Q4 2021 Bank of New York Mellon Corp Earnings Call
[music].
Good morning, and welcome to the 2021 fourth 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 recur or rebroadcast these materials without being white mountains consent I will now turn the call over to Mary Maurice being why Mellon.
Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to our fourth quarter 2021 on a call.
Today, we will reference on financial highlights presentation, which.
It can be found on the Investor Relations page of our website <unk> com.
Todd Gibbons, our Chief Executive Officer will open with his remarks.
Emily Pardon me, our Chief Financial Officer will take you through the earnings presentation.
Following their remarks, there will be a Q&A session.
Before we begin please note that our remarks include forward looking statements and non-GAAP measure.
Information about these statements and non-GAAP measure.
Available in the earnings press release.
Double rooms.
The financial highlights presentation, all available on the Investor Relations page of our website.
Forward looking statements made on this call only as of today January 18, 2022 and will not be updated.
I was hired over the top.
Thanks, Meredith and thank you everyone for joining us this morning.
Emily We will review our fourth quarter results and spend some time on our 2022 outlook in a moment.
But before that I'd like to touch on a few financial performance highlights.
And talk about the progress of the firm has made across a number of dimensions in 2020 one.
Last year was in many regards remarkable to me, how why Mellon and I couldn't be prouder of the resilience dedication and innovative mindset of our management team and our exceptional colleagues around the world.
As I reflected on in the year there were three broad themes that really stood out to me.
One was our outstanding sales performance and improved organic growth.
The second one was the number of new and innovative solutions that we're working on and in many cases have already brought to the market.
Third was our probes and effectiveness and harnessing our unique one being why Mellon culture and the capabilities that we have by delivering more comprehensive and differentiated solutions to our clients.
Now I'll spend a little bit each at each of these points in a moment.
Together with a supportive market backdrop.
Benign credit environment are meaningfully improved organic growth has allowed us to more than offset the stiff headwind that we had from lower interest rates and deliver a solid and improved financial performance in 2021.
Referring to slide two of our financial highlights presentation, we reported EPS of $4.14 for the full year of 2021, that's up 8% year over year.
Revenue of $15 9 billion was up slightly year over year, as 2% organic growth and the benefit of higher market levels, offset lower net interest revenue and higher fee waivers.
Fee revenue was up 4% year over year and about 9%, excluding the impact of money market fee waivers.
And expenses were up 5% year over year, reflecting our investments as well as the quality revenue that we generated.
Our pre tax margin of 29% as well as our return on tangible common equity of 17%, we're roughly in line with the prior year.
And we returned $5 $7 billion of capital or 160% of earnings to our shareholders through common dividends and $4 $6 billion of share repurchases.
As I said earlier 2021 was marked by outstanding sales performance and a meaningful increase in organic growth.
Organic growth was the highest that we've seen in a number of years.
Asset servicing wins were up almost 50% compared to 2020, which has produced a meaningful pipeline of AUC a.
Our average deal size was up because we want larger and more complex businesses.
And just as importantly, our retention rates also continued to improve.
We believe this success is a testament to our service quality and it's also a reflection of our broader capabilities as well as our open architecture framework, which is resonating with our clients and is differentiating us in the marketplace.
I'd also like to call out our ETF business, which has delivered substantial growth and gained market share.
R E T S. AUC, a grew by roughly 30%, which outpaced the broader market and that doesn't yet include our recent win of approximately $350 billion of Blackrock Ishares.
Issuer services delivered meaningful organic growth on the back of the resumption of depositary receipt issuance and dividend activity. Following what had been a COVID-19 related slowdown in 2020.
Our continued strong sales performance.
Version gathered record new assets of about $160 billion and continue to grow active clearinghouse in the mid single digits. Despite the headwind of <unk> a couple of large clients in the second half of the year.
Growth has been notably broad based across broker dealers and registered investment advisors clients have told us numerous times that our ability to bring broker dealer and our Iot solutions. Together is one is a real differentiator and we continue to benefit from our uniquely unconvicted role in the marketplace as we don't compete with our clients.
Treasury services delivered strong organic growth on the back of payment volumes recovering to pre COVID-19 levels and.
And we improved the average price per payment transaction by about 5% as we continue to shift the product mix towards higher value added channels.
Aronson collateral management is now running at a record $5 billion of collateral management balances balanced growth has benefited from our unique role as a primary clearer of U S government Securities and we've also seen continued growth in international balances.
Our markets business has offset the impact of lower volatility and tighter spreads compared to the prior year with strong broad based organic growth across FX and securities lending.
Investment management saw the highest net inflows into long term products since 2017, driven by R. L. D I and fixed income strategies, but also including strong net inflows to our responsible investment funds as well as strengthen our initial suite of index Etfs.
$70 billion of net inflows into cash products were the highest in over a decade.
We optimized our money market fund lineup to ride a more competitive and scalable offering and was our new CIO in place, we're thrilled to see strong flows and improving market share.
And finally, our wealth management business acquired significantly more new clients in 2020 one than in 2020.
And I'm pleased to see how the team is executing against the strategic plan that we put in place a few years ago.
We've continued to gain further traction in the larger faster growing clients segments, and our expanded banking offerings, both on the lending as well as the deposit side is driven a meaningful uptick in the percent of well percentage of wealth management clients, who also bank with us.
The second theme I mentioned earlier was innovation.
And in some cases, it's been outright disruption.
This is probably the area that is most exciting for us.
I cannot recall in my tenure at the company a year in which we launched our rolled out more innovative products and services than we did over the last 12 months.
I'll call out just a few.
Digital assets, while still early days and recognizing that the regulatory landscape in this space is still evolving.
Our investments in building an industry first integrated digital and traditional assets offering are clearly showing positive initial results. Following the launch of our digital assets unit at the beginning of last year.
We solidified our leadership in servicing crypto funds with the announcement of our partnership with grayscale investments over the summer.
We've contracted with almost half of the pending funds in the U S and service most of the cripple crypto funds in Canada.
As I said, it's still early days, but we're excited about the disruptive potential of <unk> as well as smart contracts and the associated opportunities both on the revenue as well as the efficiency side.
In terms of real time payments. This is an area that we embraced early on and we continue to lead with innovative solutions to drive the proliferation of real time payments in the U S.
I remember that we were the first bank to originate a payment on the clearinghouses real time payments network several years ago.
Late last year, we were the first to launch a real time bill pay solution from builders and their customers.
We're pleased by the initial uptake we've already onboard additional clients in the long list of interested prospects continues to grow.
As you know the market for Treasury services is large and it's growing but it's still very fragmented and ripe for disruption. So we're excited about the market leadership coming out of our Treasury services business. It really goes far beyond just real time payments that include examples like being able to leverage the cloud for wire payments and having been the first.
Bank to complete a trade finance deal using sofa.
Third item is the future of collateral is the world's largest global collateral manager, we continued to lead the charge in driving towards global cloud mobility and optimization by connecting distinct platforms, expanding the scope of eligible collateral and implementing new capabilities.
For example, last year, we introduced Chinese bonds as eligible collateral on a global Tri Party platform.
And we were the first bank to add agency mortgage backed securities as collateral on overnight cleared repo transactions.
Another first.
We started offering our clients the ability to accept collateral based on their ESG criteria through our digital platform.
And finally I'd be remiss not to mention the lines, the parsing X, which we introduced last quarter.
Pershing X will design and build innovative solutions for the advisory industry.
Including a leading end to end wealth advisory platform that will help firms and their advisors solve the challenge the challenge of managing multiple disconnected technology and data sets.
Well certainly a multi year project. The team has hit the ground running in this past quarter, we acquired optimal asset management, which is not only an important step in our build out of <unk> X in that it will allow us to offer direct indexing capabilities to our advisory clients within Pershing, but it will also benefit our investment.
Management business as well.
The third and last theme is what we call one being why Mellon.
Now I've always been proud of our collaborative culture here at <unk> Mellon and as you know our broader portfolio of businesses differentiates us from our competitors.
Over the years, we've emphasized the interconnectivity of these businesses and the meaningful operational synergies between many of them.
But we can still do a better job of delivering a whole firm to our clients and so last year, we conducted a thorough review of the opportunities.
Further enhanced our setup cross business collaboration.
<unk> been highlighting some of the most notable cross business client wins, such as of Monday, Lockheed Martin and Oak Hill on our earnings calls over the last couple of quarters.
Our ability to seamlessly deliver a much broader set of capabilities from across our security services are market and well services and investment and wealth management businesses.
<unk> is a unique value proposition for our clients and our intensified cooperation collaboration efforts already driving higher revenues and.
In summary, I'm pleased with the progress we've made over the last 12 months and while we certainly have certainly have more work to do I'm confident that the company is on the right path for sustainably higher organic growth.
As we look to 2022 and beyond we expect double digit earnings per share growth. As we are determined to continue delivering consistent organic growth, which together, what's the current expectation for higher rates should enable us to generate positive operating leverage while at the same time continue investing in that.
Gross inefficiency of our businesses.
That I will turn it over to halfway.
Thank you Todd and good morning, everyone.
Before I review, our financial results and then thank you.
Thank you.
Lastly, we are now turning the corner.
Service.
Thank you.
Okay.
And surety, which.
Jeremy Thank you Mr. Harrison.
And mortgage and wealth.
Thank you ladies Hershey Treasury services.
Alright.
Investing in wealth management.
<unk>.
We made the change.
How do you.
Differentiated.
To better align our reporting with how we already manage.
Could you provide additional granularity.
I will just get better.
Against our strategy.
With that I will turn to page three and our results for the acquirer.
Oh Paris.
Year over year basis.
And Hawaii.
Total revenue for the fourth quarter does that 4%.
Fee revenue also grew 1%.
Excluding the impact.
This reflects the benefit of higher market values and kidney.
Thanks, Brian .
Not on the page our mind.
<unk> 47.
<unk> increased by 14%.
With roughly 60% of the German.
Driven by growth from new and existing business.
40% driven by higher.
Goodbye.
And AUN.
Kelly.
10%, reflecting higher market values.
Maybe.
Money market fee waivers that are just finishing services Inc.
<unk> hundred 43.
An increase of 10 million compared to the prior quarter entirely driven by higher money market fund balances.
No meaningful impact on pretax income.
And that's been the other revenue with $107 million.
And roughly 40 million valuation on a strategic equity.
Alright, thank you.
Can you hear.
And Nelson the corn.
<unk>.
Net interest revenue.
Expenses were up 1%.
Excluding.
Our provision for credit losses was a benefit of 17.
No.
Primarily driven by an improvement in the macro economy.
EPS with a gathering line.
This includes a negative impact on litigation reserve.
7%.
As well.
This information.
With 27%.
In our experiment tangible common equity.
Yes.
For the full year, which John Demeritt earlier.
Sure.
Total revenue grew by 1%, reflecting higher revenue, partially offset by lower net.
<unk> revenue grew by 4% or 9% excluding <unk>.
Other revenue was $338 million.
<unk> been meaningful.
Sure.
Andy.
Our net interest revenue was down 12%.
Expenses were up 5%.
Isabela.
Notable item.
Excluding the impact of notable items nearly half of the increase was driven by higher net incremental investment and the remainder was rapidly right.
Between revenue related expenses.
Thank you.
Okay.
Provision for credit losses was a benefit of 231 million.
EPS of $1 14.
Our pre tax margin of 29% as well as a return on tangible common equity of 17%.
In line with the prior year.
Capital and liquidity.
Our tier one leverage ratio, which is our binding capital constraint.
5%.
Accidently 28 points sequentially.
Finally, Kevin Brian return of $1 5 billion of capital to our shareholders in the quarter, including $1 2 billion of buyback.
Hi, Jeremy.
And we ended the quarter with one ratio of 11, 1% approximately.
Claims compared to the.
Okay.
Finally, our LCR was 109% flat.
Slightly lower than the prior.
Your partner.
Turning to net interest revenue.
LNG trend.
Sure.
I will talk about it.
Sure.
Net interest revenue was 677 million in the fourth player.
Thank you Kristen.
Yes.
Okay.
And by the impact of higher short term rates floating rate securities in our investment portfolio.
Bring deposit and liability.
The pricing.
Higher alone Securities.
Ernie.
Yes.
Average deposit balances increased slightly by 1% sequentially.
In the interest earning assets from last week.
Average loans increased by about 6% with.
Growth, primarily driven by marshman collateralized loans and wealth management and growth in capital call.
We also took place in additional cash Charlie security, resulting any quarter over quarter increase in the overall average investment securities portfolio of cheaters.
Moving on to expenses.
Kevin.
For the quarter with reduction of 1% year over year.
Excluding the impact of notable items expenses were up 6%.
Just over half of which was driven by incremental investment.
And the remainder by higher revenue relief.
Including higher.
Okay.
A few additional details regarding noteworthy quarter over quarter.
Yes.
And with up 3% driven by severance expense.
Thank you.
Thanks Kaki.
And with 11% driven by.
Hey, good evening.
Continue to optimize our real estate footprint.
Okay that makes sense.
Related to your return.
Business development expense increase driven by higher marketing expenses and one GB.
Other expenses with Dan Jim Butler.
Litigation.
Great.
And R&D.
Thank you.
Thanks, Shirley services reported total revenue of $1 8 billion.
Chris.
Randy this is by the middle of that.
What makes up this 5%.
<unk> revenue was up 6% and 10% excluding the impact of fee waivers.
And that's the other revenue benefited from it.
Equity net.
Our net interest revenue was down 3% driven by lower interest rates, partially offset by higher loan.
Uh huh.
And I think Scott the lines of business with our security services and wealth services segment I will focus my comments on the investment services.
You can find in our financial.
And as servicing investment services.
10%.
Excluding the impact of fee waivers investment services fees were up 12.
Primarily driven by higher Ed if I may.
This takes time.
Higher market value.
You bet.
Our strong performance last year came on the back of already healthy sale in 2020.
Further sales momentum in 2021.
Investing in innovation.
Sure.
In issuer services investment services fees were down 3%.
When excluding the impact of fee waivers investment services fees were up.
One person.
L P Browne and depositary receipt, largely offset by the impact of the previously disclosed key public sector. Many inquiries.
FX revenue and your Securities services segment increased by 6%.
As solid volume growth from existing and new.
More than offset the impact of lower volatility.
Yes, I'm from market and well servicing.
Right.
Marcelo services reported total revenue of $1 2 billion up 1%, primarily driven by higher net interest revenue.
Sure.
<unk> revenue was up 1%.
Or is that excluding any impact.
Yes.
Net interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates.
Encouraging investment services fees were down 2%.
However, excluding the impact of fee waivers investment services.
3%.
<unk> have declined.
Later in the year more than offset by growth in the back of higher market values.
Anthony This is Brian .
And this has continued to see good underlying growth.
Net new assets in the quarter were 69 billion in clearing accounts were up 5% year.
Over here.
In Treasury services investment services fees were up 4%.
Excluding the impact of fee waivers.
Servicing fees are at.
8% Okay.
Were really driven.
Okay.
In clearance and collateral management and investment services fees were up 7%.
Reflecting broad based growth on the back of higher Tri Party collateral management balances.
Your line.
Internationally.
Turning to investment and wealth management.
And that's been in wealth management or the total revenue of 1 billion up 3%.
Fee revenue was up 4% and 9% excluding the impact of fee waivers.
Net interest revenue.
On the back of higher loan balances, partially offset by lower interest rates.
Assets under management.
Up 10% year over year, reflecting higher market values.
Full year net inflows into both long term and typically LTI.
And cash.
For the quarter, we saw 31 billion of net inflows into cash and $4 billion and long term.
Investment management revenue was down 1%.
However, excluding the impact of fee waivers revenue with us.
Primarily driven by higher market values and full year net inflows are offset by lower seed capital gains.
Wealth management revenue.
<unk> percent driven by higher market only.
This is down the fourth quarter of the prior year.
Net interest revenue on the back of healthy loan growth and we continue to steepen.
Thank you.
Assets continue to grow.
And with 321 billion, a 12% year on year.
Sure.
Page 11 shows the results of the other segments.
I will close but our outlook for 2022 unchanged.
I'll start with a reminder, that outlook at eight and occurrence.
With that in mind, we currently expect NII to increase by approximately 10% in <unk>.
Primarily driven by higher rates and balance sheet day Marcia.
Marcia.
<unk> per dollar.
Sure.
Alright, Thanks station for continued organic growth.
Waivers, we built in total defense.
7% in 2020.
Washington.
We expect roughly 4%.
7% increase to be driven by the recovery of money market fee waivers Ethan alright.
And assuming some runoff in money market fund balances from current level ladies.
Ladies that's roughly 2% to be driven by organic growth.
Approximately 1% by market driven factors.
And as a reminder, we generally expect a quarterly run rate of around $60 million or in investment and other revenue.
This line can be lumpy G&P capital gain should each strategic equity investments in other companies.
For expenses ex notable items.
That's an increase of at least.
75% year over year.
Roughly 60% of the increase is expected to be driven by higher revenue related expenses, which include higher distribution and service.
Ian.
Labor.
And the impact of inflationary pressures will remain.
Driven by investment roughly half of which is Jeff Daniels foundation of incremental investment.
And last year.
Specific to the first quarter I would like to remind you that staff expenses.
Elevated due to long term incentive compensation expense for retirement eligible employees.
Sure.
As a result.
First quarter expenses to be up.
And at least 6% year over year.
With regards to capital management, we expect to return roughly 100% of earnings.
Subject to changes in Ci and deposit balances.
And for the sake of completeness, we continue to expect part of effective tax rate for the year to be approximately 19%.
Donna.
As Todd alluded to earlier.
Expected January positive operating leverage on the back of continued organic growth and higher rate translating to higher and higher and lower fee waivers.
Are you going to invest in the future growth.
<unk> of our business.
With that operator can you. Please open the line for questions.
Yes, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, we ask that you. Please limit yourself to one question and one related follow up question.
Our first question comes from the line of Glenn Schorr with Evercore ISI.
Hi, Thank you very much.
I Wonder if you could unpack the net interest revenue.
On that outlook.
Around 10%, maybe just trajectory wise.
You're assuming the forward curve.
Just talk about the timing as that comes in and you can combine that with <unk>.
Quickly the fee waiver recapture happened along that Paul.
Sure.
Sure.
Good morning, Glenn and good a happy new year, I'm actually really glad you kicked off with Ni RVP is the first time in a long time, we've got something positive.
So.
As we mentioned is expected to be up about 10%.
And year on year.
To give you color.
Pacific too.
The questions you asked.
Yes, we just use the forward curve and as you know it at the moment anticipates that three rate hikes through 25 basis point rate hikes. The first thing in March although of course, there is talk about the first one being a bit more than we can we can talk about the sensitivity there.
Deposit betas, obviously come back into play the expectation in our outlook is that betas will largely retrace what we saw in the last cycle, there could be a little bit higher.
Just given the change in our deposit mix, though again, a core example, treasury services.
Deposit base there is about twice as big as it was.
In 2015, and obviously that business has a higher betas.
We expect our securities portfolio to be roughly flat.
Most of the reduction on the asset side will be coming from cash held at central banks and lower yielding HLA.
We do continue to be cautious on duration in.
In fact over the last six weeks, we've brought duration in a bit.
We actually moved some HLA into HTM to preserve capital.
Also we are expecting some healthy loan growth and for premium amortization to reduce a bit.
The one just just Glenn one thing I do want to just point out is that for the first quarter just given that the first rate hike is not until March also it's just worth mentioning we've already seen deposits come down a bit from the fourth quarter average, where they were really at elevated levels due to the kind of market dynamics.
So you won't see much of that benefit sequentially.
Q1.
Okay.
Okay, not a lot there thank you.
And maybe just one other.
Sure.
I think I heard you say in the prepared.
2% organic growth in <unk>.
<unk> two.
Which would be in line with Taiwan, obviously better than on the <unk>.
So I guess the question is can you.
Welcome.
The investment that Youre, making.
And the outlook.
I'm just curious how you can actualize what.
They're related to markets that have already gone up business that has already been won.
We implemented we're seeing follow through and revenues related to new investments.
Thank you you may begin.
Thanks.
Yes.
So maybe maybe I'll take that one.
So what in that one.
But a couple of things when I look at collateral management, that's one where we have been investing for quite a while.
And we invest in what we call the future of collateral, which was really making collateral interoperable around the world, which we thought would lead to growth in our.
Our especially in our international assets, which is exactly what it has done.
Also benefiting from some of those capabilities is unclear.
Responsibility now for derivative players to two.
To have collateral against their Uncleared margins, we have now we're now going through phase six of that so we are picking up significant.
Assets as a result of that.
And we've also added certain innovations to our capabilities for example.
The ability to have ESG criteria established in our repo and what youll accept on repo.
Something that has shown some pretty interesting growth. So that's something where we have been gaining and it's shown up in the numbers and we continue to expect two to.
To continue.
To gain I mean, one of the other interesting things that we've brought up is what we're doing in treasury services and payments business and I think we've reinvigorated that business with some meaningful some meaningful investment.
We were the first as you know to do an RTP real time payments through this New York Clearinghouse that was done essentially to test it but now we were actually putting practical product in place So we announced.
Late last year.
Our request for payment service that we're providing to utilities that.
That operation that we have multiple players on that on that platform.
We see opportunity whether its brokerage firms insurance companies corporates or white labeling it for mid sized banks. There. So I think some of the innovation that we're seeing in the Treasury services, we have not seen that drop to the bottom line, yet we picked up with cap capture a little bit of market share in a little bit of a better price itself coming coming into this.
We've talked a fair amount about Pershing X, which is a significant multi year investment that we're making in our Pershing platform specifically on the advisors to simplify and make the advisory function much more productive for our clients. We made an acquisition of a direct indexing firm in the quarter.
We decided to buy rather than build for speed to the market.
Group is going to be able to tailor portfolios.
Portfolios provide tax optimization down to the individual level.
That hasnt started that hasn't started yet so that will start probably by the end of this year.
It can be continuing to invest so we see that not as a 2022 event by the 2023 and 2024.
Nice growth in our wealth management business and here, we've invested in some of the technology and.
And we won some recognition for the quality of some of the advice path and kind of the wealth management tools that we put in place.
Sure.
Clients there on the asset servicing side, we've talked about the digital assets unit that we've put in place. It is garnering assets quite rapidly as we've gotten.
Most of the pending ETF.
Hi.
Crypto assets that are coming in the U S and just in a very high percentage offshore, especially in Canada.
<unk> also got the Redeveloped and ESG App, what we're starting to see some revenues flow on that and we're investing just in the basics of custody. Because we think we can catch we can capture more of the developing markets custody. So it's kind of a mix Scott still some on the come but some of it embedded in our run rate today.
Thank you. Thank you.
We will go next to Brian Bedell with Deutsche Bank.
Hi, good morning, everyone and happy new year.
If I can circle.
First off on fee revenue with assumptions really just start on the fee waivers and just the trajectory of that Emily.
Just to clarify I think you said three rate hikes and the forward curve.
<unk> was as of December 31st not sure if the forward curve.
Yeah, right like advancement of the curve and expectations, so getting a little bit more.
Yeah were aggressive in the market for fed hikes impacts that so maybe you could give me if you could just walk through the seat.
Money market fee waiver trajectory through the year and really circling back to the portion that gets released after the first half and then maybe after the second hike and then just on the equity market assumption equity market return assumptions within that markets are down 1% market impact.
Sure. So a bunch there so let me take the waiver outlook first.
Remember waivers are a function of both balances also and and rates.
And you are correct.
Just looking at the full in our guidance is baked into the forward curve with three rate hikes.
Have pointed out in the past that with the first 25 basis point hike, we would expect to recoup about 50% of the waivers.
Having said that we do also expect that balances to begin to decline a bit, especially by call. It the third or fourth third or fourth hike.
So we do see.
Some runoff in.
Imbalances.
So when you put it all together.
We would expect a money market fund waivers to be a little less than half of what they actually were in 2021 .
Having said that it's very important to note that as waivers dissipate. We also do see a rise in distribution expense.
And that's been that's been captured in the and the expense outlook.
To give you an idea.
Sorry.
Okay I'll take the answer this yes to answer the second question, which was more about sensitivity just I think.
Something that would probably be helpful.
If we size the impact of both waivers and frankly.
If we had say a 50 basis point hike in March versus a 25 basis point hike.
That would be about $100 million more in and recouping waivers than what's in our guidance and it'd probably be about $50 million more in Nio, our select totally off the March hike, what was $50 25 would be about another $150 million more in terms of revenues.
Revenues versus what I've I've.
Got it.
And then I think Youre a little.
The equity market return assumptions within that 1% of fee contribution from sort of markets.
Sure.
So just just to step back total.
Yes.
Total fee revenue up 7%, roughly 4% driven by the reduction of waivers roughly 2% organic growth and 1% from market driven factors.
Market appreciation is is kind of a little over 2%.
But it is offset by lower fund fees.
And some currency headwinds just based on the average for FX rates over the course of 'twenty one.
Got it got it and then if I could just circle back on the NII, our deposit run off assumptions in terms of the magnitude.
That you're expecting and then also just on.
The assumptions for global.
Short term rates, I guess, particularly in the U K and how that might influence the and I our assumption.
Sure So alton.
Ultimately from a deposit perspective, we don't really expect much runoff in deposits from here until kind of again, you know third or fourth rate hike or the fed starts to actually actually tightened.
So.
It's.
Ultimately.
Balances I mentioned have already come down a bit from average fourth quarter level and in terms of.
They are particular, just speaking specifically about betas, which is what I think you're probably getting at we do think there'll be largely in line with the past and that like I said before maybe a little bit higher Treasury services deposit balances are higher.
Also just to always keep in mind that our deposit base is largely institutional are also in the 15 16 period, we were trying to come into compliance with SLR. So we were pushing from deposits off balance sheet.
But all of that is.
Is it baked into the Nia our guide that we gave.
Okay, and then just the global like like the bank of England.
Assumptions for it's all it's all it's all of the forward curve. It's all the same thing same thing okay. Great. Okay. Thank you so much.
We'll go next to Betsy Gracie with Morgan Stanley .
Hi, good morning.
Hi, Betsy.
I wanted to follow up on that discussion, we just had and ask about how youre thinking about the impact of Q T quantitative tightening on deposits with the fed expected to shrink the balance sheet.
Starting as early as March.
Okay.
Yes, yes. Thanks, Betsy this is Todd I'll take I'll take this one.
We.
Right now it depends on when they actually start to actually shrink the balance sheet.
The guidance that we've heard is probably not an event until the second half and so that's the estimates that we have put in to both.
The betas and the size of the balance sheet, whether it whether it would be money market balances because it will certainly impact them or it is.
Deposit balances.
But assuming that they don't start really letting stuff run off until the second half of the year, we don't see an enormous drawdown in the combination of money market balances because of the fed's balance sheet, just isn't going to contracted that much in 2022, we might see that a little more rapidly in 2023, unless they were to do something even.
More aggressive like like selling so well.
We took the basic assumptions market assumptions that we've seen and kind of if.
Thats imply that all of the guidance that Emily just gave you which is a little bit of one off balance sheet of the fed balance sheet in the second half, which starts to impact both deposits and money market balances as well.
Okay. So you're basically looking for the fed to stop buying but not actively shrank.
I don't think they will actively our estimate is that they wont actively sell but actively led maturities run off got it yes. Okay.
Alright.
And then the follow up question I had on the expense discussion just thinking about how to.
Model expense ratios by the new segments that you've got you know obviously the new segments are really helpful. Really appreciate you breaking out the wealth piece can you give us some sense as to how we should think about modeling that expense ratio in the various segments as we go through 'twenty two.
Emily you want to take that I want to start with that.
Sure.
Sure. So I mean, I was just taking a step back versus just the overall expenses.
Five 5% and just to be clear about 30% or 170 basis points are really revenue related.
I think volume related compensation as well as as I mentioned the distribution expenses that we will see an uptick in for money market funds that the wafers come back or as we get the dissipation I should say of of waivers.
About.
Another 30% or 170 basis points again as if its merits the normalization of business expenses and some also expenses just related to occupancy as we return to the office and baked in there too is inflation, which is not insignificant.
And then the remaining.
40% or 200% is is that is due to higher investment spend but.
Just to be clear half of that is annualized.
Annualized investments that we have made in.
In the second half of this year as you all know we had an uptick up investments in the second half of this year.
I would think of it as well.
We're not breaking it down to too much.
Too much I would say that it's.
A bit higher in <unk>.
And ultimately in market and and and wealth services given some of the investments that we're making especially in encouraging access as Todd alluded to but we are making investments across the firm. So I would say a bit a bit higher there and but the rest kind of in or around the average.
Got it okay, so not that much differential outside of the call out on person.
Mhm, yes, but I do think that I do think let's see we will see the operating margins and our security servicing business. Those are depressed right now and I do think youll see those expand both.
The nation of greater efficiency and revenue mix.
Okay.
Due to high base is also a little higher there.
Yes.
Yes, exactly yes.
Okay.
We do I mean, just further to Todd's point.
Security services the margins there are depressed.
And a little over 20, 21%.
For the year, and we do expect and I talked about this at the last conference I would that would you expect that to.
Grow in excess of 30 30 plus percent over the medium term and as Todd alluded to part of that is is certainly profitable growth and of course efficiency.
Part of that is obviously just more normalized rate.
Okay. Thanks, so much time on Italy I appreciate it.
Thanks.
We will go next to Jim Mitchell with Seaport Global security.
Hey, good morning, maybe just a follow up on the expense question. I guess this is about the second year in a row close to 6% growth.
Just how do you and I understand all the inflationary and other pieces moving pieces, but how do we think about longer term, if you're if you're doing 2% organic growth hopefully doing better is the notion that you can get expense growth down to similar to the organic growth and then sort of market other things drive sort of operating leverage or how do.
We think about the long term trajectory of <unk>.
Expenses relative to revenues.
Sure. So I think youre getting at operating leverage and we're always incredibly focused obviously on operating leverage and delivering positive operating leverage next year.
We are we are expecting just based on my guidance to grow revenues more than we're growing expenses. So that's good.
And when we think about the future and just the expense spend.
We do see that ultimately moderating in 2023 and 2024.
So you'll see that coming down a bit in 2023, and 2024 and of course, we have a well continue to see an uptick in in and rates and higher you know and I are recouped, probably the remainder of our waivers that plus the additional organic growth that we also will be delivering we feel pretty confident that well.
We'll be delivering even higher operating leverage 'twenty 'twenty three 'twenty 'twenty four.
We are delivering positive operating leverage in 'twenty two.
Sure.
Sure.
And let me add something to that we're doing something that's a bit unusual for us for example, with Pershing X, we're making a very significant investment here, that's probably got a two year payback.
We've also been.
Investing in resiliency and I think we're getting we're starting to get in front of that.
And.
The inflationary pressures hopefully this is just a onetime kind of step up.
But.
Those will have to say the market will have to play itself out. So we do think that where we're spending a little faster than we would in a more normal environment.
And we do expect that we will get more leverage out of our business model is we just continue to make it more scalable.
Right. Okay. That's all very helpful and just as a follow up.
If you're expecting deposits and the balance sheet to shrink as the fed.
Raises rates, what why the need to issue preferred just flexibility I'm just trying to understand the the preferred issuance.
Sure Yeah, just more more flexibility. We were also just opportunistic in terms of.
And in terms of rates and Ulta.
<unk> you know you have to prepare for if rates rise there, obviously will be a corresponding impact on OCI. So all of those factors.
Okay. Thanks.
We'll go next to Mike Mayo with Wells Fargo Securities.
Reflecting our strategic relevance to our clients.
Hi can you hear me okay.
Yes, I'm glad that there was some background noise.
Okay.
Is that better.
Yes.
Okay.
I'm going to just give what I think I heard you say then that you correctly.
What I think I heard you say is that.
This year as an investing year.
You're guiding for 2% organic fee growth of 3% with markets versus expense growth of five 5%. So it looks like youre spending about half of the benefits of the money market fee waivers to invest I'm, not saying a cause and effect, but that's the way. The math works you said 40% of that.
The increase in spending relates to accelerated investments and then after this investing year 2023, and 2024 that moderates and then we should see more of those.
Those benefits.
So am I hearing that correctly and I am I am I also interpreting that you're you're taking a portion of these benefits to reinvest back in the business, especially in 2022.
Okay, Yeah, I'll take it I'll take a stab at that I think what you're asking very specifically is what portion of the uptick.
From rates, both in NAR and recouping waivers are we kind of reinvesting I mean, I think that's what you're getting at.
I mean, just to be clear and you can do the math I gave you the math that.
The higher rate environment.
Both from a <unk> perspective, and from a labor perspective is.
A bit over call it 700 million.
And in in revenues for the year with this forward curve et cetera.
The way I think about the expenses and what were kind of reinvesting all of that and based upon the expense Guide I gave you can also do the math that call it $100 million to $150 million of the expense growth is related to incremental investments net of efficiencies.
So call it 20% or so of that is being reinvested.
Okay.
I guess.
I guess I'm just trying to reconcile when you said, 2% organic fee growth with five 5% expense growth.
Some of that is just for factors outside of investing as you said inflation occupancy merit, yes.
Revenue related so it's just the cost of doing business. The other question is why Wouldnt the NII guide the higher <unk>.
Living that the securities portfolio will remain flattish.
Okay.
Hum.
I mean ultimately there's many factors that go into many factors that go into our NII guidance. So it's a it's a mix of I suppose part probably the main reason is a deposit coming off a bit.
And that would probably be the largest the largest reason.
And arguably conservative.
Mike We do anticipate contraction of the balance sheet.
So it is going to come from more short term cash.
Thats paying a little bit a little bit lower yields.
I think your follow up questions are we being conservative we're trying to reflect what exactly the market is indicating to forward curves.
We're not in the guidance that we're giving you is it speculation.
It's only speculation in that sense, it's the best estimate for betas.
For what's going to happen to the yield curve using the forward yield curve as the guidance for it.
Yeah last one just.
The contraction of the balance sheet like by how much and there's not much history for this right going through this phase of.
The rate situation. So are you thinking you know what.
<unk>.
Fifth or just roughly.
In broad terms, how much contraction of the balance sheet and why.
And we'll take our.
Sure. So you don't take it go ahead anyway, I can take that yeah.
Yeah.
Well, let's be clear, we did see I put a reminder, we did see balances already come down from fourth quarter averages. We don't really attribute that to that kind of run off obviously from rate that's right rather than its more about just elevated levels and market dynamics in the fourth quarter.
And then from here the way I kind of think about it is we probably won't see much more run off until the second half partly because like I said, it's really after the fed really hikes a few times.
And I'd say kind of single single digit.
Reduction.
Okay. Thank you.
In this in this year, yeah right alright.
Great. Thank you.
Thanks, Mike.
We'll go next to Gerard Cassidy with RBC.
Good morning, Doug Good morning, Emily.
Good morning, Gerard good morning.
I didn't come back to something you said in your prepared remarks that your new business wins I think you said are up 50% from 2019.
Is that it seems like a very strong number.
That compared to a prior two years from 2016 to 2019, maybe in the second.
What what was the main drivers was it better products better pricing. Your people are just hitting it harder and can you give us some color on what drove that.
Wrong number.
Sure. So we had run for a couple of years there.
We were we were literally running negative organic growth.
And so maybe four years ago.
I would say some of the service levels were up to up to par.
And we turned that around so we made a very significant investment in the quality of the service that we're delivering.
We did make some we did provide some innovation.
Around.
R.
Our full bundle what we can deliver some of the some of the connectivity that we made to some of the <unk> providers, our data and analytics capability.
And most importantly, the quality of our service in the asset servicing space and that became noticeable and.
Both the combination of investing in technology.
The quality of service that we delivered and we started picking up some market share.
And so I would say that was that was the primary driver.
And it's been a it's been a mantra here.
In fact that Emily was back the asset servicing side.
She did a great job of putting together real analytics to support it.
I understand exactly what was going on with our clients and adjust accordingly, So I think it's a combination of the two clients are going to be with you. They expect that youre going to be investing for the long term.
Committed to it and we've demonstrated that and number two you've got to provide you've got to do the basics.
Potato stuff with them as well.
Very good and then as a follow up.
You guys gave obviously the outlook for 2022, which is much appreciated in that outlook, you talked about the share repurchase or the total payout ratio of approximating 100%.
Subject to changes in the Aoc I or maybe deposit balances.
On the OCI.
Sure correctly I may have not seen it correctly, but it looked like it was a negative $2 2 billion at the end of the fourth quarter can you share with us what drives that number and how it could affect the total payout ratio as the year progresses.
Yes sure.
Yes go ahead.
Yes.
Well I guess.
Thinking about just the payout and ml, we can talk about Aoc I'm not sure I recognized the numbers that you're talking about the 2 billion but.
In any event.
The hour we were fortunate obviously this this year or 2021 I should say to be able to pay out 160%. Obviously helped by the fact that we had.
We had excess capital limited by a lot of what we could do in 2020 in the first quarter of 2021.
The guidance that we're going to pay out around 100% of earnings is.
No it is.
Baked into that our Aoc I, you know our assumptions et cetera. So it's all there.
The.
Basically our capacity and the pace of the buyback is a.
Got it depends certainly on.
Future earnings the economic outlook the size of the deposit base in any given quarter and what we're expecting and you're right the trajectory of OCI.
But all of that is baked in to the guidance and the thing that you know frankly, that's nice is that for.
These days in terms of capital management, we're now under the SCB framework. So we certainly can be much more dynamic and flexible.
And just on the OCI Emily would sure what rate what part of the yield curve has the biggest effect on your a OCI. The short end of the long in the middle.
The shortened.
Okay, Great I appreciate it thank you.
We'll go next to Ken Houston with Jefferies.
Alright, thanks, good morning.
I just wanted to follow up on balance sheet positioning to Gerard question. So you're at the lower end of that tier one leverage ratio zone, five and a half to six that you've talked about and I. Just I just wanted understand a little bit deeper that flexibility with regards to changes in OCI versus perhaps.
Are you solving for five and a half at this point, but how would you look at like where do you want to be in that range and to your point about FCB.
You know how important does maintaining the buyback be versus just staying in.
One of our capital thanks.
Sure. So I can I can take that and Todd you can add.
So tier one leverage.
This quarter as you guys can see on the fourth quarter was five 5%.
You really do the math, but you all have the all of the factors to be able to do it yourself. It was 546%. So we did dip into the buffer just a bit.
We always talked about the fact that that would be entirely appropriate given the excess liquidity in the system and the growth in our deposit so going forward, we were going to be managing to five 5%.
And if you know what we're optimizing around a lot of different things.
Including OCI, so baked into our guidance is is the.
Certainly our expectation that we'll be above five 5%.
Okay. So we consider all of those factors, perhaps OCI balance sheet size and you kind of sit somewhere in that zone.
You got it.
Okay, Alright, and then second question just on the related point.
If I back out the premium amortization it looks like the securities portfolio yield is kind of getting to a flat point and it looks like the mid 100 <unk> can you talk about just what you're finding in terms of front book versus back book and again does that OCI risk changed your view of how you are investing in the securities portfolio from here. Thanks again, Mike.
Okay. So a couple of different things there so look the way I talk.
Talking about reinvestment yields we don't really disclose from book first that back book, what I would say is that.
It's probably answers a bit of Mike Mikes question earlier, which I hadn't thought about but reinvestment yields will still continue to be a bit of a headwind over the course of 2022. So.
The yield that we're investing in now it's still lower than ultimately the yield of maturity securities that are maturing I think we would expect that to probably be a lot better matched.
Or equally matched almost by by the fourth quarter, it's really in the fourth quarter, so that will still be a headwind and.
And look where we're thinking about and certainly paying.
Paying attention to OCI.
Let's see I and as I mentioned in my in my early remarks, you know we did even move.
It's cool to HTM exactly for that reason to preserve capital.
Understood. Okay. Thank you.
We'll go next to Brennan Hawken with UBS.
Okay.
Good morning, Thank you for taking my questions.
I had a follow up so Emily I think it seems like from your comments when you backed into the components of expense growth.
Like roughly one percentage point of the five five is from the distribution side of the fee waivers.
Number one if you could confirm that that's correct and then number two if we it means if we adjust for waivers because we all got very much used to.
Adjusting for waivers from last year when when you guys were talking about the revenue X waivers and then.
Wanting to drive more investment it looks like ex waivers, where we're looking at negative operating leverage here, because because you back out the 4%.
Benefit from fee revenue.
You've got that gets you to a 3% fee revenue growth X waivers if I'm right on the 1% you're at four and a half on expenses X waivers and so.
They've fee operating leverage.
Given given that last year, we were adjusting for the waivers backing them out to consider where the few fee operating leverage wise why not maintain that same discipline now.
And what's what's the major issue with holding back that out that fee operating leverage thanks.
Sure So I'll I'll.
Take that and Todd if you want to add so.
You're thinking about the youre thinking about the expense.
The distribution expect largely in the right way.
And look.
Your question about operating leverage is that good.
Our level of investment is not planned by nor dictated by you know operating leverage it's based upon the investments that we see in the future growth of the company.
In terms of what you call fee operating leverage yes, you're right in 2022, it will be it will be negative.
But we're not going to be apologetic about investing in the future of the company and we've continued to do that over the course of the cycle.
To add to that.
There we go alright. Thank.
Thank you.
Thanks for that color and then.
The assumptions around the single digit decline in deposits.
Our excess deposits still are 10% to 15%.
And when when we start to cross the you know.
75 basis point, you know that's two three hikes, where you start to see an acceleration of the deposit run off.
Wouldn't that 10% to 15% of excess deposits burn off pretty quickly.
Or do you have a different view or have the excess deposit levels changed you know maybe if you could add a little color around some of those assumptions to help us square that circle would be helpful.
Sure. So I think your estimate of excess deposits is probably pretty close to what we're currently thinking.
But you got to remember underneath that there is some organic growth as well. So if you take the 10 to 15, and then youre growing 2% to 4% organically.
And then you look at look to see the fed really contracting their balance sheet very aggressively until later and later in this year, we don't see a huge impact on this year.
It's really going to depend around the.
The beta so you might see money bouncing around based on what.
We and others are willing to actually actually pay for it. So that's what's factored into it but ultimately I think that was excess deposits will come down with mitigated somewhat by just just normal growth.
Okay got it thanks for taking my questions.
We'll go next to Alex Blaustein with Goldman Sachs.
Hey, good morning, everybody just a couple of questions at this point.
I heard the discussion around deposit betas, perhaps being slightly higher this time around because girlfriends.
Treasury services side of the business is there a way you can flush it out a little bit more just to give us a sense of what you expect for deposit betas in this cycle versus the prior cycle.
Okay.
Yeah.
I am not going to break it out by line of business, but.
And the last in the last cycle I think the first 25.
With the first 25 basis point hike. It was about betas were about 25% and in this we're kind of expecting closer to like.
I guess, the 35 to Fortyish percent and Thats overall on average across all of our businesses.
Got it okay, that's probably explain some of the some of the countless people people are asking a lot of it I actually like that yes.
My follow up just around capital management.
Again, thanks for the color around OCI.
Sorry, if I missed this dividend versus buyback expectation. So as you think forward within a 100% payout ratio. What are you guys thinking in terms of dividend growth versus the buyback and the preference there.
Yes.
Yeah I'll go ahead.
We've been pretty consistent in targeting dividends around around sorry.
Alex So I think probably you will see the adjustment come in the form of in the form of the buyback.
If there is one got it.
Got it okay. Thanks very much.
We'll go next to <unk>.
One more question.
Our final question comes from the line of Steven <unk> with Wolfe Research.
Hi, Thanks for squeezing me in here I, just want I know you spoke about deposit beta assumptions underpinning. The guidance you gave some color on deposit run off.
Hoping you could just provide some color specifically on what you're assuming in terms of noninterest bearing deposit declines and some deposit remixing over the course of the year.
Sure so.
When we think about niv, if if if you will.
Noninterest bearing deposits, we probably think we still have anywhere you know well actually sorry.
When you think about it and it's actually disclosed so actually I don't I can I can talk about your numbers I think net interest deposits or are close to nine.
90, 90, or so billion, what youll see as deposits and U S rate hike, what generally will happen is that they will somewhat some will roll off course, sure, but others will actually just kind.
Kind of migrate into interest bearing deposit so all of that is baked into our guidance.
And do you have any specific assumption you can provide just in terms of the absolute level of contraction you are contemplating.
What we've seen.
Color there.
Yes.
What we've seen historically through these cycles as we're operating somewhere around 30% of our total balance is noninterest bearing.
And it's a little bit tricky to pick up because of the U S versus non U S. But that is that's definitely very high because of the level of interest rates, we would expect that to dropped into the low 20, something like that.
Alright, that's helpful color and then just for my follow up.
I might be jumping the gun here, but I wanted to see if you guys have done any preliminary work our analysis around Boswell four and how that might impact minimal capital requirements. I know you guys are constrained by leverage today on.
There's some speculation that under the new capital regime, the inclusion of operational risk and standardized in particular, just given that such a big piece of your overall <unk> today.
Could have a meaningful impact on overall capital requirements. I know you don't have the proposal from the fed, but even any preliminary thoughts around how you're handicapping that potential risk would be really helpful.
Sure.
We're obviously very involved with the conversation with with regulators and Youre correct that the.
The inclusion of operating risks will be a bit of a headwind in terms of capital, but there are other other factors that are coming off.
So net net we think it's going to be relatively.
What will be relatively neutral.
Okay.
That's great. Thanks, so much for taking my questions.
Thank you Steven.
And 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.
Yes.
Nothing to add thank you very much for your interest in the firm and you can follow up the various in the team. Afterwards, if there are any further questions. Thank you very much and good day.
Thank you.
Thank you. This concludes today's conference call and webcast a replay of this conference call and webcast will be available on the <unk> Mellon Investor Relations website at two P. M. Eastern standard time today have a good day.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Yes.
[music].