Q3 2022 State Street Corp Earnings Call
Good morning, and welcome to State Street Corporation third quarter 2022 earnings Conference call and webcast. Today's discussion is being broadcast live on state Street's website at investors about State Street Dot 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 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 in a state Street website now I would like to introduce Eileen.
Vidal 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 <unk> will speak first.
And Eric I'll block, our CFO will take you through our third quarter 2022 earnings slide presentation, which is available for download in the Investor Relations section of our website at investors that State Street Dot 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 slide presentation also available on the IR section of our website.
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 or form.
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 2022 continues to unfold like no other year in recent memory with the challenges face today are rising partly out of but acutely different from post the world faced in 2020 during the onset of the COVID-19 pandemic and while the global operating environment continues to be very challenge.
Our third quarter results clearly demonstrate the resilience of our business model and our focus on maintaining and further improving phase III pretax margin, which was a solid 29% in the third quarter. Excluding notable items.
During the third quarter financial markets were negatively impacted by the adverse effects of the ongoing war on Ukraine, and several macroeconomic headwinds, including continued price and wage inflation dramatically higher interest rates significant U S dollar strength and heightened fears of a global recession.
These factors collectively drove heightened uncertainty, which contributed to meaningful declines in both global equity and fixed income markets as well as increased market volatility, which in turn impacted flows.
We continue to carefully navigate the business through this environment, while the operating climate created a number of fee revenue headwinds for our business in the third quarter, the savings and efficiency of our alpha and enterprise outsourcing offering makes our value proposition, even more attractive to asset managers and asset owners and the.
Market, an inflationary environment, we maintained.
And a solid balance sheet and strong capital position delivered significant NII growth as well as healthy FX trading revenues and remain laser focused on intensely managing what we can control as demonstrated by our expense management.
Turning to slide three of our presentation I will review, our third quarter highlights before Eric picture through the quarter in more detail.
Starting with our financial performance.
Third quarter 'twenty, two EPS was $1 80, or 182, excluding notable items compared to 196 or $2. Excluding notable items in <unk> 'twenty, one double digit year over year declines in average global equity market values drove most of this decrease.
Total fee revenue for the third quarter declined 8% year over year, primarily reflecting the impact of significantly lower global equity and fixed income market levels on servicing and management fees as well as the stronger U S dollar.
Within total fee revenue, our global markets franchise. Once again continued to perform well with FX trading services and securities finance revenues, increasing 14% and 4% year over year, respectively. As the business was able to benefit from increased volatility while supporting our clients.
We also drove a solid result within front office software and data with third quarter revenue, increasing 9% year over year.
Total revenue for the third quarter declined just 1% year over year.
Lower total fee revenue was largely offset by a very strong NII result, which increased 36% relative to the year ago period, driven primarily by higher interest rates.
Faced with continued market related fee revenue headwinds and inflationary pressures, we remain focused on controlling expense growth.
Even as we invested in our people and business third quarter total expenses were flat year over year and quarter over quarter, primarily driven by the impact of a stronger U S dollar and expense management.
Business momentum was solid in the third quarter with new AUC, a asset servicing wins amounting to 233 billion.
Encouragingly, our third quarter wins include expanded relationships with two existing alpha clients, demonstrating our ability to broaden and deepen client relationships and drive new back office mandates through our alpha strategy.
As a result of this quarter's solid sales performance AUC, a one but yet to be installed with three four trillion at quarter end.
Front office and data also experienced good business momentum in the third quarter with annual recurring revenue, increasing 20% year over year to $267 million.
At Global Advisors assets under management totaled three three trillion overall third quarter AUM.
Management fees were negatively impacted by weaker equity and fixed income markets, but we still saw positive net flows into our cash spy and U S low cost ETF products during the quarter.
Even in the volatile environment, our global institutional money market business has continued to gain market share this year with AUM, reaching a record level in the third quarter have having experienced four quarters in a row of inflows.
We remain excited by our global advisor strategy and the growth potential of our franchise and announced new leadership in the third quarter as <unk>, Hong will become <unk>, new President and CEO in December .
I would now like to turn to the proposed acquisition of Brown Brothers, Harriman, <unk> Investor services business, which remains subject to regulatory approvals and other closing conditions.
Current regulatory environment for M&A transactions involving G sibs as challenging.
We are engaged in ongoing dialogue with U S and international banking regulators regarding the prolonged regulatory review process we.
We have developed with BPH proposed modifications to the transaction, including changes to the operating model and legal entity structure and a reduction to the purchase price.
We anticipate that a modified transaction would be somewhat more complex.
And include a delay in timing and amount of deal synergies, resulting in a slower path to accretion.
While discussions with regulators on the proposed modified transaction are ongoing the likelihood of a successful outcome is increasingly uncertain.
There can be no assurance that a mutually acceptable modified transaction will be agreed and enter into or as to the timing or outcome of any regulatory approvals and other closing conditions for a modified transaction.
The modifications to the transaction remains subject to review and approval by both BPH as partners and our board of directors.
As previously noted the sale and purchase agreement allows each of state Street and PVH the right to terminate the transaction upon written notice without a contractual penalty at any time.
We continue to believe the strategic rationale for the transaction remains compelling and that has encouraged us to continue to seek an acceptable path forward.
These efforts are actively underway and as we previously stated we expect to reach a decision on whether the transaction could proceed forward during this quarter.
Turning to our balance sheet and capital. Despite a continued rise in interest rates. Our CET one capital ratio was a strong 13, 2% at quarter end.
As I have noted previously we recognize the importance of capital returned to our shareholders and it remains an integral component of our medium term targets.
Accordingly, having already announced at 10% per share increase to our quarterly common stock dividend earlier. This year, we now intend to repurchase approximately $1 billion of state Street common stock in the fourth quarter under the existing common stock repurchase program authorization, which expires at the end of 2022.
Additionally, in keeping with our medium term targets that is also our intention to return greater than 80% of earnings in 2023 in the form of common stock dividends and share repurchases subject to approval by our board of directors and market conditions at the time.
If the proposed acquisition of PVH Investor services did not progress, we would expect capital return to be significantly more than that amount.
To conclude the events of the last two and a half years demonstrated the resiliency of state Street's business model during times of heightened market volatility and macroeconomic uncertainty even if the financial markets broadly declined in the third quarter, we delivered a healthy pre tax margin of 29% excluding notable items.
In addition to solid new business wins, while the environment is challenging and uncertain. We remain confident in our ability to continue to successfully execute against our strategic agenda and improve our operating model and financial performance over the medium term for the benefit of our clients and shareholders.
As we look ahead, we will continue to adapt to the highly uncertain environment by remaining intensely focused on managing what we can control is our solid expense discipline in 2022 to date has demonstrated with year to date total expenses flat to the same nine month period in 2021, even as we invested meaningfully in our people.
And business.
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 I'll begin my review of our third quarter results on slide four.
We reported EPS of $1 80, or $1 <unk>, excluding acquisition and restructuring costs as detailed in the panel on the right side.
As you know the operating environment in the third quarter remained challenging with persistent market volatility related to ongoing geopolitical tensions inflationary pressures rapidly rising interest rates and concerns about the global economy.
Despite these challenges as you can see on the left hand of the slide strong growth in both net interest income and our FX trading services business enabled us to partially offset the significant headwinds from lower equity and fixed income markets in the quarter.
Additionally, we continue to demonstrate prudent expense management in the third quarter, even as we experienced ongoing price and wage increases while we continue to invest in the franchise.
Yes.
Turning to slide five.
During the quarter, we saw period end investment services, you see a decrease by 18% on a year on year basis, and 7% sequentially. The.
The year on year change was largely driven by continued lower period end market levels across equity and fixed income markets globally, our previously disclosed client transition and the impact of currency translation.
Partially offset by net new business installations.
The quarter on quarter decline was largely a result of these same factors.
Similarly at global Advisors period end, AUM decreased 15% year on year and 6% sequentially the.
The year on year decline in AUM was largely driven by lower period end market levels institutional net outflows and the impact of currency translation, which was partially offset by positive net flows in both our ETF and cash businesses.
Sure.
Turning to slide six on the left side of the page Youll see third quarter total servicing fees down 12% year on year, largely driven by lower average equity and fixed income market levels, lower client activity and adjustments normal pricing headwinds and the impact of currency translation, partially offset.
Set by net new business.
Excluding the impact of currency translation servicing fees were down 9% year on year.
Even with the negative impact of the market environment in the quarter I would highlight that we were pleased to see good double digit growth in our private markets businesses.
Sequentially total servicing fees were down 6%, primarily as a result of the same drivers.
Lastly, we recorded a traditional custody wins were 233 billion in the quarter with attractive fee rates across key client segments.
And we now have more than $3 two trillion of assets to be installed a good portion of which are attributed to large <unk> deals that were won over the past year.
Given our large backlog, we installed approximately 350 billion of assets this quarter, which is in line with our historical pace.
Yes.
Turning to slide seven.
Third quarter management fees were $472 million down 10% year on year, primarily reflecting lower average equity and fixed income market levels. Our previously disclosed client specific pricing adjustment institutional net outflows and the impact of currency translation.
Partially offset by the absence of the impact of money market fee waivers and positive net ETF and cash inflows.
Management fees were down 4% quarter on quarter, largely due to equity and fixed income market headwinds and the impact of currency translation.
Notwithstanding the challenging backdrop in the quarter, while we did see some outflows in our ETF business due to an exit of a low yielding Asia Pacific Fund our franchise still remains well positioned for growth.
And Etfs, we saw sustained ETF inflows into the Spyder low cost suite and fixed income funds.
In our institutional business, there's continued momentum in defined contribution with third quarter inflows of $10 billion, including the target date franchise.
And our cash business top quartile performance on our government money market Fund was a major driver of net inflows, which contributed to market share gains and the institutional money market funds.
On slide eight FX trading services had yet another strong quarter relative to the period a year ago third quarter FX trading services revenue was up 14%, primarily driven by higher FX spreads driven by higher market volatility and the recent regulatory capital changes partially.
Offset by lower client FX volumes.
Quarter on quarter FX trading services revenue was down 4% as the benefit of higher FX spreads was more than offset by lower client FX volumes, which tend to be lower in the summer months.
Securities Finance performed well in the third quarter with revenues up 4% year on year, primarily driven by higher spreads due to higher specials activity only partially offset by lower agency and enhanced custody balances due to falling market levels.
Sequentially revenues were up 3%, mainly reflecting higher agency spreads.
Third quarter software and processing fees were up 2% year on year, primarily driven by higher front office software revenues associated with CRD, which were up 9%, while lending fees were down 11% due to changes in product mix.
Finally, other fee revenues of negative $5 million in the third quarter declined on a year on year basis, largely due to negative market related adjustments.
Sequentially, we saw an increase in other fee revenue, primarily reflecting fewer negative market related adjustments.
Moving to slide nine let me provide some details on the performance of the front office software and data revenue in the third quarter on the left panel of the Slide front office software revenues increased 9% year on year is a more durable and recurring software enabled revenue continues to grow nicely driven by new client implementations and.
<unk> success in converting clients to a cloud based SaaS platform environment sequentially.
Sequentially revenues were up 1% due to higher software enabled revenue, partially offset by lower professional services revenue our revenue backlog remains healthy.
Turning to some of the CRD and Alpha business metrics on the right panel, we continue to be pleased with our new bookings for the business.
$14 million of new bookings from this quarter was well diversified across client segments segments, particularly wealth and asset owners, demonstrating the benefit of and breath of Klein's the platform can now support.
As for Middle Office, we continue to have extremely healthy I installed revenue backlog of over $100 million, which is up 50% on a year on year basis as I mentioned earlier.
Now turning to slide 10 third.
Third quarter, NII increased 36% year on year, and 13% sequentially, primarily reflecting the impact of higher short term interest rates from central Bank hikes, only partially offset by lower client deposits more than 40% of this increase was driven by non U S. Dollar rates as we saw central banks globally raise interest rates.
On the right of the slide we show our average balance sheet during the third quarter.
As a result of a rapidly changing rate environment industry wide deposits have begun to trend lower and we are seeing some of this play through our balance sheet as well.
Excluding the impact of currency translation average deposits were down 5% both year on year and sequentially, primarily driven by the global tightening in monetary policy by central banks.
And by the impact of significantly lower market levels on a UCA.
The investment portfolio is down modestly as we continue to manage duration and we now have more than 60% in HTM.
As today's results reaffirm our balance sheet continues to be well positioned to recognize this interest rate in NII tailwind and also protect a OCI.
Yes.
Turning to slide 11 third quarter expenses. Excluding notable items were once again proactively managed in the light of revenue in light of the revenue environment and flat year on year are up.
Approximately 4% adjusted for currency translation and notable items.
We've been carefully executing on our continued productivity and optimization savings efforts, which generated approximately $80 million in year on year gross savings are approximately $230 million year to date, which puts us in line to achieve our full year expense optimization guidance of 3% to 4% of the expense base.
It also contributed to our year to date positive operating leverage, which we also expect to deliver for the full year.
These savings in addition to benefits from a stronger U S. Dollar enabled us to offset some of the wage inflation. We have seen you have been seeing in the industry. While we continue to invest in the strategic parts of our company, including Alpha private markets and operations automation.
On a line by line basis compared to third quarter, 21 compensation and employee benefits were down 1% as the impact of currency translation was partially offset by higher salary costs associated with wage inflation and higher head count.
Head count increased 6%, primarily in our Poland and India Global centers as we invested in important technology capabilities and added operations talent to support new products and services and growth areas, such as alpha private markets and Middle office servicing.
There was also a portion of the head count increase associated with some hiring catch up post Covid, we expect head count growth to start to level off.
Information systems and communications expenses were down 2% as we began to see benefits from our in sourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments.
Transaction processing was down 10%, mainly reflecting lower sub custody costs related to equity market movements.
Occupancy was down 5% largely due to currency translation and other expenses were up 17%, primarily reflecting higher securities processing costs marketing costs travel costs and foundation grants.
Moving to slide 12.
On the right side of the slide we show our capital highlights. We are pleased to report CET. One of 13, 2% up 30 basis points quarter on quarter, primarily driven by higher retained earnings and well controlled <unk>.
With respect to <unk> there is volatility in I would caveat that they were lower than we expected this quarter.
Would anticipate some IWA increases that we continue to both optimize the balance sheet and efficiently put capital to work across our businesses.
Third quarter tier one leverage ratio of six 4% was up 40 basis points quarter on quarter, mainly due to the decrease in balance sheet size and higher retained earnings.
As the slide highlights our capital position is strong and our commitment to being stewards of shareholder capital remains steadfast.
In keeping with that commitment, we returned $232 million to shareholders in the third quarter through dividends and as Ron highlighted we now intend to repurchase approximately 1 billion of state Street common stock in the fourth quarter.
This higher than expected buyback amount is based on our healthy capital levels and our expected future uses of capital.
The <unk> mark to market and OCI this quarter amounted to $170 million negative as compared to minus half a billion into <unk> 'twenty to meaningfully improved as a result of the management actions. We took despite another strong run up in interest rates this quarter.
Turning to slide 13, we provide a summary of our third quarter results. Despite the continued volatile market environment I am pleased with our quarterly performance, even with the current macroeconomic environment and persistent geopolitical uncertainties, our strong growth in net interest income and FX trading services enabled us to partially offset another.
Quarter of significant headwinds from both equity and fixed income markets highlighting the resiliency of the franchise.
And our expenses remained well controlled demonstrating our laser focus on productivity.
Okay.
Turning to our outlook, let me share our current thinking regarding our fourth quarter and some of our macro assumptions as we look over the remainder of the year.
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 and fed funds rate of four 5%.
And we expect others International Central Bank to continue to raise rates in <unk> and beyond into 2023 as well.
Our our outlook assumes <unk> equity market levels will be flat to September month end, which would imply a 10% quarter on quarter decline in global daily average equity markets and <unk>.
We also expect continued U S dollar strength to be worth about one percentage point of headwind to Fannie and <unk> expenses on a quarter on quarter basis, which is included in our guide.
So in terms of the fourth quarter of 2022.
Given the expected decline in average global equity market levels, we expect total fee revenue to be down about 3% on a sequential quarter basis.
Servicing fees down four 5% quarter on quarter and management fees down 8% quarter on quarter.
Turning to NII following yet another strong sequential increase in NII and three Q, we expect to deliver additional NII growth of 4% to 10% quarter on quarter, driven by the tailwind from U S and foreign Central Bank rate hikes.
This outlook includes our expectation for some continued deposit outflow in <unk>.
For the full year, we now expect NII to be increased 28% to 30%, which is better than our prior full year guide of 24% to 27%.
We also expect continued good growth in NII in full year 2023.
Sure.
Next we expect total expenses, excluding notable items to be roughly flat quarter on quarter. Despite inflationary wage pressure as we continue to target productivity initiatives in the face of a challenging environment for fee revenue.
This focus will enable us to drive positive total operating leverage and a healthy pre tax margin for both the fourth quarter and the full year.
Full year expenses are expected to be flat versus last year.
Finally, we would expect the fourth quarter tax rates being approximately 18% to 19% for the quarter.
And with that let me hand, the call back to Ron.
Thanks, Eric.
Operator, let's open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star key followed by the digit one on your Touchtone phone Youll hear three tone palm acknowledging your request and your questions. We've pulled in the order. They are received should you wish to decline the polling process. Please press the star key followed by the.
Digit too if you're using a speaker phone. Please lift the handset before pressing any keys, we'll pause for a moment to assemble the queue and we will take our first question from Glenn Schorr with Evercore. Your line is now open.
Okay.
Hi, there.
So maybe just to wrap up question on BVA.
I appreciate all the transparency along the way.
Regulators hate it more complex market balance has fallen I definitely win with you on the strategic merits.
But.
The question people have is finite just walk away it seems like.
You can do some really creative stuff with the capital now.
And at what point do you just say not work not as accretive to complex Neff said.
Ken its Ron.
Maybe needless to say, we go through that calculus that youre describing everyday.
And.
That's part of what's led to this.
I mean, obviously the regulatory environment is driving the timeframe here, but whats driving our work is is that trade off the trade off between.
The.
The opportunity to consolidate on a global basis.
<unk>, a very attractive firm versus what's the alternative uses of capital including <unk>.
Returning it back to shareholders.
We believe there's still the possibility.
That we can get this.
We can structure the transaction in a way that it will.
Work, both for shareholders and to achieve the strategic objective, but as we've said in the disclosure.
The.
But the likelihood of that happening is going down so.
I think what you can take away from this is one of the reasons that's driving that decrease probability is the calculus that you're describing.
Okay, well I guess, we don't have to wait that much longer so I could show up for another couple of months.
Just one follow up on.
I think you mentioned, 60% of the securities portfolio has been moved into held to maturity at.
It shows in the smaller ASI hits as rates go up.
What's the other side of it like do you can you calculate what the NII give up or any other offsets to moving that.
That large of a piece in held to maturity.
Hey, Glenn it's Eric.
We've we've carefully considered.
What portion of the investment portfolio to move to.
Held to maturity and.
And what amounts.
Well.
Do as we make that consideration is.
The benefit is that you've largely don't give up NII by and large you're earning the coupon on whether theyre treasuries or agencies, our MBS just in a different accounting form and structure, but the earnings of the corporation are the same and that's what's what's quite attractive.
Attractive about HTM.
Reason why you Wouldnt put the whole portfolio in HTM is partly you want some flexibility you want to talk from time to time rebalanced the portfolio and you might want to rebalance $5 $10 15 yards, then that takes an NFS contract under which to do it and then partly you want to make sure that you have.
You always have monetization at the front end.
To maximize and to maintain the liquidity contract he'd like we've now put that in place we can we can repo.
HTM Securities in size, we test that in the marketplace and we're quite comfortable but there's a point, where you say look I'd rather sit on cash I'd, rather sit on available for sale and so we feel like quite a good balance now that really provides a real positive NII trajectory and you see that we've got it now.
Now to 28% to 30% up in NII this year.
<unk> also started to signal that we're positive on the NII trajectory in 2023, and partly because the entire investment portfolio, whether it's in NFS or HTM.
Is contributing to that that upswing.
Thanks, Eric.
Okay and next we'll go to Ken <unk> with Jefferies. Your line is now open.
Hey, good morning, guys.
Come back to putting the deal into context with the with the buyback that you announced what you had been clearly, saying you'd want to get back into the buyback. This quarter. So can you just help us understand the.
The $1 billion sizing and if that has anything to put in context with your thoughts around how the pricing and eventual outcome. If the deal goes through might end up coming through or is it completely separate and just just based on where capital regardless of the deal outcome.
Ken It's Eric as I said in my prepared remarks.
Buy back.
Was.
It was larger than anticipated and part of that is we do two things we look at our current capital levels, which have trended.
Towards that 13% CET, one mark that we had.
We had guided to remember that that discussion we had in the first quarter and then partly because partly as we consider the capital uses over the next couple of quarters, including the possibility.
The Brown brothers investment services transaction, and you would expect us to.
Factor in any adjustments downward adjustments to purchase price that.
We are that we would expect and that's that's effectively what we've done so it's a mix of factors, but those are the those are the components and I think we're quite pleased we can now proceed with $1 billion as Ron said we were.
We're planning on comp.
Comfortably.
Returning more than 80% of earnings to shareholders next year quarter by quarter by quarter.
Which is.
What our medium term targets are and that is still available has the capacity to do a deal. It is admittedly adjusted adjusted price if it's if it's.
If it's appropriate at the time.
Okay and then on the.
The denominator side I guess the capital just can you just give us a little color on how you expect deposits to traject from here, a pretty meaningful decline in both interest bearing and noninterest bearing just relative to where your ending here just your general outlook on your thoughts around deposit mix and flows. Thanks.
Yes, I think our deposit trends will probably be in line with some of what youre seeing in the industry I think we're within that.
One.
If you look at the.
The fed reports if you look at the.
Other institutions and we've certainly begun to see that rotation out of deposits this quarter.
About 5% both year on year end and quarter over quarter adjusted for currency translation I think what we have seen.
Over the last year is a series of factors that have impacted and this is my way to say that I can give you some guidance, but it's going to it's going to vary depending on how the factors play out. So you have U S dollar appreciation and so you have a.
Non dollar deposits are come down as a result, we have equity markets falling which means the AUC as that we custody for are coming down and with that.
<unk> institutions retail hold similarly, lower cash amounts and so part of what's happening here is the environment is actually affecting deposits.
Somewhat independently of where we are in the rate.
With rising rates and quantitative tightening now we are seeing the effects of rising rates and quantitative tightening as well. So I kind of give you that as a background because I think there are four or five factors that play here.
Which is which is more than expected I think as we look forward. We continue to expect some some deposit outflows in the fourth quarter, we expect those to be somewhat less than we saw in the third quarter.
We do expect some and those are factored into our NII guide in one of the reasons why we have a wider NII guide than usual is because theres a theres a range of outcomes, but we're seeing we're seeing what we expected we're seeing what we expected as we as rates, Ralph and we price carefully and maintain I think some healthy betas this quarter.
We're seeing noninterest bearing.
Begin to flow out because with the higher rates both in the U S and internationally.
The U S. In particular you have.
You have the difference that the clients.
Clients can earn and then one of the things we're doing with our clients is to be.
As to think about the full range of offerings for them, sometimes it's the base account, sometimes it special accounts with deposit sweep if you remember we.
We've historically put in place deposit initiatives to have the right balance of deposits on the balance sheet and then.
The other thing that this is feeding as some of our other businesses whether it's the the.
The cash business and <unk>, whether it's the repo business Theres, a whole set of product offerings that are.
Pat.
That cash flows to that we're pleased with.
<unk>.
To support our clients with so theres, a theres a theres quite a bit going on in this area more to calm.
But yes, we're comfortable with some of these forecasts and what what I find particularly.
Important to keep in mind as NII continues to rise even with some of these deposit outflows and part of that is the U S rates that were also familiar with but given that.
So much of our balance sheet is international.
Those those foreign rate rises are particularly helpful. On those deposits are are are are at good levels as well.
Got it thanks, Eric.
Thank you and next we'll go to Alex Blaustein with Goldman Sachs. Your line is open.
Hey, Ron and Eric Good morning, guys.
I was hoping we could speak a little bit more broadly around state streets capital allocation strategy.
PVH does not go through what's your appetite for any other deals whether it's in the services space or asset management space.
Macro conditions are pretty volatile so I'm sure that that will impact that as well, but curious how you're thinking about the trade off.
Between the accelerated buyback.
Or other deals and then if you do go down the path of more buybacks should we be thinking about the upper end of your CET, one and leverage is sort of the target to which you will go to or you might need to run with a buffer on top of that given uncertain macro conditions.
Yes, Alex.
Why don't I begin on this.
Just on how we think about M&A. It sounds like we have a shopping list here.
The BPH.
As a unique opportunity to consolidate the market on a global basis and by that I mean.
<unk> not just about adding to some particular geography, but it really does.
<unk> bolster us in.
In all the major geographies that we're in.
Having said that.
We've got our own.
We believe has a distinctive organic strategy in the servicing area led by our.
Our alpha proposition, which continues to grow.
There is a lot of development that was being completed this year and early next year.
Which will lead to a lot of new on boardings, and we think even make the proposition.
Attractive to a broader set of clients so.
We always are looking in the marketplace to see if there's something that makes sense, but it's not like the money is burning a hole in our pocket and if this doesn't work we're immediately going to go out and.
I'll come back with something else Eric.
Eric you may want to talk to us about how we think about on contract for buybacks yes.
And Alex I think I'd I'd add that.
We're quite conscious that we raised almost $2 billion of equity from our investors.
And diluted them, we certainly expect that the.
If the deal doesn't proceed that the bulk of our excess capital needs to go back to shareholders.
That's that's deserved and I think.
Expected and we would we would we would deliver on that I think in terms of.
Capital ratios.
I had said.
Earlier this year when the economic environment felt more benign than we had.
The plan we had.
Simplified and.
Attenuated a lot of the OCI.
Risk in the investment portfolio that we might be willing to go down to the lower end and even below the lower end of our 10% to 11% range I think now given the economic uncertainties.
For the time being and expect to operate in towards the middle of that range that might change over time, but for now I think our current expectation is we have we have.
We have reduced the volatility in the investment portfolio, which reduces on one hand, the need for a capital buffer to some extent on the other hand, the economic environment.
Is is much more.
There's much more volatility in it and that pushes us net other direction, but the net of that is that I think we're quite comfortable with the 10% to 11% range and operating somewhere in the middle there.
Great. Thank you that's helpful.
My follow up question may be around the business side of things you guys have a very sizeable pipeline of installations and on the servicing side a lot of them are alpha mandates.
Obviously tend to be a little bit more complex.
You've talked to us I think on the last call.
The cadence of how that's going to come through on the revenue side, but I'm just kind of curious how you would contextualize any incremental investments or expenses that will need to come with it given sort of the complexity of those installations over the next 12 to 18 months.
Yeah, I'll start Alex on the investments and Eric.
Thank you for the pattern on the investments.
There is actually ongoing development as I mentioned earlier and that development much of some of which is.
Is being completed this year some of which is being completed next year, but it's all part of our.
Of our medium term plan as well as our budget. So there's nothing.
Out of the ordinary that you should expect to do this and in fact much of the development is behind us or will be behind us at year end.
These.
Within the three four trillion as you would expect.
<unk>.
The larger more complex.
Alpha mandates in some cases.
There are development partners with us, where we're developing new features and functionality.
Which will be available not just to that particular client, but more broadly to the client base. So.
These are important things to kept on important things that get done right and we think are a good use of our investment dollars. Because the result, not just in being able to onboard that client, but to be able to broaden the offering.
And then.
Alex I would add that we certainly need to.
The plan and begin to.
To set up on boarding teams those are those are well well underway.
And so so you saw head count tick up this quarter for example.
Expenses were well controlled the head count was in.
In our in our hubs and some of the lower cost markets purposely so we're navigating through that but.
Some of the expenses have to be.
Put on in advance of as we're doing the Onboarding in advance of the <unk> installation and the recognition of revenue and some come as the revenue comes on but I think as Ron said all of this is within our.
Our expense guidance.
It will be within our expense guidance when we get to that in January for next year and our view is that we collectively need to continue to drive margins in the right direction, given our medium term targets that needs to be a mix of both the revenue lift we're getting from alpha deals as well as the expense and productivity initiatives both.
Within the alpha environment and across the traditional franchise and all of that has to come together.
To deliver on our financial commitments.
Great. Thank you both.
Thank you next we'll go to Brennan Hawken with UBS. Your line is open.
Good morning.
Ron and Eric Thanks for taking the question.
I'd like to ask on BPH, it seems somewhat unusual to be getting regulatory approval before.
The approvals within the company.
So why is that happening and.
Given that there is risk of deterioration.
Wassa talent customers, Ron you made reference to that during the last quarter call. When you guys. First said you were renegotiating.
Would you have the ability to adjust price further.
If this process drags and or has that been set already.
Yeah on the approvals.
Our board has been actively involved in this Brian .
The PVH partners on their side throughout this process. So obviously there was an approval before we announced this in September of 'twenty. One there is an ongoing.
Consultation with our board and we've walked through modifications, but we don't have a final deal yet largely because.
We have not actually.
Gotten through the regulatory process and figured out what the actual structure would be that will satisfy all of the regulators. So.
It's not completely binary and that we're not talking to our board until it's all done but obviously.
Our board needs to see the entire thing.
In total and be able to make that decision.
In terms of the.
The ongoing.
Kind of risk to clients and people.
That's there it continues.
Spending a lot of time with clients.
I've mentioned before.
About half the client base is the shared client base.
So these are clients that we've talked to anyway.
I think there is still a strong desire on the part of our clients.
Can be completed in a way that makes sense I would like to see it completed.
So I do not worry about further client attrition, we obviously are worried about people attrition.
On both sides, but largely on the BBA side.
We're monitoring that closely.
To the extent to which we felt like.
After the.
The price reduction we've already negotiated the circumstances have changed.
Sufficiently further that we needed that again of course, we would raise if we needed to do that.
Okay. Thanks for that Ron and then.
Second question is.
Maybe.
A bit.
Well I would just come right out.
Why is this so strategically compelling.
Yeah.
It seemed as though it was largely a scale deal now.
It's deteriorated.
You said earlier, Ron that the accretion is probably not going to be more drawn out and it's going to be lower in <unk>.
We planned it's more complicated so you're introducing a lot of operational and legal complexity.
I get it you are lowering the price but.
Is this really a good use of time is this really a good use of management focus why not just understand that the environment deteriorated the regulatory approvals didn't come through it couldnt work is constructed and so.
It's better off just to walk.
I mean.
Again.
We are repeating myself, a little bit Brennan here, but that's exactly.
<unk>, what we ask ourselves every day and you are right. It is taking a lot of management time, I think what's compelling about it is several things one is its footprint many of the things that.
Our out there are supposedly out there rumored to be out there tend to be single geography kinds of things.
And if you have a strong desire to be in that geography, maybe it has something useful but they are I would describe as it does tactical.
This one.
As.
<unk> adds scale to us everywhere, where we are.
And.
Really does set it apart from the other secondly.
It's got some technology assets that we like we've talked about those in the past third it's Scott.
<unk>.
A.
Are people and professionals.
We believe our.
Equal to and sometimes even better than that some of our people and that's attractive to us but.
That has to be weighed against all of the factors that you and others have embraced here and continue to do that which is why were not coming here, saying to you yet.
We're ready to go we're not ready to go and it's also why we're coming here, saying that we recognize.
On long enough.
And that we need to bring this to a close this quarter.
And then to that thanks for all the color.
Next we'll go to Steven <unk> with Wolfe Research. Your line is now open.
Hi, good morning.
So I wanted to ask one clarifying question on NII as some of your bank peers, they've indicated <unk> exit rate could be close to the peak. This cycle. It just is lag deposit pricing begins to catch up with rate hikes. You noted that the twenty-three NII aric will be up nicely year on year, but do you see the potential.
For 'twenty, three NII coming in above that annualized <unk> level, suggesting that that fourth quarter NII guidance is not going to be representative of the peak.
Okay.
I think youre trying to get deeply into our 2023 forecast that.
I think it's a little premature to do that I mean to be honest, but let's see how deposits flow.
And.
And evolve this.
This coming quarter, let's see whether the.
The U S Central bank and the foreign central banks.
Continue to have the wherewithal to tame inflation, that's important right or are they going to are they going to.
Or or or or or not.
So it's quite dependent upon all of that I think the reason I made my positive statements about 2023 is that we don't see fourth quarter as the as the quarterly peak, we think there's more of that.
<unk>.
More NII upside over over over subsequent quarters.
We also.
Have a balance sheet that has a mix of USD and non USD and in some cases.
We tend to have more foreign deposits and those are areas if those foreign central banks continue to hike.
And address the serious inflationary environments in their geographies that gave us an additional tailwind that may be different than a U S bank. So there is certainly momentum here.
Want to get into fourth quarter annualized versus my my current view of 2023.
I did say good continuing growth purposely.
I think there is there is more to there is more to come on NII, but I think I think we'll know more in a quarter or two to be honest, but but but we see.
We see a trajectory that is that is good and.
Positive given what we know in the environment today.
Thanks for that Eric So reading the tea leaves I may scrap my question on the expense growth algorithm and what that implies for next year, but the one area I did want to unpack on expense is the margins in the investment management segment. They were down about 600 basis points year on year that scenario, where you may see.
<unk> progress over the last couple of years, certainly youre going to see some pressures given the declining market, but wanted to get a sense as to how much expense flexibility you have there and where you think you can actually hold the line on the pre tax margin for that particular business.
Okay.
I think I'd.
I would start answering that that question by saying, we're actually quite pleased by the progress we've made and in growth and margins in the investment management business over call. It the last.
Three years I think.
It had teens level margins if you go back in time.
That we got into the Twenty's some of that was the market uptake, which flowed through the management fee line. Some of it was a I think delivering strongly on flows and.
Net new revenues was positive across the franchise cash where as an example continues to be a standout but each of the three franchises have new products and offerings have been quite good and I think what the team has done there well as as they have secured those flows launch those new products they've.
Also.
Manage the expense base and so just because it was a tailwind from equity markets fixed income markets are from flows they've actually kept expenses remarkably.
Flat in that environment or a flattish in that environment, which I think is a testament to how they've navigated the environment I think what you should expect is that.
A couple of things.
If equity markets continue to operate at this level, we need to continue to work on expenses and productivity becomes an even bigger focus there and then it should be across the company I think on the flip side of that if we get some kind of rebound in equity and fixed income markets that plays through the asset management.
Business financials, I would expect expenses to continue to be disciplined there and margins to certainly go back to.
To some of the.
The higher levels that you saw but.
But I would say I think at 31% margins were quite pleased with where we are and I think there is a dip.
We are.
Equity markets go.
I think the trajectory will continue in a generally positive direction.
Helpful color, Eric Thanks for taking my questions.
Next we'll go to Brian Bedell with Deutsche Bank. Your line is now opened.
Great. Thanks, very much for taking my questions just one quick cleanup on BPH.
Can you close that deal if it all works well can you close that on December 31st or earlier.
And buyback that billing and and.
Do you need to have that tier one leverage ratio be within or above your target range. In other words can you can you do this and be at say at the low end of the target range, just temporarily for <unk> or even below.
Brian It's Eric I think the timing of this deal is quite uncertain, given given where we are we actually have not been able to complete the regulatory process and.
There is still so.
So I think I think the.
Thinking about this in months as opposed to quarter or is it okay.
It's premature.
We've done the.
Buyback calculation, though fully considering the.
The reduced price that is that would be.
Part of.
Brown brothers transaction, and so whether the timing is quarter extra quarter why.
We were comfortable proceeding with a $1 billion were please.
Pleased to get it started and in the.
Coming days.
And.
Sure.
Yeah.
Regardless of how that plays out.
To return as I said and as Ron said comfortably more than the 80% that we've committed to throughout next year.
At a minimum.
No that's great and then just one on the deposit beta is maybe if you can just talk about how.
How are you how do you see them right now as they exist in terms of like how youre defining them for both the U S versus the non U S. And then as we move into next year.
Maybe sort of an outlook without giving NII guidance of course, but just sort of a range of where you think the terminal betas could be.
In the U S versus the non U S. Even if it is even if it's a fairly wide range.
Yes, let me let me describe it this way.
And I'll, let me cover U S and non U S to because both both matter and.
In a positive way for our books I think the the betas this quarter in the U S were in the 55% range, where we're pleased to see that those are up from about 35% last quarter, but exactly where you would expect us to be where we expect it to be given the uptick in rates.
Next quarter, if we go from 55% this quarter at a 65% data is next quarter, we'd be quite comfortable and then yes. Just continues to inch up that's just how it plays through.
In euros were also.
And that 50% range.
As we've started to cross into positive territory for for Central banks, and we expect that to continue so part of the reason for the NII forecast into fourth quarter and into next year is that we expect betas in this 50% to 60% range and in euros. The market operates will differently than the U S. But.
That that would be in the range and then in.
In pound Sterling.
Betas are lower they tend to be in the 30% to 35% range there.
And then you can keep going Aussie dollars Canadian dollars and so forth and we.
We have a balance sheet that is prepared for rate rises across those currencies as well.
And then Youll just see.
Betas.
Notch up quarter.
Quarter over quarter I think.
At the terminal level. There is there is always some amount of lagging that you do that's just how it how it happens you never get to 100% beta or anything near that because you had some noninterest bearing and you have some.
<unk> deposits, but we'll see.
We're comfortable where we are in the 50% range going to 60 and I think it will.
It'll it'll.
I think it will play out well for the for the NII on the balance sheet Accordingly.
Okay. Okay, that's great color. Thank you.
Sure.
Next we'll go to Jim Mitchell with Seaport Global your line is open.
Hey, good morning.
Eric maybe just one last question on NII and I apologize, but as we think about big picture.
Fed funds being potentially 200 basis points or more higher than 2018 European rates being positive versus negative back then do you see anything conceptually.
To suggest you showed your NIM shouldnt be higher than back then or just wanted to get your thoughts on that.
Jim It's Eric I'm, a little more focused on NII, then on NIM and the reason.
We've done that is because we've actually changed the shape of our balance sheet over time and you remember we added some deposit initiatives, which tend to be at lower nims, but they are NII accretive and positive and we do that because sometimes you want to balance currencies around the balance sheet, we want to.
Our raised deposits, where we want to land.
We need to keep deposits for intra day, there are lots of reasons why we have.
Different mix of the balance sheet, and we've done that purposefully and in an engaging way with our clients over the last two three years. So I don't I don't I don't think I don't think as a result, the balance sheet is bigger and part of the reason we've been we've allowed it to be bigger is that the leverage ratio is not particularly constraining on us and so what.
What are our intentionality is actually to maximize NII as opposed to NIM. So I think as you as you play that out I think our nims are lower at this point than they were last time in the cycle and I think they will.
<unk>.
B below the nims will be below the highs of the last cycle on the other hand, I think if you if you calculate the forecast we've given you for NII for fourth quarter. So the next quarter that we're about to print that will be a new high of NII relative to what we had seen in the last <unk>.
Nicole and so and that's why we're a little more focus because thats what comes back to shareholders.
What creates.
Earnings and earnings momentum that <unk>.
Contributes to the bottom line.
Okay fair enough and just maybe on the Blackrock ETF transition how much is left.
Do you see that as a material any kind of a material impact on solid revenues.
We've.
Our guidance has been pretty consistent on this we.
And I think you'll find it in our 10-Q's and k's that we estimate that the.
The revenue outflows about two percentage points of fees.
So.
That hasnt changed.
Sorry.
Some of that begin to come out this quarter.
That was worth about $5 million this quarter, if you kind of get to the full quarter amount it will be just under $10 million.
For for fourth quarter, and that was worth about a trillion dollars of AUC. So that that did occur and we will continue to keep you updated on that but.
As we've previously disclosed and talked about the conversions just take time.
And.
It'll it'll play out.
<unk>.
Sometime towards the towards the second half of 2023, and then into 2024 will probably the.
<unk>.
Sure.
The majority of it but we'll just say we're working closely with our.
With the with Blackrock, we continue to.
Be quite pleased with.
The existing business, we do with them and the work we do for them in the alternative servicing area, which.
We're one of the largest providers and <unk>.
Help them as they want to evolve.
Diversify and support their other plants.
Okay, great. Thanks.
Thank you next we'll go to Gerard Cassidy with RBC. Your line is now open.
Thank you good afternoon, Eric and Ron Eric can you remind us you talked a little bit about it in your.
Prepared remarks about fee revenues the pricing pressure that you see every year can you remind us if that number has changed at all and second as part of that I think you've also indicated in the past you needed a certain amount of assets under custody to neutralize that pressure and don't remember I think it was a truly.
<unk>, five, but I could be wrong of new business wins to neutralize that downward pricing pressure.
Sure, let me start that and it is.
Area that we continue to to work on the <unk>.
Pricing headwinds are just.
<unk>.
A.
The condition of our of our industry why because as you remember pricing as AUM or AUC, a based and so as equity markets go up.
<unk> expect some of that to come back to them.
The pricing headwinds on an aggregate basis and the servicing fee line are about two percentage points of headwinds a year.
And.
While we saw that that bubble in 2017, 18 19, that's come back down that that ticked up and then it has been well managed back down to that 2%.
Or so level and Thats, what we are seeing today, we're not seeing any anything different than that and it's well within our expectations in terms of wins.
We always want to focus on net new business and.
For net new business to drive a positive.
Impact on the revenues as they did this quarter I was I was clear in my prepared remarks that net new business was positive we had some nice wins, we actually had some nice wins, a nice fee rates right because both matter to your point.
The benchmark I've put out there is that we expect about a trillion five of AUC a wins a year.
To be in a good positive.
Direction in trajectory for net new business.
But to be honest is the CFO I'd like to see a little more than <unk> seen last year was particularly strong this year year to date I think we're where we're comfortably.
Where we.
We're already comfortably at that level and we still have another quarter to go so.
The sales momentum continues and what I find important as it continues across both both.
Our traditional cut.
Cutting accounting business and our alpha offerings and so it's been broad based.
Gerard.
Sorry go ahead.
What I would add is on the topic of pricing, we mentioned to you at the end of the second quarter.
Launched a targeted repricing initiative.
That is well underway.
And it's focused on the areas.
High value or where costs are increasing.
Higher than in other places.
Is it soon.
As to achieve margin preservation.
To offset the cost of delivering something high value or to offset the increasing cost.
Areas for example, where we have disproportionate market data and things like that so that initiative is well underway.
When we talked to you last time.
It just launched so we were in the dozens of clients now.
Now we're in conversations with triple digit number so we're pleased with that progress too.
And it hasnt been well received or understood I should say nobody likes price increases.
Clients understanding of why this conversations to take place I.
I think understood is the right word.
Gerard I think that.
These are sophisticated institutions themselves they see what's going on so.
I think it's been for the most part are understood.
Very good and then Eric as a follow up.
Can you remind us what percentage of assets under custody are under management.
Our variable rate priced products, meaning.
Your customers pay basis points on the assets under custody and so therefore to your point when the value goes up and down and obviously affects revenues.
Yes, it's a bit of a mix across different segments and across geographies, but.
Good rule of thumb is $50, 55% of our asset under custody base, so move up and down with markets. There's another 20% that of the pricing tends to be.
Based on transactional activity and and we actually saw transactions.
Volumes DTC trades wire transfers derivatives.
Transactions and so forth.
Come down this quarter and then the last.
20, 25% tend to be relatively fixed or or sometimes semi fix the number of funds custody for.
Or some some some some some flat fees.
Gentlemen, thank you.
Thank you.
Next we'll go to Mike Brown with <unk>. Your line is now open.
Hi, good afternoon, thanks for taking my questions.
I guess on BPH.
I suppose it's been a while since we've gotten a financial update on the business and how it's performed in this in this volatile environment year to date.
And clearly there is a possibility that we can.
Have a resolution that could end up.
Moving forward with the acquisition so as we think about our models here and getting those.
Kind of aligned with how BBA performing any anything you can share on how the company has performed year to date.
Yes.
We're obviously.
<unk>.
Monitoring the business performance closely monthly quarterly and I think it's.
You should expect you can go back to some of the materials that we had shared.
A year ago September .
As the base case, but you could take that Mike.
Mike and extrapolate some of what you've seen in our book of business, right, where an asset management oriented.
Custodian you can even look at some of our peers as as benchmark and I. Thank you.
You'd find what we've seen which is that there is.
<unk> boost in NII.
And their book or NII, plus fees because of the mix of programs that they run for the.
Their client.
Their clients' cash.
<unk> said, partially offset I would say with a.
With some downdraft in.
In servicing fee rates equity and bond markets and then you'd see.
<unk>.
A bit of uptick.
On the FX services kind of business. So I think it's it's ours and other large custodians are parallel to what <unk> seen.
And so.
It's something we're considering but.
<unk>.
As we talked about earlier.
We were conscious that it's.
That we need to think about this.
From a couple of different perspectives, but it's.
It's performing in line with what we and you would expect at this point.
Okay understood. Thanks for that color, Eric maybe just one one last clean up one for me.
How should we think about how the unrealized losses on the SaaS portfolio could creep back over the next.
Call. It 12 months to 24 months as we think about your capital ratio or that how that will impact the capital ratios.
Over that time period.
Yes.
It is part of our capital forecasting now so.
And it was actually included in some of the.
On the buyback and capital return estimates that we've provided not only for the fourth quarter, but also.
For our intentions related to it to next year.
I think this quarter.
The accretion.
<unk>.
$60 million or so of capital and that's just the reversal of those.
Of that.
Of that mark creating back as the bonds mature there tends to be a little lumpiness to it but that's the that's the start of the.
The accretion and so it did provide some amount of modest tailwind in <unk>.
We'll certainly factor that in right because just like earnings create an opportunity to return capital to shareholders. The accretion does as well and that'll be that'll be part of that build our capital ratios, which then we can.
We can.
We can share back with with shareholders.
Okay. Thank you for taking my questions.
Next we'll go to Mike Mayo with Wells Fargo Securities. Your line is now open.
Hi.
Just to clarify so in the next 10 weeks, we should either expect.
You just say that you will proceed with the BBA deal.
Or that you won't be proceeding and maybe there will be an extra $2 billion buyback my interpreting that correctly.
Oh.
What you should take away from what we've said Mike is that.
By the end of this quarter, we will have a decision on whether to proceed forward or not to proceed forward.
The buyback.
First we need to.
Order authorization.
For further buyback and.
We will communicate what we're intending on buybacks after that authorization.
Okay and just.
I know the first question. This call was why not just walk away and that's been the topic. Let me just take the flip side just I'm sure you've invested a lot of resources and time and thought into this is a real issue.
The regulators and I'm just wondering it's like roughly 10% of your size other G <unk>, either 10% to 15 times larger.
When I worked at the fed 30 years ago, we all must be considered de minimis right.
And I'm, just trying to figure out the change.
I'll note that change in mindset as it relates to mergers generally.
But I'm just wondering does this put you in a permanent strategic penalty box that you can't pursue any mergers or is it something unique to this deal.
Can't talk particularly about this deal in general, but can you make any broader statements like when <unk> do this or do that it gets extra scrutiny or it's not as easy to get through anymore.
Yes, Mike what I would say is that the.
The timing of our announcement and this deal in retrospect, probably couldnt have come at a worse time, because if you think about the.
The regulatory agencies many of them.
To some extent, we're going through some kind of personnel change.
So that itself to slow things down in some cases.
<unk> driven a.
A very significant change in philosophy.
That change in philosophy will be permitted or not.
I don't know I'd like to think not but.
To answer I think the number your question has anything.
Anything changed beyond.
Yes.
Regulatory.
Situations and the answer is no.
We have.
For all the reasons that we stated to you going back to September of last year.
We feel like the deal with strategically compelling.
In terms of longer term what does this mean for <unk>.
For our position I mean again, that's something that we think about and that's something that we certainly have conversations about with our with our primary regulator.
And I think theres, some sympathy to all of that but.
Yes.
I don't want to talk about something in the abstract beyond the.
The transaction that we're in which is the PVH deal.
Yes.
Not all regulators, it's a subset.
No.
Yes.
So the situation that we're going to work our way through but working our way through very cognizant of.
What it means for shareholders, what it means for clients et cetera.
And then last follow up on this is there anything that you can do to help control the outcome of this at this time or is it simply.
Based on the analysis by the regulators.
Okay.
Well.
I mean, we've talked about modifications to the transaction and the modifications for a month or two.
Meet either regulatory concern order too.
Navigate.
To do what we believe is required to navigate through regulatory concern. So that's what we're up to now.
Okay alright, thank you.
Okay next we'll go to Betsy aggressive with Morgan Stanley . Your line is now open.
Hi, just a couple of quick follow ups.
One I know you've had some M&A charges merger and integration charges over the past few quarters I mean, if any of that is for the BPH deal. It was there anything in.
I'll walk away that.
You would be refunded four I'm guessing the answer is no, but I just wanted to make sure I understand how that works.
Betsy it's Eric no those are those are incurred charges that.
About primarily our staffing and then some of the service providers, but.
We've also what we have done is avoided some of the obviously there.
There are costs that are continuing on deal closing some of the advisory fees et cetera. Those have not played through there and those would not be incurred so those are those are as as.
Or kind of the base level expenses.
And then.
There's no there's no there's no tail on those are by and large.
Right, Okay and is it possible to size how much of those were or have been for BVA churn.
Right.
Since since <unk>.
Earlier this year, they've primarily been been around.
The <unk> transaction work.
Okay.
And then we've had two quarters of very strong dollar performance here dollar strengthening in Q on Q.
I see it in the deck.
Ins and outs on the.
The drag on revenues the benefit to expenses, a little bit of a drag on.
The AUC AUM volumes, you've got some benefit from volatility.
And the trading lines. So just wanted to get your sense of how has the dollar strengthening all in impacted you and.
And how do you think about managing.
That was just generally speaking.
Yeah.
It's Eric what I described is that the Dol.
<unk> has an effect.
As do all of the currencies on our P&L and balance sheet.
But it's it's a it's relatively symmetric and us.
<unk> almost neutral and I say that in EBIT terms and in balance sheet terms.
The dollar strengthening reduces revenues, but also reduces expenses not in all currencies and all the time, but.
It tends to have almost a an EBIT neutral impact on the P&L and then on the balance sheet. You also have a similar effect where.
As.
<unk> deposits are revalued.
Downwards in foreign jurisdictions in the U S. Appreciates so are the assets in those jurisdictions and so you have some cemetery, so by and large it's a I'll call. It roughly neutral which is why we don't do any particular.
Particular hedging on it because we find that we can manage through it.
Comfortable manner, except that it it makes our reporting to all of you.
And the analysts and investors.
Yeah, a little more complicated, but that's the.
That's just what needs to happen and.
And when you think about the.
Footprint that you have today and the effort to continue to get scale in that footprint.
Is the international exposure strategically important from a diversification perspective, where do you feel that the growth outlook for the non U S markets as higher just wondering.
Yeah.
Hey, Betsy it's Ron let me take that I would say that we have.
Got a good.
Geographic mix now.
And so the way we think about it in virtually all of our locations. It's not like we're not at minimum efficient scale, but to the extent to which we can achieve more scale there wed like that I think in general.
The.
Non U S markets have continued.
Most circumstances not all.
To grow faster than U S markets on on balance if we could get a little bit more there we'd like that.
Got it thank you.
And next we'll go to Vivek <unk> with JP Morgan Your line is now open.
Thanks, sorry to beat a dead horse, but.
Going back to PVH.
Given that you can talk about buying back $1 billion of stopped the deal value was $3 5 billion. That's a pretty substantial percentage would you still be buying the full entity you had intended to when you announced the deal or is there some.
Elimination of a part of it.
Flip it the other way it could you buy just a piece of it or is it only available as a holding.
Vivek, it's Eric.
Is this the kind.
The outlines the perimeter of that of the PEO with Brown brothers Hasnt really changed its around the investment services business.
That's the business that we're attracted to and Thats the one that.
They'd like to.
To transact so theres no no no there's not been any real change there, yes, vivek, we were never buying the whole business.
No what I meant was the whole investment services business could you buy a piece of it is just different geographies given the regulatory complexity to setup. If there are geographies that are more attractive and more.
Difficult to replicate on their own.
Yes.
I suppose that's something we could explore vivek.
Then the attraction goes down even more so.
Okay.
And not clear that that accomplishes what.
Brown brothers itself is trying to accomplish which is.
They'd like to exit the business not.
Have even a smaller.
And they already have now.
Okay.
Ron I wanted to go back to a different topic, you mentioned about the price increase Nicholas discussions Youre, having and you said the operative word is understood with you our clients should I interpret understood is understood and.
Agreeing to it.
But not necessarily open to it and shopping it around with other providers.
So I would say again this has been highly targeted.
So it's not like we've said, there's an X percent across the board kind of thing, we've really tied it to one where our costs are under the most pressure.
And two where there's.
High value added delivered to the client and so I think you should interpret understood as.
We understand why you are asking for this theres certainly some talk around it.
Is that the right number et cetera, but I would say in more cases than not.
But far more cases than not we're getting agreement on it.
Yeah.
Great.
Thank you.
Thank you.
This concludes today's question and answer session I will now turn the call back over to Ron or Hanley for any additional or closing remarks.
Thank you operator, and thanks to all of you for joining us on the call.
Ladies and gentlemen, this concludes your conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Okay.
Yes.
Yeah.
Yes.
Yes.