The Bank of New York Mellon (BK) Gerald L. Hassell on Q1 2016 Results - Earnings Call Transcript

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The Bank of New York Mellon Corp. (NYSE:BK)

Q1 2016 Earnings Call

April 21, 2016 8:00 am ET

Executives

Valerie C. Haertel - Global Head-Investor Relations

Gerald L. Hassell - Chairman & Chief Executive Officer

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

Mitchell Evan Harris - Chief Executive Officer-Investment Management

Analysts

Alexander Blostein - Goldman Sachs & Co.

Ashley Neil Serrao - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC

Brian B. Bedell - Deutsche Bank Securities, Inc.

Glenn Schorr - Evercore Group LLC

Ken Usdin - Jefferies LLC

Mike Mayo - CLSA Americas LLC

Brennan McHugh Hawken - UBS Securities LLC

Adam Q. Beatty - Bank of America Merrill Lynch

Geoffrey Elliott - Autonomous Research LLP

Brian Kleinhanzl - Keefe, Bruyette & Woods, Inc.

Gerard Cassidy - RBC Capital Markets LLC

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2016 Earnings Conference Call hosted by BNY Mellon. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference call will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent.

I will now turn the conference over to Ms. Valerie Haertel. Ms. Haertel, you may begin.

Valerie C. Haertel - Global Head-Investor Relations

Thank you. Good morning, and welcome, everyone, to the BNY Mellon First Quarter 2016 Earnings Conference Call. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as members of our executive leadership team. Our first quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results and can be found on the Investor Relations section of our website.

Before Gerald and Todd begin, let me take a moment to remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement in the earnings press release, the financial highlights presentation, and those identified in our documents filed with the SEC that are available on our website, bnymellon.com. Forward-looking statements made on this call speak only of today, April 21, 2016, and we will not update forward-looking statements.

Now I would like to turn the call over the Gerald Hassell. Gerald?

Gerald L. Hassell - Chairman & Chief Executive Officer

Thanks, Valerie, and good morning, everyone, and thanks for joining us to discuss our first quarter performance and our progress in driving our long-term growth strategy.

Now in difficult market conditions, actually more so than reflected in our underlying assumptions of our Investor Day target, we begin delivered what I think would be considered healthy results in almost any environment. Year-over-year earnings per share were $0.73, up 9%. Adjusted for the roughly $0.01 of litigation and restructuring charges, we had operating earnings of $0.74 per share, up 10%.

Now focusing on year-over-year comparisons on an adjusted basis, total revenue declined 1%, reflecting both the challenging revenue environment and our focus on driving profitable and disciplined revenue growth. Net interest revenue rose 5% as we benefited from the first full year impact of the December rate increase. Fee revenue was positively affected in some of our businesses as we recaptured some of the money market fee waivers. Total expenses were down 3%, driven by our business improvement process. We generated roughly 250 basis points of positive operating leverage, we increased our pre-tax operating margin by approximately 150 basis points to 31%, and our return on tangible common equity in the quarter was 21%.

Now looking at our progress against our strategic priorities. Driving profitable revenue growth remains our first priority. Growing revenue has been a challenge across the industry. We have a heightened focus on profitable and disciplined revenue growth. We are not just driving gross revenue, we're expanding market share at any cost. We're leveraging our scale and expertise to create new sources of value for our clients, and we're delivering innovative strategic solutions in areas with strong potential upside, and we're investing in technology to revolutionize the client experience and create a digital enterprise.

And we also have numerous long-term growth initiatives underway at different stages of maturities. Our collateral management solutions are a great example of where we are investing in capability with upside potential and where our business model gives us a competitive advantage. And we've been providing collateral services to the sell side for decades. We have leveraged these capabilities to assist the buy side. We now have a complete and mature products to help buy-side and sell-side clients solve pressing issues, and we believe offer unique value in the process.

We view foreign exchange capabilities as an essential client offering, adding value to the multiple business lines across our enterprise. As you recall, we recently added a new executive to head our markets team, Michelle Neal, who is reporting directly to me to ensure that we are fully optimizing the strategic long-term growth opportunities we see in this business. And we are also investing in electronic trading infrastructure to price and trade FX for our clients on a single platform, as well as multi-dealer trading venues, all for the purpose of capturing more client-driven flows.

We expect our NEXEN next-generation ecosystem to increase our technological edge and revolutionize our client experience. NEXEN will provide a consistent client experience across our businesses, enabling our clients access to all of our services through one portal offering, offering them increased flexibility and new opportunities to leverage services and data from us and third-party providers, who are integrated into our platform.

Now we've begun rolling out NEXEN to our clients in asset servicing, liquidity services, global markets and corporate trust, and we are collaborating with clients to deliver an enhanced experience. Now based on early client feedback, we are convinced this will be a real game changer and solidify our position as a technology leader. And we'll share more of this important strategic initiative as we continue to expand functionality and bring more clients under the NEXEN ecosystem.

We also have a number of initiatives focused on harnessing blockchain and distributed ledger technology. We see this as a potentially transformative technology and we're fully engaged. Blockchain has a broad range of possible applications for our business and we are working closely with FinTech firms actively participating in consortiums and running various pilot programs internally.

An investment management under Mitchell Harris, we are focused on executing the investment management strategy we have already laid out. During the first quarter, our focus on improving investment performance drove strong benchmark in peer-relative performance in a number of our equity strategies. We have a number of initiatives in flight to align our capabilities with the largest growth pools and deliver high-value investment solutions. The key initiatives include expanding our alternative multi-asset strategies and enhancing our distribution capabilities to our core institutional client base and building out our retail strategy.

On the institutional side, our focus is on extending our LDI strategies to the U.S. market, and we've launched a new U.S. multi-strategy fund that replicates the strategy that worked so well in Europe. With respect to retail initiatives, our focus on third-party intermediary advisors and expanding the Dreyfus distribution platform in the U.S. has led to solid organic growth. During the quarter, we were one of a handful of firms that saw positive flows into U.S. retail mutual funds.

And the growing synergies between wealth management and Pershing have also helped drive loans and deposits to record levels. The 50% expansion of our wealth management sales force is now complete and it's generating healthy new revenues backed by a strong pipeline. And earlier this month, we closed on our acquisition of a Silicon Valley wealth manager called Atherton Lane Advisers, strengthening our footprint in one of the fastest-growing U.S. wealth markets. As these examples demonstrate, we're investing for today and tomorrow, helping our clients achieve their goals.

Now, executing on our business improvement process has been a huge focus for us. We are leveraging our scale and expertise to deliver efficiency benefits to our clients and improved results for our company. We are on target to achieve the structural cost reductions we shared at Investor Day.

So, let me share a few examples of our progress. We have reduced rentable square footage by 1.3 million square feet and are moving forward on significant opportunities to further rationalize our real estate footprint globally. We have built out our Global Delivery Centers for further migration. During the quarter, we relocated more than 225 positions to low-cost locations to balance our workforce globally. And we have now migrated more than 3,300 positions since the inception of our program. And we also implemented an initiative to drive more corporate action instructions through our electronic means. The STP rates are increasing, efficiencies are being realized by us and our clients, and operational risk is declining. That's a real win for all of us.

Now our third priority centers on being a strong, safe, trusted counterparty. We have made significant investments to enhance our resolvability by substantially reducing risk, taking meaningful steps to prepare for multiple resolution contingencies, simplifying our legal entity structure, significantly improving our operational and financial resiliency, and increasing our financial strength. Clearly, we have more work to do on our living will, and we are committed to addressing the issues raised and meeting our regulators' expectations within the required timeframe.

Our fourth priority involves generating excess capital and deploying it effectively. During the first quarter, we repurchased 577 million in shares and we distributed $185 million in dividends. From a regulatory ratio standpoint, our key capital ratios again improved. This quarter, our CET1 ratio under the fully phased-in advanced approach increased by 30 basis points to 9.8%, and we increased our supplementary leverage ratio by 20 basis points to 5.1%. We also remain in full compliance with the liquidity coverage ratio, which became effective in 2015, with a full phased-in period that extends through 2017. We remain confident that we will be in full compliance with all of the regulatory ratio requirements at the time or ahead of the required dates.

Last but not least, people are our ultimate competitive advantage. Attracting, developing and retaining top talent is also a strategic priority. Within Pershing during the quarter, we announced two appointments. Lisa Dolly, who has been with Pershing for over 25 years and was previously the Chief Operating Officer, was promoted to the CEO, demonstrating our deep leadership talent bench. Lisa's former role was filled by Lori Hardwick, a successful and highly qualified leader with lots of investments, technology and advisory expertise and an extensive track record of success in business growth, most recently with Envestnet.

In addition, Piers Murray is joining us later this quarter as Chief Operating Officer of our Markets business. He comes from Deutsche Bank, and brings a proven history in a global markets products and solutions. He will work with Michelle in strengthening our Markets business.

Together, these moves are evidence of our ability to attract and develop truly outstanding talent, which is something we showcased in our first-ever digital People Report posted on our website. Our People Report tells the story of how we are invested in our people and building a winning culture, and I encourage you to take a look at it.

Now the bottom line is this, we are executing against each of our strategic priorities and it's coming through in our results. Our strategy is designed to produce client and shareholder value and perform well through all environments. We've shown you that we can do just that and our goal is to continue that trend.

With that, let me turn it over to Todd.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Thanks, Gerald, and good morning, everyone. My commentary will follow the financial highlights document, starting with slide seven that details our non-GAAP or operating results for the quarter.

First quarter EPS was $0.74, up 10% versus the year-ago quarter. On a year-over-year basis, first quarter revenue was down 1%, expenses down 3%, and we generated 250 basis points of positive operating leverage. As we've noted in prior quarters, the strength of the dollar continues to impact results, so it's negatively for revenue and positively for expense. However, the net impact of currency translation is minimal to our consolidated pre-tax income.

Income before income taxes was up 4% year-over-year on an adjusted basis, and on a year-over-year basis, our pre-tax margin increased approximately 150 basis points to 31%. Return on tangible common equity was 21% for the quarter.

Our results reflected the benefit of higher money market fees. Now, we previously indicated that we expected to recover roughly 70% of the fee waivers with a 50-basis-point increase in the Fed funds rate. As expected, with the first 25-basis-point increase in December, we were able to recover nearly 50% of the waivers. As you can see, the recovery is not necessarily linear. Therefore, additional rate increases are not expected to be quite as impactful as the first. Note that money market fees primarily affect clearing, investment management, issuer services and asset servicing.

Slide eight shows our consolidated fee and other revenue. Asset servicing fees were flat year-over-year and up 1% sequentially. Both comparisons reflect net new business and higher securities lending revenue, offset by lower market values. The year-over-year comparison was also impacted by the unfavorable impact of a stronger U.S. dollar.

Clearing services fees were up 2% year-over-year and 3% sequentially. Both increases primarily reflect higher money market fees, partially offset by the impact of lost business. The sequential increase also reflects higher volume. Issuer services fees were up 5% year-over-year and 23% sequentially. Both the year-over-year and sequential increases primarily reflect higher money market fees in corporate trust and higher dividend fees in depositary receipts. Treasury services fees were 4% lower, both year-over-year and sequentially, and that reflects higher compensating balance credits related to clients, which shifts revenues from fees to NIR.

First quarter investment management and performance fees were down 6% year-over-year, and that was 4% on a constant currency basis. The year-over-year decrease on a constant currency basis primarily reflects the headwinds of lower equity market values and net outflows in 2015, partially offset by higher money market fees. The sequential decline of 6% reflects those items in additional to seasonally lower performance fees.

FX and other trading revenue on a consolidated basis was down 24% year-over-year and 1% sequentially. FX revenue of $171 million was down 21% year-over-year, primarily reflecting lower volumes relative to the unusually robust activity that we enjoyed last year. The 4% sequential increase primarily reflects higher volatility, and that was partially offset by the impact of foreign currency hedging activity. If you exclude the hedging, the sequential increase would have been 12%.

Financing-related fees grew 35% to $54 million versus the year-ago quarter, and increased 6% sequentially. The year-over-year increase primarily reflects higher fees related to the extension of secured intraday credit declines. The sequential increase primarily reflects higher underwriting fees. Distribution and servicing fees were $39 million, 5% lower year-over-year and sequentially, as the favorable impact of lower money market fee waivers was more than offset by certain fees paid to introducing brokers.

Investment and other income of $105 million compared with $60 million in the year-ago quarter and 93 million in the fourth quarter. Both increases primarily reflect higher lease-related gains. The sequential increase was partially offset by lower other income resulting from clearing service termination fees that we recorded in the fourth quarter, and lower income from corporate bank-owned life insurance.

Slide nine shows the drivers of our investment management business and help explain our underlying performance. Assets under management of $1.64 trillion were down 5% year-over-year, reflecting net outflows in 2015 and the unfavorable impact of a stronger U.S. dollar, principally against the British pound. Sequentially, assets under management were up 1%.

We had long-term net inflows of 1 billion, that was driven by $14 billion in liability-driven investment inflows, where strong client demand has attracted more than $40 billion in assets over the past 12 months. And we also saw flows into alternative investment strategies.

Long-term net outflows were mainly driven by passive investment strategies totaling $11 billion, which were recognized in index investments. Active equity outflows declined to $3 million, signaling a slower decline and may indicate that the industry is starting to see equity flows stabilize following one of the worst years on record in 2015. Additionally, we had $9 billion of short-term cash outflows.

Our wealth management business and U.S. intermediary expansion initiatives continue to show progress. Wealth management delivered the 20th consecutive year-over-year earnings growth and we're seeing above market share inflows in many of our intermediary channels. Investment management loans and deposits both reached record levels of 23% and 5%, respectively.

Turning to our investment services metrics on slide 10. I want to point out that in the first quarter of 2016, we reclassified the results of our credit-related activities that were previously recorded in the other segment to investment services. This reclassification to investment services better reflects where the client relationships and services reside. The reclassifications did not impact the consolidated results. Also, concurrent with this reclassification, the provision for credit losses associated with the respective credit portfolio is now reflected in each business segment. All prior periods have been restated to reflect that.

Assets under custody and/or administration at quarter end were $29.1 trillion, up 2% or $600 million year-over-year, reflecting net new business and the favorable impact of a weaker U.S. dollar on a period end basis, principally against the euro which was partially offset by lower market values. The late quarter AUC/A was up $200 billion. We estimate total new assets under custody and/or administration business wins were $40 billion in the first quarter. In the last couple of quarters, we've seen slower than historic growth rates, reflecting our strategy of selectively adding new business versus simply growing market share.

Looking at the other key investment services metrics, the market value of securities on loan at period end was up 3% year-over-year. Average loans were flat year-over-year while average deposits were down 8%. Our broker dealer metric of average tri-party repo balances was down 2%, our clearing metrics are lower, and we again recorded a net decline in sponsored DR programs as we continue to focus on exiting low-activity programs at the lower end of our client base and programs that do not meet our profitability criteria.

Turning to net interest revenue on slide 11, you'll see that net interest revenue on a fully taxable equivalent basis was up 5% versus the year ago quarter and 1% from the fourth quarter. Both increases in NIR reflect higher yields on interest earning assets, partially offset by higher rates paid on interest bearing liabilities in the impact of interest rate hedging activity, which are primarily offset in FX and other trading revenue lines. Yield on interest earning assets was up 9 basis points year-over-year and 8 basis points sequentially.

Our net interest margin for the quarter was 101 basis points. That's a 4 basis point improvement from the year ago quarter, and 2 basis points higher than the prior quarter. If not for the impact of the hedging activity I previously mentioned, the net interest margin would've been 4 basis points higher for the quarter.

Turning to slide 12, you will see that non-interest expense on an adjusted basis declined 3% year-over-year, and 2% sequentially as we drove expenses lower in nearly all categories. The year-over-year decrease reflects the favorable impact of a stronger U.S. dollar, lower staff and legal expenses and the benefit of our Business Improvement Process. The savings generated by the Business Improvement Process primarily reflect the benefits of our technology insourcing strategy, and the implementation of our global real estate strategy. This was partially offset by higher distribution and servicing expenses related to fee waivers.

Staff expenses decreased year-over-year, primarily reflecting lower estimated 2016 incentives and a higher adjustment for the finalization of the annual incentive awards. So that was partially offset by the curtailment gain related to the U.S. pension plan that we recorded in the first quarter of 2015 and higher severance expense and ongoing support of our Business Improvement Process.

The sequential decrease on non-interest expense reflects lower expenses in all categories, except other and distribution and servicing expenses. The sequential decrease in staff expense primarily reflects lower compensation and employee benefit expenses, partially offset by higher incentives primarily due to the vesting of long-term stock rewards for retirement-eligible employees. The increase in other expense primarily reflects the adjustments in the bank assessment charges recorded in the fourth quarter of 2015. The increase in distribution and servicing expense is due to higher money market fees.

The sequential increase in head count reflects our campus technology recruiting effort to attract the best technologists. We expect the large recruiting class to account for anticipated turnover. In addition, the year-over-year increase also reflects the onboarding of employees to support strategic growth initiatives and risk-related activities. Our location strategy has helped us to increase our head count to support strategic initiatives, while we've been able to reduce total staff expense.

Turning to capital on slide 13. Our fully phased in advanced approach common equity Tier 1 ratio increased by approximately 30 basis points to 9.80. That was primarily driven by an increase to capital generation. Our supplemental leverage ratio increased to 5.1% this quarter, primarily due to increased capital and a reduction in our balance sheet and off balance sheet exposures.

A couple of other notes about the quarter. As you'll see in the release on page three, our effective tax rate was 25.9%, which is in line with our previous guidance. On page 11 you'll see some investment securities portfolio highlights. At quarter end, our unrealized pre-tax gain on our portfolio was $1.2 billion. That compared to $357 million at year end. The difference in value is primarily due to a decline in market rates.

Now let me share a few thoughts to factor into your thinking about the second quarter and the rest of 2016. Money market fee waivers appear to be recovering in line with our previous guidance. We would expect investment and other income to be in the range of $60 million to $80 million going forward. Staff expense should decline sequentially in the second quarter as a result of the acceleration that took place in the first quarter.

We expect to see an increase in resolution planning expenses as we work to address those issues raised regarding our living will. Given these pluses and minuses this year, we expect expenses to be flat in the second quarter versus the first quarter. We expect our effective tax rate to either be approximately 25% to 26%. And finally, we expect to continue to repurchase shares under our current authorization during the second quarter.

To sum up, we delivered a solid quarter in spite of difficult market conditions as we continue to execute on our strategic priorities. With, that let me hand it back to Gerald.

Gerald L. Hassell - Chairman & Chief Executive Officer

Thanks, Todd. And we can now open it up for questions.

Question-and-Answer Session

Operator

As a reminder, we ask that you please limit yourself to one question and one related follow-up question. Our first question comes from Alex Blostein from Goldman Sachs.

Alexander Blostein - Goldman Sachs & Co.

Thanks. Good morning, everybody. So Todd, just picking up on the NII discussion, I think you answered part of that already in the prepared remarks with the hedging headwind, I guess, about 2 basis point incremental to what you reported. But just thinking through the puts and takes, where we are in the rate cycle besides the balance sheet, so how should we think about the rest of the year from an NII perspective assuming rates don't really change and again, the starting-off point on the NIM, I guess, would've been 2 basis points higher versus what you've reported, right?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. That's correct, Alex. I would expect you'd see a couple of basis points higher on the NIM, and that would be reflective and a little bit higher NIR going forward. The balance sheet is relatively stable. It acted about as we had expected it would with the rate increase that we saw at the end of the fourth quarter, so client deposits were down a bit. So it looks to be very stable. We've adjusted further the negative interest rates with the move to (28:11) ECB and the euro.

And the thing that's a bit of a headwind is with the flattening of the yield curve, the reinvestment rates are a little bit less than we would have liked. But net-net, the hedging should normalize, and we would expect to see a couple of basis points of expansion if rates don't change from here.

Alexander Blostein - Goldman Sachs & Co.

Got it. Thanks. And Gerald, a question for you. Along the lines of some of the new initiatives that you outlined in prepared remarks. So particularly in the investment servicing front, you highlighted collateral management, FX, NEXEN, which all seem to be in various stages of development. But taking a step back, can you help us contextualize that a little bit better, what it means for the servicing business' organic growth kind of over the next year to two years versus what we've seen over the last couple of years? Just trying to put some numbers around these initiatives.

Gerald L. Hassell - Chairman & Chief Executive Officer

Yeah. Sure, Alex. Appreciate the question. I would say the one that has the most immediate, greatest upside is in the collateral services side. As we've talked about over the last year or so, we really designed the collateral services businesses for the sell side and for firms like yours to be able to finance their positions and to be able to segregate collateral and to try to optimize the collateral for capital purposes.

We're also seeing increasing interest on the buy side and we're adjusting our algorithms to help the buy side better utilize our capabilities as they have to post collateral, and also as they invest in tri-party repo programs. So we see a pretty significant opportunity for us to do this, not only in the U.S. but around the world. And so whether it's segregation, optimization, transformation of the collateral and help reduce the capital costs for different firms, we think that's got some real upside potential. So I would say that's first and foremost at the top of the list.

In our foreign exchange and markets business, we think we have greater opportunities to utilize the electronic infrastructure that we're building to capture more order flow and do more netting across our businesses and improve the margins for us and improve the execution for our clients. So those are two areas that I cited in my opening comments that we think have some real upside to it.

Alexander Blostein - Goldman Sachs & Co.

Great. All right. Thanks for taking the question, guys.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Thanks, Alex.

Operator

Taking our next question from Ashley Serrao with Credit Suisse.

Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)

Good morning.

Gerald L. Hassell - Chairman & Chief Executive Officer

Good morning.

Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)

Gerald, on asset management and investment management and the margin profile there, appreciate this quarter was tough macro wise, but hoping you can provide an update on how you feel the plan to drive margins higher there is going versus the goals outlined at Investor Day? I'll leave it at that.

Gerald L. Hassell - Chairman & Chief Executive Officer

Yeah, thanks, Ashley. We've said at Investor Day, and recently at our last annual meeting last week, we think we have some more work to do in improving the operating margins with the investment management area without sacrificing the investment strategies and without sacrificing, or actually adding to the strength of our portfolio managers. We think a lot of those costs can be dealt with at the center of investment management, and also trying to better rationalize or make more efficient our distribution costs.

So we think there's opportunities to apply the same discipline to the rest of our businesses, to the running of the business of investment management and improve the ability for the boutiques to continue to drive their investment performance. So it is one of our goals and we're on track and we still have some work to do there.

Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then, Todd, on deposit costs, I was curious how you're thinking about passing on the benefit from higher rates to clients? It looks like the deposit betas are fairly low so far, but how should we be thinking about the next 25 basis points of high (32:35) so it's sustainable?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah, Ashley. I would say that our deposit betas are probably a little lower than we had anticipated, so that's the good news. We would've expected that we would've recovered most of the first 25 basis points, which is the case, although there is some deposit attrition that I mentioned. And right now, as we forecast looking out, we are adjusting our betas slightly favorably.

Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)

Great. Thanks for taking my question, and congrats on the quarter.

Gerald L. Hassell - Chairman & Chief Executive Officer

Thank you.

Operator

And our next question comes from Betsy Graseck from Morgan Stanley.

Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC

Hi. It's Betsy.

Gerald L. Hassell - Chairman & Chief Executive Officer

Hi, Betsy.

Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC

A couple of questions. You mentioned early on in the conversation around blockchain and the question I have is, how are you in determining how to make those investments and what kind of timeframe to return on investments are you anticipating? I noticed that you remember both of R3 and also the Hyperledger Project, and I know there's dual tracks in many cases on competing asset classes. So, I'm just trying to understand how you are allocating your resources.

Gerald L. Hassell - Chairman & Chief Executive Officer

Sure. No, you hit it right on. We are members of a variety of different consortiums and so we're participating in helping set the standards for the industry. I think that is one of the keys to the success of blockchain technology is standardization of the processes. We're also looking at it in our payments area and our corporate trust area and our broker dealer clearance business, particularly applied to repos.

We think blockchain can be transformative. We also can see it as being an ability to increase the resiliency of our capabilities. I think it's going to take time to fully materialize, and it does require, in all cases, a trusted counterparty. And we think that's one of the roles that we can play, which is what we play today, the trusted counter party that everyone can show up on both sides of the ledger and trust that it will be executed well, and we plan to play a role in the middle of that. So we are making investments. It's already in our run rates in terms of either the expense or the investments, which aren't really that big in terms of the R3 and Hyperledger and those sorts of investments. But we're spending a lot of time and energy on it, but I think it's going to take some time to see it play out in a full, meaningful way.

Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC

Okay. But yeah, the question I'm getting is, is it like Betamax or VHS? Does it matter? Can we have a dual track of standard? In other words, can some asset classes be on one backbone and other asset classes be on a different backbone?

Gerald L. Hassell - Chairman & Chief Executive Officer

Well, that is going to be one of the questions, is it beta max, or is it VHS or what is it? And that's why you're seeing so many different initiatives occur in the marketplace and why we're participating in a variety of them. We think trying to get to a better common standard, at least for certain asset classes, will be the way to go and that's why we want to be a leader in helping drive that exercise.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. Ultimately, Betsy, in order to get the network effect, you're going to have to have standardization. And also, we think that there will be a trusted counterparty because the proof of work costs are so high and there are going to be regulatory issues associated with it, so that's why we think there is a great role for us. So I think there's an opportunity for this to either reduce operating costs, but it will require significant standardization and is likely to start in smaller markets where those standards can be addressed.

Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC

Okay. All right. Thank you.

Operator

And we'll take our next question from Brian Bedell of Deutsche Bank.

Brian B. Bedell - Deutsche Bank Securities, Inc.

Hi. Good morning, folks. Hey, maybe just, Todd, on the expense outlook. Good clarity on the second quarter and excellent expense control, of course, in the first quarter. But as we look out through the rest of the year, it looks like you'd be on track to reduce expenses at least another 2% or potentially more. I know they're seasonally high expenses you moved into the back end of the year. But maybe if you could just give us some color on what you're seeing for project spend coming into the back half of the year and whether you think you can do another 2% down on expenses this year?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. I think we're a little ahead of where we had expected to be, frankly, Brian. We did see – I just want to remind you, in the first quarter, we do tend to see seasonal lower legal expense, also a little bit seasonally lower business development and consulting. And the other thing we saw is revenues were down in our higher comps business lines. So as the market moves, we would expect revenues to pick up in those lines and the associated expenses with them.

We do think that around both the resolution plan, we're going to have to accelerate some of the investments that we intended to make. We had committed last year to invest $140 million over the next 18 months or so in order to build resilience and improve the probability of success in our plan. We may have to accelerate that a bit.

So there are some headwinds we're facing, but I think we've got some – we're basing it off of a lower base than we would've expected to be at this time, so we're probably a little ahead of the guidance that we had previously given.

Brian B. Bedell - Deutsche Bank Securities, Inc.

Okay, great. And thanks for that. And then maybe either for Brian or Joe, I guess if you can talk about the dynamics in clearing, we have the previously announced client loss versus the impact of the money market fee waivers and client wins. And then maybe, Brian, if you want to comment a little bit about development of NEXEN in terms of the investment outlook for this year and how you're seeing -which stage of development you're in, in terms of bringing on new clients and that and whether you think there's a revenue generation component coming either this year or next year?

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

Sure. Happy to. It's Brian Shea. Clearing services actually is suffering a bit from the loss of those clients that we talked about and shared with you in advance, but we're benefiting from the reduction in fee waivers driven by the December rate increase. So that's offset with, really, the loss of the client business in the short term. And we've also benefited from taking on a number of clients in the third and fourth quarters as a result of J.P. Morgan's exit. And we continue to see interest from self-clearing firms who are looking to outsource and we converted another self-clearing firm in the first quarter. So overall, the clearing services picture is solid. And they're executing very strong expense discipline so we think we'll have modest year-over-year growth from clearing services.

The other dynamic in clearing services is that the RIA custody business is growing and the DOL judiciary standard is likely to help accelerate that growth over time. So we feel good about our position there and the leverage of the private banking services of our wealth management group into that RIA and broker dealer market is also a very positive long-term development for clearing services.

Turning to the NEXEN question, NEXEN is no longer an idea or a vision, it's really a reality. It's in production. And we now have 3,600 client users across 950 clients, exercising and using NEXEN in production every day. It cuts across now AIS clients, asset servicing clients, broker dealer services, liquidity, direct and corporate trust, as Gerald mentioned. And we expect to have more functionality, more capabilities, more APIs, more third party FIN tech applications embedded in the platform over time, and we expect to roll this out to our entire client base over time. So we're getting real momentum and take-up, and the reaction from the clients is actually quite positive. The client experience is just better.

Brian B. Bedell - Deutsche Bank Securities, Inc.

Great. And so the revenue expense dynamic in terms of – it sounds like you're through a lot of the investment phase and now you're closer to realizing potential revenue gains from this?

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

Yeah. I guess the way I'd say it is, as part of the business of improvement process we're actually self-funding the development of NEXEN, so we continue (41:28). As we insource technology developers and we simplify our infrastructure, we are able to shift technology investment firm redundant, lights on-type investment to strategic investments. So that's enabling us to fund NEXEN and other market-leading solutions for clients without actually increasing our technology investment or expense.

Operator

And we'll take our next question from Glenn Schorr with Evercore.

Glenn Schorr - Evercore Group LLC

Hi, there.

Gerald L. Hassell - Chairman & Chief Executive Officer

Good morning.

Glenn Schorr - Evercore Group LLC

A question about – Good morning. About some of the balance sheet remixing. Some of this just happened, some of it's purposeful. But security is down 4% year-on-year, loans up 6%. I noticed the 23% growth on the investment management loans, so curious what those are and if that's what the big driver is, driving the 21, 22 basis point jump in average loan yields year-on-year?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Sure, Glenn. One of the strategies we've had is to growth the wealth management business, and so that's where the loans are booked. So those are either margin-style loans or mortgages to high net worth individuals. And we have had some meaningful success in expanding that mortgage portfolio. Most of those are jumbo mortgages arms, some of them would be floating, and that has helped drive the mix that you talked about and that's been planned.

Another area of loan growth that we've enjoyed is in our secured financing transactions. I would expect the rate of that growth to flow somewhat from what we've been doing to date. And the mix now, I think, will be more stable as we look out the next 12 months or so.

Glenn Schorr - Evercore Group LLC

Got it. Okay. That's perfect. And then I know the jump up really happened last quarter but I'm looking at the year-on-year increase in non-performing loans and the decrease in the allowance, and I know it was stable quarter-on-quarter. So I guess the real question is just a quick comment on what you see credit-wise for your mix. Hidden within there is an energy question, but really, just overall credit.

Gerald L. Hassell - Chairman & Chief Executive Officer

Yeah. Glenn, that was just one loan that had to do with the Sentinel reversal of a court decision, and that became a non-performing loan. We took the provision against it to market to the current value, so that's done. The rest of the portfolio is absolutely stable.

Glenn Schorr - Evercore Group LLC

And right coverage ratio?

Gerald L. Hassell - Chairman & Chief Executive Officer

Yes.

Glenn Schorr - Evercore Group LLC

Okay.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

You did see us increase our provision in the first quarter to $10 million, but the credit portfolio continues to be strong. We do have some exposure to energy, which we explained on the call in the last quarter. And there will be some migration even though that is almost entirely investment grade. There is some modest migration and we would expect some provision associated with that portfolio but we don't expect it to be material.

Glenn Schorr - Evercore Group LLC

Okay, thanks.

Operator

Our next question is from Ken Usdin with Jefferies.

Ken Usdin - Jefferies LLC

Thanks. Good morning. Can you give us a little more color? You've mentioned that on the fee waiver side you got about 50% back and the next hike won't be as incremental. But Todd, maybe you can just help us understand given that there are some of the expenses that come back in, what's the current existing drag still on a per share basis that you got from fee waivers, and how many more hikes would it take to get the rest of it back?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. We had indicated that we thought there was about a $0.06 to $0.08 drag to EPS driven by fee waivers, and so we're getting about 50% of that back so, we got about $3.50 in these numbers relative to the fee waivers is our best estimate. That's probably a little bit better than we had anticipated. We did expect it not to be exactly linear. The first move is the best one, the second move will be not quite as great. But having had the experience of this, I would expect we would cover a little better than our previous guidance of 70% with a 50 basis point move. And I expect 100 point basis point move would cover all of it.

Ken Usdin - Jefferies LLC

Okay, great. The second question just on the core (45:58) asset servicing business. After a really great run of big, big business wins, the last couple of quarters have been decent but in kind of the $50 billion-ish range, can you talk about the pipeline for just core wins and your outlook for growth in that segment of the servicing business?

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

Yeah, this is Brian Shea. The new business signed number can vary reasonably significantly quarter to quarter, and we've had a couple of soft quarters. I would say it reflects a couple of things. Our focus on profitable client relationships over sort of just pure revenue and market share, we're being extremely disciplined and selective about the new business assignments we take on. And that's actually part of the reason you're seeing improved operating margins and you're seeing our fee to expense ratio improve significantly. But in terms of the pipeline, the pipeline remains actually pretty strong. It's up significantly on a sequential basis. And we still believe that this is a strong growth driver for the company going forward.

The secular trend towards asset managers wanting to outsource and refocus their energy on the investment process itself we think is continuing, and that's why we have invested in things like the real estate and private equity administration business. This, in 2016, after lifting out the Deutsche Bank team and serving Deutsche Bank will now be starting to take on third party clients. And in addition, we have a strong pipeline of middle-office services from asset managers and demand for the Eagle technology platform. So we still believe that we can drive long-term growth and we're confident in that.

Ken Usdin - Jefferies LLC

Okay. Thank you.

Operator

Our next question is from Mike Mayo with CLSA.

Mike Mayo - CLSA Americas LLC

Hi. So in aggregate, expenses are down, the pre-tax margin's up from 30% to 31. So in aggregate, that's moving in the right direction, but when I look at the investment management adjusted pre-tax operating margin of 30%, I'm not sure the last time it was that low, at least going back several years. And so I'll ask the same question that I asked at last week's annual meeting and that is, under what scenario would you consider more aggressive dispositions a part of your asset management business?

And along the lines of that question, I guess at the meeting you now have a new lead director, after the meeting and so what's his role, what's your interaction with him in the first week and what do you expect that role to be? Do you talk to him about things like hey, maybe the investment management business should be restructured more aggressively to help improve what's a margin way below peer?

Gerald L. Hassell - Chairman & Chief Executive Officer

Okay. A lot of questions in there, Mike. But I always appreciate them. First of all, we have a lot of confidence in our investment management business. It's been a tough quarter and we saw a lot of outflows not only in our firm but across the industry last year. 2015 was probably one of the biggest outflow years in traditional active equity. And as you know, that's one of the highest fee realization products across the industry. We feel better that the active equity flows have stemmed the tide. We saw some outflows in index, but our LDI strategy, our alternative strategy continues to pick up and so we ended up with positive, net long-term flows for this quarter which I think fairs pretty well against our competitors.

We do have work to do on improving the operating margin in the business, no question about it. I said it last week when you asked the question. I'll say it again, we have some work to do there. But I think some of the outsized margin performance by our peers, and really because they tend to be more active equity-oriented and they have higher fee realization to begin with. But we still have work to do there. We have a lot of confidence in the business. Mitchell Harris is here with me today, and I think Mitchell is the right person to improve the business and improve the performance overall. So we remain very confident in that and being a critical part of our company.

Regarding Lead Director, yes we announced the new Lead Director. Every company goes through a change in its director makeup. He, like all of our directors, are very active. We have an ongoing dialogue with him. The Lead Director's role is to interface actively with management, which he has already begun to do and represent the directors in communicating well with management. We're off to a great start and I have no concerns about how we're interacting with our board.

Mike Mayo - CLSA Americas LLC

And then as a short follow up, earlier you said you might reduce distribution costs to help out investment management. Could you elaborate on that, or any other details on where you see the greatest potential?

Gerald L. Hassell - Chairman & Chief Executive Officer

Yeah. What I referred to was making sure we're getting the bang for our buck for our distribution expense and make sure it's targeted in the right places where we're getting good results. And so maybe, Mitchell, you want to comment on a little bit.

Mitchell Evan Harris - Chief Executive Officer-Investment Management

Thank you. What I'd like to actually comment on is if you really look at our core business, Mike, it's actually pretty strong and moving up. The other revenue line is what's confusing things a little bit, and I think you have to keep in mind the first quarter of last year was very strong, especially on the seed capital front. And even when you look at our – and it wasn't as strong, obviously, in this quarter.

You also have the issue of internal payments that we've given to investment services on fee waiver abatements that's in that line; that stays within the company. So it's not really a weakness, per se, and as Gerald did mention, investment performance has been good; flows are abating. The first two months were weak. The – March was actually much better, and we're getting it in the right category. So you only had $3 billion down in equities, which was, on average, it was $8 billion down per quarter last year.

Alternatives are still improving. Our initiatives in terms of the retail – which was mentioned earlier – distribution, we had 300 million in positive flows. We were the eighth best performing retail out of 30. So I think our distribution is improving. Our performance is improving. The money market fee waivers help all of us. Flows are becoming less negative. And on the expense management side, we are looking at where there's overlaps between the boutiques, between the IM center and we will cuts those out. So I think we're going to continue to drive both expenses down. And I think there are significant revenue opportunities going into the year.

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

And we've taken a hard look at the corporate overheads and those are coming down related to investment management as well. So I think there's opportunity...

Mike Mayo - CLSA Americas LLC

Thank you.

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

...Opportunity for both scale as well as other actions we can take.

Gerald L. Hassell - Chairman & Chief Executive Officer

Thanks, Mike.

Mike Mayo - CLSA Americas LLC

Thank you.

Operator

Our next question comes from Brennan Hawken with UBS.

Brennan McHugh Hawken - UBS Securities LLC

Good morning. Thanks for taking the questions. First, nice tip of the cap to Hamilton in your deck, by the way, on the back of the $10 bill brouhaha. Good to see that.

Gerald L. Hassell - Chairman & Chief Executive Officer

Thank you. Thank you.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yes. We had a lot of emotional attachment to that one, and we're very, very pleased with the Secretary of Treasury's decision there.

Brennan McHugh Hawken - UBS Securities LLC

No doubt. So on expenses, can you quantify – I don't think, Todd, you did in your prepared remarks, how much was severance in comp this quarter and maybe how would that compare to last year and the fourth quarter?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah, I think if you – there's a couple of things; one is when we finalize our actual incentive payouts, oftentimes there is either adjustment one-way or the other. That adjustment was favorable and it actually approximately offset the severance. So, on a year-over-year basis, the net of that was basically zero. I think a way to look at our expenses on a year-over-year basis and the staff expense, I'll give it to you very specifically, the acceleration was $9 million higher. And last year we had a pension curtailment when we curtailed our defined benefit plan, and that was a $30 million benefit. So we had a $39 million headwind, if you will, going into this year's first quarter from those two events.

Plenty of that was offset with, effectively, the benefit of curtailing the pension last year. So it wasn't frozen. We took the gain when we announced it, but it wasn't actually frozen until the third quarter, so we got the benefit of that. So there's about a $20 million headwind on a year-over-year basis from those various categories.

Brennan McHugh Hawken - UBS Securities LLC

Great. Thanks for walking me through that, Todd. And then issuer services, you guys called out depository receipt business and the strength there. Given the continued rally in the EM, should we assume that that's sustainable and is that still a reasonably good indicator for that business?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. Yes, DRs is – definitely tied to emerging market activity in issuance. And so a pickup in emerging market issuance will be helpful to DRs for sure. The other driver there is corporate actions tend to be helpful, so if you have a pickup in banking activity or merger activity, that tends to be a positive driver for DRs as well.

On the corporate trust side of issuer, we've signaled that the fee decline we experienced for the prior few years would moderate and level off, which it has done. They're benefiting now from the restoration of some of the fee waivers, and while bond issuance was down pretty significantly industry wide in the first quarter, our market share in corporate trust is picking up. And we think that'll be one of the drivers of growth in the future for investment services.

Brennan McHugh Hawken - UBS Securities LLC

Great. Thanks for the color.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Thank you.

Operator

Our next question is from Adam Beatty from Bank of America-Merrill Lynch.

Adam Q. Beatty - Bank of America Merrill Lynch

Thank you, and good morning. Question on asset management, particularly the positive U.S. retail flows. You mentioned multi-strat and alternatives. Is that what's driving the positive flows, or are there other products that are working? Thanks.

Mitchell Evan Harris - Chief Executive Officer-Investment Management

Well, this is Mitchell. You have LDI that you had $14 billion of positive flows, so that's contributed to it. And fixed is flat, but – meaning core fix, but it's primarily on LDI and on alternatives.

Adam Q. Beatty - Bank of America Merrill Lynch

Thank you. And then maybe a broader question about the outlook for wealth management, particularly the retirement business. As the retiree population grows, are you seeing – I mean LDI has been strong on kind of the institutional side. On the retail wealth management side, are you seeing people do a similar kind of individual LDI where they're moving to fixed income and trying to immunize their savings? Or given some shortfalls in people's retirement savings, are they kind of going more towards equity and swinging for the fences in terms of building capital? Which trend is more dominant in your wealth management business?

Mitchell Evan Harris - Chief Executive Officer-Investment Management

They're definitely not swinging for the fences. It's more of a balance. People are confused. Most people don't have enough; the wealth obviously do. But they're looking for solutions in this market. Are interest rates going up? What's going to happen to fixed income? The equity markets have been very volatile, so they're looking at a more conservative balance type of approach, quite frankly. So equities remained a significant element but probably has come down a little bit, and they're looking more at corporate credit, munis have performed well and had to balance out their fixed income portfolios.

Adam Q. Beatty - Bank of America Merrill Lynch

Very helpful. Thanks, Mitch.

Mitchell Evan Harris - Chief Executive Officer-Investment Management

Yep.

Operator

Our next question comes from Geoffrey Elliott with Autonomous Research.

Geoffrey Elliott - Autonomous Research LLP

Hello. Good morning. Thank you for taking the question. Very interested to hear you highlighting blockchain technology so much. How do you think about the possibility that all of this innovation kind of removed some of your technological modes and ultimately reduces the pool of revenues that could be available to the whole trust of custody industry?

Gerald L. Hassell - Chairman & Chief Executive Officer

We actually see ourselves as one of the major participants in using the technology to improve the efficiency of our operations and the resiliency of our operations. And as I said earlier, the fact that no matter what technology is used, a trusted counterparty intermediary is required, we see ourselves playing in that role. So, while certain efficiencies and certain revenues may lessen the revenues, we think we're going to pick up that in the cost side as the technology gets improved and rolled out.

So, we see ourselves as being a critical player in the middle of this. As I said, we have pilot programs going on in the payments business, in corporate trust and our broker-dealer business, and particularly around repos. So, we're watching it carefully. We're participating actively. It's really hard to tell exactly how it's going to roll out, but we do see ourselves as being a major participant in it.

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

Yeah, this is Brian – sorry.

Geoffrey Elliott - Autonomous Research LLP

Just go ahead.

Brian Thomas Shea - Vice Chairman & CEO-Investment Services

I would just add that we're executing a NEXEN ecosystem strategy, which includes an app store. And part of the reason for being immersed in this FinTech world is to find solutions that can really add value to clients. And clients are obviously interested in getting the value with the new applications and innovative technology, but they frankly, in many cases, do not want to integrate it, do not want to do the work of managing that.

And so, our ecosystem will be enable us to embed third-party solutions in a much more easy streamlined way, which will reduce the client's under management cost. So, we think NEXEN enables us to leverage these companies and these innovative solutions, and it also enables us to actually help drive revenue growth and more value for clients. And we're – another example would be on NEXEN, we have a digital pulse big data solution in. We've invented client optimization technology, securities lending optimization technology, liquidity management optimization technology, all of which are sources of improving our clients' profitability and sources of revenue for the company in the future.

So, there's real opportunity here, as well as some risk, and we're immersing ourselves to try to make sure that the opportunities outweigh the risks.

Geoffrey Elliott - Autonomous Research LLP

Great. And just a very quick numbers question. The expenses, what would the year-on-year change have been on a constant-currency basis?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

It's about 100 basis-point benefit. So, it would've been about 100 basis points more, rather down three, they would have been down two.

Geoffrey Elliott - Autonomous Research LLP

Perfect. Thank you.

Unknown Speaker

Thank you.

Operator

And our next question is from Brian Kleinhanzl with KBW.

Brian Kleinhanzl - Keefe, Bruyette & Woods, Inc.

Great. Thanks. I just had a quick question on the balance sheet. I know you gave kind of guidance as to what the margin would do if rates were flat over 2016, but if we do get another rate increase in 2016, would you expect a similar drop in deposits like you saw this quarter, or are you expecting stability kind of over the deposit base as rates increase from here? Thanks.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah. No, we expect that there will be further run off with additional rate increases. We think that, that deposit runoff, that attrition is probably a little bit less than we had previously guided. So we – back in our Investor Day, we had guided that with normalization of rates, let's say that's 100 basis points or so, we would've expected to see about $40 billion to $70 billion of runoff. I think we will see something to the lower end of that. So we've seen in the first $25 billion, we've seen about $13 billion or so. So, I think we would stick with that guidance. We do think the margin expansion will more than offset any loss of deposits, which will lead to higher NIR in a rising-rate environment. And when we model that and report that in our financials, we are reflecting the runoff that comes – our estimated runoff that comes with the movement in interest rates.

Brian Kleinhanzl - Keefe, Bruyette & Woods, Inc.

Great. Thanks.

Operator

And our final question will come from Gerard Cassidy with RBC.

Gerard Cassidy - RBC Capital Markets LLC

Thank you. I apologize if you addressed these questions, I had to jump on and off your call. But Gerald, can you share with us – there's a lot of disruption going on in the capital markets and many of the European and UK capital market players have downsized and are exited specific businesses in the capital markets such as FIC trading or equity trading. Are you guys seeing any opportunities to gain market share in your business lines in those markets due to the disruption that some of those companies are going through?

Gerald L. Hassell - Chairman & Chief Executive Officer

Well, the companies that are going through that are in, many cases, some of our largest clients, so some of their reduced activity is part of the challenges that we're trying to overcome in terms of the market activity. That being said, we are seeing some of the shift in that activity to smaller firms who also happen to be more rapidly growing clients, and we do see ourselves being able to provide, extend our service model to some of those firms who are picking up some of the trading flack or need the collateral services that I talked about earlier.

We do have what we refer to as prime custody, prime services solutions, so some of the activity we see ourselves being able to pick up on a direct basis without taking on the risks associated with normal prime brokerage activity. So, we try to do it in a conservative thoughtful way, but we do see ourselves being able to expand a little bit more in that space.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

But I would add to that, Gerard, we're not interested in becoming a large, fixed income trading operation.

Gerald L. Hassell - Chairman & Chief Executive Officer

Yeah, absolutely.

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

So, that's not what we're looking for. We do make markets for some of our clients, for Pershing clients and so forth, but it's a relatively modest accommodation business for us and we don't expect that to change.

Gerard Cassidy - RBC Capital Markets LLC

Great. And then as a follow-up on CCAR, obviously this year we had the negative interest rate environment and I think most banks probably quantitatively will come out of it okay. But from a qualitative standpoint, from the systems stand point, are you guys comfortable with what you were able to submit to the regulators? I know many banks have addressed that their systems are going to be using manual overrides to handle that negative rate environment. Are you guys – is yours similar that or are you fully automated and you could do it without any manual overrides in negative rate environment here in the U.S.?

Thomas P. Gibbons - Vice Chairman & Chief Financial Officer

Yeah, well, I think one of the benefits is we're mostly an institutional company, and so that we've had the experience of passing on negative interest rates through our systems in Europe and in a number of jurisdictions and now in Japan as well. So, we think that is something that we could operationally manage.

Gerard Cassidy - RBC Capital Markets LLC

Great. I appreciate it. Thank you.

Gerald L. Hassell - Chairman & Chief Executive Officer

Great.

Gerald L. Hassell - Chairman & Chief Executive Officer

Well, thank you very much, everybody, for joining us this morning. Additional questions can be directed to Valerie Haertel and our Investor Relations team. And we look forward to engaging with you, and thank you very much for dialing in.

Operator

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

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