Bank Of New York Mellon Corporation (The) (BK)

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The Bank of New York Mellon (BK)

Q1 2011 Earnings Call

April 19, 2011 8:00 am ET

Executives

Andy Clark -

Thomas Gibbons - Vice Chairman, Chief Financial Officer and Senior Executive Vice President

Brian Shea - Senior Executive Vice President and Chief Executive Officer of Pershing LLC

Timothy Keaney - Vice Chairman, Chief Global Client Management Officer, Chief Executive Officer of Asset Servicing, Senior Executive Vice President and Chairman of Europe Operations

Robert Kelly - Chairman, Chief Executive Officer, Member of Executive Committee, Chief Executive Officer of The Bank of New York and Chief Executive Officer of Mellon Bank N A

James Palermo - Vice Chairman, Chief Executive Officer of Global Client Management, Vice Chairman of Mellon Bank N A and Vice President of The Bank of New York

Analysts

Brian Bedell - ISI Group Inc.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.

Alexander Blostein - Goldman Sachs Group Inc.

Betsy Graseck - Morgan Stanley

Kenneth Usdin - Jefferies & Company, Inc.

Howard Chen - Crédit Suisse AG

Gerard Cassidy - RBC Capital Markets, LLC

Glenn Schorr - Nomura Securities Co. Ltd.

Unknown Analyst -

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 Earnings Conference Call hosted by BNY Mellon. [Operator Instructions] Please note that this conference call webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Mr. Andy Clark. Mr. Clark, you may begin.

Andy Clark

Thanks, Wendy, and welcome, everyone. With us today are Bob Kelly, our Chairman and CEO; Todd Gibbons, our CFO; as well as several members of our executive management team.

Before we begin, let me remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement on Page 12 of the press release and those identified in our documents filed with the SEC that are available on our website, bnymellon.com. Forward-looking statements in this call speak only as of today, April 19, 2011, and we will not update forward-looking statements.

This morning's press release provides the highlights of our results. We also have the Quarterly Earnings Review document available on our website, which provides a quarterly review of the total company and individual businesses. We will be using the Quarterly Earnings Review document to discuss our results. Now I'd like to turn the call over to Bob. Bob?

Robert Kelly

Thanks, Andy. Good morning, everyone. EPS was $0.50 or $625 million in the first quarter. Given the seasonality of our business model, it's probably most useful to focus on year-over-year comparisons. That's because we're coming off the fourth quarter when performance fees from investment management and corporate action fees and DRs are seasonally at their absolute peak, so sequential comparisons are less valuable, frankly.

Total revenue grew 9% year-over-year, primarily due to acquisitions, but not entirely. We'll come back to that. We continued to grow faster outside of the U.S. Non-U.S. revenue was 37% in the first quarter. That's up 200 basis points from a year ago. We're continuing to see good growth in investment management fees. They're up 12% year-over-year. And AUM was up 11% in Q1 to a new high of $1.2 trillion.

Fee growth in our investment management -- or Investment Services businesses was 27%. And even excluding the impact of acquisitions last year, it was still up a good 9%. Clearing had perhaps our strongest quarter, up 27% year-over-year and up 5% sequentially. Asset Servicing continued to benefit from new business and acquisitions. Assets under custody was $25.5 trillion, a new record, up 14% year-over-year.

Net interest revenue does indeed remain constrained due to short -- very low short-term interest rates, and our hope is we may have seen the low point of the year in Q1. And despite 25% higher volumes in FX and other trading, this category was negatively impacted by very, very low volatility this quarter. It was down 22% from the previous quarter and down about -- and it's currently, I think, at the lowest rate since 2007. And that is the primary driver of our FX revenue.

On the new business front, we had 6 -- this will be our sixth consecutive quarter of positive long-term asset inflows for investment management. We actually had $31 billion for the quarter, almost double what we saw in the first quarter of 2010. Wealth Management had a record level of client assets and has a strong pipeline and the Depositary Receipts business continues at a very strong win rate. You may have noticed that our provision was 0, so this will be the third quarter in a row it was 0 or negative.

Expenses were up sharply, but roughly half of that was due to acquisitions, and litigation expenses increased as well. Expenses actually declined 2% sequentially, which includes the impact of litigation expenses as well. We're kind of viewing litigation as core at the moment and a reflection of the environment we're operating in. I see this as the last phase of the financial crisis with plaintiffs seeking to recover losses. It's a sad reality of the U.S. legal system, and it's a fact that the entire industry is facing, including us, and will continue to be somewhat of a risk. In the end, we'll navigate through it.

The fundamental strength of our business model is our ability to rapidly grow capital and generate a high return on it. This quarter, we generated almost $800 million of Tier 1 common, up 7% from last quarter or 28% annualized. Tier 1 common equity is really our key regulatory capital and are constrained until Basel III is implemented. So we really focus on our return on Tier 1 common.

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