Q2 2022 State Street Corp Earnings Call

Speaker 1: Good morning ladies and gentlemen and welcome to State Street Corporation's second quarter 2022 earnings conference call and webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com

Speaker 1: This conference call is also being recorded for replay.

Speaker 1: State Street's conference call is copyrighted and all rights are reserved.

Speaker 1: This call may not be recorded for rebroadcast or distribution, in-hole or in part, without the expressed written authorization from State Street Corporation.

Speaker 1: The only authorized broadcast of this call will be housed on the State Street website.

Speaker 1: I would now like to introduce Eileen Fazell-Biehler, Global Head of Investor Relations at State Street. Please go ahead, Eileen. Look at that.

Speaker 2: Thank you. Good morning and thank you all for joining us. On our call today, our CEO , Ron O'Hanley, will speak first. Then Eric Ablof, our CFO , will take you through our second quarter 2022 earnings slide presentation, which is available for download in the investor relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions.

Speaker 2: During the Q&A, please limit yourself to two questions and then recue. Before we get started, I'd like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation.

Speaker 2: In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a 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 . Our 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.

Speaker 3: Thank you, Eileen, and good afternoon, everyone. This morning, we released our second quarter financial results. The second quarter operating environment continued to be impacted by the ongoing geopolitical events in Europe and the notable macroeconomic environment.

Speaker 3: The associated price and wage inflation, rising interest rates, fears of recession are driving declining equity and fixed income markets, currency volatility, and concerns over market liquidity. These factors created a number of fee revenue headwinds for our businesses.

Speaker 3: Despite the adverse market conditions, State Street performed well in the second quarter, with a strong balance sheet and good sales momentum, while delivering strong FX trading and significantly better NII growth year over year, coupled with well-controlled expenses and a healthy pre-tax margin.

Speaker 3: We remain focused on executing against our strategy and intensely managing what we can control to navigate through uncertainty, drive further business momentum and achieve our medium-term goals.

Speaker 3: Turning to slide three of our presentation, I will review our second quarter highlights before Eric takes you through the quarter in more detail.

Speaker 3: Starting with our financial performance, 2Q22 EPS decreased 8% year over year, though it was down just 2% year over year, excluding notable items, primarily a prior year gain on sale in 2Q21.

Speaker 3: weaker markets were the major driver of this decline.

Speaker 3: Total fee revenue for the quarter declined 6% year over year, primarily reflecting the impact of significantly lower global equity and fixed income market levels on servicing and management fees and the stronger U.S. dollar.

Speaker 3: Within total fee revenue, our global markets franchise continued to perform well with FX trading services revenue, increasing 16% year over year, benefiting from higher FX market volatility, which drove higher spreads.

Speaker 3: Total revenue for the quarter to climb 3% year over year, but was down just 1% excluding notable items, is lower total fee revenue was largely offset by a strong NII result, which increased 25% relative to the year ago period.

Speaker 3: In the face of market related fee revenue headwinds in the second quarter, we remain highly focused on controlling the expense base. Second quarter total expenses were flat year over year and declined 1% excluding notable items.

Speaker 3: Our ongoing productivity actions largely offset higher than anticipated salary increases and planned business investments.

Speaker 3: Turning to our business momentum, which you can see across the middle of the slide, we reported a strong quarter of new AUCA asset servicing wins, which amounted to $972 billion, with back office services accounting for 40% of these wins by AUCA.

Speaker 3: As a result of this quarter's good sales performance, AUCA 1, but yet to be installed, increased to a record $3.6 trillion at quarter end.

Speaker 3: During the second quarter, we also reported another alpha client win with 12 of State Street's 20 alpha clients now live as of quarter end.

Speaker 3: We were also awarded the title of Security Services Provider of the Year in the Financial News 20th Annual Trading and Technology Awards.

Speaker 3: Front office software and data also experienced good business momentum in the second quarter, with annual recurring revenue increasing 20% year-over-year to $251 million.

Speaker 3: At Global Advisors, assets under management totaled $3.5 trillion at quarter-end.

Speaker 3: Overall, second quarter AUM flows were negatively impacted by the weaker equity market environment, but we still saw positive net inflows into both our cash and US low-cost ETF franchises during the quarter.

Speaker 3: Even in the volatile environment, we continue to innovate and expand our capabilities to drive future growth. For example, Global Advisors continues to press forward in active ETFs and ESGs, as illustrated by the launch of the actively managed Spider Nuveen Municipal Bond ESG ETF and a number of MSCI Climate Paris-aligned ETFs.

Speaker 3: Last, in terms of business momentum, I was particularly pleased to see that State Street was recognized as the top provider in FX services by Euromoney magazine in the second quarter. Importantly, State Street regained its number one position overall for real money clients, in addition to being ranked number one for best service for real money clients.

Speaker 3: Our FX franchise supports and complements our core investment services business and has proven to be an effective deployment of our capital.

Speaker 3: Turning to our balance sheet and capital, despite a continued rise in interest rates, our CET1 capital ratio improved significantly to 12.9% in quarter end due to our active management of risk-weighted assets and the mitigating actions we executed in our investment portfolio in the second quarter.

Speaker 3: The strength of our balance sheet was highlighted in the second quarter with the release of the Federal Reserve's annual CCAR stress test results in June , following which we announced our intention to increase State Street's quarterly common stock dividend by 10% to 63 cents per share in the third quarter, subject to approval by our Board of Directors.

Speaker 3: We were pleased to announce the intended increase to our quarterly common dividend as we recognize the importance of capital return to our shareholders.

Speaker 3: With that in mind, in the fourth quarter of this year, it remains our intention to resume our existing common share repurchase program in an amount reflecting interest rate levels and market conditions at that time.

Speaker 3: I'll now turn to our proposed acquisition of BBH's investor services business, which remains subject to regulatory approvals and other closing conditions.

Speaker 3: We continue to be excited about the business and its people, the franchise it represents, and the opportunities the transaction represents for our collective clients and for accelerating our strategy.

Speaker 3: I've mentioned previously that we've been engaged in ongoing dialogue with US banking regulators regarding the regulatory review process.

Speaker 3: potential modifications to the transaction intended to facilitate resolution of that process.

Speaker 3: Based on those discussions, we have developed with BBH proposed modifications to the transaction structure that the parties believe present a path forward.

Speaker 3: The proposed modifications include changes to the operating model and legal entity structure and changes to the regulatory approvals required to complete the transaction.

Speaker 3: As part of the proposed modified transaction, State Street is seeking amendments to the transaction terms, including the purchase price.

Speaker 3: Both BBH and our Board of Directors would need to review and approve the modified transaction in amended terms.

Speaker 3: During the third quarter, we intend to finalize the proposed structure in contractual terms and confirm our approach with regulators.

Speaker 3: Assuming the financial and operational aspects of the proposed modifications are timely finalized and contracted, subject to regulatory approval and other closing conditions, the parties are aiming to close the transaction at the end of the fourth quarter of 2022.

Speaker 3: However, there exists significant timing uncertainty and risk that closing will extend beyond that timeline.

Speaker 3: There can be no assurance that a mutually acceptable modified transaction will be entered into or as to the timing or outcome of any regulatory approvals and other closing conditions for this modified transaction.

Speaker 3: After September 6, 2022, either party can terminate the transaction without penalty, absent further agreement of the parties.

Speaker 3: To conclude, as we progress towards our medium-term targets in this uncertain environment, we remain particularly focused on maintaining and further improving our pre-tax margin performance, which, despite the challenging market conditions, increased almost 29% for the quarter, excluding notable items. We're still standing on the low end of the equation of the term taxable income, which

Speaker 3: To help achieve this goal in the face of inflationary pressure and a challenging revenue environment, we will continue to exhibit expense discipline and to drive our automation and productivity efforts.

Speaker 3: We also remain laser focused on innovating for the benefit of our clients and driving organic growth as demonstrated by the strong AUCA wins in the second quarter all while returning capital to our shareholders.

Speaker 3: And with that, let me turn it over to Eric to take you through the quarter in more detail.

Speaker 4: Thank you, Ron, and good afternoon, everyone.

Speaker 4: I'll begin my review of our second quarter results on slide 4.

Speaker 4: We reported EPS of $1.91 or $1.94 excluding acquisition and restructuring costs as detailed on the panel on the right side of the slide.

Speaker 4: As Ron noted earlier, the operating environment in the second quarter remained challenging, largely characterized by continued market volatility related to macroeconomic events and continued geopolitical uncertainties.

Speaker 4: As you can see on the left panel of this slide, strong growth in both net interest income and FX trading enabled us to partially offset significant headwinds from lower equity and fixed income markets in the quarter that impacted other fee areas.

Speaker 4: Also evidenced by today's results, our approach to expense management remains very disciplined and deliberate.

Speaker 4: On a year-on-year basis, second quarter expenses were down, even as we experienced higher than expected wage increases and continued to thoughtfully invest in the franchise.

Speaker 4: Lastly, you'll see that in the second quarter we had a lower than expected tax rate. The bulk of the discrete tax items that contributed to our lower taxes were due to the reassessment of a deferred tax asset worth roughly $60 million.

Speaker 4: All things considered, during the quarter, our business model demonstrated resilience against the challenging backdrop.

Speaker 4: Turning to slide five.

Speaker 4: During the quarter, we saw period end, AUCA decreased by 10% on a year-on-year basis and 8% sequentially.

Speaker 4: Amidst continued and uncertain economic conditions, the year-on-year change was largely driven by lower period and market levels across just about every equity and fixed income market around the world, partially offset by net new business and client flows.

Speaker 4: on a quarter-on-quarter decline was largely the result of the same lower period and market levels.

Speaker 4: as we've also started to see industry outflows from investment products as the risk-off sentiment continues.

Speaker 4: Similarly, at Global Advisors, quarter-end AUM decreased 11% year-on-year and 14% sequentially. The year-on-year decline in AUM was also largely driven by lower period and market levels and institutional net outflows, which was partially offset by positive net inflows in both our U.S. low-cost ETF complex and cash inflows in the quarter.

Speaker 4: Turning to slide six.

Speaker 4: On the left side of the page, you'll see second quarter total servicing fees down 7% year-on-year, largely driven by lower average equity and fixed income market levels, normal pricing headwinds, client activity and adjustments, and the impact of currency translation, partially offset by net new business growth.

Speaker 4: Excluding the impact of currency translation, servicing fees were down only 4% year on year.

Speaker 4: I'd also highlight that from a segment perspective we continue to see excellent revenue growth in our alternatives client segment both year on year and quarter on quarter.

Speaker 4: Sequentially, total servicing fees were down 5%, primarily as a result of the same drivers, lower average equity and fixed income market levels, client activity and adjustments, and the impact of currency translation partially offset by positive net new business.

Speaker 4: Within servicing fees, back office fees were down 7% year on year and 5% quarter on quarter, largely driven by the factors I just described.

Speaker 4: Middle office services was down 12% year-on-year and 8% quarter-on-quarter, primarily due to decreased client AUMs driven by lower market levels and client transaction activity and adjustments.

Speaker 4: But we are seeing some compression in our legacy middle office book. It is an important component of our alpha proposition when it connects to both the front office and back office, and new wins generally come with contracts of 7 to 10 years.

Speaker 4: We continue to expect to see good growth over the medium term, as evidenced by our large, uninstalled middle office revenue backlog of more than $90 million, which I will talk more about in a moment.

Speaker 4: Even against this challenging backdrop, we continue to be pleased with our investment services business momentum and robust pipeline.

Speaker 4: We recorded another strong quarter of new AUCA wins worth $972 billion, while AUCA 1, yet to be installed, amounted to $3.6 trillion at quarter end.

Speaker 4: As Ron mentioned earlier, during second quarter, we reported another new alpha win, All Spring Global Investments, taking the total number of alpha clients to 20 and now have 12 implementations live.

Speaker 4: Lastly, in response to industry inflationary cost pressures, we've undergone a comprehensive analysis of our pricing across all our product areas.

Speaker 4: The result of this analysis has led to the decision to begin to adjust our client pricing upwards in certain areas of servicing, where the wage pressure is most acute and industry capacity is stretched.

Speaker 4: Ultimately, we believe these pricing changes will support the continued investment that allows us to best serve our clients.

Speaker 4: Turning to slide seven.

Speaker 4: Second quarter management fees were $490 million, down 3% year on year, primarily reflecting lower average equity and fixed income market levels, the impact of currency translation, and a specific client repricing adjustment, partially offset by the elimination of money market fee waivers, and the run rate impact of net ETF inflows.

Speaker 4: Management fees were down 6% quarter on quarter, largely due to equity and fixed income market headwinds, partially offset by the elimination of the same money market fee waivers.

Speaker 4: As you can see on the bottom right of the slide, our franchise remains well positioned for growth. In ETFs, although we saw outflows in equity and commodities, we continue to see inflows into spider low cost and fixed income ETFs.

Speaker 4: In our institutional business, there's continued momentum in our target date franchise, notwithstanding outflows primarily from one large client with very low fee assets, which ultimately benefited the overall management fee rate this quarter.

Speaker 4: Across our cash franchise, we again saw another quarter of strong net inflows, this time worth $15 billion in the quarter, contributing to market share gains.

Speaker 4: On slide 8, FX trading services had yet another strong quarter. Relative to a period a year ago, second quarter FX trading services revenue was up 16%, primarily driven by higher FX spreads, partially offset by lower client FX volumes.

Speaker 4: Quarter on quarter, FX Trading Services revenue was down 8% as the benefit of higher FX spreads was more than offset by lower client FX volumes too.

Speaker 4: Our second quarter of securities finance revenues decreased slightly year on year, primarily driven by lower agency and enhanced custody balances due to lower markets, partially offset by higher spreads.

Speaker 4: Sequentially, revenues were up 11%, mainly reflecting higher spreads, partially offset by lower agency and enhanced custody balances.

Speaker 4: Second quarter software and processing fees were down 11% year on year and 6% quarter on quarter, largely driven by lower front office software and data revenue associated with CRD which I'll turn to shortly.

Speaker 4: Finally, other fee revenues of negative $43 million in the second quarter declined both year on year and quarter on quarter.

Speaker 4: Both the year-on-year and quarter-on-quarter declines largely reflect negative market-related adjustments, while the absence of prior-period positive fair value adjustments on equity investments also contributed to the sequential decline.

Speaker 4: While we saw pressure throughout the quarter, almost half of the 43 million came through in the second half of June .

Speaker 4: Moving aside, nine.

Speaker 4: Let me provide some details on the performance of our front office software and data revenue in the second quarter on the left panel of the slide.

Speaker 4: As a reminder, CRD represents the majority of these revenues, but we also include alpha data services, alpha data platform, and Marquatus revenues they are part of our front office offering.

Speaker 4: On both a year-on-year and quarter-on-quarter basis, front office software revenue declined as expected, primarily driven by the absence of several on-premise renewals in the prior periods as well as some episodic fees when compared to the prior year quarter, partially offset by higher software-enabled SaaS revenue. It is important to note, however, that the more durable and recurring software-enabled and professional services revenues have continued to grow nicely with a year-on-year growth of 15%, demonstrating success in deploying our cloud-based SaaS platform environments to more clients.

Speaker 4: Turning at some of the softer metrics enabled by CRD and ALF on the right panel, you'll see that our annual recurring revenue has grown 20% year-on-year as we convert more clients to SaaS, which we expect will create a stickier and more profitable business model.

Speaker 4: As for the middle office, we continue to have an extremely healthy backlog of uninstalled revenue worth $92 million, which is almost twice the prior year.

Speaker 4: Lastly, we are pleased to have announced another Alpha Mandate win this quarter.

Speaker 4: We're also excited to have expanded an existing alpha relationship this quarter, winning approximately $300 billion of new back office assets to custody from an asset owner client.

Speaker 4: This provides another proof point that our alpha value proposition is working as we're gaining more of the wallet share over time.

Speaker 4: Turning to slide 10, second quarter NII increased 25% year on year, primarily reflecting the impact of higher interest rates and continued growth in loan balances.

Speaker 4: Related to the first quarter, the NII was up 15 percent.

Speaker 4: The sequential increase was largely driven by the improvement in both short and long end rates, which benefited our yields, together with continued growth in loan balances partially offset by lower investment portfolio balances.

Speaker 4: On the right side of the slide, we show our average balance sheet during the quarter. Average deposits were down 6% year-on-year and 2% quarter-on-quarter, primarily related to the impact from currency translation and dollar strengthening, which accounted for almost half of the year-on-year decline and two-thirds of the sequential decline.

Speaker 4: The investment portfolio is now down modestly and we have almost 60% of our securities now in health to maturity.

Speaker 4: We're pleased that our balance sheet is well positioned to recognize this interest rate and NIITelwind and also protect OCI.

Speaker 4: Turning this slide 11, second quarter expenses, excluding notable items, decreased 1% year-on-year or increased 2% adjusted for currency translation.

Speaker 4: In response to the revenue environment, we have been proactively managing our expenses, including lowering our incentive compensation.

Speaker 4: In addition to carefully executing on our continued productivity savings efforts, which generated approximately $60 million in year-on-year growth saves, or approximately $150 million year-to-date.

Speaker 4: These savings enabled us to continue to self-fund the good portion of the 4 to 6 percent higher wage rates we're facing and the targeted investments in the business, including the alpha product, the infrastructure and broader automation.

Speaker 4: Compared to 2Q21, compensation employee benefits was down 3% as lower incentive compensation, the impact of currency translation were partially upset by salary merit increases associated with wages and inflationary pressure and higher contractor spend.

Speaker 4: including currency translation, compensation employee benefits would have been up 1%.

Speaker 4: Information systems and communications expenses was down 2% primarily due to the episodic credits related to vendor pricing optimization and infrastructure rationalization.

Speaker 4: Occupancy was down 4% due largely to currency translation, and other expenses were up 18%, primarily reflecting higher recoverable client-related expenses, which are offset in fee revenue, professional fees, and travel costs.

Speaker 4: On a quarter-on-quarter basis, expenses were down due to seasonal expenses in the first quarter.

Speaker 4: Headcount increased quarter on quarter as we continued to insource some strategic technology functions from vendors as well as support growth in alpha.

Speaker 4: Overall, in light of the current macroeconomic environment, we have had a pretty healthy pre-tax margin for the quarter at approximately 29%, excluding notable items, supported by active expense management and strong NII growth.

Speaker 4: Overall, in light of the current macroeconomic environment, we have had pretty healthy pre-tax margin for the quarter at approximately 29%, excluding notable items, supported by active expense management and strong NII growth.

Speaker 4: Moving to slide 12, on the right side of the slide, we show our capital highlights.

Speaker 4: We are quite pleased to report the ET1 of 12.9%, up 100 basis points quarter on quarter.

Speaker 4: We're also happy with our performance under this year's CCAR with a calculated stress capital buffer well above the 2.5% minimum resulting in a preliminary SCB at the floor.

Speaker 4: As a result, in June , we announced a planned 10% increase to our 3Q22 quarterly common stock dividend, subject to Board approval, and it remains our intention to again begin our existing common share repurchase program in the fourth quarter in an amount reflecting market conditions at the time.

Speaker 4: To the left of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios. As you can see, this quarter, even against the backdrop of a challenging operating environment, we drove stronger and higher capital levels.

Speaker 4: During the second quarter, we completed several of the previously announced RWA optimization actions across our trading, lending, and investment portfolios, reducing RWA $12 billion quarter on quarter.

Speaker 4: We also shifted about $20 billion of AFS security to HTM.

Speaker 4: As a result, we limited AOCI from the investment portfolio to under 500 million or 40 basis points of CET1.

Speaker 4: Even with a roughly 60 basis point, upward interest rate move across the two and five-year part of the curve.

Speaker 4: You'll see a larger AOCI move in the GAAP books, but much of that is ratio hedged and offset by the appreciating dollars effect on RWA with an offset in goodwill and intangibles as well.

Speaker 4: Given that we have now significantly reduced the OCI risk to interest rate shocks by 75%, we are now comfortable operating somewhat below our standard target ranges for both CET1 and Tier 1 leverage ratios.

Speaker 4: Turning the slide 13, we provide a summary of our second quarter results.

Speaker 4: Despite the continued volatile market environment, I am pleased with our quarterly performance, which demonstrates the strength of our business model.

Speaker 4: The current macroeconomic environment and persistent geopolitical uncertainties notwithstanding, our strong growth in both net interest income and FX trading services enabled us to partially offset significant headwinds from both equity and fixed income markets, highlighting the resiliency of our franchise.

Speaker 4: And, our expenses remained well controlled, demonstrating the progress we are making in improving our operating model.

Speaker 4: Now, turning to Outlook. We would like to provide our current thinking regarding the third quarter.

Speaker 4: At a macro level, while market rate expectations have been volatile, our current interest rate outlook is broadly in line with the current forwards, which suggests a year-end Fed funds rate of 3.5%.

Speaker 4: We expect other major international central banks to continue raising rates, with the ECB expected to start increasing rates in third quarter.

Speaker 4: The current spot level of global equity markets would imply that average equity markets in 3Q would be down 7-8% QoQ.

Speaker 4: and US dollar appreciation to be about a percentage point of headwind to revenues and tailwind to expenses, which will be included in our guide.

Speaker 4: Now, in terms of the third quarter of 2022 and on a standalone State Street basis.

Speaker 4: Given the implied declines in average global markets, we expect total fee revenue to be down about 2% on a sequential basis.

Speaker 4: And, we expect both servicing fees and management fees to be down 4%, quarter on quarter, driven by weaker market levels.

Speaker 4: Turning to NII.

Speaker 4: Following one of the strongest sequential increases in the NII for many years in 2Q, we expect to deliver further growth, with NII expected to increase 5 to 9% quarter-on-quarter, driven by the tailwind from Central Bank Great Hikes.

Speaker 4: This outlook includes our expectation for some initial deposit outflow and rotation in 3Q.

Speaker 4: And, for the full year, on a standalone State Street basis, we expect NII to increase 24 to 27 percent, which is significantly better than our prior full year guide of 18 to 20 percent.

Speaker 4: Next, we expect total expenses, excluding notable items, to increase just under 1% quarter-on-quarter, driven by inflationary pressures on wages as we continue to target productivity initiatives and execute against our strategy with a deep focus on expense discipline.

Speaker 4: This focus should enable us to drive positive total operating leverage, including notable items for the full year.

Speaker 4: Lastly, we would expect our 3Q tax rate to be approximately 20% for the quarter.

Speaker 4: And with that, let me turn the call back to Ron.

Speaker 3: Thanks, Eric. Operator, we can now open the call for questions.

Speaker 1: Thank you, sir.

Speaker 1: Ladies and gentlemen, we will now begin the question and answer session.

Speaker 1: If you would like to ask a question, please press the star followed by the number 1 on your telephone keypad.

Speaker 1: If you would like to withdraw your question, please press the star 2.

Speaker 1: One moment while we compile the roster.

Speaker 1: Your first question comes from Glenn Schor of Evercore. Please go ahead.

Speaker 5: Hi, thanks very much. In your preparedness, you talked about acute management fees driven by market and others. You also said a client specific pricing adjustment. I just wondered if you could give a little more color.

Speaker 5: on that just so we know if it's a one-off or if this could be other adjustments built forward. Thanks.

Speaker 4: Sorry, Glenn and Sarah, you're breaking up on the audio. Could you I got bits of that, but could you repeat that please for the for us?

Speaker 5: So, the prepared market is going to be lower to Q and C driven by markets, which is obviously going to happen. But you also said non-specific, like an adjustment. I wonder if you could give a little more detail, say the size, what kind of adjustment that was just in case we see thinking about that going forward.

Speaker 4: Sure, Glenn, let me try to cover that. And I think you're focused on servicing fees and management fees. So let me do them both so that we have a little bit of context for you. On page six of the materials on servicing fees, you asked about the impact of client safety and adjustments, and on a year-on-year basis, largely due to the

Speaker 4: kind of lower level of activities and sometimes that comes through with lower markets. So it's worth about a percentage point of headwind on a year-on-year basis and about two points on a quarter basis for that.

Speaker 4: On management fees, there was a series of impacts quarter on quarter. Most of that was driven by market. You know, there was one client that we called out, but that would have been worth, you know, at most one to two percentage points of fees for that.

Speaker 5: is if and when we continue any downtrend in these markets, do those same contracts have floors? Should we expect more stable servicing fees if and when the markets continue to drag lower? Thanks a lot, Eric.

Speaker 3: Glenn, I'll take that. You're accurate. We have a small number. They tend to be very large clients where you just do hit the top of the fee schedule or even in some cases, the fees continue to tail down.

Speaker 3: I don't think we're close to that yet in terms of that being meaningful. So, I wouldn't expect to see that being a factor in the near term. Unless we see much more significant kinds of market downturn.

Speaker 6: Okay, thank you.

Speaker 7: Operator, the next question.

Speaker 1: Your next question comes from Ken Houston of Jeffries. Please go ahead.

Speaker 8: Thanks. Good afternoon. Ron, just following up on your opening remarks and what we saw on the forward-looking statements, as you go forward and try to negotiate, I guess just how do you think through your optionality, meaning that of course a price concession is probably your best outcome. If you can't get one, is that a go, not go decision right there and then …

Speaker 8: If for some reason you do walk away one side or the other, what becomes your next immediate steps in terms of either capital strategy or go-forward strategy? Thanks.

Speaker 3: Yeah, Ken, we're very much in the midst of this, so I don't want to get out ahead of it. Firstly, we remain committed to the combination on a strategic basis, but given that we have also fought against in term of this issue.

Speaker 3: we foresee this being restructured in a way that, you know, it changes some of the operating model, some of the circumstances change. We do believe, well, we know we believe some kind of a price adjustment would be warranted. I don't want to get ahead of where we are in discussions with DBH, they remain very amicable and both sides are committed to making this happen. We're committed to, you know, we like the business, we like the people.

Speaker 3: So, you know, obviously, if we don't get there, then there's a lot of options in front of us. And, you know, we come back to you at that time.

Speaker 8: Okay, that's fair. And then secondly, Eric, on your NII update, the new guide, I'm just wondering how much of that update is a new curve and if you can help us understand where you are on that and what are you getting on new securities yields now versus what's rolling off the back book?

Speaker 4: Yeah, Ken, the uptick in the NII guy, I think, probably probably both for the third quarter and then the full year, which we've updated is primarily driven by the higher yield curve and expectations in the US, plus some expectation that the ECB is going to start to seriously.

Speaker 4: raise rates in the third quarter. And we've said that once the ECB crosses a 25 basis point, a positive rate threshold, that begins to be accretive. So I think those are the major drivers. On investment portfolio yields, I think you see that in our average balance sheet. They are up on average almost 50%.

Speaker 4: that have an average duration of 2.8 years, so you can kind of see what an older security with that vintage would look like, and compare it to what's in the market today. And you'll see a nice pickup, and that's what's flowing through, and giving us the kind of quarter-on-quarter increase on average. So you saw this quarter, and we'll expect to see another increase on average, and that order.

Speaker 9: I wanted to make sure I understood.

Speaker 9: What types of things are you know being looked to change? Is this a function of you need to keep more data servicing processing within certain countries to satisfy regulatory requirements or is is there something else that's more?

Speaker 4: not operational but more around what parts of the business you can do. I'm wondering if it's an expense issue or if it's a revenue opportunity issue. Betsy, it's Eric. You know, those are all the kinds of areas we're working through and I think the heart of this when you do a banking deal, a global banking deal of this sort, is the legal entity structure. And you obviously know we run a holding company, a bank, a series...

Speaker 4: some ramifications to your point on the operating model that will have some amount of effect on perhaps the pace of expense or revenue synergies. And that's what we're working through. What we have said and we'd want to reiterate is that we are committed to finding a way to preserve the economic accretion in the range that we had previously.

Speaker 4: disclosed back in September . And so we're highly focused on that. And as a result, there's some changes that we're seeking on the transaction, including price that Ron mentioned.

Speaker 9: OK, and then you get this in front of regulators.

Speaker 9: But if they don't agree by September 6th, you have indicated you want to close by the end of the year.

Speaker 9: how should investors think about what your

Speaker 9: expected a thought process is going to be between that time period September 6th or 31st.

Speaker 3: Yeah, Betsy, it's Ron. I mean, the September 6th date, you know, it's basically the one-year anniversary of the deal. And like a lot of transactions, they have an outside limit. So the way you should interpret that is, you know, what we've said is both parties remain committed. We've got to work through things. I mean, the regulatory world and the political world has changed significantly since we announced this deal and what we're looking towards is a way to

Speaker 3: breakthrough and close it in a reasonable time period. And I know this time period doesn't seem reasonable to anybody, but it's actually better than some of the alternatives that we've been faced with. So think about the September 6th, it's an existing date and assuming everything is going along fine and parties are agreeing, then we just agree to an extension of that to the close date. Got it.

Speaker 3: disclosing and reminding everybody what the terms of the transaction are.

Speaker 9: Okay, no, that's helpful. And then just last for me is I think you mentioned that, you know, given the restructuring of the balance sheet that you've made and the success with that, that you're now

Speaker 9: comfortable with running potentially below management targets for CT1-SLR. Could you remind us what the targets are and how much below you're willing to dip?

Speaker 4: Sure, Betsy. It's Eric. I think the best place to see our capital ratios and targets is on page 12 of the presentation deck. You see what I'll call our standard CET1 targets, our 10 to 11 percent, our standard Tier 1 leverage targets, five and a quarter to five and three quarters.

Speaker 4: And what we've done, as you mentioned, is we've dramatically reduced the volatility risk from OCI, which means that we're quite comfortable running below that. Directionally, that means on CET1, for example, could be up to 50 basis points below that, while we run at much lower risk and volatility levels in OCI.

Speaker 4: And on a leverage basis, it tends to be about half of that amount.

Speaker 4: it tends to be about half of that amount. Thank you.

Speaker 1: Your next question comes from Brennan Hawken of UBS. Please go ahead.

Speaker 10: Actually, good afternoon. Thanks for taking the questions. It's been a long day. So Eric, you referenced that you were considering some adjustments to the pricing model, which make a lot of sense. You know, obviously we're dealing with a very inflationary environment. Have you begun those discussions and what has been the reaction from clients so far?

Speaker 10: Are you hearing from some of your clients that some of the competitors are also making similar moves, you know, just to be assured that you're not going to be out on your own pushing in that regard? Because it's normally when we take a pricing, of course, in the custody world, we typically – it's typically a tougher place to get price increases. So kind of curious about that. Brennan, it's Ron. Why don't I start on this, and Eric will fill in. We're early in this process, but yes, we have –

Speaker 3: Interestingly, the earliest ones have been, in some ways, I think clients were not surprised that it was coming at them. So I'm not saying that's the way it's gonna be. None of us enjoy paying more for something today than what we paid yesterday. But we're going at this in a very fact-based way. These tend to be sophisticated institutional buyers and they know what's going on. So I can't speak for what others are doing.

Speaker 3: I just don't have a feel for that, but we're running our business in the way we believe we need to, and we think this is an important component of it.

Speaker 10: Okay, thanks for that. And then when we think about the, you laid out, Eric, the expectation around ECB and whatnot, but as we see potential policy rates in different parts of the world diverging, could you give us a reminder about the currency mix of your deposit, of your deposits as it stands now, and whether or not you expect in the next, you know, in the foreseeable future.

Speaker 10: that shift at all, you know, as yield differentials widen between different currencies. Thank you.

Speaker 4: Sure, Brennan. It's Eric. And we actually added some additional disclosure in our addendum, our financial addendum this quarter. You'll find it on page 8 that actually breaks out the balance sheet, including the total assets, the investment securities, and deposits by the major currencies, USD, Euros, pound sterling, and so forth.

Speaker 4: because we are quite focused on navigating this interest rate environment. And to be honest, you know, securing the benefits of interest rate increases around the world, right? We position the balance sheet currency by currency. We have pricing, you know, plans and betas that are carefully developed currency by currency. I don't think we expect a lot of...

Speaker 4: change in the composition of the balance sheet. I mean the the US

Speaker 4: You know, it's clearly the U.S. central bank's clearly moving much more quickly with not only interest rates but quantitative tightening, and that will potentially have a downward trend on U.S. currency deposits. On the other hand, with U.S. rates, prevailing rates higher than what you see around the rest of the world, there's a natural draw into the U.S. from global investors. So it's hard to, I think it's hard to...

Speaker 4: actually forecast the currency composition and the deposit levels given those movements. But we're well prepared. And in fact, some of the interest rate or some of the NII increases that you saw this quarter are coming not only by virtue of the U.S. rate rises, but also those in pound sterling and some of the other Anglo-Saxon currencies. That's the data that says Ind Secondit. So the market is not capitalism.

Speaker 4: you know, we're positioning currency by currency as a result. Great. Thanks for that. Sure.

Speaker 1: Your next question comes from Jim Mitchell of Seaport Global. Please go ahead.

Speaker 11: Oh, thanks. Good afternoon. Eric, maybe just on the securities portfolio, you had a pretty big shift into HTM to de-risk the AOCI. But I'm just looking at it does have a materially higher yield. Is there...

Speaker 11: Something to think about in the HTM portfolio that you've kind of locked in longer duration or is a little more

Speaker 11: Credit risk in there, how do I think about the ATM portfolio versus AFS and how that can evolve? Does it hold back and I sensitivity or not? Excuse me.

Speaker 4: Jim, it's Eric. We're quite careful about managing our NII sensitivity holistically across the book. I think what you'll see is that because we use HTM to protect against interest rate and OCI volatility, it's more natural that if we have a blended book of short, medium, and longer-term securities, that we would move more the medium and longer-term securities into HTM.

Speaker 4: because thereby we get the most protection while we give up the least amount of sale optionality. So that's why you're just seeing a higher yield. I think you'll see that generally be true and you can follow that in our disclosures accordingly.

Speaker 11: Okay, great. And then when I think about the get to be installed business, I mean, it continues to grow. I know there's a long tail to getting those installed, but are we at a point where this, I mean, I think we've looked in the past, and I think we all get a little frustrated that we see these big wins, and it's hard to determine or see it in the numbers. Are we at a point where this is getting to materiality and that we could see a nice acceleration in organic growth next year when this stuff gets installed? Yeah, I think you've got the right, broad time frame. I mean, the...

Speaker 4: I guess the way I would describe it is the larger the deal, the more complex and more transformative it is for our clients. They're fundamentally changing their operating model. They're harmonizing systems and processes. We're co-investing with them to build for them a front, middle, and often back office model.

Speaker 4: you know, that will suit them for, you know, a decade or more. As you think about the 3.6 trillion of AUSA to be installed, 2023 is an important year. We expect that about a third, you know, this will move around, but about a third will likely be installed by the end of that year. And perhaps as much as half of the revenue associated with the AUSA, we expect that the AUSA will be able to move around and be able to move around and be able to move around. So, you know, that's a big deal. And I think that's a big deal. I think that's a big deal. And I think that's a big deal.

Speaker 4: with those wins. Great. That's helpful. Thanks.

Speaker 12: Your next question comes from Brian Begell of Joint Your Bank. Please go ahead. Thanks very much. Eric, if you could just repeat that comment on the 1-3rd of the 3.6 string. Was that by the end of next year? Did you say I met I just missed that one. Did you say I met I just missed that one.

Speaker 12: Your next question comes from Brian Bedell of Deutsche Bank. Please go ahead. Thanks very much. Eric, if you could just repeat that comment on the one-third of the 3.6 trillion. Was that by the end of next year? Did you say? I just missed that. Yeah, that's correct. By the end of 2020. Yeah.

Speaker 12: Just back to the BBH strategy. Good to hear that you're both committed to this. If you are able to close it with any amended terms and amended structures, can you just remind us, or if you have comments on the deposit strategy which was...

Speaker 12: Obviously, bringing the BBH deposits on balance sheet and then there was an opportunity to bring potentially a large portion of balances from their $60 billion off balance sheet, or third party bank I should say, arrangements. Would that still be doable or does the structure change that calculus?

Speaker 4: We are still in the process of nailing down both the legal entity and the operating model changes. We are working through those and working towards developing a firm view of when and how the deposit and suite program is operated and how we may in the future use that program and take advantage of some of the cash and deposit optionality. But that's in process at this point.

Speaker 12: to the last cycle I think we were down you know more than 15% in average deposit levels from start of Fed hiking to to the trough in 2019 is that a reasonable starting point to think about that deposit runoff or something different in the cycle that would make you think that you wouldn't have that

I think the last cycle is always going to be indicative, but you remember there were moving parts in the last cycle, including the SLR rule was in flux and there was, many of us on the banking side had to navigate the size of our balance sheets and the penalty of what was happening at the interest rate environment and quantitative tightening.

I think what I've said in the past is relevant over the, you know, since the pre-COVID time period, our deposits are up, you know, roughly, you know, $60 billion. You know, we think that, you know, half of that can easily be ascribed to the quantitative easing that we had and that'll reverse out. Now, you know, that's an estimate and it's always, you know, hard to forecast this because

higher and has moved faster, right? We're likely to see closer to the 10 billion per trillion in the first year and then maybe lighten out in the second and third year. But those are all the scenarios we're working through. I think from our perspective, we're extremely flush from a liquidity standpoint. The deposits are valuable, so we're monetizing them for the purpose of the.

the PNL and we expect over time to be able to not only get to the higher levels of an II that we have in the past, I think we were in the $6.95 million range during the last cycle I think our forecast and it's hard to forecast this perfectly but the forecast that we've built.

put us at or above that level in this next cycle. And part of that is that while there is some tightening and erosion of total deposit levels, you also have higher US rates, higher global rates, and in particular, we'll have a move in ECB and European rates, at least based on the current forward. That's great color, thank you so much.

level in this next cycle. Part of that is that while there is some tightening and erosion of total deposit levels, you also have higher U.S. rates, higher global rates, and in particular, will have a move in ECB and European rates, at least based on the current forward. That's a great color. Thank you so much.

Your next question comes from Steven Schubach of Wolf Research. Please go ahead.

Hey, good afternoon.

So, Eric, I wanted to better understand just some of the guidance items that you outlined specific to both fees and expenses. And on the fee side, certainly the guidance that you offered suggests greater resiliency compared with some of the more acute declines that we've seen in some of the market proxies. Just want to get a sense as to what's driving that better outcome. And specific to expenses, I was hoping you can give some bookends in terms of...

What range of expense growth we should be contemplating. You cited inflationary pressures multiple times. The need to maybe revisit pricing with some of your clients, but you also have some FX tail-in. So it's hoping to get some perspective on what sort of expense growth range we should be thinking about for the remainder of this year.

Sure, let me start on fees. You know, the real environmental challenges, if you just extend out the current spot levels of that equity markets are sitting at, the average, the daily average for third quarter is gonna be down, you know, 78% versus the average for second quarter. And that's the basis by which, you know, we are in revenues both from surfacing fees and management fees. So that's the headwind that we have.

We're hoping that some of the market related, the lumpy stuff that we have in other revenues doesn't repeat, and that might give us a little bit of insulation. So that's why I said, seriously, imagine fees could be down the 4% range sequentially, but total fees, perhaps closer to 2%. So less so. And obviously, volatility levels.

under a percentage point for the third quarter. You know, you can put a range around that and estimate fourth quarter. And so we're, I think that's what we've done from a guidance standpoint. I think what we are willing to say is because we have a kind of an overall view of fee revenues for third quarter, we can guesstimate into fourth quarter as can you. I think at NII we have quite a solid view of the full year.

which we've provided, you know, we're comfortable saying, and we said in our prepared remarks, that, you know, we expect to drive positive, total operating leverage for the year, you know, adjusted for notables, but, you know, we feel confident in that, given the current market environment. And part of that is, you know, we have some visibility as we've described on fees, and a good bit of visibility on NII.

And to be honest, while there are some wage and inflationary pressures, you know, because the P&L is lighter, we've proactively adjusted the incentive line to compensate for that. And we're committed to navigating through this environment in a...

you know, in a thoughtful way and deliver results that are as positive and as appropriate as possible.

That's really helpful color and just one follow up on the expense commentary I heard.

One of the questions we've been fielding from a lot of folks pertains to the longer-term expense growth algorithm. You guys have done a really good job of reining in expenses on an absolute basis over the past few years. Clearly, the inflationary pressures are starting to build. As we think about your efficiency agenda that you guys have prosecuted on, but at the same time the inflationary pressure is building simultaneously, how do you see that expense growth algorithm evolving over time? Thanks for watching.

Yeah, this, and I think we'll know more over the course of the year, but I think there are some inflationary pressures, some of which we can look for ways to at least limit, but we can't really avoid. So let me give you an example. You know, on the $8 billion expense base that we have, about $2.5 billion of that is salaries.

Now, salaries historically have moved up about two percentage points a year, maybe three. But right now, if you look at merit increases, the higher salary replacement rates for new hires versus exits, bidding back, collectively, at Talon, salary costs are up closer to four to six percent. So, you're more likely to end up with higher salary than some other

on a run rate basis, on a base of two and a half billion. So you could do the math there and start to get a sense that that creates an additional headwind that we didn't have and that headwind could be worth an extra point of expenses on the total $8 billion base. It's that kind of.

environment that we're operating in. I mean, we need to see if that persists into next year. Do we have a recession or not? What happens to labor markets? And then the other part of that is working through where we are on non-comp expenses. You know, where vendors come to us sometimes and say, look, we feel the need to adjust. And we're obviously trying to manage and rein that in. And I think that's.

that's another factor. So I think we see some of those we're trying to telegraph them, but we're also committing to committed to achieve and deliver on our medium-term targets. And some of that's going to be by finding in some ways to maybe limit or contain or offset, but in other ways they may come through. You know, the entry environment will give us a tailwind. And then you heard us describe some of the...

you know, selective changes that we're discussing, you know, with clients around, you know, pricing and, you know, top line pricing. So there are a number of different factors. I think I'm not, I'm not, I'm not, it's early to give, you know, a fulsome view of what next year pretends, but I would say that we're conscious, we're in a dynamic environment, we're conscious that there are some elements that we can control and others that, that that..

are not as controllable, but we're also committed to getting to the medium-term targets. And I think that provides a good set of goals for us and that we're committed to.

controllable, but we're also committed to getting to the medium-term targets. And I think that provides a good set of goals for us that we're committed to. Please let me help us build the nose, Eric.

I'm sorry, you're on. Yeah, Steve, what I would add to that is that throughout this period that we've been managing expenses over the last several years, as we've been quite clear on, we've also been investing in the business, particularly around automation and technology. There's still payoffs expected from that. We've seen some. There's more in the future. So the other bit of this will be continuing to manage that algorithm between

How much are we continue to spend on automating more to get the future productivity savings? How much are we going to do to get the future productivity savings?

It's great, Collar. Thanks so much for taking my questions. Your next question comes from Gerard Cassidy of RBC Capital Markets. Please go ahead.

Hi Ron, hi Eric. Guys, maybe Eric, you've in the past given us an update on the variable rate pricing of your fee revenues. What percentage of fee revenues today would you consider variable pricing, you know, which are greatly influenced by market levels of course? And second, and Ron, when you talked about, you know, talking about price increases for some of the products for your customers, is that for both the variable rate type pricing as well as fixed...

level dependent, so the kind of assets under custody levels. There's then a portion that is driven by transactional or activity of volumes, and then the balance is fixed. So there is a mix. And that's what you're seeing flowing through the P&L at this point. They are complex schedules. You can measure them with a ruler in some cases just because they span the world. They span the world.

you know, products and regions and entities and often have some history associated with them. But that's the broad basis.

And yeah, and then Charade, just the second part of your question, you know, are we going at the, you know, the asset based fee, the variable fee or the fixed fee? I mean, it's a little bit of both. And again, we're trying to be reasonable, firstly to our clients, but also to ourselves. And really tying to this to where there's real inflationary pressures. And also recognizing that we have a commitment to

generating really good service for our clients, right? Service better than our competitors. So it's less about is it the variable or the fixed, it's where are we having these pressures and therefore where do we need a price increase. Very good. And then just as a quick follow up Eric, in the health and maturity portfolio, the duration was 2.8 years as you pointed out. Can you share with us the OCI accretion back into capital? About how many basis points a year do you think you'll see in

describe the AFS portfolio.

both on average and on end of period basis in the HTM portfolio. And I think in total, the yield on AFS right now is about 91 basis points. On the health to maturity, about 155 basis points. That's just because of the duration that we tend to put in health to maturity to protect it from OCI. In terms of the accretion that'll come through.

We expect the accretion to start towards the fourth quarter in particular, a little bit in the third, and then into the fourth quarter. And we're looking at accretion in the $100 to $200 million range of capital. It'll bounce around quarter by quarter as different maturities come through. But that's a healthy amount of capital accretion, and that could be worth 10, 15 basis points.

Please go ahead.

Hi, first thanks for changing the time of your conference call.

given so much else happening today.

So on the pricing due to inflation, I mean it all makes sense, it's all logical, but can you actually get that done? We've talked about pricing going down for the last three decades. Now it seems like you have more of a reason to increase pricing than ever before. Ron, you've been on the other side of this.

you're getting the phone call, hi this is state three, we'd like to increase the pricing by five percent.

and then you're like, well, we're gonna go to these other three or four or five providers. So how much confidence do you have that you can pass on some of these price increases to your customers?

That's a good question, Mike. I would say that what's changed over the years is

virtually everybody, you know, you go back 15, 20 years ago, virtually everybody bought the same service.

It was custody fund accounting, it was publicly listed markets, it was fairly consistent and plain and it was very easy to do as you said. I think what's changed is that even if you...

certainly in the medium to large managers, you're seeing a broad product base, some of which are actually reasonably complicated to do, whether it's complicated because of the skills required, complicated because of the technology that's required, and it's in those areas where we're seeing the highest inflationary pressures..

And we think that we offer a superior capability. We think that in many cases there's just limited capacity in the marketplace. And we also think that it's a time where that everybody's seeing the same kind of pressure of the last 10, 15, 20 years, world's been enjoying, you know, in effect, the great deflation.

And that's not what's going on now. So it's always dangerous to utter those words, you know, this time is different, so I won't. But we do think there's a set of circumstances in a targeted set of areas where pricing adjustments are required and that we believe the clients will understand and again, very early reads, but they seem to be.

And as a compromise, are you talking more about compensating deposit balances like

the trust banks had in the past when rates were higher.

you know, the trust banks had in the past when rates were higher.

banks had in the past when rates were higher? No.

Okay, it's just plain old, we want to get paid more because our costs are up for us and everybody else. And so one third of what we're saying. Mike, on deposits, remember, we've been under earning on deposits against, you know, what costs us to hold deposits, which is preferred securities, right? For now, you know, several years, we barely offset that, you know, at the height of the last interest rate increase in 2017-8.

uh, you know, salary and, you know, non-comp, you know, pressures that we're seeing are not different than what others are seeing in the rest of the economy. And that, that on a net basis is quite different. Okay. That's good clarification. Thank you. Um, and then just last on that, your costs going higher. Um, you know, I thought a lot of banks seem to have an advantage just like you, you had 2 billion of expenses, 1 billion in comp, but comp in society is going up less than other inflation, right? Like, um,

food, rent, gas, everything else is going up a lot more than employee costs. And what we've been hearing, at least anecdotally among the banks, is that some of those employee cost pressures have been waning in the most recent months and weeks.

But what I hear from you is that that's not the case, or even if it is the case, you're still talking about kind of 2x historical growth than in the past.

Mike, what I would say is what you say about comp costs lagging behind other inflationary expenses. That is true and that's typical. That's typically how inflation works its way into and through labor markets.

I would say that

say that that

We've certainly seen a much higher than trend pressure on us and I would venture since we're swimming in the same pool of skills here, I would say certainly with our nearing competitors in particularly in the in the skilled areas that we need and as Eric noted in some of the you know replacing somebody that's committed a much or a significant higher cost than before.

Now, I think it's also true that if you believe that there's a recession facing us or that in any event there'll be less kind of economic growth going forward than what we see now for a period of time, that's likely to take pressure off it. But there's still a very real move up in select areas around our expenses. And I actually don't think.

it would be different for a comparable institution. All right, thank you very much. Your next question comes from Rob Lildhack of Autonomous Research. Please go ahead. Hi Ron, hi Eric. Just a quick one from me. I wanted to ask about the drop in RWAs in the quarter. Could you talk about what the drivers are there and what kind of RWA outlook or assumption is embedded in your guidance going forward?

Yeah, we, as you recall, Rob, we had in the first quarter, consciously deployed more

RWA in some of our business activities, in particular in trading and in lending, just because we had a surplus amount of capital and so we put it to work and had some good revenues. This quarter, we ran that back in, partly because we were committed to driving our capital ratios upward. And partly, to be honest, we found some opportunities for optimization. So I talked about more than a $10 billion reduction quarter on quarter.

That came across businesses in securities finance. It came in the lending book where some of the loans qualify for margin loan treatment, which comes at a different RWA level. And then we had some amount of credit, I'll call it sort of credit light in the investment portfolio that was 100% risk weighted that we allowed to roll off. So there were some tactical adjustments that we made on that basis.

We also tend to have some volatility in RWA. You know, the FX derivatives book can move around by three, four billion dollars, and that was a, we got a good bounce there. So I think about a third I'd say was of the 10 to 12 billion quarter on quarter reduction was a good bounce, and we'll take those. But that could actually, that three to four billion could bounce back up in the third quarter, and we're obvious.

Your next question comes from Vivek Junaga of JP Morgan. Please go ahead.

Your next question comes from Vivek Junega of JP Morgan. Please go ahead. Please go ahead.

Thanks. Firstly, I want to echo Mike's comment about changing the timing of the call. I'm glad. I would take that one step further and say in the future it would be helpful if you would even think of another day. So it would be not on such a crazy day for all of us, so we can actually pay a little more attention to it. But moving past that, the price increases that you're talking about on servicing contracts, given that these are longer duration contracts, Ron.

When should we expect that they could start to go through? Is it a year out or do you think you could actually go, these could go into effect in fairly short order? What kind of timing would you point to?

Yeah, that's a good question. And again, because we're trying to be very fact based and tie it to where there's increases in where we feel we need to do this. The answer is it varies. You know, in some cases.

It's around particular transactions or asset class types where we can Institute in other cases there. You know there is There is an agreement that we need to secure from the from the client but our goal is to I mean obviously the pressure is now so You know we we want to Possible again, we're early in this process, so you know we'll see what we accomplish in terms of overall timing But I think given our approach which again is

based on facts and the realities of client situations. We're optimistic that we can accomplish something here.

and the realities of client situations were optimistic that we can accomplish something here. Thank you.

There are no further questions from the phone lines. At this time I'll turn the conference back over to Mr. Ron O'Hanley for closing remarks.

Both thank you operator and thank you all for participating in the call. Thank you for your support.

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