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The Bank of New York Mellon Corporation (BK)

November 14, 2011 2:00 pm ET

Executives

Andy Clark -

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

Gerald L. Hassell - Chairman, Chief Executive officer, President, President of The Bank of New York, President of The Mellon Bank N A and Member of Executive Committee

Unknown Executive -

Curtis Y. Arledge - Vice Chairman, Chief Executive Officer of Investment Management and Member of the Executive Committee

Curtis Y. Arledge - Chief Executive Officer

Timothy F. Keaney - Executive Vice President, Chief Global Client Management officer, Senior Executive Vice President, Vice Chairman and Chief Executive officer of Asset Servicing

Karen B. Peetz - Vice Chairman, Chief Executive Officer of Financial Markets & Treasury Services and Senior Executive Vice President

Analysts

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Unknown Analyst -

Operator

Good afternoon, ladies and gentlemen, and welcome to the 2011 Investor Day hosted by BNY Mellon. [Operator Instructions] Please note that this conference's audio and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. Please standby for the conference to begin.

Andy Clark

For those of you who are joining us on the webcast, welcome to BNY Mellon's Investor Day. My name is Andy Clark and I am the Managing Director of Investor Relations for BNY Mellon. I want to thank everyone for joining us, both here and on the webcast.

Before we begin, let me remind you that our remarks today include forward-looking statements. These statements relate to our goals, initiatives and expectations and are based on assumptions that involve risks and uncertainties and are therefore subject to change. Our actual results may differ materially from those indicated or implied by the forward-looking statements, as a result of various factors, including those identified as risk factors in our most recent annual reports and 10-Q, which are filed with the SEC and available on our website, www.bnymellon.com.

Forward-looking statements speak only as of today, November 14, 2011, and we will not update forward-looking statements. Now I'd like to turn the presentation over to Gerald Hassell, our Chief Executive Officer. Gerald?

Gerald L. Hassell

Thank you very much, Andy, and thanks, everyone, for joining us this afternoon. We really appreciate you coming in today.

This is the first conference we've had in a number of years, and I think it's timely that we take the opportunity to review our business model and particularly examine how it's performing, particularly in a radically changed environment that we're all facing here today.

With me today is our entire Executive Committee team, many of whom are in the audience that you've met before and know and a few of the presenters that are here up on the stage here with me today. Curtis Arledge, on the -- on my far left who head our Investment Management area. Tim Keaney and Karen Peetz who head our Investment Services businesses and of course Todd Gibbons, our CFO.

Let me start by saying that I am very confident. We have the right business model, the right strategy and the right team to execute on the plan, who are about to present to you today, believe we can deliver consistent, solid earnings per share growth and attractive returns to our shareholders in what I believe will be a very challenging environment for the foreseeable feature.

I think of us as being a very attractive play on capturing and participating in the growth of financial assets globally and the cross-border investment flows, particularly into and out of high-growth regions such as Asia, the Middle East and Latin America. We provide not only services to support the entire investment process, but also manage financial assets on a global and a local level.

We have significant scale in virtually all of our businesses and we are unmatched in terms of our capabilities and breadth of our services. We have a low-risk, capital-intensive, fee-based model that generates significant consistent levels of earnings and capital with a lot of upside potential, even if we don't see a return to the high capital markets activities that have powered our earnings in the past.

But I'm not going to kid you that we are in a very challenging environment and it will be up to us -- or it will be with us for an extended period of time. We're clearly facing sluggish economies globally, low interest rates, very volatile financial markets, little in the way of new issuance calendar, particularly for structured products and a continuing deleveraging of major market participants. And in general, a lack of confidence and uncertainty that's inhibiting growth.

We're also facing very high legal and regulatory costs and we're certainly no exception to that, particularly in foreign exchange. So let me spend a minute or 2 on foreign exchange because I know it's on your mind.

We believe that much of the press about the foreign exchange matter has been unfair and unbalanced from our perspective. We strongly believe that the facts underlying the suits are simply wrong. Our reputation and our integrity are being challenged and we think quite unfairly.

Now I strongly believe that our standing instruction program not only provide good value to our clients, but we execute at fair prices. And in fact, our volumes have remained stable throughout this period that we've been under examination.

In essence, we think the actions that are being brought on by the so-called whistleblowers and the attorney generals reflect a fundamental misunderstanding of how foreign exchange markets really function. We are confident that we will be able to explain this to a judge at the appropriate time.

There is no question that the lawsuits have created challenges for us, and we've undertaken a very aggressive outreach program to our clients to make sure we're doing all that we can to answer their questions and provide information and assurances to their boards, their trustees and their senior managers.

I was recently out at an asset servicing conference, and also at an asset management client advisory board. Quite personally have been involved in the outreach program, talking to our clients on a direct basis and on a one-on-one basis. And many of our senior managers have done the same thing as well.

We've also been listening to our clients very, very carefully. And in fact, we're developing new program options that they -- that we think will meet their evolving needs. Now just as we do with all of our services, we will adopt options and programs that meet their needs. We do this in every one of our business lines and we're doing it here as well. We obviously have to constantly innovate to be competitive and we will here too.

Now the lawsuits are very frustrating and may take some time to resolve, but I don't think we should be coerced into paying huge sums for no apparent wrongdoing. We will have, however, be pragmatic in our approach if a path to a reasonable resolution becomes available.

Obviously the litigious environment that we're in is just another factor that's making this market so challenging. Clearly our job is to manage through these choppy waters and still deliver good returns to you and service our clients incredibly well. And I know we can do that.

As we continue to review our businesses, we've been challenging ourselves to answer some very basic questions that I know that are on the tops of your minds.

And our business models deliver superior performance versus our peers, and we lower our cost structure, improve our operating margins in a slow growth environment without the benefits of capital markets activities that have historically powered our earnings. And we put our liquidity work, improve the yield on our investment portfolio without reaching our risk appetite. And we adjust the pricing and service delivery paradigm and asset servicing to improve its profitability. Are we investing in the right services to capture growth in the developing markets? And can we grow capital to meet the global regulatory requirements while simultaneously investing in our businesses and returning capital to our shareholders? These are the critical questions that we spent a great deal of time on. And I can tell you, we are confident we can and we will deliver on all of these.

The entire team and I are deeply committed to this company and driving excellence across our entire firm and we are perfectly aligned with you. The single business biggest personal investment of our team is in BK stock and the majority of my net worth is in this company.

We are a very good company and my sole focus is to make this a great company for all of our constituents, our clients, our employees and our shareholders.

To put it in sports terms, I use perhaps too many sports analogies, but to put it in sports terms, I think we've won the playoffs in a pretty regular basis. We haven't won the Super Bowl. I want to win the Super Bowl multiple times. That's our goal.

Now many people have asked me, what are we going to do differently? I have a very simple operating philosophy. When our clients succeed, we succeed. So it all starts with client focus. If we serve them incredibly well, we will naturally grow with them. We listen to them. They can best tell us what solutions are necessary to make them successful. They'll tell us what's needed in the marketplace to continue to grow. And if we have an open dialogue with them, we can have a mutually beneficial relationship and talk to each other about how we can both be successful, growing forward.

Next is teamwork. I'm a huge believer in teamwork, working together as a team for the benefit of the entire firm. Each member has a role to play and we cannot win as a bunch of single individual units, but we can win when we come together as an entire team and make a real difference.

Collaboration. I really stress collaboration across all of our businesses to develop solutions that the clients and the market are seeking. We have a broad set of products and services in the industry. We don't always pull them together well on behalf of our clients. But I want to make it easier for us to do business with, and our clients want that of us too. The more we can make it easier for them, the more they're going to want to do business with us.

And lastly, emphasized innovation. We're constantly looking ahead to where the market is going and being proactive in developing new and better capabilities. For you, I want to stress that we are realists. We will be commercial and pragmatic in everything we do. We're not going to sugarcoat the challenges and we won't overstate what we can do.

So let's turn to the agenda. We don't have an agenda. So I'm going to spend up a little bit of time on our business model, and why you should like it and ways that we're working to strengthen it.

Curtis, Karen and Tim are going to drill down into the investment management and investment services areas and discuss specific opportunities and ways for growth. Todd is going to take a deeper dive into the ways we are transforming operations, technology and our corporate services to drive operational excellence and improve our overall operating margins. He's also going to give you a bit of the financial outlook, sharing the data points that will be helpful in modeling our performance going forward. And then we're going to leave plenty of time for questions and also at the very end, we'll be hosting a little reception afterwards, which we invite you to stay and visit with us.

I also included in your package, in the Appendix our 3 years worth of financials by our reporting segments, but we're not planning on going through the financials themselves and spend more time on the business model, the strategies and areas for improvement.

So let's begin with the advantages of our business model. I wouldn't trade our business model for any other financial institution in the industry. We are an investment company. Our model is focused on the entire investment life cycle, managing and servicing global financial assets. That focus has enabled us to develop more expertise and investments than any financial firm. No matter what our clients might want to do related to investments, we can help them succeed. We're delivering strong revenue growth versus our peers, and believe that we can continue to do it going forward even in challenging markets.

Our operational excellence is a phrase that you're going to hear a lot about today and from us in the future. It brings together the concepts of operating efficiencies, taking risk out of the system, taking risk out of our organization, and then last but not the least, quality service. All these 3 things come together well and drive operational excellence. And we're dedicated to being at its very best in this category.

Our model is principally a fee-based model with very little credit risk. That has helped us maintain an exceptionally strong, highly liquid balance sheet with excellent credit quality, and a strong capital position with superior credit ratings.

It's also a capital light model. We generate capital very rapidly, and we're going to be very disciplined about deploying it in the future.

We've also been delivering high returns on tangible equity. And as I said earlier, we're focused on a culture of teamwork and collaboration, starting with the executive team here today and extending down into our entire organization. We have one shared agenda, making us a great company.

Now let's talk a look about -- talk a little bit about the growth in financial assets on a global basis. One of the main reasons our business model is so attractive is that we benefit from the organic growth and financial assets and the globalization of financial markets. Those assets all need to be managed or serviced in some capacity.

In the decade ending 2010, financial assets worldwide grew at a rate of 6.4% or 42% faster than the growth in GDP. Financial asset growth clearly drives our assets under custody and assets under management.

Also during the past 2 decades, the cross-border investments have grown at 11% per annum, as financial markets have become more interconnected. All of our businesses benefit from the increase in cross-border flows.

This next slide depicts the size and growth rates of assets under custody and assets under management globally. This gives you some sense of how total assets by region are expected to grow, with the fastest growth coming in Latin America with a compounded annual growth rate of 13%; and in the Middle East, you can see it's more like 11%; and in Asia-Pacific at 9%.

Now we are well established in all of these markets, and we're continuing to invest in them to capture that growth.

Now this gives you a better sense of how we help clients at every stage of the investment life cycle. We help create assets, working with clients that issue debt for our corporate trust area or depositary receipts for equities.

We facilitate the trading and settlement of assets through our broker dealer clearance, global markets and treasury services areas. We hold and service or manage financial assets for beneficial owners through asset servicing and asset management. And we can provide a distribution channel for those assets again through asset management or our Pershing platforms.

And we can restructure those assets, as in the case of debt restructurings and corporate trust, which is quite active right now. So we have more opportunities to grow broader and deeper client relationships as we touch every single element and phase in the investment life cycle.

Now here you can see that our revenue growth has far exceeded the median of our peer group, with 11% growth year-over-year for the last 12 months. It clearly demonstrates the underlying strength of our business model and our ability to grow both organically and with acquisitions in a low-rate environment.

Now to enhance revenue growth, we are realigning our coverage model to focus more resources on key clients and industry segments that have the greatest need for our services. Now Karen's going to talk a little bit more about this in a few moment.

We're also collaborating across our businesses to deliver more sophisticated solutions and not just sell one-off products. We are enhancing our investment management products and distribution capabilities, which Curtis will cover. And we're continuing to expand in targeted countries and regions, where the growth characteristics are so attractive, but we're also doing it in a very prudent and focused way to maximize the returns on our investments. These activities will help us extend our outperformance.

Now turning to operational excellence. Driving improvements has taken on a renewed sense of urgency, particularly on the cost side. We're pushing a number of opportunities in our business operations, technology and corporate services to reduce costs. It's all about simplifying, rationalizing, centralizing and just plain being smarter about how we run our businesses. Together, these efforts will reduce our expense run rates in a meaningful way so we can achieve positive operating leverage even in a slow growth environment. And Tim and Todd will discuss these efforts in more detail, and size the opportunity for you.

Now our business model has limited credit and market risk. Now given our role in the global markets, our largest risk is operational risk, and we are very focused on managing it well. We tie risk management to our business operations to ensure that we're constantly managing ourselves to sound business practices and that we're protecting ourselves as well as the assets of our clients. There's a continuous process to enhance control and to measure and mitigate the risk in our operations to reduce the likelihood of loss.

Now everyone in this role has clearly defined roles and responsibilities. They know what's being -- what they're being held accountable for. And those in compliance and control functions has the authority to ensure that we're doing what's right.

Now I believe investing in risk management has very clear benefits, including improving our profitability, improving client retention to just essentially fewer errors, potentially lowering regulatory capital and then reducing the risk to our reputation.

Now driving operational excellence also means delivering high quality client service. We believe very strongly that we can leverage our technology to not only drive efficiency, but also improve the client experience. Delivering great service is a cornerstone of our company and it's driven by a highly engaged and strong base of investment professionals globally. You can see here that we already enjoy a very strong reputation for service quality and one that we don't take for granted. Great service leads to increased revenue opportunities, and we believe it's a real differentiator in the marketplace.

Now another differentiator is our incredibly strong highly liquid balance sheet. Nearly 2/3 of our total assets, 2/3 are liquid assets. Our credit quality is excellent, and we are investing that liquidity in high-quality, short duration securities. And where we lend is primarily to an investment-grade entities in support of our relationships to build fee-based businesses.

We have strong capital position, and as I said generates significant levels of new capital, some of which we will retain to meet Basel III requirements while much is available for redeployment.

We also have the highest credit ratings among U.S. banks. And importantly, our business model has fared very well through numerous stress tests.

Now as I mentioned earlier, our business has generated lots of excess capital. We generate in the neighborhood of $3 billion over the last 12 months, and our return on tangible equity year-to-date has been 24%. While our return on total equity year-to-date is only 8%, we are in fact taking actions to improve upon that, and we will be highly disciplined in how we redeploy that capital.

Returning capital to shareholders is our priority at the moment. Over the last 12 months ending September, our combined payout ratio of dividends and buybacks is 49%, and it reflects the fact that we increased our dividend on a quarterly basis by 44%.

Now our targeted annual payout ratio for dividend is in the 20% to 25%. Our targeted annual payout for dividends and share repurchases is a combined 60% to 65%, subject to regulatory approval.

Acquisitions are a relatively low priority, particularly given where our share price is today, and we think it's very hard to find a better investment.

So in summary, we have an attractive business model that powers investment success. We are extremely focused on enhancing our revenues, operational excellence, particularly in the area of reducing our cost base and simply controlling what we can and we're very focused on driving earnings per share. We have a strong balance sheet and are generating significant levels of excess capital.

So with that as a beginning, let me turn it over to our other speakers who will delve into some more depth and detail around our plans. And we'll begin with Curtis Arledge. So thank you.

Curtis Y. Arledge

Thanks, Gerald. Good afternoon, everyone.

After having been here just over a year, it's my pleasure to share with you some of the important aspects of BNY Mellon's Investment Management business and our plans going forward. So in my talk, I'm going to walk you through some key facts about our business, talk to you a little bit about our unique business model, and then describe some of the opportunities and growth plans we have for our business going forward.

Just to get started, BNY Mellon Investment Management is one of the leading global investment managers in the world with $1.2 trillion in assets under management across both our Asset Management business and our Wealth Management business. Investment Management was created by the connection of those 2 businesses about a year ago.

We have an attractive growth profile, and we will deliver solid results through some pretty challenging markets because we have a balanced business mix, diversified well across asset classes, clients, geography. We also have delivered very strong investment performance through these difficult times.

We believe we can expand our investment and distribution capabilities and really benefit from some of the structural changes that are happening in the developed world and the growth rates that are occurring in the developing world. And lastly, we have a terrific opportunity to continue to coordinate with our investment services colleagues around firm-wide clients.

We're also committed to operational excellence. There are clear opportunities on our platform to streamline our activities and really get after the benefits of scale that exists on our platform. The great news about that is the more resources that we use around our investing and around our clients, the better we're going to do for them. And so we obviously want to drive operating efficiencies to make that happen, and also to improve margins. And I'm going to talk about all these point in my presentation.

We are one of the largest asset managers in the world as you can see from the table and also one of the largest wealth managers in the United States. We believe that scale is increasingly important in asset management. After a pretty difficult period in markets, clients are spending a lot of time diligencing their managers and asking the question, do they really have the resources to do the investment analysis that's required to deliver returns in challenging markets? And so we are frequently asked and talked to clients and consultants about how they're thinking, how much do firms spend on distribution, how much do they spend on infrastructure. Because every time they do that, they're not spending it on actually delivering alpha, and so scale benefits are really important.

But we also know that scale can be the enemy of delivering alpha, and we know that it is critical not to allow scale but diminish the benefits -- excuse me, to diminish the environment that creates critical and differentiated investing. We believe that our model is ideally suited to foster both investment excellence and get the benefits of scale.

On the wealth management side, we're the seventh largest wealth manager in the United States. We are able to provide comprehensive services, including wealth and estate planning, trust services, private banking and more importantly, we have clients that really do turn to us for investment management expertise. Of all the assets that we have under our care, we actually are the investor, investment manager for about half of them.

Our clients get the benefit of being connected to an institutional asset manager. We look after each one of their portfolios based on their own client objective, but we have the ability to leverage our firm-wide resources to deliver the best for them.

I think to understand our client mix is also really important. The wealth management terms gets used a lot to describe a lot of different businesses. Our business is somewhat unique. First of all it's about 227 years old who served the families of Alexander Hamilton and the Mellons. After that, I can't really disclose our other client names. But I can tell you that of about -- of all the assets that we manage for clients, over half of them are for clients who have more than $100 million. These are clients who have unique needs in wealth services, they're users of alternative products, and we've worked with millions of them for a very long time.

Now I'll turn to our business mix. And this is -- these comments now are more about our Asset Management business. As you can see on the left side, we are well diversified across equity. 38% of our exposure comes from -- these are management fee revenues comes from the equity business; 22% from fixed income; 27% from less directional, less correlated to market moved product, things like absolute return and alternatives, currency products and asset allocation products.

So about 87% of our management fee revenues come from the asset business. But we really like that, we think that it requires significant, intellectual capital to be in this business. It positions us well to be able to sit down and help our clients with their problems. We also think that it has -- that there's less margin pressure. Candidly, these are in many cases capacity-constrained products, and they don't suffer as much margin pressure as more of the passive strategies do that are more commoditized. And then lastly, we obviously like the opportunity to potentially on performance fees when we do deliver.

On the right-hand side, you can also see what's occurred over the last 5 years through growth acquisition and through organic growth, we have grown our client mix globally. We want to serve them where they are, and we also want to find investment ideas wherever they exist as well. So being global is clearly important to our strategy.

One more point on diversification. We are hard-line investors. We really do believe that diversification is one of the fused free lunches. We not only recommend it to our clients, but we actually run our own business that way. We believe it makes our revenues less volatile. And while we might have less upside in a big market rally in the equity world, we have to compare that to the benefit -- costs and benefits of being able to weather turbulent times.

You see, we know that clients, they want to know that we're going to be able to serve them the same regardless of the market environment. And so it's another reason for us to be well diversified.

Now I want to turn to our model. I want to talk a little bit about our boutique structure. First, let me share with you our boutiques, for those of you who aren't as familiar with them. On the left-hand side of the chart up here are our larger scale firms, the three shaded together are headquartered in Europe, and the fourth at the bottom on the left side are in the U.S. And they each have generally a focus more aligned with either equity, fixed income or multi-sector asset allocation. And at the bottom, you can see our cash business.

On the right-hand side, are our niche firms. Firms that are either focused on asset class, whether it will be leverage loans, commercial real estate or geography in the case of ARX that's focused on Brazil or BNY Mellon Western that's focused on China. So these are our boutiques. There are 16 of them, and we manage money, all of our clients' money through these various firms.

Now to our business model, which is a multi-boutique business model. It is in many ways both centralized and decentralized. Generally, we think that investment management firms, all of them have 3 core things that you have to get right. First is delivering investment formats. Second, is working well with clients, excelling with clients and then last is running a great business, having all the infrastructure to drive results.

We actually do all 3 of those things through both our boutiques and across our large investment asset -- large investment management company.

Let me talk to you just a little bit about how we do the first, across our boutiques. Our boutiques are very focused. Because we give them scale, they get to focus on being the best. And they don't have to worry about being the biggest. They don't have to cover the full cost of a retail distribution capability. They don't have to cover the full cost of all the common infrastructure that are required to be in this business. And so they are completely in the investing world, focused on their investment process.

The great thing about all of our boutiques is that they know that they are solely responsible for their investment process. They are fully accountable for it when it doesn't work. They can't blame it on some centralized investment process. And they, therefore, spend a whole lot of time getting it right. They really like that. They like it because they also get to enjoy the benefits when it does work. They have the knowledge that their clients will value what they've done, and it really does feed the pride that they have in their culture.

With clients, they have a direct relationship. Clients want to know their investors. They want to know that the person who is actually taking control of that mandate understands it and understands how it fits into their -- the overall strategy. So each of our boutiques have direct relationships with clients.

And also, our boutiques have unique needs. If you're trading currency payers, you have different needs than if you are trading inflation link products. And so they have their own analytics and technology capabilities to really support their unique needs.

Because they are completely focused and in many cases spending all of their time on investment process, client relationships and infrastructure, they're also very nimble. They're not weighted down as many large-scale asset management companies are. We do these same 3 things across what we call the center. The center is all of the businesses -- sorry, all of the activities that take place across the firm.

As it relates to the investing box, how does the center help? Well we run a very large group of people who spend their entire time assessing the investment performance of each one of our boutiques. They're looking at their excess returns. They're measuring their information ratios. They're looking at how they're performing versus benchmark versus peers versus the amount of risk that is being taken by our boutiques to deliver returns.

Anytime they see a bump in one part of the world, they roam around to the other part of their boutiques and see what the impact might be. So they're constantly given them decision support about what's going on in markets.

We also have a group of people and what we call the center for investment insight. And that group is designed to gather insight across our entire boutique model, all 16 firms. So our firm in Brazil is seeing what's happening in the emerging world. Clearly there's tremendous investment information in that. And so we gather information and share it with our boutiques, never causing them to be more bullish or more bearish because of it, always of winning groupthink. And we also make that information available to our clients. It's the kind of thought leadership that clients have really looked to us for.

At the center, we also have more of a holistic relationship with clients. So we have coverage officers. While each of our boutiques might have a relationship with an individual client, we may in many cases have relationships with many of our boutiques.

One of the more interesting things that came out of our client advisory board in Chicago last week was the number of our -- we have 15 clients to serve on our advisory board. And the #1 thing that they said that they looked for, differentiating from an investment management firm, is to really understand their full needs. And one of the advisory say it really well. She said, "We not only want them to understand them. We want them to care about them. We want them to really value their overall holistic relationship with us."

It's become quite trendy in the investment management world to talk about having a solutions team, a number of people are opening new ones. I think I would just point out that our has been around since the early 1980s, and is actually created out of clients coming to us and asking us questions about everything from asset allocation to how their back office should work. And so our solutions effort is critical to what the center does with clients.

I would also point out that all of our retail and mutual fund activities are done from the center. Both Dreyfus in the United States and a firm eventually called Asset Management International or AMI outside the U.S.

Lastly, we have 16 firms that are going to be doing some many of the same things. They all have billing payment systems, they have a number of what we call more common utilities. And from an infrastructure perspective, we can support all these. We can give them infrastructure that is both cheaper and better than they would get on their own. And again that allows them to reinvest all of their time and energy into creating investment excellence.

So with this, we believe that we have a model that allows us to outnimble other large competitors that act in a more centralized way across their entire platform. And we think we can outscale standalone boutiques that are not connected to a firm such as ours, all in the name of delivering, investment performance. And we think that our model, the results that we're getting from it are working.

As you can see from the slide, about 3 quarters of our institutional active mandates are beating benchmark over the intermediate and long term where clients are obviously focused.

We've been fortunate that the industry has recognized that. We've gotten awards for Best Fund Management Company, Best Equity Manager in Brazil, Best Eurozone Fixed Income Manager, best LDI Manager, multiple awards from Lipper.

And on the right side is an ad we recently ran celebrating the 2 of our boutiques. It's actually tied for #1 in the absolute return category. Obviously a fast-growing category, and we're very proud of that.

But more important than an industry recognition is getting recognition from our clients. And they are showing -- they are actually giving us the award and the honor of being able to serve them. You can see on the right -- on the left-hand side that we've enjoyed long-term asset flows in both equity and fixed income. And actually the negative numbers in our alternatives section there are actually from our currency team, where clients use our currency capabilities in many ways to hedge against the weakening dollar. And the outflows we saw there were less about us and more about them taking some of their chips of the table as the dollar weakened into the middle of the year.

On the right-hand side, again we think clients are really showing differentiation. They're moving their assets to those who have demonstrated the ability to generate long-term sustainable returns. And we're proud that over the past year, we've ranked at the top of organic growth rates of long-term assets against some pretty worthy peers that are put in order below.

All right, so now I'll told you a few key facts about our business. I've described our model to you. I've shared with you some of the information of our performance and our fund flows. I want to move to where we're focused for the future, where we think the opportunities are to grow and to do things differently to drive investment performance and the results for shareholders.

Now first, opportunity is really to expand and enhance our investment capabilities. And everywhere that we're doing this, we're doing it around what we believe are major shifts in the landscape, secular trends, structural changes.

The first one that I've shown here is really to expand our global credit investment capabilities. As the world has changed, we've seen a financial services landscape that is changing dramatically, driven by regulation, driven by the owners of financial stocks. And banks are simply, we believe, are going to provide less capital especially in the non-investment-grade segment of the world on a relative basis than they did in the past.

But the economies are still going to need this capital. Someone is going to need to provided it to them. We believe that risk premiums are likely to go up and therefore, returns will be attractive.

We want to be there to serve private investors as they fill the vacuum that is being left as the financial services industry is having to shrink its balance sheets. And as a result, we really are focused on building world-class credit capabilities whether being corporate credit, real-estate credit or beyond.

Secondly, there are enormous changes in investor behavior. We've all seen clients that are sitting back after really having a difficult time 3x in the last decade and ask themselves, "What is my portfolio supposed to be doing for me?" It was easy to think about with the equity fixed income mix when markets were generally rising, but now clients are getting much more in tune to their liabilities. They're much more focused on what the goal of their portfolio is. And when I talk about clients, I'm talking about everyone, from the aging retail investor, the pension funds and down ones, everyone is really set back. And they're spending a lot of time identifying that what they really need is less volatility. And when they go see what's available to them in terms of returns, they are not so happy, rates are low. And so they've moved towards trying to find higher income and less volatility.

And that is the reason that absolute returns become so important. That asset allocation products have become so important. That alternatives have become so important. And so we want to respond to this shift in client behavior by continuing to grow out what we think are already market-leading capabilities in many of these products.

And then last, it seems undeniable that the growth, the shift in the world. You have extremely overleveraged developed economies. I don't need to tell anybody in this room about the face -- the challenges that are facing the developed world. You don't have the same of overleveraging in the developing world. You have all the reasons that everyone again knows as to why growth rates are much faster outside the developed world, and we want to be there as these markets grow and our clients desire to invest in them.

I'm going to talk a little bit more about Asia specifically in a minute so let me move on.

The next big thing that we're doing is broadening and strengthening our global distribution capabilities. I already talked about our solutions effort, and what we're finding is that even though we have a pretty big effort, the demand for it is growing rapidly. And so we're going to continue to expand our capabilities as clients are continuously coming to us and asking us for help with their -- when they think about their overall portfolio.

We're also improving platform-wide coordination around key clients. And I would say that's true within Asset Management. I'd say it's true connecting Asset Management to Wealth Management, and Karen Peetz is actually going to talk in a minute about how we're doing across our whole company.

We need to invest further in building our retail and intermediary efforts. We have about $60 billion in assets in noncash mutual funds at Dreyfus and then another $60 billion outside the U.S. $120 billion of assets that we've raised through the retail and intermediary channels. We think its's punching well below our weight.

We have investment capabilities across every -- nearly every asset class everywhere in the world. We've generated some fantastic returns, but most of those have been for large institution investors. And as the client contribution grows and as other wealth platforms, clients, they are very large clients for BNY Mellon are looking for products to put in their platforms. We want to serve their needs. We think this is a big opportunity.

And then lastly, we want to build brand awareness for Investment Management. BNY Mellon well-known as a large investment services company. We also do some incredibly fantastic things on the Investment Management side, and we want more of the world to know about them.

I mentioned just briefly that we want to better connect Asset Management and Wealth Management. They're also other opportunities at Wealth Management. We're now in 16th of the top 25 wealth markets in the United States. We recently made an acquisition in Chicago, really to round out that we're now at the top 10. Every market we've gone into we have taken critical mass in a market and brought to it the strength of our overall Wealth Management offering and the strength of our balance sheet and at a time when clients really are looking for stable firms to do business with. It's been very successful.

I said that we want to better connect Asset Management and Wealth Management. And one of the things that we did most recently is we moved the Director of Investment Strategy from Wealth Management into Asset Management to help our Asset Management boutiques better understand what it is that our wealth management clients are looking for, and already have gotten some promising results from that.

Lastly, we want to coordinate with our Investment Services team. I mentioned our client advisory board meeting in Chicago. We had 15 clients there. 14 of them were also asset servicing clients. It wasn't by design, it just turns out that our best relationships always seem to occur at the highest rate when they are also relationships across the rest of our company. It's a terrific opportunity and we want to work and define enterprise solutions for clients across our entire firm.

As it relates to growing out our retail market share I mentioned a minute ago, and one of the richest opportunities for us at BNY Mellon is for Asset Management to connect with Pershing.

Let me tell you a little bit about Pershing. So Pershing is obviously a market-leading clearing and business solutions provider. They cover 1,500 financial intermediaries. They are comprised of 100,000 advisers. That's 5 times larger than the largest brokerage firm in the United States.

Those advisers cover 6 million clients who have $900 billion in assets. They have a $300 billion mutual fund super-market and are a leader in providing managed account solution platforms. While we have focused in working with Pershing, we've been successful. So for example, in the cash products, Dreyfus has gotten a 26% market share. But we have only scratched the surface in what we can do with Pershing in terms of helping them design investment solutions for their clients, framework around how their advisers offer financial products to their clients, and we think this is a terrific opportunity for Asset Management to get better connected to that client base.

Lastly, this a great platform to share industry knowledge. There's so much going on. Think about all the derivatives regulation that has occurred and all the things that are happening in industry. At BNY Mellon, it's commonly known that Tim Keaney knows more about Dodd-Frank than Dodd and Frank combined, and he just sits down the hall from me. So every time there's some major regulatory issue that pops up, I have the opportunity and our whole team has the opportunity to work closely internally with people who are trying to solve this problem for investment management firms all over the world.

I want to touch specifically on what we're doing around high-growth regions, specifically Asia. Our thoughts here and their all your thoughts as well, but it really is that you have high-growth rates in these economies. They're also creating a tremendous amount of wealth. Capital markets are starting to really expand. Whereas in the past, banks might have provided most of the capital, the debt and equity markets are really starting to evolve.

And the people in those countries that are beginning to get real wealth are going to invest a lot of money in financial assets over the coming decades. We want to be there for them.

Large institutions in this part of the world. In the past, traditionally they put their money in developed markets. The reason? Their capital markets weren't fully developed. But as we go out, and I'm sure many of you will do as well, we find that these investors are increasingly focused on the differences in growth rates between the developed world and the developing world that focused on the differences in the fiscal condition. The leverage in the developed world is scary to them in some ways and they like to reposition some of their assets back into their domestic markets. We worked very successfully and have great relationships with many of these clients with what we've done for them in the developed world. And we want to take the opportunity to help them as they invest in their own domestic economies.

And lastly, investors in the U.S. and Europe are significantly under-allocated to the emerging world. While emerging markets may be a sort of a hot trendy thing to talk about, if you actually look at the allocation investors have to this part of the world, it's small. A lot of that has to do with developing maturity of their capital markets. But that will change.

So for all of those reasons, we think there's a huge opportunity for us to increase our investing activities in the region. Now we're already down in a pretty good way. We've been a beneficiary and that many of our boutiques have been able to raise capital to invest in these markets. But we know that investors are increasingly going to want to invest with firms that are on the ground, that are local, that are living in these markets, involved in the dialogue with the policymakers in these markets. And so while we have Hamon, locally, that invest in Asian equities and we have BNY Mellon Western, a JV that we're a partial owner of, 49% of investing in China. We know we need to grow our on-the-ground investing capabilities. And it will become a key focus for us in 2012 to expand those.

Markets like Korea, Taiwan and Singapore is going to be big markets for us, in addition of the ones that we're already in.

We also want to strengthen our distribution capabilities. We have very strong distribution in Japan, but really not anywhere else in the region of any significant size. And we want to change that. We have a number of large institutional investors that work with -- our good client of ours in the region, but we also have a terrific opportunity to connect with investment services who has been in the region for decades and has very long relationships with people built on trust and service. And we want to do our part to extend that relationship and grow it.

I mentioned earlier the relationship we have with Pershing and the opportunities in the United States. This same opportunity exists as we -- as Asia grows and as we both grow Pershing and Investment Management in the region. And there's an opportunity for us to create multicurrency, managed account solutions that can help Pershing grow their business and also better connect us to clients in the region.

Quickly on operational excellence. In my year that I've been with BNY Mellon, we have absolutely spent a lot of time looking at how to make the platform more efficient. There are absolutely scale, benefit opportunities that have not occurred.

Starting with our boutiques structure. So a couple of small things that we've done is really to look at each of the boutiques and address whether or not they should exist. One of the things that we did is we merged our firm called Blackfriars into Hamo.

It was a subscale platform and it had an expense base without the necessary revenues to go with it, and we just didn't feel like they had all the resources that it would take to be successful. Hamon on the other hand benefited from that.

We recently closed Encura [ph] an Australian equities based firm. Again more of a situation where the product just didn't get to the level that we felt comfortable having our name on it. We want our clients to know that when they buy a BNY Mellon Investment Management product that it needs a certain minimum threshold, at which it is very high, and not all of our boutiques, those 2 specifically not get to it.

We also think there's opportunity to streamline our platform, rationalize our systems and our data architecture just going to help us not only reduce expenses, but make it easier for clients to work with us, especially clients who have used our multi-sector offerings. If a client wants to buy a fixed income product that we offer, and then later move to equities, we need to be able to make that as easy for them as possible.

So in summary, we really do believe that our business model drives significant value. We think that we are able to realize the benefits of having both scale and of being nimble unlike many in the industry.

Our business mix is well diversified across asset class, client, geography as I mentioned. And we are positioned for the structural changes that exists in the developed markets and in developing markets. We absolutely want to capitalize on opportunities for more efficient operations. And with clients, we want to have a holistic relationship with them to conserve their entire needs and better connect with the rest of our company, so that with our solutions, when we present solutions to clients it is on their end-to-end investment needs. We want to have relationship with that client across our whole company because those are the types of relationships that we find serve them best.

Now I'd like to turn it over to Karen Peetz.

Karen B. Peetz

Thanks, Curtis. In keeping with the theme of collaboration, Tim Keaney and I are going to be presenting both revenue enhancements, as well as operational efficiencies. To clarify our respective roles, I'm responsible with several businesses that are reported as treasury services, issuer services, clearing services, which is also known as Pershing and then also alternative investments and broker-dealer services. And Tim's responsible for asset servicing, which includes custody, fund accounting and the outsourcing business. Together these businesses make up the whole of Investment Services.

We have an incredibly powerful franchise at BNY Mellon. And in terms of market leadership and breadth and quality of services, it's unmatched.

We like our business model, and we're confident about our future.

As Gerald noted, some of the key questions you want to answer today, include number one, can we accelerate the revenue growth of these businesses? And number two, given the current realities of the environment, especially around NII fire power, can we adapt our model to improve our margins? The answer to each of these questions is absolutely. The bottom line is that we are well positioned to capitalize on our strength and achieve above median revenue growth in these challenging market.

It's true that NII and strong global capital markets are important factors for our business. They are not, however, the only drivers. How well we service our clients, the relationships we have with them and our ability to innovate and drive operational excellence will have a major impact on our performance.

We are working on a number of fronts to enhance the power of our company in each of these areas. These are truly exciting and potentially transformative changes.

And as Gerald noted, we're starting from a position of strength. We are one of the strongest and best capitalized financial institutions in the world, and clients increasingly are looking to entrust their assets with us.

When we execute on the initiatives we're going to talk about today, we will be even stronger as an organization. I have no doubt that the steps we are taking will enhance revenue, take out cost and risk and enable us to continue to deliver the highest quality of service in the industry.

Okay, so I'm going to focus on revenue growth plans, not just for my businesses, but for the entire company. Tim will come on after me, and focus on the work underway to drive operational excellence across the enterprise that started primarily in Investment Services.

Our revenue strategy will enable us to grow at above average rates by increasing the wallet share we have with our existing clients, and also winning new ones. It's an area where, quite frankly, we've not done as well in the past as we need to.

Today, we are relatively under penetrated in our relationships, particularly with our largest clients. For example, if you look at our top 40 clients, we earned about $2.3 billion in revenue. However, that represents only about 2.5% of their wallet. What that means is that we have tremendous upside.

And when you consider that 1% of wallet share for this group of clients equates to about $1 billion, any improvement could have a significant impact.

The strategy we're putting in place will enable our clients to do a lot more with us and build on the strength of our franchise. There are 2 main components to this strategy. The first is that we're going to extend beyond cross selling, where we've actually quite have a bit of success in the past few years, but now we're going to focus on leveraging our broad capabilities to deliver cross-functional solutions to our clients. And we'll expand our presence globally to take advantage of growth opportunities that we see in different parts of the world.

So let's talk specifically about how we're going to execute this plan. We are going to reorganize ourselves around 6 market segments. These industries are the largest users of our products and where we have considerable expertise around the firm. We are forming full-service teams focused on the needs of these market segments from across our businesses. This will enable us to leverage our existing strengths to develop more sophisticated and innovative solutions for our clients.

So for example, if you say an investment -- if you are an investment management company, we will have a solutions team that includes members of all of the key businesses that touch investment managers. They work together to develop true multiproduct solutions that can be replicated or adapted for other investment management clients. This will make us stronger and more valuable as a resource to our clients, which in turn will help drive revenue growth.

Another major upside, as Curtis was talking about, is that many of our Investment Services clients also are buyers of Investment Management products. By forming these cross-business teams, we will be better able to leverage the relationship that we have on the Investment Services side appropriately when we identify the needs and opportunities for our Investment Management products.

We're also refining our approach to managing client relationships to improve collaboration and make us a stronger partner. Our approach is based primarily on the potential for each client, whether they be a full-service strategic partner, a broad-based multiproduct relationship or a client who uses one or more of our services. As part of this strategy, we'll be focusing greater resources on our most strategic clients.

Over the past year, we've refined our global client management model to create a group of global leaders to manage these accounts, really seasoned people with deep knowledge of the industry and their clients who can deliver the full capabilities of our firm. We're already seeing much deeper and richer discussions, developing more medium and long-term solutions and winning significant new business as a result.

We will continue to have client executive be the point people to oversee our broad and complex relationships and ensure that we understand and respond to our clients' needs globally.

We've also retooled our relationship management approach with our other clients to enhance collaborations across our coverage team where that's appropriate. That's enabling them to be more effective in identifying client needs and to make referrals across businesses.

As part of this effort, we are making significant enhancements to the skills of our sales and relationship officers, and we are seeing significant results as a result of this training and development.

We're also working to more fully leverage our product breadth to do more for our clients. We believe this breadth is a major competitive advantage for us. As clients with the solutions to the challenges they're facing, they need capabilities beyond those offered by the traditional model, and that's where we can help. We are an investment company and provide a far more comprehensive set of solutions than traditional organizations do.

What does that mean? As the chart on the left illustrates, in addition to the Investment Management, custody and outsourcing services offered by traditional trust banks, we can deliver a number of additional important services. That list includes debt and equity, services, global payments, collateral management, as well as clearing and financial adviser services. These capabilities enable us to provide far more comprehensive and effective solutions than traditional trust banks can.

Why do we see this ability to deliver more comprehensive solutions as a major advantage? Because simply put, the world has gotten more complex. Today our clients are dealing with many challenging issues, including managing risk or profit pressures, resolving liquidity shortfalls, grappling with new regulations and looking for new and innovative ways to grow, often in far-flung markets.

As Gerald mentioned in his remarks, when our clients succeed, we succeed. Therefore, helping clients solve problems like these is of primary importance to us, and product breadth enables us to do just that. Whether it's related to capital structure, execution and processing or investments, we have products and services that can help clients at every stage of the investment life cycle.

Let me give you an example of what I'm talking about. One of our global financial institutions clients is engaged in several businesses around the world, including private banking, investment banking, global markets and so on. This client, like a lot of peers of its peers has been focused on managing capital and expenses in this current environment. At the same time, they're looking to take advantage of growth opportunities that are cropping up in different parts around the world. Our team has been able to help them in a number of areas.

For example, we have been able to help them reduce costs, risk and capital requirements while enhancing service quality by leveraging Pershing's capabilities to outsource their private client platform. We've enabled them to free up resources by exiting nonstrategic activities in pension servicing by our strength in assets servicing. And we've been able to help them grow by providing their clients with top-notch investment products in Asia and Latin America. And by doing these things, we project to earn over $50 million in incremental revenue.

And this is just the beginning. There are a number of other exciting discussions we have underway, including ways to manage their collateral more effectively on a global basis and trading opportunities with our global markets businesses.

And this is just one example. We see similar opportunities with many of our other clients. For example, I'm not sure if you saw the press release that we issued at about 1:00 today, but we just received an outsourcing mandate from Bridgewater Capital, which is one of the largest hedge funds in the world to provide mid- and back-office services for $125 billion in assets.

The key point of this, the challenges of today's economic environment are causing financial institutions around the world to re-examine their business models. There's growing pressure on them to strip out costs and risks, increase flexibility and focus more on their core competencies. Our product breadth and expertise gives us many more ways to help these firms than other institutions who employ a more traditional model.

And it's a strength that we continue to bolster. For example, we recently made an early stage strategic investment in HedgeMark, a multi-solutions risk management platform that will provide greater transparency for investors in alternative investments. This supports our business development initiative across several of our most important business units and will give us additional firepower to take advantage of the opportunities this market presents.

It's for these reasons that we have been able to capture opportunities like the ones I mentioned, And while we are having many more conversations around the world about doing similar things. And as we roll out our new coverage model that I described, we're going to get even better at capturing these opportunities, and with it a better share of wallet. That's good news for our clients and good news for our shareholders.

The steps we're taking in terms of organizing our coverage teams by market segment, aligning our resources based on relationship potential and leveraging our broad product suite to address client needs positions us to do something that is critical to outperformance, and that's driving innovation. To capture that opportunity, we'll also be organizing our product development team by key market segments, so that we have a service model that's fully aligned and positioned to leverage the full capabilities of BNY Mellon to address client needs.

We've already seen the potential of this approach in the hedge fund space. In the past couple of years, hedge funds have been grappling with the need for additional transparency, ways to comply with new regulations, manage trading risk with counterparties and attract and retain nervous investors. To help them with that challenge, we worked collaboratively across our businesses to create a solution that combines custody and fund administration with collateral management. We then added elements of our specialized liquidity services to create a seamless and fully integrated solution that we call Prime Custody.

The end result was a win for our hedge fund client, their client and for BNY Mellon. And this year we expect Prime Custody to generate almost $160 million worth of revenue and do even better in 2012.

And that's just one example of the innovative things we're doing. We have a number of other initiatives we're working on that we believe can be significant revenue generators for us in the future. And as we implement the changes we're talking about, we expect to see this pipeline grow, and even more new products and services emerge.

International expansion is a key component of our strategy. We're continuing to expand globally, focusing on the markets with the strongest growth potential across our businesses. We have a strong base from which to expand. We are a market leader with many years of experience not only in the U.S. and in Europe, but we also have a long-established presence in Asia. Believe it or not, we've been in Japan for 40 years.

To take advantage of the opportunities we see in the emerging markets, we've created dedicated teams that are managed by some of our most senior leaders to ensure they receive attention, direction and resources that they need to grow.

Our product suite gives us an inherent advantage here because it enables us to enter markets at different stages of development and establish our name and reputation. Our approach is to establish infrastructure and cross-border connectivity first, and then move on to build strong local capabilities. As a result, we're positioned to benefit from the growth and globalization of the world's financial markets at each stage of their development.

In this chart, we'll illustrate this for you. The X axis on the chart shows the maturity of some of the key markets where we do business. With emerging markets on the left and fully matured markets on the right. The Y axis gives you a sense of the size of the total financial assets by market. These products breadth enables us to enter markets at different points in their maturity. Something that traditional trust banks cannot do. This gives us the opportunity to establish our presence and get to know the market sooner, which is a competitive advantage downstream.

In emerging markets such as Russia and Poland where the capital markets are not fully developed, we tend to enter the market by facilitating payments and trades, servicing debt or helping clients tap into the global investment marketplace with products like depositary receipts.

As the market matures and more asset classes are created and investment strategies go global, we're able to layer on services such as fund administration, asset management and asset servicing.

In the case of fully mature markets where investment strategies are sophisticated and require a high level of servicing, as well as access to a broader range of services, we can import even more services. In these fully mature markets, we're able to provide our full range of services, supporting almost anything clients need to do related to investments. Whatever their need, we have a proven solution for which we already have scale and global infrastructure. So as the market matures and assets grow, we're positioned to capitalize.

Capitalizing on global growth trends is easy to say. Success, however, depends on the ability to execute. And as history tells us, not everyone succeeds here. While we do not underestimate the challenge, we have reason to be confident. We've seen steady, sustained growth in 2 important cross-border, non-English-speaking markets, Brazil and Germany. We have made progress in building our capabilities and establishing a local presence through a variety of means like joint ventures, acquisitions and greenfield growth. We're proud of our success and bullish about the future.

We plan to take the lessons learned there and apply them carefully to other markets such as China, where we have recently established new banking capabilities to take advantage of the tremendous opportunities there. We're off to a fast start and we've already won important appointments in asset management where we are managing money globally as well as asset servicing, treasury services and corporate trust, where I'm proud to say we're the trustee on the first dim sum bond.

However, we believe this is just the tip of the iceberg. We are enjoying organic growth in China, exceeding 20% per annum. This reflects an increased demand for value-added services and their strong economic environment. And so yes, we are very optimistic about our prospects in China.

So we've talked about the opportunities. We have to grow our revenues at above average rates, despite a very challenging environment and our plans to do so. But the fact of the matter is making good on these promises, making them a reality will come down to execution. That's the management's challenge and it's the mantra Gerald has had since he became CEO.

To execute well and capture the opportunities we see will require consistent client focus and collaboration and a willingness to work with our clients to develop new and innovative solutions to meet their needs. The leadership of this company is completely committed to doing precisely that. We focus on it on a daily basis with our teams. And so yes, I am confident that we can execute well. Earning a greater share of our clients' wallets, developing significant new relationships and expanding our presence in the fastest-growing markets around the world, and when we do these things and we will, you will see the revenue needle move, despite the extremely challenging markets we're facing.

Now let me hand it over to Tim to talk about how we're driving operational excellence.

Tim?

Timothy F. Keaney

Thank you, Karen, and good afternoon, everyone. Let me start by echoing what Karen mentioned earlier about whether we can adapt our model to improve our margins and our profitability. I echo your answer Karen, absolutely yes, and I'm going to try to describe how.

We have a relentless focus on the bottom line versus a primary focus on gaining market share. You all know we love market share, but the business is changing, margins have been shrinking, which is something we're addressing here today. With this bottom line focus, we are implementing an ambitious transformation program. When all is said and done, it will create a new operating model and a margin-focused organization that we believe can fully capitalize on the strength of our franchise.

We have 3 main areas for action. First, we are ensuring that we operate as efficiently and effectively as possible. So we're taking a close look at all stages of our end-to-end processes by conducting a root and branch assessment. This will drive process reengineering efforts and ensure that our operations and technology model support the client segment approach that Karen just mentioned a few minutes ago. We'll also discuss some important cost savings initiatives within our technology and infrastructure group.

Second, we're accelerating in further enhancing our use of our global delivery centers. We've been very successful with this in the past, having moved over 1,600 positions over the past 3 years. As you'll see shortly, we see further opportunities to leverage use of these global delivery centers over the next 3 years.

Third, this is very important. We've chosen to rethink our approach to clients. In particular, we recognize that different clients have different needs. So we're aligning our business around a distinct set of client types. This approach will ensure that we deliver the services that our clients need as they adjust their own business models to operate in today's marketplace, which I think Karen described quite well.

Across all clients, we will instill greater pricing discipline. We're going to make sure that we are receiving the right level of fees for the value that we provide and the risk that we assume. The goal is that every client must meet minimum profit thresholds.

Let me describe each of these 3 elements of our transformation program in more detail. Let's start with the first collar, operating as efficiently and effectively as possible. Since our merger in 2007, our firm has clearly been focused on growing share and establishing the leading quality position in virtually every one of our businesses. The fact is we really haven't focused very much, looking at ways to leverage common activities across our businesses. This is now changing. And with this change, we have a wealth of opportunity to make a real difference in what we do, how we do it and where we do it. We see significant opportunities to create efficiencies across what we're calling enterprise utilities. Think of these as Centers of Excellence to help us drive down our costs and improve quality.

We think about this aspect along 2 parallel paths. In certain businesses, work's already underway to create utilities for things like billing, reconciliations, escheatment, trade capture, client onboarding and document management.

In Asset Servicing, we've been focused on co-locating operational staff that are performing similar functions. The next step, at the back end of 2012, will be to look at what we could do across investment services. The sheer scale of this opportunity is tremendous. We have over 20,000 operationally-oriented staff in investment services operating from over 50 different locations around the globe.

Operational activities like cash processing and reconciliations are done in 6 or more locations around the world and, believe it or not, we do billing in over 10. We have an end state objective or a target to be doing these kinds of activities in no more than 4 different locations. And an ancillary benefit of consolidating our cash processing, we've been able to enhance our cash management returns by collaborating with clients to offer a wide range of alternative cash management and short duration bond products.

Our goal is to solve for what is common, reduce the number of systems that support these activities and most importantly, serve our customers better. We believe there is significant opportunity here, and we'll ensure that we execute against these plans.

The second area is simplifying business processes. We've taken a close look at our processes, and it's clear we're not as effective as we could be. A couple of good examples are client onboarding and the way we handle client inquiries. These 2 areas are ripe for reengineering. We can use process design tools and imaging workflow technology to work for us here. In several businesses, we've been using these kinds of tools quite successfully. We have a dedicated and experienced team to help us tackle areas where we see opportunities to become a lot more efficient. We expect to achieve real savings because many of these activities touch a number of our business and operational areas.

The account opening process, which I mentioned just a few minutes ago, is a great example of the kind of area we will focus. Within BNY Mellon, legal, compliance, client service, operations, risk management are all involved in the process of opening up a new client account, not to mention the client and their legal counsel. We think we can make meaningful progress by focusing our resources in leveraging these new tools. We are working hard to improve efficiencies around many parts of our business that simply take too long today, which has a direct effect on productivity and earnings. We have a dedicated team of over 100 individuals and Six Sigma-trained staff who will make real strides here.

The third area of action for us is using major structural and organizational reengineering to gain productivity and increased service levels. We've made excellent progress in our custody operations area today. Well, I would say we enjoy over 99% straight new processing rates. But there is significant scope for improvement in 2 of our larger operational areas namely, transfer agency and accounting. And in those areas, we have over 7,000 staff today.

We will turn time zones and technology into operational excellence, and in turn, into a competitive advantage. In this example, an associate in Asia could complete all reconciliations in their time zone before handing over scrub data to an accountant in the U.S. or Europe. They'll hit their day and hit their ground running, which will clearly significantly improve their productivity.

Contrast that to today where a typical accountant spends the first few hours of each day performing cash and securities reconciliations and scrubbing corporate actions. That's before they start their real accounting work. I hear these issues highlighted constantly that travel around the world meeting with our accounting staff. Once again, our Six Sigma-trained professionals will help lead this effort, and importantly, fundamentally change the way we do accounting and transfer agency work. We estimate that we can make our staff in these areas up to 30% more productive, which will help us fund future growth and enable us to meet the very challenging market and customer cut-off times for valuations.

Our technology platform is at the foundation of how we deliver our products and our capabilities to our clients around the globe. We have a great opportunity to unlock the potential of our technology platform and create another significant driver to deliver operating leverage across our Investment Services businesses by eliminating the technology clutter that has built up over the years.

How are we accomplishing this? By simplifying, rationalizing and just slimming down. We'll be investing in commoditized hardware to run our software applications. We'll be eliminating software that is clearly underutilized. We'll be standardizing over 67,000 desktops around the globe. We'll also be reducing the cost of storage and, importantly, slowing the growth of storage by retaining only the information that our clients really need, and importantly, that our regulators demand. We'll be outsourcing some non-core technology and infrastructure that will help reduce some of our costs and importantly, create more variable costs within our infrastructure.

We're also going to be taking advantage of a higher level of cloud technology deployment, again, creating more variable cost but importantly, narrowing the time it takes to introduce new products and services into the market, both internally and externally.

In the area of business applications, we'll be eliminating redundant applications that will support our core operations' functions. We will leverage our world-class application development capabilities to internalize third-party developed application software. This will not only reduce our cost, but again will help improve our time-to-market.

And finally, a key strategy in delivering the entire company is to deliver more of our firm through one single mobile-enabled portal called Workbench. All this and more is part of our IT transformation program, which will reduce our rate of technology expense growth. It will deliver higher service levels. It will lower our technology labor costs. It will leverage that world-class development capabilities to drive product innovation and through a common portal, we will introduce our products and services to a broader range of clients than ever before. Later in our presentation, Todd will provide you with a view of how this technology transformation program will influence our expense run rates over time.

The second main pillar of transformation centers on maximizing the opportunities we have leveraging our global footprint to reduce our costs. Again, we have very solid evidence of the benefits here. We've been leveraging our global footprint since the merger and before with great success.

Over the past few years, we focused on more fully utilizing our global delivery centers, which are strategically located in Pittsburgh, Manchester in the U.K. and Pune, India. We're now planning to take this to a new higher level by placing more sophisticated functions into these locations over time. Each of these centers is strategically located, has excellent infrastructure and cost dynamics and gives us access to a deep talent pool due to a strong educational community.

This is about making sure we have the right people in the right places with the right tools to serve our clients excellently. As you can see over the past 4 years, we've made significant progress in this area and have achieved savings of $56,000 per position, all the while achieving industry-leading quality rankings across our business. We think that we can achieve this level of savings or better as we move up the value chain and perhaps get nearly 50% of our investment service operating staff in these global delivery centers over the next 3 years.

We've developed extensive training, imported experienced talent to help get staff up to speed and transfer knowledge. So we're extremely confident in our ability to move more sophisticated and expert functions to these centers over time, which, when done correctly, not only increases the savings but translates into better customer satisfaction and lower employee turnover. It's been a home run for us so far, and we have even higher expectations for the future.

Earlier, Karen mentioned how the fundamental changes in capital markets-related revenues have affected the Investment Services businesses. The most significant impact of this, however, has really been felt in the Asset Servicing business. This brings me to the third and perhaps most important pillar of how we'll achieve operational excellence in investment services. We are implementing a new client service model in Asset Servicing, which is designed to align specific client needs or attributes. This will improve core profitability and ensure that every client is profitable. Again, post-merger, we are very focused on quality and client retention.

Consequently, a significant number of clients have been receiving highly customized services delivered through the same service model as our largest most complex clients, but we were only earning less than $100,000 of revenue per year. In the new environment in which we operate, this approach is simply not practical or sustainable. So we are now taking measured steps to better align the services our clients receive at a pricing level that appropriately compensates us for the value we deliver and the risks that we take.

So what does this mean in practice? Put simply, we've classified 4,700 individual accounts into 2,100 overall relationships and are taking steps to differentiate our service offering around 3 distinct client groups. The slide behind me describes the attributes of each of these groups. I'll describe how we use this new approach to help power our revenue growth and better match our cost to serve for the client segments on both ends of the spectrum.

On the left, within Asset Servicing, the first tier describes our top 200 revenue earners with potential for significant double-digit revenue growth. This segment largely features global financial institutions. These clients have complex global needs, are likely to benefit from the broad BNY Mellon suite of services that Karen talked about earlier. They require the most sophisticated products we have and they demand highly customized solutions.

Each one of these clients will have a dedicated senior executive for developing a joint global account plan, which sets out a road map for how we're working in partnership to significantly grow our relationships. We are not new to this approach, but we are rolling out this model to engage with a larger number of clients who we want to work with in a more collaborative, broader and deeper way.

As it turns out, these clients are the winners in their space. They're also the winners in consolidating industries. Let me give you one example, slightly different from the one that Karen gave you earlier, on how we're working in close partnership with a large, well-known global financial institutions.

Our original relationship dates back over 25 years when we started to deliver what we described as the core services of custody, accounting, settlement, cash management. Over time, our relationship grew with this client, who grew through acquisitions and mergers and is a great example of the kind of winner, as I mentioned just a moment ago to become a top 50 global financial institution providing banking, investment, insurance, retirement services and Asset Management in over 50 countries around the globe. Today, we provide core and value-added Asset Servicing to over $150 billion in assets. We've supported our clients' growth, as Gerald described, by aligning with them every step of the way as they've grown over those last 25 years. And we continue to try to strive to understand their needs to make sure that we remain positioned as their long-term partner.

This focus has resulted in a significant broadening of our Asset Servicing relationship, but more importantly, it's opened up the door to global markets, Corporate Trust and Pershing that, now in their own rights, have very large relationships, which is the key goal here. This is the very model that we're going to be working hard over the coming months and years to roll out to our next 200 clients.

Although this has widely been viewed as a success, we've estimated that we're only getting about 50% of this particular client's investment services spend. So we're not just focused on the business that we have. We're aggressively and vigorously pursuing the business, which is done elsewhere, which generally presents and opportunity for our clients to leverage our capabilities in a much more strategic way. In this environment, we have very clear evidence that our broad product range and our ability to deliver better value is being well-received by such clients.

At the other end of this spectrum, we have a client segment that includes 1,400 clients across industry segments and geographies. These clients require more of a product-centric offering, which we are committed to deliver at the highest quality but at a price that makes sense. A key feature on our approach to these clients is to reprice our offering to reflect the value we deliver, and this may include the introduction of higher minimum prices.

Given the nature of our offering, we'll deliver this through an operating model that does not require the same level of high relationship management coverage that our larger, more complex demanding clients demand. As I mentioned earlier, our goal is to ensure that every client meets our minimum profit thresholds. And where applicable, we're going to be raising prices on selected larger clients that don't meet these margin requirements. To be clear, we're going to undertake this in a deliberate, thoughtful and measured way, which may result in a small level of client attrition and perhaps a modest decline in assets under custody. However, we believe that the majority of our clients will see the real value that we provide.

While losing clients is not our goal in the market conditions of today, we would see such actions as an endorsement of our approach to managing our business not from a -- more from a profitability point of view than from purely a market share point of view. This is a coverage delivery model we're going to be rolling out. It's clients and needs oriented. It will help improve our margins while we maintain a relentless focus on quality. In this business, we have a very strong and experienced management team that we're confident will execute on this plan and we'll realize the benefits in the months ahead.

The initiatives that Karen and I have outlined today reflect our ability to adapt to what we're calling the new normal in the global financial landscape. Deteriorating capital markets, heightened volatility and increased regulatory obligations have all had a profound impact on our industry. They also happened to create real opportunities for us. We recognize the world has changed, and we're responding accordingly. Our position as the leader of investment services demands a measured but fundamental change in the way we manage this business. We are going to improve our margins by driving operational excellence throughout our organization. We'll differentiate ourselves based on quality and manage our client relationships with a strong emphasis on profitability.

With that, let me turn it to Todd to quantify some of the benefits and discuss timeframes for results.

Thomas P. Gibbons

Thanks, Tim. I think my colleagues did a very nice job outlining some of the initiatives that we're taking in investment services and in investment management. I'm going to bring that conversation full circle and talk about, actually, quantify what savings we think that can generate. And then what I'm going to do is provide an outlook for 2012 through 2014. We'll look at revenue growth. We'll look at expense growth. We'll take a look at what we think we can realistically do in terms of operating margins, operating leverage and finally, ROE and earnings per share.

Let's start with our efficiency initiatives. They fall into 3 large buckets. The first involves improving the productivity of our business operations. This includes continuing to leverage our delivery centers, reengineering and further automating our processes and combining common functions across our businesses. The second is simplifying our technology and the infrastructure around that and also reducing the number of applications that we use. Fewer applications will save us in maintenance and technology cost, but it will also provide additional opportunities to simplify our operations. The third focus is on making our corporate services more efficient, better and less costly.

Now let's drill down into the savings by category. Overall, we expect to generate about $650 million to $700 million of expense savings in 2015. The largest opportunity is related to transforming our business operations where we expect about $415 million to $450 million of the total. We've outlined a few examples of the actions that we're taking here.

We'll continue to maximize the benefit of our global growth delivery centers. As Tim noted, that there's a great opportunity, for example, in investment services. He personally has the experience to do this and get it done and get it done right. To increase efficiency, we're looking to reengineer operations and automate a number of functions. For example, we will integrate more standardized workflow tools that will increase automation and productivity in a number of our custody-like operations, some of which we have listed here.

And, of course, we will consolidate applications both in Asset Servicing and in Corporate Trust. Fewer applications provide 2 benefits: lower technology costs and the opportunity to standardize and simplify operations. We are targeting 4 key systems in Asset Servicing, and we will also be able to reduce the number of Corporate Trust systems by about 25%. For example, our Corporate Trust record-keeping systems will be reduced from 8 to 1.

Now let's move on talk a little bit about infrastructure of technology. As Tim noted, we will utilize our private cloud to virtualize distributed applications, effectively eliminating proprietary hardware and software. Now the strength of our software engineers is really a key to our franchise. We have a world-class development team, and we are going to in source hundreds of jobs from third-party developers into our internal software development company. Expanding our team of highly engaged employees developing our IT solutions will lower our costs, it'll drive more innovation and, importantly, it'll transfer knowledge to our staff. Once again, we know how to do this. We've done this for quite a few years, and we now have the experience to accelerate it throughout our company. Not only will it lower our costs, it will make our application development more efficient and also more responsive to client needs.

Another opportunity is around our desktops. We have approximately 67,000 desktop computers in the company, and they operate with more than 100 configurations. As we've acquired businesses over the past, we've tended to focus on integration. Now we have the opportunity to standardize and reduce the number of images here by about 90%, that'll clearly reduce the cost of maintaining our desktops, and it'll also increase the productivity of our staff.

Within the corporate services bucket, we're centralizing our purchasing function, which will be able to help us better control our costs related to temporary health, market data feeds, as well as legal and professional services. And I think it'll do all of that in the near term. In the longer term, we'll address other expense categories, and there is a pretty significant spend to attach here.

We've recently hired a new Chief Procurement Officer. She's got a tremendous amount of experience in the industry, and right out of the bat, we're pleased with her early successes.

We also have the opportunity to reduce occupancy costs. We have too many high-cost locations, specifically in our market centers, and we have plans to consolidate. In addition, throughout the world, we have a number of subscale operations, and the current environment on top of that offers the opportunity to amend and extend certain leases for a meaningful reduction in costs.

You will be able to assess how we're doing in all of these actions by following the metrics that we began to show you in the first quarter, and that is how do our investment service fees look relative to expenses. If it's improving, it's either an indication that we're getting better pricing or we're getting more efficient. Now the revenue mix can change over time and have some impact. But over time, this ratio will let you know that we are executing.

The next slide breaks out for you the expected savings for investment management and investment services. Of the expected $650 million to $700 million in savings, most of it, as you would expect, is in the Investment Services business, that's $375 million to $405 million. There's $40 million to $45 million generated by investment management, and the balance will come from our technology and other corporate services.

Now let's summarize the initiatives. Overall, we expect to generate $650 million to $700 million in expense savings in 2015. To help you model these savings for the interim years, we've provided some ranges in those years. Now the savings I am quoting here are net of all related program cost. In fact, we have included the cost of a number of investments with payback periods that extend well beyond 2015. We continue to believe it is critical to make these investments, although their full benefit won't be enjoyed over this time period. We have to stay focused on continuously improving our operations. And that all may sound well and good and easy to do, but it takes a lot of discipline and requires that we regularly invest some of our savings into new initiatives.

So in 2012, we're expecting the net savings due to the program to range from about $240 million to $260 million; in 2013, it'll be $400 million to $430 million; and in 2014, $535 million and then ultimately, $535 million to $575 million; and then ultimately, we'll get to the $650 million to $700 million in 2015. These initiatives will require us to take about an $80 million to $100 million of incremental expenses in this quarter, and that just represents what we need to get the program started. Other than the expenses in the fourth quarter, the cost to generate the savings in the out years are reflected in these numbers.

Now let's take a look at how this all factors into our outlook for 2012 and 2014, and this is in terms of expectations for revenue, expense growth, leverage margins, as well as returns. Let's start with the macro outlook, which we've laid out for you here. I don't think through the course of the presentation, we've made it much of a secret that we think the environment will be tough for the foreseeable future. We are facing slow global growth with probable -- we'd expect additional de-leveraging.

For our key revenue drivers, we expect the following. Historically, slow growth in equity values. We're estimating somewhere between 4% and 7% across the globe. Now volumes and transaction volumes, typically, it's greater than GDP, and as you saw the last 10 years, it was significantly higher than GDP. But given the de-leveraging that we anticipate, we would expect volumes only to be in line with GDP for the next few years.

We also don't expect the central banks to take any policy changes over this time frame, and we do expect our balance sheet to grow more in line with GDP rather than the spikes that we've seen recently. Obviously, our model is sensitive to the capital markets. If markets perform better than expected, we will enjoy significant operating leverage. But given the troubles in Europe and elsewhere, we feel that de-leveraging is going to continue, and we need to plan and have planned for a tough environment.

Now for your modeling purposes, I would assume that core expenses will increase in support of revenue growth, and I would use our average margins or so when you look at that revenue growth. We do face some other expense challenges as regulatory compliance, legal and benefit costs are going to continue along the trend line that we've had in the past year or 2. We've done a lot of work to improve our credit quality over the years. We've reduced our credit portfolios and the risk in our portfolios. But the loan loss provision should be pretty modest somewhere in the $0 to $60 million per year.

Now before we get into the -- to finalize those numbers, let's talk a little bit about some tactical actions that we're taking in relation to net interest revenue. Given our assumption around the environment, we are planning to take some additional steps to support our net interest revenue and our margin until rates finally do change.

We're sitting on a tremendous amount of central bank deposits, somewhere in the vicinity of $65 billion after the growth that we've seen over the course of the summer. We're going to gradually reduce those deposits. That runoff will be deployed in the combination of relatively short duration. There's not going to a lot of interest rate risk or a lot of credit risk here. But short duration, high-quality investments, including agency floating-rate securities, some U.S. municipals, as well as consumer asset-backed securities.

In addition, we will also increase our term repo book, and as we have previously indicated, you will see an increase in our secured financing portfolio, which has now grown to about $5.5 billion. Through these actions, we expect to increase our net interest margins slightly even with no rate changes. We should be in the 130 to 140 basis points range in this rate environment. That will change based on fluctuations in deposits. For example, if deposits were to spike again, we would expect a little downward pressure on NIM as we can't reinvest at quite such a high rate.

Conversely, if we see a runoff of the less sticky deposits, we would see an increase in NIM accordingly. Once market normalized, the markets normalize, we should be able generate about 160 to 180 basis points of net interest margin. The combination of a relatively smaller balance sheet and hundreds of millions of dollars more in income on free deposits will drive the margin expansion back to the levels that we'd seen previously.

Now let's move on to our financial outlook. Karen, Curtis and Tim are taking many actions that will help us outperform. But given the difficult macro outlook, we are being realistic about our expectations for near-term growth.

We think 3% to 5% revenue growth over the 2012 to 2014 time frame is reasonable, and we think it will be above our peer group median. As we just discussed, we're fortunate to have the opportunity to reengineer our cost base to help reflect this reality. Thus, if you take our base case and you factor in the impact of efficiency initiatives, we should be able to reduce the growth rate of expenses to 2% to 3%, which translates into 100 to 200 basis points of positive operating leverage and margins expanding by about 100 to 300 basis points. Should we see an uptick in revenue, there is significant upside to earnings as operating leverage really start to kick in.

Turning now to capital. Strong capital generation is inherent in our fee-based business model. If you combine earnings and intangible amortization, we generate roughly $3 billion of capital on an annual basis. Not only are we generating lots of capital, but we're getting a high rate of return on our tangible equity versus the top U.S. banks. Year-to-date through September, our return on tangible equity was 24%, some 71% above the median of the top 10 U.S. banks. Both trends should continue as our model generates recurring fees, 80% fees versus 20% net interest revenue with the need for a limited growth in risk-weighted assets.

Now our significant capital generation positions us well for meeting Basel III requirements. As you have probably heard by now, we are one of the 29 designated as a globally,, systemically important bank. The affected institutions at this point don't know what the required capital buffer will be, but we do know that it will be in the range of 100 to 250 basis points, bringing the range to a range of 8% to 9.5%. And although we can't be sure exactly where we're going to be, we'd looked at the criteria pretty carefully, and we would expect to be required to hold somewhere between 100 and 150 basis points above the 7% minimum. I would note that the phase-in period for the G-SIB capital buffer does not begin until the beginning of 2016. Over this time period, we will be well ahead of even the higher level that we anticipate, which gives us a significant amount of flexibility.

Here's a roadmap to how we expect to get there. First of all, we currently estimate our Basel III Tier 1 common ratio to be 6.5%. If we excluded the assets that were at one time in the grantor trust, our ratio would be closer to 8.5% to 9%. Since we are holding these assets well below their current market value, we could sell them and realize a gain. However, we expect to recover the additional discount over time, so we just don't feel compelled to take a noneconomic action.

In our view, the securities provide an additional buffer. So if we start with our third quarter estimated range of 6.5%, earnings will add roughly 450 to 500 basis points. Pay downs of sub investment securities will add approximately 80 to 130 basis points. Now Gerald described to you what we're going to do in terms deployment of capital with a targeted dividend rate of 20% to 25% and a combined dividend and repurchase payout ratio of 60% to 65%, the capital deployment you need to meet that is probably going to be in the range of 325 to 425 basis points.

And finally, the latest bucket titled, other, of 140 basis points is primarily driven by intangible amortization, which kind of profusely [ph] announced in divestitures. Now the regulators are not requiring early compliance. Also the stress test for the capital plans is a Basel I test. We currently have a Tier 1 ratio of 14%, and it's 12.6% Tier 1 common. And given the low-risk, high-fee model, we expect, as we have in the past, to perform very well under those stress tests. We also, as we've demonstrated here, have a very clear path for compliance with Basel III. So we expect to be permitted to execute the prudent plans that we've disclosed here.

Now let me spend a minute on capital deployment and return on equity targets. As Gerald mentioned and we really want to reinforce, we are going to be very disciplined around the management of our capital. Right now, acquisitions are a low priority. However, we would consider one if it had some strategic importance. Also given the problems in Europe, it's possible something might make sense, but the financial hurdles are going to be high as we've outlined, must be accretive by the end of year one. We're expecting a 15% or targeting a minimum 15% after-tax IRR, and the transaction must exceed the return offered by the much lower risk of just simply repurchasing our shares.

And with our share price currently at such an attractive level, that's a pretty tough hurdle. In terms of return on capital and returns on tangible equity and return on equity are expected to be greater than 20% and 10% over the time period. We see these returns as achievable with some meaningful upside in a more normal environment. Until we get the final rules, it will be difficult for us to establish any really long-term ROE targets. We expect them to be somewhat lower than the historical average, but they should still be very strong.

Now here's what it means from an EPS perspective. For 2012 to 2014, we are targeting a compounded annual EPS growth rate of 7% to 11% on a reported basis. Here's how we get there. Core earnings growth will add 2% to 4% EPS on an annual basis. If you reflect back on what we're projecting around expenses and revenue growth, you can see how we got there. The impact of our expense initiatives will add another 2% to 3% annually to our EPS trajectory. Now when you layer in our targeted share repurchases, we add an additional 3% to 4% in annual EPS growth.

The combination of factors results in compounded annual EPS growth of 7% to 11%. We do expect next year to be a bit tougher and at the lower end of the range as we feel the full impact of the share owner services divestiture and some higher related costs. A better market could change that, but at this point, this is our best estimate for the next few years.

With that, let me turn it back to Gerald for some final thoughts before we begin our Q&A session.

Gerald L. Hassell

Well, thank you very much, Todd, and everyone else who spoke this afternoon. I trust that the information that we've been able to provide to you today, the strategies that we've outlined will help you more fully appreciate the power of our business model, not only for our clients but for you as well. I truly believe that we have the broadest set of solutions that the market has to offer in terms of supplying services and management of assets around the entire investment life cycle.

We really are an investment company. We are fully and solely dedicated to managing assets and servicing assets around the entire investment life cycle. It gives us more opportunity to deepen relationships and broaden those relationships for the growing winners and the gatherers of assets on a global scale. So I think it's incredibly important, very powerful to have our investment management and our investment services capabilities together because it really brings value to our clients and to our shareholders.

Clearly, the long-term secular trends are working in our favor, and the recurring nature of our core fee revenues drives a stable level of earnings that is less impacted than many financial institutions by the headwinds of financial regulation. Many, many financial companies are going to have to go through adapting and altering their business model. We are not. Our business model works perfectly well in the new regulatory environment.

We're also generating significant levels of capital that Todd just referred to, which give us enormous flexibility to invest in our businesses and return capital to our shareholders. The end result is, we believe, we're going to have strong relative performance in challenging markets with substantial upside when the market's normalized, and I do believe eventually they will normalize, and we will see the benefits of our operating model during those times.

So back to the original question that I mentioned in my opening. Can we continue to grow and adapt to the realities of the current environment, new capital requirements and deliver strong performance to our shareholders? The answer is absolutely yes. I know we can do this. It's all about execution, and it's interesting when I put together my own goals for our board. At the end of the statements that I put together for the board, I put it as a goal but it's actually a statement. It's execute, execute, execute. That's what I shared with our board. That's what our team is dedicated to, and that's what we're dedicated to on behalf of our shareholders.

So with that, let me open it up for questions. We need some mics back here. Glad to see this isn't a shy group.

Question-and-Answer Session

Unknown Analyst -

In terms of client attrition, can you give us any sense of what you're expecting there and any change in the way you are going to require clients to pay you for various services?

Gerald L. Hassell

Sure. In terms of attrition, I better stay over here. Right now, we're very much in the early phase of the process of rolling this program out as Tim mentioned earlier. We don't expect much in the way of client attrition. The early, early indications and visiting with clients and talking to them about the need for mutually beneficial relationship they understand and they get it. Some of the smaller clients might, say, find some alternatives, that's possible. But we really want to make sure we have a good open dialogue with our clients. We built some level of attrition into this model, but not that much. It's still too early in the process to determine how impactful it'll be on the downside. We do think, however, that on the upside, we're going to have a more profitable business. and that's what our goal is. Tim, I don't know if you want add anything more to it.

Timothy F. Keaney

No, Gerald. I think the only thing I'd add is we're trying to drive fees. Our industry probably got too dependent on capital markets-related revenue. We know that's been reset. So the goal is to raise fees, raise them across the board and also recover our rising cost in this business.

Howard Chen - Crédit Suisse AG, Research Division

Howard Chen from Credit Suisse. Just following up on that, Tim, just to set the baseline on greater pricing discipline, what are your minimum pricing thresholds today? How much of your customer base maybe doesn't achieve that? And if you look at pricing on new mandates over the last 6 months has anything changed versus the legacy book?

Timothy F. Keaney

I'd say in the largest 2 client segments of the ones to the left, which are about 700 clients, I think it remains extremely competitive today. I think where we see pricing power and that's where we're going to start first is that tail of clients, the 1,400 clients, they also tend to not be clients that have big cash balances. They're not in the securities lending program. They're not invested internationally. So we're not enjoying foreign exchange revenue, and I would say kind of, on average, it's hard to generalize on this because custody only clients are probably profitable today, and we're just raising our minimums a bit. It is really about a combination of covering some of the rising costs that are coming through FATCA and cost basis accounting will be 2 great examples. Just cost basis accounting and FATCA are going to cost us $50 million a year and cause us to create a whole new department, and so we're going to look to spread that cost across the client base. We've also found we're doing a huge amount of customized work for those tail clients, and we're just going to start charging for it. So it's really hard to generalize across the 1,400 client base, but we're really doing this client by client based on the mix of products and services they use from us.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Glenn Schorr from Nomura. Just a quick follow-up on pricing and then one on costs. On pricing, can you give us, Tim, an idea of the maturity cycle of the contracts? Because I think that has a big stay [ph] impact, in other words, I find it hard to believe that too many clients want to fork up money in mid-contract.

Timothy F. Keaney

Yes, good question. I'd say the majority of the clients are somewhere around 3, maybe 4 years. Some of the tax-exempt business would be closer to 5. But I would say probably about half of our clients were able to start passing through increased costs much more quickly because we don't have a fixed-term contract. So yes, I think it's going to take a cycle. And as I mentioned, new business that we're bidding on, we're already bidding with the new reality in mind and with our minimum profit margin thresholds.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Got it, and I appreciate that. And then a quick one on cost, on Slide 58, when you go through the base case of initiatives, I just want to make sure that 2% to 3% expense growth is plus 2 to 3 expense growth including the 650 to 700 that you've outlined over that time. If we're in a little softer revenue environment, unfortunately for longer than we all hope, is there any flexibility to keep that lower because it's really, say, big cost save program and then expenses are still going up. Just trying to reconcile those.

Timothy F. Keaney

Well, part of it has to do with -- there is going to be some level expense growth to support the revenue growth. I mean, we can't have 0 expense growth while revenues are growing simultaneously. We're trying to curb the rate of growth as new revenues are coming onboard, layering in these initiatives to offset some of the legal regulatory and other costs that we're facing. And so that's why we try to break it out for you that way. We're going to be incredibly disciplined around the expense side. Every one of the big buckets that we laid out for you has a lot of individual initiatives behind it. They have time frames around it. They have owners of them. So we know exactly where to go in terms of making sure we get those out.

Curtis Y. Arledge

Can I just add something. I think, the way we modeled it and we gave you the tools to model it yourself, frankly, there, is we assumed the additional dollar revenue is going to have the traditional operating leverage against it or operating margin against it. The figure is something like 70%. So if you saw -- we kind of were striking the midpoint of some of those averages. If you do that, you will probably see flat to perhaps negative expense growth, and we don't see the revenue.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Alex Blostein, Goldman Sachs. Quick question for you guys on net interest income, and I guess the expectations you have in for the 130 to 140 guidance. So is that including the discount accretion, I guess you guys currently is still having the run rate. What are you thinking about that runoff and then as far as the $65 billion goes, how quickly do you expect to reduce that and will it do some yielding securities?

Gerald L. Hassell

Todd, why don't you take it?

Thomas P. Gibbons

Yes, we are reflecting the runoff that we would expect in the accretion related to the subinvestment grade securities. Those will burn off after 4 or 5 years. So there's about $4 billion of that. So one way to look at it, now, we're investing 25, and we're going to see slowly $4 billion runoff. The $4 billion has higher yield than were able to generate on the 25, but you overcome that, more than overcome it with just the size of the additional investments.

Gerald L. Hassell

A question here..

Unknown Analyst -

Just following up on Glenn's question. So it looks like that 3 initiatives, your expenses should go grow along with your revenues between 2012 and '14 about 3.5% -- 3% to 5%. And I guess what I'm trying to better understand is excluding the initiatives, which are substantial, longer term, is there an operating leverage in this business or is the fact that the regulatory lift the expenses this year with all the Dodd-Frank stuff are just coming during that time period that on the base or would be equal revenue growth...

Thomas P. Gibbons

Yes, well, certainly for the near term, the regulatory litigation, other headwinds are really keeping pace with our revenue. And that's why we felt compelled to introduce the initiatives and have a sense of urgency around it to make sure we produce positive operating leverage in spite of headwinds, in spite of a slow growth environment. We think we owe that to you. And so the combination of all these things actually produced this positive operating leverage in a slow growth environment and to the extent, we have better capital markets activity, most of that stuff falls to the bottom line. So the operating leverage really ramps up if we get some positive activity on the revenue side, particularly in the capital markets area.

Unknown Analyst -

Yes, but longer term, you would expect us to model, excluding these special initiatives would have lots of operating leverage?

Thomas P. Gibbons

Yes.

Curtis Y. Arledge

I mean, Steve, you got -- right now, in a relatively low-growth environment, you've got situation where we've got regulatory and other expense headwinds. Eventually, those will become tailwinds. They'll actually not only abate, they'll go the other direction. And so it's difficult for us and the 3% to 5% revenue growth environment to generate a whole lot of operating leverage without significantly attacking and transforming our cost base. So that's what we've done here, and that's where the operate leverage comes. Otherwise, I don't think over this time frame, we can realistically do it.

Unknown Analyst -

And just one other question. The NIM guidance, longer-term NIM guidance, that's excluding discount accretion, I assume? And what sort of set bonds[ph] Rate you would have to see to achieve that?

Thomas P. Gibbons

Yes, I'd say a lot of it comes back and there's 2 impacts to it with the lower rate environment. One is the impact under our NII. The other is the impact to our fee waivers. But specifically to net interest income, we recover a fair amount it at 100 basis points. So if that one is rated 100 basis points, we probably get 65% to 70% of the recovery.

Unknown Analyst -

Todd, can you talk about Steve's question across business segments. So if you look at that 2% to 3% revenue growth or sorry the 3% to 5% revenue growth, 3% to 5% expense growth. If we look at this overall company if we break that down across segments, with you at a high level, give us a sense of what that would look like by the broader segments?

Thomas P. Gibbons

Yes, I don't want to say I have that level of precision or ability to predict the future. But it's not too dissimilar between investment management and investment services. Our expectations when you look at those kind of market drivers, you might see a little higher growth rate over that time frame from investment management. And we don't anticipate a great environment for some of our Issuer Services business. Actually pretty good for some of them, and others are going to feel some pressure. And corporate trust is one that has struggled to grow when you actually have 5% less issuance last year in terms of new debt issuance. So I think Karen and her team have done a great job of making that business even more profitable despite a slow growth rate. But a couple of businesses will slow a little. It will grow a little more slowly than the other ones.

Gerald L. Hassell

Yes, the other metric to watch which we already started to get to you is fee revenue versus expenses, particularly investment services. That's the area where the bulk of the expenses are going to come out of. So we want to get that ratio in better form, and that's a measure you should watch. And then the margin within the investment services area. Investment management to margins already pretty healthy, and so actually, you can see in our presentation because not all the direct cost coming out of the investment management area. But most of it's coming out of ops technology infrastructure, investment Services businesses.

Unknown Analyst -

Going back to the wee little cycle you talked about, I know you've been finding linkages all of those clients, by lots of services. So is there a reason to remain in the Corporate Trust business? Is there really connection to the rest of it?

Gerald L. Hassell

Yes, corporate trust we like the business. We're in one of those cyclical times. It seems like a long cycle, but eventually if we're going to see some economic growth globally, bank's balance sheets and the regulatory environment are not going to able support economic growth. You're going to have to issue debt to public markets in order to support any level of growth anywhere in the world. We're in a great position to be the trustee for those issues when they come about. So we still believe in the business long term. It's a very profitable business, and in spite of revenues actually coming down a little bit, we've been able to hold the profitability of the business. So I think it's a very good business. Karen, actually you want to add to that?

Karen B. Peetz

No, I would say many of the same things and emphasize the fact that the pricing pressure is not as significant because that's where scale actually helps, and having this global footprint that we have that's kind of second to none. So I would say we like the business. We'll stay in the business, and the margins are quite good.

Unknown Analyst -

In terms of operating margins of improving 100 to 300 basis points, is that -- should we think about it off of a base of 28%, 29% operating margins today. So that you're at 31%, 32% in this current environment, that would be in a normal...

Thomas P. Gibbons

I think that's pretty close.

Unknown Analyst -

And in a normal environment, should it be...

Thomas P. Gibbons

Well, one of things, let's make clear. The operating margins can be driven by a number of factors. One of them is revenue mix. But assuming a consistent revenue mix, I mean, and if you think about our model, it's still leveraged for the upside to the markets, whether it comes in the form of NII, sec lending as we see recovery in FX, we see recoveries there. But normalizing for that or assuming that, that stays consistent off of the current base, that's where we estimated that increase in the operating margins. So we're not going to be able to deliver 100% of the expense reduction. We think it'll be unrealistic to think you can get 100% of it, but you'll get a meaningful part.

Unknown Analyst -

And then one follow-up in terms of the comment that next year will be tougher, does that assume that operating margins could actually come down just until we get the timing right on expenses starting to come through, or do we think that's actually some of initiatives on the top line revenue?

Gerald L. Hassell

I think that was referring to the fact we'll be at the low end of EPS growth in a challenged environment. But we're still looking to push through those expense savings that we laid out for you in 2012.

Unknown Analyst -

James Chan [ph] from Partners [ph] . Just a couple of quick questions. We made something like $2.8 billion of acquisitions in 2010. And if I apply 15% return on that like $400 million after-tax, $600 million pretax. Where does that show up in your numbers? It's not in your expense. That's the first question. Second question on different subjects. On the FX headline, are we actually losing market share? Where are those guys who were suing us? Are they going to other FX services providers? I just like to know what's the actual impact on the ground on our FX business.

Gerald L. Hassell

So let me take the last question first. We've seen our FX volumes continue to be stable. I mean, in fact, they've actually increased throughout this period. More negotiated, but the steady instruction has been stable throughout. So they continue to -- the clients and sales continue to view this as a very valuable service. When you're executing small transactions in high quantities and you're getting interbank rates, it's a pretty good deal. And so we think what we're basically seeing is that our FX volumes and transaction levels have held up. A lot of the FX profitability has to do more with volatility, and so it depends on the volatility quarter-to-quarter how much you'll see us earn in our foreign exchange business. Going forward FX, like every single trading operation that you can see on the planet, is constantly being reviewed in terms of prices. And so that's why we're thinking about new options, new sort of new products, new services to make sure we capture more volume and get more chances to play in that space. On the acquisition side maybe Todd will, I'll let you address some of the -- where does it show up.

Thomas P. Gibbons

Sure. Obviously, the environment is significantly different than it was when we executed those acquisitions. We're anticipating something like a 7% or 8% growth rate. We're anticipating and we were seeing at the time higher interest rates and obviously, those haven't come to fruition. So it basically offsets the pressure that's come around with the business mix, which Tim has spoken so eloquently about. I would say in terms of the performance of them, GIS has been pretty much along our business model. I think it's done quite -- pretty darn well. I think we've gotten most of the revenue synergies that were expected from it, and we've actually been able to execute on most of the expense synergies. And some of those synergies will still be reflected and are reflected in these numbers that we're talking about. Our acquisitions in Germany has not panned out as well. It has made us the #1 provider. But the timing of it hasn't really come through in the P&Ls. So you really don't see it. We do think that we'll ultimately make the business model that we had anticipated for it, but given the softer environment it's taken us a little longer to get there.

Unknown Analyst -

Gerald, could you talk about any particular incentive structures that have been put in place to align to delivering the initiative you talked about?

Gerald L. Hassell

Sure. No, it's a very good question. The whole executive team is very well aligned with the company's performance, as well as their business unit's personal goals. We are looking to take that down several levels within the company so that different people are more fully aligned around how the company, overall, performs. On the delivering the whole company, the coverage model that Karen talked about, the teams themselves will have mutual goals and, therefore, their compensation will be aligned around the goals set or around those major clients. So we're really working hard. We're still not done yet of better aligning everybody around delivering the whole company or around the company itself, not just individual business units or individual performance. You still have to pay many, many [ph] people based on the performance of their individual business units, particularly in the investment management area and the boutiques. We can't violate the sanctity of the investment process within the boutiques and how the people get paid. They can't be overly influenced by corporate behavior whereas the consultants and the clients will say, they're not perfectly aligned with investment success. So we're really being very careful about how we think about it, but make sure more and more people align with the benefits of the whole firm. We have a question over here.

Unknown Analyst -

I came in a little late, so I apologize if you addressed this in your opening remarks. During the process that you went through coming up with these goals, did you guys consider any divestitures of businesses smaller businesses that are core today?

Gerald L. Hassell

Well, sure. We have one that we hope to close by the end of this year, Shareowner Services, our former stock transfer business. We have some minority interest in things that we're working on as well. I think we, as a management team, certainly my whole career and our whole team has never been afraid to transform the company and to look at businesses. If they're not meeting our return hurdles, they're not for the benefit of their shareholders, we haven't been shy about peeling off things. We like the vast, vast majority of the businesses we're in today. There might be a couple of little things around the edge, but I think we pared it down to something that really makes sense for us and for our shareholders and clients.

Unknown Analyst -

And then my second question is to Karen. On your 4 groups of customers that you define, what percentage of them are hitting your sweet spot or what is your sweet spot in the number of products that you like to see them purchase from you? And what's the goal for 3 or 4 years from now on moving more customers to that sweet spot?

Karen B. Peetz

And just to clarify. You're talking about the market segment group, because I think we had a few more than that. But yes, certainly, our largest clients mostly in the broker-dealer and the financial institutions space that's where we're looking at that top 40 that's mostly in that kind of genre. And then we have other products that speak more to corporate at as an example. So depositary receipts and Treasury Services, you sell a lot to the corporate. And then Tim, of course, has the investment management firm and then you know what Curtis does. So it's a mix I guess is the point, and in those different segments, we have different opportunities to sell different products. And we did kind of talked about an audacious goal among us, I don't think we're ready to say what that is, but we do have a goal that we're shooting for.

Unknown Analyst -

Yes, Karen. You had a slide, and I'm not sure if it applies to the whole company or just your business where you showed the revenue growth by geographical segment for the industry and how much comes from each segment. And I get back of the envelope calculation, which might be way off but it looks like about 7% growth. And you all are talking about 3% to 5% growth, revenue growth, for the whole company. So I'm wondering if that's a meaningful gap, how should we think about that or are you not properly aligned or is that something you're going to address?

Karen B. Peetz

Yes, I would say that we didn't map those 2 things together and that the regions we were trying -- with that slide we were trying to show kind of the upside of opportunity in the areas where we haven't been as well penetrated so that was really the kind of intention of the slide.

Unknown Analyst -

And how do you anticipate penetrating those regions?

Karen B. Peetz

Well, we have a great footprint that already exists with people on the ground. In many cases, we have multiple products represented or businesses represented. In most of the fastest-growing markets, we actually have representation of each of the core businesses. And so what we were trying to make the point is that as the company, or excuse me, as the country develops, we can keep adding more services. So we tend to put the flag in the ground with payments and trade and then maybe they'll issue a depositary receipt and then maybe they'll do debt, so you'll do Corporate Trust, and then in comes asset servicing and then some of the kind of bells and whistles around hedge fund servicing and that kind of thing. And somewhere in there, investment management happens as well. So it's different by country how much penetration we already have mostly because of the kind of age and stage of the countries and their capital markets.

Unknown Analyst -

So when do you think your penetration will be such that you could grow at a 7% rate rather than 3% to 5% rate?

Karen B. Peetz

I don't think we have an estimate for that but, obviously, the mix and reach of these countries that we're choosing to invest in that's what we're after.

Gerald L. Hassell

Yes, many of these countries and regions were already growing at that rate or in excess of that, which might imply, by definition, say in the U.S. marketplace, you're not growing as quickly. And there's no question given the environment that we're in here and some of the major European markets, we're not always growing as quickly as that 3% to 5% in other parts of the region. But you have to remember there are small basis in terms of our total revenue. So even if they're growing at 10%, 12%, they're not going to move the needle of the whole revenue base quite as quickly. But we are getting some good penetration in all of these markets.

Unknown Executive

Gerald, one other -- you mentioned in this discussion when you think about what Karen just described whether it's in Brazil getting a banking license or Australia getting a banking license, I distinguished that from what you see on the slide that we tried to draw out on Brazil and Germany specifically, we're not able to do what we call going deep. So a lot of our businesses benefit from cost border flows. Our payments business, our DR business would be 2 good examples of that, maybe even Corporate Trust. Where we draw a distinction and maybe this is where we get some 5% to 7% is when we go deep in the market and compete for the assets that stay in market. So just like in the U.S. only about 15% of the assets in the U.S. get invested abroad. It's pretty much the same dynamic whether you go to places like Brazil or Germany. But now because of the acquisitions that we've done, we're getting a banking license where we can do capital markets in these local markets, we're now competing for local mandates and the local assets are actually growing at a much higher rate than the traditional, more mature markets of the U.S., the U.K. and Canada. So you'll hear us maybe talk from time to time about going deep. So in Germany, we're now not just competing from maybe the $1 trillion assets that go across border. We're competing for the $8 trillion in assets to stay invested in Germany. And in Brazil, we're not just competing for the $3 trillion of the assets to stay in Brazil -- the 15% or so that go outside Brazil, we're competing for the local Brazilian assets, and that has a different growth dynamic to it.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Ken Usdin from Jefferies. I was wondering if you can just elaborate a little bit more on the capital goals and planning. So obviously, still don't know exactly what the SIFI is going to be, but even if that 1% to 1.5%, a couple of years from now, the average will be 10% seems like a ton more than the company would need based on its business model. So is it just you're modeling conservatively for now and then you see if the rules change or is that you really think that that's what the business will need to hold and that's a change versus history?

Gerald L. Hassell

Yes, let me start in this, Todd. I think modeling conservatively. It's just showing you how fast we generate it, and so even with the 60% or 65% payout ratio for the combined dividend and share buyback, we're still accumulating capital in an incredibly rapid rate. Ideally when we want to keep investing in the businesses, invest in the regions around the world, so we can capture more of that growth as markets pickup and then, of course, we're always saving some level of capital as we see incredible opportunity, to acquire something that meets these hurdles. But I think it just demonstrates the degree of flexibility we have. Todd, I don't know if you want?

Thomas P. Gibbons

Yes, in the numbers that we outlined for you, Ken, we didn't do anything with that capital. We let it keep growing.

Gerald L. Hassell

Accumulate it.

Thomas P. Gibbons

So you can model for yourself what we might be able to do, whether that would be able to put more leverage in this model, which obviously it would. We don't really know, and I'm trying to make this point. We don't really know what our targets are going to be. And until we get a little clarity around what the expectations of the accord is going to be on the rule-making for the U.S., it's hard to say exactly what we would target. What we do know is we don't think we're going to need any significant buffer to the buffer, if you will, because for us we think it models our balance sheet pretty conservatively. But we need to know what the implications of a breach is before we put any hard targets out. But to your point, yes, we just did let the capital continue to accumulate without showing any value to what we might be able to do with that excess capital.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay. And a follow-up for Karen. Karen can you just talk about the depository receipts business, given the changes in the global world, the de-leveraging that's going on, some companies stopping paying dividends. Can you just talk about like the near-term and longer-term outlook for the business, and if anything is changing fundamentally underneath?

Karen B. Peetz

Sure. So we do track it very closely. You get paid basically on issuance and on cancellations in that business. So sometimes it can be as to how much the cancellations is impacting your revenue, but it isn't good because you lose it. So we track that, of course, very carefully every month. We still have a very strong pipeline in DRs. We have an unnamed, very large program that we'll be adding early in the new year. We continue to see active issuance. I mean, I have some fun facts about the fact that issuance continues to be far exceed where we were this year, at this time last year. And emerging markets products. So the likes of India, China, Brazil is where most of the activity is. And I don't think they're going to be slowing down terribly anytime soon. So we have a good outlook for DRs.

Curtis Y. Arledge

One thing if I can add to that. We did try to make it clear on the earnings call that the third quarter was a bit unusual where we saw a fair amount of corporate actions. Typically, we see it seasonally in the fourth quarter, but we saw a little bit of change in behavior and more of that front loaded to the third quarter. So we would expect it just seasonally to be softer in the fourth quarter than it traditionally has been.

Gerald L. Hassell

Mike?

Unknown Analyst -

What was the tipping point for the reengineering program, and do you think you started a little late?

Gerald L. Hassell

Well, the late part, we've actually started some of this a while ago. Tim talked earlier about moving some different functions into some of our global development centers. That's a program that we started after the merger. I think the tipping point is simply longer -- lower and longer. I think we just believe we're going to be in a period of time of slow growth in difficult markets, and we really have to get after the expense base of the company and make sure we're maintaining quality and risk management at the same time. And that's why we've adopted this term operational excellence because I think the 3 do go hand in glove with one another. I think we're just in a new reality and so we are being very realistic about what the expectations should be for growth and therefore, we have to engineer our cost base and our business model to match that new expectations, the new reality.

Unknown Analyst -

And as far as the change in CEO? I mean, we've known you forever. There was a change in CEO. Why did the old CEO leave? What was that over? Was that over this?

Gerald L. Hassell

I'm moving on. We've got a great company to move forward with, and we have got a great team. And I really don't have anything more to say about it.

Karen B. Peetz

Someone over here.

Gerald L. Hassell

Okay, we'll get.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Rob Lee, KBW. I have asset management question.

Gerald L. Hassell

Great. We do have a big investment management business.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

So I hear. So I hear. Most firms have the multi boutique model, they typically operate under some type of revenue share arrangement with those boutiques. And I think many of us probably aware of some firms that had some issues of that in terms of getting the costs aligned properly, some expense issues, so to speak, and trying to fix that. But can you talk a little bit about how -- do you have revenue share of your affiliates? Does that have -- do those have to be restructured to take advantage of some of the changes you see and any issues you foresee with having them accept changes?

Thomas P. Gibbons

No, we're actually very well aligned in our capitalization programs where boutiques actually are driven by after expenses [indiscernible]

Gerald L. Hassell

Tim always has the loud mic.

Thomas P. Gibbons

So the shorter answer there is that our boutiques are paid on pretax, and they also -- some of them actually are paid based on the franchise value of their firm. So an equity like stake in their companies. So no, we don't have a revenue share for the reason exactly that you asked the question, which is we want them have focused on really 2 things: delivering investment performance, which drives long-term value of their franchise but also focused on pretax, so after expense. Anytime that we can do something for them that is cheaper and better for them, their incentives are aligned to make that happen. So I think they're on a good spot around this.

Andy Clark

Guys, I think we probably have time for one more question.

John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

John Stilmar from SunTrust. Quick question for you. I think, Karen, if you define wallet share, can you put a little more specificity of what other competing resources might be for that wallet share and what wallet share really means?

Karen B. Peetz

So wallet share, in our mind, means how much does the client spend and then what percentage of that do we have, and that's where we made the point that we actually only have about 2.5% of our top 40 clients. So you have to figure it by just adding a percent and that equals like $2.5 billion. So just 1% more could make a lot of difference, which is why we're focusing on these top 40 clients because they also tend to be the large broker-dealers and the large global financial institutions who have these huge wallets. So that's kind of what wallet share means, and that's the focus that we're adding to it.

Gerald L. Hassell

We've actually done quite a bit of research, particularly on our largest clients. How much do they spend on services for investment management that we can provide those services to them, and so we've been able to identify roughly what we think their wallet size is, how much they're spending in the marketplace and then we know exactly what we're getting from them in the way of those revenues. And so that translates into that 2.5%. That's kind of on average. Some, obviously, we have better market penetration, but I think it goes to show you just a little bit of increase in that wallet share is an enormous revenue potential. And we are actually having conversations at a "C-Suite" level, so it's not just product sales people going in one at a time product by product. We're actually having strategic dialogues with these firms about how can we help each other succeed.

Timothy F. Keaney

Gerald, just maybe one other point on that. Some of the work...

Gerald L. Hassell

You got to put your mic. It's hard to stick it away.

Timothy F. Keaney

Good team effort. The other thing we've recognized is look at the market segments that Karen talked about earlier. They actually use different bundles of our products today, and so that's been captured in the share of wallet work. So the kinds of products and services an insurance company may use will be different than a fund manager, might be different than a sovereign wealth fund. That's been captured in this exercise as well. So I would call it pretty precise share wallet analysis that we've done.

Gerald L. Hassell

Maybe we can take one more question from Betsy.

Unknown Analyst -

My question was on Page 60 on the capital charges. You indicated that it's going to be fairly obvious how you get some from 6.5% to 10% over 3 years. So I guess I'm wondering on the trajectory given some of the recent speeches that we've had from some of the state governors, do you think you need to pullback on the repurchases until you get your Basel III up a little bit higher towards that 9% before you then kick it back in?

Thomas P. Gibbons

The answer to that is no. I think that we can do this in a linear fashion over this time frame, which is exactly what is reflected here. Now that's my understanding. The regulators could always change their course, but they've been very reasonable to date in how they've looked at us. They've looked at our risk. They look at our ability to sustain the stress and allowed us to do what we believe are very prudent measures. So we continue to execute on our share repurchase program. We slowed down the pace a bit just reflecting the reality of the current environment. But we expect everything here as -- and I can't say it with certainty that it's going to be approved, but we would expect knowing what we know that it would be.

Gerald L. Hassell

Great. Again, thank you very much for coming. We'll be outside for a little reception. So I'm sure you'll have a chance to talk to us more personally, and thank you very much for coming out today. Appreciate it.

Operator

Thank you, ladies and gentlemen. That concludes BNY Mellon's Investor Day. Thank you for participating.

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