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

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The Bank of New York Mellon (BK)

Q2 2011 Earnings Call

July 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

Analysts

Brian Bedell - ISI Group Inc.

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

Alexander Blostein - Goldman Sachs Group Inc.

Betsy Graseck - Morgan Stanley

John Stilmar - SunTrust Robinson Humphrey, Inc.

Kenneth Usdin - Jefferies & Company, Inc.

Howard Chen - Crédit Suisse AG

Gerard Cassidy - RBC Capital Markets, LLC

Glenn Schorr - Nomura Securities Co. Ltd.

Michael Mayo - Credit Agricole Securities (USA) Inc.

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Second 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'll 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 13 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, July 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, and good morning, everyone. In Q2, earnings per share were $0.59 or $735 million. That was up 18% versus the first quarter and 9% versus the prior year. First on the revenue front. Both fees and net interest income increased year-over-year, as well as sequentially. And the revenue was up 15% year-over-year, including acquisitions. So excluding acquisitions, which is the way I look at it, revenue growth was about 7% year-over-year. This trend is, frankly, encouraging because if you look back, we had 5% growth Q1 versus Q1 and 3% growth in 2010 versus 2009.

Fees were up about 18% or about 8%, excluding acquisitions as we benefited nicely from new business trends and improved market values. And net interest income was actually up from Q1 and last year driven by much higher client deposits reflecting the strong balance sheet. And speaking of the strong balance sheet, we still had a gain had a 0 provision for credit losses during the quarter. In terms of expenses, they're too high. We're up 21% year-over-year or 12% without the acquisitions. If you kind of peel that back a little bit, about 2% or 3% of that growth came from increased regulatory compliance and litigation costs. These, frankly, are the unpleasant realities of a post-crisis environment. So net of these factors, expense growth was in line with our fee revenue growth. However, the bottom line is we're not getting positive operating leverage year-over-year. We need to and we will. We plan to hold an investor conference this fall likely October or November, and we'll provide you with lots of details about our expense reduction initiatives, as well as some thoughts on revenue growth opportunities as well. Investor Relations will get back to you soon with a date.

A few thoughts on our 2 major businesses, investment management and investment services. In investment management, the results are strong and there are no acquisitions affecting the numbers. We had 11% revenue growth year-over-year, 8% expense growth. And this generated 300 basis points of positive operating leverage and a 20% growth in pretax earnings.

In terms of metrics underneath it, we had AUM growth at 22% year-over-year, which took us to a new high of $1.3 trillion. We are seventh consecutive quarter of positive long-term asset inflows or $32 billion, also a new record. I'd also like to note that in wealth management, we opened an office in Chicago and are currently planning to expand in D.C. and Dallas.

In investment services, we had 16% growth in revenue year-over-year as asset servicing benefited from acquisitions, new business and improved market values. Assets under custody were up 21% year-over-year to $226.3 trillion, which is a new record for us. Issuer services had a very nice performance through the Depositary Receipts business. Pershing was up 21% year-over-year helped by some very large new business wins. And it was also good to see sec lending revenue was up 73% year-over-year. So within securities lending, we had 9 new clients and another 26 existing clients either expanded their mandates with us or they expanded their collateral guidelines, which of course, leads to increased activity.

In terms of our capital account, we generated more than $800 million worth of new Tier 1 common equity before dividends and share repurchases. As you know, our dividend was raised from $0.09 to $0.13 in the quarter. We also bought back 10 million shares almost, and we generated an additional 45 basis points of Basel III capital. Now we don't know what our final city buffer will be for us, but we hope to know in the coming months. But given our high-quality balance sheet and rapid capital generation, we feel very comfortable that we can continue to repurchase shares and comply with any regulatory capital requirements.

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