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Bank of New York Mellon Corp  (NYSE:BK)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Third Quarter 2018 Earnings Conference Call hosted by BNY Mellon.

(Operator Instructions)

I will now turn the call over to Mr. Scott Freidenrich. You may begin.

Scott Freidenrich -- Executive Vice President and Treasurer

Thank you. Good morning, and welcome to BNY Mellon's Third Quarter 2018 Earnings Conference Call.

This morning, BNY Mellon released its results for the third quarter of 2018. The earnings press release and financial highlights presentation to accompany this teleconference are both available on our website at bnymellon.com.

Charlie Scharf, BNY Mellon's Chairman and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mike Santomassimo, our Chief Financial Officer. Following Mike's remarks, there will be a Q&A session.

Before we begin, please note 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 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, October 18, 2018, and we will not update forward-looking statements.

With that, I will now turn it over to Charlie.

Charles W. Scharf -- Chairman and Chief Executive Officer

Thank you, Scott, and good morning, everyone. Thanks for joining our third quarter earnings call.

Before asking Mike to walk you through the financials, let me frame the quarter with some thoughts on how our businesses are performing. In terms of the headline numbers, earnings per share of $1.06 was up 13% from last year's third quarter. These results included two significant items, approximately $0.05 from litigation charges and a $0.05 benefit in our tax line. Year-over-year, revenue grew 1%; expenses grew 3%, though 2% of that was related to litigation. And we continue to benefit from reduction in our tax rate related to the new tax law in the US and from strong capital return.

While we are not pleased with our total revenue growth for this quarter, there were some areas with modest strength and others that are weaker, several of which we believe will strengthen over time. Our Investment Services revenue growth was 3% and Investment Management revenue growth was 2%. These were partially offset by lower revenue in the Other segment. Mike will cover that later.

As I've said since joining the Company, we're not satisfied with our growth as we've been too reliant historically on the impact of the markets. Our focus on organic growth will take time to show up in the revenue line across our businesses; and though small, there continue to be signs of positive momentum in some areas, which we'll cover. With the reality that it will take time to see the impact of our growth activities show up in the revenue growth line, we are disciplined on expenses and will continue to be. Though our expenses increased 3%, I mentioned that 2% of the increase related to litigation, so excluding litigation charges, we had minimal expense growth. You also know that we've been significantly increasing our investment in technology and infrastructure to get to minimal expense growth. All other expenses, in total, were lower than the prior year. I will discuss this a little more later, but we will continue to focus on improving our structural operating leverage while continuing to invest for growth.

Looking at our businesses, let me first start with Asset Servicing. Asset Servicing revenue growth was 3%, and we had reasonable fee net interest revenue and FX growth. We again saw steady performance in our core custody, middle office and fund accounting revenues, onboarding more than $450 billion of AUC/A across a number of investment managers and other clients. Additionally, we have a mandate to provide middle office outsourcing for a significant private credit manager, where we're investing in new capabilities. Securities lending benefited from the increased demand for highly liquid assets, primarily US treasuries; and we're benefiting from new clients and expanded business with existing clients. And our growth in client-driven foreign exchange revenue is driven by new business wins, higher session range volumes and markets spreads. Our global pipeline remains strong across all major Asset Servicing products. As asset managers continue to look for ways to reduce their costs, we're seeing increasing consolidation of global operations and technology, which is driving demand for outsourcing, managed services and data management solutions.

In Pershing, while we saw a reduction in revenue last quarter from two previously disclosed client losses, our total revenues were flat to last quarter and up 3% from the prior year. So this means growth is offsetting these losses. As a reminder, we've been awarded multiple mandates that will begin to positively impact results, starting in the second half of next year, and more significantly into 2020. Timing aside, we're confident as ever in our ability to continue to build Pershing over the long term.

In Issuer Services, revenue growth of 2% was driven by mid-single digit growth in Corporate Trust, partially offset by a decline in depository receipts. As you know, quarter-by-quarter performance in depository receipts is episodic and several significant client events have been pushed from the third quarter into future quarters. Although the DR markets are weak, we're winning our fair share now while remaining disciplined on structure, and full year revenue growth should be strong. Corporate Trust's revenue growth was driven by the repositioning of our front office sales and relationship management teams and by better coordinating with our firmwide Global Client Management team to leverage our relationships for deals that our financial institutions and asset management clients are bringing. This is yielding opportunities and mandates. And I should add that our pipeline remains strong, particularly for CLOs and corporate debt. We have had good momentum with clients. Although market share stats are imperfect in this business, it appears that we've gained some traction in the first half of the year. We've also started to deliver new digital capabilities that give clients a better transparency into their loan positions, compliance data, cash activity and trade information, and it's been well received.

In Treasury Services, Paul Camp joined us this quarter as the new leader for this business. Paul has tremendous experience and has already brought a renewed sense of urgency and has some great ideas for building our business into a stronger growth engine for the Company.

Having said that, we continue to see growth albeit less than we'd like in our payment volumes from existing and new clients and are focused on growing the liability balances from our Treasury Services clients. We're continuing to invest in capabilities such as Real-Time Payments, which should help differentiate our offering.

In Clearance and Collateral Management, we reported 8% revenue growth. We again saw strong revenue growth from the onboarding of the remaining former JPMorgan government clearing broker-dealer clients, higher clearance volumes related to record issuance levels and strong demand for US government debt and treasury issuances, and growth in Collateral Management activity from new business and increased client activity. Here, we're seeing interest from new entrants to the collateral market such as corporates and alternatives investing their cash in repo, as well as the continued roll out of rules requiring segregation of margin related to derivatives. Our capabilities in Clearance and Collateral Management are a clear point of differentiation. One such point of differentiation is our collateral optimization engine. It has significant growth potential as Collateral Management business becomes increasingly important part of the investment process.

Turning to Investment Management. As you know, the environment continues to be difficult for the industry and we achieved 2% revenue growth this quarter. We continue to focus on investment performance, drive scale in our business, invest in product development and distribution capabilities, and strengthen our wealth management franchise. Net flows returned positive this quarter, with $15 billion in net inflows. We saw strong flows in LDI, as well as positive flows in fixed income and multi-assets and alternatives. And our US multi-asset manager, which we've rebranded Mellon, has had good activity across a range of asset types, including entering into a new subadvisory partnership.

In our Wealth Management business, Catherine Keating joined us as CEO and is already identifying opportunities to strengthen this business. We'll have more to say about this in the future.

In terms of talent, we're continuing to attract great people at all levels of the Company. We're working to develop and capitalize on the deep knowledge and specialized expertise that exists across our Company and complementing that with new outside perspectives. In addition to Paul and Catherine, we added a number of other senior leaders this quarter, who we expect to play major roles in increased growth and profitability. These include Roman Regelman, who joined us as Head of Digital. He will lead and coordinate our thinking as he set the strategic direction for a digital future, including data management, analytics, artificial intelligence, machine learning and robotics. Akash Shah has joined the Company in the newly created role of Head of Strategy. Akash joined us from McKinsey, where he co-led the capital markets and investment banking practice, and has a strong background focused on exactly what we're in the midst of, transforming businesses for the future and positioning them to drive organic growth and innovation. Emily Portney joined us as our new Head of Asset Servicing for the Americas and will help drive our business forward in the US, Latin America, as well as overseeing our interests in the CIBC Mellon Asset Servicing joint venture in Canada. And we announced two key technology hires after quarter end. Sabet Elias has joined us as Chief Technology Officer, bringing extensive experience in building and operating global high-performance, mission-critical technology environments. And Avi Shua was appointed Technology Lead for Wealth Management, helping us build technology platforms to grow our Wealth Management business, which, as I said, is a key priority. We're thrilled at our ability to attract such an outstanding group from top-tier institutions.

So, as we look forward, we will continue to methodically build out our capabilities and teams. We've been investing in technology, both to improve our existing operations and infrastructure and to build new capabilities for our clients; and we will continue to invest. We will remain keenly focused on expenses. We continue to believe there are meaningful opportunities to become more efficient, which will help fund the technology investments we need to make, as well as provide improved service for our clients. And we are highly focused on driving that efficiency in both the short and long term.

And I'll close by describing how I think you'd feel if you were inside the Company. As I've said, we are a proud company and we're a strong company, with exceptional client relationships. And we have great subject-matter expertise inside the Company, but we're not performing as well financially as we'd like. We believe our franchise is capable of delivering more organic growth than we've delivered thus far. And we are focused business by business on changing our thinking, developing capabilities, improving the quality of our work and aligning internal resources to achieve this end. Becoming more efficient is an important part of the puzzle. We believe that increased efficiency improves the quality of our work, allows us to invest in what's important for our clients, and is pro-growth. Importantly, there's a shared understanding that we will hold each other accountable for higher standards of performance and proceed with a strong sense of urgency. Given the nature of our business, all the work we're doing will take time to come through in our numbers, but I want you to know that every day we're challenging ourselves to get there faster.

With that, let me turn the call over to Mike.

Michael Santomassimo -- Chief Financial Officer

Great. Thanks, Charlie. Good morning, everyone.

Let me run through the details of our results, then provide some thoughts on the fourth quarter. Note that all comparisons will be on a year-over-year basis unless I specify otherwise.

Beginning on Page 3 of the financial highlights document. In the third quarter, we had earnings of $1.1 billion and earnings per share of $1.06, up 13%. There were two significant items included in the quarter. We incurred litigation charges that increased expenses 2%, which negatively impacted earnings per share by approximately $0.05. The charges relate to new developments in the quarter for previously disclosed matters that we anticipate resolving shortly. And we had a net benefit of approximately $0.05 per share, resulting from adjustments to our provisional estimates for the impact of the US tax legislation from last year and other tax changes, which decreased the effective tax rate by approximately 4.5%. Year-to-date, we had earnings of $3.3 billion, or $3.20 per share, up 21%. In terms of shareholder capital return, year-to-date, we've returned $2.7 billion to common shareholders through $1.9 billion of share repurchases and approximately $800 million in dividends. That includes actions taken during the third quarter, where we repurchased 12 million shares for $602 million and paid $283 million in dividends.

Now, turning to the third quarter highlights on Page 4. During the third quarter, total revenue was up 1%. We did have a couple of items that impacted the revenue growth rate. Securities gains in the third quarter of 2017, lower foreign exchange currency hedging revenue and the pre-tax impact of our renewable energy investments negatively impacted growth by almost 1.5%. Just a reminder that we get the benefit of our wind investments or renewable energy investments in the tax line, but have the pre-tax costs that are included in investment and other income.

Fee revenue was up 1% to $3.2 billion. Growth in the quarter benefited from higher equity market values, Collateral Management and Clearance volumes and performance fees. We saw a reasonable growth in our Asset Servicing business, including the client-driven foreign exchange fees, as well as in our Corporate Trust and Clearance and Collateral Management businesses. Investment management and performance fees together grew 2%. Fees in Pershing were essentially flat, despite the impact of the previously lost clients.

Third quarter net interest revenue increased 6% to $891 million, driven by higher interest rates, partially offset by lower interest-earning deposits and other borrowings. As expected, our deposit balances were down year-over-year and sequentially. Year-over-year, our average interest-bearing deposits increased 4%, while our average non-interest-bearing deposits declined 14%. As we have consistently said for our clients that(ph)deposit pricing is continuingly becoming more competitive with betas increasing as rates rise. On Page 7 of our earnings release, you can see that the rates of -- on our interest-bearing deposits increased from 45 basis points in the second quarter to 63 basis points this quarter. On the surface, this would imply deposit beta of approximately 72% globally. But when you get to the underlying beta for interest-bearing US dollar client deposits, which excludes wholesale funding, it is really in the low- to mid-80% range.

The net interest margin increased 12 basis points to 1.27%. Sequentially, the NIM was up 1 basis point. Our expenses grew 3% to $2.7 billion. As I mentioned earlier, litigation increased expenses approximately 2%. The remaining growth in the quarter was due to the continued investments we are making in technology, which was partially offset by declines in other areas. As Charlie mentioned, we are focused on delivering our -- on our technology investment and driving efficiency across everything else we do. All of these items resulted in a 2% decline in pre-tax income to $1.3 billion. The litigation charges negatively impacted pre-tax income growth by approximately 4% and a 9% increase in net income applicable to common shareholders to $1.1 billion, which benefited from the lower tax rate. This performance, coupled with a reduction in our share count, translated to a 13% increase in earnings per share to $1.06. Our pre-tax operating margin was 33%, down 1% from the prior-year period. Again, the litigation negatively impacted the pre-tax margin by approximately 100 basis points. Our capital position returns continue to be strong. Our CET1 ratio was 11.2% and our return on tangible common equity was 23%.

Before we go deeper into the quarter, on Page 6, are the year-to-date results, which track well with the discussion we had at Investor Day. Total revenue was up approximately 5% and expenses were up approximately 3%, generating solid operating leverage. Foreign exchange translation increased both growth rates by about 100 basis points. Net income applicable to common shareholders was up 17%; earnings per share was up 21%; and return on tangible common equity was up more than 200 basis points to more than 24%.

Page 8 highlights our Investment Services business results. Investment Services revenue was $3.1 billion up 3%. Within Investment Services, Asset Servicing revenue grew 3% to $1.5 billion, primarily reflecting higher equity market values, securities lending volumes, net interest revenue and foreign exchange volumes. This includes a reasonable increase in Asset Servicing fees and a 27% increase in securities lending revenue, driven by increased demand for US government securities and some new client activity. Pershing revenue was up 3% to $558 million, a result of higher net interest revenue, equity markets, long-term mutual fund balances, partially offset by the impact of previously disclosed lost business. As I mentioned, fees were flat despite the impact of their previously disclosed lost business. Issuer services revenue was up 2% to $453 million, primarily reflecting higher interest revenue in Corporate Trust. Corporate Trust related revenue was up mid-single digits, offset by declines in depository receipts. The sequential increase of 5% reflects seasonality in depositary receipts. Treasury Services revenue increased 3% year-over-year to $324 million, primarily reflecting higher net interest revenue and transaction volumes. Clearance and Collateral Management revenue was up 8% year-over-year and down 2% sequentially to $264 million. The year-over-year increase reflects growth in Collateral Management and Clearance lines and net interest revenue. These increases are primarily due to the onboarding of the new government clearing clients, which was substantially completed in the quarter. As a result of the clients onboarded and other increases in activity, average tri-party collateral management balances were up 18% and are just under $3 trillion.

Non-interest expense within Investment Services increased 8% year-over-year and 3% sequentially to $2 billion. The litigation charge negatively impacted expenses by approximately 3% year-over-year and sequentially. The remaining expense growth was primarily driven by increased investments in technology, offset by lower staff expense. Also, foreign exchange and other trading revenue increased 5% from higher volumes. Assets under custody and/or administration grew 7% to $34.5 trillion. And in Pershing, despite the lost business, average long-term mutual fund assets were up 5% year-over-year, and average clearing accounts were down just 2%. So some key metrics are showing positive momentum that point to higher organic revenue over time.

Turning to Page 9 for Investment Management highlights. Asset Management revenue increased 2% to $704 million, benefiting from growth in the equity markets and higher performance fees, which were partially offset by the impact of net outflows in prior quarters and by lost revenue associated with the sale of CenterSquare. Wealth Management revenue was up 1% to $311 million and down 2% sequentially, with the sequential decline a result of lower net interest revenue, partially offset by higher equity market values. Assets under management increased slightly year-over-year and increased 1% sequentially to $1.8 trillion. Asset flows improved in most asset classes with net flows of $15 billion. Our actively managed strategies experienced $18 billion in net inflows, with $16 billion in LDI flows, $2 billion in multi-asset and alternative inflows and $2 billion in fixed income flows, partially offset by active equity outflows of $2 billion. Index had outflows of $3 billion, primarily due to outflows from clients for whom we supervise on their index strategies. And cash was flat.

Turning to our Other segment on Page 10. Fee revenue decreased year-over-year and sequentially, primarily reflecting the pre-tax impact of our investments in renewable energy. As I mentioned before, we get the benefit from these investments and the tax line and foreign currency hedging. Non-interest expense decreased, primarily reflecting lower staff costs.

Turning to capital and liquidity on Page 11. Our capital and equity ratios at September 30 improved since the end of the second quarter. Common Equity Tier 1 capital totaled $18.5 billion at September 30, and our CET1 ratio was 11.2% under the Advanced Approach. The supplementary leverage ratio was 6.4%, and our average LCR in the third quarter was 121%.

Now Page 12 details our expenses. On a consolidated basis, expenses of $2.7 billion increased 3%. The litigation charges negatively impacted the expense growth by approximately 2%. The remaining growth is primarily due to investments in technology, partially offset by lower staff expense and lower distribution and servicing expenses. Note that the technology expenses are included in staff, professional, legal and other purchase services and in software and equipment. Expenses were down slightly sequentially, primarily reflecting lower net occupancy, staff and business development expenses, partially offset by higher litigation. The decrease in net occupancy expense is primarily due to the expenses associated with the relocation of our headquarters that was recorded in the second quarter.

Now, looking ahead to the fourth quarter, there are a few things to factor in your modeling. As a reminder, our results in the fourth quarter of 2017 included impacts from the US tax bill and severance litigation and other charges. The total cost of relocating our corporate headquarters is estimated to be approximately $75 million, of which $12 million was recorded in the second quarter, and we expect to record the remaining expense in the fourth quarter. Excluding the real estate cost, we would expect the growth rate of our overall expenses in the fourth quarter year-over-year to be directionally similar to what you've seen year-to-date, which implies a modest uptick from the third quarter, consistent with prior years.

As it relates to net interest revenue, you should factor in the following. At this early point in the quarter, overall deposit levels are slightly higher than the average for the third quarter, with non-interest-bearing deposits about at the same level. As rates rise, we expect deposit betas to continue to increase, which we think is consistent with what is happening in the market. We are assuming that one-month and three-month LIBOR are slightly above their current levels on average for the quarter, but we have seen some compression in spreads between one-month and three-month LIBOR and the Fed Funds rate that will have an impact in the fourth quarter. If these assumptions play out, it should result in net interest revenue being similar to what you saw this quarter. Fourth quarter seasonal performance fees are expected to be in line with the fourth quarter of 2017. And excluding the significant items in the third quarter, we still expect our full year effective tax rate to be approximately 21%.

With that, operator, can you please open up the lines for questions?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Ken Usdin of Jefferies.

Ken Usdin -- Jefferies & Company -- Analyst

Thanks. Good morning, guys. On the Asset Servicing business, I wonder if you can detail a little bit more the flattish kind of results, but you said you had some benefits from the broker-dealer business. Can you walk us through how did Collateral Management act and just how did the core Asset Servicing act? You mentioned some pending potential wins. I'm not sure if you meant that those were converted as well. So just if you can give(ph)the flesh out color on what you're seeing currently and what you're expecting out of the core Asset Servicing. Thanks.

Charles W. Scharf -- Chairman and Chief Executive Officer

Hey, Ken. Are you talking about Asset Servicing or Pershing?

Ken Usdin -- Jefferies & Company -- Analyst

Asset Servicing. Didn't the broker-dealer clients come in through Asset Servicing? Are you saying they came in through clearing on the fee side? Some(ph)at the income statement.

Charles W. Scharf -- Chairman and Chief Executive Officer

Yes. Asset Service -- well, I'll let Mike answer. Asset Servicing revenue growth was 3% overall. And when you look at it, the underlying fee growth was reasonable. We had net interest revenue growth and FX growth.

Michael Santomassimo -- Chief Financial Officer

Yes. So I think -- so let me sort of dig into a little bit of that, Ken, for you. So, obviously, we'll -- I'll just pick it apart, so tell me if I miss something. But for the new clients that Charlie referenced that we onboarded, very little revenue in the quarter from those so far -- yet, so you'll start to see that kick in as you look forward. So that didn't contribute much to this quarter. I think for the -- where you'll see the new JPMorgan -- the clients that converted over from JPMorgan, that will be in the Clearance and Collateral business line in our release. And as you sort of think about the Asset Servicing fee line, as Charlie said, when you sort of dig into the underlying businesses, both in Asset Servicing and Clearance and Collateral, we saw some reasonable growth in both quarter-to-quarter.

Ken Usdin -- Jefferies & Company -- Analyst

Got it. Yes, so there's a little mixing, matching there between business line and income statement. I think that's where my question was a bit confusing, but thanks for clearing that up, Mike. And then -- OK, so then, separately, just on the balance sheet, the betas, can you -- you talk about -- you talked about that you expect them to move up from here. Can you -- would you still anticipate as long as LIBOR is moving the right way, can the NIM expand from here, or is it going to be more of a function of just what the mix is looking like every quarter, because obviously there's pushes and pulls between the dollars and the NIM spread?

Michael Santomassimo -- Chief Financial Officer

Look, I think on NIM, Ken, I don't know that you can expect that's always going to be a straight line up, right. But I think the -- as you sort of look at the various components of it, where we're sort of -- our biggest driver, as you know well, is sort of how we're -- where we're reinvesting in the securities portfolio, and those yields continue to sort of move up each quarter. So all the -- we're seeing probably a 15 point -- 15 basis points sort of increase and sort of pay downs versus where we're reinvesting thereabouts, right. So, maybe a little more, a little less, depending -- on average, depending on sort of where you are. So I think you can see the NIM sort of grind up over time, but I don't know that you can always expect it to be sort of a straight line up every quarter. And I think, as it goes -- when it goes to LIBOR, as we said in sort of my commentary, we're sort of expecting LIBOR to be slightly above -- call it a few basis points above where you see one and three months today, and that will sort of give you the result that we sort of highlighted in the release.

Charles W. Scharf -- Chairman and Chief Executive Officer

And one thing I'd add is just, remember, the timing of the change in betas doesn't always align with the timing of the repricing of our portfolio.

Michael Santomassimo -- Chief Financial Officer

Yes.

Ken Usdin -- Jefferies & Company -- Analyst

Thanks, guys. Appreciate that.

Charles W. Scharf -- Chairman and Chief Executive Officer

Next question, please.

Operator

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

Alexander Blostein -- Goldman Sachs -- Analyst

Hey, guys. Good morning, and thanks for taking the question. Just picking up on the last discussion, I guess, understanding that quarter-to-quarter the balance sheet could be a little volatile, but as you look out the next couple of years and we continue to go through the rate cycle, how do you expect the balance sheet to perform, i.e., do you think there's any growth there, or do -- should we think the balance sheet will continue to kind of shrink?

And then, in terms of the mix between interest and non-interest-bearing deposits, kind of similar, so I guess that has been coming down a little bit. I think, you guys have about 29% of non-interest-bearing as a percentage of total. When you look pre-crisis, I think it was somewhere in the mid-20. So, should we think of that as still a kind of reasonable level to where non-interest-bearing deposits will go?

Charles W. Scharf -- Chairman and Chief Executive Officer

Yeah. Hey, Alex. It's Charles. Let me start with just some broad comments and then I'll hand it over to Mike. I think one of the interesting things that we have -- as we've gone through this rate cycle is, I think we all believe that we can be far more proactive as we deal with our clients in understanding what's going on with deposits and being more proactive about attracting the kind of deposits that we would like to attract. I think, it's true in almost all the businesses that we have. So I think the level of rigor that we have today about -- thinking about rates, thinking about conversations with clients, making our desires clear across Asset Servicing, Corporate Trust, Clearance and Collateral Management, Treasury Services, all of them I think, over a period of time, we feel absolutely like we could do a better job at attracting balances as opposed to having balances just be something that happens to us. That obviously takes some period of time, but it's a very different kind of discussion today than we were having six or nine months ago here.

Michael Santomassimo -- Chief Financial Officer

Yeah. And would -- I'll add a few things. So I would just add and as we sort of grow the underlying client franchise, that's going to bring deposits with us, right. So that's another piece where you'll see some -- grow over time. I think, as you sort of think about the non-interest-bearing deposits and the percentage of the total, I think we've been pretty consistent over the last couple of years, and we think that that percentage will sort of grind down. But it's been -- it bumps around a little bit quarter-to-quarter. It was a little lower last quarter, it's a little -- 29% this quarter, you can see that from the release.

I will though just remind you a little bit about the nature of our deposit base. We don't disclose non-interest-bearing by line of business. But when you sort out -- what we showed you at Investor Day was about half of our deposits in total are from Asset Servicing, and then the rest -- the next biggest piece is our Corporate Trust and Treasury Services. When you look at the non-interest-bearing component of it, the percentage that come from the Asset Servicing business that sort of traditional asset managers, hedge funds, private equity, the whole mix. is far less than 50%. So the other pieces of the puzzle, namely Corporate Trust and Treasury Services drive a bigger piece of the overall non-interest-bearing for us. So that should sort of needs to be factored in as you sort of think about the trajectory of them over time.

Alexander Blostein -- Goldman Sachs -- Analyst

Got it. Thanks for that. It's useful color. And I guess my second question is just around clearing fees and those are just the actual fees not the entire business line item. So down a little sequentially, and I think it's largely a US business for you guys, so I guess markets should have been a little bit of a helper. Is it all due to just lower(ph)client activities, lower volumes in the third quarter, or is there something else going on underneath?

Charles W. Scharf -- Chairman and Chief Executive Officer

I mean, the third quarter typically is a little bit slower than the second quarter, but -- so there's nothing -- there's no underlying trend there at all.

Alexander Blostein -- Goldman Sachs -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Brennan Hawken with UBS.

Brennan Hawken -- UBS -- Analyst

Hi, good morning. Thanks for taking the questions. I just actually wanted to follow up on that last point and question on the non-interest-bearers. And, Mike, that was -- thanks for reminding us all of the different business mix, which definitely leads to a larger portion in non-interest-bearing deposits. But in the past, we've heard that there were certain economic incentives provided to clients such as fee credits on some of those non-interest-bearers. But that explanation was under the prior management team. So kind of curious whether you all have sustained some of those incentives, or whether the approach to those deposits has changed at all under your guy's plans and your approach.

Michael Santomassimo -- Chief Financial Officer

Hey, Brennan. I think that the -- where you have earnings credits, which is a pretty normal thing to do for some businesses is really focused in our Treasury Services business. You don't see earnings credits in any -- are not really prevalent in the other businesses. And so -- and that's how which is a pretty consistent way that us and others provide value for some of those client deposits in Treasury Services.

Brennan Hawken -- UBS -- Analyst

Okay, great. Thanks for clarifying that. And then thinking about the proportion of deposits that are in US dollar, is it still around 70% for you all? And if so, was there just some kind of noise in the deposit costs this quarter, or a catch up, or what have you, that worked out to about the 80% deposit beta that you referenced, Mike, earlier? Because when I do the math, I get to a number that's a bit higher than that, so just curious whether I need to make some adjustments to my calc.

Michael Santomassimo -- Chief Financial Officer

I think you do, but the -- so I think I sort of highlighted it in my commentary, Brennan. So, it's really the wholesale funding, which is a very small piece of our overall funding mix, drives some of that service-level sort of the calc that you've got there. So when you dig underneath that though it's what I refer to the 80% to 80% -- low-80% range -- low- to mid-80% range, which again, I'll say, is very consistent with what we're seeing and hearing from clients across the market.

Brennan Hawken -- UBS -- Analyst

Great. Great, thanks. Well, I'll follow up offline for some of the details on that wholesale funding adjustment. Thank you.

Charles W. Scharf -- Chairman and Chief Executive Officer

Sure.

Operator

Our next question comes from Steven Chubak of Wolfe Research.

Steven Chubak -- Wolfe Research, LLC -- Analyst

Hi, good morning. So, I just wanted to dig in and maybe just unpack some of the commentary on deposits, but more specific to the impact of QE unwind. I think the last fulsome update you gave was at 2014 Investor Day. You guided to about $40 billion to $70 billion of expected deposit runoff from Fed balance sheet normalization. And since you gave that guidance, it looks like deposits have come down about $30 billion or so. And now that we just have better visibility into that process, I was hoping you could maybe help us frame how to think about the remaining runoff impact as the Fed continues this process over the next couple of years.

Michael Santomassimo -- Chief Financial Officer

Look, Steve. It's Mike. You're referring to some guidance that was provided, I think, back in 2014. So a lot obviously has evolved since then, but I think when you think about wholesale deposits, more generally, they are definitely correlated to what you're seeing in excess reserves at the Fed. And so as that sort of grinds down, you're going to see liquidity come out of the system, right. And that, all else equal, potentially drives deposits -- continues to drive deposits down a bit. But as Charlie mentioned, I think, we think there's an opportunity to be more proactive, smarter about how we sort of go after the opportunity with our clients, as well as sort of the impact we'll have as we sort of grow the client franchise. So I don't think you can just take a -- the Fed QE online and sort of thinking about it in a linear way as you think about our deposit base.

Steven Chubak -- Wolfe Research, LLC -- Analyst

Okay. So just as a follow up, is there an expectation that there's enough of an organic growth opportunity, where you guys could actually see the deposit balances increase, even with the headwind from Fed QE online only because the impact seems to be fairly pronounced and the correlation quite high around 96% between the two, your deposits and industry excess reserve?

Charles W. Scharf -- Chairman and Chief Executive Officer

We're not going to predict it at this point. Obviously, time will tell. But I think we feel like we can do a better job at gathering deposits in any environment, whether it's an environment with the effects of the unwinding of QE, rising or falling rates, any of the above. How those two interact? We'll have to see.

Steven Chubak -- Wolfe Research, LLC -- Analyst

Got it. Thanks very much for taking my questions.

Charles W. Scharf -- Chairman and Chief Executive Officer

Sure.

Operator

Our next question comes from Mike Carrier with Bank of America Merrill Lynch. Please go ahead.

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

All right. Thanks, guys. Just -- first question just on the Asset Servicing, and this is just on the fees. When I look at it sequentially, it seems like that was a bit more muted just given what we would have expected just from some of the market returns. Maybe just a little color if you can provide on what else is included in that line? Is there some seasonality from like a transaction standpoint that can limit growth like the quarter?

Michael Santomassimo -- Chief Financial Officer

Yeah. Mike, I think -- Hey, Mike. It's Mike. I think -- we've said, I think, at one point a year or two ago like that -- it's a -- you can't think about it just based on what's happening in the market. The Asset Servicing fee line, I think, what we said a while ago is, call it, 25% or 30% of it's influenced by overall market levels, or the -- and that will sort of move up and down. But you've impacts from transaction volumes that go through there and a whole series of other little factors that may drive it sequentially quarter-to-quarter.

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. And then just on the expenses, on the legal item, just any color around that? And if it was like a one-off versus what would be kind of ongoing legal costs? And just trying to understand that just relative to like going forward for a run rate there?

Charles W. Scharf -- Chairman and Chief Executive Officer

Yeah. This is Charlie. Listen, I think we have a -- fairly clear disclosures about what the litigation we have in progress. This one related to approaching conclusion for two of those items that were mentioned. So we obviously have the remaining items to go. Some might get resolved sooner, other might go around for a long time. But they were known cases that moved along, I would say, quicker than we probably would of thought a couple of months ago, and that's what happens when you have settlement discussions. And there are other things going on with others in the industry as well.

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks a lot.

Operator

Our next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Thanks. Good morning. Thanks for taking my questions. Maybe just go back to fourth quarter seasonality. Maybe, Mike, if you could just touch on a couple of different areas. Clearly, we have the performance fees from Investment Management. But maybe if you can flesh out the depositary receipts comment and the delay of revenue into fourth quarter from what typically isn't(ph)seasonally strong third quarter. And then any other areas clearly volumes tend to be strong in the fourth quarter, but maybe just to clarify what you think can be the improvement on the Pershing side, and then also the contribution from JPM on the Clearance and Collateral Management side.

Michael Santomassimo -- Chief Financial Officer

Okay. I'll try to pick that and maybe, hopefully, I'll get all your pieces, Brian. Thanks for the question. The -- as you sort of think about PRs, these events that cause bigger fees at any given quarter are not in our control, right. So, --

Brian Bedell -- Deutsche Bank -- Analyst

(inaudible), dividends, splits, things like that.

Michael Santomassimo -- Chief Financial Officer

Yeah. And so, I think coincidentally a bunch of that stuff historically happened in the third quarter, and there's a couple of items that got pushed out of the third quarter in the future quarters. So whether it happens in the fourth quarter or in a quarter or two, I think that will be depended upon the clients finalizing their activities. And so you'll sort of see that come through, but there were one or two of those, as Charlie sort of mentioned.

As you sort of think about Pershing on a go-forward basis, I think you saw, over the last two quarters, that things sort of stabilized post the client losses. I do -- we did highlight, last year, that there were some termination fees related to these losses in the fourth quarter. So, that will have a bit of an impact on the sequential results. But overall, we're seeing good activity in that business, pretty consistent -- and pretty consistent activity in that business over the last number of months.

Did I -- I think that's -- I think those are the items, or did I miss anything?

Brian Bedell -- Deutsche Bank -- Analyst

And then the JPM clearing collateral.

Michael Santomassimo -- Chief Financial Officer

Oh, sorry. Yes, so you -- so we did finish the conversion of the JPMorgan clients into the business, probably a later part of the third quarter. So you will see a little bit of an uptick as we go into the fourth quarter, so you'll see that in the run rate as we go.

Charles W. Scharf -- Chairman and Chief Executive Officer

And this is Charles. I just wanted to maybe just make a couple of comments about revenue growth that look beyond next quarter. So I think, first, I guess the way I would characterize it is, I think when you just think, I mean, look at the businesses and the way they're performing today, and our expectations for opportunities are. Within(ph)the Investment Services business, which produced 3% revenue growth this quarter in total. Asset Servicing was 3% growth. When we sit here and think about the opportunities that sit in front of us versus the pressures, we think there are more opportunities than there are pressures. We think whatever pressures exist will continue, but we have opportunities to grow that business faster than we have. And as I've said, that is a long cycle business from the sales perspective and it takes time. But we feel very good about our position and the opportunities.

Pershing, we've talked about multiple times, we had these we had two specific losses that we've known about for a long time. It affects the numbers in the short term. We know we have a series of wins that were in the process of onboarding, which take a long time to do the work. We have the expenses embedded in our results, or at least a big part of it to do that. And we have no revenues from it and we know they're coming. But more importantly, we love our position in the business. We believe we've got significant opportunities in the RIA space. And so, again, we're not going to put timeframes around it necessarily, but relative to the quality of the business and the opportunity we think it's significant. Issuer Services space, Corporate Trust, that is one where you start to see progress more quickly. And that's I -- it's a little bit blocking and tackling, it's better technology, it's better sales force, that's better organized; leveraging the relationships across the franchise. And we're starting to see that impact.

DRs, as we said, very seasonal quarter-to-quarter; a lot of volatility. Year-over-year, I think the numbers will be pretty strong relative to what we saw last year. Treasury Services, new leader, meaningful opportunity for us in a much more significant way than we've had in the past. And I've put wealth manager in that category as well. So, I just think -- I know obviously there's a lot of focus on quarter-by-quarter. I say this consistently, hard to move these businesses in a single quarter. But as we think about what the opportunities are, given the market positions that we have and the type of people that we're bringing in with the ideas that we have, it's -- we certainly feel good about the opportunity, it's just going to take some time.

Brian Bedell -- Deutsche Bank -- Analyst

That was exactly my second question, Charlie. You totally anticipated it, so thanks for that. Maybe just one little area, middle office, that you didn't cover. I know(ph)you guys really started to ramp that up when you onboarded the T. Rowe deal, and I think you alluded to another mandate coming soon. Maybe just talk about your strategy there. Obviously, State Street has been the big fish in the pond on that one. Do you guys plan on being more aggressive in that space?

Charles W. Scharf -- Chairman and Chief Executive Officer

Yeah. I think -- listen, I think middle office is a -- it's complicated, as you will know. It's complicated because there's no one middle office solution out in the marketplace. Historically, they've been very bespoke, generally more complicated than people think when you decide to take something on, and so I'm not sure when you look at the profitability across the industry the idea of we don't look to middle office to be a gigantic profit contributor to the company.

Having said that, it is a very -- it's a pain point for our clients. We think, over a period of time, we can help build scale, which means we have to create some more consistency in the industry. And if we can do that for clients, it gives you the opportunity to talk more broadly about other pieces of the equation, and so that's something that we are interested in doing. It has forged more important, deeper relations for us, and so we'll continue to do that. Longer term, more broadly, we all, as an industry, there's -- there are opportunities to figure out how to simplify middle office dramatically. And that's something that we're equally focused on over the much longer term. But in the short term, it is an opportunity for us to help our clients.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thank you for the color.

Charles W. Scharf -- Chairman and Chief Executive Officer

Next question.

Operator

Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hey.

Charles W. Scharf -- Chairman and Chief Executive Officer

Hey, Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

Charlie, you spent a lot of time on the new hires. Where are you in terms of changing the culture? How long should that take? And what do the new hires bring to the table?

Charles W. Scharf -- Chairman and Chief Executive Officer

Listen, obviously it's a hard question to answer where are we, I think. And I tried to, in my remarks, talk about the way you'd feel if you were inside the company to get to that point. I think this is a company of 53,000 people. That's done certain things a certain way, and it takes time. And when I say it takes time, I don't think it's a question of winning the hearts and minds of people here. I think, as I've said before, it's a very objective group of people that come in genuinely every day and want to do a better job for their clients, which ultimately should translate to better results for ourselves. It's a question of what does that mean, how do we operate, do we have enough people role modeling behaviors and things like that. And so, I -- if I had to say where we were, we're probably in the earlier innings rather than the later innings. But I also feel like if you were to talk to people inside the Company who've been here, they would say, I hope -- I think they would say it's fairly substantially different.

We have, I think, -- and I've seen this in my prior lives, I think this question of bringing talent in from the outside; it is a question of balance. We -- and I really genuinely mean this, I said this in my remarks, we have great subject-matter expertise here. As I said, we've got people that deeply care about clients, but you can't be too inwardly focused in an environment, which is changing dramatically around you. And so the idea of bringing in people that have just a -- have been at different companies, that think about the businesses differently, operate with a different sense of urgency than we've operated in the past, have experience at growing businesses, those are all additive to the discussion when you're sitting around a table along with that consistency. So, not that I hate to call individuals out, because it puts a lot of pressure on them and also it's a little bit unfair to everyone else. But I mentioned Paul Camp, who joined us to run Treasury Services. We have a strong Treasury Services business today, which is high quality. But we think that we can do much, much more than has been done with it. I think if you were to talk to people inside the Company, what has Paul brought to it in the short time he's been here, you walk into a meeting with Paul and you got energy, you got excitement. He has huge respect for what's been built here in Treasury Services. But then, we'll talk about all the opportunities in front of us, both in terms of how we organize, in terms of where we want to get more aggressive, in terms of the kind of products we need to build. So, it's a -- it's just -- it should be a shot in the arm for businesses or areas that complement the great talent that we have here.

So, this is not a question of replacing every job with someone on the outside, but the -- and I -- we don't usually go out and call out people's names specifically, but this -- it's a substantial list of people in very senior jobs, which we think will be very important not just in their areas but helping shape the mindset of what growth means. And I said this before, growth is not -- we just don't come in one day and decide, OK, we want to grow today. So, let's just tell everyone and make it happen. Growth is about teaching people how to go about doing that. It's -- you need to think about do you have people in place that actually can think about the strengths of the organization, what products we should be building, how should work more closely across the organization, do we have the right product set, do we have the right people in product development, are we incenting people properly for it. I mean the list goes on and on. And so having some people that have done that, that think that way, helping role model those behaviors for people here that are very open-minded about it, I hope over a period of time it just continues to build on the transformation that's in progress here. I hope that was helpful.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Yeah, that was very comprehensive. Thank you.

Operator

(Operator Instruction) Our next question comes from the line of Jim Mitchell with Buckingham Research. Please go ahead.

James Mitchell -- Buckingham Research -- Analyst

Hey, good morning.

Charles W. Scharf -- Chairman and Chief Executive Officer

Good morning.

James Mitchell -- Buckingham Research -- Analyst

Maybe just a question on expense -- good morning. A question on expenses. You talked about a meaningful opportunity to get more efficient in the short and long term. Can you maybe give us a little more detail on where you see the biggest opportunities to get more efficient?

Charles W. Scharf -- Chairman and Chief Executive Officer

Yeah. So, I think it's -- thank you for the question, because we do get a lot of questions from people saying, well, we've done a good job of controlling expenses over a period of time, is there more to go? I personally think there is a lot more to go, and it's not because we've done a bad job, it's because -- it's like peeling an onion back. The more you peel the onion back, you start to see the next layer, and I think that's what we're experiencing. And it's short term and it's long term; it is tactical and it's structural. Examples, we've done a very good job here, if you look at real estate costs. I mean, if you look at what's driven the -- our ability to become more efficient over the past four years or so, a lot of it's been driven by being smarter about consolidating and moving to lower cost locations.

Having said that, we still have more we can do. We've highlighted the fact that we relocated the corporate headquarters. The building we're sitting in now, which is our corporate headquarters, we probably have 3,000 -- I'm rounding, 3,000 or so people in it at the beginning of the year. We got out of 325,000 square feet couple of blocks away. Some of us are here, the rest will be here by November. We're going to get paid, call it -- forget about the accounting for a second, we're going to get paid $15 million to $20 million a year by someone to sublet that space. We'll have 3,800 or so people in it by the end of the year. We think we can get 5,000 to 6,000 people in this building. And by the way, again, we can go back historically -- and it's not as if that wasn't happening, but as these things happen, you get more and more clarity and more and more opportunity. We think about how we manage the company. I mean, very basic things, layers in the company.

When you think about -- I think about the layers between me and the most junior people inside the Company, and across the Company, consistently, it's 10 to 11, which is far far more than I've experienced at other organization, average spends of controls. And then you go through some of the more structural things and we just think about the physical, manual work that we do that should be automated. And so, as we think about this, we're focused on really two different dimensions. Number one is, in the short term, we are going to spend more money on technology. That is -- it's the -- that is the livelihood of who we are. We need to do it, we need to improve our basic operating infrastructure, and we need to build products and capabilities for the future. That will take more to do. And so we need to continue to drive these efficiencies in the shorter term not because we just wanted -- we needed to fund that stuff, but because it will fund that stuff. And as you walk around a place, it becomes more obvious, what these things are. At the same time, over the longer term, we do need to build capabilities that allow us to become much more structurally efficient. Those are multi-year projects that relate toward automating tasks that are manual today, using technology and things like that. So as we look over a multi-year period, it's something that we think is -- there's still plenty of opportunity left.

James Mitchell -- Buckingham Research -- Analyst

That's great for the color. And maybe just a quick clarification question on 4Q. On the modestly up expenses, I think you noted that that excludes the real estate charge. But does that -- the comparisons include the legal charge in 3Q, or should we pull that out as well? Just want to make sure I'm getting that right.

Charles W. Scharf -- Chairman and Chief Executive Officer

I would pull it out.

James Mitchell -- Buckingham Research -- Analyst

Okay. Thank you.

Operator

Our next question comes from Geoffrey Elliott from Autonomous Research. Please go ahead.

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello. Good morning. Thanks for taking the question. You touched last time on the efforts around CCAR and capital planning. And looking at the mid-cycle resubmission -- mid-cycle DFAST that you submitted(ph), you published, your company run stress capital ratios have improved quite a bit. What does that leave you in terms of any efforts to accelerate the process of getting some of that excess capital out?

Charles W. Scharf -- Chairman and Chief Executive Officer

Listen, I think we said last time that we're highly -- we are -- our constraint is our model, not the Federal Reserve's models. It's something we've been and continue to be highly focused on. And if we've got something to say, we'll say it.

Geoffrey Elliott -- Autonomous Research -- Analyst

Okay. I guess, we'll leave it at that. Thank you.

Charles W. Scharf -- Chairman and Chief Executive Officer

Okay.

Michael Santomassimo -- Chief Financial Officer

Thanks, Jeff.

Operator

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

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

Great, thanks. A quick question on the non-interest-bearing deposits. I know before you've said that they've historically averaged about 30% of your total deposits. But as you go back much further in time and look at the end of the rate cycles, both in the 90s and the 2000s, those non-interest-bearing deposits really troughed out around 20% of total deposits. So is that what we should be thinking about this time? Is that, on average, over a cycle of(ph)30%, but really they should be tracking more closer to 20% as they have in the past.

Michael Santomassimo -- Chief Financial Officer

No. Brian, it's Mike. We haven't said that that's through historical average. I mean, I think that's the experience over the last few years. But as you point out, that number was lower sort of in history. A lot's sort of changed since then in terms of the business mix and stuff. So, look, I think we would stay with sort of what we've been saying consistently, right, is that they're going to bounce around quarter-to-quarter, but we think that number will sort of grind down a little bit over time. Where it bottoms out, we'll see, but --

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

Okay. And then a separate question on Investment Management. If you kind of look at the flows year-to-date, and let's exclude LDI, which has still been a strength in the business. I mean, long-term active flat. Your -- look at your index, it's down $22 billion, your cash is down $25 billion. I mean, what did it take to get those to turn from outflows really to inflows from here? And when can we expect to start seeing better traction in flows in the business?

Michael Santomassimo -- Chief Financial Officer

Yeah. Look, so I think when you look at our business -- I mean, it's hard to put it all together and think about it as one. We have a -- we have Walter Scott, which is an active asset management company in the equity space, which, over a period of time with differing performance levels inside the market, should differentiate us presumably more in difficult markets than in very, very strong markets. It is -- they are long-term holders not focused on the technology sector, have a great track record. And so, again depending on what happens in the markets over a period of time, you should see the stronger performance there.

In our asset manager here in the US, we're going through a restructuring as you know of combining the three into one called Mellon. We've been pretty clear that our performance, historically, hasn't been great. We are strategically making a significant change and putting a series of capabilities there to create a multi-strat asset manager, which we have to prove to the market is more attractive than the separately managed firms that didn't have the appropriate scale inside the market. And so, that hopefully, over the next year or so, will start to see more progress there. So it's -- again, they're all very, very different that have different drivers to them. But I can assure you, when we think about each one, we're focused on driving improved performance in each of them, but that too will take time just given the nature of the business.

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

Okay, thanks.

Operator

Thank you. And it does appear we have no further questions in the queue at this time.

Charles W. Scharf -- Chairman and Chief Executive Officer

Thanks, everyone, for joining.

Michael Santomassimo -- Chief Financial Officer

Thank you. Appreciate it.

Operator

Thank you. This concludes today's conference call webcast. A replay of this conference call webcast will be available on the BNY Mellon Investor Relations website at 2:00 P.M. Eastern Standard Time today. Have a good day.

Duration: 65 minutes

Call participants:

Scott Freidenrich -- Executive Vice President and Treasurer

Charles W. Scharf -- Chairman and Chief Executive Officer

Michael Santomassimo -- Chief Financial Officer

Ken Usdin -- Jefferies & Company -- Analyst

Alexander Blostein -- Goldman Sachs -- Analyst

Brennan Hawken -- UBS -- Analyst

Steven Chubak -- Wolfe Research, LLC -- Analyst

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

James Mitchell -- Buckingham Research -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

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