Q4 2021 State Street Corp Earnings Call

January 19, 2022

Yeah.

Good morning, and welcome to State Street Corporation's fourth quarter and full year 2021 earnings conference call and webcast. Today's discussion is being broadcast live on State Street's website at investors thought StateStreet.com.

This conference call is also being recorded for replay.

State Street's conference call is copyrighted and all rights are reserved.

This call may not be recorded or rebroadcast.

For rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation.

The only authorized broadcast of this call will be housed on the State Street website.

Now I would like to introduce Ilene [inaudible] Bieler, global head of Investor Relations at State Street.

Good morning, and thank you all for joining us on our call today, our CEO Ron [inaudible] will speak first then Eric Aboaf, our CFO will take you through our fourth quarter and full year 2021 earnings slide presentation, which is available for download in the Investor Relations section of our web site investors.statestreet.com afterwards, we'll be happy to take questions.

During the Q&A. Please limit yourself to two questions and then re queue. Before we get started I would like to remind you that today's presentation will include results presented on a basis that excludes or adjust one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slides presentation.

Patients.

In addition, today's presentation will contain forward looking statements. Actual results may differ materially from those statements due variety of important factors such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K.

Forward looking statements speak only as of today and we disclaim any obligation to update them, even if our views change. Now let me turn it over to Ron.

Thank you Eileen and good morning, everyone. Earlier today, we released our fourth quarter and full year 2021 financial results. Before I review our results, I would like to take a moment to acknowledge the dedication and strong performance of State Street employees during the past year.

These team members remains central to the continued successful execution of our strategy as we hope to create better outcomes for the world's investors.

Together, we accomplished a great deal in 2021, including higher fee and total revenue generation, successful execution against both sales effectiveness and client retention goals that is driving growth in business momentum as well as announcing the proposed acquisition of Brown Brothers Harriman investors.

All of this would not have been possible without our employees hard work skill and commitment.

Slide three of our presentation highlights the progress we made during 2021 with both of our business segments performing strongly as we advance towards achieving our medium term financial targets.

Within the investment servicing business, our enhanced core strategy combined with our strategic pivot to an enterprise outsource solutions provider across the front, middle and back office manifested itself and stronger business momentum and revenue growth in 2021, which you can see along the top of the slide.

As we successfully diversify and broaden our wins by reaching the client segment, we achieved record AUCA servicing wins of $3.5 trillion in 2021 and continue to deploy our enterprise outsourcing capabilities underpinned by our integrated front to back Alpha platform. We announced 9 additional alpha wins in 2021.

With 10 Alpha clients now live at year end.

We also continued to enhance our product capabilities in 2021 launching alpha for private markets as well as our new State Street Digital Division.

At Global Advisors, we executed well against our long term strategy, which contributed to a number of records for that business in 2021, including revenues, assets under management in ETF inflows.

Importantly, Global advisors full full year pre tax margin expanded by over six percentage points in 2021 to a record 32% deepening the value of our investment management franchise to State Street's results.

Our Spider business performed particularly well in 2021, gaining US ETF flow market share, including low cost inactive in addition to the record inflows I just mentioned.

If I look back at 2021, I am particularly pleased with our client impact. Improvement in our sales effectiveness and heightened focused on client satisfaction service quality and retention across our businesses together with a favorable equity market backdrop helped to drive a stronger revenue performance.

Notably, full year servicing and management fees each reached our highest level on record in 2021 with total fee revenue increasing by 5% year on year and exceeding $10 billion for the first time.

While we delivered a strong revenue performance in 2021, expense management remains a key focus for us with companywide productivity and engineering efforts achieving approximately $330 million of gross expense savings.

Because of our strong revenue and sales performance in 2021, and the healthy pipeline in front of us. These efficiency savings allowed us to fund investments in our talent technology and business in the fourth quarter to drive future growth.

Even with this increased investment total expenses were well contained relative to the revenue growth.

Helping to drive a significant improvement in a number of key financial metrics that you can see on the bottom of the slide.

Despite record low interest rates and excluding notable items, we delivered meaningful full year pretax margin expansion positive fee and total operating leverage and EPS growth in 2021, and we expect to do this again in 2022.

Turning to slide four. I will briefly touch on our fourth quarter highlights before Eric takes you through the quarter in more detail. 4Q '21 EPS increased 28% year over year or 18% excluding notable items.

<unk> 21, EPS increased 28% year over year or 18% excluding notable items.

This strong year over year earnings growth growth was driven by solid total fee revenue growth, which more than offset interest rate headwinds on NII, leading to a good fourth quarter total revenue performance.

We delivered 130 basis points of total positive operating leverage in the fourth quarter, excluding notable items.

Importantly, we again expanded State Street's pretax margin, which increased by more than a percentage point relative to the year ago period to 28% in the fourth quarter. Excluding notable items.

The solid business momentum that we saw during 2021 continued into the fourth quarter, which you can see in the middle of the slide.

AUCA increased to a record $43 seven trillion at quarter end.

And new asset servicing wins amounted to 332 billion for the quarter.

AUCA 1, but yet to be installed was two eight trillion at quarter end, while Charles river's annual recurring revenue in the fourth quarter increased 9% year over year to $244 million.

At Global Advisors, assets under management totaled $4.1 trillion at quarter end management fees increased to a record $530 million in the fourth quarter benefiting from higher year on year average equity market levels and record inflows to our ETF franchise.

Turning to our balance sheet at the bottom of the slide, capital return remains a key part of our medium term targets and we recognize its importance to our shareholders. As you know we suspended common share repurchases in Q3 in connection with our intended purchase of Brown Brothers Harriman Investor services. We currently expect to reinstate common share repurchases during the second quarter of this year in line with our previous expectations.

reinstate common share repurchases during the second quarter of this year in line with our previous expectations.

Yes.

To conclude my opening remarks, I am pleased with the strategic operational and financial progress we demonstrated in 2021. We've meaningfully improved our full year financial performance across a number of key metrics, creating value for our shareholders and advancing us towards our medium term financial targets.

Looking ahead, I have four core strategic objectives for 2022, which are aimed at helping us achieve our vision for the organization and positioning the business for future success.

First is to continue to grow revenue by executing on a number of key strategic priorities this year, including completion of our pivot to an enterprise outsourcer underpinned by our alpha platform build out continuing to develop key product offerings and capabilities, particularly private markets and further strengthening sales and client management capabilities and processes.

Management capabilities and processes.

Second, the successful integration of PVH Investor services is a key priority.

The proposed acquisition is a financially compelling use of capital and once closed, it will strengthen our market leadership by creating the world's largest custodian, expand and deepen our international reach, further propel our alpha strategy and add strong talent that will supplement our focus on client and service excellence and expertise.

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Third, as we did in 2021, we must continue to transform the way we work by driving increased productivity and efficiency throughout our organization, we are developing and implementing a simplified scalable configurable end to end operating model.

This more scalable model will allow us to deliver increased client quality operational capacity speed and resilience.

Fourth, we must continue to build an even higher performing organization.

Our performance culture and improved employee experience will enable us to sustain a more diverse engaged and empowered team with the experience capabilities and desired behaviors required for further for future growth.

These four goals reflect our relentless focus on performance and achieving our medium term financial targets.

The confidence that we will be able to meet our strategic and client goals, while also delivering positive fee and total operating leverage.

And expanding our pre tax margin each year through our medium term horizon aided by the strong momentum we are seeing across our businesses.

And with that, let me turn it over to Eric to take you through the quarter in more detail.

Thank you, Ron and good morning, everyone. Before I begin my review of our fourth quarter and full year 2021 results. Let me briefly discuss some of the notable items, we recognized in the quarter outlined on slide five.

First, we recognized acquisition restructuring costs, most of which were related to CRD and whose integration is now complete.

Second, we recognized the net repositioning release of $3 million, which consists of occupancy cost of $29 million as we continue to reduce our footprint and a release of previously accrued compensation costs were $32 million as attrition picked up and we redeployed staff more effectively than anticipated.

Third, we saw an opportunity to correct an imbalance in the competitiveness of our compensation program by accelerating expenses associated with certain deferred cash incentive awards. The impact of the acceleration increased expenses by $147 million in this quarter.

This change will allow us to realign the mix of immediate versus deferred cash in our incentive compensation awards in future periods.

Which will make our pay practices competitive and enable us to better attract talent and an increasingly tight talent market.

Our mix of deferred equity remains unchanged.

Finally, you'll see that in the fourth quarter also benefited from a $58 million gain on sale of legacy LIBOR based securities previously classified as held to maturity. This sale in this quarter is higher than usual tax benefit helped to offset some of the deferred compensation expense acceleration I just mentioned.

Turning to slide six. I'll begin my review of both fourth quarter and full year 2021 results. As you can see on the top left of the slide, we finished the fourth quarter with strong revenue growth compared to 4Q '20.

4Q '21 fee revenue increased 4%, primarily reflecting strong growth in servicing fees management fees and CRD revenues, only partially offset by lower FX trading services.

4Q expenses were well managed delivering positive total operating leverage notwithstanding the significant 2021 NII headwind.

4Q pre tax margin is up more than one percentage point year on year and ROE is up almost two percentage points.

On the right side of the slide we show our full year 2021 revenue performance. As Ron highlighted earlier, 2021 was a record year for us for fee revenues.

And despite historically low interest rates in 2021, I am quite pleased that for the full year, we still delivered positive operating leverage of more than a percentage point improvement in pre tax margin and EPS growth in the double digits.

Turning to slide seven. You'll see our investment services balanced growth remained strong as we saw record AUCA at the end of the fourth quarter of $43 seven trillion a year on year on a year on year increase of 13% largely driven by higher market levels, client flows and net new business.

Quarter on quarter AUCA growth was muted as markets were pretty mixed.

At Global Advisors AUM at year end increased 19% year on year, and 7% quarter on quarter to a record $4.1 trillion.

The year on year and sequential quarter increases were both primarily driven by higher market levels, coupled with net inflows.

Of note, we reported strong net inflows during the fourth quarter of almost $80 billion. Our global Spider ETF business recorded the highest ever quarter driven by strong US flows pushing total net ETF inflows to 107 billion for the full year.

Turning to slide eight. You can see another quarter of good business momentum fourth quarter servicing fees increased 6% year on year. The increase reflects higher average equity market levels client activity inflows and positive net new business again.

These items were only partially offset by normal pricing headwinds and about a full point of currency translation.

On a sequential basis, I would remind you that while the S&P was up on average, international markets were down some markets were relatively neutral.

Servicing fees were down 1%, primarily due to client activity and adjustments and the impact of an appreciating US dollar partially offset by another quarter of positive net new business.

AUC wins totaled a solid 332 billion in the fourth quarter, which gets us to a record $3.5 trillion, new wins across client segments and regions for the full year.

And our pipeline remains strong.

At quarter end, AUCA one but yet to be installed amounted to $2 eight trillion with alpha representing a nice proportion, which reflects a unique value proposition and our competitive strengths as he only front to back offering from a single provider.

Turning to slide nine. Fourth quarter management fees reached a record $530 million up 8% year on year and up 1% quarter on quarter, resulting in an investment management pre tax margin of 34% for fourth quarter.

The year on year management fee results, primarily benefited from higher average equity market levels and strong ETF inflows.

These year on year benefits were only partially offset by previously reported client asset reallocation and money market fee waivers of $20 million in the quarter.

But quarter on quarter results were largely driven by a slight uptick in equity market daily averages.

As you can see on the bottom right of the slide our franchise remains well positioned as evidenced by both strong quarterly momentum and full year results.

We are particularly pleased that the actions that we've previously taken over the years and our long term institutional and ETF franchises delivered growth over the course of 2021.

Regarding management's fee money market waivers. We currently expect that they will come in at approximately $5 million less in the first quarter of '22 based on an anticipated March fed rate hike, which will be included in our 2022 outlook.

2022 outlook.

Turning to slide 10, let me discuss the other important fee revenue lines in more detail.

FX trading services was down 7% year on year, reflecting lower FX volatility and lower volumes in our standing instruction business.

On a sequential basis, FX revenue increased 8%, primarily driven by higher FX volatility, partially offset by lower volumes.

Moving to Securities Finance. Fourth quarter fees increased 16% year on year, mainly reflecting higher client securities loan balances and new business wins and enhanced custody.

Business wins in enhanced custody.

On a sequential basis, fees were down 4% quarter on quarter, mainly as a result of lower agency balances.

Finally, fourth quarter software and processing fees were down 4% year on year, and 2% lower quarter on quarter, largely driven by lower market related adjustments, partially offset by continued growth in CRD, which I'll turn to next.

Moving to slide 11, I'd like to highlight our CRD and Alpha performance, we delivered strong standalone CRD results in the quarter with year on year revenue growth of 13%.

Full year standalone revenue growth was 11% year on year, which makes this the second year in a row where we grew the business revenue in the double digit range.

The more durable SaaS and professional services revenues continue to grow nicely as we on boarded in converting more clients to the cloud. SaaS clients now represent nearly half of our CRD client base.

In addition, we achieved record new bookings of $62 million for full year 2021, with a healthy revenue backlog of $117 million at quarter end demonstrating the continued business momentum as we head into 2022 supported by the by the State Street Alpha value proposition.

Turning to [Alf] on the bottom right of the slide full year 2021 was a busy year as we announced nine new alpha mandates and nearly double the amount of wins we've achieved since inception. At year end, we have 10 total live alpha clients.

We've also been busy enhancing our alpha product offering this year. In addition to launching alpha for private markets and our acquisition of Arcadis in the third quarter. We also went live with our with our Alpha data platform in the fourth quarter, which is our cloud native platform, providing enterprise data management and access to all the data and analytics that our clients use to perform their daily end to end investment processes.

Investment processes.

Turning to slide 12. Fourth quarter NII was down 3% year on year, mainly driven by the impact of a low 2021 interest rates on the investment portfolio yields partially offset by another quarter of higher loan balances as well as growth in deposits in the investment portfolio.

<unk> fourth quarter, NII was down 3% year on year, mainly driven by the impact of a low 2021 interest rates on the investment portfolio yields partially offset by another quarter of higher loan balances as well as growth in deposits in the investment portfolio.

Relative to the third quarter, 4Q NII came in 1% lower primarily as a result of the expected normalization of premium amortization. As you may recall third quarter '21 included an episodic benefit worth about $7 million, which we've previously noted wasn't expected to repeat in fourth quarter.

We do however, see continued premium amortization slowing.

We, like many of you are excited about the rise we've seen in long end rates this year.

However, short rates have been flat, so far and it's really the prospect of fed action in the March timeframe, which would have a significant benefit on NII.

On the right of the slide we show our average balance sheet during the fourth quarter. Average assets increased 4% quarter on quarter, primarily driven by higher deposit levels. We consciously allowed average deposits to float up this past quarter.

Which we then expect to monetize in a period of rising interest rates.

Turning to slide 13. Fourth quarter expenses, excluding notable items were up 1% year on year as we previously decided to increase incentive compensation to reflect strong year on year performance and pulled forward some investments in the business.

At the end of the year, however, we also experienced some higher than expected episodic expenses. Medical costs were higher as we saw ramp up in year end claims. We saw some elevated it vendor costs and we realized higher marketing spend associated with GAA volumes.

Compared to 4Q '20 on a line item basis, excluding notable items, compensation and employee benefits was up 2% driven by higher incentive compensation and medical costs, partially offset by lower headcount and salaries.

Notably, our continued focus on digitization automation as well as resource discipline have helped us reduce our head count this year by two percentage points, even as we on boarded larger deals and process more transaction volume.

Information systems, and communications were up 11% due to continued investment in our technology infrastructure and resiliency as well as the equipment expenses as we move more activities to the cloud.

Transaction processing was down 7%, primarily driven by lower market data and brokerage costs.

Occupancy was down 6%, reflecting the benefits from eliminating another 5,000 seats and achieving a 115% occupancy rate.

And other expenses were down too.

Overall, we're pleased this year with our continued ability to demonstrate productivity and expense discipline.

Excluding the impact of currency translation with approximately one percentage point, full year 2021 expenses would have been flat and in a year where fee revenue growth grew by mid single digits, we meaningfully expanded our pre-tax margin and generated positive total and fee operating leverage despite a challenging interest rate environment.

Moving to slide 14.

On the left side of the slide we show the evolution of our CET 1 and tier one leverage ratios followed by our capital trends on the right side of the slide.

As you can see, we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements.

As of quarter end, our standardized CET 1 ratio of 14.2% increased .7 percentage points quarter on quarter.

Primarily reflecting an outsized reduction of about $5 billion in RWA related to the impact of FX mark to markets.

And higher retained earnings. We expect RWA to increase in the first quarter to a more normalized business levels and the effects of expected regulatory changes coming in 2022, all of which has been previously considered in our capital guidance.

We expect <unk> to increase in the first quarter to a more normalized business levels and the effects of expected regulatory changes coming in 2022, all of which has been previously considered in our capital guidance.

Our tier one leverage decreased slightly quarter on quarter, mainly driven by higher client deposits and lastly, we returned a total of $209 million to shareholders in the form of fourth quarter dividends.

As previously communicated we expect our CET 1 and tier one leverage ratios to be at the lower end of our target ranges for the first half of 2022 inclusive of the implementation of SA CCR and the expected closing of the Brown Brothers Investor Services acquisition.

Turning to slide 15, you can see a summary of our 4Q '21, and full year 2021 results.

I've already covered fourth quarter in detail. So let me say a few words about our full year results before jumping into our outlook for 2022.

In summary, we're pleased with our strong performance this year.

Notwithstanding the challenging interest rate environment, we delivered a 5% increase in total fee revenue for the year with servicing and management fees reaching our highest levels on record.

Our expenses for the full year remained well controlled.

And despite higher revenue related costs and investments in our business and people.

As a result, even in last year's low rate environment, we delivered positive operating leverage and we were able to drive pre tax margin and ROE closer to our recently enhanced medium term targets.

And with that, I will turn to outlook.

Yes.

On Slide 16, let me cover our full year 2022 outlook as well as provide some thoughts on the first quarter both of which do not yet include the previously announced acquisition of the Brown Brothers investment services.

We continue to target a closing by the end of the first quarter, although the timing could fall in the second quarter. We are in the process of obtaining the required regulatory approvals some of which have already been secured.

The process is proceeding at a slower pace than anticipated with many regulators around the world addressing the high volume of global M&A activity.

That said, given the current higher equity market step off and new interest rate forward. We now expect about 25% year on year EBIT growth for the acquired business for each quarter in the first year post closing instead of just 15% year on year EBIT growth in our original acquisition deal modeling.

Okay.

Now as I usually do, let me first share some assumptions underlying our current views for the full year.

At a macro level, our rate outlook largely aligns the current forward curve and assumes we see three US rate hikes in 2022, but the first hike occurring in March.

We are also assuming around five percentage point to point growth for equity markets in 2022 as well as further Nomura lies the FX market volatility, which influences our trading businesses.

As for our currency translation, we expect the US dollar will be stronger for the year, which will be a headwind to revenues, but mostly offset as a benefit to expenses.

So beginning with revenue.

For the full year. We currently expect that fee revenue will be up 3% to 4% with servicing fees growing 2% to 3%. Both include about a point of currency translation headwind for 2022.

Regarding the first quarter of 2022, we expect fee revenue to be up 2% to 3% year over year, given equity market expectations and continued business momentum with servicing fees expected to be up 1% to 2% and management fees expected to be up 8% to 9%.

For full year NII, depending on the timing of the projected rate hikes, we expect 2022 NII to be up 10% to 12% on a year on year basis.

Regarding first quarter of 2022, we expect NII to be up 3% to 4% year over year and still flattish sequentially.

Now turning to expenses.

As you can see in the walk, we expect expenses ex notables will be up just 1.5% to 2% on a nominal basis in 2022, as we continue to invest in the business and our people while driving both positive total and fee operating leverage.

We currently assume that this includes a one percentage point benefit to expenses due to the stronger US dollar.

You can also see on the walk that for full year '22 we expect another year of gross saves of approximately 3 to 4 percentage points, which will help fund variable costs and ongoing business investments scenarios like Alpha, digital, tech infrastructure and automation.

Regarding the first quarter of '22. We expect year on year expense growth to be largely in line with our full year guide and includes the seasonal compensation expenses.

Which occur in the first quarter.

All in all, our plan is to invest behind the revenues and deliver both positive total and positive fee operating leverage.

Finally, we estimate our effective tax rate to be in the 17% to 90% range for 2022.

And with that, let me hand the call back to Ron.

Thanks, Eric.

Operator, we can now open the call for questions.

Yes.

At this time, if you'd like to ask a question, please press star one on your telephone. Again that's star one to ask a question.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Alex Bolkestein of Goldman Sachs.

Hey, good morning, guys happy new year to both of you.

Maybe we can start on backing some of the guidance. I'm sure there's going to be a good amount of follow ups on the back of that as well but.

Maybe just starting with the fee guide.

Really zoning in on servicing fees. State Street, obviously made a considerable amount of improvement in retaining clients and winning new business. So maybe help us unpack within the 2% to 3% growth for the year.

<unk>, obviously made a considerable amount of improvement in retaining clients and winning new business. So maybe help us unpack within the 2% to 3% growth for the year.

What sort of contemplated from markets in terms of the benefit of the 5% that you guys highlighted earlier? So how much of the market been a benefit versus the net new business and pricing?

From markets in terms of the benefit of the 5% that you guys highlighted earlier, so how much of the market been a benefit versus the net new business and pricing.

And I'm assuming Blackrock is included in this guidance as well, but how much of a drag in the servicing fee revenue you guys expect from loss of the Blackrock mandate?

Alex, it's Eric. Happy New year to you too. Let me cover our fees and then servicing fees, which I think is where your focus or guide for total fee revenues up 3% to 4% for the year, our guide for servicing fees up 2% to 3% and obviously that includes about a percentage point from foreign exchange so in effect the servicing fees are up.

foreign exchange so in effect the servicing fees are up.

For example, 3% to 4% and our guide adjusted for currency translation.

If you think about the drivers we've factored in all the known events.

Both our growth, our installations, net new business and so forth.

If you want to peel it apart a little more deeply.

More deeply.

We start off at a good equity market level, and we expect some year on year growth from equity markets. That's probably worth about two percentage points of a tailwind to growth.

Flows and client activity, which are variable is probably worth another percentage point and part of our kind of fee structure.

Net new business continues to tick up we expect core net new business to be up 2% and that obviously includes all the new on boardings offset by

<unk> continues to tick up we expect.

core net new business to be up 2% and that obviously includes all the new on boardings offset by

any attrition so thats on a net basis. And then obviously there's just the usual, 2% grind down of pricing and that kind of gets you to the low end of our range.

We think there's some upside which is why adjusted for currency.

Servicing fee guide is in the 3% to 4% range.

What it does is it represents the continued acceleration of our business towards our medium term targets, which are really in the 4% to 5% range.

Acceleration of our business towards our medium term targets, which are really in the 4% to 5% range.

Great, that's perfect.

Just maybe staying on the topic.

But looking at the expense side of the P&L. The 1.5% to 2% growth I think is contemplated on obviously the fee outlook that you just outlined.

If we are in a tougher equity market backdrop, and let's say you guys don't hit the 2% to 3% servicing fee growth over this 3% 4% fee growth.

What is sort of the bookends around the expense growth trajectory that we could see this year? So in other words like in flat equity markets should we expect you to be below the guide on expenses, given there's maybe more flexibility or kind of the range is the range and the revenue will be more kind of working independently.

Expense growth trajectory that we could see this year. So in other words like in flat equity markets should we expect you to be below the guide on expenses, given theres, maybe more flexibility or kind of the range is the range and the revenue will be more kind of working independently.

That's a fair question and you can see that part of the way we create some I'll call it installation for ourselves as we think about equity markets. And where they might go whether it's up a lot up modestly flat or down is that we've designed our plans with a view that we should.

And intend to do deliver a couple of points of operating leverage and actually a couple of points of fee operating leverage right that that couple of points.

For a couple of points of operating leverage and actually a couple of points of fee operating leverage right that that couple of points.

It gives us some flexibility to handle some [variablity].

<unk> and the <unk>.

And what happens in actuality in equity markets.

Thank.

So it certainly will move within a range based on what we see obviously, if we see a market and equity market correction of down 5% or down 10%.

Down, 5% or down 10%.

We will do everything we can to come in below our our range and certainly we can flex in this business.

A full point can be flexed, its not easy, but it can be flexed.

And that would be the the approach that we take but we're confident with kind of the level of equity markets they are today part of this.

Part of what we see.

It's fairly nominal uptick in equity market. So we think thats a good kind of middle of the fairway plan, but it will certainly flex it.

To the extent that we can.

That's great. Thanks very much for the color. Sure.

Your next question comes from the line of Jim Mitchell with Seaport Global.

Hey, good morning.

Maybe you could just talk a little bit about the BPH.

The BPH.

I appreciate the discussion around the increase in EBIT from rates how much of that can you speak to their off balance sheet sweep deposits? Maybe update us on the level of that and how you think those acted a rising rate environment in terms of the sweep fees is it pretty similar to the spread on deposits.

you speak to their off balance sheet sweep deposits? Maybe update us on the level of that and how you think those acted a rising rate environment in terms of the sweep fees is it pretty similar to the spread on deposits.

Jim, it's Eric. The business that.

The business that.

Brown Brothers as Ron on the investment services side is performing well so what we've seen is with the higher equity markets we've seen.

They are servicing fees come in a bit stronger for this coming year, I think that deposits both on balance sheet and the swept ones are within the range of what we've seen.

It's stronger for this coming year, I think that deposits both on balance sheet and the swept ones are within the range of what we've seen.

And I think we described those as bid under 10 billion on balance sheet and a bit over 65 billion swept and they're coming in right around that range and that's our expectation for 2022. The both the on and off balance sheet do have.

The both the on and off balance sheet do have.

Good translation into higher revenues as as rates move up.

Translation into.

Higher revenues as as rates move up.

And the on balance sheet, the betas are similar to ours.

We've had very nice data is in the early part of that in the last rate cycle and expect to have that again on ours and on theirs and then the outbound sweeps also have betas. They're not quite as strong as deposits, but they are in the range actually and that that also will provide some very nice I think fee growth.

Strong as deposits, but there, but there are there they are in the range actually and that that also will provide some very nice I think fee growth.

As we as we take on that that business.

Okay. Great and then maybe just pivoting to the asset management business you had record flows.

Stronger close in many years.

Can you just describe where the biggest drivers of that growth are coming from? What you're doing to enhance that growth?

Is this more just the environment's grade? Or do you think there's some sustainability to that growth to that that inflow?

Jim. It's Ron let me take that I think that.

Growth is reasonably broad based in the sense that it's firstly from our investments and ongoing investments in the ETF.

Firstly from our investments and ongoing investments in the ETF.

You saw lots of strength in the core Spider offerings, which are really instruments of choice for the large institutional investors.

Lots of strength in the core Spider offerings, which are really instruments of choice for the.

For large institutional investors.

And good growth in areas where he has boosted active ETFs.

Fixed income low cost ETFs non US. So we expect to continue to see a good performance there.

Particularly as we have worked to solidify our our position with institutional investors.

We have worked to solidify our our position with institutional investors.

Secondly in the institutional. The traditional institutional space.

In the institutional.

The traditional institutional space.

The team's done a lot of work in developing products that are companions to the to the core index business, we have a great client roster and we've seen some diversification.

In that business. Then finally, we've got a great cash business there.

And obviously ebbs and flows as cash dose itself, but also benefit a little bit from rising rate environments.

Obviously ebbs and flows as cash dose itself, but.

Also benefit a little bit from rising rate environments.

As the remainder of the fee waivers goes away so it's really across the board.

Of the fee waivers goes away so it's really across the board.

Okay. Thanks for the color.

Your next question comes from Steven [inaudible] with Wolfe research.

With Wolfe research.

Hi, good morning.

So Eric, I just wanted to unpack some of the NII the assumptions underpinning some of.

Eric I just wanted to unpack some of the NII the assumptions underpinning some of.

The NII guidance. I was hoping you could just share some insights in terms of what you are contemplating as a fed initiates QT in terms of just deposit flight broadly or deposit run off. And maybe deposit remixing out of noninterest bearing deposits and just in terms of spot rates, where you are reinvesting today versus the back book deals.

<unk>.

Sure, Steve. It's Eric. Let me do that in reverse order I think the.

The front book and the back book are starting to converge in the investment portfolio and you'll see that our investment portfolio yields took another small tick downward this quarter.

We are starting to converge in the investment portfolio and you'll see that our investment portfolio yields took a.

And fourth quarter, but starting in first quarter, well first quarter, we'll see that relatively flat and then you'll see a slow progression upward. So we're comfortable with where we are in terms of long rates.

And obviously the higher the long rates come in the better off we'll be. The NII.

The NII.

Uptake for this year and then let me get to the question around balances and quantitative tightening. I think is just comfortably dependant on the fed increases.

As just comfortably dependant on the. On the fed. Increases.

On the fed.

Increases.

I think where we're showing 10% to 12% expectations in NII. A little more than half of that.

10% to 12% expectations.

<unk>.

And NII little more than half of that.

As off of rising short term US rates.

<unk>.

A little less than a quarter is off rising non US short term rates and then the last portion is off of the rise in long rates, so we're really geared towards the front end rates.

The rise in long rates, so we're really geared towards the.

And then that flows through directly to balances.

For deposit balances we currently expect.

US and international deposit balances to be flattish I would say this year.

And. I think we're all wrestling with whats the pace of the fed's actions in terms of rising interest rates.

I think we're all wrestling with whats the pace of.

The fed's actions in terms of rising interest rates.

When does that start and then when do they start with some amount of quantitative tightening?

With some amount of quantitative tightening.

And I think it's just helpful to bookend this. There is been a lot of discussion about quantitative tightening the last week or two certainly it will happen. If you go back to the last cycle, which was just three four years ago, so not long time away.

Quantitative tightening started 2 years after the first rate rise.

Quantitative tightening started.

Two years after the first rate rise.

And a full year after the second and third and fourth kind of that steeper part of the rate rising cycle and so I think quantitative tightening so there'll be there'll be a bit as range on this is something to expect in 2023 more than 2002.

2023 more than 2002.

And will thereby and then have some effect on deposits. How much it's hard to tell.

Will thereby and then have some effect on deposits how much it's hard to tell.

As you know this this this cycle we've controlled some of the uptick in deposits. We had pushed them off in the third quarter as you recall I'll, let some back in this quarter.

Push them off in the third quarter as you recall I'll, let some back in this quarter.

We'll certainly see some deposits.

Downwards in '23 and '24 perhaps or potentially just stay flattish.

Because the question is the pace of the quantitative tightening and if you recall last time around just.

I guess three or four years ago, I think the fed felt like it tightened to March right and created some disruptions in the short term money markets and so while we expect some tightening to happen.

Let's say a year and a half from now or thereabouts.

We'll see. I think the pace of the tightening may be.

The I think the pace of the tightening may be.

Maybe more a more moderate but anyway, we will see that. Let's call it 23 topic, I think 2022 should be fairly straight.

Call. It 23 topic, I think 2022 should be fairly.

Fairly straight.

Thanks for that context, Eric and just for a follow up on how you're thinking about capital management.

You spoke about re initiating the buyback beginning in 2Q. I was hoping you can give us some context as to like what level of payout.

You are planning as we look ahead to '22 '23 and just in terms of future changes to the capital regime any guidance you can provide on the impact of shocker or and preliminary thoughts on the impact of upcoming changes under a Basel four regime would be really helpful.

Sure there is there's a lot there in your question. So let me take it kind of from the near end timeframe to to further out.

Kind of from the near end timeframe to to further out.

We've I think we're.

We're pretty comfortable with our capital guidance that will be at the low end of our 10% to 11% range for CET 1 and the first quarter that includes both the SA CCR being implemented.

And the consummation of the Brown brothers acquisition so.

The consummation of.

The Brown brothers acquisition so.

That I think will carry us through at the low end of our range for the first half of this year.

<unk>.

This year.

And we were I think comfortable with both of those.

As we as we go through the year and second quarter, we'd certainly like to to start that buyback. We'll see at what pace.

We'll see.

What pace.

The pace of our buyback start will depend on the kind of the exact capital ratios as we hit first quarter and then second quarter, we will see.

How will the Ci swings either positive or negatively.

Positive or negatively.

And so I think that then sets us up to start buying back stock in the second quarter and then proceeding at pace in third quarter fourth quarter and beyond.

At pace in third quarter fourth quarter and beyond.

And then I think at that point we're back to trying to.

<unk>.

I think at that point.

We're back to trying to.

Or we're not trying but operating within our guidance that capital return should be in the 80% plus of earnings.

And that puts us I think in a way that we continue to return through dividends and buybacks capital and a nice comfortable way. So anyway, a nice path forward.

That.

That puts us I think.

In a way that we continue to return through dividends and buybacks capital and a nice comfortable way so anyway, a nice path forward.

But first half of this year I think low end of our ranges.

First half of this year I think low end of our ranges.

And then in the sector. In the quarter, and then third quarter fourth quarter, we start to reinstate and then accelerated buybacks to a comfortable level. The Basel III refinements Basel four end game there are different ways.

In the quarter, and then third quarter fourth quarter, we start to reinstate and then accelerated buybacks to a comfortable level.

<unk>.

The Basel III.

Refinements Basel four end game there are different.

[Waste inherent vocabulary out there].

Certainly come to pass. Clearly, we will get some benefits on the loan book, but we have a smaller loan book than others.

Clearly, we will get some benefits on the loan book, but we have a smaller loan book than others.

We'll probably get some headwinds from the fundamental review of the trading book and then some headwinds from from the ops risk capital charges. So my guess is it'll be a bit of a headwind but.

The ops risk capital charges. So my guess is it'll be a bit of a headwind but.

Like I said before it's been all factored into our capital ratio guidance, we generate quite a bit of capital each year.

And we feel comfortable that we can continue to deliver on our medium term targets of returning 80% or more of earnings back to shareholders.

Earnings back to two to shareholders.

That's great color. I can just quickly can you did you quantify the impact from [inaudible] just so we could start to reflect that in our models?

Yes, I didn't in the prepared remarks, but the rough amount we carry typically about $115 billion of RWA. So it's a little less this quarter. [Soccer] will cost us in the first quarter.

Soccer is.

Will cost us in the first quarter.

Just over $10 billion and we've got offsetting actions about half of that about half so call it around 5 billion. So I think net basis, it's probably worth about five bucks of RWA. But as I said before in my prepared remarks. This has all been factored in.

About half of that about half so call. It around 5 billion. So I think net basis, it's probably worth about five bucks.

<unk>, but as I said before in my prepared remarks. This has all been factored in.

To our capital guidance that we gave back.

Over the last several quarters, and where we're confirming and affirming that we'll be within within our ranges in the first half of the year.

In the first half of the year.

Understood, Eric. Thanks so much for taking my questions. Sure.

Your next question comes from Gerard Cassidy with RBC.

Good morning, good morning Arun.

Hi, Gerard.

Eric can you give us some further color on you gave us good detail on the servicing fee growth?

And how you expect to see that 3% to 4% grow this year.

Grow this year.

With some new inflows as you pointed out but also from some equity improvement in the markets. I think you said about two percentage points of that number.

When you take the when you look at the equity portion, how important is the US markets versus in the other markets? Can you kind of give us a flavor as it generally geared towards the US markets that drives your growth?

Gerard, it's Eric, it's really a mix I think maybe.

It may be almost.

So I just think about the range as it is a bit under half that's driven by US markets.

That's driven by U S markets.

Closer to probably I don't know a third ish of European markets, and then Australia and emerging market just because of the, in some cases the higher fee rates is also important.

Closer to probably I don't know a third ish of.

European markets, and then Australia and emerging market just because of the.

In some cases the higher fee rates is also.

That could be worth 20, 25%. The other is remember.

2025% the other is remember.

We have part of our book is fixed income assets that we that we service and so. That's why equity market tailwinds affect part of our book, but but not all of our book and in rising rates, we've got the opposite effect on the fixed income side.

What I, just as we from a planning purposes as we go into the year, though on a point to point basis.

Yes.

Just as we from a planning purposes as we go into the year, though.

On a point to point basis are.

If we were to stay flat from now through the end of the year versus the average of last year of 2021. That in and of itself should give us at least a point point and a half of servicing fee lift and then what we're talking about is whether the point to point growth from December 31st to 2022 December 31st.

Of last year of 2021 that in and of itself should give us at least.

Point point and a half of servicing fee lift and then what we're talking about is whether the point to point growth from December 31, two.

Can give us that extra half a point. So I think that's how you get the roughly two percentage point tailwind that we expect. Some of it is in a way baked in assuming markets don't go down and then a smaller piece is coming from some modest depreciation.

<unk> is coming from some modest depreciation.

Very good and then as a follow up you discussed it is have your peers about the expectation of rising interest rates and short term rates run rates in 2022.

Can you share with us the duration of the fixed income portfolio?

What range should we watch carefully that won't impact the OCI, meaning the mark to market would be negative for the portofolio?

The duration of the investment portfolio we inched down this quarter you could have seen that in the NII slide that we had. I think we are at about two point. 2.9 years, so trended down a bit.

Yes.

The duration of the investment portfolio.

Inched down this quarter you could have seen that in.

And the NII slide that we had I think we are at about two point.

Two nine years, so trended down a bit.

From the last quarters last couple of quarters. And right now we're a little more comfortable we've been investing in the belly of the curve.

Last quarters last couple of quarters and right now we're a little more comfortable we've been investing in the in the.

Kind of a two to five year range. I think the 10 year up through two percentage points is quite comfortable for us, including from an OCI management standpoint, I think if you get a good bit above two percentage points on the 10 year, you kind of have a double effect.

Up through two percentage points is quite comfortable for us, including from an OCI management standpoint, I think if you get a good bit above.

Two percentage points on the 10 year, you kind of have a.

On one hand, you get in OCI. Head, which obviously accrete back over time, so it's it's temporary and the other hand, you celebrate higher rates falling through the investment portfolio over the coming quarter or so.

You got a double effect on one hand, you get in OCI.

Head, which obviously accrete back over time, so it's it's temporary and they on their hands you celebrate higher rates falling through the investment portfolio over the coming quarter or so.

I think it's next but but net positive if we have some sort of spike at the back end, but it would affect just the mechanics of how we operate quarter to quarter on the margin.

It's it's next but but net positive if we have some sort of spike at the back end, but it would affect just the mechanics of how we operate quarter to quarter on the margin.

I appreciate it thank you Ed.

Thank you, Gerard.

Again, if you would like to ask a question. Please press star one on your telephone.

Your next question comes from the line of Rob [inaudible] with Autonomous research.

Good morning, guys. You had another good quarter of loan growth here with average loans up 7.5% sequentially. What were the drivers there and how sustainable do you think that is into 2022?

Rob It's Eric. Loan growth has been good for us the last say couple of years to be honest. I think we've comfortably.

Growth has been good for us.

<unk>.

Say a.

Couple of years to be honest I think we've comfortably.

Driven loan growth quarter after quarter.

Quarter after quarter.

Up in the low double digits on a year over year basis. This quarter, we continued to see good client demand, but we also shifted some.

On a year over year basis. This quarter, we continued to see good client demand, but we also.

Shifted some.

We also added some CLO and loan form as we reduce the CLO and securities form from the investment portfolio. So there was a bit of a of a shift that said I think in general.

Reduce the CLO and securities form from the investment portfolio. So there was a bit of a of a.

A shift that said I think in general.

We're comfortable doing is continuing to grow core loans because that's.

We won't always have a shift every quarter. This is more a more episodic just as we rebalanced and think about stress testing.

Stress testing and how.

And how to operate efficiently with our multiple constraints, but we are still comfortable continuing to grow this loan portfolio in the low double digit range. It wont happen every quarter. There is a little bit of seasonality, but we continue to see quite strong demand from our alternatives clients in private equity capital call financing we see demand.

In somehow arts of the alternative in real estate markets that we play in.

In some.

Somehow arts of the alternative.

In real estate.

Markets that we play in and.

The biggest focus I would say is as we learn more and deploy capital to our clients and a lot of what we do is work with them and make sure that as part of a broader relationship because that's where it really is renew motive.

For us and for them and helps us grow the.

It helps us build the reputation and the and the and the momentum to build the fee line as well.

Got it. Thank you and then turning to expenses and operating leverage the outlook implies maybe a two percentage point delta between fee growth and expense growth. But that also bakes in plus 5 or 6% from investments and variable costs. Do you think of that as and it's still an elevated level of investment and there's some more operating leverage available?

Turning to expenses and operating leverage the outlook implies maybe a two percentage point delta between fee growth and expense growth, but that also bakes in plus five or 6% from investments and variable costs do you think of that as and it's still an elevated level of investment and theres some more operating leverage available.

Longer term or is this kind of the required level of investment going forward.

It's hard to forecast the future. The amount of investments is partly around whats table stakes in the marketplace and partly around where do we see opportunities to differentiate our offerings and clearly you've seen us invest in particular in alpha.

The amount of investments is partly around whats table stakes in the marketplace and partly around where do we see opportunities to differentiate our offerings and clearly you've seen us invest in particular in alpha.

In the front office and alpha that spans into the middle and back office and we're also finding opportunities in the back office to invest through a set of feature functionality enhancements and custody and some areas of accounting, which also is attractive and segment by segment so.

<unk>.

Through a set of feature functionality enhancements and custody and some areas of accounting, which also is attractive and segment.

Segment by segment so.

It's hard for me to say, what's the necessary amount of investments. We think there is a range. We think last year, we probably invested a bit less than that its probably instead of 5% to 6% I would say.

A bit less than that its probably instead of 5% to 6% I would say.

There was probably a point and a half less of investments during 2021.

So I think what you'll see us youll see us flex the amount of investments from one year to the next. I think what we're conscious of is that.

Confidence in investing should come from seeing the revenue growth and seeing the revenue growth from par past investments and that's what we're seeing. We're seeing the revenue growth from the past investments that we've made across the franchise and I think that gives us the confidence to continue to carefully invest in some cases.

Cross the franchise and I think that gives us the confidence.

Two to continue to carefully invest in some cases.

Accelerate that but I think in modest ways I think the other part of our culture has been to at the same time, as we invest find productivity and savings.

We think that's an important part of how to run a business.

But certainly a business that over time, we're digitizing and automating should come with.

Business that over time, we're digitizing and automating should come with.

Productivity savings and engineering, and I think the other part of our business processes.

Engineering, and I think the other part of our business processes.

And I think you hear this from from our senior executives the more we can drive and productivity saves the more we feel comfortable in investing and that's a very that's a virtuous circle.

Circle.

Yes, that's helpful. Rob go ahead.

Go ahead.

I'd just add to that is that.

It's actually good news that we're seeing opportunities to invest in the business.

Because particularly as we've built out the alpha platform, which was originally aimed at the asset management space and the traditional asset managers, we're now starting to rollout Alpha for private market. So it's good that we're seeing the opportunities, but I would underscore Eric's point that.

Platform, which was originally.

Aimed at the.

<unk> management space and the traditional asset managers, we're now starting to rollout.

Alpha for private market. So it's good that we're seeing the opportunities, but I would underscore eric's point that.

But notwithstanding that goodness, we're focused on is continuing to eke out higher and higher productivity.

And we see more opportunity there so we see the ability of this virtuous cycle to continue.

Ability of this virtuous cycle to continue.

For quite a while longer.

And the fact that there are investment opportunities is actually a good thing because it shows that.

Actually a good thing because it shows that.

Notwithstanding the narrowness of our where we operate there's plenty of space to grow.

Got it. Fair to characterize it then that this level of investment maybe last year and this year gives you the capacity in the room to play both offense and defense. Yes.

Yes.

Great. Thank you.

Your next question comes from Glenn Score with Evercore.

Glenn score with Evercore.

I like that that runs. Question on the deferred comp acceleration I'm just curious what level employee always talking and I'm asking because the deferred portion.

Question on the deferred comp acceleration I'm, just curious what level.

Employee always talking and I'm asking because.

The deferred portion.

Obviously, you're saying to get practices more competitive so that presumes that you were deferring more than peers and that going forward, you would have a higher cash piece going forward.

Presumes that you were deferring more than peers.

Going forward, you would have a higher cash piece going forward.

I'm just curious on.

It's probably included obviously in your expense guide, but what's changing here.

Glenn. For the employees that are going to feel this would be, are not our most senior employees would be kind of the Middle Senior lower senior if you will and down. So in our parlance AVPS, VPS, MDs.

Yes, Glenn.

The employees that are going to feel this would be.

Are not our most senior employees would be kind of the.

Middle Senior lower senior if you will and Don so in our parlance.

Avp's Vps.

Empties and.

And some of those senior Vice President of Telesphere.

Okay and then. Glenn just to give you a context.

Glenn just to give you a context.

Hum.

We've made this change we had made one change 5 years back and I think this now gets us to be competitive with the marketplace and the way to the facts that might help a little bit is.

Five years back and I think this now gets us to be competitive with the marketplace and the way to the.

The con.

Factors that might help a little bit is.

No.

Way back when we had immediate cash in that 30% range of compensation for the average employee. The deferred cash was 40% and the equity the deferred equity was 30% that was a that was a place that was completely out of market.

We fixed about two thirds of that.

Five years ago, and got to 50% immediate cash 20% deferred cash.

And 30% deferred equity.

And now we're with this final change.

We're going to take that up to the immediate cash to 60 to 65% the deferred cash to just 5% to 10% mostly for the most senior folks and then the deferred equity stays at 30%. So we think we're now in line with the market.

As part of this change what does happen is you've got to crystallize some of these deferrals into the P&L in the current period.

And then what that allows us to do is going forward to add to the cash mix.

And because we've crystallized the previous deferrals, those don't hit the P&L in the future, but the new cash will hit the P&L in the future. So this will be neutral to subsequent periods.

Neutral.

Two to subsequent periods.

On the expense line.

Okay. Thank you very helpful.

I was going into your four objectives, Ron and the first three I think are straightforward.

And I think wveryone has high confidence in your ability to do those. I'm curious on the how to and what you're doing what you're going to measure and number four which was the must be a higher performance.

Answered organization, just curious how you talk towards how you can execute on that.

So I mean this is an ongoing objective of perverse, Glenn and it really is around performance culture, and if you think about culture, which is a very used sometimes maligned.

The objective of perverse, Glenn and it really is around performance culture, and if you think about culture, which is.

A very used sometimes maligned.

terms for us it's about desired behaviors.

On the flip side. Kind of eliminating undesirable behaviors. So hat we're focused on is those two terrible behaviors. all related to kind of driving performance.

Kind of eliminating undesirable behaviors.

We're focused on is those two terrible behaviors.

Oil related to.

I would argue that it's even more important now than when we started a couple of years ago, because on top of everything else that we need in terms of serving our clients and serving our shareholders and we're now operating normal operating in this hybrid world for the foreseeable future.

Puts a burden new burdens and new requirements on managers, particularly middle managers.

A burden new burdens and new requirements on managers, particularly middle managers.

So, it's all about being able to eke out the benefits which are considerable in a hybrid world in terms of employee flexibility and some real estate cost savings and those kinds of things, but at the same time, making sure that we're continuing to deliver where we are. So we think about performance in terms of thinking about culture and high performance in terms of behaviors.

Considerable.

Hybrid world in terms of employee flexibility in.

Some real estate cost savings and those kinds of things, but at the same time, making sure that we're continuing to deliver where we are so we think about performance in terms of thinking about.

Culture and high performance in terms of behaviors.

Thanks a lot, Ron.

Your next question comes from Brennan Hawken with UBS.

Good morning, Thanks for taking my questions.

I wanted to circle back Eric.

Just wanted to kind of clarify some of the points you made I think you talked about PVH and the EBIT growth expected to accelerate here in 2020 to up to 25%. So just to make sure on level setting correctly. You also talked about some strength in servicing if not all NII.

PVH and the EBIT growth.

<unk> to accelerate here in 2020 to up to 25%. So just to make sure on level setting correctly. You also talked about some strength in servicing if not all NII.

That 25% should we apply that to the 375 that you provided previously.

When you announced the deal or did that actual number shift from expectations?

Am I using the right baseline and then for the other disclosures you provided around the revenue and whatnot, should we did those shake out as in line with expectations? Or did they work out to be a little better as you alluded to? And how should we think about that baseline when we think about three quarters of a year here for them?

Am I using the right baseline and then.

For the other disclosures you provided around the revenue and whatnot should we did those shake out as in line with expectations or did they work out to be a little better as you alluded to and how should we think about that baseline when we think about three quarters of a year here for them.

Yes, let me. Fair questions Brennan, it's Eric. We had, as you remember accurately estimated that our 2021 performance to be EBIT of about $375 million they came in right around that level, so we're comfortable with that as a base case and if you recall we had shown 17% growth from 2020 to 21.

Fair Fair questions Brennan, it's Eric.

Had.

As you remember accurately estimated that our 2021 performance to be EBIT of about $375 million they came in.

Right around that level, so we're comfortable with that as a base case and if you recall we had shown.

17% growth from 2020 to 21.

In.

In our.

And some of our documentation as we announced the Brown brothers investment services acquisition.

From a deal model perspective at the time, we had expected off of the 21 base to grow at about 15%. So in line with the past part of that was the equity market tailwind continued to play through.

<unk> continued to play through.

And part of that was just good business performance. Our Brown brothers colleagues in investment services really drive a nice set of initiatives each year to drive growth client activity and so forth.

Our Brown brothers colleagues in investment services.

Really drive a nice set of initiatives each year to drive growth client activity in <unk>.

What we're finding now is because of the equity market step off in the interest rate environment.

What we're finding now is because of the equity market.

Step off in the interest rate environment.

<unk>.

We expect to be roughly at about a 25% EBIT growth from '21 to '22. I think a portion of that is the is on the equity. On the servicing fee line. A portion of that is on the fee line that comes from the sweeps remember that that comes through the.

A portion of that is the is on the.

Equity.

On the servicing fee line.

<unk> that is on the.

Fee line that comes from the sweeps remember that that comes through the.

Fees as well and then a portion is from from on balance sheet, NII and I don't have the pieces handy, but clearly the interest rate.

The pieces handy, but clearly the interest rate.

Tailwind is probably the more significant of those factors that will affect both the on balance sheet and the swept deposits.

It's probably the more significant of those factors that will affect both the on balance sheet and the swept deposits.

Okay, great. Thank you for that clarification.

And then a separate issue for my second question. It looks like there is a transition of leadership seems like Cyrus is retiring in the asset management business. It's been a business where there's been both speculation and open discussion with you all in the past about strategic direction and whatnot.

A separate issue for my second question it looks like there is.

Ah.

Transition of leadership seems like Cyrus is retiring.

In the asset management business.

It's been a business where there's been both.

Both speculation and open discussion with you all in the past about strategic direction and whatnot.

What does the transition in leadership present as far as an opportunity to shift strategic direction? And what can you let us know about your updated thoughts on that business and whether or not a leadership transition is impacting the direction you want to go?

The transition in leadership present as far as an opportunity to shift strategic direction and what can you let us know.

'bout your updated thoughts on that business and whether or not a leadership transition is impacting the direction you want to go.

Brendan I mean as you can maybe see from our results.

Maybe see from our results.

We've invested in that business over the years and the investments are paying off we like the business.

It's very complementary to the core servicing business, having one of the largest asset managers.

So as our client of our core businesses been able to let us kind of a bit of an R&D laboratory.

To let us kind of a bit of an R&D laboratory.

There's client overlap in certain segments like asset owners sovereign wealth funds that we've gotten better and better at leveraging so we like the business. We intend to stay in the business. Under Cyrus' leadership have done a great job.

Leveraging so we like the business, we intend to stay in the business.

Under <unk> leadership have done a great job.

The numbers speak for themselves. I don't expect to see a broad strategic change here. Certainly not direction I just outlined. As always opportunities to do more and do better in all of our businesses.

Don't expect to see it.

Broad strategic change here.

Certainly not direction I just outlined.

As always opportunities to do more and do better.

And all of our businesses.

So we will want to continue to do that. We've got a very strong talent base there. But this is an attractive business and one in which we will look inside and out. Get the right person to take us to the next level here.

We've got a.

Very strong talent base there with this.

This is an attractive business and one in which we will look inside and out.

Get the.

If the right person to take.

It goes to the.

To the next level here.

We have full intention of continuing to run and grow their business.

Continuing to run and grow their business.

Okay. Thanks for taking my questions.

Your next question comes from Mike Brown with KBW.

Hi, good morning, Thanks for taking my question.

So I appreciate the update on [inaudible] EBIT outlook, there and I guess as we move closer to that closing date. I was just curious the change in the EBIT outlook in the operating environment. Does that does that actually trigger any increase in the total consideration that will need to be paid? Obviously, the implied valuation would be would be lower than that announcements that was just.

EBIT outlook, there and I guess as we move closer to that closing date I was just I was just curious.

<unk> in the EBIT outlook in the operating environment does that does that actually trigger any increase in the total consideration that will need to be.

Paid obviously, the implied valuation would be would be lower than that announcements that was just.

That was just thought that cross my mind. And then the follow up there is can you just remind us of the unexpected fee synergies, specifically, which ones do you feel confident that you can deliver on sooner after the close versus the ones that will take more time to come through? Thank you.

On the expected fee synergies, specifically, which ones do you feel confident that you can deliver on sooner after the close versus the ones that will take more time to come through thank you.

Yes. My question I start that I will turn the synergy part of the question over to Eric. But no.

There is no contingencies in the purchase price either up or down other than the usual ones that you would expect in terms of risk management, so no there is no.

Risk management, so no there is no.

The total additional payment that will be due here.

And Mike. It's Eric just on the synergies. I think each one of them has a cadence.

I think each one of them has.

Some of which we are we did spell out I think on the cost synergies, which is the the opportunity and that's obviously.

Sometimes will come out of their base of expenses, sometimes our base of expenses as we put the two together. We had estimated about 40% of our cost synergies would come in in year one and then the balance. Year two and three and that's probably the single largest area. In terms of the fee synergies the balance sheet actions.

synergies would come in in year one and then the balance. Year two and three and that's probably the single largest area. In terms of the fee synergies the balance sheet actions.

The balance.

Year, two and three and that's probably the single largest area in terms of the.

The fee synergies the balance sheet actions.

Should come through relatively quickly we can modulate the amount of swap versus on balance sheet.

On balance sheet.

That's because we've got the capital resources plan for that and I think that's one of the ways that we create real value. And then the last one on the fee revenue synergies.

Resources plan for that and I think thats.

One of the ways that we create real value and then the.

The last one on the <unk>.

<unk>.

Some of the FX kind of markets synergies come in a little more quickly right. Because it's about offering a broader set of say FX products on which we were more capital intensive than simple swaps forwards.

Synergies come in a little more quickly right because it's about offering a broader set of say FX products on which we are.

More capital intensive than simple swaps forwards.

That is more about setting up clients and then quickly being there for them and then some of the servicing ones take a take a little longer and part of the sales cycle, but I think there's a good mix.

Setting up clients and then quickly.

Being there for them and then some of the servicing ones take a take a little longer and part of the sales cycle, but I think there's a good mix.

Obviously as we work on closing and bringing Brown Brothers in, part of what we've been doing is as you'd expect kicking the tires on what are the opportunities how to go to the next round of definition on those so that we can hit the ground running and as I had said.

As we work on closing and.

Bringing brown brothers in part of what we've been doing is as you'd expect kicking the tires on what are the opportunities how to go to the next round of definition on those so that we can hit the ground running and is.

I had said.

When we announced the deal we'd like to to meet or exceed our targets and I think the exogenous market tailwinds are part of that but we'd also like to do it on through old fashioned execution as well.

The exogenous market <unk> are part of that but we'd also like to do it.

Through through old fashioned execution as well.

Okay.

Okay, great appreciate the color there.

And maybe just one last one just a quick clarification.

Apologies, if I missed but did you quantify that discrete tax benefit or is the best way to think about that as just back into it?

After considering your typical tax rate.

I wrestled the mic with that because we're actually a series of tax benefits that came through this quarter. There was some closing of the previous year tax books.

There were some foreign credits that accrue in those jurisdictions, which then help our GAAP taxes, and then there are some foreign credits that then kind of map back into the US as a tax payments as a deduction. So there's a series of them I think the best way to do it is the probably take our full year tax rates.

Then help our GAAP taxes, and then there are some.

Foreign credits that then kind of.

Matt back into the U S as a tax payments as a deduction. So theres a theres a series of them I think the best way to do it is the probably take our full year tax rates.

Are typically in the 17% to 19% range. So you take the midpoint of that. Think about full year this year now with these discrete which were more elevated than usual in a good way.

Think about full year this year now with this with these.

Discrete which were.

A more elevated than usual in a good way.

Got us to closer to 15% tax rates. I think the difference is probably the.

Tax rates I think the difference is probably the.

You might call the lumpy piece. What I would also note is that I think tax planning has been the kind of thing that we've done for many years, we we do it we're always on the bright side of the line and we do it carefully.

What I would also note is that I think tax planning has been.

The kind of thing that we've done for many years, we we do it we're always on the bright side of the line and we do it carefully.

Part of it being an international bank. We like other international banks are able to do some some a modest amount of tax planning and so youll see it I think we see.

We are.

We like other international banks are able to.

To do some some a modest amount of tax planning and so youll see it I think we see.

We see that come through the P&L annually. It just tends to be a little lumpy quarter to quarter and with a little more lumpy good then the unusual this particular quarter.

Okay understood I appreciate the taxes are always a complicated subject. So thanks for that, thanks for that color, Eric.

Sure. Thank you, Mike.

Your next question comes from Brian Bedell with Deutsche Bank.

Great. Thanks, good morning.

Maybe just circle back on the on the deposit opportunity for BPH.

Circle back on the on the deposit opportunity for BPH.

Just to clarify I think you said there's right now $10 billion of deposits. On the balance sheet at BPH, and then 55 additional in the in the sweet program.

On the balance sheet at BPH, and then 55 additional in the in the <unk>.

Sweet.

And I think initially you were planning to bring about a total of $20 billion.

Inclusive of the deposits on the balance sheet over to you to convert initially I think 14 billion with the conversion to get you to 20.

Maybe if you could just update us on the plan for 2022, if you do close that at quarter end in the first quarter of what you'd like to bring on. And then maybe just talk more strategically about what maybe what kind of portion of that of that suite opportunity you might bring on to the balance sheet against capital permitting.

For 2022, if you do close that at quarter end in the first quarter of what you'd like to bring on and then maybe just talk more strategically about what maybe what kind of portion of that of that suite opportunity you might bring on to the.

The balance sheet against capital permitting.

Sure, Brian. It's Eric. I think you have a good estimate of those just for the broader group. I think we said about five to 10 billion or on the balance sheet today. About 65 billion are off balance sheet and slapped in [inaudible].

Good.

estimate of those just for the broader group I think we said.

About five to 10 billion or on the balance sheet today.

About 65 billion in our off balance sheet and slapped in.

<unk>.

As we consummate the acquisition and we're targeting the first quarter, we said at the end of the first quarter. We are targeting we said it could be in the second quarter. So this stuff just just takes time.

Consummate the acquisition and we're targeting the first quarter, we said at the end of the first quarter. We are targeting we said it could be in the second quarter. So this stuff just just takes time.

We will.

We're looking to bring on the 5 to 10 that they have on the balance sheet and probably another 10 ish or so that is [swept.]

I think over time the question is really at what interest rate levels do we operate at. If we're at prevailing short rates of 50 basis points, let's say.

At what interest rate level.

Levels do we operate at.

A floor at prevailing short rates of <unk>.

50 basis points, let's say.

Then on balance sheet deposits aren't terribly attractive, but when you hit prevailing cure rates of 100 bps or 200 bps, and obviously you can do this across different currencies than you're more inclined to bring more on balance sheet.

Terribly attractive, but when you hit prevailing cure rates of <unk>.

100 bps or 200 bps, and obviously you can do this across different currencies than you're more inclined to bring more on balance sheet.

And so we think of it as a range. I think we also though are quite.

We want to be quite thoughtful about maintaining a program that works well it works well for our clients and the Brown Brothers investment services clients. It works well for a number of global financial institutions that they have relationships with that they sleep, primarily dollar deposits to who appreciate those deposits.

We certainly want to maintain the program for for suites want to maintain it in size, but you can certainly see swings of another $10 billion.

Swings of another $10 billion.

Beyond the initial move potentially. But I think we'll see when we get there and part of it will be discussions with the clients themselves on one hand, and part of it will be with the counterparties and I think there'll be a will be there'll be goodness in opportunity here.

In most circumstances.

That's great color and maybe just as a segue to the second question around deposit beta expectations.

I think you mentioned you thought they might be the similar to the last hiking cycle to confirm that it seemed like they moved around a bit.

To confirm that it seemed like they moved around a bit.

During the cycle, but kind of ended up around a little over 30%.

Like a little over 30%.

Of a deposit beta relative to fed funds rates at the time.

And then maybe if you can clarify that and if you think that would be similar to this cycle.

That would be similar to this cycle and.

And you know obviously, if you would you be treating those PVH deposits in a similar fashion or do they have a different profile.

Sure, Brian. And it was actually a good opportunity as we see rates rise in the likelihood of fed funds.

<unk>.

We did get a chance to go back and revisit what we both said and what we saw in from a deposit beta standpoint back in 2015, 2016, 2017, I do expect the Brown Brothers deposits behave similarly to ours. They are primarily with asset managers.

Revisit what we both said and what we saw in from a from a deposit beta standpoint back in.

2015, 2016, 2017, I do expect the Brown brothers deposits behave similarly to ours. They are primarily with asset managers. They are.

They are currency by currency similar to ours, but if.

If you go back and I think we were good about disclosing our quarter on quarter interest bearing deposit betas and usually you have to do it by currency right.

Because of how the data's play through but in the first rate, the first one or two rate hikes.

We saw and expect again to see deposit betas in the call it 10% range, maybe 10% to 15% range.

But it's quite low when you get to the third fourth or fifth hike you are in the 30% range plus or minus some.

As your leg into the rate cycle, and it's really when you get in the past there in the fifth sixth seventh hike, where you're likely to get closer to a 50% interest bearing deposit beta is now I'd like to get there.

In the.

Past there in the fifth sixth seventh hike, where you're likely to get closer to a 50% interest bearing deposit beta is now I'd like to get there.

We'd be pleased with the with 50% if we get there with that level prevailing rates, but I think there's a good there's a good opportunity here because in truth, we've been quite limited in our ability to earn NII that covers our cost of capital and so a lot of this is just catch up.

NII that.

That covers our cost of capital and so a lot of this is just catch up.

To a levels that are more and more in line with the long term averages.

Okay. That's great color. Thank you.

That's great color. Thank you.

There are no further questions. I'll turn the call over to Ron O'Hanley for closing remarks.

Thank you operator, and thanks to all of the call for joining us.

Thank you for participating. You may disconnect at this time.

Okay.

Angola.

Sure.

Yes.

At this time.

Great.

<unk>.

Okay.

And in 2013.

Hum.

Great.

Yes.

Hum.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Understood.

Okay.

Very helpful.

Great.

Okay.

<unk>.

Okay.

And.

Yes.

Correct.

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