Q1 2021 Bank of New York Mellon Corp Earnings Call
Please standby we're about to begin.
Good morning, and welcome to the 2021 of first quarter earnings conference call hosted by being why 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.
L B N y mellons consent.
I will now turn the call over to Maggie non Paul Chung Sky being why Mellon Investor Relations. Please go ahead.
Good morning, Michael again, one of Alan first of quarter one.
One on <unk>.
Oh yeah.
We will reference on financial highlights presentation available on the Investor Relations page of our website of being one of all of them Dot com.
Japan being one of them.
Oh will lead the call.
Emily Portney of CF.
Paul will take you through our earnings presentation.
Following <unk> remarks, there will be a Q&A session.
Before we begin please note all of our remarks include forward looking statements and non-GAAP measures.
Nation.
And non-GAAP measures are available on the earnings press release on natural supplements and financial highlights presentation, all available on the Investor Relations page.
Right.
Forward looking statements made on this call only as of today.
April 16th of 2021 of them will not stop.
David.
Bob I will hand over to Tom.
Thank you Magda good morning, everyone.
I will touch on a few financial performance highlights and some other.
Development.
And hand, it over to come later on.
All of them in more detail.
First I wanted to spend a minute discussing.
Apartment, which were all operating.
As I reflect on the past year worried that keeps coming to mind for me.
The resilience of our business model of global International infrastructure.
Of course of clients and our employees.
We saw the resiliency of the potentials.
So either of the lessons learned from previous purchase.
And so the quick and decisive action government and regulators.
Now we're moving from a period of resilience periods that were all optimistic will be one of them.
That's right.
While we all remain clear eyed about the challenges of installed.
I am one of many business leaders and see many reasons all of us.
Great.
When we move past the Covid world.
The optimism stems from the confluence of several.
Several factors, including the deployment of the vaccine.
Potential strength from consumers now in the U S households of as Stephen at extraordinary levels of.
The savings rate is running about 14% and that's more than twice per year average yeah mountain held in cash available for spending.
Around 15% of GDP, which is way above normal as well.
In addition monetary stimulus.
On the government spending plans of likelihood of salary GDP growth.
We expect significant GDP GDP growth going forward, assuming the pandemic is managed as expected.
The strong economy is likely to keep activity and assets level on.
And expectations for stronger growth is beginning to be reflected on this evening.
Now I also wanted to touch on the future of work and general productivity.
Dennis.
Mark of a level of innovation and technology adoption.
Companies have now become accustomed to a new way of working.
We've proven our ability to maintain high quality service for our clients adopt and deploy new technologies quickly. Thanks.
Collaborate with one another in virtually all of this past year.
We're going to take the best of what we've learned to continue to innovate and thrive.
Driving value for our clients and our employees, including assessing what our workforce and workplaces will look like.
Intangible embraced hybrid working arrangements.
Define future work that continues to position as a buyer of choice of Orange.
Now, let me turn to some highlights on our performance, where we see momentum across our businesses.
On slide two we reported revenue of $3 9 billion.
Fee revenue, excluding the impact of money market fee waivers increased 6% year over year against the prior year quarter that had exceptional.
I believe of volume and volatility.
Asset servicing of ours, particularly benefited from healthy client activity as well as market appreciation of.
<unk> margin of 49% is relatively flat year over year, not bad considering the significant loss of interest rate.
We had a credit provision release of $83 million.
So of 97.
Since the last year.
Turn on top of tangible common equity of 16%.
Turning to our business is now the strength of asset servicing revenue reflects higher markets robust client volumes and continued business momentum.
Our open architecture strategy of platforms continued to gain traction with clients powered by our data and analytics solutions.
In the first quarter of large global asset manager in acquisition mode signed a multiyear agreement per datable, that's our cloud based platform.
All of it allows our clients to integrate acquisitions quickly.
Easily interact with data to gain actionable insights to help drive their business.
We are proud to have been selected by Gabelli funds launched its new actively managed ETF.
As of the ESG theme product and sort of been named ETF service provider or burst Sky bridges Big quite ETF Trust fees.
The first quarter, our ETF servicing platform launched a record 51 fun.
In our ETF assets under custody of administration has now surpassed <unk> one trillion dollars.
Recently, we also announced the establishment of a new digital assets unit.
She's building of multi asset platform of will allow us to custody of traditional as well as the lives of those include.
Adding cryptocurrencies.
Great.
Growing client demand for digital assets include regulatory clarity presents an opportunity for us to extend our current service offerings.
Time in this emerging field.
Moving on roofing and flooring and part of amantadine.
Urging benefiting from continued elevated transaction volume equity market strength interest.
So on underlying fundamentals.
As I mentioned last quarter, we did lose a couple of clients due to consolidation and this together with a low rate of bar will impact Burger King in 'twenty one.
Most of the underlying good organic sales growth.
Clearing and collateral management fees remained strong we expect healthy activity going forward.
Collateral management international fees of appointing new business wins.
In addition, as we announced earlier this week, we now accept Chinese bonds as collateral on our Tri Party platform to Hong Kong Bank.
Connect.
Chinese fixed income market only expected to grow demand that's been mounting protection solution, which until now non existent.
This is another example of BMI Mellon continued innovation to drive value part of arms.
Turning to investment in our wealth management fees.
Recently announced realignment of Mellon capabilities fixed income equity and multi asset and liquidity management.
Right.
Price was cash perspective.
It's one of the hand scale and capabilities of our specialist firms.
And strengthen their research platforms operations as well as global reach.
We kind of year of consistent quarterly long term inflows and investment.
Of course, our top strategies continues to be strong.
Wealth management higher market has helped to drive client assets of a record level of almost $300 million.
We've implemented many positive changes new business, including new sales teams of broader investment banking offering and new digital capabilities for clients.
We were gratified by very high satisfaction scores on our year end client survey all survey categories up year over year.
Now our proprietary goals based planning tool advice path.
Recently named the CIO 100 or award.
This award recognized 100 technology teams across industries that are driving growth.
Digital transformation.
So a lot of us in helping to build momentum for growth of existing and new clients.
Moving beyond financial performance I want to spend a minute on ESG.
On its top of mind for our investors employees and our clients.
We are committed to ensuring that we use our reach marketing funds and resources to address pressing ESG issues. Our goals include offering our clients leading analytical solutions.
Of our ESG investors with new investment strategies, and encouraging and enabling guests to medicine.
Last month, we published our first report on how we're managing the impacts of climate change of our business.
In accordance with the passport climate related disclosures or <unk> guidelines I encourage you to read it as it includes examples of where we are where we have initiatives in place related to climate risks and opportunities and lays out of multiyear metrics and targets, including plans for the enhanced disclosure ground power Duane.
Our parts out of the environment.
Now, let me close with where I am.
On your started with continued extraordinary effort by the U S government on a reserve to address the economic fallout of the.
The pandemic fiscal and monetary stimulus.
Much of uncertainty remains on equity markets generally optimistic, although somewhat volatile and longer term treasury yields of steep with the amount of liquidity in the system and inflows into money market funds have you of any short term rate slower in some cases, even negative. So there are many positive factors that support our business model.
On short term rates continue to be a challenge on.
Our business has proven to be resilient, and we're well poised for organic growth.
Moreover, we continue to bring innovative solutions to the market to help our clients and help them grow with that I'll hand, it over to Emily to review our results in more detail.
Thank you Todd and good morning, everyone.
I will work with each other herself of corner all comparisons will be on a year over year based on a lot like that day.
Otherwise.
Moving on three of the financial highlights document on.
In the first quarter of 2021 reported revenue of $3 9 billion on EPS of.
Of the 97 of them.
That's what could go on.
<unk> of the reserve value of about eight.
Sharon parcel of 39 million renewable energy investment impairment of about four cents per share.
Revenue was down 5% on a whole pool on for Dan.
Eight per cent.
As expected or that was sort of negatively impacted by continued low interest rate associated with money market fee waivers on the absence of share repurchase activity for lots of questions All day.
<unk> revenue excluding fee labors per se.
Driven by March of level, good organic growth and the positive impact of any other weaker U S. Dollar.
Well kind of probably moved down quite reversal of exceptional COVID-19 prevent volumes and balance of experience here, though.
Some of them.
Okay.
As a reminder, last quarter, we guided to about one of the half for signs of organic growth for the year on that's quarter of organic growth of greater bunch of per se.
Beginning this quarter, we reclassified the fee revenue line item, what's dry cleaner and simpler reporting.
Basically we took on debt and other income out of that.
Fee revenue.
The new reporting line, which includes investment in other income as well as other trading variable interest entity.
Charity day the law.
The reclassification had no impact on total revenue on.
The book how can be found on page 19 of 20 of the financial supplement prior periods have off of the Hancock.
Foreign exchange revenue holiday fell on corner of 24% versus the fourth quarter on primarily on the back of high volume.
6% lower versus on exceptional prior year.
Net interest revenue was down 20%.
Expenses increased 5% year over year, which is of book higher than prior guidance because of higher revenue related expenses higher litigation costs on the appeal.
Some of our stock price associated with equity of one of <unk>.
Think of play.
First quarter of 2020 also benefiting from an accrual adjustment that was not repeated on 2021.
Provision for credit losses, I spoke of on me.
This 8 million, primarily reflecting an improved macro outlook on thier.
Sorry price index.
We will have net recoveries of 1 million and our portfolio remains high quality, but of course.
Five per cent of loans rated investment grade at March 31st.
They talk margin of 29% with a relatively flat cost share.
A strong outcome considering the impact of the low interest rate environment on fee waivers and an eye on both a bunch of de Minimis.
So instead of a bank.
All of them, but they 0.5% and Harley.
T fees of $16 one per cent.
Holds for stepped out of trend analysis of the main drivers of the quarterly results all of the Jos.
Hum notable item for the fourth quarter of 'twenty 'twenty right.
And that's on services revenue of 3 billion bank, 8% year on year.
The decline was primarily a result of lower net interest revenue pool of labor and lower FX revenue.
It's hard ones now.
On higher volume liquidity balance at March of levels any of these are U S dollar index.
Services and other revenue X waivers went up two per cent.
And that's the head of wealth management revenue increased 10% of higher market value of modest equity investment gains and losses, a year ago, and a weaker U S dollar offset the impact of fee waivers.
Money market day labor net of just.
To be sure on servicing expense or $188 million of a corner of her instead of 175 billion guidance that we provided previously.
The higher than expected of waivers forgiven by higher balance.
Turning to page five on.
Capital on liquidity ratios remained strong and well above and kind of target and regulatory minimum.
Common equity tier one capital total about $21 1 billion as of March 31st and are still of a tier one ratio of 12, 6% under both of the ban on standardized approach it.
Sure one leverage was five 8% down 50 basis points on the fourth quarter, primarily due to higher deposit.
They continue to monitor the impact of a crazy on the system on our balance sheet.
Okay.
All of our clients' cash management needs, while at the same time, managing our tier one leverage ratio, which is our binding constraint.
Over the last year, except the pause of heartburn casually, taking unprecedented environment into consideration, we're comfortable utilizing a portion of our internal buffer that we renamed home for the tier one leverage ratio and therefore could go below $5 five per cent gray period of time.
Finally, our LCR was flat it has on the fourth quarter at 110 per cent.
In terms of shareholder capital returns make parts of 699 million of common stock on the first quarter in line with the federal reserve not of modified limitations that apply to all of CCAR Bank.
I'm on page of pay our 31 cent quarterly dividend, which totaled $277 million this past quarter.
Turning to page six.
My comments on net interest revenue well highlight sequential changes.
Sure one net interest revenue was down $3 seven per se, but about two thirds of the supply.
On driven by the impact of lower interest rates on the other one third of driven by other items, such as bank accounts and hedging activity as a reminder, although average.
Again this quarter, they had minimal and I are of value in the current low short low short term rate environment.
Turning to page, seven which summarizes deposits and securities channel.
I've mentioned deposit balances continued to grow and on average were up 21 billion or 7% from the fourth quarter and up to 70 billion or 27% on a year ago.
As was the case in the fourth quarter again in Q1, a larger driver of the gross was excess liquidity driven by monetary and fiscal stimulus.
Turning to the securities portfolio on.
Average the portfolio was flat in the fourth.
Quarter end of approximately.
You know, 20% over the prior year low.
And then of Securities portfolio, we do continue to turn back non HLA securities primarily in non agency MBS munis and investment grade corporate bonds.
He left shrunk bogey of wallet, while maintaining our conservative risk profile.
We also continue the birth of loan portfolio Opportunistically.
The other 40 act blending and other margin lending as well as capital Corp.
So its bank provides an overview on expenses of the largest covered earlier.
Turning to page nine.
I've mentioned earlier total investment services revenue year on year declines by acres that cause any impact of low interest rates on NII and fee waivers and lower FX compared to the strong year ago quarter.
And I know it was down 20%.
And other revenue flavors without Super simple.
At that revenue on investment services had a strong quarter of 18% from the fourth quarter and down 15% year over year of higher client volume, partially offset normalization of spreads on volatility.
Assets under custody Android administration increased 18% year over year to $41 seven trillion on the back of higher market values of client inflows.
The favorable impact of of weaker U S dollar on net new business.
And they were sort of different kind of guy so I'm going to focus my comments on fees.
As of servicing fees were up.
Excluding fee waivers, primarily reflecting higher client activity and higher market levels, partially offset by lower FX revenue two of them.
Terribly high period last year of.
Pipeline remains strong.
When loss ratio ratios continued to improve.
Person had another strong quarter. Despite the impact of fee waivers wealth fees were down there would have been up excluding fee waivers year over year of clearing of counsel on 5% Mutual fund assets were up 24 per cent and we saw continued strong net new asset flows of 28 billion in the quarter.
Transactional activity remains robust with average daily clearing revenue up about 30% from the fourth quarter, Although we do not although we do expect a channel on on either of you moved your 2021.
Issuer services fees decreased mostly driven by fee waivers on COVID-19 related dividend fees impact on D. R.
Treasury services fees were up modestly X waivers on the back of higher payment volume and higher money market on balance and a continued shift to higher margin products.
Clearance and collateral management fees were down slightly primarily due to elevated volume and a year ago quarter.
Continued organic growth on our non U S. If that's what Tri party balances on clearing fees increase was offset by slight declines in U S volume and lower intra day on yet.
Yeah.
Holds 10 summarizes the key drivers that affect the year over year revenue comparisons for each of our investment services business.
Turning to investment and wealth management on page 11.
As noted earlier total investment of wealth management revenue in the quarter increase and of course that.
Overall assets under management of held steady compared to the fourth quarter's record 2.2 trillion.
More of 23 per cent year over year, primarily due to higher market values of positive impact of a weaker U S dollar on.
Net inflows.
Investment as long as rent revenues of 13% in spite of over 700 basis points negative impact of new labor of the benefit of higher market levels of course.
The investment gains on our current course of potential compared to loss of a year of golf and a weaker dollar more than offset lower performance fees against a strong year ago quarter.
In the first quarter, we had net inflows of 36 billion, including on our fourth straight quarter of of long term inflows of 17 billion driven by strong inflows and LD eye on fixed income as well as index on.
Investment performance remained strong on go to more than 80 per cent of our top 30 strategy of having peer rankings of ranked in the top two of core child on a three year basis.
<unk> 73 per cent a year ago.
Well monitor it revenues were up 5% on the back of higher much higher.
Client assets grew to a record 200 of 92 billion on more of 24% year over year, primarily due to high market value and inflows.
Non mortgage loan on client deposits are also up.
Now turning to the other segment on page 12.
The year over year revenue comparison was primarily impacted by the impairment of one renewable energy investment as noted earlier.
The expense increase primarily with bunch of incentive comp accrual reversal in the year ago quarter.
And your comments about the outlook of.
As we think about the balance of 2021.
On our full year guidance for me unchanged, just implied and I are on a full year basis will be down around 11 to 12 per cent compared to 2020.
With regard to waivers using the forward curves of project just like we do for an eye on it.
That's waivers net of distribution and servicing expense to be around 220 million of second quarter.
This will have a modest negative impact to revenue of approximately 20 million, you'll know of rate, partially offset by higher balances.
The second half of the year, we do expect to be more in line with the first quarter.
With regards to.
Flavors the growth rate on the first quarter was significantly higher than previous full year guidance due to higher volume.
Bank those volumes to moderate going forward.
Regarding expenses, we previously guided to be up about one 5% excluding notable items.
Given the higher expense this quarter, we now expect them to be up about two per cent as a reminder, on a constant currency basis, we guided that we would be flat year on year on that will now be up about 50 basis points.
Finally in terms of our effective tax rate, we still expected to be approximately 19% of 'twenty 'twenty. One. However, we are monitoring of the latest at all types of proposals.
In terms of shareholder capital return we worked on.
They need to pay our quarterly dividend once again make open market share repurchase repurchases income clients of the federal reserve modified limitation.
That was to repurchase approximately 600 million of common stock and of second quarter.
Looking beyond the second quarter, the federal Reserve's latest indications of CCAR Bank indicated that they will likely influence the SBB framework for capital management of third quarter.
We're following that guidance closely.
We look forward to receiving as a result of the judge desktop and operating under the stress capital buffer of framework, which will allow for more of profitability and shipping that we can return more than 100 per cent of of earnings to shareholders starting in the third quarter.
With that operator can you. Please open up the lines for questions.
Of course, thank you and if you would like to ask a question. Please press star one on your telephone keypad.
Again, it is star one if you would like to ask a question and our first question comes from the line of.
Brennan Hawken with UBS. Please go ahead.
Hi, good morning, Thanks for taking my question.
Uh huh.
Hoping to ask actually.
Emily about some of those comments on capital and bad.
Returning to the SCB approach would you asked a couple of returns.
On the tier one leverage ratio now inside your.
Your guidance band.
On the buffer of five five to six I believe.
You all have referenced hey, guys levers.
Levers to pull.
Which might help on that front.
So could you maybe walk us through some of those dynamics and then also.
How rigid is that.
Buffer thank you.
Uh Huh applied.
It seems to be a bit above peers, and so would you or are you in a position where you can allow yourselves to go underneath of that buffer for a period of time.
Given the unusual growth in deposits.
Sure Hi, Thanks for the question.
So.
We are you know we are a very managing on deposits very closely I'm, having said that going on you know we will absolutely continue to support our clients of their balance sheet, and our where we're comfortable with where deposits are now.
But of course, it goes without saying that over the course of the last 12 months. There have been you know all of a lot of additional reserves with a ton of liquidity in the system and so we've seen a surge of those deposits a large portion of that search is access. So it's non operational we've been very successfully working with our.
Two of two basically explore and move some of those non operational deposits to off balance sheet vehicles on thankfully. We we we have a oh good platform of liquidity of direct that has lots of lots of alternatives as an open platform.
So that has been very very effective.
You are correct in pointing.
Pointing out of they did a great day mentioned on my my prepared remarks that low given the unprecedented liquidity in the system, we would feel comfortable dipping into our tier one leverage a buffer we do hold of very significant buffer in excess of 150 basis points over Reg minimum of we size that.
Very carefully it's basically two both of absorb any any impact of OCI, a given rate changes as well as also be you know any surgeon and imbalances and given that's really what we've seen in the buffer is really there for this particular kind of unprecedented environment.
Ultimately, we would feel comfortable dipping below the five five per cent for a period of time of course running a certainly above of the regulatory minimum.
Okay got it that.
That helps.
That's great to hear and then one other question on the balance sheet.
It seemed as though the interest earning asset growth.
Lagged deposit growth this quarter on an average basis.
Okay.
What was that.
Because some.
Some of those deposits.
On temporary maybe you all were in the process of of.
Encouraging some folks to consider off balance sheet options like you referenced and therefore.
When we gauge balance sheet growth here this quarter, we shouldn't more of pay attention, which one should we pay attention to for each one of this morning.
In the interest, earning asset growth deposit growth.
Hum.
Or is it just that day.
Putting more money to work and therefore, the interest earning asset growth catch up I just wasn't it seem to big GAAP So wasn't sure.
Yeah, I mean, sure so certainly and I think of suspension of cool yeah of a significant portion of the deposit growth that we've seen.
We do think of it is excess of non operational so.
It's very hard to really redeploy that into the securities portfolio or the loan portfolio for any real duration. So so as a result of a lot of that is just sitting at the fed, earning 10, 10, 10 basis points, which which obviously is dilutive to NIM, but of course, you know it is overall accretive to cash and I are just you know obviously it.
Generally so.
So you know when we think about just and I are in general we really just use the forward curve to two project.
And despite of course, the the Steepening of the long end of the curve. We did see the short end grind and grind lower and also the duration of the curve, where we invest is it's more on the two to five year, Mark and that didn't go up as much as as the long end, but of course they are to the extent of the curve does continue to sleep in and <unk> shipped.
Of course that will be extraordinarily helpful.
Thanks for the color.
And we'll take our next question from the line of Brian Mcgill with of Deutsche Bank. Please go ahead.
Alright. Thanks, Good morning can you hear me.
Yes, Brian we can hear you.
Very good thank you.
Just one more on on the on the.
Great.
Interest revenue and fee waiver Cisco on to succeed and continue to be.
Here really.
We're really in the second quarter.
And back a little bits of that deposit strategy with the excess deposits is there an ability to put a little bit more on the securities portfolio and moving to the second quarter on.
So what I'm trying to get out of there.
Sure.
Given your full year guidance are we at sort of stability as you see of coming into the second quarter on an I or maybe another dip down before we go on and then similar to that on the fee waivers I think you said, it's 220 per at the second quarter, but then on a I'm not sure. If I got this correct that and thought that was going to improve in the back half.
And that was based on balance is can you share for them.
Sure.
Sure.
So and in terms of and I are if you know we don't really give oh.
Ultimately corridor by corridor balance isn't so much of it is dependent upon on or quarter by quarter projections of how much of it is dependent upon obviously the rate curve.
Deposit levels on MBS prepayment and other factors all of which are baked into our projections and what I would say is I. Just reconfirmed is that you know our full year projection for N. I R is still the same as the original guidance, given which is 11 or 12 per cent down year on year, so that that hasn't changed really.
In terms of waivers are so labors are a function of two things basically are short term rates are specifically three months of six months kudos as well as repo rates are also a function of a money market fund balances and actually what we saw this quarter is actually both.
<unk> rates grind lower balances go higher as a result waivers overall were a bit higher than originally anticipated at $188 million.
You know that that's the total impact however was slightly positive Q2 are to revenue.
And again I'm just we use the forward curve are two also project waivers are looking at the forward curve also the historical relationship between rates and and money market balances et cetera are we think we don't really think that the waivers the size of waivers of where our peak in the second quarter it of.
220 million and then and then by the way that would be probably at the at the fees. We're talking about the gross yields you're talking about probably slightly negative to revenue.
But then we would expect out of the second half of the year to be more in line with the first quarter and look I always like to remind people of albeit it's probably not till 2020, the latter half of 'twenty 'twenty, two or 'twenty 'twenty three but that is a when fed funds that are eventually hits 25, you know as one of the fed new.
<unk> Ah, we will recover in excess of 50% of those waivers and when it hit the 1%. It's it's very close to 100 per cent of those waivers.
That's a good clear and then the second question is on organic growth pick up of 2%. This quarter, maybe if you could just talk about the drivers of that I know Todd you mentioned.
They're very good demand for our data analytics with it.
Data book.
It sounds like that contract in the beginning you mentioned, it's not a in the run rate yet.
Maybe if you could just talk about that.
Our momentum in the organic growth rate of interest.
Sure. So thanks for the question, Brian So the first quarter.
We got the benefit obviously of a lot of activity, it's hard to project exactly where that activity is going to go but the guidance I think that we provided to you.
It's probably not sustainable sustainable at this level, but we did get some somebody new wins.
Missouri is reflected in net.
Pershing volumes were particularly high very good flows in any number of other accounts. So we're seeing a lot of good growth on.
On which with existing clients as well.
With our balance is there we do expect them as I said the moderate somewhat.
And I also good pointed out that.
Previous call that we had some of our watch business and Pershing.
That'll impact US later, this year or so or Pershing has got pretty strong underlying organic growth two of us can be basket of goods by both the interest rates as well as the.
As well as that loss of business that'll impact on the second in the second half, but we are seeing sustained momentum across just about all of our businesses strong pipelines and so I think as we've taken as we converted the pipeline of sales we continue to build the pipeline another pretty vague.
On a quarter for sales of higher win loss ratio with a win loss ratios are improving and we.
Retention has continued to be to be good I mentioned.
The date of volatile we had a number of clients and data, but no signs of very significant one.
Hum.
And building deeper relationships with new.
In fact client a lot of interest in our system.
Analytics on our applications that we've described to you before.
We're actually seeing a recovery in payment flows to sort of treasury services, which is largely commercial commercial payments.
And a lot of it.
Global we're seeing that good.
Recovery backed on economic recovery and we're also picking up some market share we've got some pretty interesting opportunities. There are as we look forward, we're pretty excited of what we might be able to do in the real time payments of space.
Acid wealth management had positive.
Positive flows.
We're seeing a meaningful improvement in wells.
Talking about the investments that we're making across the businesses both of them get you even in the core custody.
Our Oh middleware.
Middle office functions of.
On the payment system clearing and collateral management fees. It was off of an extraordinarily good quarter last year.
But we continue to pick up global assets.
The fact that we built out this bank.
On connect capability.
China is an exciting innovative.
On service that we're providing to clients.
And the coughing.
Confident that that's going to continued COVID-19 continue to grow.
So good good underlying momentum helped by very strong activity on the first quarter.
That's great color. Thank you.
Yeah.
Thanks, Brian.
Our next question comes from the line of Betsy Christa.
With Morgan Stanley. Please go ahead.
Hi, good morning.
Hi, Betsy and good morning.
Okay, a couple of questions on a little bit on the technical side on the build out that you're doing around the.
The digital assets the crypto currencies on that kind of thing on could you remind us the kind of pace that you are anticipating.
Being able to roll this out and are you going to be.
Is it are you gonna be custody of the physicals are just wanted to understand what the.
Sure.
How wide the aperture is on this opportunity.
Okay sure Betsy I'll I'll take that Scott.
So.
When we talk about our digital assets.
It's the efforts of what.
We're talking about is.
Digitizing traditional securities so that they're more easily mobilized.
Things like you can digitize some of you can digitize on money market funds and make it an eligible assets put into repo, which could which couldnt do in the past and you can make it much much more efficient, we think theres going to be quite of bit of that activity.
As well as smart contraction.
And what that might be able to do for the corporate trust and other businesses. So that's one element of it.
The other thing that we're going to city of it this way.
There'll be digitization of Fiat currencies, we're already involved in a consortium with.
With fidelity, which is a central bank currency, which free which could which could trade at 24 seven in digital form.
And it's really just developing regulatory approvals for it now so we do think there'll be in there already exists.
Digital currencies.
Fiat currencies and wherever you sit on the thing that gets the hype is really around crypto currencies, but we would be of digitizing excuse me, we would be customizing those as well. So we have we have been working on a prototype and.
We expect to be to be offering our capabilities across all three of those by the by the end of the year as we're building things out with clients of ours have shown institutional interest.
So, yes, we would actually have.
The fees.
On the wallet, if you will or that would be the custodian for the underlying crypto currency or any one of those particular digitized assets.
Okay. So you would actually be cutting the physicals, you're not going to be sub custodian net out to somebody else.
That is not our intent at this point.
And then what's the timeframe for getting to market is that of 2021 or 'twenty two time frame.
We expect that youll be hearing some things too.
At the end of 2021.
It may be a little bit earlier for some elements of it.
Okay and then the other thing I wanted to just touch base on was around the.
Climate comment that you had in your prepared remarks Todd.
I I mean part of it is asking the question what can you do with this about your own footprint.
Or is this also about working with your clients in and if it's working with your clients how how.
How do you anticipate you will help them get more climate friendly so to speak.
Yes, so there's really two elements to it Betsy one is what we're doing is of enterprise our own carbon footprint for example.
We've been very we've been very active we published recently in February we published.
But considering.
Considering climate of DIY Mellon report, which gave very specific examples of what we've done around carbon waste and other other.
Environmental related activities that we are carbon neutral we have them for an extended period of time and.
We have been named.
Bye bye of.
Of the CDP.
Really one of five financial institutions that have been given an a rating on client climate and we've been we're the only financial institution gotten that rating over the past eight years. So that's that's what we're doing as a firm and managing paper.
And our carbon footprint in terms of what we're also doing is we're providing services to clients for example of where we're the largest trustee on green bonds and we can certainly help clients establish.
The trustee of function that goes it goes along with that but in addition in the asset servicing space one of the things that have come out of our data and analytics capability is a very interesting application on.
ESG.
And allowing our clients to customize reviews of their own portfolios.
We use of Crowdsourcing techniques that you need.
We offer of cloud based solution.
Uh huh.
The client basically bring to license from what data providers were conducted hundreds of data providers, we've got two and a half million securities in that flow.
Occasion, and then there's a there's kind of a constant feedback loop to the.
Data providers sort of constantly enhancing the.
The amount of information that they might have on a particular security. So we're excited about that we are quite of few clients on it now and we're just contracting for.
Permanent.
Usage.
In addition to that of our investment management space.
Building quite a few of them.
ESG products.
And in the servicing space we.
We were just awarded.
Tract of Etfs that was based on yesterday. So it's really goes in those two forms one is the commercial element that we can help our businesses and number two is just doing the right thing for our own company.
Okay. Thank you I appreciate that color.
Thanks, Pat you can net.
Our next question comes from the line of Alex boosting worth of Goldman Sachs. Please go ahead.
Yeah.
Hey, good morning, Todd and Emily Hope you guys did well.
Maybe another question around capital. So I heard you guys are obviously targeting over 100% payout.
Something that you guys have targeted for a little while ago.
Can you just help us kind of calibrate that against a significant buyback you have authorized currently on.
Obviously here to see from you know probably the technical restrictions in terms of how much you could ultimately get done in the third quarter, given just the volume thresholds, but maybe help us think through that relative to your comments and your willingness to kind of go below that five 5% of tier one leverage so just kind of trying to think through how much you could ultimately get them.
Sure.
So ultimately you you are correct and mentioning that we had approval of a sort of remind folks on the board approval was given in the fourth quarter of last year to do buybacks up to a $1 4 billion through the third quarter of this year given.
Given the fed's limitations on the buyback is actually through the second quarter, it's probably going to be pretty unlikely that we could execute the entirety of the $4 4 billion just literally in terms of you know a D V et cetera.
But we will do as much as as you know as we are allowed.
And if you are assuming that the fed does or turnkey or or implement that you'd say the SCB framework, which does allow for much more flexibility.
We you know we wouldn't tend to you know certainly execute in excess of 100 per cent of of a hell of a return on I should say in excess of 100 per cent of earnings on a third quarter not as.
As much as they could do and anything that we couldnt do we like we would hope to catch up and they are in the fourth quarter and that cash in that program.
Got it that's helpful and.
And then maybe we can unpack some of the dynamics a little bit more so two questions. There I guess one.
Deposit costs.
But roughly flattish I guess sequentially just kind of in terms of what you guys of charging.
Is there room for that to grind, a little bit lower as you're trying to optimize the balance sheet or there's not a whole lot of you guys can do in terms of pushing pricing on deposits declined and then I wanted to clarify your comments around premium amortization I don't know if you if I missed it but what was it in the quarter and your full year on any of our guidance what does that assume for.
Premium am.
For the rest of the year.
Sure. So I'm just talking about first the first deposits you are right that the deposit rates are relatively flat and remember that's an average across to you on non U S dollar as well as U S. Dollar we are charging a in for example euros on and for Japanese yen, we're not of course charging per anyway.
And then you asked.
I mean look I'm you know they're there.
Don't know if this is the trough, but this is probably pretty much close to them you know close to Ah you know ultimately.
That's the rate that we'd get to of course, they price actually went negative in the U S. We could start charging for deposits. We certainly don't feel on how they felt that that is that is necessary and ironically.
Can you start charging for deposits than you know you can start to.
Earn money I don't earn more of it.
And and I are so but that isn't the intention at the moment.
In terms of yours.
Yeah, Let me just ask something of that so.
Think of you.
On the fed guidance, Alex that day.
Provided.
They really have talked about there being means for them to limit any possibility of negative rates for new sustainable time, but we've seen repo rates go negative a little low.
So we do think that there are probably policy actions of that were to dip down but as we go through the <unk>.
Scrub through the nature of the deposits that we've gotten and obviously, there's very limited value to them now and we've got a whole capital against them.
Now we are.
We are winding down, but there's not a whole lot more to grind down.
And then second half of it and Oh share on that on a on the MBS prepayments fees in our NII our projections, we've already taken into account you know a of trajectory of F. N. B S prepayments slowing down just based upon me the rises in rates.
So just to think about it in terms of sizing we would expect the MBS prepayment speeds have slowed down by about probably 15 to 20 per cent by year end.
Great. Thank you very much.
Thanks, Alex.
Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Oh hi.
It had some good.
Rugs and servicing that you talked about.
Two of the volumes that should moderate is that kind of expectations around purging of what are you seeing perjuring or retail behavior, you have to of a window into that world.
Yeah.
Yeah, Michael I'll take that so it's a it's a good day.
I think it's a combination of things so we've seen a lot of activity.
On the trading space we've seen.
We have seen retail activity that was very high.
As you know been Pershing Pershing does see some of that but it's been but it's been in the institutional side as well as the retail side.
We would expect that to subside somewhat from the from the elevated levels that we saw in the fingerprint.
The first quarter what was interesting is the institutional business is probably a little more active in March and the retail business is probably a little more active in January and February.
Okay, So you're seeing a slowdown in retail trading with quarter one of one of them, yes people return back to work do per se.
They trade last share anything related to that.
Okay do you think of supervisors, keeping an eye on what they are doing at their desks at a little bit more.
I believe that interest.
But.
You know, it's very hard to say, Mike because what you got to remember is there is a massive amount of cash sloshing around the system and it's got to go somewhere.
One of the things that I pointed out of savings rates double that.
National average, we've got 15% of households are of holding 15 per cent of GDP and cash.
Is it going to spend it investment invested or just let it let it loses value sitting sitting in cash.
Our guess is that we're probably going to see lower activity, but it's.
My guess is as good as yours.
Okay and then just one last question on the fee waiver of any of your customers most of all of you.
I mean this is I mean, this is 220 million of fee waivers in the second quarter coming up I mean, hopefully you're building for the long term, good well, but shareholders don't benefit from that so.
I mean, you said it.
Not going to charge for deposits or I mean, what any other options there or just you just have to eat it and hope you get.
Long term goodwill.
Well Michael.
Uh huh.
Let me start out and you think you can you can follow up on that so.
A lot of the a lot of the excess balances is ending up in cash or even anything of any money market funds of which we considered it we continue to see this cash.
This cash build so even though it's $220 million of fee waivers of its Austin a lot of that's just driven by excess balances that we don't think of gotta be there.
But when.
When interest rates of what interest rates recover just likely thank god.
The excess reserves in the system will obviously cause of all obviously kind of contract.
That being said, we do think it provides a lot of upside when the market turns around which we which we've which we've reflected the last time. We went we went through this cycle and we can earn a little bit on it on its still in a little bit of good news is that the fed speak recently has been pointing to.
The possibility of the firm things up on the short end of the curve and we've actually seen before grades kind of improve a little bit.
Little bit recently so.
We're making the assumption that using the forward curve from a few days ago, when we gave that guidance that.
The waivers will be active by like they did during the day of the.
First quarter.
That being said I'd say it is that you're.
Significant is a.
A significant hit to earnings we think we'll recover it we.
Still ran of 29% operating margin even with that environment.
And the other thing that we've done is between and I are in fee waivers. We think we are now or add on.
We're very close to the trough and then it can obviously worsening of interest rates, even gone up a little bit of a little bit lower.
But we think we are close to close to the trough and so the business model now I'm going to start to grow you know to grow off of this level.
Great. Thank you.
The other thing I just might be the only thing I just might add to that is just sort of just remember that a large portion of those waivers are are really just funds that we distribute so.
It's where the kind of other recipient of just lower you know lower fees.
Versus competitive waivers that that we're actually offering are in asset management.
Great. Thank you for that.
Kinda of our next question that comes from the line of it can using with Jefferies. Please go ahead.
Oh. Thanks, Good morning, just sort of follow up on the asset services view on it was nice to see the 5% improvement sequentially and I just wonder.
Last quarter, you had mentioned some of that book your repricing and kind of one time things. This quarter, you mentioned that theres, a little bit of elevated activity I'm, just wondering from Mike and out.
Book perspective, anything we should know just about kind of.
The trajectory of on boarding new wins, and and are we kind of dream of a clear line of sight on on any expected meaningful repricing.
This year thanks.
I know you want to take it.
Sure.
Yeah, you know, we did see a nice uptick in terms of assets asset servicing fees, they were up about 5% actually sequentially.
Yes.
And I'm, just you know 50% of that is due to assets.
Asset based on asset levels and the remaining 50 per cent is is you know is based on transaction volume and transaction volume across asset servicing all of our businesses in asset servicing was up significantly double.
Double digits and in some cases, a quarter on quarter as Todd alluded to we do expect that volume to moderate a bit in the second half you know having said that are you know are.
We also feel that theres very strong fundamentals across the business of our pipeline is strong on the average sized deals in the pipeline or on a bigger.
Retention stats are very strong and we're also making significant investments in new business that that are resonating well with clients.
In terms of the re pricing.
Theres nothing really structural that that we observe a repricing of the repricing that we did Ah experienced glass of last quarter that was a bit lumpy was really totally.
Tied to just a few large clients that happen to be going to RFP at the same at the same time.
You know, it's always been a pretty modest headwind for the bill for the business that we've been able to offset with new business retention gross with our existing clients and end and further efficiency.
Got it thanks for that Emily and then just one more balance sheet question in terms of fed.
Fed accommodation the incremental deposits that flowed in and certainly seem to land on your balance sheet. How are you just anticipating changes as you as we go forward with potential ends to QE and.
And how how do you think your balance sheet would act versus more of a.
On more traditional regional banks in terms of degree of retention of the deposit sort of floated. Thank you.
Sure.
Sure.
So it.
Ultimately you know we you know we think when you know we we basically as as the fed increase of reserves, we think roughly about two per cent or so ends up on our on our balance sheet of it's actually hard to you know hard to tell on depends very much on the on the economic backdrop.
I did mention we do think of a large portion of the deposits, which are you know that we that we've seen in the growth of those deposits, especially in the last two quarters is excess so non operating and we do think that that you know would receive pretty quickly you know when when interest rates start to you on line.
Monetary policy starts on I don't know Todd if you'd have anything to add to that yeah.
If you go back to.
Freely.
All of it event, which really led to gross like we've seen something close to $100 billion of balance increases.
Some of that was intentional as we built relationships and it comes naturally with the growth in our businesses, but it's taken a significant amount of that was was what we call fit into that excess.
Definition, so we would imagine probably somewhere between $25 billion to $50 billion of that hundreds of billion dollars increase would roll off.
Got it okay. Thank you.
Thanks, Ken.
Our next question comes from the line of Jim Mitchell from Seaport Global Securities. Please go ahead.
Hey, good morning, maybe just if I think about your guidance on NII. It does seem like your the implication is that NII of sort of stabilizing here and I assume that.
Of that implies sort of securities yields are going to kind of hold at current levels. So.
So if we kind of assume a static balance sheet going forward of them, but I know that that's not necessarily right way to think about it but if we assume that they try to isolate.
What could be the inflection point what level of rates.
You've indicated the two to five years important you're not going to go further out than that.
The five year now at 83 basis points, moving higher or do we need to see that translate into the two to three year I mean, what level of rate structure should we start to see maybe yields go on the other way.
Okay, why don't I start Emily and then you can you can add so.
I have really two key elements to it.
Jim.
One is the short end of the curve. So we've got a significant number of assets that are pricing off of off of LIBOR or shortly of short term indices and once again. This quarter. We saw for example of one month LIBOR was down three basis points on its average in Europe.
The fourth quarter and two basis points from three month LIBOR. So we got a.
Net offset the benefit of the of the move on the longer part of the curve.
But the steepening out to five years, when we keep we keep the duration of around two of the half year. So that would mean, there's going to be significant assets out there that roll off and get re investment is helpful.
It will slowly come into it but it's basically been offset that benefit has been offset by what we saw on the short end of the book.
No that makes sense.
Just trying to think through assuming short rates are pretty stable from here, what kind of gets book what the longer on really starts to help you.
Yeah.
Five and 10 years because of what that does is it extends the duration of the.
Hum.
On the mortgage backed securities of their yields pick up because of the amortization of premium declines.
Kind of a constantly reinvesting itself and stuff gets reinvested to maintain the duration of that currently exist in the portfolio. It would go into higher level. So this it would be helpful. Here.
And we are and then Jim just yet we disclosed on the Q just sort of sensitivities that might be helpful. For you to write that.
Oh I got it I just.
I'm trying to get a sense of what level of rates and the shift in the middle of the curve would be helpful. But we can always talk about that off on thanks.
Yeah.
Thanks, Jim.
And our next question that comes from the line of Steven <unk> from Wolfe Research. Please go ahead.
Hey, Good morning. This is Michael on the stock has gone on for Stephen.
Following up on on the NII Guide and you gave some detail around where you're deploying some of that excess liquidity from here and I appreciate the color on premium am as well.
Maybe you can just provide some color around how much of that deployment is contemplated on the NII guidance for the securities portfolio.
Sure So I would say.
Sure. So I mean, our securities portfolio is basically flat to a you know flat to last quarter and we are marginally increasing our non HQ L. A within a quarter, but you know when we when I talked about the NII and I our guidance for the full year are still being about.
<unk> 11 to 12 per cent, you know, where where you know the rate curve. It just based on the forward curve of deposits basically remaining pretty much where they are if not coming down a bit.
And MBS prepayments speeds going down so those are the key assumptions.
Thank you for taking my question.
Thanks Steven.
Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Good morning, Todd Good morning, Emily.
Good morning Gerard.
On can you frame out for us when you think about new year's of Bank of New York The number of new products that bank of New York has introduced over the years I think of like custody of non traditional assets.
<unk> is one.
When you think about the opportunities of this digital digitalization in the crypto currencies that you guys are working on that you've already talked about.
How big can this be again, comparing it to other new ventures that you've been involved with over the years at bank of New York, If you could compare that.
Yes.
It's early to tell I mean, if you think of all of the noise of Bitcoin got so it's still only about 10 per cent of gold and gold is a customized assets is not that important frankly right. So rob.
Sure Joe.
It's getting it's getting a lot of hype I do think decentralized finance is coming I do think free tax are gonna be of important players and I do think that we can position ourselves well and work with fin techs.
Uh huh.
To build opportunities I think youre going to see it in payments.
I think youre going to see it you are going to see in custody. It's hard for me to say just how big of an opportunity that is at this point.
It will grow I think the more important thing is that we need to give investors choice.
So if they do want a if they do on a mobilized assets faster, we need to be able to help them to do that if they didn't want to be able to hold some non traditional assets. Just as you went into alternatives and other things we need to be able to help them to do that.
In a way that is is it eliminates a lot of the counterparty risks that currently exist which is high.
And also enables them to get reporting on a consolidated basis and valuations and so forth, which is also critically critically important.
And so there are a number of etfs coming out of that are that are crypto related.
There is you know there's obviously good underlying growth on a very very small base. We think it's we think it's an important part of the full product capability, how big it ultimately comes I think that becomes quite fixed interest.
A little early for me to really speculate.
I see okay. Thank you.
And then second feeling of you guys put Oh go ahead.
No I was just going to add one little thing, which as you know like it as much about retention as it also is about new business are you know our clients are demanding integrated capabilities across digital assets as well as traditional our traditional securities and currency.
Got it thank you.
You guys have always told us and you've talked about it again today the leverage ratio is the binding constraint not the CET. One ratio you pointed out of Emily that it may dip down below five 5%, but.
Still well above the regulatory minimums, we understand that.
What point would the leverage ratio actually come into play where you would have to back away from your buybacks, even though you're of the CET. One ratio then of problem, but one of what at what point do you say.
We've got a slow it down because of the leverage ratio is falling too far down in the as part of that is the leverage ratio really linked to the QE meeting of deposit growth and should we get of tapering them. We should get some relief on your balance sheet growth, which maybe would help the leverage ratio as well.
So yeah, let me let me start earlier than many of you can add if you think about it we've put a buffer on the leverage ratio of four business as usual.
This is infrastructure testing books of business as usual and that buffer of really reflects the potential for a spike in interest of excuse me of a spike in deposits.
Or.
Uh huh of decline due to other comprehensive income based on the mark to market in the securities portfolio.
So frankly.
Gerard we've seen the spikes and dips.
And could it go up a little bit higher yes.
But our view now is.
Part of the reason for the buffer.
It has already taken place.
And as I indicated on one of the earlier questions, we probably when things start to normalize we probably have $50 billion.
Run off in deposits. So that's an enormous amount of enormous impact on that ratio.
And also of the cover some of the OCI does capacity that high so.
Given the fact that that we've already made the spike it makes sense for US to go ahead of dip into of buffers and then when you said you were going to have 5% probably is not an unreasonable thing.
This environment. If we were on a if we were in an environment, where we were a year ago I'm not sure I would say that.
The only thing I might add interest I mean, even if we were you know go we'd like as Todd just said, we'd be comfortable going towards 5%.
And then there are.
If you're still you would need a considerable increase in deposits.
Oh, there you know from from where we are today.
So we've got plenty of revenue.
Very good thank you.
Thank you Ed.
And as a reminder, it is star one if you would like to ask a question.
Our next question comes from the line of Rob of Wildcat from Autonomous Research. Please go ahead.
Yeah.
Good morning, guys.
If we could go back to the crypto currency in digital access fees per second you're clearly taking a few steps forward. There will be announcements you made this quarter is is that because you think we've hit some kind of inflection point in that part of the market or is it just more of a natural evolution of your sales.
Yes.
Yeah.
Rob I would say, it's more of a natural evolution, we're having we're having deep discussions working with clients.
On the institutional side and we're starting to see this toward the end of last year and the beginning of this year.
The institutional side of it was getting more and more interested in.
And digital assets.
So we started working with them for for solutions of course.
A broad part of our of our business.
Yeah.
Okay. Thanks.
Okay, Brian Thank you.
And our final question comes from the line of Brian Klein handle with K BW. Please go ahead.
Yeah. Thanks, two questions here, one on the assets sort of thing here.
Thanks for your update on how the underlying pricing of with 50% for us at levels of 50 per cent for transaction volumes.
Where do you want to take those percentages of a longer term is that the mix that you're out and this would be steady state per gear or are you trying to get more transaction volume basis does it take how price in terms of off here.
So I'm going to take that cash.
Sure.
So I mean, you know.
The 50 50 split of ship and nature of the Beast and the nature of the business. So it's not like we are trying to move that in any direction for pretty much you know, yes. That's just really the visits the dynamics of how we price in asset servicing about about 50% of of the revenue stream is based on asset levels and about.
Per cent or so is based on transaction costs, though.
That's pretty much they all of them.
Okay. The second question I mean, you've looked at issuer services of Treasury services and revenue drivers of growth being impacted by interest rates above and beyond the money market fee waivers is there any way to allocate what part of those revenues are kind of driven by interest rates as we think about asset sensitivity on a go forward basis.
Yeah sure. So both of those businesses are of significant deposit taking businesses or either of either.
Or either were taken out of our back on balance sheet or off balance sheet through of sweeps into into money market funds.
And so the interest rate impact, it's a meaningful contribution to about both of them I don't think we break that we've broken out exactly what the what the split is but it is.
And it's a meaningful contribution to the obviously to the operating margins because there's no expenses associated with the <unk>.
With me.
They are what we've seen in Treasury services is an intentional build in deposits over the past year as we build out those relationships and it's very much related to the activity in the accounts did it because it needs it needs to be a cash and accounts to make to make payments and theres. Some frictional cash the net debt tends to come.
To come with that.
Money market fee waivers of little less important there, but if you think about the corporate trust business, what issuers will do is they'll they'll no.
Put cash of day or two in advance of payments that need to be made on on.
On top of issues that we're aware of where the where the trustee of the paying agent and.
Typically that's what that's value of that where we get a little of that value or we sweep of them for money market funds.
And so that's a meaningful contributor to that business.
That's where they are that we're now seeing the kind of the late stages impact of fee waivers and Thats why the issuer services business was down.
Down sequentially.
At year over year.
But we don't breakout of very specific numbers, but.
Okay.
Okay. Thanks.
Operator go ahead.
With that that does conclude our question and answer session for today I would now like to hand, the call back over to Todd with any additional or closing remarks.
No no. Thanks, Thanks for all of your interest and of course any follow up questions. You may reach out to our Bagdad, our investor Relations team.
Look forward to talking to you all soon take care.
Thank you.
Thank you. This does conclude today's conference and webcast.
A replay of this conference call and webcast will be available on the BN why Mellon Investor Relations website at two o'clock P. M. Eastern standard time today have a great day.
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