Q2 2019 Earnings Call
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In why Mellon released its results for the second quarter of 2019.
The earnings press release, and a financial highlights presentation to accompany this call are both available on our website at being White Mellon dotcom.
Charlie Scharf be inline melons, chairman and CEO will lead the call then Mike Santoli CMO, our CFO will take you through our earnings presentation.
Following my prepared remarks, there will be a Q and a session.
As a reminder, please limit yourself to two questions.
Before we begin please note that our remarks today may include forward looking statements.
Actual results may differ materially from those indicated or implied by our forward looking statements as a result of various factors, including those identified in the cautionary statement in the earnings press release, the financial highlights presentation and in our documents filed with the SEC all available on our website.
Forward looking statements made on this call speak only as of today July 17th 2019, and will not be updated with that I will hand over to Charlie.
Thank you Matt Good morning, everyone. Thanks for joining us I'll share. Some overall thoughts about our second quarter performance, then I'll hand off to Mike who will then take you through the financials in more detail. We reported earnings per share of one dollar one down 2% versus a year ago total revenue was down 5% year on year as we anticipated the level in shape of the yield curve negatively impacted our results through lower end.
In addition continued low levels of volatility and overall muted market activity negatively impacted our foreign exchange and securities lending activities in asset servicing and our asset management business suffered from the impact of lower assets under management and the impact of divestitures.
Against that backdrop.
We continue to maintain strong expense discipline without sacrificing investments of for the future of our franchise total expenses were down 4%.
This includes a significant increase in our technology investment, which was more than offset by savings in other areas.
So we're being very judicious and ruthlessly prioritizing investments while also benefiting from our continued progress in increasing our underlying efficiency.
On the capital front return on tangible common equity was 21% our capital ratios remain strong and we continue to return a substantial amount of capital back to our shareholders.
We're increasing our quarterly common stock dividend by 11% to 31 cents per share starting in Q3.
We also plan to repurchase up to $3.94 billion of common stock through the second quarter of 2020, an increase of around 20%.
The significant impact of lower Eni on our business certainly impacts our thinking of how we manage the company in the short term, but it does not change our longer term focus and our work to build out our franchises.
Our business mix is unique our market positions are strong and we see opportunities across the company to build out a stronger longer term growth profile.
Pershing is a great example, we occupy a great position, serving the wealth community and continue to invest in our market leading platform to serve independent broker dealers, but we also continued to invest significantly to capture more of the fast growing our IEI segment.
We held our annual client event this quarter with attendance by a couple of thousand of our clients and partners at that meeting, we announced a series of initiatives aimed at improving our clients' experiences.
We're streamlining and digitizing customer onboarding for our clients to enable them to spend more time, what they do best we're also rolling out a new capability that will allow firms and advisors to use net asset flows and capesize to measure their overall business performance.
And identify trends in their business more quickly.
We've also just released a new technology assessment tool to help advisory firms pinpoint their technology needs identify the right technology stacks and drive better returns on technology investments at a time when clients are increasingly struggling with those topics.
And as we said over the last few quarters, we're moving beyond the impact of the client losses that impacted our results over the last year and expect to see continued improvement in our revenue growth as we onboard a series of new mandates. Later this year. In addition, our sales pipeline continues to be strong.
In clearance and collateral management you see another example, where we have distinct competitive advantages and are seeing continued strong performance given our role in servicing both the buy and sell side and our status as the sole provider of U.S. government clearing.
We can help clients optimize their funding needs in a way that others just can't.
We continue to generate additional revenue through collateral optimization services as well as attracting incremental balances. In addition client activity and market demand is driving increased security settlement volumes and growth and collateral management balances. We continue to see strong us government securities settlement volumes, driven by elevated levels of us treasury issuance and secondary market trading.
This business should continue to be a source of strong organic growth.
Both banks as well as non banks are seeking access to our government security settlement platforms and access to US dollar funding market through Tri Party and other repo clearing capabilities.
As we increase the coordination of our government securities clearance platform and our global collateral management capabilities, we expect to provide enhanced capabilities across regions, especially as we develop interoperability across those regions and assets were currently working to build a next generation global collateral platform to support these capabilities as well as enhanced resiliency and data and analytic capabilities not currently available in the market. We think it will significantly boost our ability to attract new market participants as well as additional business from our existing clients. In addition, the business remains focused on technology enabled solutions for our clients facilitating optimizations collateral across our platform as well as for collateral held away from us and the ability to monitor intraday liquidity and credit usage on demand with our proprietary.
We're also seeing progress in issuer services, our new Siloed platform has been received well by clients and should provide the foundation for us to compete more effectively.
We continue to see good business momentum in corporate trust as we gain market share in a number of our key debt products in Treasury services. While we are challenged by the impact of the yield curve, we do see some success and our focus on expanding our client relationships, which was has resulted in higher deposit balances.
While these are interest bearing deposits predominantly.
They are from strong relationships across multiple geographies, and we think strengthens our business over the long term.
We remain focused on building, our liquidity trade finance and payments businesses as well.
In asset servicing although equity markets, particularly in the us have been strong reduced client activity and the impact of the yield curve has negatively impacted our financial results, but we continue to experience important new wins across client segments and geographies just to highlight two of them. We were recently awarded mandates by ATP, Denmark's largest pension fund and in the US we renamed Microsoft's New Global custodian for the Treasury operations. The first time in nearly a decade that Microsoft to switch custodians.
And we continue to expand our servicing capabilities for higher growth asset classes, such as alternatives and EPS in fact assets under custody related to ETF servicing are up roughly 50% versus a year ago, a sign of our traction in the marketplace.
Client response to our commitment to work with third parties to more closely integrate the front to back operating model has been positive our aligns with Blackrock has also been well received and we're in the process of enabling our integrated functionality to several joint clients and continue to have extensive discussions across existing and potentially new clients.
And as I mentioned and Mike will cover in more detail low levels of volatility in market activity has significantly impacted our foreign exchange in securities lending activities, while we haven't seen a change in these trends just yet they can and will change very quickly at some point, we will be the beneficiary of that.
In our asset management business.
Though our performance in asset management was negatively impacted from cumulative outflows over the past year the level of outflows in our higher margin products has slowed and were seeing continued improvement investment performance, particularly in some of our larger equity strategies and our wealth business. We were negatively impacted by the interest rate environment, but our assets under management flows where we get paid for investment advice continued to be positive.
On the expense side, you see the impact of our continued focus on using our resources wisely.
We have not announced a special program to reduce expenses, but as I think you can see in our results and we will continue to see we're embedding quality improvement and a clear focus on increasing efficiency into the body in white mountain culture, and how we manage the company. This includes eliminating unnecessary management layers across every area of the firm from staff to sales to operations automating processes, which are today manual and rethinking the flow of activity between us and our clients. Just a reminder, while these activities will result in lower expenses, it's actually more important that they will increase the quality of the work we do for our clients well sounds more strategic to discuss new capabilities. We are building, which we are there is a meaningful opportunity to improve our growth trajectory by differentiating our firm through the quality of the work we deliver day in day out.
We're far from done here. This is a multi year journey and the ability to continue to drive benefits for both our clients and ourselves to continues to be extremely meaningful and as I mentioned earlier, though our expenses declined this quarter. They continue to include a significant increase in technology and product development investments. While some of these expenses are discretionary to some extent we remain committed to these investments to build the business for the future. We will continue to keep an eye on the impact to the environment and our business and know that we have this lever and others to pull if we choose to reduce the expense base, even more significantly but we believe we should protect these investments as much as we can as they will drive much of the future success. The company, having said that we remain confident that our ability to continue to drive improved quality and drive efficiency will offset these investments for the next couple of quarters.
We also continue to bring in and elevate exceptional talent to help us accelerate our progress there have been a couple of talent changes worth highlighting bill Daley has joined as vice chairman and will be responsible for overseeing our government affairs philanthropy and corporate and social responsibility efforts I've known bill for many years and couldn't be more excited to attract someone with his reputation abilities experience and judgment, Jim Crowley has become CEO of purging. Jim has spent his career at purging and has overseen a broad range of responsibilities from sales to operations. Most recently, serving as the Chief operating officer. He knows our clients systems an organization. So it's been a quick and seamless transition. Most importantly, Jim understands the importance of not missing a beat with our business, while thinking through where we can go where we can go to play an even bigger role in the support of the growing wealth business and we just announced that Joel in Anderson will be joining in September as head of human resources, I've known and worked with Joe Lin and know how important she.
We'll be in our journey of creating a high performance culture that can support the growth of our business. So in closing we in the industry. We will have to continue navigating market challenges as the yield curve creates headwinds in the shorter term.
But believe that we will be beneficiaries of central bank actions as we are confident they will ultimately result in stronger global economic growth and stronger market activity.
We have not changed our belief that opportunities across the franchise to drive higher growth exist and we continue to remain focused on balancing our short term performance with building our company for the longer term with that let me turn the call over to Mike.
Thanks, Charlie let me run through the details of our results for the quarter, all comparisons will be a year over year basis, unless I specify otherwise.
Beginning on page four of the financial highlights document.
In the second quarter total revenue was down 5% to 3.9 billion.
This mainly reflected lower net interest income the impact of prior year outflows and divestitures and asset management and reductions in foreign exchange and securities lending, which were driven in part by market factors.
Total fee revenue was down 3% year on year within investment services, we saw fees grow across a number of our businesses.
Dennis just revenue was down 12% and expenses were down 4%.
This resulted in an 8% decline in pre tax income to 1.3 billion.
$969 million net income applicable to common shareholders.
And a 2% decrease in earnings per share to one dollar one cents, which was helped by our common stock repurchases.
And our pretax operating margin was 33%.
Moving now to capital and liquidity on page five.
Our capital and liquidity ratios remained strong as of June Thirtyth, our key ratios were stable or up since the end of the first quarter.
Common equity tier one capital totaled $18.5 billion and our Cetone ratio was 11.2% under the advanced approach.
Our average LCR in the second quarter was 117%.
The SLR with 6.3%.
And as Charlie indicated we are pleased with the significant capital return that we announced a few weeks ago.
Now looking at net interest revenue on page six.
As I mentioned net interest revenue was down 12% year over year and 5% sequentially.
Total average deposits were up both year over year and sequentially. This was driven by higher interest bearing deposits, partially offset by the expected decline in non interest bearing deposits.
The rates paid on interest bearing deposits increased from 99 basis points in the first quarter of 2019 to 104 basis points in the second quarter.
Despite the expectations for lower rates pricing has continued to be competitive throughout the second quarter, but appears to have stabilized.
Loan balances declined encouraging and clearance in collateral management, primarily driven by lower client demand for leverage.
The net interest margin decreased eight basis points sequentially, driven by the impact of higher deposit rates and lower market rates impacting our reinvestment yield.
On page seven we'll go into more detail about how our net interest revenue change versus the first quarter.
As I said net interest revenue was down 5% sequentially, which was at the low end of the range, we provided with our first quarter results.
At that time, I said that we expected that average non interest bearing deposits with continued to come down.
And that the rate paid on interest bearing deposits, we continue to increase due to competition.
Both of these happened as expected.
At that point, we also expected to yield on our securities portfolio to be relatively flat to the first quarter.
Given the downturn in rates since then the yield on the securities portfolio was actually down approximately five basis points.
US short term rates moved five to 20 basis points lower during the quarter impacting our loans and floating rate securities.
The longer end of the curve is lower by between 30, and 40 basis points impacting our fixed rate securities portfolio reinvestment yields.
European Government Securities yields are also lower as a reminder, about one third of our portfolio Reprices every quarter.
Included in the lower yield on the securities portfolio is a negative impact from higher premium amortization.
These reductions were partially offset by the higher interest bearing deposit balances and we took advantage of short term investment opportunities.
We are taking action to increase and AI, while maintaining our current risk profile.
For example, we so low yielding unique in the quarter and reinvested in high grade clothes and other asset backed securities.
We also took advantage of attractive pricing in the reverse repo market and are selectively investing in short term loan assets as well as optimizing funding and long term debt issuance.
Now page eight details our expenses.
On a consolidated basis expenses of $2.65 billion were down 4%.
Approximately 1% of the decrease was driven by the favorable impact of the stronger us dollar.
The remaining decrease reflects lower staff expense and our continued expense discipline, which resulted in decreases in most other expense categories, while absorbing a significant increase in technology investment, which is reflected in staff professional legal and other purchased services as well as software and equipment lines.
As discussed over the last couple of quarters, we have executed a number of efficiency initiatives, including or organization streamlining, which helped drive the expense improved in the quarter.
We remain confident that we can become significantly more efficient in the future.
Turning to page nine.
Total investment service revenue was down 3%.
Assets under custody and administration increased 6% year over year to 35.5 trillion.
Primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger us dollar.
Within asset servicing revenue was down 8% to 1.4 billion, primarily reflecting lower net interest revenue foreign exchange and securities lending lower client activity and the unfavorable impact of the stronger dollar.
As you can see foreign exchange and other trading revenue was down 11% in foreign exchange client activity with modestly lower and volatility has been historically low for some time.
Securities lending has also been negatively impacted by lower demand and tighter spreads.
Although revenue was down the securities available to lend increased 15%, which should position us well as the market changes as the markets change.
Consistent with the last number of quarters, we don't see an acceleration in pricing headwinds in the business just a continuation of what we have seen in recent years.
Encouraging revenue was up 1% to $564 million and up 2% sequentially, reflecting the impact of higher client assets and growth in accounts and clearing volumes, partially offset by lower net interest revenue.
The sequential increase includes a small piece of the new business pipeline that we've been talking about which we expect to impact our result, which we expect to impact our results in the later in the year and have a more meaningful impact next year.
Issuer services had a good quarter revenue was up 3% to $446 million benefiting from higher depository receipts fees and higher volumes in corporate trust, partially offset by lower net interest revenue in corporate trust.
The 13% sequential increase primarily reflects higher fees in both businesses.
The sequential increase in depository receipts was primarily driven by timing of corporate actions and a little increased transaction volume.
We continue to see good business momentum in corporate Trust.
In Treasury services revenue was down 4% to 317 million, reflecting lower net interest revenue. Although total treasury services deposits are up we are seeing the impact of the shift from noninterest bearing the interest bearing deposits and higher cost of it of the interest bearing deposits.
Claims and collateral management revenue was up 6% to $284 million due to growth in clearance volumes and collateral management due to the new government clearing clients that we converted last year in other new clients as well as higher clearance volumes related to heightened levels of us Treasury issuances.
Average Tri party collateral management balances were up 21% approximately two thirds is from client the client conversions and the remainder is from new business and more activity from existing clients.
Page 10 summarizes the key drivers that affected the year over year revenue comparisons for each of the investment services business.
Now turning to investment management on page 11.
Total investment management revenue was down 10%.
Asset management revenue was down 12% year over year to 618 million, primarily reflecting the change in AUM, which was impacted by the cumulative outflows since the second quarter of 2018.
Partially offset by higher market values.
It also reflects the unfavorable impact of a stronger us dollar principally versus the British pound and the impact of divestitures and hedging activities.
Just a reminder performance fees can vary based on client anniversary dates and were lower compared to significant outperformance last year, particularly in India.
We had outflows of 24 billion in the quarter, primarily driven by 22 billion and outflows from low fee index strategies with two thirds of that from a single client the ticket assets in house.
We had equity outflows of $2 billion for the quarter.
Despite the outflows, we had strong investment performance in our largest equity strategies.
We had 4 billion of outflows in fixed income products.
And and multi asset and alternative inflows turned positive at $1 billion.
We had a $1 billion in LDI inflows in $2 billion in cash inflows and overall assets under management of 1.8 trillion, which were up 2% year over year due to higher markets, partially offset by the impact of the stronger dollar and Netflix net outflows.
Wealth management revenue was down 5% year over year, and 1% sequentially $299 million with both decreases primarily reflecting lower net interest revenue, partially offset by higher market values.
Within wealth management client assets increased 1% and were up sequentially, 2% to $257 billion.
Turning to our other segment on page 12.
Noninterest expense decreased year over year, reflecting lower staff and occupancy expense related to consolidating our real estate that was recorded in the second quarter of 2018.
Now looking ahead to the third quarter. There are a few things you should consider.
With respect to net interest revenue, let me walk you through some assumptions, but as always you make your own assumptions as well.
Based on what we see today, our interest bearing deposits would be similar to the second quarter.
We expect that average noninterest bearing deposits will continue to come down.
The rate environment has been changing quickly and the forward curve is currently pricing in at least two cuts this year.
And as a result, we expect the securities portfolio yield will decline in the third quarter.
The competition for deposits remains high.
And deposit repricing is difficult predict with a high degree of certainty, but we expect that beta on the back of the fed rate cuts will be close to a 100% for some parts of the deposit book.
But the overall beta will be less than 100%.
Given these assumptions, we would expect a sequential percentage decline in net interest revenue to be similar to what we saw in the second quarter.
Depending on the yield curve deposit pricing and noninterest bearing deposit volumes.
Keep in mind that depending on the on balance sheet market dynamics, there may be shifts of revenue between net interest income and FX and the other trading line.
And I would continue to caution you that is very early in the quarter and the environment has been dynamic.
Although equity markets have been rising a little less than a third of our.
Is correlated to the equity markets. So you should factor that into your expectations for Q3 investment management fees.
As a reminder, that we had some notable items in the third quarter of 2018, which you should factor into your modeling.
And lastly, while we remain committed to continue to invest more in technology and product development.
We will continue to monitor the impact to the environment in our businesses and know that we have levers to pull if necessary to further reduce our expense base.
With that operator can you. Please open up the lines for questions.
Thank you and if you'd like to ask a question. Please press star one on your telephone keypad.
Our first question comes from the line of can you stand with Jefferies. Please go ahead.
Thanks, Good morning, guys.
Thanks Ted.
Ask on that rates part of the outlook Mike.
So.
You said, a third of the book Reprices every quarter.
And I'm just wondering if you can elaborate further on.
The pace of change what that means for investment yields just presuming this curve environment I am assuming that then means then maybe more say here, we'll have continued pressure past the third quarter.
Can you elaborate on that and also just wondering how you are to that magnitude of change in duration, where the duration stands today. Thanks.
Yes, Hey, Ken Thanks for the question. So as you as you would expect I'll make sure I cover all pieces of it then pick it apart, but on the duration as you would expect given the down tick in rates.
The durations come down just naturally as Prepays have gone up in the mortgage back book.
Weve you know as we continue to take action on the maturities that come through the portfolio, we add a little bit of duration back, but but overall, it's ticked down slightly sort of and sequentially in the quarter.
As you sort of think about the impact of lower rates. There is a lag is that sort of kind of baked into the book if a third of its repricing every quarter. So I think that you should go to model that pretty pretty easily I think.
Okay and my quick follow up is then just you mentioned I guess trading rate risk credit risk can you just talk about the philosophy at this point in the economic cycle of making that move in your confidence from a risk management perspective. Thanks, Mike.
Yes, I think in the in your talking about some of the changes we've made in the securities portfolio with the communities and and Siloed et cetera that I mentioned is that where you're yes, thats. It thats it. Thanks.
Yes look I mean, I think when you look at what we did it's one one it's not a major sort of driver in the book, but.
The the the munis, we sold were yielding below.
Yes, we are and so all we did was sort of redeploy those in some very high quality asset backs and Ceos and so I would I wouldn't take this as the abandoned or directing a big change in direction of the book now this is Charlie.
The only thing I would add is I would just take it as.
We're going through everything that impacts.
Eni to figure out what we can and should do on the margin that can be additive without changing the risk profile any real material way.
Okay understood. Thanks, guys.
Thanks.
Thank you. Our next question comes from the line of Betsy Graseck from Morgan Stanley .
Hi, good morning.
Good morning.
Hey, a couple of questions. So on the expense side this quarter.
It really good results I wanted to understand I know you gave some.
Basic.
Explanation on where that came from but maybe you could drill down a little bit on how much more.
Vince can you could continue to do that or not touching the investment spend because we get the message on Eni is coming down, but I think part of the story. This quarter was you were able to offset that with the expense cuts.
Yes, Hey, Betsy Charlie.
Listen.
I've been very very consistent I think since the day I got here about what we say on this and nothing is different which we continue to believe that there are meaningful opportunities to reduce expenses and that will continue for a relatively long period of time, meaning beyond what we actually even think about at this point.
It cuts across a whole series of initiatives everything as I've talked about from.
Reducing layers.
Location of employees automation of things like reconciliations instructions with clients corporate actions and a v. automate and go through the long list of things that we're constantly looking at.
And.
What I'd say is an environment like this you get even more focused on figuring out what you can do more quickly.
Havent actually impact our results again, we do it because it drives quality the byproduct of that quite frankly is that we've become more efficient assets.
And so as time goes on I think we get more and more confident that there continues to be more opportunity for us.
Which is why I made the comments relative to the efficiencies relative to the size the investments we have to make.
We think as I said for the remaining couple of quarters, the efficiencies will more than offset the increases.
But if we think the environment warrants a change in the level of investment we can do that.
But.
We feel very very positive about where we're going with the expense trajectory of the company in a way which is positive for our clients.
Okay.
Thank you.
Thank you. Our next question comes from the line of Steven Chubak with Wolfe Research. Please go ahead.
Hi, good morning.
So I wanted to dig in a little bit to the securities book in some of the NII disclosure and you spoke to some changes in securities mix and maybe reinvesting NCL lows you also talked about potential to optimize some of the higher cost funding sources Im just wondering whether some of those changes or some of those actions are contemplated as part of the NII Guide.
Yes, I mean look all of it is.
Contemplated Steve as we sort of look at it and as Charlie mentioned sort of were going through every.
Every last piece of it.
Thats sort of builds up to drive and I and we're going to continue to work to optimize it as best we can without substantially changing sort of the risk profile that we've got.
Got it and just one my for my follow up I wanted to ask about.
Capital ratios and maybe more specifically trying to get a sense as to know as you look out over the next couple of years, just given the strength of your car track record. How are you thinking about managing are determining whats the appropriate capital target, especially in anticipation of the fact that the CB could potentially be deployed are implemented as early as 2020.
Yes look like Steve I think we've got to.
Yes, we've got to kind of let the capital rules.
Get finalized right and hopefully that will happen sooner rather than later, but as you know we've been waiting for a while for that so I think that'll that's got to happen sort of first.
And as you know we've been sort of constrained.
You know with based on sort of the leverage ratio in in C car for the last number of years and so that we don't see that sort of changing as being a constraint for us going forward and at this point.
And you know where as you can see over the last couple of years, we've been very active too.
Both optimize sort of how we think about our modeling that goes into.
Stress testing and C car and I think you've seen that as we've sort of increased our.
Capital return over the last last couple of years and I think.
We will continue to sort of do that as as things evolve.
Great. Thanks for taking my questions.
Thank you. Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please go ahead.
Good morning, Thanks for taking the questions.
First question just on proving that should some growth in the quarter you guys mentioned some of the Onboarding clients.
Can you provide an update on the timing and the impact head if some of that new business.
As well as what drove the lower margin balances in the quarter. It seems a little counterintuitive on from what we're seeing with the peers.
Yes, Hey, Mike its Mike ill take that so as we've said over the last few quarters I think on the new business side, we would we're in the middle of Onboarding a number of those clients now and we would expect to start seeing that more meaningfully towards the end of the year and into the first part of next year.
On the margin balances. There is if there is theres really no story other than weve seen a lack of demand from from clients.
Right, now and and that could turn pretty meaningfully pretty quickly, but but it's really just been muted activity from the existing clients, but as nothing I mean has nothing to do with.
Just the clients.
Net net changes in clients in our business, it's actual activity of the existing clients that we have and it's just the impact of the way to think about the risk they want to take in the market today, yes.
Got it Okay, and then just as a follow up.
Maybe Charlie just based on the investments you guys mentioned, the purging wins, you pointed to some of the asset servicing wins.
Any traction on the collateral and the clearing management. So it seems like some of the organic growth initiatives you guys have been putting in place are starting to gain some traction just wanted to get an update on.
On your view on more the strategic.
Repositioning and outlook.
Because obviously, there's a lot of folks on eni in the rate headwinds, but it seems like you're making some of the traction on some of the the business areas.
Yeah listen I think at some.
You know, it's very early and so there too.
Just because we have some businesses, which have seen some growth doesn't mean, we internally we feel better about it than we should.
But we do have some businesses that.
Hatch continually shown some organic growth and others, where it's still slow.
Predominantly because of the time it takes for us to build up our capabilities and the long sales cycles.
We highlighted those where you're seeing growth in the business and those are the real they're consistent they relate to both our execution and the market positions that we have.
And on the longer tail businesses.
Such as asset servicing.
That continues to be a work in progress.
But we feel.
As good as we have felt that the opportunities are there.
It just will continue to play itself out over time.
Okay. Thanks, a lot.
Thank you. Our next question comes from the line of Brennan Hawken with CBS . Please go ahead.
Hi, Good morning, Charlie and Mike Thanks for taking the questions.
Mike.
You referenced I think.
Hey, Hi, beta expectation when in a rate cut environment and I just was curious to get some color on what drives.
Thank you the confidence that it'll be high.
This quarter, we saw market rates begin to fall and yet interest bearing deposit yields went up it looks like the policy. If we get a policy kind it will be viewed as an insurance cod and in the past those haven't had as high beta. So just kind of curious about what it is that you're seeing in the market and what you are hearing from folks closer to those deposit markets.
And what would give you the confidence that those betas will be high.
Yes, I mean, Brendan look I mean, obviously, we'll see how things play out over the next.
Coming weeks, but we've got a very disciplined process, where we go business by business segment by segment within those businesses.
And try to be realistic about what what the beta is going to look like for each of those segments.
And Thats sort of how we go about the process of trying to understand what what's possible and some of those segments are more competitive than others, and we'll have lower beta beta than others and there is dynamics that we sort of take into account.
And so we're going to continue to do that and work through that as as sort of rates.
Sort of come down the only thing I'd add Brent and I know you know this but the.
We don't and we don't sit here and pretend to be able to forecast how many rate cuts there will be what we said is.
We're just taking what's.
In the implies and saying if that holds true here is what we would expect to the extent that its something less than that and it's something more insurance like.
You might be right, but then that also changes the outlook for and I in a more positive way than it otherwise would have been for some of the out quarters.
But if it is a series of cuts.
Then the rate at which we and others will be willing to move.
Is impacted by that so.
A lot will have to do with what the actions are and what the words are around it and what the expectations are beyond that first Scott.
Yes, that's that's all really really fair and helpful. Thanks for thanks for that color.
My next question is is on expenses you guys have talked about how you have been to have this quarter is a reflection of the discipline and how.
You have the ability to step up when when you need to and.
Show the impact of the efficiency efforts you've been making.
Is this as we think about.
No.
Tuning up our models here.
Should we think about this is the right jumping off point.
For the rest of the year.
Or are there some factors that we might be missing that we should consider when we consider.
The back half here.
Yes, I think Brendan.
You know I think you really got to sort of look at it year on year, because theres dynamics that sort of change as you sort of look at individual quarters.
And so I think you got it so I think you could sort of take the view that both Charlie and I gave in terms of the efficiencies offsetting all the investments and sort of think about that on a year on year basis for each of the quarters going forward.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of Glenn Schorr with Evercore ISI. Please go ahead.
Hi, Thanks very much.
A quick follow Hello quick follow up on your comments on ETF servicing up like 50% versus last year.
Curious if you can help us with.
Thoughts on what kind of base are we talking about and maybe just talk a little bit more towards overall positioning winning new clients is.
The revenues coming from current clients and their organic growth just curious.
Yes. This is Charlie I will take that listen we don't disclose the individual pieces.
But it's when you look at who services the biggest EPS out there.
We have not historically been one of the large GTF provider. So thats, just a way of saying.
Relative to what you see in the world, it's from a small base.
But it's also just very clear for us relative to the focus that we have on it.
We have one.
So I would describe it as a significant piece of business from us from a strong name in the market that wants to grow in the space.
And we're very very focused on growing it in a more material way.
Then what you've even seen seen in the past. So that's that's the reason why we want that highlighted not a huge revenue impact in the short term, but important strategically for us.
Understood.
And maybe I could go over to the asset management side last quarter. I think you pointed out some of the investments you're making in passives oil smart beta LPI.
Maybe you could provide a little bit more color on.
I know these are longer tail investments, but curious on what you're working on right now.
Yes. This is listen is exactly the same set of a list as you point out it doesn't change quarter on quarter.
When you looked at the results in the quarter. Obviously, you saw the flow information Mike talked about it.
You know big piece, driven by one very specific client that took something in the index space in house.
We are focused on the things that we spoke about and.
It is a it's a relative.
It's not the easiest environment.
But we're what we're focused on our existing platform is ensuring we have the right products and focused on performance and we walk you through some of the things.
On the performance side, which.
Should over period of time drive flows and drive our own financial performance.
Okay. Thanks Charles.
Thank you. Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Thank you good morning.
In view of the pressure that everyone is seeing on the margin because of the rate environment.
Have you guys considered.
Obviously your loan book is not as big as your Securities book, but is there any consideration of trying to focus on maybe growing the loan book to offset some of these pressures that you're seeing on the margin.
Listen I think.
I think we are.
As Mike said, we are focused on looking at every every component of anti.
But not rethinking the risk profile profile of who we are and what we are when you look at what we do in the lending space.
For the most part what we do in the lending space supports the rest of the businesses that we're in.
It's a it's slightly more than an accommodation is the way I would think about it is an important component of what we do and what we provide for clients.
But we don't have the infrastructure, we don't have the diversification, we don't have the size.
Lending platform that somebody others have.
And our view is if you just entered that just for the sake of creating Eni beat to solve a short term problem that probably wont and well for.
For us if we went down that road.
So we're trying to be far more.
Selective about where we can pick ups in the some yield without putting ourselves in a position, especially at this point.
In the credit cycle that will hurt.
We will regret later on.
Very good and then.
Following up on your assets under management comments recognizing that.
Equity is not a material part of your assets under management, but can you share with us in the trend obviously that many of the active managers, both in fixed income and equity or seeing some pressure from the passive is of course can you share with US are you guys seeing that same kind of pressure in your active part of the assets under management and what are you trying to do the offset it.
Yes, Hey, John it's Mike.
Certainly in some of the.
In some strategies, we're seeing more pressure than others.
But and I think what we're trying to do is make sure that our where we have differentiation that we're focused on performance and as you sort of look at our large or larger strategies. They do they are differentiated they are not sort of like index hugging kind of strategies and I think we've seen good performance, we've seen a slowdown and in and out in outflows and in some cases, a return to inflows in a few of them and so we're focused on those differentiated strategies, which I think will will help us over the long run and I guess I think what I would add is.
Breaking the two parts there.
Flows and.
Just the fee environment.
I would say.
The the pressure that we've seen on fees, while it hasn't gone away.
It hasn't increased and it's probably we probably had more filter through than less at this point. So that's some on a relative basis.
The negative going away from a for US, which is which is certainly a good thing and as I said, we're focused on in our equity businesses, whether it's some.
The Walter Scott business or any of the others focused on performance. The underperformance has been quite good.
And when you see better performance you see better impact on flows.
It's early.
But.
It certainly feels better when you've got the stronger performance than when you don't.
Charlie Mike Thank you.
Thanks, a lot.
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.
Hi, guys. Thanks.
Just hoping to follow up on a couple of specifics here. So I think Mike you mentioned the beta.
On rate cuts will be closer to 100% on a portion of your deposit base.
What percentage of your interest bearing deposits will have that kind of a 100% based on the rate Gotta, which assuming is more contractual and which is why you kind of have that level of confidence.
Yes, Alex I mean, that's not something that we disclosed in that level of detail, but as I said you should assume it's not just where we've got contractual sort of rights to do that.
We're being very disciplined about how we sort of go through the segment by segment review in the book.
Okay and then.
Lots of color around expenses.
More on the qualitative side, but was hoping would think through the rest of the year and maybe even into 2020.
If I hear you guys correctly it sounds like the efficiencies are more than offsetting technology spend so should the expense run rate be down versus kind of the first half of the year for the back half of the year.
Yes, as I said, Alex you should sort of think about it sort of year over year right for the third and fourth quarter, just given some of the dynamics as you sort of look at the way the pinedale sort of works out and you know you should assume that the efficiencies offset.
The investments, we're making in the third and fourth quarter year on year, so sort of flattish year on year.
Got it thank you.
Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi.
Good morning.
So I heard your controlling what you can control the expenses, but I'm just wondering about the pricing.
Environment, so assets under custody are up 5% year over year, but servicing fees are only flat.
He said the pricing pressure is the same as it has been so should we think about that relationship as the pricing pressure or not how should we think about it.
Yeah, Mike I would.
Hey, its Mike I would I would just remind you that as sort of the markets go up so in particular, the us markets have sort of gone up year on year rise. So that does have an impact on AMC.
And you know as as if if if it's just market sort of driving.
If you don't get paid the same.
For that increase that you do for bringing in sort of new clients rights as clients have sort of graduated fee schedules. So there's a little bit of that you see in there and then.
We'll go back to what we said on the pricing like we really see no discernible difference at this point relative to what we've seen over the last three years I will say the following thing Mike.
Which bone satisfy you, but it's just the reality, we don't spend a lot of time looking at that ratio.
There is assets under custody are not directly related to that line, we get paid for different things not just the level of.
The level of a you see that exist, sometimes it's based on transaction, sometimes based upon the activities that we have so we would expect that number to grow over time at a faster rate.
But that doesn't mean that we won't see benefits in the net interest I'm sorry in the operating margin of the company over a period of time.
That's the way, we think about and what we look at.
Well that's helpful. So maybe just a more specific question then when you talk about pricing pressure what is pricing pressure like you say, it's kind of similar to the way. It's been the last few years is it 1%, 2%, 3% half a percent how would you quantify that.
We don't talk about the specifics, it's obviously embedded in the overall number.
On a percentage basis relative to just when you look at our revenue growth number.
The negative impact is not a hugely significant number.
Okay, and then last follow up some of your peers that reported so far the money center banks have shown.
Servicing fees up 5%, whereas yours was down.
5%.
I'm, sorry that was much different on a core basis here as anywhere no matter, how you slice. It the mice that are banks did a lot better. This quarter is there anything unique to them are unique to you or like you said new business flows on later this year, maybe that changes then.
Listen we should we don't we're not.
He has spent a lot of time talking about our competitors and there's a lot that's hard to understand when you just look through our press releases relative to these businesses.
What weve looked at for our competitors for comparable businesses doesn't that doesn't agree exactly with what you said, but we can certainly follow up with you later on that.
Okay. Thanks, a lot.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.
Great. Thanks, good morning folks.
The first question, Mike just you talked about issuer services and some of the differences on the DRD timing.
We've had some shifting between the second third quarters and the timing of that seasonality. Maybe you could just talk about the impact of that in to Q on a sequential basis, and then sort of.
Given that timing what would the outlook on the ore side.
Might be for for Threeq, you in terms of seasonality.
Yeah, Hey, Brian So as I said I think a couple of quarters ago, you really sort of need to look at issuer services over the full year and not focus too much quarter to quarter and I think when you do that you sort of see actually more stability.
Over the last few years.
Then you sort of look at that as you might guess that looking at a quarter to quarter. So I would just encourage you to sort of look at it that way and go back to sort of what we.
What we sort of printed in 2018 and use that as a base to sort of thinking about the whole year.
Okay.
Okay fair enough.
And maybe just a question on the organic growth obviously.
But both you guys talked about some of the progress, you're making especially in clearance and collateral.
And with encouraging I mean, I guess at this sense that at this.
At this stage do you have a sense of.
How you would characterize that organic.
Revenue growth parsing that out from.
Yes.
On the market impacting at least those areas.
Where you are growing and then.
In conjunction with that you've made some new hires obviously.
While you are still.
Reducing the expense based on on the comp side. So maybe if you can talk about weather.
You still plan on making out some other senior new hires too.
To accelerate that organic growth in other businesses.
So let me let me start with the second piece for US first of all I want to point out.
We didn't just highlight hires from the outside we highlighted promotions from within.
And so because there are a series of very big jobs here, which.
We promote from within and are thrilled with the talent that exists here listen I think we're ready.
We highlighted in this earnings release, because we do think the jobs that we've talked about are important to continuing to further our progress inside the company over period of time, which should talk less and less about that as we create more stability in the senior management ranks but.
The positions that we've added that we've talked about we think are meaningfully additive to our ability to think differently about these businesses and.
And grow them and.
First question was the significance of the organic growth and where we can't listen I think it's taken out it does it's a hard question I think we would.
Yeah, I think if you just asked like whats the tone that we want to set relative to the way we're thinking about it is.
We are.
Very early on.
In our journey to build a company with has a higher rate of growth than it had in the past.
The fact that we have some businesses that are showing.
Underlying organic growth is certainly a good thing.
It's real we think it's you know while there might be some volatility did sustainable both because of the work we're doing in the quality of the franchise that we have it's not everywhere. We have a lot more work to do so the trends are mildly positive with.
Still a lot more to do.
Okay, great. That's good color. Thank you.
All righty.
Thank you and ladies and gentlemen, as a reminder, that star one on your telephone keypad to signal for question. Our next question comes from the line of Robert Wild Heck with Autonomous Research. Please go ahead.
Hi, guys on the balance sheet I think in the past you've said that the feds normalization was going to lead to deposit run off of.
I'm 40 to 70 billion, but that was that was from a while ago anyway. You can help us quantify the impact that process has been having and how that will change once the fed stops.
Yes look.
Hey, Roberts, Mike is that as I said in my remarks.
We sort of expect interest bearing deposits to at this point in the quarter to be about where they were last quarter and then non interest bearing that keep coming down a little bit.
And I think post Q, either stopping in the fed reducing its balance sheet.
That should be a net positive.
Going forward, but we'll see how it plays out.
Okay. Thanks, and then can you just give a quick update on the Blackrock gladden.
Yes, correct Latin partners, and how that has progressed and.
What the client uptake has been like on the additional capabilities you built out.
Yes, it's.
I think what we've seen is.
A very very high degree of interest from both existing clients that we have.
And potential clients.
We're in the process of Onboarding.
Some of the of the existing common clients we have.
A meaningful portion of those.
To give them access to the new capabilities and most of the remaining ones are extremely interested and we're just in the process of of going through that discussion.
So all in all I think we are just feel very good about what we've done there.
And continuing to talk to other third parties.
About being able to do the same.
Great. Thanks, a lot.
All right.
Thank you. Our next question comes from the line of Brian Kleinhanzl with KBW.
Yes, good morning.
A quick question you still seeing good growth and the Tri party collateral balances how much of that is still coming from the onboarding.
From JPM or is that fully done at this point in time.
The the Onboarding finished in the late third quarter last year, so you're still seeing the annualization of that Brian So roughly sort of two thirds of it.
From the conversion and the other the remaining from either new clients or growth from there the rest of the Vivus.
Okay, and then you mentioned on the expenses that the tech spend was going to be offset by efficiency savings, but when should we see the tech spend slow as of June .
So when there was some accelerated expense to get the platform as you want it to be but should we see it slow and 2020 or this is just an ongoing rate of spend that we should expect for the near term.
Yes.
I don't.
I don't know the answer to that is the short is the short way of thinking.
Is this the thing to answer I think we've.
Certainly thought about it in detail through the end of the year were at the beginning part of our process for thinking through next year in detail.
There is no doubt that the tech spend should become more efficient as time goes on there's still a lot to do.
So relative to the way, we think about overall expenses, obviously that will be governed by the way we're thinking about.
What our requirements are and what the environment is so we're very conscious of the world that we live in.
But I think we'll defer the answer the.
The question until we think about it some more through our process.
Okay. Thanks.
And gentlemen, it appears we have no further questions at this time.
Alright, thanks, everyone for the time take care.
Thank you. This concludes today's conference call webcast a replay of this conference call webcast will be available on the B in line now and Investor Relations website at two P.M. Eastern time today have a good day.