Q1 2020 Earnings Call
Ladies and gentlemen, holding for todays doesn't 21st quarter earnings Conference call.
At this time or.
Just one minute.
Thank you for patients and I see please remember one.
[music].
We're about to begin.
Good morning, and welcome to de she doesn't 21st quarter earnings Conference call hosted by begin my Mellon at this time, all participants Arnie listen only mode. Later, we will conduct a question and answer session. Please note that this conference call webcast will be reported and will consist of copyrighted material you may not recorded or rebroadcast these materials without being my melons consent.
I'll turn the conference over to Matt Good Fortune, Scott you might know ones global head of Investor Relations. Please go ahead.
Good morning.
Today, you have not been released its results for the first quarter of 2020.
Earnings press release, and the financial highlights presentation to accompany this call a both available on our website I feel I know in dot com.
Good day.
In one that we see all will be the call.
Like such a female our CFO will take you to earnings presentation.
So in Mike's prepared remarks, there will be acuity session.
A reminder, please limit yourself to two question.
Before we begin please note that all locks today may include forward looking statement.
Actual results may differ materially from both indicated or implied by our forward looking statements. Other the adult various factors, including those identified in the cautionary statement <unk> earnings press release, the financial highlights presentation, and you know documents filed with the FCC all available on our website.
Forward looking statements made on this call speak only as of today April 16, 2020 and will not be updated.
I will hand over to called.
Thank you bag and good morning, everyone.
Before getting into our results I want to call out the heroic efforts of medical professionals at first responders in the U.S. and abroad.
Doctors at my immediate family, So I'm acutely aware of the risks and what they're dealing with.
We're also grateful for the extraordinary actions taken by central banks regulators and governments to minimize the extent possible the financial fall off as we all faced this unprecedented crisis.
Now, let's shift to our financial results I'll briefly highlight our first quarter performance then focus on how we're navigating the current realities discuss what the immediate impact has been our business and then look at how we think about the potential impact going forward.
Mike will then go through the financials in more details.
The first quarter, we reported earnings of $944 million and earnings per share of a dollar five that's up 12% over the first quarter of 2019 with revenue up 5% at expenses flat as we benefited from heightened levels of market activity and volatility partially offset by the impact of lower interest rates.
All of our investment services business showed solid growth.
Clearly we have entered an unprecedented environment, where things are changing quickly it's going to be a very challenging time for everyone.
As the situation the situation as of all quickly but from the start our focus was on the health and wellbeing of our people and the continuity of service to our clients.
We quickly transition the vast majority of our people to working from home, which opened up space for us to create social distancing for the small number of essential in office staff.
Fewer than 5% of our global employees remain on the office.
Central in office staff are primarily performing roles that cannot be done remotely.
The investments we've made in our infrastructure operating platforms and cyber information security have clearly benefited us enabling us to support this broad scale remote working arrangement all of the controls and security oversight that government us one working inside the office aren't full effect when we're working remotely.
The response from or people, it's been that's been except exceptional you couldn't ask for greater professionalism dedication to our clients at a time when we're also dealing with unprecedented levels of market activity and personal challenges.
Please note that while our people are caring for our clients we're carrying for them.
We've made available to them a host of health and wellbeing resources, including access to tell health services free testing for Cobot 19 in the U.S., along with us covering all costs related to outpatient urgent care or emergency room visits for the evaluation and treatment related to cope with 19.
Recognizing the mental health challenges during these uncertain times, we made available a stress management program and emotional support services and resources to help our people cope and deal with the social isolation.
And we're supporting our colleagues who are unwell or may have been exposed by guaranteeing full pay for absences for those who have tested positive we're ourself quarantined.
We're also providing paid time off to care for immediate family members with Cobot 19, or cobot 19 like symptoms.
Finally to support our people we made the decision that we will not do any additional layoffs during 2020.
It's absolutely the right thing to do at a time into pandemic is creating so many personal uncertainties for our people.
Since the crisis began we remain fully operational and open for business and we've been there for our clients. During this unprecedented period of market disruption.
We engaged early with thousands of clients globally to discuss their own continuity plans and work with them to ensure a minimal disruption to their operational processes and transaction settlements.
We stood up playing command centers for operations and client facing staff to centralize escalate and quickly resolved plight inquiries, we accelerated training got or digital tools to help clients reduced their physical a manual process footprint minimizing their operational risk profile.
We've also taken a series of humanitarian actions in an effort to help those negatively affected by the virus.
That has included making philanthropic a call the commitments to important support organizations in regions, where employees live and work including organizations working on that front lies in the U.S. AMEA and May learn child, China, and other affected areas and in Asia and India.
Announcing a two for one matching program for employee donations.
We've also donated hundreds of video kit capable tablets to public hospitals in New York to help patients and medical staff communicate with their loved ones and partnering with nonprofit organizations to provide aid first responders health care transit and other first frontline workers as well as sort of some of the most vulnerable populations to the pretty.
As you know critical items, such as meals shelter medical equipment educational supplies and financial support as well as 50000 face masks. We did on donated to due to New York City hospitals dealing with shortages. We also continue continue to look for opportunities to do more.
Lastly, we are focused on maintaining the strength liquidity and lower risk profile of our balance sheet.
Using it to support our clients ad markets.
We've been in regular dialogue with the regulators and key market participants to ensure a coordinated ads and see how we can help bring stability to markets.
When the markets first came under pressure last month, the federal reserve activated a primary dealer credit facilities to provide funding to primary dealers they achieve that through our Tri Party repo services, that's something we're uniquely positioned to do that's been a privilege to help.
Given our strong capital liquidity position, we've used our balance sheet to support our clients that means accommodating their elevated deposits and funding about $3 billion incremental draws on committed facilities.
In March we also purchased more than $3 billion and assets for money market funds, including our own to help create liquidity for fun holders and we have continued to do so in April.
Looking ahead, we had our clients face extreme market and economic uncertainty while it is too early to protect the impact to predict the impact we have a well diversified and financial resilient franchise that is relatively well position to withstand what's to come in terms of the immediate impact our business March had extremely.
High levels of volatility to Mark extrasolar markets dresses, we experiments much higher client volumes than normal and activity is up across all of our business lives.
Let me just share a few data points that bear this out.
In foreign exchange, we saw higher volumes across all parts of our business up approximately 50% in March and large spikes in volatility.
And U.S. dollar payments Treasury service on average process 2.5 trillion payments per day March picking one day at over three trillion in mid March compared to 1.7 trade in recent quarters.
They times purging saw elevated truck trading volumes, two and a half to three times normal levels.
Clearance in collateral management U.S. government Securities Clarence volumes in March were up more than 20% from February levels, driven by the heavy U.S. treasury issuance, coupled with increased market volatility.
It asset servicing during March we experienced an increase in U.S. accounting trade volumes of more than 50% versus the first two months of 2020 and global security settlement volumes were up approximately 40% over the same period.
We've also experienced substantial deposit inflows.
Good asset management, we experienced net inflows driven by cash inflows of 43 billion.
Our performance fees were up due to solid performance across our largest strategies.
I just think about our company's performance over the rest of year I would caution against extrapolating. These results for the full year, the full ramifications of the lower rates and the moves in the capital markets are not yet being fully felt.
The decline in our capital ratios. This quarter reflects large deposit inflows, mostly due to the flight to safety from current market conditions and said balance sheet expansion.
Share repurchases of $985 million were completed prior to deciding along with the other big banks to temporarily suspended for the buybacks. So that we can use or significant capital liquidity to provide maximum support to our clients.
We believe that we will have the ability at a wide range of scenarios to continue to pay our dividend and to support our clients.
Looking ahead to the remainder of the 2020.
It's difficult to forecast impacted the CRO to buyers on our results with certainty because so much depends on how the health crisis evolves its impact to the economy and issues take.
Actions taken by central banks and governments to support the economy.
We have a lower risk fee based business model that positions us relatively well in an environment. Like this we performed stress test regularly as do our regulators and see car. We consistently perform well we have a highly diversified business model with a conservative risk profile and fees in general are skewed towards recurring revenue streams.
We should benefit from increase activity and clearance in Claro management from increased issuance of U.S. treasuries and U.S. Tri Party collateral management, although the latter somewhat depends in Federal Reserve Bank of New York operations.
Terry policy turn times of uncertainty tends to have a positive effect for us through lower excuse me through higher deposit volumes and we will continue to manage our expenses tightly.
All that having been said the lower interest rate environment, which impacts as both through net interest revenue and through money market fee waivers and purging asset management and corporate trust as well as the market decline in certain industries being under pressure will have an impact it Mike will cover those items in more detail later.
Well, we believe we have the capital and with the liquidity to withstand a multiple scenarios pair dividends and continue to support our clients.
Finally, I wanted to take a moment to convey how deeply honored I have to be CEO of this great company.
All my near term focus is on safe guarding the well being of our employees supporting our clients through this period and maintaining our balance sheet. We're looking ahead to ways to build our solid solid foundation with a strong business model and balance sheet to drive improved performance and capabilities across our company.
With that I'll turn it over to Mike.
Thanks, Todd and good morning, everyone first let me Echo Todd opening comments regarding credible number of people in our communities who are either out there on the front lines or providing essential services to help the rest of us and our families not to mention all the people in government in our industry, who are working together to help the economy how people pay their bills.
And then sure this new functionality global markets were thankful to all of them.
With that said, let me run through the details of our results for the quarter.
All comparisons will be on a year over year basis, unless I specify otherwise.
Beginning on page five of the financial highlights document.
In the first quarter of 2020, we had earnings of 944 million and earnings per share of a dollar five.
Up 4% and 12% respectively.
Comparisons versus the fourth quarter of 2019 are impacted by the notable items, we incurred last quarter, specifically the gain on sale the equity investment, which was partially offset by severance and litigation expenses and that security losses.
Total revenue was 4.1 billion or up 5%.
Fee revenue increased 10%, primarily driven by heart foreign exchange and other trading revenue higher transaction volumes and increased activity from existing clients across investment services and higher performance fees and investment management.
Which were partially offset by equity investment losses and losses from consolidated investment management funds.
Net interest revenue declined 3% to 814 million year over year and was flat to the fourth quarter.
We increased our provision for credit losses by a 169 million in the quarter. This was driven by the macroeconomic outlook in conjunction with the application of the new Cecil accounting standard.
Our actual losses or net charge offs were 1 million during the quarter.
Expenses were essentially flat driven by continued investment in technology and the higher pension expenses, we spoke about last quarter, partially offset by lower staff expense and the favorable impact of a stronger U.S. dollar.
We had a solid return on tangible equity of 20% and maintain a pre tax margin of 30%.
In terms of shareholder capital returns.
We repurchased 21.7 million shares for 985 million.
Giardia repurchases were completed in January and we're all completed ahead of the March 15th announcement by the financial services for member banks regarding the temporary suspension of repurchases.
We also paid 282 million in common stock dividends in the first quarter.
Now moving to capital and liquidity on page six.
Our capital and liquidity ratios remained strong and well above internal targets and regulatory minimums.
The declines versus the prior quarter, primarily reflect this quarter's very strong deposit growth that increase the size of the balance sheet.
Common equity tier one capital totaled 18.5 billion as of March 31st NRC EG, one ratio was 11.4% under the advanced approach and 11.3% under the standardized approach.
Our average LCR in the first quarter was 115%.
In our SLR was 5.6%.
As a reminder, that effective April 1st the revised rules will allow us to deduct central bank deposits and us treasuries from the SLR denominator.
Under the new rules, the SLR would've been approximately 7.6%.
Turning to page seven.
My comments on net interest revenue will highlight the sequential changes.
Net interest revenue was 814 million flat to the fourth quarter.
Despite lower rates in the quarter results were better than what we had expected driven by the elevated deposit levels, particularly in the last three weeks in March.
We also benefited from higher securities a loan balances and the widening of LIBOR to fed funds spreads.
This was offset with negative the negative impact of hedging activities, which are mostly offset in trading other revenue.
The increase in loan balances in March was primarily driven by clients drawing approximately 3 billion from their committed credit facilities and elevated overdrafts.
Higher overdrafts are normal when there was an increase in market volatility and the overdrafts are generally well secured.
That is net interest margin of 101 basis points was down eight basis points versus the fourth quarter.
Page eight describes have deposit balances trended over the course of the quarter.
Deposit balances were close to flat to the fourth quarter average for the first two months and if you recall, we had some episodic episodic activity last quarter. So balances were running a little ahead of where we modeled before the increased market volatility in March.
In March deposits increased over 300 billion on average and 337 billion a March 31st which you can see in our supplement all the businesses saw increases with the largest dollar increase in asset servicing.
Through the first few weeks of April deposit balances are down from the March 30, onest levels, but remain elevated.
Moving to page nine.
Our average interest, earning assets increased to 324 billion.
Approximately 41% of these assets are holding cash or reverse repos.
Got 42% or in our securities portfolio, and 17% or in the loan portfolio.
In addition to the funded loans in the page. We also have unfunded committed lines. The details can be found in our annual report and we'll be updating the 10-Q I will give you an overview of the funded loan exposures.
26% of the portfolio is related to high quality mortgages, and well secured investment credit lines provided to our high net worth wealth management and Persian clients.
To date, we have received a limited number for parents request related to the mortgage loans are working through them with clients.
The investment credit lines performed well during the market volatility.
21% or margin loans, primarily in person.
These loans are well secured and have performed well during the recent volatility as well.
23% art to financial institutions, and they are composed primarily of short term trade related loans to investment grade banks with tenors less than one year unsecured loans to clients, including asset managers, who often borrow against marketable securities held in custody.
10% of the portfolios in commercial real estate.
Approximately 70% of loans that are our secured with moderate leverage and solid loan to value ratios.
Roughly 10% of this exposure is related to hotels in retail.
There are predominantly these are predominantly with clients with whom we have long standing relationships many over multi generations.
The remaining exposure is primarily to reach the majority of which are investment grade and are well diversified across industries.
And the remaining 6% as commercial lending these bars are primarily investment grade.
Now turning to the securities portfolio, we have a high quality liquid portfolio much of it is in U.S. government agency Securities Us treasuries and sovereign debt.
<unk> increased as we deployed more cash into securities, including the commercial paper in Cds, We purchased from our affiliate in third party money market funds.
The 4 billion of clothes are highly rated.
94%, AAA and the remainder double or better.
97% of the non agency CMBS or AAA and have solid subordination.
Rest of the ratings break down can be found in the supplement.
Page 10 provides an overview on expenses.
On a consolidated basis expenses of $2.7 billion were up slightly driven by higher technology expenses and pension costs offset by lower incentive expenses.
Now turning to page 11.
Total investment services revenue was up 9%.
Assets under custody under administration increased 2% year over year to 35.2 trillion, that's higher client inflows were partially offset by lower market values and the unfavorable impact of a strong U.S. dollar.
Within asset servicing revenue was up 8% to 1.5 billion, primarily reflecting higher volatility and higher client driven volumes in our foreign exchange service higher transaction activity higher deposits and new business growth with existing clients.
In purging revenue was up 16% to 653 million, primarily reflecting higher clearance volumes, particularly in March.
It was also driven by onetime breakage fee related to a potential client that will not affect the run rate and higher client assets and accounts for new business onboarded as well as existing clients.
Issuer services was up 6% to 419 million with growth in both corporate trust and depository receipts revenue.
Depository seats revenue was driven by cross border settlement activity, while corporate trust reflected net new business and higher deposit volumes.
Treasury services revenue was up 7% to 339 million driven by higher deposit balances and higher payment volumes.
Deposit balances increase year on year by 22%, reflecting the environment and our investments in new capabilities and increase focused on deposit gathering.
Clearance in collateral management revenue was up 9% to 300 million.
Collecting elevated volumes imbalances across clearance Tri party repo and collateral management global collateral management.
Average Tri party collateral management balances in the U.S. and globally were up 15% and 11% respectively.
Page 12 summarizes the key drivers that affected the year over year revenue comparisons for each of the investment services businesses.
Now turning to page now turning to page 13 for investment management.
Total investment management revenue was down 4%.
Asset management revenue was down 3% year over year to 620 million, primarily reflecting equity investment losses, including seed capital as well as unfavorable change in the mix of at U.M. Since the first quarter of 19, partially offset by higher performance fees and the positive market impact.
Performance fees, a 50 million were up 31 million a year 30 from 31 million a year ago due to good performance in some of our international active equity portfolios.
As a reminder, our performance fees tended to be highs the highest in the first and fourth quarters and lower in the second and third quarters.
We had inflows of 38 billion in the quarter, most of which was in cash.
Overall assets under management of 1.8 trillion are down 2% year over year duty unfavorable impact of a stronger us dollar.
Wealth management revenue was down 6% year over year to 278 million, primarily reflecting lower net interest revenue due to lower interest rates.
Now turning to other segment on page 14.
Revenues were roughly flat year over year, while expenses declined by 18 million, primarily due to lower staff expense.
And finally, a few comments about the second quarter.
I'll walk you through a number of variables that we're watching closely having said that I encourage you not to put too much emphasis on a point in time view as the variables are changing quickly.
As for net interest revenue as I mentioned deposit balances continue to be elevated but lower than the March 31st levels, we're expecting balances to stabilize above the February average, but below the March 30 Onest search.
We will see the full run rate of lower interest rates are funding costs and asset yields including the securities portfolio.
We would expect between 25% to 30% of securities portfolio reprice in the second quarter.
The forward curve for live work that's been spreads shows a narrowing from today's levels.
In the portfolio, we are monitoring prepayments speeds of the mortgage backed securities as they may be volatile in the current environment.
So using the forward market curves and our best estimates right now we would expect net interest revenue to be down sequentially between 2% to 5%.
Changes to any of the variables mentioned could both positively or negatively impact we estimate.
We also expect that love that the low interest rates will begin to impact money market fee waivers. This impact will be felt more in purging initially, but will also impact other parts of the firm.
The total impact is difficult to estimate but could be be between 50 to 75 million in the second quarter net of lower distribution expense.
Higher yields and short term instruments may help reduce the impact in the second quarter.
The first quarter foreign exchange and trading revenue was impacted by the significant increase in market volatility and associated client volumes protect primarily in March.
Levels have subsided somewhat in April that still remain elevated compared to the recent historical lows in 2019.
Additionally, the substantial increase in transactional activity in March across many of the businesses, which Todd noted was exceptional and not likely to re occur. We will also see the full impact to lower evergreen equity markets, although some have begun to recover.
On expenses were continuing to focus on driving down discretionary expense, while protecting our most important investments continue to reprioritize spending given the environment.
We would now expect full year expenses to be approximately flat year on year, including the expected 50 basis point increase from the increase in expense and expense.
Credit costs will be highly dependent on individual credits and how the economic forecast change by the time, we get to the end of second quarter.
And in terms of our tax rate, we would expect the full year 2020 effective tax rate to be between 20 and 21%.
Now before we get Accuen I, just like congratulate Todd on behalf of the management team and being named CEO, It's well deserved and really good news for us in the company.
That operator can you. Please open up the lines for questions.
Absolutely and ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad and as a reminder, we ask that you. Please limit yourself to one question and one related follow up question.
Thank you. Our first question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Thank you can you hear me.
We can't Gerard.
Great Congratulations Todd.
The new role you certainly deserves and so congratulations.
Thanks drug.
Hey, can you give us a big picture insert obviously, you guys are wounded, chief Plumbers, and some engine systems and we certainly as you pointed out extraordinary volumes in so many different areas can you give me say read from the inside How's the system Daniel.
All this surge it appears to have ended as well, but maybe you can give us some turkestan examples of how long the metro system work of the surgeon activity.
Yeah, I'll take that Gerard so it's Todd I think it's impressive how well the the system did handle the huge increases in activity or whatever but there are a couple of glitches, but not not many and you know for example in our clearing and collateral management business we went.
To 100% work from home very early on.
And all of that worked quite smoothly and so we saw we saw volumes increased 50% overnight.
But we had the you know the technology and the capacity to to manage it. So I think I'm pretty impressed across the board, where we saw resiliency and disaster recovery plans that had to change a bit too because typically a disaster recovery plan would be focused on a region.
But this was obviously global.
And so they moved to work from home was it was wherever it could be executed was executed. So you know up a couple of occasional glitches constant conversations between the clearing counterparties as well as our clients. We had many thousands of conversations to make sure that we were connected.
And that they knew how they could connect with US we Oh, there was a lot of mobilization to the you know to the use of our portal and electronic means of communication, which made things much simpler.
So I I mean, I think it was a I think it was an impressive a reflection of the strength of our financial system and the and the infrastructure of it.
Thank you and any more specific question.
Obviously see so is it your provision for the quarter similar to other banks.
Two parts first what kind of economic assumptions will use to come up with that provision that you put into the first quarter results and then second if you could identify where most of that is allocating wasn't too.
You mentioned simply tell exposure to financial customers will be helping as well. Thank you.
Mike you want to take that one yes, yes surgery. It I'll take that so so I'd say first as you sort of think about the reserve that we built you know very very small piece of that.
<unk> was due to individual either borrower downgrades or the incremental loans that we saw drawn and most of it was really reflective of the changing economic environment and the new in the new accounting standards.
And as we sort of think about the outlook that was in there.
The outlook takes into account multiple scenarios and and we sort of use that changing environment to sort of you know inform what we did and as you sort of look at it did the meeting it was a meaningful waiting towards a very pro long recessionary scenario that doesn't fully recover as until you get into 2021.
So I think thats the way I would sort of think about it.
Thank you.
Thank you. Our next question comes from the line and Brennan Hawken, but yes, [laughter] hi, Good morning can you hear me.
We've got weekend, rather that you're a little noise in the background.
Sorry, it's a it's another earnings calls for lapping that I kind of have something doing cell phone here, Oh geez first off Todd congratulations.
On the.
On getting the role of CEO.
Kevin They kept this expense for a while the glad to see we got to the right price [laughter] I quick one on.
Deposit cost trends so.
You know they came in better than expected. It was probably helped by some of the timing of deposit growth like you know.
There is there way you could help us think about that line into two maybe how much was averaging a and then.
What you expect to continue to see as far as some relief on the deposit cost front that would be great. Thanks.
Mike Mike you want to take that one as well and thanks, Yeah sure thing.
But yeah, yeah, sorry, I'm sorry about that.
Yes, it Brian as you sort of think about it. So as you as you know the fed moved pretty substantially in the latter or the middle of March I guess and yeah, we adjusted our pricing there and so you only saw it really a couple of weeks if that sort of embedded in the first quarter average is and so as you sort of look at the you know the full.
Run rate impacted that it's going to be a pretty substantial increase down.
For the cost of interest bearing deposits.
And so you know in the beta you know obviously changes that you can sort of get close to zero, but I think you'll see a pretty some significant decline as you get down for the rest of the corner.
Okay, alright, thanks for that.
And then when we think about.
The servicing lines E. I believe Mike that you talked about how there was some strength from volumes.
Which aided the line, which you guys flagged.
During Q1, Q as well in early March.
And it was great to see it come through but it seemed as though he sort of cautioned about that sustaining.
It is that because you have seen some of those volumes already subside and can you help us think about maybe how much of a contributing factor that was so we could maybe calibrate for how to adjusting our forecasts. Thank you.
So Mike do you want to start and maybe I'll add a little color.
Like I think if you sort of think about what we saw as Todd mentioned in his in his script, but it is it's the volumes. We saw in the latter part of March were were exceptional and they went from you know for lack of a better way to describe it sort of zero to 100 overnight and you guys, we sort of look at what we.
We're seeing post quarter end you know the volumes are still higher than they were before the search but certainly off the piece that that we had a in the latter in the latter part in March and I think as you sort of what got the need to go expectation, it's really hard to predict how to get a certainty how long tail.
They'll stay elevated and and come down.
Back to norm, Yeah, Yeah, I'd add a little color I mean and at some of the businesses like clearing and collateral management. So do you think about our government clearing business, that's continuing to sustain itself at very high level because the government is issuing a lot of debt and there's a lot of trend has a lot of trading going on around that.
Collateral management business is probably a little bit off from where we saw it at the peak, but I think secured lending will become more and more we'll continue to be important industry and we're likely to see growth there, but the very high volumes. For example that we would have seen it pershing and that you know the by the transaction volumes are going to are going to fall back to at least.
I think more normalized levels, which they've begun we've begun to do what we've seen that asset servicing to certain extent as well.
Okay, all right well I'll try and then triangulate those those factors. Thanks, Thanks, a lot for the color.
Thanks Brendan.
Thank you. Our next question comes from the line as Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, Good morning, Congratulations Tom that's great news.
Thanks, that's it.
I had a question around the press now that the rules are starting April 1st as you know to kick off day for the new rules could you give a sense as to how you're thinking about that capital stack and.
What you would do with deprive here.
Okay, and Michael It turned out one over deal.
Yeah like obviously, that's is nowhere in the middle see car. So you know we're not going to.
Talk much about sort of what our capital plan looks like at this point, but as you sort of think about where given the increase in the balance sheet, where were most constrained right now is tier one leverage.
And I think as you sort of think about perhaps that you know that could be a a good.
Hey on how long, we sort of remain constrained there that could be a good way to continue to.
On that I think we're going to continue to look at opportunities either re bye.
Crafts.
Yeah, if if that comes back in the market and the pricing comes back to where it was just you know four or five six weeks ago.
So we're continuing to look at the capital stacking will give you more ah ones.
Once you close down.
And then when I'm thinking about the funding mix.
There's room for your funding costs to come down obviously with not only deposits, but in looking at the long term debt is there's some opportunity there as well in this environment introduced the funding cost.
Mike.
To reduce long term debt is that what you're suggesting but yet yeah, well that just looking at the yield on long term debt you know as there is there room there to bring that down in addition to deposit cost of funds here yeah.
Well lower rates are going to it you know impact all the our funding costs overall, right and I think you're going to see that come through.
In in the second quarter, So I think you'll see that.
Okay. Thanks.
Thank you next moves you can you <unk> with Jefferies. Please go ahead.
Thanks, Good morning, everyone.
Hi.
Mike can you talk a little bit about more about just on helping us understand as it's been a while now on the fee waiver side. So the 50 to 75 can you just help us understand what that means when you say net of distribution expense, where it shows up in the any income statement and then would there be logically just because rates are going down.
Bigger potential impact as you move past suit you just on the direction of rates.
Yeah, I think I'll I'll try to give you a little bit of the things they were sort of thinking about related related to that but.
So first and foremost this is going to have an impact on on government funds. A first right as you sort of thinking about where yields are and one of the variables that makes it pretty hard to estimate right. Now is just where ti vo yields are you know so a week over the last three weeks they've gone from negative to.
20, plus basis points back down a bit now over the last day or so and so that's going to be a big driver of of you know the the when when they start when fee waivers start to kick in and the depth of of them as well and so you sort of have to keep that in mind.
Yeah, and as you sort of thinking about the.
The funds than our asset management business that may get impacted by it that may be distributed through other parts of the company.
Some of those fee waiver fee waivers will be offset by lower distribution expenses in a in those businesses. So you'll see the fee waivers come through the fee line and then you'll see distribution expenses lower you know as they start to impact those impact those funds.
Okay got it.
A little bit.
I'll add a little little bit of that to that.
It's important to note the difference between prime and government funds. So the yield on prime funds is it you know can certainly support.
Support the feeds fees. Initially there was avoidance of prime funds. So if it were starting to see some investors come back to them. So that could have a you know what impact that would neutralize some of it.
Mikes point as it is is there going to be enough yield in assets in government funds to generate the fees and the huge amount of issuance at T. Bills has kind of surprised us a little bit and put a little bit of yield into that but that can't be certain that could that could come down again.
Got it and just to follow up on the cost side, obviously are adjusting to try to keep costs flat in this environment can you just talk a little bit more about what are you shift seen or was it a <unk> do you push out some investment spend is it an incentive comp adjustment what are the ins and outs of your ability to hold the line there that you're get your attempt.
Thing to do thanks, guys and best of luck God Okay.
Thank you, Mike you want to take that.
Yeah, we haven't we haven't seen so so we haven't really seen any impact on our most important investments and as you sort of look at the investment portfolio.
And you get deeper into the last there's there's always opportunity to sort of re prioritized the timing of some of those things and so we're doing that.
You're going to see you know I'll state the obvious, but you're gonna see lower travel and and business development costs, what will be part of it.
You know, although Todd said, we're not going to have any restructuring or layoffs through the rest of the year. We're also putting.
A lot of discipline around new hires that we're bringing means it in getting this environment. So I think it's a multitude of factors.
That you highlighted that help us out in public confidence together.
Thanks, guys.
Thank you all makes me too Brian been dealt with Deutsche Bank. Please go ahead.
Great. Thanks, Good morning, and also congrats.
The get the Oh.
Let's start to start with maybe Todd I'm done thanks, Mike for giving us that's a pretty good out look for the activity levels coming into the second quarter, but maybe you can give it some perspective on what you can see for the rest of year, obviously extremely difficult to predict.
But with the government intervention in the uncertainty about the task to recovery.
Hi, how are you see that potentially impact.
Some of the key business lines in activity and also you know including comments on.
The backstop on that that on prime money funds to the extent you you can get much more confident than people invest in the prime funds or something.
Yeah, well first of all as I mentioned, we're seeing a little bit of that so we are seeing a little bit of positive flows into into the prime funds.
But if you you know if you look at activity levels.
We would expect them to two obviously come down from the surge that we saw toward the end of March, but probably be elevated and again anything we say there's just so much in some uncertainty to that the you know the environment. The situation that we face and it's really hard for us to to look out.
Long term until we get on the other side of this of the health crisis.
But but that being said, we wouldn't expect to stay at the extraordinarily high levels that we saw in March with the exception, perhaps of our clearing and collateral management business just because there is going to be so much debt issuance, but in the rest of our businesses. The the transaction volumes component of pershings business the same thing it.
Asset servicing we would expect that to moderate just about under any circumstances, unless we just saw into another couple of blips and more of a.
Policy saw activity that could take place over the remainder of the year.
Yeah, and then the organic growth efforts that you're doing as well that they can depend deposit gathering and collateral management that is that on track or that sort of.
Spending in this environment.
Yeah, I would say if you looked at the organic growth, especially around the deposits I mean, we had oh, we have seen some positives. There. Obviously there were surged deposits that are just going to be associated with this interest rate environment and you know they have this this financial environment.
But when we look out at our other businesses, we have room to gain some market share I think we've done that in our payments business.
We had some good wins in the first quarter and our asset servicing business I would expect under this environment people are probably going to slow down making a whole lot of transitions. We've got a healthy pipeline both in our asset servicing and purging business I'm not sure a lot of people are going to make a whole lot of change we are seeing some new fund complexes come on but we're also seeing.
Some being some being deferred.
That's great. That's helpful. And then make just real quick on and I have looked into the second quarter does that exclude FX hedging activity.
Yeah, I mean FX hedge.
No not by saying, but the hedging activity, it's hard to predict because it's not a point in time at the end of the quarter.
So, we're not making assumption either way on a disappointment.
Great. Thanks, very much for taking my questions.
Thank you, ladies and gentlemen, as a reminder that is star one signal for question. We'll next go to the line of Brian Kleinhanzl with KBW. Please go ahead.
Great. Thanks, Good morning, and congrats Doug a quick question on Perjuring and kind of what you've been seeing with all the changes going on in the industry and kind of what that means for the pipelines and that business.
That helped her that too early to say at this point in time.
Yeah, I mean, I'll make a couple of comments and and Mike Mike can add some color.
First of all I think it's it's a little early to say.
Purging has a has a different model and I think I.
I think clients are quite interested in seeing a more open architected approach.
What what some of their competitors are doing so I think the conversations are quite healthy there I think the pipeline continues to be a strong.
Come out with a very competitive subscription price alternative, though I'm too to meet what or whatever the demand of that client bases were continuing to invest in our advisory services business. So I don't think it's I don't think there's any significant impact and that we're seeing.
From some of the consolidation elsewhere in the business other than its making us a little bit more of a differentiated or a differentiated alternative and I'd also.
Mentioned that purging purging of did quite well for that to the crisis. So it was able to keep.
It's a it's technology up and running and accommodate the surge in the growth which in some instances. We played out was three to four times.
I give anything to add to that.
And then I would say, it's probably more more broadly.
Side of just purging you know I think we're seeing we're seeing the benefits of a lot of the investments we've been making over the last couple of years I think clients are seeing that as well I know anecdotally, we heard from a client that just you know probably brought onto our middle office service late last year, and saying I'm not sure how it could have done this without you.
Couldn't have couldn't have dealt with all of the increase in the volatility on my own and so I think we're seeing that sentiment really across I'm thinking more broadly across the client base.
Okay, and then just a separate question on those deposits have you thought come in and surge barks, they're going to rolling off the balance sheet. Now are those go just going more so into your own liquidity products and that's been factored into the fee waiver that you gave I think where they are they just rolling off completely.
Well why don't when I take that one of them right you can jump in if you. If you think about what happened and ecosystem. So when there was a lot of draws for example, under these commitments at round around the country a lot of that cash had to go somewhere some of it was deposited back and banks.
Lot of it went into government funds initially government funds had nowhere to invest so a lot of that ended up and the money market funds, where we were the custodians. So we saw that big Spike. That's now there's lot of that Spike has normalized itself out as there are other alternative investments for those government.
Lines, some of those where our own.
Money market funds and some of them work competitor money market funds I think thats the biggest the biggest most volatile.
Component of the cash that we saw mode.
With that.
Your next question because to Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi, So I guess you are provisioning 169 times your level of charge offs.
Finally bring that up.
As what sort of economic scenario are you assuming in taking those provisions.
Right.
Yeah, Mike that as I said earlier, we're you know we use a multiple <unk> you know many scenarios is sort of go into sort of thinking about what the open it reserving looks like but but it's a scenario where you don't see you know a meaningful sort of uplift or doesn't fully recover until you're into the middle of next year. So you started recovery in the.
In the latter part of the year and you you doesn't fully recover until later in 2021.
They said it earlier as well you know only a small portion of the the reserve is related to either actual borrowed downgrades, where the increase in the loan portfolio and the remainder of it is related to the changing economic environment and the way you that flows through the new accounting standard.
Well I guess, so what I'm getting to it it's not just you need to yoki industry. So it seems like you're fighting for kind of a oh you recovery.
But you had been infrastructure for a and b recovery like you're retaining our employees your expenses should be kind of flat this year.
I'm going to guess, you're not changing tech spending, but I'm not sure. If that's correct. So help me reconcile keeping and infrastructure for a de recovery why your underlying premise is for a usually company.
Do I take that Mike really take it.
Either way going start okay, yeah, well, what why don't I started so.
We did give guidance or might give guidance that we do expect expenses, Mike to be lower than they otherwise would have been.
We think that.
Having the human resources here is the right thing to do not only for for them, but also to position ourselves well to service our clients through this kind of other than environment and trying to make any significant changes just wouldn't be particularly a prudent on our part that being said we are controlling other.
Components of our cost we want to continue to make the investments in technology that we count I'm sure some of that will be delayed.
Or or could be somewhat pretty different different prioritization, but we're going to keep a very close either expenses. We think we can do a little bit better than the guidance that we had oh, we had previously given for for a number of reasons and we're where we are talking about a U shape type of Rick.
Coverage.
Which means you do need those resources to continue to support our people in this kind of environment.
And just last follow up then it gets on the tech spending. So you expect some delay or like what was your tech spending going to be what will be now or how should we think about that.
Yeah, we are committed to continue with the spend that we've that we've gotten and thats what weve. That's what we've indicated I'm certain that a couple of things might end up being delayed a bit but I'm not going out.
Not going to pull that out of our plans at this point in time by any means.
Okay. Thank you.
Thank you all next go to Alex and stand with Goldman Sachs.
Great. Thanks, Thanks for taking the question then two I quote a everybody's comics congratulations to Todd.
A question for you guys with respect to just broader liquidity in the system clearly theres been a tremendous amount of cash flows come into the sidelines and that's supposed to both the fed action as well as the general a risk off backdrop, how long how should we think about biggies ability to sort of absorbs. These deposits so changes to spot SLR definitely help but there.
Lots of other considerations, so kind of help us think through the ramifications of that so little bit longer term and how the balance sheet could ultimately be in terms of size on beyond beyond the first quarter.
Okay, Mike you want to take huh.
Yeah, I always say you know I think the you know the SLR no change is sort of helpful. You know that that's out there, but I think if any sort of look at our constrained.
The balance sheet, it's been tier one leverage based on the the overall size the balance sheet and I think you know we had been able to sort of work through that with with our clients pretty effectively so far.
And as Todd said you know the.
As the environment.
Normalized is a bit for the money fund.
And the rate environment sort of settled down you know we've seen those will serve balances come off and so in so our expectation as things normalize more is that.
Balance sheet, you know will either have sort of hold steady or sort of come down from where we are right now and so we feel like we can sort of work through that pretty effectively.
With the current a current capital that that we've got.
Got it thanks for that and there's just a couple of cleanups around and I are GPU help quantify the hedging benefits in the quarter I know it hits an eye on shows up in FX. So just to clean it up and also any sense of new money yield on the fixed portion of the securities portfolio is that matures and gets reinvested just trying to get a sense.
They had one two and I are beyond the second quarter on that fixed element portfolio. Thanks.
Sure. So I'll think I think the first piece.
The hedging benefits. So so yeah. This is kind of really sort of simple we have interest rate swaps.
In the portfolio on the in the way those the way the way those are the way they are valued everyday sort of create some basic basis risk between oil gas and live or they really all we're doing it sort of hedging that basis rates that risk that's created from the interest rate swaps.
And that.
That that impact for the quarter is based on where you know where it all ends up on the day at the end of want one day at the end of the quarter.
So there's really nothing else sort of happening there and you can kind of see the relative impact on the slide in the presentation and so that's a hard thing to sort of predict in terms of where it's going to end up at the end to end of quarter.
As you sort of think about the securities portfolio. I mean, you can kind of see where you know where.
Rates are right now as you think about both the fixed rate in the and the floating rate piece of the portfolio and I think as we as we sort of look at our investment.
Strategy going forward.
We're doing whatever weekend and try to get you know some yield out of out of it.
And I think you know the reinvestment rates are down from what you saw obviously in the in the second quarter, but but you know just a reminder, the overall duration of the portfolios just a couple of years right. So we're not we're not you know.
We're not.
Buying a lot of 30 year treasuries as we sort of things about this portfolio and I think we're doing our best to try to keep that spread up as best we can walk within the risk appetite right.
Great. Thanks very much.
Thanks, Alex.
Thank you and generally have no further questions in queue. At this time I'd like turn the conference back over to Mr., Todd given for any additional or closing remarks.
Okay. Thanks, Derek and thanks, everybody for your interest in our company and have a good day.
<unk>.
Thank you and 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, Let's say at two o'clock P.M. Eastern standard time today.
Thank you have any day.
[noise] mm.
[noise] Oh.
[noise].
[noise] [noise] Oh.
[noise].
And Oh.
[music].
Oh.
Oh.
[music].
[noise] Oh.
[music].
Oh.
[music].
[noise] Oh.
[noise] Oh.
[noise].
[noise] Oh.
[noise].
[noise] and.
Oh.
[music].
Oh.
Oh.
[music].
[noise] Oh.
[music].
[noise] [noise].
[music].
[noise] Oh.
[music].
[noise] [noise].
[music].
Oh.
Oh.
[music].
[noise] Oh.
[music].
[noise] Oh.
[noise] Oh.
[noise] Oh.
[noise].
And Oh.
[music].