The Bank of New York Mellon Corporation

Good morning and welcome to the 2020 Fourth Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Magda Polczynski, BNY Mellon Investor Relations. Please go ahead.

Good morning. Welcome to BNY Mellon's fourth quarter 2020 earnings conference call. Today, we will reference our financial highlights presentation available on the Investor Relations page of our website at bnymellon.com. Todd Gibbons, BNY Mellon CEO, will lead the call. Then Emily Portney, our CFO, will take you through our earnings presentation. Following Emily's prepared remarks, there will be a Q&A session. Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement, and financial highlights presentation all available on the investor relations page of our website. Forward-looking statements made on this call speak only as of today, January 20th, 2021, and will not be updated. With that, I will hand over to Todd.

Thank you, Magda. Good morning, everyone. Let me start with a brief summary of the fourth quarter financial results, which Emily will then review in more detail. And then I'll come back with some thoughts on our franchise and our outlook for 2021. Starting on slide two, in terms of the fourth quarter, we reported revenue of $3.8 billion and earnings per share of 79 cents or 96 cents after excluding notable items, which Emily will cover in a few minutes. Turning to the full year 2020 financial results on slide three, and I'm referring to them on an adjusted basis, earnings per share of $4.01 was flat to the prior year on revenues of $15.9 billion. Fee revenue increased over 5%, excluding notable items, and almost $370 million impact of fee waivers in 2020. Expenses were flat as our cost discipline and productivity gains essentially offset incremental investment, and the operating margin was solid at 30%. Now, we have a lower-risk, fee-based business model that positioned us well to this environment. We had no net charge-offs. We also delivered strong results in the two rounds of Federal Reserve stress tests announced in June and December. Our model is highly capital generated, and our common equity tier one ratio increased to 13.1% from 11.5%. Now, when I shared my 2020 priorities with you a year ago, of course, no one expected that the world would change so rapidly and dramatically. Throughout the pandemic, we have supported employees, clients, and our communities and we're proud to provide the infrastructure for several critical government programs for COVID relief, including the term asset-backed security loan facility, the municipal liquidity facility, the primary dealer credit facility, and the payment protection program. Now, while navigating the extraordinary environment, we continue to advance our long-term growth agenda across all of our businesses. That agenda includes accelerating our digital and data transformation, investing in several growth opportunities, and leveraging the power of the open architecture platforms and solutions we provide to help our clients grow their businesses. In asset servicing, we have seen no let-up in client onboarding this year. This is a testament to our focus on client experience, data, and digitization. Half of our AUCA growth in asset servicing year-over-year is from organic growth with new and existing clients. And we built positive momentum. We closed out the year with significantly higher win ratios and retention rates. and had our best sales quarter in the last 10 in the fourth quarter of 2020. Once onboarded, these wins will start to benefit revenue in late 2021. We've been pursuing a strategy of moving up and across client value chains beyond just supporting operations to revolutionize data and digital-enabled solutions across front, middle, and back offices. For example, we were recently mandated one of the largest asset managers in Europe to provide front-to-back services, adding custody, accounting, and transfer agencies. This includes a collaboration to integrate an order management system to deliver portfolio and risk management, improve sales and distribution, and operational efficiencies. This is another example of our open architected security servicing platform, which we call Omni. We are currently integrated with the leading OMS providers that cover 98% of the addressable market. and our partnerships are starting to help us win business, as the above example illustrates. We also have a leading data and analytics business and are now building on our 20-year track record in software and service to create robust cloud-based data and analytics capabilities. With the help of several new clients who were early adopters, we have introduced a new platform called the Data Vault, which allows clients to quickly onboard and manage both structured and unstructured data from many sources. To share one example, we were selected by Janice Henderson to transform their global data platform, including implementing the data vault, which will help improve the quality and ease of access to investment information across the enterprise. We also have a suite of new business applications for the front office, such as our ESG investment analytics application, which was recently won a significant award, as well as our distribution analytics offering to help clients with asset growth. These applications together with the vault position as well to drive growth. Purging is one of the unique businesses that differentiates us from our custody peers. It helps us build deep relationships and is a powerful source of additional connectivity to the fast-growing wealth space. Fourth quarter results in purging benefited from elevated transaction volumes, which are expected to moderate a bit in 2021, as well as continued strong underlying fundamentals. Net new assets for the year were $82 billion. Pershing's business, which includes over 600 broker dealers and 500 registered investment advisor firms, is a very attractive and efficient platform for our asset servicing clients to access their points of distribution. In fact, today, through Pershing, asset managers have placed $1 trillion of their product and continue to value this unique opportunity that only we can offer. Clarence and collateral management fees were up in 2020, excluding the disposal of an equity investment last year, and we continue to innovate in this space. For example, as a result of intense collaboration between our market business, asset servicing, clearance and collateral management, and group treasury, we are in the process of launching an innovative solution. It offers clients the ability to pledge money market fund shares to meet tri-party collateral obligations across a wide range of transaction types, such as repo and securities lending agreements, secured note programs, collateralized deposits, and also allows segregation of initial margin for derivative contracts, all in a straight-through processing models. So clients can now buy money market funds on our liquidity direct platform and seamlessly pledge them as collateral in these types of transactions. In treasury services where we delivered good performance, we have continued investing in automation and are advancing our real-time payments capabilities. We are actively working on an exciting large-scale commercial payments pilot with one of the world's largest fillers. This capability is expected to reach tens of millions of consumers via their retail banks throughout 2021, leveraging continued adoption across the RTP network. That's known as the real-time payment system. Within investment management, flows have been largely in step with industry trends, and we've offset equity outflows with strong fixed income cash and LDI inflows. We've had three straight quarters now of long-term inflows and have improved investment performance. Across the top 30 ranked strategies by revenues, 75% are in the top two quartiles on a three-year basis, compared to just over 70% a year ago. In 2020, we launched eight ETFs, with more to come this year. We've also been building out sustainability funds, such as the Future of Humans Fund with UBS, and a series of Mellon funds focused on pressing global themes, for example, aging populations. Finally, we continue to build out our leadership team, John Tobin was recently named as Chief Investment Officer of Dreyfus Cash Investment Strategies, bringing to this role deep and broad money market industry expertise. We will continue to build on our leadership across the entire cash ecosystem to position our business for long-term growth. And just a couple of weeks ago, we announced that Ewan Monroe would be joining us as CEO of Newton in June. Ewan has a proven and highly relevant track record in the investment industry, spanning three decades and will be a great addition to Newton. So we're excited to have both of them join Hanukkah's team. Before I hand over to Emily, I'd be remiss if I did not comment on our push of meal wine melon towards ever greater diversity and inclusion. We have one of the most diverse Fortune 500 boards, and our executive committee has become increasingly diverse. To accelerate progress in our most underrepresented ethnic talent populations, and help position our firm as a competitive choice with Black and Latinx graduates and experienced professionals. We set some concrete short-term representation goals in the US. It's important on many levels, and we know diversity is highly correlated to long-term financial performance. And finally, during the year, I made a number of appointments to my leadership team. We have a highly motivated group of talented employees implementing our strategy, which is centered on driving growth creating differentiated value for our clients, digitizing and optimizing our operating model, and fostering a high-performance culture that is focused on delivering excellent client service in new and innovative ways. With that, Emily will now review our fourth quarter results in more detail, after which I will make some concluding remarks.

Thank you, Todd, and good morning, everyone. I will walk you through the details of our results for the quarter and briefly review the full year as well. All comparisons will be on a year-over-year basis unless I specify otherwise. Beginning on page four of the financial highlights document, in the fourth quarter of 2020, we reported revenue of 3.8 billion and EPS of 79 cents. Both the current and prior year quarters included a number of notable items. The fourth quarter 2020 results included an unfavorable 18 cents per share impact from charges related to litigation, severance expenses, losses on two non-core business sales, and lease exits and real estate sales. For real estate, the charge is a result of plans to exit around 8% of our overall footprint, and we expect this will be break-even on an annualized basis within a year. Remember, Our results in the fourth quarter of 2019 benefited from a gain on the sale of an equity investment, partially offset by severance and litigation expenses and net securities losses. When excluding these notable items, the fourth quarter of 2020 revenue was down 2% and EPS was down 5%. Results were negatively impacted by continued low interest rates and associated money market fee waivers. Net interest revenue was down 17%. Excluding notable items and fee waivers, fees grew 5% driven by the impact of higher market levels and continued positive momentum across most of our businesses. FX and other trading was roughly flat due to 33 million of these capital hedge losses in the fourth quarter of 2020 or about 18% negative impact to that line item year over year, which is offset in investment and other income. Expenses are down 1% on both a reported and adjusted basis with adjusted results due to savings in T&E and distribution and servicing expenses offset by continued investment in technology and the unfavorable impact of a weaker US dollar. Our provision for credit losses was 15 million, reflecting reserve additions related to our commercial real estate portfolio. Pre-tax margin was 24% or 29% excluding notable items, which considering the impact of interest rates and waivers, which have minimal expenses associated with them, shows the resiliency of our model. ROE was 6.9% and ROTC was 13% and included approximately 150 basis points and 300 basis points impact, respectively, from the notable items. We also continue to generate substantial excess capital as our CET1 and Tier 1 capital each increased by about $700 million this quarter. Page 5 puts out a trend analysis of the main drivers of the quarterly results and is adjusted for notable items where indicated. Investment service of revenue was $2.9 billion, down 4%. The decline was primarily a result of lower net interest revenue and fee waivers. These headwinds max benefits from higher market levels, volumes, and liquidity balances, as well as strong underlying momentum across many of our businesses, which I'll get into later. Investment and wealth management revenue increased 2% as higher market values and the impact of the weaker U.S. dollar, along with improved investment performance, offset the impact from fee waivers. The impact of money market fee waivers on our consolidated fee revenue net of distribution servicing expense was 134 million in the quarter at the lower end of the 135 to 150 million we previously guided to and an increase of 33 million quarter on quarter. Whereas in prior quarters, most of this impact was felt largely through purging or clearing service lines and to a lesser extent investment management, This quarter, we began to see a more meaningful impact within asset servicing and issuer services. We have provided you with a detail of the impact by business in the appendix of this highlight deck. Turning to page six and seven, setting out full year results and trends. Our full year 2020 results demonstrated resiliency and balance sheet strength during an unprecedented time. Excluding notable items, fees grew 3% despite a roughly 250 basis point negative impact from fee waivers. Full year expenses were essentially flat on an operating basis in line with the guidance we had provided throughout the year. Operating EPS was flat despite the impact from low interest rates and as we absorbed a higher credit provision. And we delivered a solid pre-tax margin and strong ROTCE through a challenging year. Turning to page 8, our capital and liquidity ratios remain strong and well above internal targets and regulatory minimums. Common equity Tier 1 capital totaled $21.9 billion as of December 31st, and our CET1 ratio was 13.1% under the advanced approach and 13.4% under the standardized approach. Tier 1 leverage was 6.3%, down 20 basis points from the third quarter to the higher deposits. As we've noted in the past, we are comfortable operating with a ratio of around five and a half to 6% versus the 4% regulatory minimum. Our current tier one leverage ratio is well above our target. Finally, our LCR in the fourth quarter was 110%. In terms of shareholder capital return, we continue to pay our 31 cent quarterly dividends, which totaled 278 million this past quarter. and are looking forward to resuming open market share repurchases in the first quarter. This will be in compliance with the Federal Reserve's modified limitations that apply to all CCAR banks and allows us to repurchase approximately 625 million of common stock in the first quarter. We look forward to operating under the stress capital buffer framework, which will give us more flexibility in terms of capital return. Turning to page nine, My comments on net interest revenue will highlight the sequential changes. Q4 net interest revenue was down 3%, primarily driven by the impact of lower short-term rates. And although our deposits increased significantly in the fourth quarter, they had minimal NIR value. Turning to page 10, which summarizes deposits and securities trends. Deposit balances continued to grow over the course of the quarter and on average were up 28 billion or 10% from the third quarter and 75 billion or 32% from a year ago. On a sequential basis, a larger driver of the growth was excess liquidity in the system driven by monetary and fiscal stimulus. On a year-over-year basis, strategic deposit initiatives across treasury services, asset servicing, and wealth management business tied to underlying transaction activity which supports our client relationships and fee generation objectives was a significant driver of growth. The average rate paid on interest-bearing deposits was negative six basis points, minimally changed from the third quarter. As a reminder, about one quarter of our deposits are in foreign currencies, including Euro and Yen, which have negative rates. In the US, our average interest-bearing deposit cost was about four SIPs. Turning to the securities portfolio, on average, the portfolio was flat to the third quarter and approximately 35 billion over the prior year, or 27% as we deployed a significant portion of the growing deposit base throughout the year. As the bar chart shows to the right, we continue to gradually increase our non-HQLA securities to increase yields while maintaining our conservative risk profile. As a result, average non-HQLA securities, including trading assets, was $36 billion in the fourth quarter, up $24 billion from a year ago. Turning to page 11, we provide you with some color on our asset mix and specifically the loan portfolio. Exposures and statistics at year end were largely similar to the third quarter. As a reminder, our portfolio is predominantly investment grade and for the year we experienced net recovery. We recorded a 15 million provision this quarter as we internally downgraded a modest number of names, primarily in our commercial real estate portfolio. Our assumptions around the macro outlook, as well as the relative weightings of the scenarios were largely unchanged from the last quarter. And we continue to closely monitor this portfolio, particularly the commercial real estate exposure and other sectors more acutely impacted by the current environment. Page 12 provides an overview on expenses, which we covered earlier. Turning to page 13. As mentioned earlier, total investment services revenue year on year declined by 4%, mostly due to the impact of low interest rates. NIR was down 14%. fees were slapped or up 5%, excluding 113 million of fee waivers. FX and other trading revenue had a strong quarter as FX revenue grew by over 30% in investment services driven by higher volumes and volatility. Assets under custody under administration increased 11% year over year to 41.1 trillion. And we continue to see organic growth with new and existing clients, as well as the benefit from higher market values and the impact of a weaker U.S. dollar. As I move to the business line discussion, I'll focus my comments on fees. With an asset servicing, fees were up modestly as higher market levels and FX and higher liquidity service fees partially offset the impact of fee waivers, lumpy repricing associated with a few client renewals, and lower SEC lending. In Pershing, continued strong underlying fundamentals offset the impact of fee waivers. Clearing accounts were up 5%, mutual fund assets up 10%, and we saw continued strong net new asset inflows of $28 billion in the quarter. Transactional activity also remained high, as it did for most of 2020, and we would expect that to normalize a bit as we head into 2021. Issuer services fees decreased 3%, primarily due to the impact of waivers. waivers, mid-single-digit growth in DR fees was offset by a small decline in corporate trust. Treasury services fees were up. Our payment volumes rose, particularly in the second half of the quarter, and the increased fees also reflected improved product mix and client wins, and higher money market funding deposit balances on the back of targeted initiatives. Clearance and collateral management fees were down slightly. Good organic growth in our non-U.S. business, where tri-party balances and clearing fees both grew double digits, was offset by declines in U.S. volumes, lower intraday financing fees, and the absence of income associated with an equity investment divested last year. Page 14 summarizes the key drivers that affected the year-over-year revenue comparisons for each of our investment services businesses. Turning to investment and wealth management on page 15. As noted earlier, total investment and wealth management revenue in the quarter increased 2%. Overall assets under management grew to a record $2.2 trillion and were up 15% year-over-year, primarily due to higher market values, $73 billion of inflows, and the positive impact of the U.S. dollar weakening. In the fourth quarter, we had net inflows of 20 billion, including long-term strategies inflows of 15 billion, driven by a second straight quarter of inflows in LDI, as well as fixed income. Wealth management had its strongest low quarter in two years, resulting in positive organic growth in the quarter. Investment management revenues were 3%, as the benefit of higher market levels and a weaker dollar were offset by the impact of fee waivers. Fee waivers impacted growth by about 300 basis points. Wealth management fees were down 1% due to the sale of our Canadian wealth management business. Clients' assets grew to a record $286 billion and were up 8% year over year. Now turning to our other segment on page 16. The year-over-year revenue comparison was primarily impacted by the gain of an equity investment in the fourth quarter of 19 and a business sale loss in the current period. Expenses increased, reflecting severance and real estate impairment charges noted earlier. And now a few comments about the outlook before I turn it back over to Todd. First, the more recent usual caveat that the macroeconomic environment remains fluid. So as we think about full year 2021, for NIR, our guidance remains unchanged in that a run rate slightly lower than the fourth quarter, call it about 3%, remains a good proxy for the quarterly run rate expected this year. Although recent yield curve deepening provides a modest tailwind, short-term rates have continued to decline. Also, we expect NBS prepayment fees to remain at current levels despite the steepening yield curve as mortgage rates have only risen slightly. Finally, we are currently planning for average deposits for the year to be slightly lower than our fourth quarter average as we help our clients redeploy liquidity into more efficient investments on our platform. For transaction-related fees, we expect volumes to normalize a bit versus the healthy levels we saw in the fourth quarter. On money market fee waivers, we still expect to be at a full run rate in the first quarter. We now, however, expect the impact of first quarter waivers net of distribution expense benefits to be approximately 175 million, assuming short-term rates stay at current levels. So as we think about full-year fees for the entire company, we expect them to be relatively flat, as the impact of equity appreciation, organic growth, and the weaker dollar will be offset by fee waivers and lower volume. Excluding waivers, fees would be up 3%. By the way, we assume equity markets will rise approximately 5% from the beginning of 2021. Regarding expenses, we continue to expect them to be flat for the full year on an operating and constant currency basis. But due to recent weakening of the dollar, this means that in absolute terms, full year expenses are now projected to increase by approximately 150 million or 1.5%. This currency impact is offset by a life increase in fee revenues as previously discussed. Finally, in terms of our effective tax rate, we expect it to be approximately 19% for 2021. Specific to the first quarter, the items I just mentioned will have a proportionate impact, but as a reminder, First quarter staff expenses are typically higher relating to long-term incentive compensation expense for retirement eligible employees. Also, in the first quarter 2020, we made an accrual adjustment that reduced the expenses that will not be repeated this year. As a result, we expect first quarter total expenses to be up three to 4% year over year, including the impact of currency. With that, let me turn it back over to Todd.

Thank you, Emily. Before opening up for questions, let me share some final observations speaking to slide 17 and 18. Our franchise is powered by a wide breadth of services and capabilities. This differentiates us and certainly makes us unique amongst our closest peers. We are a top three provider across asset servicing, issuer service, clearance and collateral management, as well as purging. And we rank among the leading players in more fragmented businesses, such as wealth management, investment management, and treasury services. This gives us a strong platform and scale, both of which are crucial for success. We are responding to the evolving needs of our clients and actively connecting different parts of the company to drive growth. While significant pandemic related challenges remain, we are entering 2021 with confidence and momentum in our core franchise. At the same time, overall revenues year over year will be impacted by the full effect of low interest rates, money market fee waivers, and the absence of COVID-related transaction activity. For the full year, we expect to deliver modest organic fee growth, similar to 2020, which we expect to accelerate beyond 2021 as our growth initiatives gain traction. As we look out at 2021, I have three overarching priorities for the company. One, execute our growth initiatives. Two, scaling and digitizing our operating model. And three, fostering a high-performance culture that is focused on delivering excellent client service in new and innovative ways. While focusing on these priorities, we will continue to vigilantly manage operating expenses, which we expect to be flat for 2021 on a constant currency basis. Between 2018 and 2021, we funded approximately $1.1 billion in new investments by generating internal efficiencies with no increase in expense. We will continue to invest in technology, although the profile spend is more focused on initiatives to grow and make the business more efficient. Turning to capital returns, we are pleased that we can resume care repurchases in the first quarter. We remain committed to returning at least 100% of earnings to shareholders over time, including the excess capital we have built since the second quarter of 2020. We have the capacity to drive meaningful EPS growth through buybacks. In conclusion, we have navigated an extremely challenging year well. Our capital-generative and low-risk model delivered what it is supposed to do in terms of stability and capital generation. I'm proud of the leadership team and the dedication and hard work of our employees during unprecedented and challenging times. And with that, operator, can you please open the line for questions?

Thank you. And if you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and one related follow-up question. And we'll take our first question from Brennan Hawken from UBS. Please go ahead.

Good morning. Thanks for taking my questions. Emily, there was a lot of walkthrough there on the revenue guide, so I just wanted to make sure I heard that correctly and understand where I should index. You know, you guys provide a lot of disclosure on slide 22. Is the right starting point that we use the fee revenue X fee waivers and notable items for 2020, which is the $13.1 million? And then, you know, we layer in the different and various impacts that you laid out and then take the new run rate for fee waivers expected in one queue and then kind of annualize that. Is that the right way to think about it? And how does the strengthening of the dollar play into that? Sorry.

Sure. So just to – I guess just to – I won't break down each and every piece, but ultimately, if you look at our full year, 2020, if you actually take into account – we've tried to spell out as best as possible the impact of waivers. Likewise, we are expecting an increase in market appreciation. as well as we're going to have some favorability in terms of the weakening dollar. If you put all of that together, year-on-year revenues will be essentially flat and up 3% ex-fee waivers.

Got it. That's fee revenue, Brennan.

That's fee revenue, yes.

And that is assuming, who knows where the dollar is going to be, but we just use the spot dollar at year-end.

Fair enough. So the 12.77 is the number we should focus on to be flat, basically. X all those puts and takes. Yeah. Yeah. Great. Excellent. And then expenses flat, which is in line with what you gave in December on a constant currency, but we've seen the weakening dollar. And so when we think about the expense line, if the dollar remains unchanged from where we are, Now, and of course we can calibrate that through the year depending on the different factors, we'll see a roughly 1.5% uplift on the operating expense line from the 2020 level. Is that fair? Correct, correct. Okay, okay, excellent. Thanks, I just wanted to try to clarify some of that. And when we think about the deposits dropping from the 4Q average level, Is it fair to assume that we'll probably shake out at a level that's above the third quarter, or are you guys thinking that we might actually even revert down to that level or below? Is there any help you can provide in trying to think about how to gauge the magnitude of that normalization in the deposit side?

Sure. But ultimately, we're projecting deposits to be relatively flat from here or potentially to decline a bit. Now, in fairness, we could see excess liquidity in the system. But, of course, we are monitoring our capital ratios, and we have to optimize returns to shareholders. So we will be actively, very proactively managing the size of the balance sheet. So that's ultimately roughly flat from here, but we're slightly lower.

Okay, great, great. Thanks very much for clarifying.

And we'll go ahead and take our next question from Ken Usden from Jefferies. Please go ahead.

Hi, thanks. Good morning. Emily, just to follow up on your organic growth outlook, I'm just wondering if you could help us put in context like just what that measures, right? It's not necessarily a stock measure of just revenue growth. So like, is it taking the core building blocks of the segments and just kind of like measuring the unit growth? And how do you put that one and a half into context with the, you know, with the overall fee guide, right? Can we, I don't know if you can maybe walk us through that. Thanks.

Sure. So when we think about organic growth, we define it as pretty much, you know, growth excluding market appreciation or depreciation, excluding currency impact, and excluding waivers. So, I mean, that's generally how we think about it. I think Todd had mentioned that we, in over the course of 2020, it was, you know, around, you know, between 1% and 2%. we're expecting it to remain pretty much stable at those levels, and that's embedded into the fee forecast that I've just given.

Right. Okay. That's helpful. And then just a specific question on asset servicing fees on the income statement side. Seeing that there was a little bit of a – there was an increase in fee waivers in that 1138 number, but even if you exclude that, Asset servicing was down. The press release mentioned something about some repricing. I'm just wondering if you can walk through just what happened, the pushes and pulls there of why the core was down sequentially, whether it be organic growth, repricing, activity, et cetera. Thank you.

Sure. So we had in asset servicing in the fourth quarter, we were helped by higher market levels, higher FX and other trading, and higher liquidity balances. But that was offset by waivers. Sec lending was down a bit. And yes, you are correct. There was a bit of some lumpy repricing in the quarter. Ultimately, we don't control, actually, the timing, obviously, of repricing. We happen to have had two or three large relationships repriced on the back of renewal, so we ultimately retained the business, but that was a modest headwind as well.

Okay. And then I guess just a quick follow-up to that is that, you know, have we rebased? You know, does it kind of build off of here, or how do you think about those repricing versus renewals as you think forward? Thanks.

Sure. Sure. Sure. So as you all know, repricing is very lumpy. You will see the full impact of those repricings throughout the year, but it's not like we've seen anything structural or an underlying change in the trend of repricing. It's always been a modest headwind that we've offset with greater efficiency and net new business.

Thank you.

And we'll take our next question. from Betsy Gracek from Morgan Stanley. Please go ahead.

Hi, can you hear me?

Yeah, Morgan, Betsy.

Oh, hi. Okay, so first question just on, I think, the deposit commentary. I wanted to get a better understanding as to why you think deposits aren't going to be continuing to increase as much as they have been. I mean, I think the Fed's still increasing the size of the balance sheet. I expected you would get some benefit from that.

Yeah, I think I'll start, and then I'm sure Emily will join in on this. I would expect that the Fed is going to continue to buy securities, which kind of adds to the deposit base, and there's still some question exactly how the very large balances that sit at the U.S. Treasury at the Fed whether they're going to wind those down. So the two of them could increase the overall reserves and deposits in the system. That being said, we can manage some of that. And now that we're back in it, and we did that a number of years ago, so we targeted some of the less valuable balances. And once we're able to use our capital, that's not how we're going to use it. It won't be particularly efficient. So we've demonstrated that we can do that. And, of course, any valuable deposits little benefit to them. We'll discourage that.

Okay, that's via pricing or what have you. I guess the other question, Todd, is you mentioned how one of the strategies here that you're going to be executing on this year is to increase the efficiency and delivery of the products and services. I wanted to understand how you're thinking about that with regard to some of the OCC rules that have been out there recently regarding stablecoin. I'm just wondering is, you know, how much does the blockchain initiatives that you've got underway drive that efficiency improvement or is that, you know, more of a hobby? And does it matter that the OCC has approved banks for stablecoin? Does that factor into your strategy? Thanks.

Yeah, I think it clarifies things a bit. And there is a fair amount of activity. And, by the way, we have appointed somebody in front of what I'll call the tokenization efforts. They're really across three fronts, and we are seeing some acceleration around tokenized assets, tokenized fiat currencies, and also cryptocurrencies. So we're seeing a lot more interest. in cryptocurrency and customizing and other services associated with it. We've done a little bit there. We have been a custodian for a futures contract, and it's kind of getting it started. In terms of tokenized currency, we've been a member of Utility Settlement Coin, which is now Finale, from an investor and a participant in its development from the beginning, and we do see that having meaningful applications And we're also involved in tokenizing assets, and we're looking at what we might be able to do to tokenize into TriParty repo to make it even more efficient. So I think it's going to be an important element. We're investing not hugely in it right now. It's not a – I don't see a lot of imminent revenues, but it's something that we will definitely be on the forefront on. Betsy, you still there?

Oh, thank you. Yes, appreciate that.

And we'll move to our next question from Brian Bedell from Deutsche Bank. Please go ahead.

Hi, Greg. Thanks. Good morning, folks. And just a quick one on the net interest revenue outlook. I think you were implying after a 3% drop in 1Q versus 4Q would be The guidance would be stable for 2Q, 3Q, 4Q. Just wondering what the headwinds are, if we do have a steeper yield curve, I guess, is the forward curve your assumption with that? And then what would be the headwinds that would keep that stable if we were to see a steeper yield curve and lower prepaid speed as we go throughout the year?

Sure. Hi, Brian. So you've got that spot on. Our guidance is take the fourth quarter run rate, discount that, call it about 3%, and that's a good proxy not only for the first quarter, but when you think through the average run rate for the year, at least based on what we know now. We don't try to get cute. We just use the forward curve. And despite a steepening of the curve, we're still very sensitive to short end rates, which have actually come down. Also, when you think about where we play the duration of our investments, that part of the curve is actually not up as much as the longer end. I guess the last thing I would just point out about prepayment speeds, which you've mentioned, is that despite a steepening of the curve, we really haven't seen mortgage rates increase that much, so we're not expecting those at the moment anyway to really decline much. That's really all of this, of course, is subject to change based on the rate environment, but that's how we're projecting.

Hey, Brian, I just wanted to make sure it's perfectly clear. I mean, when you think about the steepness of the yield curve, we've seen that, but we've also seen short-term rates come in a little bit, and that's meaningful. So if we do continue to see it and we continue to – and that starts to slow down prepayment speeds, or even mortgage spreads were to widen a little bit, then we would expect prepayment speeds to slow down. But all we do is we use the current markets, you know, expected future rates, really the forward curve. So that's what's in that estimate.

Okay. That really makes sense. And maybe, Todd, just going back to some of the initiatives you mentioned in the early part of the call and trying to triangulate that with the organic growth rate. So the The 1.5% organic growth rate, I think that implies, Rob, numbers around $250 million of organic revenue expectations for 21. And then you mentioned, I wrote down five different initiatives, both the front-to-back mandate, the data vault, ESG investment analytics, the collateral management, money market, fund-track party, repo solutions. and the commercial payments, real-time payments system as well. Are those more, just to get a flavor, are those contributing more to, I guess, if we could sort of frame what portion of the organic revenue growth in 21 may be attributable to that, or is it really more for building that in 22 and you can see potentially the organic worth rate improving in 22 as a result of these initiatives?

A little bit of both. We have a very strong sales quarter in the fourth quarter, but most of those won't be implemented, Brian, toward the end of the year. They're going to have a de minimis impact on the revenues for this year, but they'll go into next year. Some of those are because of what we've done around data and analytics, the data vault. the one Janice Henderson, they're an early adopter, and so that'll take some time to implement. And then we think we're gaining some additional traction. When we look at some of the applications, we've had many, many, many demonstrations and many users on a trial basis, for example, on our ESG app, so that's starting to build some momentum. The trial management program that we're investing in, we don't expect, toward the end of the year. So there's a little benefit in the organic growth rate this year, and we would expect that to accelerate a bit next year.

Okay, fair enough. Thank you.

And as a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Again, it is star 1 on your telephone keypad if you would like to ask a question. And we'll take our next question from Mike Mayo from Wells Fargo. Please go ahead.

Hi. I've got a question on one positive trend and one maybe negative trend. But on the negative trend, you said you had elevated transaction volumes in Pershing. They should moderate. Have they moderated already? And what kind of see-through do you have to the kind of the market situation if those transaction volumes are moderating. And on the positive side, you said asset servicing had the best sales in ten quarters in the fourth quarter, measured health in about a year. How are you going to close these deals, you know, in this pandemic environment? I mean, are you closing the deals over Zoom? Are these existing relationships? Because I keep hearing, like, getting new relationships is tough. So just wanted some color behind both of those trends.

Yeah, one of the big transactions that were closing was entirely virtual. That was with a very large, and a lot of these have been entirely virtual. And we built a very good relationship with that particular organization's large European asset manager. In fact, right before the pandemic broke, right at the time, I was was unable to do it. So there have been, from soup to nuts, things slowed down for a while, but it's getting a little more normalized. On the institutional front, I'd say on the wealth front with individuals, that's a little bit more challenging, Mike. But on the institutional front, it's certainly not ideal, but we've had many instances of where we've been able to handle that. In terms of your question around Pershing, we're only a couple of weeks into the new year, and volumes generally have stayed pretty strong relative to the fourth quarter. I just think that's a little bit too early to call. Our estimate is that they would normalize a bit. Maybe they won't. Maybe we'll stay up here, but You had a third question in there, and I don't recall what it was, Mike, but I'll try to take it.

Well, just read through the capital markets when you think things settle down. But it sounds like they haven't settled down yet, Dave, from what you're seeing with Pershing.

Yeah, I think that's right. I think you're seeing more retail activity than you've historically seen. Great.

All right, thank you.

Thanks, Mike.

We'll take our next question from Alex Bloestein from Goldman Sachs. Please go ahead.

Great. Hey, good morning, Todd. Good morning, Emily. Just to follow up around the organic growth target that you guys put out there of 1.5%, can you talk a little bit about what you're assuming for pricing dynamics within that across sort of your various businesses? Obviously, towns like Q4 maybe was a little bit of an anomaly of several larger towns just kind of happened to reprice at the same time. But Maybe give us a sense kind of what like that unit repricing looks like. Is it, you know, 1%, 2% kind of what that is? And how do you incorporate that into your guidance? Thanks.

Yeah. Emily, why don't you take that? Do you want to take it?

Sure. I'll start and please see that. So, I mean, you know, repricing pressure is just the norm in our businesses. So it's always a headwind but a very modest headwind. And we routinely and always actually offset that, more than offset that, with greater efficiency and net new business. So we don't, you know, look, there has been some monthly repricing, but we don't see any underlying structural change or trends. So, you know, from that perspective, it's not, you know, it's not hugely material. Okay.

And part of our pricing schedules, too, are graduated. So as the value of the assets increase, the pricing does reflect that, Brian. But this is specific to repricing existing clients as they benefit from some of the operating efficiencies and the for a number of years, the downdraft on that. It was just a little lumpy this year. We see it going back to normal, but that lumpiness will have a little bit of an impact on 2021.

Got it. Understood. And then just a clarification around NIR. Sounds like you guys are assuming MBS prepayments will remain at current levels for 21. Can you just remind us what premium memorization was in the fourth quarter and any sort of sensitivity you guys can provide around that with respect to prepayment speeds?

Sure. I'm afraid I'm going to misquote, but I think, you know what, let's follow up with IR.

Okay. Sounds good. Thanks. Thanks, Alex.

We'll take our next question from Rajiv Bhatia from Morningstar. Please go ahead.

Hey, good morning. Just a quick question on the Pershing LOB. Within Pershing, how does your revenue growth compare in the independent broker-dealer clearing channel versus RA custody? And how big of a headwind is consolidation within the independent broker-dealer space by self-clearing firms like LPL?

Yeah. And so we're growing faster in the registered advisory firms and then the broker-dealer side of the business. But the broker-dealer side of the business is still meaningful, and it's a large component of it. And so as we look into it, especially in the advisory space.

Got it.

Thanks. Todd, just going back, if Alex is still on the call, I didn't have it at my fingertips. MBS prepayments were about a headwind of $173 million in the quarter. And, yes, you are correct. We just are expecting, despite a steepening yield curve at the moment, for that to remain stable.

Rajiv, did you have a follow-up question?

No, thank you.

Okay, thank you.

We'll take our next question from Brian Bedell from Deutsche Bank. Please go ahead.

Oh, great. Thanks for taking the follow-up. Todd, I just want to circle back on the front-to-back mandate that you want to stand for the largest of the ones that you've been servicing, but I'm just wanting to get a flavor of how many others that you're doing, given that you are integrated with virtually all of the OMS providers. Is that a sizable type of mandate for you if we consider other contracts and maybe then just see out what the needs are?

Okay, sure. I mean, we've integrated now with six LMS platforms, you know, partnerships with Bloomberg, Aladdin, and so forth. And through that, you know, we're offering custody insights, information around liquidity, and it's kind of a unique capability that we're able to do, transactions, holdings, and so forth. And I think what it does is it very much enriches the experience of doing business with us. So I think it's Helped us to retain relationships. I think it's helped us to grow a couple of relationships that I just indicated. So we are starting to get some traction with it. Moving on to the data business, which we've been in for some time, but now we've cloud-enabled it and made it a much richer capability. We've had a number of large beta clients that have been operating it, and we're now starting to convert some of them So I think it's not just what they can do with us, but for the first time now, we're starting to see some meaningful wins that I would attribute, maybe not entirely to it, but certainly that was a helpful driver.

Okay, that's helpful. And just real quick on purging, consolidation in the RIA states, Can you actually benefit from that, or do you see most of the providers going to a self-clearing option?

Yeah. As we look back historically, more often we are winners to it, but there can be just bad luck. And so either the acquirer was self-clearing or had some other approach or some other we found that we had won more recently. We had a couple of losses.

Thank you. Thank you for the follow-ups.

Thanks, Brian.

We'll take our next question from Brian Klein-Hansel from KBW. Please go ahead.

Great. Thanks. I was wondering if you could just kind of walk through again the tier one leverage comments that you made. You had said that, you know, this quarter where it was at 6.3%, And then you gave that your target was 5.5% to 6%, but then you said you felt you were well above where you needed to be. It seems like you're just above kind of where your targets are, though. So how does that impact your aspirations for capital return?

Sure. So Tier 1 leverages 6.3%. I think we've been pretty clear that we're comfortable running more at a rate between 5.5% to 6%. So that does imply that we have significant excess capital. And you can assume that we're going to look to return that to shareholders over the course of the year if we're permitted to do so.

Brian, the other thing I would add to that, Brian, is that we have excess deposits right now. And so since we're not able to do anything with our capital – we're not really pushing them away or managing them as carefully as we could. Once we get back into a normal capital management cycle, deposits that aren't worth anything, we're not going to keep them here.

And so then when you talk about the deposits, how does that play into the money market fee waivers? Are you anticipating pushing those off into the money market funds, which is then the driver of the fee waivers? Or if that were to happen, that could be an incremental negative to the fee waiver guidance?

Sure, I can take that. So, I mean, the fee waiver guidance and the increase in that is really tied to what we're seeing in the short end, and TBO rates and repo rates have actually come down since we originally projected, and that's really what the 175 now that I mentioned. You are correct with a lot of excess reserves. If that all ends up in money markets, that could ultimately put more pressure. So that is a potential risk. The one thing also just while we're on waivers that I just would highlight is that, you know, Pershing did hit its full run rate in terms of waivers in the fourth quarter, so you will start to see those waivers, you know, increase in other lines of business, so asset servicing, issuer services, IM, treasury services, for example.

So, Brian, if money market mutual funds increased, if the balances increased, we would certainly waive more fees, but net we'd have more fees. It's just that it's 100% of the component that we get. So they've basically been relatively stable. So when we do these comparisons, the volumes have been relatively flat, so that hasn't created any noise. So if money is moved into money market funds, there probably will be much less fees than there typically would have been, but there will probably still be some fees.

Got it. Thank you. Thanks, Brian.

And with that, that does conclude.

I think that was our last question, operator.

And that does conclude our question and answer session. I would now like to turn the call back over to Todd for any additional or closing remarks.

No, thanks. Thanks for your interest. And obviously, you can call IR to follow up on any clarifications. Have a good day.

Thank you. This concludes today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2 o'clock p.m. Eastern Time today. Have a great day.