have any knock on the size of our balance sheet and so you take advantage of opportunities like that.
You too.
We need a capital to do that.
Uh huh.
So I think look I think we're gonna we're going to look at all the options to figure out with one or opportunity is revenue side sort of grow and keep the balance sheet, where is it grows the balance sheet and we're now looking on sort of our opportunities given its really not rules and.
I think you'll do your you know more from us on that as.
See garden, just capitals outcomes.
Focus mostly on the next few months, yes, it's the you know, it's a little bit challenging.
We just don't know exactly what we're going to be we get Watson different things and obviously follow on discussions but at this point. We just don't have enough decision to stay with you actually back to us.
Okay.
All right you think you're going to get that at sea car.
Well that where you got to wait for it.
Yes.
I think that's a that's the honest answer I think the you were at all going to find out when rules come out and see color, how much or how much of its clear and we'll see as the bottom line the the notice rule.
So it got off to get done pretty short period.
Yeah, Okay, alright appreciate it thank you.
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.
Hi, good morning, everybody. So just a couple of follow ups, so while I guess on expenses.
Mike Let me just to clarify the base off of what you guys are talking about 2020 cents growth is about 10.8 billion.
Kinda corn up in the are put into 2019.
Yep.
Yep, it's what's in the press release in phase three.
And then when you talk about the Tech span you guys had $3 billion show in 2019, I tell maturities that all running through the he could steam and and again it sounded like that was a 10% growth in 2019.
How much are we grow Threed you guys expect to see there for 2020 reach me just kind of trying to get a flavor for how much you need to reach in your in savings to keep the overall expenses below the 2% range.
Yeah, I think most of its running through the female already nowadays so the for 2019. So most of its going to you know so yeah, we not only we've given you the exact percentage increase that's going to go out, but but we're we're continuing to.
Liver, you know consistent sort of.
Efficiency gains as we go.
And as you know, we do not in others and sort of talking about over time, when we still think there's a long long road ahead deficiencies that we can generate through.
Since we're making so we feel pretty confident.
It was over the next years.
Right and my second question around gas mask business I'm, just wondering when I look at the flow dynamics [noise] fixed income out the I don't was a little light this quarter again, despite what and it's been I really strong trend in the industry and then cash management. All satin you got some outflows can you provide a little bit of color kind of what what's been driving that.
And then the market performance also a decidedly negative number which obviously surprising given what the market not so maybe kind of how flush out what's driven but the flows that in the market thousand square.
Yeah.
Yeah, Hi.
This is not going to be a straight line no sort of off as you sort of thinking about was not business and there's been lots happening through the UK, finishing market.
I'm not sort of needs through me people sort of make sure they were sort of thinking about sort of how to manage their liabilities in the right way.
And we feel really good still about the pipeline in the unfunded commitments that we've gotten out business.
You can get UK lots, they've been continuing to invest in bringing their capabilities outside of that.
Our market.
So I think there we still feel good about the LDR phase we feel good about what they're doing a performance has been a good and so we don't really wasn't any concerns in the.
Hi space really at all.
As you know just more broadly about our asset management business is largely institutional.
Yes.
Clients and so you're going to have some chunky chunky flows from time to time for four.
There is no reasons as you sort of look at any given quarter and so you know there's nothing underneath the fixed income side and obviously the point to that.
Core issuer or trend that we're concerned about.
Well. The you also had a question around marketing that they want it and things to keep in mind, you fairly substantial exposures and okay.
There were currently the currency impacts Andy and yet we impacts are willing to and then it would have been domestically.
So that's one thing I would throw in there in terms of the in terms of the cash I would say, that's a little disappointing and I think we need to do better there.
Got it very very much.
Thank you, ladies and gentlemen, as a reminder that is star one on your telephone keypad to signal for a question.
We'll next go to de line of Brian Kleinhanzl with KBW. Please go ahead.
Good morning.
Quick question Obama deposit optimization, unless you talked about just trying to get a sense of how far long you are in that process. It sounds like you did that over the course of 2019 or the like there's still a long runway to deposit optimization from here.
No no listen I think Brian . It's a you were continuing to optimize so I think the you know it's the dialogue that very granular conversation with clients and it declined by clients sort of dialogue and so I think you know we've made some progress but we'd go more to go to continue to make sure that we're optimizing sort of the pricing.
And.
So.
Okay, and then separately, it's really hard to give an update on how the allied and offering is moving forward I'm still some concern across the industry, whether or not proprietary ever since third party solutions is the way. It's moving you give any update there. Thanks.
Sure I'm you know, we we've been building on a number of partnerships over the past six to nine months and I'd say, they're really plugging into flavors, but first it where.
The ones that you're referring to is where we connected.
Some of the leading order management system is aligned Bloomberg and soon for.
Many of our mutual clients already have signed up.
And then many aren't in the process are signing up so we've got a very high success rate, where we've got common finance. The other things that is doing for us since opening doors for a other conversations where we see our clients able to gain efficiencies.
Because it was so I think it's got like right now the benefits that were seeing since initiating discussions you opening doors and giving us more opportunities.
And secondly is strengthening relationships business that we've already got.
Because it is integrated it is single sign on declined is able to looking down into their capacity activity near real time.
I think there's the real benefits to our clients there are paying off.
And I mentioned that there were really as we think through partnerships are really coming two flavors. The other devices everything that we are doing with syntax and so we've been out quite a few just this week, we announced one.
Where.
Working with the intent to provide independent.
Alternative apps for funds. So this provides both and oversight function as well as a.
And she's the control. In addition, it serves as a contingency or a problem and construction of an out.
So.
We partnered with.
All of our clients and actually.
But they found the implementation would have been too difficult.
And so by partly partnering with them implementing we gain scale from doing that.
As a as well as.
Providing a service rather than just doesn't get some software. So we're pretty excited that's already attracted.
Pension this week.
Yes.
Thank you. Our next question comes from the line of Robert While pack with Autonomous Research. Please go ahead.
Morning, guys I'm just wanted to ask a question on the balance sheet and the impact of.
You know said injecting reserves into the system are you seeing significant impacts there and you know.
Her way how long until we can kind of see that play out in numbers. Thanks.
Let me take a news we did so difficult Robert for us to be able to identify any single particular incident or on a day to day basis.
He just looking back at historical trends and you look at the balance sheet and you look good.
The balance sheet.
Our balance sheet related to deposits, you'll see that there's a correlation.
But depicting why that took place.
On money market fund that decided to leave a little extra cash of accounts or anything like that is very very hard.
The truth is still out of it.
I mean.
Right.
Thanks, I think that's all I had.
Okay. Thanks Robert.
Thank you and our next question comes from the line Incivek Junisha with JP Morgan Chase. Please go ahead.
Hi.
Hi, Tom Hi, Mike Lawrie profession.
What's business centers made.
The most tech catch up.
It's going to England.
Talking about from a business standpoint, I know you're spending in a lot of different areas not sensitive where do you think youre.
You need to do so more either from a competitive standpoint, or you know business neither tend to give some sense. So.
Because you've got obviously a lot of businesses.
Yeah.
I actually think we are in pretty good shape, what we're trying to do the back trying to get ahead of the game and if you think about some things that were done just walk through the whole listed partnerships and kind of differentiated capabilities and his willingness to integrate with best in class.
We're not always.
To deliver the best application.
And we want to provide our clients flexibility so even with that holds or perhaps over to look at asset servicing we need some very good investments and our corporate trust business and we're starting to gain back market share, we had lost a little mortgage or over the years.
We continue I like where we are well known.
You did better there so I think where I think this is a matter of front end breakout.
Catch up.
Yeah.
Is there room to improve the efficiency of tech spend with any kind of from others and trying to flatten it.
You know shift.
Mix of what that spending on you're hearing that from a from competitors and peer of yours.
Yeah room from you can do that.
And now when can we start seeing about flatten out.
Isn't that gets might be on you know Todd talked highlighted a little design in his script, where you know we are you. We are as focused about driving efficiency in our technology spend as we are anywhere else in company.
And we will reduce the number of asked by 10%, there's another 10% coming.
Over 20% reduction on grass and as we sort of make these investments in the underlying infrastructure and application. It makes the next set of investments you on me not much more efficient cheaper faster.
And so it's something you're already seeing in a in spend.
We're making.
Since you have and you know.
Range.
Something on operating margin. When you think you couldn't get too with all of the specs spending as we look out a new York.
Yeah, I don't we haven't given you a view on on go forward operating margins is that you know as I said earlier I think you guys, we sort of get through to either through the you know the short term you medium term Ron on net interest revenue, we do feel confident that the model still holds where it will be able to do.
Over you know for a little bit of revenue growth, a pretty significant amount of earnings growth and I think that implies expansion in operating margin at that point. So I would just sort of model Noah.
The big behind we gave you know you know while doing on Investor day, a couple of years ago is probably good stuff is still a good we've gotten so.
One last one for you Mike.
Most people yields fell pretty sharply the London.
Many of them balance sheet, the lowest levels and some in five quarters.
How should we think about back is that.
That run rate that backdrop.
Yep, that's been reduced rates and the September .
The peak in reverse repo spreads in September Didnt.
I didn't happen again.
As to those two drivers I know you like to do the arithmetic, there, but back but we look at that since no. It down and you know the size matters spread matters and the new overall.
Ultimately, we're generating a spread that spend.
That's Britain has been reasonably consistent.
Third quarter, we saw the spike.
Unusual activity.
Okay. Thank you.
Thank you and our next question comes from the line as Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi, you mentioned retiring at the entire 10%, 10% more to know what's the total number of apps that you have.
And.
I don't think this is completely related but.
What percent of apps on desktops.
Web based.
Versus not having old versions code support them.
I'm going to turn this one over the Mike Mike, but in terms of we don't disclose the total number so I don't believe.
So a number of so we've obviously got a pretty careful inventory.
So.
Part of what we're doing and resiliency buildout.
Infrastructure investment, there's also making themselves more efficient lightning sunset.
So moving some of those applications and so please.
[laughter] 10, probably closer to 12%.
10% or so.
Your next 12 to 18 months.
So I can't really trying to get into this.
Specifically, where those fabs are in terms of what base, Yeah, I guess I'm I'm I'm, not even though I think that I'm not sure. That's the right way to think about it and not all modern outs or when do stops, but I think you should assume that.
Many of the tools that are our our folks are using our continue are always getting better and we're always investing in those and and that gets you know we know we have no every weekend of the year, there's something being rolled out.
Across our <unk>, you know across our our product suite to either internal funds or external bugs and.
And that improves the way they work so.
You've done yet in terms of in terms of productivity tools.
We are rolling out.
Office.
Cloud version of my themselves 65.
One of the things that we're also doing is our operations and we get over a million finding email.
Each year, and we are developing AI around making that much more productive responses.
Wanting to it.
So we continue to invest a lot productivity and the infrastructure build out that we're making I think.
Well.
And then and then just one follow up so just generally speaking said you're spending more and technology.
We've got 3 billion filling up to what number I'm not sure. If you said that if you are willing to do so and where when do you think that turns like what do you think it's going down the J curve when do come up the other side with these investments is that like a year or two years in five years.
Only one communism.
For the detail as.
As we said, we'd really picked up the text and over the past three years.
I would say the rate has come down slightly.
Continues.
Good luck to design.
But the rate.
As probably come down I would like what she really.
And curve is making things.
Yeah.
No I mean with Mike I think the when you think about the tech spend is it's not a you know we're shooting to spend a certain number you know what we're doing each year is looking at you know how much we actually execute lose business cases, how do we think about like the return we're gonna.
And even and most importantly, like can we successfully sort of executed and with people in place to do it I mean, that's driving and you know that's that's going to be the constraints that we've got in most years is making sure that we can execute it well.
And I think right now we feel it's important to continue to make those investments because that's what's going to differentiate was going forward.
And you know keeping in mind that we've got to deliver you got to deliver bottom line is on bottom line as well and so we're trying to find balance there too.
Make sure that we're working right thing by all of our stakeholders.
And so that's the way we sort of go about how much we're going to spend in any given year. Yeah. So be it really good place. So as we look out to next year I don't want to predict and because of its own ROI on the other says we're bringing down right now we believe there is.
Alright, thank you.
Thanks, Mike.
All right looks like now this last question. Thank you everyone will not be next time. Thank you.
Thank you. This concludes today's conference call webcast a replay of this conference call webcast will be available on the being why now and Investor Relations website at two o'clock P.M. Eastern standard time today have a good day.
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Uh huh.
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Right.