Good morning, ladies and gentlemen and welcome to the Second Quarter 2018 Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon’s consent. I will now turn the call over to Ms. Valerie Haertel. Ms. Haertel, you may begin.

Good morning and welcome to the BNY Mellon second quarter 2018 earnings conference call. With us today are Charlie Scharf, our Chairman and CEO; and Mike Santomassimo, our CFO. The earnings materials include a financial highlights presentation that will be referred to in our discussion of second quarter results and can be found on the Investor Relations section of our website, bnymellon.com. Please note that our remarks today maybe 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 in our documents filed with the SEC available on our website, bnymellon.com. Forward-looking statements made on this call speak only as of today, July 19, 2018 and we will not update forward-looking statements. With that, I will now turn the call over to Charlie.

Thanks, Valerie. Good morning, everyone and thanks for joining us for our second quarter earnings call. I will begin with a few comments on our business performance before turning it over to Mike who will then run through our second quarter financials and outlook before we open the call for questions. We reported earnings per share of $1.03, up 17% from last year’s second quarter. Year-over-year revenue grew 5%, expenses grew 3% and as we did last year, we benefited from a reduction in our tax rate. I will talk more specifically about revenue growth in a second, but just a reminder, we are focused on increasing the rate of revenue growth given the nature of our business it takes time and therefore it’s very hard to draw any conclusions in an individual quarter good or bad. Having said that, we again saw some underlying franchise growth in some parts of the company this quarter and we continued to benefit from the positive impact of higher interest rates and stronger equity markets, albeit at a more modest pace than last quarter. Regarding expenses, we remain disciplined and focused on deploying our resources. Currency translation and real estate costs impacted expense growth by 2% and despite an increase in our investment in technology all other expenses were only up modestly. Let me say a few words about our asset servicing business first. We saw steady performance in our core custody, middle office and fund accounting revenues and we did see good growth in several areas, including securities lending, where we saw increased demand for U.S. government securities in equities and we had good growth in foreign exchange revenue driven by higher volumes for market activity, but also new business wins predominantly from asset servicing clients. We continue to enhance our capabilities…

Thank you, Charlie and good morning everyone. I will first run through the details of the second quarter results and then provide some thoughts for the third quarter. Charlie and I will then open up the call for questions. All comparisons will be on a year-over-year basis unless I note otherwise. Beginning on Page 3, I have the financial highlights presentation. Total revenue increased 5% to $4.1 billion in the second quarter. Fee revenue increased 3% to $3.2 billion due to higher equity market values with favorable impact of a weaker U.S. dollar, the change in FX translation rates which positively impacted fee growth by approximately 1% and growth in volumes across our foreign exchange and our collateral management business. The year-over-year growth rate was negatively impacted by lease related gains recorded in the second quarter of 2017 which impacted fee growth by approximately 1.5%. Net interest revenue increased 11% to $916 million from higher interest rates. Our expenses grew 3% to $2.7 billion. The impact of the weaker U.S. dollar and costs related to our real estate consolidation activities negatively impacted expenses by approximately 2%. Including in the real estate cost is $12 million related to moving our headquarters in New York City from lease space to our own building. We have begun the physical move of now and expect the cost associated with the relocation to be approximately $75 million, down from approximately $100 million that we communicated at Investor Day in March, with the remainder expected to be recorded in the fourth quarter of this year. This will enable us to reduce our real estate footprint by approximately 300,000 square feet in 2019. In addition to that, there were also some expenses in the second quarter related to rationalizing other locations. Our continued investments we are making…

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

Hi. Thanks very much. So I appreciate the forward-looking guidance, I am just curious on the deposit migration that you are seeing, the interest bearing down 12 inches, interest bearing up 7, non-interest bearing down 12, is that, do we look for more of the same in the next several quarters that a function of the rate environment and in other words if we go on the path, that is in the forward curve, is it going to just be chipping away or do you see an end to that client behavior, it just has obviously a big impact on the modeling? Thanks.

Hey, Glenn, it’s Mike. I will take that. So I think when you look at the non-interest bearing as a percentage of the total, it’s about where we expected it to be and what we have been saying now for a very long, very long time actually and so just it’s just about 30% of the total. And so as we have said a number of times over the last couple of years, we would expect that that percentage to trend down a little bit below 30 over a period of time. And so it’s behaving sort of where we thought it would – it is right about where we thought it would be.

Okay. And then…

And Glenn this is Charlie. It’s just and that’s the way we thought about where it looks like going forward that that continues.

Okay. And as I will finish off this and I combo then, does the same apply for the modest decline on the loan side and the incremental deposit betas of what were 60% this quarter?

Look, I think on the loans side that will bounce around from any given quarter. So I wouldn’t read into a decline in loans as a go forward trend that’s going to continue to decline. On the deposit betas, you recall that there was a rise in March that’s fully baked into the second quarter and there was a little stub of another rise in June. And so it’s probably a decent indication of where betas are trending right now.

Okay, awesome. Thank you.

And our next question comes from Alex Blostein with Goldman Sachs.

Thanks guys. Good morning. Just first question around expenses, can you provide us an update on the kind of $300 million investment initiative you outlined at the Investor Day, I guess a), is it still $300 million, how much of the $300 million already in the run-rate and how we should think about just maybe absolute dollars of expenses as we progressed through the year?

Yes, hey, Alex, this is Mike. Thanks for the question. So as we mentioned last quarter that $300 million investment sort of ramps up throughout the year and so it’s not exactly a linear sort of progression throughout the year, but we are sort of midway through the year and we are sort of approximately sort of where we expected to be in that sort of ramp up and $300 million sort of plus or minus is still sort of the range that we have been looking at.

The only thing I would add to it is that what we have talked about relative to where we had hoped the total expense outcome to be for the company. I wouldn’t say there is no meaningful difference there. So to the extent that we decide to spend more money on technology, we will actively seek to manage the overall expense base and that’s still what we are trying to accomplish.

Yes, got it. That makes sense. And my second just quick cleanup question around Issuer Services, it seems like there is kind of a different dynamic there you guys clearly making progress in the Corporate Trust and DR business has been a lot more muted. As we think about seasonality, I think historically Q3 was a strong quarter for Issuer Services, any kind of drops off in Q4, how should we think about I guess given the changes in business the way you guys have been reporting in here?

Yes, I think as you saw last year in the third quarter, Alex, there was that historical sort of pop that you get from the DR business sort of got muted last year. And so while we would expect the number to be a little higher than you saw in the second quarter, you can’t go back a couple of years, you got to sort of look at the new trend there in terms of what you think that the pop might be.

Got it. Great, thank you.

And our next question comes from Mike Carrier with Bank of America/Merrill Lynch.

Hey, Mike, if you are talking, we can’t hear you.

Mr. Carrier we are unable to hear you. Please check your mute function.

Operator, why don’t we go to the next one?

Okay. Mr. Carrier, did you want to ask your question? Okay, hearing no response, we will move on to Brian Bedell with Deutsche Bank.

Great, thanks very much. Just maybe focusing back on the balance sheet, on the asset side, I appreciate your comments Mike about being not moving up as much, but if you can talk about some of the drivers in the second quarter on the Fed Funds and securities repo one, it looks like it was especially large increase and then it looked like there was also a corresponding increase in the liability side there, what was the driver in that and how should we think about that trend going forward?

Yes. I think you sort of need to and you’ll probably notice there is, I assume, you are looking at the supplement, Brian, so there is a footnote on the page as well that I would sort of just pointed to, but what happens, we have got a cleared repo product that gets some positive balance sheet treatment that where we will do repos, reverse repos with clients that gets novated over to FICC. And so there is very little that ends up on the balance sheet, so that sort of makes the both the revenue and the rate sort of pop year-on-year and you can get a sense based on the footnote on the bottom of the impact to that. So that’s what you are seeing sort of drive that number or a good chunk of the driver of that number is that program really kicking in and we have seen some good growth there.

And would you expect that to stay pretty lively I guess with Fed hikes or does it look more sort of abnormal for just this quarter?

No, I think we have seen that. We have seen the demand for that product ramp up over last year. And so while in any given day or week, it sort of moved – the volume moves around. We have seen that demand stay pretty consistent now over the last number of months.

Okay. And then just on the follow-up maybe just as we look into 3Q and 4Q, if you can talk a little bit more about the impact to the clearing services run-rate from the JPM transitions, I think you mentioned at the end of the third quarter, just trying to look for sort of a clean number there as we look into the fourth quarter and then also similarly from the two clients lost, appreciate that you are going to be on-boarding folks in the second half of next year, but is there more revenue run-off in the third quarter versus the second quarter given those two clients running off?

So I will start with the second one first. So I think the impact of the lost clients is in the run-rate now for the second quarter, so there is not another drop-off in the Pershing business. So, I think that’s a pretty easy one. I think on the clearance and collateral, we haven’t given you a specific number. But as we sort of think about those migrations, we started with the smaller ones first and then you move to the bigger ones over time. And so – and by the end of the third quarter, we will have pretty much everything in there. So I think once you get to a third quarter number, you will have – it will be pretty much fully in our run-rate. So you are seeing a small piece this quarter and you will see a little bit more next quarter and then it will be in our run-rate.

Okay, thank you.

Yes, sorry, the only thing I will add to your question though is when you sort of think about the clearing collateral business, we are also seeing very good growth outside the U.S. So although we focused a lot on sort of the JPMorgan migrations here in the U.S., we have also got a very strong business outside the U.S. and up very strong double-digit growth outside the U.S. in terms of the demand for that product that we have got.

[Operator Instructions] Moving on to our next question from Brennan Hawken with UBS.

Hi, good morning. Thanks for taking the questions. I just had a follow-up on the deposit beta point, looking at the 15 or so basis points increase in interest-bearing this quarter, but also then thinking about the fact that I think you have said that U.S. dollar deposits are about 70%, was there an increase in non-U.S. dollar deposit costs or should we apply that 15 basis points just to the U.S. dollar which would suggest a beta higher. I am just trying to square that component of the math like if you could help out on that? That will be great. Thanks.

Yes. As you know, U.S. rates, our non-U.S. rates have not really moved around that much in the quarter. Now, there is some expectation that, that’s going to start to happen in the third quarter, particularly in the UK at least, but that hasn’t been a big driver so far. So – and remember as we have said, the betas that are going to continue to sort of increase as rates increase and so on, it sort of implies about a 60% beta for the quarter, we would expect that to keep increasing as rates go up.

Yes, it was probably 60% beta, but if we think about the U.S. dollar deposits, wouldn’t it imply a higher beta in the U.S. on the U.S. side since that’s the only thing we saw?

Yes, it would be a little higher.

Okay, good. Thanks. Just wanted to clarify that. And then it sounds like non-interest bearing shift you guys think is probably sustainable and in line with what you had expected, do you think that we are going to be continuing to trend lower here in the foreseeable future or is there any sort of visibility that you have into that line as well and the sort of remixing that we would think is natural as rates go higher? That would be great. Thanks.

Yes, Brennan, I mean, what we said a little earlier, right is that the percentage of – the non-interest bearing as a percentage of the total is a little less than 30 rounds, I think the 30% this quarter. That percentage we would expect to sort of grind down as rates rise. And so that may bounce around in any given quarter a little bit, but we would expect that to continue to grind down.

Thanks for the color.

We will take our next question from Geoffrey Elliott with Autonomous Research.

Hello. Thank you for taking the question. In terms of capital, you mentioned reviewing your models with some urgency, once you have completed that, would you be thinking about putting in a kind of mid-cycle resubmission that some of the other banks have done in the past to get the payout ratio backup without having to wait for next year’s process?

Yes. This is Charlie. I would say, I don’t think we – I think it’s unclear I think our first – the first thing we have got to do is do the work on the modeling and that is it’s got to be done properly, it’s detailed, it’s got to be reviewed, it’s got to be signed off. And so we don’t have a date at which that will be done, but the point is we are actively doing it and then depending on when it’s done in our conversations with the Fed that will figure out where we go from there. So, the short answer is we don’t know.

Thanks. And then the real estate consolidation costs coming down from $100 million to $75 million, is that because you are able to do the same things at a lower cost than you originally expected or is it because you are doing a bit less, you are doing it over a longer timeframe?

No, it really relates to one building and we actually sublet it, we know the actual numbers now.

Terrific. Thanks very much.

Our next question comes from Jim Mitchell with Buckingham Research.

Hey, good morning. I noticed that on the period end balance sheet deposits were down $10 billion, but the balance sheet was down $20 billion, is there a deliberate effort to de-lever a little bit or is there something else going on in terms of the mismatch between the deposit shrinking in the balance sheet?

Yes, there is no effort to de-leverage per se, Jim, as you would suggest. But as you start to look at treasury activity, some of the trades you had put on just make less sense now and so we know we are just looking at how to best optimize sort of some of that. So I wouldn’t read into that.

Okay. And then maybe just with the rollback bill that passed that gave you guys a carve out for the SLR, does that help at all or is it just the DFAST remains the constraint and it doesn’t really matter in how you run your business?

Yes, I think – well, I think that the bills that are out, the bill that got passed plus the some of the Fed proposals still have to get implemented and so that will take some time to sort of play into it. So in a BAU environment, the SLR is still something we are focused on to make sure that we stay where we need to be. But as we sort of think about the future as constructed the Tier 1 leverage ratio in CCAR is the place we are most focused on where our constraint is.

Yes, I guess the only editorializing I would do around it is I would describe it certainly helpful, because whenever you have something which you think makes less sense and you wind up with something which you think directionally makes more sense, that’s a positive change in terms of recognition of the way the business should be run. But as Mike mentioned, our current constraint is the Tier 1 leverage ratio in CCAR which quite frankly we struggle with in terms of a concept of constraint is the reason Mike spoke about, but we will see where that one goes as well.

Okay, thank you.

And our final question comes as a follow-up question from Brian Bedell with Deutsche Bank.

Alright, great. Thanks for taking my follow-up. Just wanted to actually circle back more strategically on the balance sheet growth strategy as rates go up you guys have always got deposits would sort of runoff to some extent, but is there, I mean, I guess going forward how do you view this from the client side of the business in terms of what you view as, let’s say, the level of excess deposits that are subject to that potential runoff versus how you want to use deposits as an important product within your toolkit? And then if deposits do runoff, would you be willing to using borrower funds to keep the balance sheet from shrinking significantly?

Yes. So, there is a bunch in there, Brian. So, I will try to get at it, but the – so, on the last piece we are always looking for opportunities to deploy the balance sheet where it makes sense and where the return make sense. So, that’s something we are looking at now and have always looked at. And so that will sort of continue as we sort of think about that. And where we are focused on deposits is really growing the underlying franchise. So, as Charlie sort of talked about a number of times now like where our focus is, is driving organic growth. And as you sort of do that across most of our products, particularly in investment services, that will bring deposits with it. And so as we sort of think about, there maybe some decline in some of the excess deposits a lot of that sort of run-off already and you have got – and as you sort of grow the franchise you will bring in new deposits as we do that and can we frame what the level of excess deposits is right now roughly so we can get a sense there?

We have not disclosed that. We think that answers…

Okay, fair enough. Thank you.

And it looks like we do actually have another question from Ken Usdin from Jefferies.

Hi Ken.

Thanks guys. Good morning. Thank you. If I can ask a question on core asset servicing, so at securities lending that line was down 1%, AUC/A were flattish, can you just talk us through some of the dynamics of pluses and minuses in the asset servicing on a sequential basis?

A lot of that Ken is just some seasonal like activity that happens in the first quarter. We get some fess for things like tax reporting and then there are some particularly some other items that sort of hit – only hit in the first quarter, so I wouldn’t read into that as a run rate decline.

Okay. And then can you give us just some idea of your – I know you have stopped giving us the new wins, but can you just give us an idea of the pipeline and how you are expecting that to kind of just project that over time as far as your new wins in servicing?

Yes. I would say – this is Charlie, I think we feel very good about what the wins were both on a gross basis and a net basis in the quarter. And I guess the only other thing I would say is because with lots of people you are right about the way the quarter pans up and whatnot, but you all know this and we talked a little bit about this over the prior quarters. Wins take a period of time, these are generally conversations that happen over multiple quarters leading up to a process generally if you are not going to renew with the incumbent. And so I think where we are today relative to where we hope we would be we are on target and success for us in asset servicing will continue to be a slow steady build which quite frankly it’s hard to look at quarter-by-quarter, you need to look at that over a longer period of time. And I think at this point we still feel on track relative to that commentary.

Great point, Charlie and if I might just two more cleanups, just related to the numbers, Mike did you say what the benefit on the revenue side was from FX translation on a year-over-year basis put into context with the 2% hurt on the cost side?

We did, it was in my commentary, roughly – it was roughly about 1%, yes, it’s like roughly 1 point, but there too, remember we mentioned, we also had some leasing gains in [indiscernible] in the prior year. So my own take at this net-net is the overall number is a pretty good, I mean the reported number is a pretty good proxy for what real growth was in the quarter. Well, on the expense side, we did have the effective currency and the real estate.

And as we roll forward that was my other question on the currency, the way to growth on expenses, if we continue to have this burden on the cost side, is this kind the 3% zone, the right way to think about go forward as well?

Yes. I would go back to sort of the guidance we gave at Investor Day on expenses Ken and I think we are sort of tracking there.

Right, okay. Thanks guys.

And we have a question from Mike Carrier with Bank of America/Merrill Lynch.

Hi. Thanks guys. Sorry about that earlier. Just one question on the investment management side, just in terms of the long-term flows in the quarter, I don’t know if you mentioned anything that was more unusual or maybe lumpy, just given the level of outflow this quarter versus what we have been seeing?

So I will take that and Charlie can add color to on, so just to remind you Mike we are very much an institutional money manager, very little retail in there. So you guys think about as you sort of look at some of these line items. I just reiterate the performance has been consistent, Charlie mentioned sort of the 89% over the 3-year and 5-year benchmark, so we feel okay there. And as you sort of look at the some of the equity – actively managed equity portfolios that’s sort of inline with what you are seeing across the industry. In depth, I would sort of think of some of those outflows is very idiosyncratic clients, changes in allocation for our clients. And then on the cash side, as I mentioned in my commentary, there was some concentration related to some big client M&A activity that brought some balances in on a temporary basis. So, you sort of see that dynamic going through there.

Okay, that’s helpful. And then I know you guys hit on Pershing just the year-over-year some of the lost business, but I guess just when I think about that business and some of the industry trends that we are seeing, generally it’s fairly favorable, but I just wanted to figure out like how much of that was just very specifically that versus maybe the core of the underlying trends of the business?

Yes, let me take a shot at this. I think these are so – just as I talked about on the asset servicing side where there are long gestation periods when people decide to leave us, it’s the same thing. So, these are things that we have known about for a long time. It’s factored into our thinking about what we think overall trends in revenue can look like. And again these are relatively idiosyncratic relative to when they show up. There continues to be a significant interest in clients of all sizes to talk about their desire to figure out how what we can do at scale relative to not just cost, but building additional capabilities, how they can benefit from that. There is a – I would describe it, it’s just an extremely open mind in the asset servicing world, where we deal with big asset managers and small asset managers across the world, but also the broker dealer community both bigger and smaller. So I think relative to the way we think about the opportunity in the business, those trends continue to make us feel very good about the business that we have and that’s not even talking about the opportunities within Pershing that we think we continue to have in the RIA space, which we highlighted at Investor Day.

Alright, that’s helpful. Thanks a lot.

And there are no further questions in the queue.

Thanks everyone for joining us. Feel free to call Investor Relations if you have any follow-up and have a great day.

Thank you everyone.

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 and webcast. Thank you for participating.