Q4 2022 State Street Corp Earnings Call
Good morning, and welcome to State Street Corporation's fourth quarter and full year 2022 earnings conference call and webcast. Today's discussion is being broadcasted live on state Street's website at investors that State Street Dotcom.
This conference call is also being recorded for replay.
These streets conference call is copyrighted and all life at least that 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 on the state Street that site.
Now I would like to introduce Eileen billet global head of Investor Relations at State Street.
Good morning, and thank you all for joining us on our call today are CEO , Ron <unk> will speak first then Eric Adblock, our CFO will take you through our fourth quarter and full year 2022 earnings slide presentation, which is available for download in the Investor Relations section of our web site 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 GAAP reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available on.
The appendix to our slide presentation.
Also available in 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, 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 Rod.
Thank you Eileen and good morning, everyone two.
2022 was an unpredictable year for many of the world's investors and the people they serve despite a market rebound in the fourth quarter 2022 was the worst year for financial markets since the global financial crisis, both fixed income and equity markets fell impacted by the war in Ukraine, and several macroeconomic headwinds including broken supply.
<unk> price and wage inflation dramatically higher global interest rates U S dollar strength.
And heightened fears of global economic recession, which remains today. The uncertainty created by these factors contributed to a meaningful year over year declines in global financial markets as well as increased market volatility impacting flows.
Despite these difficult macro conditions State Street performed well as a result, we continue to progress in 2022 towards achieving our medium term targets.
Our durable <unk> and full year 2022 results were driven by our strategy underpinned by a relentless focus on innovation the power of our distinct value proposition and state Street's diversified products and services all of which continue to resonate with clients as demonstrated by yet another year of strong organic.
New servicing wins.
As we continued to execute against our strategic agenda, we achieved a great deal in 2022.
Slide three of our Investor presentation shows our full year highlights and the progress we made towards achieving our strategic goals in 2022.
In a challenging operating environment and compared to what was a very strong year for our business. In 2021, we again delivered positive total operating leverage pre tax margin expansion and a higher return on equity as you can see on the left of the slide.
We drove continued business momentum, including one nine trillion of total new asset servicing wins delivered total revenue growth and demonstrated ongoing expense discipline in the face of inflationary pressures and our continued investment in the resiliency and capabilities of our businesses as you can see on the right hand bottom of the slide.
<unk>.
While weaker average market levels created fee revenue headwinds for our investment servicing and asset management businesses in 2022, our balance sheet businesses combined with higher interest rates on our deposit strategy produced materially higher net interest income as compared to 2021 and.
In addition, our foreign exchange trading services and front office software and data businesses produced double digit year over year fee growth manifesting the desired results of our investments in these businesses and demonstrating the revenue diversification of our business model.
Turning to slide four of our presentation I will review our fourth quarter highlights.
Business momentum was solid in the fourth quarter with new AUC, a asset servicing wins amounting to 434 billion driven by broad based wins across client segments.
We reported two new alpha mandates in the quarter and expanded 12 existing alpha relationships.
Seven of which added additional back and middle office offerings.
Helped by the sales performance, our AUC, a installation backlog was $3 six trillion at quarter end.
At Global Advisors quarter end assets under management totaled $3 five trillion supported by another good quarter of ETF inflows.
Turning to our fourth quarter financial performance for Q22, EPS was $1 91, or 2.07, excluding notable items up 7% year over year or 4% higher year over year, excluding notable items.
The year over year EPS growth in a challenging market environment with supported by the resumption of common share repurchases in the fourth quarter as we focused on returning capital to our shareholders.
Even in a year marked by economic and political disruptions total revenue for the fourth quarter was the highest on record increasing 3% year over year as lower total fee revenue was offset by very strong NII result, which increased 63% relative to the year ago period, primarily driven by higher <unk>.
Global interest rates, plus our balance sheet positioning and effective execution of our deposit management strategy.
As we meaningfully invested in our people and business, we remain focused on expense discipline in the fourth quarter with total expenses down 3% year over year or flat year over year. Excluding notable items in part supported by the stronger U S. Dollar. This was achieved by a relentless and ongoing focus on operational productivity.
Simplification and automation.
Turning to our balance sheet and capital our CET, one capital ratio increased to a strong 13, 6% a year and recognizing.
Recognizing the importance of capital return to our shareholders and having already announced a 10% per share increase to our common stock dividend earlier in 2022, we resumed share repurchases in the fourth quarter buying back a total of $1 5 billion of state Street common stock.
For 2023, it is our intention to return up to 200% of earnings in the form of common stock dividends and share repurchases subject to market conditions and other factors.
We expect our business mix balance sheet strategy and earnings momentum will enable us to do so while maintaining prudent capital ratios within our target range.
Accordingly, as we announced this morning, our board of Directors has authorized a new common stock purchase program of up to $4 5 billion through the end of 2023.
To conclude my opening remarks, I am pleased to be reporting the third year in a row of pretax margin expansion and higher return on equity, which demonstrates the successful progress we have made towards achieving our financial goals now let me hand, the call over to Eric who will take you through the quarter in more detail before I discuss our strategic priorities for <unk>.
2023.
Thank you Ron and good morning, everyone.
Before I begin my review of our fourth quarter and full year 'twenty to 2022 results. Let me briefly discuss some of the notable items, we recognized in the quarter outlined on slide five.
First we recognized acquisition restructuring costs, including wind down expenses related to the Brown brothers Investor services acquisition transaction, which we are no longer pursuing.
Second we recognized $70 million of repositioning costs, consisting of an employee severance charge of $50 million to eliminate approximately 200 middle and senior management positions largely related to our investment services business as we continue to streamline our organizational structure.
We also recognized $20 million of occupancy charge in the quarter to help us further shrink our optic occupancy costs.
We expect these actions to generate a total run rate savings of roughly $100 million.
Okay.
Lastly, we recognized the benefit of $23 million in the quarter related to the settlement proceeds from our 22018 FX benchmark Mark litigation resolution, which is reflected in the FX trading services GAAP revenue line.
Taken together, we recognized notable items of $78 million pre tax or <unk> 16, a share.
Now turning to slide six I'll begin my review of both our fourth quarter 'twenty, two and full year 'twenty two results.
As you can see on the top left of the table, despite the dynamic and challenging operating environment, the diversity and durability of our business model allowed us to finish the fourth quarter with solid results.
Total revenue for the quarter increased 3% year over year or 5% year over year. Excluding notable items as lower fee revenue was more than offset by robust NII growth of 63%, which I'll spend more time discussing later in today's presentation.
We also continued to demonstrate prudent expense management, which enabled us to deliver positive operating leverage in the quarter and.
And pre tax margin is up more than four percentage points year on year ROE is up more than a percentage point this quarter as well.
On the right side of the slide we show our full year 2022 performance notwithstanding the challenging operating environment. We saw in 2022 for the year I am quite pleased that we again delivered positive operating leverage and nearly a percentage point improvement in pretax margin.
As Ron mentioned it has been three consecutive years of margin expansion and ROE improvement.
Yes.
Turning to slide seven.
During the quarter, we saw period end AUC, a decreased by 16% on a year on year basis, but increased 3% sequentially.
Year on year. The decrease in AUC was largely driven by continued lower period end market levels across both equity and fixed income markets globally, our previously disclosed client transition and the negative impact of currency translation.
Partially offset by net new business installations.
Quarter on quarter, AUC <unk> increased as a result of higher quarter end equity market levels and a positive impact of currency translation.
Okay.
At Global Advisors, we saw similar dynamics play out period end AUM decreased 16% year on year and increased 7% sequentially.
The year on year decline in AUM, which largely driven by lower period end market levels. Some institutional net outflows and the negative impact of currency translation, which was partially offset by 22 billion of net inflows in our Spider ETF business.
Quarter on quarter, the increase in AUM was primarily due to higher quarter end market levels ETF net inflows and the positive impact of currency translation, partially offset by cash net outflows.
Yes.
Turning to slide eight on the left side of the page Youll see fourth quarter, our total servicing fees down 13% year on year, largely driven by lower average market levels lower client activity adjustments and flows normal pricing headwinds and the negative impact of currency translation partially.
Ill set by net new business excluding.
Excluding the impact of the currency translation servicing fees were down 10% year on year.
Sequentially total servicing fees were down 1%, primarily a result of the client activity adjustments in flows.
On the bottom panel of this page. We've included some sales performance indicators, which highlight the good business momentum. We again saw in the quarter as you can see AUC wins in the fourth quarter totaled a solid 434 billion driven by strong broad based traditional wins across client segments and regions, including expanding relationships with <unk>.
Testing alpha clients.
At quarter end, AUC, a one but yet to be installed totaled three six trillion.
With alpha representing a healthy portion, which again reflects a unique value proposition of our strategy.
Turning to slide nine fourth quarter management fees were $457 million down 14% year on year, primarily reflecting lower average market levels and the negative impact of currency translation, which represented about two percentage point headwind.
Quarter on quarter management fees were down 3% largely due to equity and fixed income market headwinds.
As you can see on the bottom right of the slide notwithstanding the difficult and uncertain macroeconomic backdrop and the year our franchise remains well positioned as evidenced by our continued strong business momentum.
And Etfs, we saw solid full year net inflows in the U S with continued momentum and market share gains in the spider low cost equity and fixed income segments.
In our institutional business. There is a continued momentum in defined contribution with 48 billion of inflows in the full year, including target date franchise net inflows of $21 billion.
Offsetting by industry wide outflows in institutional index products.
And our cash franchise, we still gained 60 basis points of market share and money market funds.
In 2022, even though first half inflows reversed in the fourth quarter.
On slide 10, you see the strength of our diverse revenue growth engines with both FX trading services and software and processing up double digit teens year on year and a difficult year.
Relative to the period, a year ago fourth quarter FX trading services revenue ex notables was up 15%, primarily reflecting higher FX spreads partially offset by lower FX volumes are global FX franchise was able to effectively monetize the less liquid market environment, which was driven by sharp moves in the U S. Dollar.
Sequentially FX trading services revenue ex notables was up 8%, mainly due to higher direct and indirect revenue.
Securities Finance performance in the fourth quarter was more muted with revenues up 1% year on year.
Sequentially revenues were down, 6%, mainly reflecting downward pressure on spreads due to lower specials activity in year end risk off activity by clients.
Fourth quarter software and processing fees were up 16% year on year, and 17% sequentially, primarily driven by higher front office software and data revenues associated with CRT, which were up 28% year on year and 25% sequentially.
Lending fees for the quarter were down 10% year on year, primarily due to changes in product mix and flat quarter on quarter.
Finally, other fee revenue of 18 million in the fourth quarter was flattish year on year and up $23 million quarter on quarter, largely due to the absence of negative market related adjustments.
Moving to slide 11.
On the left panel Youll see fourth quarter front office software and data revenue increased 28% year on year, primarily driven by multiple on premise renewals and continued growth in software enabled revenue associated with new client implementations and client conversions to our cloud based SaaS platform environment.
Turning to some of the front office and Alpha business metrics on the right path.
The $21 million of new bookings in the quarter was once again, well diversified across client segments, including asset owners wealth and private markets as well as across asset classes, particularly in fixed income.
Front office revenue backlog and pipeline remains healthy, giving us confidence in our future growth of this business.
As for Alpha we are pleased to report two new Alpha mandate wins this quarter in the insurance and asset owner client segments.
Yes.
Now turning to slide 12 fourth quarter, NII increased 63% year on year, and 20% sequentially to $791 million.
The year on year increase was largely due to higher short and long term market interest rates and proactive balance sheet positioning partially offset by lower deposits.
We have a well constructed balance sheet, including both U S and foreign client deposits.
Gail sponsored repo franchise.
And high quality loan and investment portfolio that was consciously configured to benefit from rising global rates.
Sequentially the increase in NII performance was primarily driven by higher global market rates working through our balance sheet.
On the right of the slide we show our average balance sheet during the fourth quarter year on year average assets declined 6% and increased 3% sequentially, primarily due to deposit levels as well as currency translation impacts.
The U S client deposit beta excluding some new deposit initiatives was about 65% to 70% during the fourth quarter.
Foreign deposit betas for the quarter were much lower in the 20% to 50% range depending on currency.
Our international footprint continues to be an advantage.
Total average deposits were up sequentially, we saw a sequential quarter reduction in noninterest bearing deposits of 5%, which was more than offset by higher NII accretive interest bearing deposits that will help support high quality client loan growth and selective expansion of the investment portfolio.
Turning to slide 13 fourth quarter expenses. Excluding notable items were once again proactively managed in light of the tough fee revenue environment and flat year on year or up approximately 3% adjusted for currency translation.
We have been carefully executing on our continued productivity and optimization savings efforts, which generated approximately $90 million in year on year gross savings for the quarter were approximately $320 million for 2022, achieving near the top end of our full year expense optimization guidance of 3% to 4%.
These savings enabled us to drive positive operating leverage and pretax margin expansion.
While partially offsetting continued wage inflation headwinds and continued investments in strategic parts of the company, including Alpha private markets technology and operations automation.
Yeah.
On our lineup by line basis compared to $4 21 compensation employee benefits were down 1% as the impact of currency translation lower incentive compensation was partially offset by higher salary increases associated with nearly 6% wage inflation and higher head count.
Head count increased 9%, primarily in our global hubs as we added operations personnel to support growth areas, such as alpha in private market invested in technology talent and in source certain functions.
There was also a portion of the head count increase associated with some hiring catch up post COVID-19.
We expect head count to increase more modestly in 2023.
Information systems, and communications expenses were down 5% due to benefits from our in sourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments.
Transaction processing was up 1%, mainly reflecting higher broker fees and market data costs, partially offset by lower sub custody costs related to lower equity market levels.
Occupancy was down 17% largely due to an episodic lease back real estate transaction associated with the sale of our data centers, which was worth approximately $12 million.
And other expenses were up 12%, primarily reflecting higher professional fees and travel costs.
Yes.
Moving to slide 14.
On the left side of the slide we show the evolution of our CET, one and tier one leverage ratios followed by our capital trends on the right of the slide.
As you can see we continue to navigate the operating environment with strong capital levels relative to our requirements.
At quarter end standardized CET, one ratio of 13, 6% increased 40 basis points quarter on quarter, primarily driven by Episodically lower <unk>, partially offset by the resumption of share repurchases in the quarter.
With respect to <unk>, it's worth noting that we saw unusually low <unk> this quarter worth about $10 billion, largely driven by our markets businesses and some specific currency factors.
Would anticipate a similar amount of normalization of <unk> and the $10 $15 billion range going into first quarter.
Our tier one leverage ratio of 6% at quarter end was down 40 basis points quarter on quarter, mainly due to the resumption of share repurchases in the fourth quarter.
We were quite pleased to return $1 7 billion to shareholders in the quarter, consisting of a billion five of common share repurchases and $220 million in common stock dividends.
Lastly, as Ron mentioned earlier, we announced this morning that our board of directors has authorized a new common stock repurchase program of up to $4 5 billion through the end of 2023.
And as I said in December we expect to execute this buyback at pace and get back to our target ranges for both the <unk> and tier one leverage market conditions and other factors dependent.
Yes.
Turning to slide 15.
Let me cover our full year 2023 outlook as well as provide some thoughts on the first quarter, both of which have significant potential for variability given the macro environment. We're operating in.
In terms of our current macro expectations as we stand here today, we expect some point to point growth in global equity markets in 2023, which equates to global equity markets being down about 2% each points year on year on a full year average basis.
Our rate outlook for 2023 large airlines of the forward curve, which I would note is moving continuously.
However, we currently expect to reach peak rates of 5% for fed funds, three and a quarter at the ECB and four and a half at the bank of England.
As for currency translation, we expect the U S dollar to be modestly stronger than the major currencies on average, but less than what we saw last year as such currency translation likes to have a half point or less impact on both revenues and expenses.
In light of the macro factors I just laid out we currently expect that full year total fee revenue will be flat to up 1% ex notable items with servicing fees likely flattish and management fees down a bit largely due to a modest reclassification of revenue out of fees and NII.
Regarding the first quarter of 2023, we currently expect fee revenue to be down 1% to 2% ex notable items on a sequential quarter basis, given some normalization of foreign exchange market volatility and impacts our training business with servicing fees expected to be up 1% to 2% and management fees, we expect to be down 1% to 2%.
We expect full year 2023, NII to be up about 20% on a year over year basis. After a very strong 2022. This is dependent of course on the outcome of rate hikes and deposit mix and levels.
After a significant step up in fourth quarter 2000 to NII, we expect first quarter 'twenty three to be flattish.
And after the first quarter of 2023, we expect to see a slight 1% to 2% of sequentially quarterly attenuation of NII throughout the remainder of 2023.
Then with a stabilization expected in 2024.
Turning to expenses as you can see in the walk we expect expenses ex notables will be up three 5% to 4% on a nominal basis in 2023.
Driven partially by wage and inflationary pressures and continued investment in the business and our people while still driving positive operating leverage.
You can also see on the walk that for our full year 2023, we expect gross saves of approximately 3%, which will help offset inflationary pressures and variable costs and ongoing investments in areas like private markets and alpha and further automation.
Regarding the first quarter of 2023 on a year over year basis, we expect expenses ex notable items to be up about 2%.
Finally taxes should be in the 19% to 20% range for 2023.
Yes.
Yes.
This outlook will deliver our fourth consecutive year of margin expansion and advances us towards our medium term target of 30%.
As well as deliver positive operating leverage and strong NPS growth for our shareholders.
And with that let me hand, the call back to Ron.
Thanks, Eric as.
As we enter 2023, we see an uncertain environment on the positive side. Many supply chains have been repaired the outlook for energy supply is better than anticipated, particularly in Europe and developed world inflation may have peaked.
Foresee continued rising interest rates in the short term, but at a slower pace.
The most significant known risks or geopolitical, including the Russia, Ukraine War, China from an economic performance and policy perspective in the United States as it approaches its debt ceiling.
Turning to slide 17, even with another year of economic and geopolitical uncertainty ahead of US we continue to be very clear on our strategic priorities for 2023, focusing on what we can control.
We plan to deliver further growth drive innovation and continue to enhance shareholder value as we further progress state street towards its medium term targets.
First we are targeting further improvements in our business growth and profitability by leveraging state Street alpha value proposition and enhancing its private markets capabilities as we aim to become the leading investment services platform and enterprise outsource solutions provider in the industry.
We intend to maintain and extend our leadership positions in a number of key businesses.
In global markets, we aim to expand wallet share as a leading provider of liquidity financing and research solutions to investment professionals.
At Global Advisors, we aim to build on our strengths in areas such as Etfs in cash while organically accelerating growth efforts in fast growing segments, where we can win.
Second as we have over the past several years, we must continue to transform the way we work by driving increased productivity and efficiency throughout our organization as we build out our simplified scalable configurable end to end operating model.
As we lead with client service excellence productivity will become a core differentiator of our value proposition.
Third we must continue to build a higher performing organization, we are strengthening execution skills and increasing accountability, thereby fostering an even more results oriented culture of required for future growth.
Our fourth priority is supported by and the intended outcome of the first three priorities and is aimed at achieving our financial goals, meaning another year of positive operating leverage marketing margin expansion and higher returns.
To conclude supported by our distinctive value proposition and diversified offerings as well as our ability to manage state street through challenging environments. I believe that we will be able to execute on each of these strategic priorities in 2023, as we advance towards achieving our financial goals, all while being an essential partner to the <unk>.
<unk> investors and the people they serve.
And with that operator, we can now open the call for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchstone side. If you would like to withdraw your request. Please press star followed by the number Tim.
One moment please for you Frank.
Yes.
Your first question comes from the line of Glenn <unk> from Evercore. Please go ahead.
Hi, Thank you very much.
Unlike the NII outlook I want to answer the question on that you've been a big beneficiary of higher rates.
I'm curious on the deposit side down almost 10% year on year in the quarter, but actually also dropped sequentially.
Think about or could you tell us what you're thinking about that you have stable outlook for 'twenty three for deposits.
We've seen a lot of fear in the banks and the deposit runoff in data and attrition and so curious what gives you that confidence for the flat deposits.
For the year. Thanks.
Glenn It's Eric.
We've navigated through interest rate cycles before and so we have a fair amount of.
Internal data and we also have I think.
And engagement with our clients that really understands the.
Multiple avenues for them to.
Putting their cash clients broadly with us half a trillion dollars of cash some of that is in deposits from that and our sponsor repo program some of Thats in our.
Global advisors money market complex all of it's in our sleep products in our <unk>.
Phase III global link.
Franchise, and so what we what we're seeing is that clients are shifting gently their deposits between different categories, but they also need an outlet for that cash they need an outlet for that cash at a reasonable price at a reasonable ability to move it.
Move it and use it as necessary.
With that as context, I think we continue to see some expected rotation out of noninterest bearing into interest bearing.
<unk> been happening I think at a reasonable pace and kind of in line.
More or less with.
What we've seen before and we expect that to continue for the next few quarters at the same time clients do half cash, especially given the risk off environment, but in general they all sit on cash as part of their.
Our investment planning and we found that they're engaged with us to leave cash in our balance sheet. They like the flexibility they like some of the pricing and obviously some cash comes in at noninterest bearing summit at lower rates when it's very transactional saw that.
Rates that are closer to market levels, and so it's an ongoing engagement with them.
The visibility we have is as is reasonably good it can always change but.
Deposits as a result seem to be in the zone now after a couple of quarters and the first half of the year of <unk>.
Coming coming down a bit.
To be flattening out I won't say that we won't see a little bit of seasonality occasionally and ill in January into February we see the downtick and then March is.
Folks prepare for tax payments and then April is down so we will see some of that kind of.
Movement, but on average we expect deposits to be flattish.
From Cowen.
Going forward into into next year and through the for the bulk of the year.
I appreciate that color Thats. Good you mentioned repo. So maybe just as my follow up question in the slides I noticed you created the centuri platform for peer to peer repo.
I'd Love.
A minute tutorial on what it's for who's it for and how you get paid.
You will get paid for that thanks.
Sure.
As part of the.
<unk>.
I think innovation heritage that we have here at State Street.
Across the franchise, but inclusive of the global markets area.
Our sponsored repo program, which is now $100 billion in size.
Started in 2000, I'm, sorry, 2008, 2005, I think if I if I go back to the history books and is now 100 million our franchise right. As an example, and we do this in FX. We do this in SEC lending Venturi is a.
As a repo offering that instead of.
Working through our balance sheet or one of the clearing corporations, which is how we do repo today actually directly connects.
Lenders and borrowers of securities and cash and so it's just another platform so to speak in other venue.
That clients.
Seem to want to engage with.
A big part of it early on is working with the asset owners those who are.
<unk> have long bulk securities.
And cash and what we find is sometimes when they may want to make margin calls for example are have margin calls they want to raise cash without selling securities right and so natural question of well.
Where do I repo repo through a bank structure <unk> repo with someone who's on the other side of that trade right, who actually wants to.
And again securities and so we find that there are counter parties on the other side of that trade, who would be interested in doing that and what <unk> does is it actually connect borrowers and lenders with direct access to one another so they have both the underlying collateral as the.
As the.
As.
The stapling stabilizing force and then they have the counterparty.
Our rating and with different Counterparties, you get slightly different pricing and sometimes that flow through is actually positive and quite appealing both to the lenders and borrowers. So that's a little bit of it in a nutshell.
I would like to grow it to some amount during the course of the year early returns are positive, but it's I'll put it in the bucket of innovation and how to how to how to connect folks in the capital markets, but connect folks who are our core clients and provide additional.
Services for them.
Okay.
Greatest tutorial thanks.
Thank you.
Next question comes from the line of Betsy <unk> from Morgan Stanley . Please go ahead.
Hi, good morning.
Hi, Betsy.
<unk>.
Okay.
Follow up question on NII, and then a question on expenses.
Just the follow up question on NII, Eric I, just wanted to make sure I understood. The cadence the pace that you are suggesting NII should follow I know you used the word attenuate, but we had a debate over here as to which way attenuate was going to traject, so sorry to ask the ticky-tacky, but I appreciate it.
That's alright.
We wanted to be.
<unk> sometimes.
Language language always mattered, but as you say.
Our perspective is we've got a very nice step off point from fourth quarter NII, We said, we'd be roughly flattish to the first quarter.
And then we expect it to trend downwards, so attenuate downward, let's say, 1% to 2% for the next few quarters just as you see.
You see a tailwind of interest rates.
Creating a.
A positive.
You see that continued rotation out of net interest bearing bearing deposits being a headwind and the net of that is down NII, we think 1% to 2% for a couple of quarters and then towards the end of the year and into 2024, we see rough stabilization, partly because we've kind of burned out.
On the.
On the.
On the noninterest bearing rotation and then we get to a more stabilized area, but all in we expect full year NII to be up about 20% year over year.
And.
We will take it from there.
Got it yes, no. That's helpful. And then on the expense side I know you mentioned that the benefit of the actions you've taken am I right a $100 million run rate I just wanted to understand when that comes into the.
2023 is that is that immediate and <unk> or is that something that comes in over time, just that'd be helpful. Thanks.
Yes, roughly about half of that comes in in 'twenty three.
The payback on most of these actions is.
About five quarters, so roughly half comes in on our fiscal 2023 basis and then.
It will hit the run rate I think within.
Quarters, whatever six ish or something after these actions most of these actions are.
In the next few.
Well, let's call it the next.
Quarter.
The run rate.
<unk> built to $100 million. So good good payback and the kind of actions we want to keep taking in this kind of environment yes.
So your point that was my final follow up which was.
Do you feel this is the extent or if for whatever reason topline disappoints based on.
No macro not working out or what have you is there more that you would consider doing going forward.
It's Ron maybe I'll take that.
We've obviously got a <unk>.
Turn of investments that we're intending to execute.
Also got an ongoing program in place that we've really had running now since 2019.
So we certainly if the environment were to change materially.
We would think about those investments we would also think about being more aggressive.
We have more or less in the background continued to take a lot of gross expense out of the system every year, we see an ongoing ability to do that.
But we also want to keep investing in the business. So there is a balance there but to the extent to which things started to go south and an unanticipated way I mean, we do have levers.
Thank you.
Thank you. Your next question comes from the line of Ken <unk> from Jefferies. Please go ahead.
Thanks, Good morning.
Was wondering if you had any kind of just what postgame thoughts.
Post the BPH decision and within that just.
You acknowledged and put forth this $4 5 billion capital plan just.
How should we think about just your commitment to that now as opposed to whatever thoughts you might have about acquisitions going forward. Thank you.
Hi, Ken.
We've always said, we've got a very clear strategy and M&A is not a strategy.
M&A as a way to.
To help execute a strategy to move it faster to enable it to get further than what's.
We anticipated, but it is not a strategy by itself, we are very comfortable with our organic strategy.
PVH was a scale enhancing acquisition.
But we would've liked to have done but it doesn't materially change in fact, it doesn't change at all our strategy.
So at this point, where we sit we have a strategy that wed like we have a strategy that we're executing against with some big milestones that we're confident we're going to be delivering on in 2023, and therefore, we are committed to that.
To that share buyback.
Okay, Great and then on servicing fees can you help us understand in your flat to plus one.
What's the impact of the Blackrock ETF D conversion, where where are we in that in that process and how much. If any is already been recognized of that expected revenue attrition at this point. Thank you.
Yes.
Maybe just.
And so that in the various components I think you saw.
The Blackrock transition begin.
At the end of last year was $10 million in the quarter sort of call it a $40 million run rate.
That continues to.
To transition out in 'twenty, three and in 'twenty four there's obviously, there's just a natural schedule that you would expect that we have.
We have worked closely with them on.
And so it'll it'll it'll impact our <unk>.
Our servicing fees.
During 'twenty three during 'twenty four and into 25, just when you think about the year on year comparison basis.
I think if you want to model it out.
Broadly we've said in our last.
Regulatory filing we said it.
It was worth about two percentage of fees.
As of.
The December 31.
Point that we just crossed its now about one 7% of fees.
I'll, let you sort of build it from there but it's it is included in our forecast that will continue to be included in our forecast.
We think about <unk>.
Net new business right. We've got a cell, we always have a bit of attrition and we will.
Want to continue to be net ahead and as you've seen us in the last couple of years, we've been net positive with net organic growth.
Broadly and then with Blackrock, specifically they continue to be a very important client of ours.
We have.
<unk> continued.
Continued in cap.
Good amount of business that we do with them were strong providers for them in alternatives, which is growing quickly and we are in.
We've also been awarded new business.
Over the last year and so that'll just I think it will just be part of the.
The outlook that I gave you as we go forward.
Okay, great. Thanks, Mark.
Thank you. Your next question comes from the line of Alex <unk> from Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for the question.
Maybe just to follow up on Ken's last point around servicing fees.
I guess, if you take your run rate servicing pieces of the end of the year. It still implies a pretty wide gap versus where you guys expect to enter 2023. So maybe just provide a little bit more granularity of where the ramp is going to come from so.
I know equity market is one thing and you guys are assuming I think 10 ish percent growth in global equities, so that certainly helps but.
The kind of $4 eight ish billion dollar run rate that you exited that to get to on a $5. One that's a 6% growth.
It was wider than we've seen in the past. So I'm just curious whether it's new business or something else that you see on the horizon that will help you bridge that gap.
Yes, Alex.
I think I tend to sell a lot more time on the full year to full year kind of servicing fees it sounds like you're modeling.
Over the last four quarters and then the.
The next four quarters, which.
Active fleet.
Model as well and we have in our in our budget, it's really a combination of factors right. So.
There is.
If you start with fourth quarter of 2002, and then work forward. We expect some appreciation in equity markets. We will see if that plays out and we'll obviously stay in touch with you all we think that'll be a tailwind.
We think client flows and activity in particular should not be a headwind like it was in 2022, maybe neutral maybe a positive just as clients have adapted to this new environment and so we see the new year this new year.
<unk>.
When theyre going to be trading investing.
Building position. So we'll see if that plays out that that will be part of it.
Then we have.
Net new business and so we do have a good pipeline both in the traditional servicing an alpha area and I think as part of that we continue to mine our existing client base because the share of wallet growth.
Can can be positive there.
And then finally, there's always the.
Some amount of normal pricing headwinds, but thats factored in but you kind of have to go through those four areas I remember.
We're serving some some growth in equity markets on a point to point basis.
But we will see if that plays out.
Alright, Thats helpful. Maybe just a follow up around the balance sheet strategy.
The NII guide in the deposit commentary all makes sense.
When it comes to the tailwind from sort of repricing the.
Portfolio with executed portfolio can you help us frame what the roll on roll off dynamic looks like today and also whether or not there are some more.
Opportunistic action you guys might take like we've seen with both BK.
Teekay and northern over the last month or so with respect to just maybe reaccelerate some of the lower yielding securities rollout.
Roll off into something that might be a little more attractive here.
Yeah.
Let me describe it as follows.
The investment portfolio has an average duration of a bit over two and a half years. So called average maturity of five years and so you go through the math that means about 20% of it rolls on rolls off in a typical year it'll it'll move around a bit.
I think what we found and Thats invested across the curve. It's the best in various currencies. So theres a mix. So you tend to get as you have roll off roll on.
Somewhere between one one and half two sometimes two 5% tailwind for that particular quarter of the amounts that are rolling off and rolling on.
And so that's what's actually been.
One of the factors that's in billing billing the yields and the yield.
<unk> on the profile of <unk> and.
And both how it was designed it what we're pleased to see so that'll be that'll be a gentle tailwind assuming.
Five year rates stay more or less where they are and European rates continuing to float up and so we'll just have to that that'll be one of the tailwind that we.
That we see.
In terms of more dramatic action.
Obviously.
I always think about what we might do but what we've noticed is that if you have high risk weighted asset positions in your risk weighted asset intensive positions in your portfolio.
And what happens here you could take the loss you reinvest.
And it helps accelerate a buyback right. That's why I think a number of players are doing that doing the just the for vanilla instruments treasuries agencies.
Government guaranteed.
Securities.
Yes.
I think the benefits are closer to a push we could we could take some.
Losses through the P&L, they're already in the equity account through OCI you put on NII in the future I think thats just moving around of the financials.
We just don't find that that is a particularly compelling trade.
To do.
Yes, well always evaluate walls, we see if we have specific.
Positions that might need some some adjustment but.
We don't see that is particularly compelling it's not really compelling economically.
And the financial benefits you guys can kind of model out either either way and so we.
I think.
We're pleased with the.
With the ability to continue to manage the portfolio in line with our current processes and they've they've been renewed <unk> NII is up significantly this past year and up another 20% next year and we've got a tailwind in <unk>.
I think it bodes well for for for where we are and where we're going.
Yes, I got you great. Thanks, so much.
Sure.
Yes.
Thank you.
Next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.
Great. Thanks, good morning folks.
And just on the on net interest revenue outlook for 'twenty three Eric can you talk a little bit about what you view as sensitivity to say if we had rate cuts in the back half of the year I don't think Thats assumed in your in your outlook, but just if you could talk about that dynamic.
Whether you think that would just be offset by reducing the deposit beta and then also on the foreign deposit beta that you talked about which is much better than U S.
Did you expect that to continue or do you see incremental on deposit betas moving higher from here.
<unk>.
Yeah, Let me let me go in reverse order.
The.
The U S for us is foreign currency betas in our experience this cycle prior cycles.
Do tend to run at different levels, partly because the U S has this structure of noninterest bearing versus interest bearing deposits right. So the client.
Deposit betas are in a subset.
Of the total.
And partly because the international markets just operate a bit differently, how we're paid and how that.
How those those expectations have been set over I'll call it decades for the industry.
Operate differently. So I think for the as we look into the next few quarters, we think the U S client deposit betas ex any new money that we were bringing on initiative basis.
Going to be in that 65% to 70%.
And the international Betas, we think will continue in the 20% to 50% range. When you look at euros.
Pound Sterling Canadian Aussie dollars and some of them some of the other currencies. So we think they're kind of they're going to they're going to be in the cell and that gives us an ability to continue to.
To take advantage of that.
The.
The interest rate increases.
If I then.
Work through the other part of your question on what happens with rate cards, that's in our.
That's in our expectations right Thats in the forward curves, especially for the U S that there could be a December cut there is some probability there could be cut before that I think it doesn't dramatically affect because they are late in the year the rate cuts don't dramatically affect the.
The NII forecast, so we'll kind of take it as it goes I do think you're as you're intimating theres a bit of this offset which is it.
If the fed's cutting rates and there is probably going to be.
Even more cash that clients keep on hand and deposits in the system, So there'll probably be some.
Some some offsetting impact and obviously with the U S beta is higher.
Conveniently rate cuts actually at some point to help with.
Yes.
With NII as well so I think there's a fair amount of.
There is a range of scenarios, let's call. It in the second half of next year and so my guess is Brian we're going to be having this conversation.
Often with you and we will certainly keep you posted as we see some of those scenarios develop or or.
There is there is there is more more variability.
That's super helpful. And then just maybe on asset servicing just maybe an update on how you're seeing the pricing headwinds.
Pulled out for this year and then also obviously you typically do you get a pricing headwind just from a mix shift.
Toward ETF, but maybe if you could talk about whether you think that might be said offset by some of the growth in alternatives and then I know I think there is an expense offset to or I should say I believe the margin is the same.
On Etfs versus mutual funds, so you're getting the expense on that maybe if you just wanted to confirm that.
Yes, Brian I think I think that the.
The pricing.
<unk>.
Experience that we're seeing in the industry has been stable and consistent over the last few years and we expect it to be consistent.
Into next year and beyond.
We just have the standard because our contracts are tied to equity markets.
When they rollover every.
456 years typically.
Folks are thinking what do they expect equity markets to be they know we're going to get paid theyre going to pay us more in the coming years and they want to share some of that and so there is.
<unk>.
A partial pricing offset but it's in that 2% headwind per year on servicing fees and relatively FINRA.
<unk> been relatively consistent yeah, and Brian It's Ron.
The mutual fund ETF shift.
The.
I mean, there's been some high profile conversions of mutual funds to Etfs, but thats.
Theres not a lot of that going on more typically what youre seeing is as Etfs being added two lines.
And yes, the economics are different.
The revenues.
These were lower.
When you are at scale when costs the expenses were much lower so it's not meaningful in this overall.
Revenue.
We're going to guide that we're giving you.
Perfect great. Thank you so much.
Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.
Good morning, Thanks for taking my questions.
So I'd like to start on capital. So the buyback sends a strong message Ron very encouraging to hear about your comments on M&A.
But I wanted to clarify that the buyback is up to $4 5 billion. So does the upper end of the range there.
Assume that youre going to see some OCI accretion and is the quarterly range of $1 $20 million to $200 million to the right way to think about it if rates are stable.
Oh.
Brennan, it's Eric the answer is yes, and yes, right. If you think about it we've forecasted just so you guys. Just says you have earnings and coming through the P&L.
It's been good to us and will be a nice a nice tailwind there is some normalization of <unk>, which I mentioned into the first quarter. Then there is some <unk> growth in our plans because we want to continue to lead more to clients and support more with their foreign exchange our hedging activities. So we'll continue to do that.
And then there is the buyback in <unk>.
Atlanta is just.
At pace get back.
Into a range and.
That that authorization comfortably gets us there.
Okay excellent.
And then.
A couple of folks have touched on it before but maybe if we think about the fee revenue.
Can you please update us on the impact of market moves to a fee revenues.
And whether or not there's also a corresponding impact on the expense side too I'd assume there's at least some degree of impact there.
Yeah, Let me let me let me do it this way I think.
As we've been relatively.
Consistent here and I think the.
The guidance will hold a 10% average change in let's.
Let's call it an increase in equity markets.
Well typically lead to about a 3%.
Increase in servicing fees.
Both of those on average so thats.
That's the kind of gearing, we have it's higher on management fees, 10% higher equity.
Markets tend to be closer to.
5% increase in management fees.
On the expense side.
If I.
It moves around a bit but.
I think it's <unk>.
10% average increase in equity markets, probably close to that.
Let's say around the range around a percentage point increase in expenses.
Could be a little bit less it kind of depends but our sub custodian costs have a gearing towards equity markets and fixed income markets.
Market data in some cases does as well so yes, it could be half a point could be a point.
That's part of what we have in the in the expense work and outlook that we've given and in some ways. I think we're actually pleased to see that particular expense increase because that particular expense increase comes with real revenue growth and thats.
That then delivers EBIT and earnings growth.
When you bring it altogether.
Excellent. Thank you for that color.
Thank you.
Our next question comes from the line of Steven <unk> from Wolfe Research. Please go ahead.
Hey, good morning.
So Eric I actually have a two parter if youll indulge me just on some of the NII guidance first I was hoping you could provide just some guardrails on your assumptions for Niv outflow given your relatively close to the trough that we saw last cycle and the for the second part just since you alluded.
NII stabilizing beyond 'twenty, three even as niv remixing pressures abate and reinvestment tailwind start to work through the balance sheet. I was curious why NII is actually growing beyond 2023 is that a function of rate cuts international mix any perspective would be really helpful.
Alright.
The.
Crystal Balling into 2024, I got Italia, we got a lot of variability playing out right now whether it's economic whether its central banks and I think guide.
I know theres a lot of talk about what's happening in NII.
Where are we where do we go to and then does it.
What happens after we get to a peak. So I was just trying to in 2024 to kind of level set that we see.
Stability there is a scenario where you see growth there are scenarios, where we may not but it's hard.
Youre getting far out.
On.
On our forecast again predictions to be to be honest, so let's come back to that maybe in the middle of the year that'll.
That'll be a good conversation.
It was about $44 billion this quarter.
This quarter, meaning fourth quarter.
It was down 5%.
Sequentially, it's bounced around quarterly, but we see.
I don't know you could have.
After 44 billion you could have.
$4 billion rotation out next quarter, you could see that again into the next quarter then it starts or it could be $3 billion and then two and so on and so forth. So we're I think we're at this level where.
We've seen.
Some amount of rotation, we think it's going to continue roughly at the pace that it's been going.
So it could be anywhere between two three and $4 billion a quarter, but you could have some some some changes to that while we do think is that we will continue to see some of it in the first half of the year and then it just starts to slowdown into the second half.
And what we've done is use of that kind of base case into our modeling and it's all factored into the 20% increase in NII that we expect for next year.
That's great.
Thanks, Eric since you did talk about stabilization I felt like I had to take advantage of that window of opportunity to look forward to talking about it a little bit more in the middle in the middle of the year.
Just one more for me on capital management I was hoping you could just.
Speak to or give us some insight into the cadence should we expect that buyback to be executed ratably or be a little bit more front loaded here and just given the commitment.
Or at least.
<unk> effort to optimize our capital levels, how are your scenario planning for the Basel four proposal our update that we should be getting from this add early in 'twenty three.
Yes.
All.
Fair and it's the kind of discussions we have internally, we want to frontload the buyback you saw us.
Start, particularly strong.
This past quarter.
And.
We want we want some out of front loading on the other hand, it's actually quite stabilizing to the stock to have buybacks.
On a consistent basis. So I think we're we don't want to front.
Frontload at an extreme and we don't want to be Ratably flat through the year at the extreme either because it gives I think it's a good kind of market practice to have some I'll call it frontloading, but reasonable consistency.
And the buyback and the buyback as well.
<unk> then.
The goal is to get into our target range at pace and then.
I'd love to operate in the middle of our range overtime. That's that's kind of how our ranges set up but I think what we always have to do is look out on the horizon is our the economic conditions worsening right and so then you may be.
On a run closer to the upper end of our range to insulate and prepare or are they particularly benign and they're particularly good uses of capital and you might want to be at the lower end. Similarly, I think we will learn more about Basel III and some of the changes in capital rules, maybe that comes with other changes in capital rules, we don't know.
Sure.
And I think later this year, we'll evaluate and Thats another reason to either run towards a different.
Areas of the range as well so it all factors in but I think we're quite comfortable with.
The direction, where we want to go and then like like you will but we will.
Think about what's on the horizon.
And plan for that.
That's great. Thanks, so much for taking my questions.
Yes.
Thank you.
Next question comes from the line of July Cassidy from RBC. Please go ahead.
Good afternoon guys.
Eric as a follow up on the stock repurchase commentary.
Did you guys and especially now as essentially.
Reference that will be more front end loaded did you guys consider an accelerated share repurchase program.
Gerard we did and.
With the accelerated share repurchase program typically does operate in such a way that the stock buybacks accelerated within the course of the quarter right within the three month period. There are typically some benefits of that you tend to add.
Penny or around that to EPS, it's actually interesting enough in a high interest rate environment. You also lose the NII.
Capital.
We've actually found that the ASR is tend to be a push roughly and so we're.
We often do.
More typical buyback within.
The available trading days in the quarter.
And in a way that's fairly market practice.
As a way to to return the cash and the capital to all of you.
Very good and then I know you've pointed to the <unk> benefit you had this quarter through the CET one ratio and I think you said in your slides here targeted range is 10% to 11% which of course youre above at this time.
You have any guidance on when you think you may reach your targeted 10% to 11% CET one range.
Okay.
It will depend on.
Let me say it this way.
We want to return the capital at pace and I've, given some book Kansas.
What what that means and that's that's a I think a forecast you guys can build off of and we want to get to our target range right. We don't want to wait till I don't know next Christmas right that that's not the.
And that I would not.
Be at pace.
And my nomenclature at the same time, there's just a range of.
What.
Well, we'll move right as part of the ways lighten again, it'll take a little longer if they go back and we fully utilize our limits in our various businesses and.
Areas than it might be a little.
More quickly so it's hard to pin it down, but as I said, we'd like to get too wed like to execute the buyback at pace, we'd like to get back to a range into a range at pace.
We're going to have we're driving that direction.
Great I appreciate it thank you.
Hi.
Well, thanks for all the answers on the cyclical factors.
Had to ask the structural.
And game of strategic end game post Brown brothers.
And the reason I ask I count five restructuring over the last 20 years, they seem to come around like the top at the Olympics. The fourth quarter is yet one more quarter with notable items I cant notable items in 18 of the last 20 quarters and I do get some of it like you have incredible headwinds mutual funds market technical debt and reinvest.
Reinventing yourself front to back.
Straight through processing, serving clients more agile Kirk.
And I also recognize what you said at the start that the ROE and the margins improved for a couple of years in a row, but when I look at the expenses that has gone the other way and it seems like maybe one a root issue is fixed costs. So really the question is.
Concrete question.
What percent of your expenses are fixed how does that compare to the past I assume they've come down and where would you like to take that and then more broadly what is the end game strategy After Brown brothers.
So let me start on that might come through so there's a lot in there.
Comment on.
I'm not going to comment on past restructurings will comment on this one right. We had we've made some changes to the way we organize ourselves we talked about that back in the middle of the year and there is some benefits we can take out of that in.
In terms of.
Simplifying the management structure, having a smaller number of senior managers, we're going to take advantage of that.
Consistent with simplifying our business it creates accountability and we stand by the need to have done that restructuring in terms of where do we take this business going forward.
It has a lot of benefits to it.
It's very tied to investment markets over time.
Investment markets grow they don't shrink so.
The actual.
If you will unit pricing.
Unit pricing May go down overall pricing actually.
Overall revenues are actually more times than not have the tailwind we like that business. It's also one that is changing fundamentally from being a.
Kind of a back office show me, the lowest price kind of thing to much more of an enterprise outsourcing business.
We are very new in that.
We're very early in that transition and we think by far we are the best positioned to take advantage of that in terms of.
The technical capabilities that we have the people capabilities that we have the position we have in the marketplace.
We've made initial inroads in wins in that but there is development that we've talked about that will be delivered in 'twenty, three and beyond but a lot of in 'twenty three that will only help strengthen our position. So we see the endgame here.
The core investment servicing business as being one which is much more akin to an outsourcing services business.
Much less.
Susceptible to kind of these instantaneous I'm going to put it to RFP and it's just a stickier business.
And we are very.
Respectful.
Wary of our competitors because.
<unk> edge and elite can be easily caught up on but.
Right now we believe we have that edge and leave we're going to capitalize on it.
In the investment management business again, similar kinds of changes there.
We're seeing.
Increased desire for the kinds of things, we do systematic and otherwise.
Our occasion, which we are very very good at.
<unk> is now an area that everybody is talking about after literally decades of reliance on the 64 remodeled guests want it didn't work it doesn't work at all times.
Lead to a lot of thinking and demand for that so we like our businesses, we like where we are strategically in terms of.
What's going to happen.
Will there be other brown brothers out there what I do think that you will see over time is.
An increasing number of competitors, where this may not be their core business.
Enough is enough the capital requirements are.
In terms of the investment capital requirements much too high.
Mostly a pump technology.
Really does continue into an outsourcing kind of environment like we believe it will it's going to put more demands.
From the business and if this is business 42 of your 80 business structure you might decide you don't want to be in this business. So that's how we see it going forward.
That was very expensive. Thank you.
Fixed cost part of the question.
You don't report it that way, but just in rough terms I guess, so in the asset servicing less rfps lowest priced this enterprise outsourcing, okay investment management more holistic instead of the old model.
So as you transition you have a certain degree of fixed costs that are tough to manage.
It's not quite like a brokerage firm.
Yes.
Reduced bonuses.
Is there any way just to ballpark how much of your expenses are fixed cost and I think they've come down from the past.
Probably trying to Florida more.
Mike It's Eric.
All good questions.
This such an industry, which used to be variable cost intensive Friday was very manual.
And when you add a new piece of business you actually have to hire fund accountants, who were working on ledger paper first and then on an excel sheets next.
So it was quite manually intensive and variable in nature.
As we've automated and think about the data centers you have talked about the movement to the cloud.
The developers that we have.
This business has really evolved to a fixed and semi fixed cost oriented business.
In truth and that means that for certain types of business, we bring on custody business core custody right.
The most automated and the most.
The oldest part of what sits in our franchise that comes and you plug it in and the computers just process a few more times not overnight, but literally in nanoseconds right and so this has become a more fixed cost business and so what we need to do is think about how do we want to manage those fixed costs.
How are they deployed the development dollars in technology, how do we shape that each year, because we can if we if we do that right will add feature functionality and that will bring in new business over time that will help.
Our retention.
And.
That will help.
Growth and so this is more of a fixed cost business and semi fixed costs, whereas it. It's more 80 20 fixed and semi fixed then.
Then 2080, and I think it actually has evolved and so what's important for us to do is to make sure that we have the products and the offerings and.
The client coverage to support that end too.
Add new business at the right type of new business, and then where there are variable cost components, we've talked about some of the more manual in complex areas right servicing for private for example is still quite manual it's complicated that are not standard systems typically in the.
<unk> there are no there's very little in third party software that one could avail. One self up those are the variable areas, where we need to continue to find ways to automate and streamline and thats part of what we're doing with.
But the ongoing investment program that we have underway.
Alright, thank you.
Thank you. Your next question comes from the line of Bob Wilcox All my time in this research. Please go ahead.
Hey, guys AUC wins in the fourth quarter were pretty good and Eric you called out a strong pipeline there what level of new business wins are you expecting in 'twenty three and do you see those coming from any specific client category cohort service area or anything like that.
As we as we have said the pipeline remains strong I think we're pleased with wins. This this year wins were about a trillion nine.
For the full year, what I have said is and.
I think we feel good.
Good about this this.
Target our line in the sand as we've said to drive the kind of organic growth that we'd like.
We want to win about a trillion five per year of new business.
Did that this past year, we did it in spades closer to double that in 2021.
And.
So and Thats, our expectation, we expect and we think thats.
That's that's par for for 2023 as well, obviously, we want to sell more than that I don't want to bring in new more new clients are offering further deepen relationships with existing clients I think what we feel good about here is both the new business this year the trillion.
And that has come in has come in a good fee rates.
The rates of the new wins are actually in line with our overall fee rate.
This year and so that means that as it on board.
It'll be.
It'll be neutral or even accretive to the fee rate.
So thats important and Thats an important part of the program in terms of segments. It's been broad based I mean this this past quarter. For example was it was broad based across regions literally I think it was a third a third a third.
And we saw particularly strong growth this past year in Asia, we'd like to repeat that again I think we got we havent intensity on.
Europe , and North America, as well, so theres not I would say, it's not one particular segment or one particular region.
It's fairly broad but.
It's.
It's a good pipeline overall.
Got it and then you also mentioned some higher renewals in the Alpha business wondering if you could talk about the retention rate there as the retention among hunter back clients compare to your more traditional youre back or middle office only clients.
Yes, Rob I mean in terms of fully installed output clients the retention rates are 100%.
And you wouldn't expect it to be much less than simply because.
It's still relatively new.
I think that there is a real commitment that's made on both sides of the house when you enter into these things first of all to actually re.
Wire the firm around.
For the client to rewire around front to back because a lot of effort on their part.
And while Theres a lot of commonality across these clients through.
On our part that we need to do to install it.
So the contracts are longer but the reality is that the the.
The switching cost.
Also gone up dramatically in.
In these front to back so we would expect more but we also recognize that we've got to earn that we've got.
Right now there is a when that happens there's a huge dependency.
On the part of the client in us delivering every day and so we take that responsibility seriously.
Got it thanks, Brian .
Thank you. Your next question comes from the line of Vivek <unk> from Jpmorgan. Please go ahead.
Thank you.
Just a couple of little details for you Eric you mentioned.
<unk> came down by about $10 billion and you expect to see another declined 10% to 15 billion any color on what you did there and visit sustainable post <unk>.
Yes, let me let me just clarify.
<unk> was lower than expected in the fourth quarter by about 10 billion and in first quarter, we expect it to reverse in other words.
Op.
10, 12 $15 billion.
And it's just it's just driven by some of the underlying volatility in our business. For example, overdrafts were lighter than expected this quarter. They move around by a few billion dollars in that moves our it'll be late by a few billion dollars each quarter in the in the in.
And the FX book, we run a very.
Sort of a typical forward book.
Two week four week six week forward.
And as you have U S dollar appreciation and depreciation you can get.
You can get.
$5 billion moves in <unk> relatively easily so that's just the volatility that we saw we tend to be quite careful to stay within our IWA internal limits. That's why we tend not to have upswings and arguably way, but we tend to have these.
These these beneficial quarters now and then we'll just note them to you. So you can model out our capital ratio trends.
Great.
Second another little details for you <unk>.
<unk> software processing and data could you parse that into data versus CRD as such not combined.
Big growth rate, there, what's going on underneath.
How much is how much.
Sure.
It's a combination I mean, the bulk of that is really around Charles River.
The franchise that we.
We purchased back in 2018, which has really given us the kind of growth that we had had expected. So you can go back and compare the size of the franchise I think at the last disclosure I think we probably show did a year ago.
And.
Compare it to that software and data line and.
Get a kind of an adjustment, but it's the large.
The large majority I'll say of that line data to us.
A very appealing offering that supplements, what's in sometimes sold with the Charles River offering sometimes with alpha and the Middle office, sometimes sold as supplemental to just custody and accounting because it's such a high value and informative.
Kind of window, sometimes for risk management purposes, sometimes four.
Client transparency purposes for our.
For our.
Asset manager asset owner clients.
And so it's actually one of the faster growing areas of that.
Of that of that area and that's why we put it together because it's actually a software type sale.
But but an important one.
Yeah, Vivek, it's Ron let me just add to that because we've done a lot of.
Innovation in this area of new product development, and we do expect that to continue to grow as Eric said because.
What.
Everybody is interested in simplifying there.
Their operations, simplifying and getting control of their tech.
Innovating on the technology side.
But in addition, there is a data management data control and some parts of the world with some investors at Transco location of data.
Got it.
Data actually both move and Russ.
So this is that increasingly.
This is a growth area.
Go beyond asset managers large asset owners in particular are very interested in that.
So we see it as a way to extend what we're doing broadly in the <unk> arena.
And just to clarify on CRD Eric.
Eric to your comment earlier.
When you had previously talked about it was growing in the sort of the low double digit range. This was a year or two ago. When you were.
When it gets broken out is that total the pace at which is this company going to grow or is that.
As it matures slowing down a little bit or is it accelerating any any granularity.
Any color on that.
Yes.
It continues to outpace I'd say it moves around depending on some of the on premise renewals that still flow through the P&L high single digits low double digits and.
What we've done is continue to.
The team continues to drive kind of the core <unk>.
CRD offerings.
It started with an equity product gets moved to equity and fixed income which are now in.
Industry.
Industry.
Peer levels in some cases industry, leading and then what we've done is supplemented that for example, we purchased small company called <unk>, which was kind of a front end portion of Charles River type offering and so we've added a kind of private markets.
Area, two what I'll call the broader Charles River complex.
So this is this is an area that I think will continue to grow.
Twice the rate of.
State Street.
Help.
Lead us forward, but also as the tip of the sphere of how we engage with clients new clients existing clients and broader ways.
And Thats why the core software I think is an important product in what I think I've been pleased with especially this year, which has been.
All over the place economically and politically right, even with equity markets up and down software and software growth core Charles River data.
Private software for private.
<unk> continues to grow in this.
Double digit range.
Low double digit range through through thick and thin and that helps balance out I think the growth dynamics of the company.
Great.
Thank you Bob.
Sure.
Thank you that does the final last question I'll be turning the call over back to Mr. Ron <unk> for closing remarks.
Thank you operator, and thanks to all for joining us.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.