Bank of New York Mellon Earnings Call Nuggets: Revenue Decline and FX Translation Impact

Bank of New York Mellon Corp (NYSE:BK) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Revenue Decline

Howard Chen – Credit Suisse: Gerald, you mentioned the signs of momentum across the franchise, but despite the new business wins and higher asset levels and improved market tones, revenues are still down from last year and earnings are in flattish, so while I know you are always trying to be disciplined on expenses, what do you need to see in the environment to potentially raise the ultimate goals of the operational excellence program?

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Gerald L. Hassell – Chairman and CEO: First of all, the revenue decline year-over-year was mostly in the net interest income line and thus we’ve taken some steps to shore that up and on the expense side, we do have the operational excellence initiatives underway. As I said in my comments that we’re always looking to improve upon those. We haven’t come out publicly and said, we want to do something better than what we’ve already laid out for you. But I can assure you that we’re working very hard to continue to maintain or lower the running rate expenses associated with this slow economic environment and to take our cost structurally on a long term basis.

Howard Chen – Credit Suisse: Then relating to the fixed-income business, I realized it’s still a modest contribution, but how would you say early progress is going and are the nature of those hedges related to overall balance sheet management, particular trading strategy or something else?

Thomas P. (Todd) Gibbons – VC and CFO: When I talk about the hedges, most of the decline was related to hedges and there are really two of them. One is hedging traditional interest rate risk, but the hedge doesn’t qualify in that case as a hedging instrument. So it’s mark-to-market fluctuates with changes in rates, we don’t typically see such a big move, but that was a (indiscernible) significant component of it. The other aspect of is one of our boutiques is particularly sensitive to changes in interest rates, their revenues are. So they have a relatively modest hedge. So that’s more of a timing issue. (Indiscernible) so what ends up happening is the mark on the hedge we take now and the revenue will be reflected in future quarters and it could go the other way. The rest of the other trading was also soft, so our fixed income and our equity trading was a little bit softer for us in the first quarter.

Howard Chen – Credit Suisse: Then finally for me Todd, your CCAR results were quite strong and the improved capital plan is pretty meaningful, but with that buyback plan that you have in hand and the new business that you see installing over the next few quarters and the higher assets levels, at what point if at all this leverage become a constraint again for you to work down the share count and buyback stock?

Thomas P. (Todd) Gibbons – VC and CFO: We don’t see it. Right now the balance sheet is staying probably stable, it’s still pretty large, but it’s not growing and we don’t see an environment where that would change. So, we’re not constrained right now by that leverage ratio. We think we can balance the two, execute our buybacks, manage the size of the balance sheet and continue to execute on the capital deployment that we’ve authorized.

FX Translation Impact

Kenneth Usdin – Jefferies: Can I start by asking you a little bit about the impact of FX translation. You mentioned it being in the investment management line. I was just wondering if you saw that across the income statement and whether or not it had a net effect to the bottom line?

Gerald L. Hassell – Chairman and CEO: Ken, it was basically neutral to the bottom-line. There was a little bit of geography on it, the most impactful was on the revenue line for asset management, but net-net it was about neutral to the Company. It wasnt that meaningful as it moved the it moved revenue positively or negatively.

Kenneth Usdin – Jefferies: Second question that the servicing business showed really well this quarter and I was just wondering if you can kind of give us some color underneath and you talked about the wins and the still to be implemented. Can just talk a little bit about just what the drivers are underneath, it looks like sec lending was down. So how much of it was custody versus broker-dealer versus collateral? Some more color on the underlying?

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Gerald L. Hassell – Chairman and CEO: Why we don’t have Tim take that question, Ken.

Timothy F. Keaney – VC and CEO, Investment Services: Yeah, I would say we’re seeing volumes helping us in our asset servicing business and net new. We still have about $540 billion left to convert. Our payments business grew nicely as well. That was volume driven. We’re also seeing a general tailwind, both around outsourcing where in our broker-dealer clearing and (purchasing) business, a number of small or mid-sized brokers are looking at getting out of self-clearing and outsourcing infrastructure. Then in asset servicing, we still see a continuing trend in the investment management sector and the insurance sector with their outsourcing their middle and back office. So I’ll say those are the general drivers.

Kenneth Usdin – Jefferies: Then last one, just a quick one. Just on issuer, I know you talked about sequentially DR is better, but corporate trust is still lower. Can we talk a little bit just through that corporate trust piece and is it close to bottoming yet for either sequentially and year-over-year, when do we finally run out of that on the bottom side?

Thomas P. (Todd) Gibbons – VC and CFO: Ken, what we’ve indicated is that we think the contraction in corporate trust will probably have an impact of 50 to 75 basis points negative as the runoff exceeds the new business, maybe 50 to 75 basis points in our revenue. It’s actually done a little better than we had anticipated. The reason for that is we’ve seen quite a few more CLOs that are seeing a recovery on that side of the structured market and a fair amount of issuance, but it is still we would expect it to runoff at about that rate. The more negative thing has been the cyclical impact that we’re experiencing in DRs that hasnt bounced back. So we continue to see more cancellations than issuance and so the universe of outstanding DRs for us to generate income on has declined.