Bank of New York Mellon Corp

NYSE:BK

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference call and 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 Ms. Valerie Haertel. Ms. Haertel, you may begin.

[Valerie Haertel, Global Head of IR]

Good morning, and welcome to the BNY Mellon first quarter 2018 earnings conference call. With us today are Charlie Scharf, BNY Mellon's Chairman and CEO; and Mike Santomassimo, BNY Mellon's CFO. The earnings materials include a financial highlights presentation that will be referred to in the discussion of our first quarter results and can be found in the Investor Relations section of our website.

Please not 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. These factors include those identified in the cautionary statement in our earnings release, the financial highlights presentation and our documents filed with the SEC which are available on our website bnymellon.com. Forward-looking statements made on this call speak only as of today, April 19, 2018. And we will not update forward-looking statements.

Before I turn the call over to Charlie and Mike, I would like to highlight a few changes to our earnings materials. Beginning this quarter, we are presenting total revenue for each of our primary lines of business within our two business segments. The change in presentation table on page 13 of the earnings release summarizes the primary product and services and types of revenue generated in each line of business.

Within in investment services the lines of business include Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management. Within investment management the lines of business includes Asset Management and Wealth Management. In addition the reporting of the following expenses has been changed. First, the M&I litigation and restructuring charges are no longer separately disclosed on the income statement. Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense.

Second, clearing expense previously included in other expense has been reclassified to sub-custodian expense and renamed sub-custodian and clearing expense. Additionally the adjusted pre-tax operating margin non-GAAP measure for the Investment Management business no longer excludes amortization of intangible assets and provision to the credit losses.

Please note that the prior periods to the expense reporting changes and the Investment Management pre-tax operating margin calculations have been reclassified to be on a comparable basis. These changes, our previous reporting views and financial trends can be found in our financial supplement. We believe that the updated presentation provides a more complete picture of our financial performance and will enable you to view revenue on the basis consistent with management.

All of our earnings documents are complementary and we recommend be viewed together.

With that, I will now turn the call over to Charles.

[Charles Scharf, Chairman and CEO]

Thank you, Valerie. Good morning, everyone, and thank you for joining us. I've got a few comments I'll make, I'll try and keep in brief since we covered a great deal of ground at our Investor Day recently. I'll then turn it over to Mike, who we'll take about the changes we've made to our reporting to provide more inside into our business performance, run through our first quarter financials and then we'll open it for questions.

First of all, we reported earnings per share of $1.10, up 33% from last year's first quarter. Revenue grew 9%, helped 2 points by a weaker dollar and expenses grew 4%, 3 points of which were due to the impact of the weaker U.S. dollar. Pre-tax income increased 20% and after tax income increased 29%.

Strong equity markets, higher interest rates and lower tax rate all helped drive our strong results for this quarter. The major global equity market indices were up significantly versus the first quarter of 2017, helping drive higher AUCA and AUMs. The return of volumes and volatility was also positive for us this quarter and we saw benefits in Pershing and FX, in fact Pershing matched their highest U.S. daily trade volume ever on February 6.

As our results show this quarter, benefiting from the market is an important part of our business model, but we also discussed at our Investor day that we look beyond the markets and focused on driving our underlying franchise growth. And while it's early, we do see it progress. Specifically, we saw growth in parts of the franchise including deposit balances, FX trading, tri-party repo activity, collateral management activity, increased securities lending activity and stronger demand for liquidity services.

In asset servicing, we onboarded new business from a key global investment manager and expanded our relationships with several sovereign wealth clients, which have added significantly to our assets under custody in the Asia-Pacific region during the quarter.

And as we discussed at Investor Day, we continue to invest in our markets capabilities in the form of people, technology and ultimately additional capabilities. While early days, we see signs that our investments are just beginning to pay-off. I mentioned that we saw increased activity in FX, and we believe that the investments we have been making are allowing us to see increased volume from existing clients and are beginning to attract new clients.

Within the collateral management space, we continue to expand capabilities. In the first quarter, we were the first to market to support offshore Chinese assets as collateral. This offering enables us to allow clients to mobilize new asset classes and asset types to collateralize trade exposures in our tri-party program.

We were also the first to launch a new API that helps dealers improve funding efficiency, what this means is that the assets can be costed [ph] anywhere, so optimization can occur irrespective of the location of assets. Given the scarcity of high quality liquid assets clients wanted a way to optimally allocate collateral, which in high volume trade environment can be done by hand, a sophisticated algorithm was needed and we delivered it.

In Pershing, we continue to see large complex financial services firms choosing Pershing to either outsource functions to achieve greater scalability, to support growth, or determined that clearing and custody, while critical are not core to their unique value preposition. One example is a mandate we received this quarter from a large regional bank to outsource the support for their private wealth and capital markets businesses, which we will be onboarding over the next 12 to 18 months.

As we discussed at Investor Day, Pershing has been accelerating its investments in global advisory solutions to further differentiate its capabilities, such as bank custody where we have a unique advantage in the marketplace. As a result, Pershing signed four relationships seeking bank and brokerage custody in the first quarter and expects to sign a total of seven over the course of 2018. This is a good example of how we are working across the firm to bring our diverse capabilities to the advantage of our clients.

Turn to Corporate Trust for a second, as we have discussed, we continue to invest in improving the client experience and our capabilities in targeted areas. And while it's early we're just beginning to see improved results. This quarter we saw organic fee growth for the first time in a while, following a change to the leadership strategy and investments we're making in technology. While early, we see improved execution and we will look to build upon the success in the coming quarters.

In treasury services, we continue to see growth in our payment volumes from existing clients driving higher banking transaction services fees. Our private label outsourcing business continues to be in demand and this quarter we had some new business wins.

As previously announced, we have been expanding our payment transformation efforts in partnership with real-time payments in Zelle providing links to other banks and financial institutions, who don't want to invest in direct connections. This is an important part of our strategy to provide value added services to our clients and the growth area for us. The pipeline remains strong reflecting significant opportunities.

Now, let me talk for a second about clearance and collateral management. We're benefiting from monitory policy easing and the increase in U.S. government debt issuances. U.S. treasury issuances for the first quarter were strong resulting in higher domestic clearance volumes. Based on current trends and expectations for further quantitative easing, we expect to see continued strength in our clearing volumes.

Additionally, the migration of the JPMorgan clients to our platforms continues to progress well. We've completed many client conversions, but the largest conversions are expected to begin in the second quarter and be completed by the end of the year.

In investment management, we've been focused on our performance and we've been consolidating funds as well as launching new ones to meet the marketplace demands for the non-traditional investments, which as we talked about at Investor Day are core to our strategy. This quarter, our investment performance continued to be positive for us, with 89% and 88% of AUMs above benchmark over three and five years respectively.

This contributed to a strong performance fee quarter relative to recent first quarters with broad based fees from LDI, fixed income, equity and alternative strategies. Additionally, we saw improved active equity flows, which benefited from new targeted products, particularly in the mobility innovation fund, which raised about $3 billion during the quarter. Our fixed income flows were strong especially in European and Global Credit as well as secured finance.

Finally, the consolidation of our North America businesses we announced last November is going well and both client and consultant reaction has been positive. We're also investing in new talent to help grow the business including key hires during the quarter to oversee investment strategy, consultant relations and trading.

And now before I turn it over to Mike, I don't want to be repetitive with comments I made at Investor Day, but I do want to mention a few things again. We are focused on building our franchise for the long-term, because we are confident in our future. We will continue to focus on delivering strong results in the short-term, and we believe we have a very financially attractive business model with unique collection of assets, which work together to give us competitive advantage.

We're focused on increasing our rate of revenue growth and while this will happen overtime, we continue to believe we can do this without sacrificing operating margin. And we will do this while investing in technology, operations and in our people both in infrastructure new solutions particularly focused on those that are data driven and digital. In fact, we said we believe that we will still generate positive operating leverage, and you saw this quarter our continued discipline in controlling the total expense base for the quarter.

We're lucky enough to have great and unique franchises, great assets and we're operating from position of strength.

Over to Mike.

[Michael Santomassimo, CFO]

Thanks, Charlie, good morning, everyone. Before I walk you through the results for the first quarter, I'd like to touch upon the reporting changes Valerie noted earlier, which are intended to give you a better picture of our business performance.

We're now reporting our revenue in a way that is consistent with how we think about evaluating our business performance. It should complement the previous format, which can be still found in our financial supplement, this should be additive to our disclosures. You can find the details of the changes on page 13 of both the first quarter earnings press release and the financial highlights presentation.

Turning to the first quarter results, as Charlie mentioned, growth in earnings for the quarter was largely due to the increase in interest rates in equity markets versus the first quarter of 2017. Although, the U.S. dollar has significantly weakened over the past year against key currencies in which we conduct business. The impact was essentially neutral on net income on a total company basis consistent with previous quarters.

With that, let me run through the details of the first quarter results. All comparisons will be on a year-over-year basis unless I note otherwise. Beginning on page three of the financial highlights presentation, total revenue increased 9%, primarily driven by a 10% increase in fee revenue due to stronger markets and a 16% increase in net interest revenue due to higher interest rates and to a lesser degree higher deposit balances.

Also contributing to the growth in fee revenue was higher foreign exchange revenue and growth in collateral management. A weaker U.S. dollar favorably impacted the revenue growth rate by approximately 2 percentage points.

Our expenses grew 4% primarily due to a weaker U.S. dollar, which unfavorably impacted the expense growth rate by approximately 3%; higher staff expense partially offset by lower consulting expenses.

When factoring in the significance of the unfavorable impact of the weaker dollar on our expense growth, you can see that while we are making important investments for the future, we continue to remain discipline in controlling our expenses. We generated significant positive operating leverage and increased our pre-tax operating margin to 35%, up from 31% in the prior period.

In the first quarter, the company repurchased 11 million common shares for $644 million and paid $246 million in dividends to common shareholders. All of this resulted in an increase in pre-tax income of 20% and an increase in net income applicable to common shareholders of 29%, which benefited from a lower U.S. tax rate. This coupled with a reduction in share count increased earnings per share by 33% to $1.10. Our risk adjusted returns continue to be strong, our CET1 ratio increased to 10.7% and the return on tangible common equity improved to 26%.

Page five highlights our Investment Service business results. Total investment services revenue increased 11% on a year-over-year basis and 5% on a sequential basis. Within the business asset servicing revenue increased 13% on a year-over-year basis and 4% sequentially. Both increases primarily reflect higher interest rates and deposit balances, which drove the growth in net interest revenue. These also increased due to higher volumes, market values and foreign exchange volumes.

We also benefited from the favorable impact of the weaker U.S. dollar. Pershing continued to perform well, up 11% with performance driven mainly by an increase in net interest revenue as a result of higher interest rates as well as fees growth in long-term mutual fund balances and higher clearance volumes.

Issuer services revenue, which includes our Corporate Trust and Depositary Receipt businesses increased 6%, primarily reflecting higher net interest revenue in Corporate Trust as well as the favorable impact of the weaker U.S. dollar. On a sequential basis the increase primarily reflects seasonally higher depositary receipts revenue. Treasury Services revenue increased 6% primarily reflecting higher net interest revenue, driven by higher interest rates and payment volumes.

Clearance and Collateral Management, which includes U.S. government clearing, U.S. tri-party activity and global collateral management was up 13%, primarily reflecting growth in collateral management, higher clearance volumes and net interest revenue. Additionally average tri-party balances were up 14%. Non-interest expense within investment services increased 5% year-over-year and decreased 7% sequentially.

Both periods also reflects higher technology cost consistent with what we discussed during our Investor Day with unfavorable impact of a weaker U.S. dollar and higher volume related to sub-custodian and clearing expenses. The year-over-year increase was partially offset by lower consulting expense. The sequential decrease was primarily due to severance litigation and an asset impairment recorded in the fourth quarter of 2017.

Now a few additional comments on the Investment Services business. Foreign exchange revenue increased 10% due to higher volumes across most of our FX products. Securities lending revenue increased 20%, primarily driven by increased demand for U.S. government securities and equities.

Average loans were 8% year-over-year however on a sequential basis they were up slightly. Assets under custody and administration grew to $33.5 trillion, reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business. Pershing's average long-term mutual fund assets are up due to higher equity markets and from clients consolidating assets on our platform.

Turning to page six for the Investment Management business highlights, total investment management revenue increased 13% year-over-year, on a sequential basis revenue increased 4%. Asset management revenue increased 16%, reflecting higher equity market values, the favorable impact of a weaker U.S. dollar principally versus the British pound and higher performance fees. The quarter also benefited from a gain on the sale of CenterSquare.

Performance fees increased from $12 million to $48 million primarily due to strong investment performance in our LDI and alternative strategies. And as Charlie mentioned our long-term active investment strategies performed well with 89% and 88% of our assets above their three and five year benchmarks respectively.

Wealth Management revenue increased 5% reflecting higher equity market values and net new business, partially offset by lower net interest revenue from lower deposit balances. Sequentially deposits were up 15% in Wealth Management. Assets under management increased 8% year-over-year, but declined 1% sequentially to $1.9 trillion.

Turning to the flows, we experienced another quarter of net inflows into our long-term actively managed strategies with $17 billion of inflows during the quarter. The LDI strategy had strong inflows of $13 billion and fixed income net flows of $7 billion, which were partially offset by outflows in our multi-asset and alternatives strategies of $3 billion. Additionally active equity flows were flat following a multi-quarter trend of outflows.

As we continue to look for ways to differentiate our equity strategies and as a result benefited from the new fund launches that Charlie mentioned in the quarter. The inflows into long-term active strategies were partially offset with $13 billion of index outflows resulting in $4 billion of total long-term inflows. Index outflows primarily resulted from clients rebalancing at a funds tracking, underperforming international equity indices in both Europe and Japan.

We experienced short-term cash outflows of $14 billion mainly drawn from government money market funds, which were in net outflows across the industry during the first quarter. Further increases in interest rates as well as competitive yields from select peers also contributed to our net outflows in these funds over the quarter.

Together total long and short net flows were $10 billion in the quarter. Lastly, the impact of the sale of CenterSquare and other changes are included in the divestiture and other line in the flows table.

So turning to the other segment on page seven briefly. Fee revenue increased sequentially primarily reflecting the impact in the fourth quarter of 2017 of the enactment of the U.S. Tax Legislation. Additionally, we recorded a $49 million of net securities losses related to the sale of approximately $1 billion of debt securities, which represents less than 1% of our portfolio. Additionally, non-interest expense declined year-over-year, reflecting lower professional yield and other purchase services partially offset by higher incentives.

Now turning to page eight on capital and liquidity, the capital and liquidity ratios as of March 31, 2018 remained above the regulatory minimums with the appropriate buffers. And most of them increased since December 31, 2017 on a fully phased in basis. Common equity tier 1 capital totaled $18.3 billion, an increase of $496 million compared with the fully phased in basis at December 31st. The increase primarily reflects capital generated through earnings and additional training capital resulting from stock awards, partially offset by capital deployed through common stock repurchases and dividends paid.

The fully phased in supplementary leverage ratio remains stable at 5.9%, which exceeds the 2018 regulatory requirement of 5% with the reasonable buffer. We also remain in full compliance with the U.S. liquidity coverage ratio requirements. Our average LCR was 116% in the first quarter.

Now on page nine, net interest revenue increased 16% year-over-year and 8% sequentially, primarily reflecting both higher interest rates and deposit balances, partially offset by higher average long-term debt. Year-over-year, our average interest bearing deposits increased 11%, while our average non-interest bearing deposits declined 3%. Year-over-year, our net interest margin increased 9 basis points to 1.22%.

On page 10 on expenses. I'd like to note, we also made a few expense reporting changes this quarter to simplify our reporting and give you better insight into our expense categories. Merger and integration, litigation and restructuring charges are no longer separately disclosed in the income statement, we've had very little M&I and restructuring expense in recent years. And these expenses previously reported in this line have been reclassified primarily to other expenses in prior periods have been restated.

Clearing expense, which is previously included in other expenses been reclassified to sub-custodian expense and renamed sub-custodian and clearing. This should help you better understand our market and volume based expenses.

On a consolidated basis, expenses increased 4%, primarily reflecting the weaker U.S. dollar which unfavorably impacted expense growth rate by approximately 3% and higher staff expense partially offset by lower consulting expenses. The sequential decline reflects lower expenses in nearly all categories.

Looking ahead to the second quarter, there are a few things to factor in your modeling. While it's still too early to predict how the quarter will play out, we expect on an average, rates will be higher in the second quarter than in the first. And as of today, our deposit balances lower than the average deposits in the first quarter. Additionally, the yield curve has flattened in recent weeks, which negatively impacts our reinvestment opportunities.

The quarterly investment and other income line is expected to be in the range of $40 million to $60 million per quarter for the remainder of 2018. Additionally performance fee should be in line with the second quarter average over the last couple of years. We expect total expense growth in the quarter to be similar to what we saw in the first quarter versus a year ago. And we still expect our full year 2018 effective tax rate to be approximately 21%.

Now before turning to Q&A, I'd like to make just a few comments on the recent regulatory developments regarding capital requirements. So earlier this month, we completed the CCAR process for 2018, while we can't discuss the details, the supervisory severely adverse scenario was noticeably more stringent than in prior years. This variability in these scenarios year-to-year may cause fluctuations in the payout ratios.

With regard to the SLR, we welcome any attempts to revise the leverage based standards and based on the draft it would appear that the requirement to decline and that would be positive for us.

With respect to CCAR, it's way too early to know the impact of the stress capital buffer framework, given that it may change year-to-year based on the thorough reserves, severely adverse scenarios and supervisory models. The proposal indicates that a minimum Tier 1 leverage ratio plus a prescribed stress capital buffer must be maintained at all times. This is consistent with the way we manage our capital already.

Given the high quality of our balance sheet, it's possible that the impact of this rule change would be positive, but it will depend on the outcome of the final rule, and it's too early to draw any conclusions by either way.

Additionally the new frameworks increased emphasis on stress capital buffers, which are based on the Fed severely adverse scenario and supervisory models raises the potential for more volatility and unpredictability year-to-year.

We are hopeful that the potential volatility and unpredictability year-to-year will be mitigated by the Fed providing more visibility into the stress scenarios and supervisory models and refinement of this methodology during the common period. We look forward to engaging with the Fed in this common period as they finalize the rules.

Now with that Charlie and I would be happy to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore ISI.

[Glenn Schorr, Evercore ISI]

Hi, thanks very much. So, I noticed in the prepared remarks and disclosure you noted net interest revenue growth in every single business obviously rates were up, but it's also balance growth. So, we noted high deposit betas, I am assuming that's kind of stay given your mix of clients and business. So the question I have is, how much balance sheet growth is possible as you continue to have like really good capital return. Because that's what - that's going to help continue to drive net interest revenue, right?

[Michael Santomassimo, CFO]

Yes, hey Glenn its Mike, let me just give you a couple thoughts there and then hopefully I'll answer the question. But, as you sort of think about the first quarter and we said this at Investor Day as well, sort of that we saw deposit balances a little higher than we expected in the beginning part of our first quarter and those have come back down to kind of where we expected them to be.

And as we sort of think about the second quarter, all things considered, we still expect NIM to increase and we would expect that even with the lower deposit balances, the rate of growth of NIR will be a little lower than the first quarter. But we still expect it to be pretty healthy versus the second quarter of 2017. So we still expect to see both of that happening.

And I think as we build - as we continue to build the franchise and bring on new clients, we would hope that our - any of the decline we see in our balances as a result of rates rising would be more than offset to or offset partially at least by new business coming in. And we have the room on the balance sheet to continue to do that.

[Glenn Schorr, Evercore ISI]

Okay, I appreciate that. You mentioned the business wins, obvious in tri-party and collateral management are climbing as the balances grow. Business wins and losses in asset servicing are we not going to get that anymore?

[Michael Santomassimo, CFO]

Well…

[Glenn Schorr, Evercore ISI]

I just didn't...

[Michael Santomassimo, CFO]

Yes, we took that stat out because and this came up a little bit at the Investor Day, and we agreed with the view that it just really wasn't a particularly worthwhile statistic it's a gross number not a net number. Our belief the way different people talk about it across the industry is very different relative to timing, relative to is it custody, is it fund accounting, middle office how you count it. And so our view so just wasn't a whole lot of value in it which we agreed with.

[Glenn Schorr, Evercore ISI]

Okay, I appreciate, thanks.

[Michael Santomassimo, CFO]

Thanks, Glenn. Next question, operator?

[Operator]

Our next question comes from the line of Alexander Blostein with Goldman Sachs.

[Alexander Blostein, Goldman Sachs]

Thanks. Good morning, guys. I wanted to follow-up on the discussion really to the capital and the NPRs put up by the Fed. So, in terms of I guess the excess capital dynamic obviously too early to really tell, but I was wondering if you guys think though the impact that you could have on the business particularly the repo markets, which I guess partially been somewhat constraint by the leverage requirement of the banks. A, I guess do you think some of that could come back, to what extent do you think that could help your tri-party repo business. And if possible to I guess breakout, how much of revenues you guys generated in tri-party repo to help us kind of calibrate what the upside could be?

[Michael Santomassimo, CFO]

Hey, Alex, this is Mike. I think the impact on - you'll get a better sense from the other banks in terms of exactly what the impact they think it will have, but you would think that given the constraints they are all under now that you would see that have a positive impact on the repo market, which would then come back to us from a servicing perspective. To what extent, it's hard to know right now.

[Alexander Blostein, Goldman Sachs]

Any sense how much you guys generated in tri-party repo revenues currently?

[Michael Santomassimo, CFO]

That's not something we disclose, but it's included in the clearance and collateral management line that you see in the disclosure.

[Alexander Blostein, Goldman Sachs]

Got you. And then just my follow-up secondly, just kind of going back to the Investor Day, you guys outlined longer-term NIM guidance of 1.25% to 1.40%, you're at 1.23% now so seems like you're kind of there. Any additional clarity you guys can provide on the assumptions I guess underpinning the 1.25% to 1.40% in terms of the rates back drop, the size of the balance sheet, the timeframe of how you guys think you'll get to those levels?

[Michael Santomassimo, CFO]

As you noted, we're pretty much on the bottom of that range as we speak and so if rates continue the way - to increase the way the market expects, we would be getting into that range as we go out through the rest of the year. And as you know, there is a lot of dynamics that sort of play into exactly what the NIM will be in terms of deposit mix the level and rates as you mentioned, but we would expect to begin to get into that range as we go up through the rest of the year.

[Alexander Blostein, Goldman Sachs]

Got it. I mean I guess like is there a scenario where it will be above 1.40%, I guess, just given there still seems to some runway on the rate side?

[Michael Santomassimo, CFO]

Yes, I mean it's possible there is always a scenario, who knows.

[Alexander Blostein, Goldman Sachs]

Got it, all right. Thanks guys.

[Michael Santomassimo, CFO]

Thanks.

[Operator]

Our next question comes from the line of Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

Great, thanks. Good morning folks. Maybe if we can just go back into asset serving, looking at it sort of the old way on the fee line of asset servicing, still very strong 10% growth year-over-year, maybe if you can just bifurcate that a little bit specific to your point of clearing and collateral out of that separately on the clearing of the treasury business. And if you can talk about maybe sort of qualitatively about the pipeline in asset servicing, I think you mentioned you onboarding a new business from a large customer, that's - can you give a little more clarity on that and the timing of that?

[Charles Scharf, Chairman and CEO]

Yes, so as you sort of look at the asset servicing line back in the supplement, it's up 10% year-over-year as you sort of noted Brian. So, again as you sort of think about the drivers of that, very consistent with what we talk about in general about what's happening. So the market levels and currency sort of helped aid that as well as growth in our collateral businesses and then organic sort of flows into our existing client portfolios.

So - and then there is a little bit of seasonality that you see in the first quarter, as you look at the sequential results from a few items, but for the most part you're seeing the same drivers that we talk about in general across the firm.

[Michael Santomassimo, CFO]

And just keep in mind with the business there are different things that go into the revenue flow, the core custody, core fee based business, obviously is impacted by the level of the markets. Wins and losses, it's a slow steady set of changes that happen based on what the trends on wins and losses. So you are not going to see dramatic shifts there. And so one client coming on doesn't materially change the number in a quarter, but it just gives you a point of view of what we're seeing in terms of wins and losses.

[Charles Scharf, Chairman and CEO]

And I think as you think about the new business wins. We feel if we were to report a number, it would be pretty consistent with what we've seen over the last number of quarters. I mean it was a little outsized at the end of last year, but otherwise if you looked at the average across the previous quarters, it's pretty similar. And the pipeline still feels good.

[Brian Bedell, Deutsche Bank]

And we have more conversion from the zero [ph] priced deals. So yet to come and I think you mentioned the JPMorgan Treasury business is still the majority of that yet is still to be transitioned, is that correct?

[Michael Santomassimo, CFO]

Yes, good number of the clients from JPMorgan have been converted already. But it's a few of the bigger ones are coming in between now and the end of the year.

[Brian Bedell, Deutsche Bank]

And just on the expense control very solid obviously in the quarter, so better than expectations. As we think about Charlie, your comments on investing in the business in the rest of the quarters this year. Do you think this type of expense level is sustainable for the rest of the year given that you still have some improvements in the costs base to make as well?

[Charles Scharf, Chairman and CEO]

Yes, I'm not going to give you a forecast on expenses beyond what we said at Investor Day, but what you saw this quarter was very consistent with our points of view on what we think we can produce. And so this quarter includes a fair amount of the additional technology investments not all of it we will be growing throughout the year. But we're very, very focused on continuing to build and increasing the operating margin, which means we should continue to see a tight control on expense.

What that means for the actual number, again away from the effect of currency, we're focused on it. And so I think everything I said there will continue to play out throughout the year.

[Brian Bedell, Deutsche Bank]

Great, thanks very much.

[Charles Scharf, Chairman and CEO]

Thanks.

[Operator]

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

[Betsy Graseck, Morgan Stanley]

Hi, good morning.

[Charles Scharf, Chairman and CEO]

Good morning.

[Betsy Graseck, Morgan Stanley]

Hey, Charlie, at Investor Day we talked a lot about organic fee growth rates. And I think you mentioned or was it organic revenue growth rates. I think you mentioned it is old days of 1% going to 1.5%. Maybe you could talk a little bit about how much of the revenue growth this quarter was organic?

[Charles Scharf, Chairman and CEO]

Yes, I'm not going to talk about that that's not something we're going to talk about at every single quarter. We did that, investors to just give you a sense of the way we look at it internally. And what we are focused on driving. I think, but when you look at some of the results that we see whether it's security lending loans, what we saw on FX, what you see the levels of AUCA. And just our comments on growing the underlying client base and franchise.

I think directionally what you see across the businesses is headed in the right direction. And I guess, the last thing that I would say is when we went through Investor Day was just was very interesting experience quite frankly to watch people's reactions to us being very open and honest in disclosing things that I don't think that anyone else has disclosed in the business. So that again you have the lens into how we're thinking about it, which from our perspective is a positive because we're focused on the things that we wanted to do better at and think we can do better.

So overall, you'll see it in the actual operating metrics over a period of times. So directionally in the businesses which have more quicker paybacks, a series of the markets related businesses, liquidity and security lending, you saw franchise growth. And we're focused on delivering it in the other businesses, which have longer lead times as well.

[Betsy Graseck, Morgan Stanley]

Got it, okay. Just obviously revenue growth was very strong this quarter. It seems like you outperformed the 1.5% long-term average that you were talking to at Investor Day I don't know if that's a fair conclusion from your perspective?

[Charles Scharf, Chairman and CEO]

Yes, I think directionally it's fair to say that there was higher organic revenue growth than we've seen in the past. We're not pounding our chests that we've declared victory here. I mean this is the very beginning. And as I said, most - the important parts of our business Corporate Trust, asset servicing, continuing to build stronger flows in our asset management business, client assets in the wealth management those take time to build. And you are not going to see big movements several months into a process here, but directionally we do feel very good about it.

[Betsy Graseck, Morgan Stanley]

Okay. And then just separately, during the quarter obviously a lot of solidity in the markets that you could speak to outlook if volatility pulls back a little bit. And then separately on LIBOR there is a lot of discussion on how you are positioned for the LIBOR move that happened in the quarter and maybe you could speak to the impacts that had this quarter. So going forward is either the one and three months be revert to the basis risk that it had before or continue to widen out from here we can get a sense of the impact on you guys? Thanks.

[Michael Santomassimo, CFO]

Hey, Betsy, its Mike. So on the first part on the volatility question. So, in the first quarter some of the volatility did impact and helped some of the volumes that we saw particularly in Pershing as Charlie sort of noted in terms of having one of our peak days in that business. So, in some ways volatility will be helpful right, but there could be negative effects of that as well depending on how that impacts the overall market. So we'll see.

I think on the second part of your question, in terms of how we're positioned vis-à-vis LIBOR, we are weighted more towards - we have more LIBOR based assets - short-term LIBOR based assets than we do liabilities. So as LIBOR starts to move up, whether it's one or three month it is sort of helpful for us relative to how we are positioned.

[Betsy Graseck, Morgan Stanley]

Okay. And then just lastly, you mentioned Zelle and some of the things that you're doing to help connect people to that without having to directly invest in the Zelle backbone, I think that's what I heard, but maybe you could give us some color as to not only what you're doing, but what you think the market is for that?

[Charles Scharf, Chairman and CEO]

Yes, I think obviously - I presume everyone understands what Zelle is, which is the group that is owned by a series of the banks that are building out the capabilities to leverage real-time payments network.

In order to participate in those capabilities, the institutions have to do a fair amount of work to integrate their technologies with those platforms. Not every bank wants to do that, and not every bank actually controls their own capabilities because some of its outsourced. Many of those banks are clients of ours in our Treasury Services business. So we have the ability to step in and provide a series of those services to help them get access to those networks.

The real question over a period of time relative to what those capabilities mean is, will banks and others build out solutions that access the capabilities of these real-time networks, so that product offerings become more attractive versus using ACH and other methods of payment today, that's something we and other financial institutions are very focused on that will take - that's not weeks or months that will evolve over the next couple of years. But those capabilities are better than what exist in the marketplace and we're - let's think of us as a facilitator for the financial institutions that don't have the infrastructure or can't spend on it to do their own direct integrations.

[Betsy Graseck, Morgan Stanley]

Super, thanks. That's helpful.

[Charles Scharf, Chairman and CEO]

Thanks, Betsy.

[Operator]

Our next question comes from the line of Ken Usdin with Jefferies.

[Kenneth Usdin, Jefferies]

Hey, thanks. First question I'd like to ask you about it seems like the issuer services business seems to be flattening out, can you just talk about the two different pieces of that? And whether or not you are seeing either better activity or just better new business start to come through, is that a turn in that?

[Michael Santomassimo, CFO]

Hey, Ken, its Mike, thanks for the question. In the Corporate Trust business Charlie sort of highlighted a little bit in his remarks, but we have seen some green shoots of organic growth there in the quarter. And so as Charlie mentioned that's a good positive trend that we're sort of hoping to build upon.

I think on the DR space, we'll see sort of how it goes, I think there's a lots of seasonality in those numbers and a lots of timing around when certain corporate actions and other activities are happening in that business. We're hopeful that we'll continue to have - manage it as best we can and we still have a very strong market share in that business and continue to sort of win our fair share things that come to the market. But it can move around quite a bit quarter-to-quarter.

[Charles Scharf, Chairman and CEO]

And there's no doubt, I mean, we talked last year about not winning several large deals, which I described and I think what we described that we're very conscious on our part. So you wind up with the lapping effects of those. And I think I'll just go back and stay on Corporate Trust for a second again we talked about this at Investor Day, when we say we're starting to see some these green shoots of growth just to be clear this is - we've - there is a very focused effort in Corporate Trust for us to - which we went through with new management place to understand why we weren't being as successful in the business as we think we could have been.

And so we've made a series of changes there, I'd say we're extremely focused on the business and we see a very heightened focused on our coverage, on our sales efforts with our - some of our most important partners across the globe that actually help generate that business and we're working on and continuing to build our technology. So again it will hopefully, if we're as successful as we think we can be it will build overtime.

But it's a very conscious effort, it's not just us watching what's going on in the marketplace and feeling good in good times and bad in bad times.

[Kenneth Usdin, Jefferies]

Understood. And if I can ask a second one just mix of deposits that are denominated in non-U.S. dollars can you update us on like the size of that and I know we're in a U.S. rate cycle, but would the balance sheet still also be positively rate sensitive should we start to see non-U.S. central bank start to raise rates? Thanks guys.

[Charles Scharf, Chairman and CEO]

Yes, on the later part of the question first, euro is becoming non-negative I think would be helpful so that would be a positive impact. I think there is a high probability that the Bank of England raises rates shortly and so that will be sort of marginally positive. But the overall mix of the balance sheet hasn't changed much with still around 70% of it still in U.S. dollars with the remainder being outside of the U.S.

[Kenneth Usdin, Jefferies]

Got it thanks a lot.

[Operator]

[Operator Instructions] And we'll take our next question with Brennan Hawken with UBS.

[Brennan Hawken, UBS]

Hey, good morning. Thanks for taking the question. Just a follow-up on that the 70% deposits in U.S. dollar and the increase that we saw here this quarter at least that came through on the average balance sheet. What sort of deposit beta would you say we saw here with the last Fed hike and do you have any expectations for where that's going to continue to go from here?

[Michael Santomassimo, CFO]

Hey, Brennan, its Mike, as we said a number of times over the last year or so we would expect that betas continue to increase as rates increase right and sort of that's what you see happening. It's largely happening as we expected across the different businesses. And again you saw - you got the full impact of a rate rise in December in those numbers and you got a little piece of one in March as well. And so I think you can kind of read into the numbers and see what you think sort of the average beta is there and you're probably not that far off.

[Brennan Hawken, UBS]

Okay. The second part of the question, I guess, implied with your lead in that could continue to see some lift from that imputed beta as well?

[Michael Santomassimo, CFO]

Sorry say it again somewhat, sorry?

[Brennan Hawken, UBS]

I am saying that it seems like what you said from the lead in from your preface that you think that betas probably could continue to see some upward pressure that's I was just clarifying that.

[Michael Santomassimo, CFO]

Yes, as rates rise we would expect betas to continue to increase.

[Brennan Hawken, UBS]

Excellent, okay thanks. And then from my follow-up here, it looks like some really nice trends in consulting expenses it's my recollection, but I'm not 100% sure here that maybe some CCAR and regulatory expenses were flowing through that line. Are we finally reaching the point where we're getting some relief on regulatory expense front? Does that mean that - that would mean and imply to me at least that that's sustainable or should be given where everything that you guys have built up from a capabilities perspective plus be in the environment that we're in, is that really do you think that that's a fair conclusion to come to? Thanks.

[Charles Scharf, Chairman and CEO]

Let me take a stab Mike, and you tell me whether you agree, how is that? I think the answer is predominantly yes, but I'd just make a couple of comments on that. I think the very significant amounts that we spent on consulting for those specific things you talked about, for the most part we'll not continue at the levels that you've seen and you see the benefits of that running through our results.

I will say and I've got just think like the newcomer, relative newcomer and I'm sure you all appreciate this, there is a hugely significant amount of regulatory expense embedded in the other lines that's just the reality of what the regulatory environment is today versus what it was years ago.

So, we spend a tremendous amount on regulatory, it's just not specifically in the consulting line and that's not going to go down for what we see at this point and time. And we continue to spend a significant amount of money outside the U.S., specifically for GDPR and MiFID II inside Europe.

So just think about it as it's a little bit of a reallocation from consulting to us doing a bunch of the work whether it's the headcount expense, technology expense and things like that.

[Michael Santomassimo, CFO]

Okay. And I'll just add one thing, so as we said a number of times too that the decline you see in consulting, we had at this time last year where we are still working on sort of the resolution plan. And so a big chunk of that decline was related to that activity that we're working on last year. But Charlie is right, there is a - there maybe a little bit of a pause in the short run, but in the U.S. where there is plenty of efforts that's going into a number of initiatives across the globe…

[Charles Scharf, Chairman and CEO]

That we are currently spending on.

[Michael Santomassimo, CFO]

That's currently in the numbers.

[Brennan Hawken, UBS]

Yes, no for sure just we got to take our victories where we can on the regulatory spend front. Thanks a lot guys.

[Charles Scharf, Chairman and CEO]

Thanks.

[Operator]

Our next question comes from the line of Michael Carrier with Bank of America.

[Michael Carrier, Bank of America]

Thanks, guys. One question on Investment Management. I don't know if you had the gain on the sale of that entity. And then also on the performance fees stronger than expect you guys mentioned some of the drivers, just wanted to get a sense, is there anything changed in terms of the recognition by quarter that we should expect things to be different than what we've seen historically?

[Charles Scharf, Chairman and CEO]

No, I mean, there is nothing that would change sort of the normal seasonality that you see in lines like performance fees. The gain, we haven't disclosed the number, but the gain on CenterSquare is embedded in the numbers, it's not a material game changer or remover for the overall results. But it is in the number.

[Michael Carrier, Bank of America]

Okay. And then follow-up on the Investment Services business, if I just look at I guess quarter-over-quarter or year-over-year just the revenue growth versus the asset growth that came in stronger and typically we're not seeing that, but it seems like under the new disclosure that can be either activity with volatility or rates with net interest income, so just wanted to get a sense. And then in terms of predicting that line, you guys give a lot of metrics, I know you're not giving that the win metrics, but is there anything else that we should be thinking about to try to think about either forecasting into that line item going forward?

[Charles Scharf, Chairman and CEO]

I think in the Asset Servicing business when you look at it in the earnings release, just keep in mind what's also in there is net interest revenue. And so, net interest revenue was as we mentioned a significant driver sort of the overall business results and I think that's true in asset servicing as well. You also have the impact of the market in FX and so forth. So just keep that in mind as you sort of look at that overall number. In terms of metrics to look at in terms of forecasting, I don't think there is anything necessarily new to sort of add to that conversation.

[Michael Santomassimo, CFO]

The only thing I would add is again it was a very good quarter relatively to asset values or the impacts in volatility on us and rates. And so we were clearly beneficiaries of that. It was an important driver as we've said in our comments of the results. We also had significant balance growth that we saw. So as we look forward to the next quarter, sitting here today it's not as strong as it was, but on a year-over-year basis still should look - I would say we still good about what we're going to say.

[Michael Carrier, Bank of America]

Got it, thanks a lot.

[Operator]

Our next question comes from the line of Geoffrey Elliott with Autonomous Research.

[Geoffrey Elliott, Autonomous Research]

Hello, good morning. Thanks for taking the question. It looks like the first quarter expenses came in a bit lower than you've been pointing to. Even given if anything the currency was moving in the wrong direction. So could you talk about what changed there as you went through the quarter, where you're able to take out those expense saves, maybe didn't have budgeted in initially.

[Charles Scharf, Chairman and CEO]

I don't know why do you say that?

[Michael Santomassimo, CFO]

I mean, Geoffrey, I think, let me clarify. So at Investor Day, we said the expenses would be up 4% to 5% in the quarter and they're up 4%. So they're about right where we expected them to be.

[Geoffrey Elliott, Autonomous Research]

So I go to more like up 3.6% and you said 2% of growth driven by foreign currency translation and then the actual foreign currency translation was 3%. So it kind of feels like you did a little bit better than you were pointing to back then. Just trying to understand where the extra saves or extra benefits on the expense side came from?

[Michael Santomassimo, CFO]

Yes, there is no single like big things that's driving in. As Charlie mentioned a couple of times this morning, we are very focused on looking at like the whole place and making sure that we're being as efficient and effective in sort of spending as we can. And so little singles and doubles sort of add up overtime. And so we're focused on all of it, but there is no single thing to point to.

[Charles Scharf, Chairman and CEO]

And we don't obsess about a half a point or a point in any given quarter.

[Geoffrey Elliott, Autonomous Research]

Sure. Understood. And I guess thinking about the full year, us there anything that kind of gives you more confident that you can do better on the expense side given what you've seen in the first quarter?

[Michael Santomassimo, CFO]

Yes, we're not going to give you a number for the full year, but as we said, a bunch of different ways. We're coming in every day focused on making sure that we're doing the best we can to keep the expense base where it needs to be, while making the investments we need to make.

[Geoffrey Elliott, Autonomous Research]

Thank you.

[Operator]

Our next question comes from the line of Brian Kleinhanzl with KBW.

[Brian Kleinhanzl, KBW]

Yes, thanks. Good morning. Just had a quick question one on your comments around the deposits, but it was little early in the quarter to be calling out the run off that we're seeing. Can you just I don't if whether that was going to interest bearing, non-interest bearing or I mean was that a significant magnitude of deposit outflow that you saw?

[Michael Santomassimo, CFO]

Well, I think what we're kind of calling out is what we mentioned in March as well, at Investor Day is that we saw higher balanced in Jan and Feb, January and February than we thought we would see. So now balances are sort of back down about where we thought they would be. And there is no single driver of that it sort of normalized to where we expect it.

[Brian Kleinhanzl, KBW]

Okay.

[Michael Santomassimo, CFO]

Yes, you saw both non-interest bearing and interesting bearing come down.

[Brian Kleinhanzl, KBW]

Okay. And then you did have some security sales in the quarter. Was that just slightly repositioned the book or is this something that you're seeing with rising rates you are looking to get more shorter duration overall?

[Michael Santomassimo, CFO]

It was a very minor repositioning that we're able to do due to the adoption of a new accounting standard that allowed us to reclassify some of our HTM bonds. So very minor in the scheme of the portfolio.

[Brian Kleinhanzl, KBW]

And just onetime in.

[Michael Santomassimo, CFO]

Yes.

[Brian Kleinhanzl, KBW]

Okay, thanks.

[Michael Santomassimo, CFO]

Thank you.

[Operator]

So our final question comes from the line of Gerard Cassidy with RBC Capital.

[Gerard Cassidy, RBC Capital]

Thank you and good morning. You guys have talked about it at Investor Day and today about the emphasis on technology investing and spending. When you look at it from a line of business standpoint, is there one or two lines that have a greater focus of the spending?

[Michael Santomassimo, CFO]

So you mean, which businesses.

[Charles Scharf, Chairman and CEO]

Asset services and investment management.

[Gerard Cassidy, RBC Capital]

Correct, exactly is there an area that you guys think that you need to put more effort and money versus another area within the organization?

[Charles Scharf, Chairman and CEO]

It's probably skewed somewhat towards investment services versus investment management. But that's not to say that there are significantly amount of opportunities for us that we're focused on to use technology in the Investment Management business, whether it's wealth management or in the asset management side.

When it comes to the core we talked about the investments that we're making in infrastructure, I would say the majority of those comments relate to the Investment Services business and the work that we're doing there.

[Gerard Cassidy, RBC Capital]

Very good. And then as a follow-up, I know there is a lot of moving parts with the capital notice of proposed rulemaking that have come out recently from the Fed, hopefully it will settle down. But when you guys look longer term it was - it looks like a lift in the dividend payout ratio that used to be a soft line at 30%. When you guys look out longer term, do you have a sense of where you think the dividend payout ratio will go relative to stock buybacks and stuff that you use for return of capital?

[Charles Scharf, Chairman and CEO]

No, I think sitting here today I don't think anything is different than - I don't think we're thinking about it any differently than what we said at Investor Day relative to dividend.

[Gerard Cassidy, RBC Capital]

Very good, thank you.

[Charles Scharf, Chairman and CEO]

All right, well thank you all very much for the time, take care.

[Operator]

If there are any additional questions or comments, you may contact Ms. Valerie Haertel at 212-635-8529. Thank you ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating.