The Bank of New York Mellon Corporation

Stand by, we're about to begin. Good morning and welcome to the 2021 First 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 Magna Polchenska, BNY Mellon Investor Relations. Please go ahead.

Good morning. Welcome to BNY Mellon's first quarter 2021 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's 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 , 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, April 16th, 2021, and will not be updated. With that, I will hand over to Tom.

Thank you, Magda, and good morning, everyone. I will touch on a few financial performance highlights and some other business developments and hand it over to Emily to review the results in more detail. But first I wanted to spend a minute discussing the environment in which we're all operating. You know, as I reflect on the past year, the word that keeps coming to mind for me is resilience. Resilience of our business model, our global financial infrastructure, and of course our clients and our employees. Indeed, we saw the resilience of the financial system itself due to the lessons learned from the previous financial crisis and to the quick and decisive action from the government and regulators. And now we're moving from a period of resilience to a period that we are all optimistic will be one of recovery and growth. While we all remain clear-eyed about the challenges that still exist, I am one of many business leaders who see many reasons to be positive in the period ahead when we move past the COVID cloud. The optimism stems from the confluence of several factors including the deployment of the vaccine, potential strength from consumers. Now, in the U.S., households have been saving at extraordinary levels. Currently, the savings rate is running about 14%, and that's more than twice the 30-year average. And the amount held in cash in households and available for spending is around 15% of GDP, which is way above normal times. stimulus and further U.S. government spending plans are likely to accelerate GDP growth. So we expect significant GDP growth going forward, assuming the pandemic is managed as expected. A strong economy is likely to keep activity and assets levels high, and expectations for stronger growth is beginning to be reflected in the steepening new growth. Now, I also wanted to touch on the future of work and general productivity. The pandemic has driven remarkable levels of innovation and technology adoption, and companies have now become accustomed to a new way of working. We've proven our ability to maintain high-quality service for our clients, adopt and deploy new technologies quickly, and collaborate with one another virtually over this past year. We're going to take the best of what we've learned to continue to innovate and drive enhanced value for our clients and our employees. including assessing what our workforce and workplaces will look like. We intend to embrace hybrid working arrangements and define a future of work that continues to position us as an employer of choice in our industry. Now, with that, let me turn to some highlights on our performance, where we see momentum across our businesses. Starting on slide two, we reported revenue of $3.9 billion, fee revenue excluding the impact of money market fee waivers, increased 6% year-over-year against a prior year quarter that had exceptional pandemic-related volume and volatility. Asset servicing and purging particularly benefited from positive client activity as well as market appreciation. Operating margin of 29% is relatively flat year-over-year, not bad considering the significant loss in interest rate revenue. We had a credit provision release of $83 million EPS of $0.97 was down $0.08 from last year, and return on tangible common equity of 16%. Turning to our businesses now, the strength in asset servicing revenue reflects higher markets, robust client volumes, and continued new business momentum. Our open architecture strategy and platforms continue to gain traction with clients, powered by our data and analytics solutions. In the first quarter, a large global asset manager in acquisition mode signed a multi-year agreement for DataVault. That's our cloud-based platform. DataVault allows our clients to integrate acquisitions quickly and easily interact with data to gain actionable insights to help drive their business decisions. We are proud to have been selected by Gabelli Funds to launch its new actively managed ETF, and that's an ESG-themed product. and to have been named the ETF service provider for First Trust SkyBridge's Bitcoin ETF Trust. During the first quarter, our ETF servicing platform launched a record 51 funds, and our ETF assets under custody or administration has now surpassed $1 trillion. We recently also announced the establishment of a new digital assets unit, which is building a multi-asset platform that will allow us to custody traditional as well as digital assets. including cryptocurrencies, in an integrated way. The growing client demand for official assets and improved regulatory clarity presents an opportunity for us to extend our current service offerings over time to this emerging field. Moving to purging and clearing and collateral management, purging benefited from continued elevated transaction volumes, equity market strength, and strong underlying fundamentals. As I mentioned last quarter, We did lose a couple of clients due to consolidation and this together with the low rate environment will impact purging in 2021 and mask the underlying good organic fee growth. In clearing and collateral management, clearing fees remain strong and we expect healthy activity going forward. In collateral management, international fees were buoyant due to new business wins. In addition, as we announced earlier this week, we now accept Chinese bonds as collateral on our tripartite platform through Hong Kong bond connect. With the Chinese fixed income market only expected to grow, demand has been mounting for such a solution, which until now has not existed. This is another example of BNY Mellon's continued innovation to drive value for our clients. Now turning to investment in wealth management, we recently announced the realignment of Mellon's capabilities in fixed income, equity, and multi-asset liquidity management. with Insight, Newton, and Dreyfus Cash, respectively. This will enhance the scale and capabilities of our specialist firms and strengthen their research platforms, operations, as well as global reach. We've had a year of consistent quarterly long-term inflows, and investment performance across our top strategies continues to be strong. In wealth management, higher markets help to drive client assets to a record level of almost $300 billion. We've implemented many positive changes in this business, including new sales teams, a broader investment and banking offering, and new digital capabilities for clients. We are gratified by very high satisfaction scores in our year-end client survey, with all survey categories up year-over-year. Now, our proprietary goals-based planning tool, Advice Path, was recently named a CIO 100 award winner. This award recognizes 100 technology teams across industries that are driving growth through digital transformation. So a lot has been happening to build momentum for growth with existing and new clients. Moving beyond financial performance, I want to spend a minute on ESG, something that is top of mind for our investors, employees, and our clients. We are committed to ensuring that we use our reach, market influence, and resources to address pressing ESG issues. Our goals include offering our clients leading analytical solutions, empowering ESG investors with new investment strategies, and encouraging and enabling ESG financing. Last month, we published our first report on how we're managing the impacts of climate change on our business, prepared in accordance with the Task Force for Climate-Related Financial Disclosures, or TCFD, guidelines. I encourage you to read it as it includes examples of where we are where we have initiatives in place related to climate risks and opportunities, and lays out multi-year metrics and targets, including plans for enhanced disclosure around how we're doing our part to help the environment. Now, let me close with where I opened. The year started with continued extraordinary efforts by the U.S. government and Federal Reserve to address the economic fallout of the pandemic through fiscal and monetary stimulus. Much uncertainty remains, but equity markets have been generally optimistic although somewhat volatile, and longer-term treasury yields have steepened, but the amount of liquidity in the system and inflows into money market funds have driven short-term rates lower, in some cases even negative. So there are many positive factors that support our business model, but short-term rates continue to be a challenge. Our business has proven to be resilient, and we're well poised for organic growth. Moreover, we continue to bring innovative solutions to the market to help our clients and help them grow. With that, I'll hand it over to Emily to review our results in more detail.

Thank you, Todd, and good morning, everyone. I will walk you through the details of our results for the quarter. All comparisons will be on a year-over-year basis unless I specify otherwise. Beginning on page three of the financial highlights document, in the first quarter of 2021, we reported revenue of $3.9 billion and EPS of 97 cents. This includes the impact of the reserve release of about $0.08 per share, partially offset by a $39 million renewable energy investment impairment of about $0.04 per share. Revenue was down 5% and EPS was down 8%. As expected, results were negatively impacted by continued low interest rates and associated money market fee waivers and the absence of share repurchase activity for most of 2020. Fee revenue, excluding fee waivers, grew 6%, driven by market levels, good organic growth, and the positive impact of a weaker U.S. dollar. While client activity was down slightly versus the exceptional COVID-driven volumes and balances experienced a year ago, it was stronger than we had anticipated. As a reminder, last quarter we got into about 1.5% organic growth for the year, and this quarter, organic growth was greater than 2%. Beginning this quarter, we reclassified a few revenue line items, which drives cleaner and simpler reporting. Basically, we took investments and other income out of our fee revenue and created a new reporting line, which includes investment and other income, as well as other trading, variable interest entities, and securities gains and losses. The reclassifications had no impact on total revenue, and the details can be found on page 19 and 20 of the financial supplement. Prior periods have also been reclassified. Foreign exchange revenue had a strong quarter of 24% versus the fourth quarter, primarily on the back of high volumes, and was 6% lower versus an exceptional prior year. Net interest revenue was down 20%. Expenses increased 5% year-over-year, which is a bit higher than prior guidance due to higher revenue-related expenses, higher litigation costs, and the appreciation of our stock price associated with equity awards. As previously disclosed, first quarter of 2020 also benefited from an accrual adjustment that was not repeated in 2021. Provision for credit losses was a relief of $83 million, primarily respecting an improved macro outlook and CRE price index. We had net recoveries of $1 million, and our portfolio remains high quality with approximately 85% of loans rated investment grade at March 31st. Pre-tax margin of 29% was relatively flat to last year, which is a strong outcome considering the impact of the low interest rate environment on fee waivers and NIR, both of which have de minimis expenses associated with them. ROE was 8.5% and ROTC was 16.1%. Page four sets out a trend analysis of the main drivers of the quarterly results and is adjusted from notable items of the fourth quarter of 2020 where indicated. Investment services revenue was 3 billion, down 8% year on year. The decline was primarily a result of lower net interest revenue, fee waivers, and lower FX revenue. These headwinds max benefits from higher client volumes, liquidity balances, market levels, and a weaker U.S. dollar. Investment services fee and other revenue X waivers was up 2%. Investment and wealth management revenue increased 10% as higher market value, modest equity investment gains compared to losses a year ago, and a weaker U.S. dollar offset the impact from fee waivers. Money market fee waivers, net of distribution and servicing expense were 188 million and a quarter compared to the 175 million guidance that we provided previously. The higher than expected waivers were driven by higher balances. Turning to page five, our capital and liquidity ratios remain strong and well above internal targets and regulatory minimums. Common equity Tier 1 capital totaled about $21.1 billion as of March 31st, and our CET1 ratio was 12.6% under both the advanced and standardized approaches. Tier 1 leverage was 5.8%, down 50 basis points from the fourth quarter, primarily due to higher deposits. We continue to monitor the impact of liquidity in the system on our balance sheet. We will continue to support our clients' cash management needs while at the same time managing our Tier 1 leverage ratio, which is our binding constraint. Over the last year, excess deposits have grown substantially. Taking the unprecedented environment into consideration, we are comfortable utilizing a portion of our internal buffer that we maintain for the Tier 1 leverage ratio and therefore could go below 5.5% for a period of time. Finally, our LCR was flat compared to the fourth quarter at 110%. In terms of shareholder capital returns, we purchased 699 million of common stock in the first quarter in line with the Federal Reserve modified limitations that apply to all CCAR banks and continue to pay our 31 cent quarterly dividend, which totaled 277 million this past quarter. Turning to pay sticks. My comments on net interest revenue will highlight sequential changes. Q1 net interest revenue was down 3.7%, with about two-thirds of the decline driven by the impact of lower interest rates, and the other one-third driven by other items such as day count and hedging activity. As a reminder, although average deposits increased again this quarter, they had minimal NIR value in the current low short-term rate environment. Turning to page seven, which summarizes deposits and securities trends. As mentioned, deposit balances continued to grow and on average were up 21 billion or 7% from the fourth quarter and up 70 billion or 27% from a year ago. As was the case in the fourth quarter, again in Q1, a larger driver of the growth was excess liquidity in the system driven by monetary and fiscal stimulus. Turning to the securities portfolio, on average, the portfolio was slashed to the fourth quarter and up approximately 26 billion or 20% over the prior year. Within the securities portfolio, we do continue to invest in non-HQLA securities, primarily in non-agency MBS, munis, and investment grade corporate bonds, as we look to improve yields while maintaining our conservative risk profile. We also continue to grow the loan portfolio opportunistically, such as in 40 act lending and other margin lending, as well as capital call financing. Page eight provides an overview on expenses, which we largely covered earlier. Turning to page nine. As mentioned earlier, total investment services revenue year on year declined by 8% due to the impact of low interest rates on NIR and fee waivers and lower FX compared to the strong year ago quarter. NIR was down 20%. Fee and other revenue X waivers was up 2%. FX revenue and investment services had a strong quarter. quarter and down 15% year-over-year as higher client volumes partially offset normalization of spreads and volatility. Assets under custody and or administration increased 18% year-over-year to $41.7 trillion on the back of higher market values and client inflows. The favorable impact of a weaker U.S. dollar and net new business. As I move to the business line discussion, I'm going to focus my comments on fees. Asset servicing fees were up slightly, excluding fee waivers, primarily reflecting higher client activity and higher market levels, partially offset by lower FX revenue through a comparably high period last year. The pipeline remains strong, and win-loss ratios continue to improve. Pershing had another strong quarter despite the impact of fee waivers. While fees were down, they would have been up excluding fee waivers. Year over year, clearing accounts were up 5%, mutual fund assets were up 24%, and we saw continued strong net new asset flows of $28 billion in the quarter. Transactional activity remained robust with average daily clearing revenue up about 30% from the fourth quarter. Although we do expect this to normalize as we move through 2021. Issuer services fees decreased mostly driven by fee waivers and COVID-related dividend fee impact in DR. Treasury services fees were up modestly, X waivers, on the back of higher payment volumes and higher money market fund balances and a continued shift to higher margin products. Clearance and collateral management fees were down slightly, primarily due to elevated volumes in the year-ago quarter. Continued organic growth in our non-U.S. business, with tri-party balances and clearing fees increased, was offset by slight declines in U.S. volumes and lower intraday financing fees. Page 10 summarizes the key drivers that affect the year-over-year revenue comparisons for each of our investment services businesses. Turning to investment and wealth management on page 11. As noted earlier, total investment and wealth management revenue in the quarter increased 10%. Overall assets under management held steady compared to the fourth quarter's record 2.2 trillion and were up 23% year over year, primarily due to higher market values, a positive impact of a weaker U.S. dollar, and net inflows. Investment management revenue grew 13% despite over 700 basis points negative impact from fee waivers as a benefit of higher market levels, equity investment gains in the current quarter compared to losses a year ago, and a weaker dollar more than offset lower performance fees against a strong year ago quarter. In the first quarter, we had net inflows of $36 billion, including our fourth straight quarter of long-term inflows of $17 billion, driven by strong inflows in LVI and fixed income, as well as index funds. Investment performance remains strong, with more than 80% of our top 30 strategies having peer rankings ranked in the top two quartiles on a three-year basis, up from 73% a year ago. Wealth management revenues were up 5% on the back of higher markets. Client assets grew for a record 292 billion and were up 24% year over year, primarily due to high market values and inflows. Non-mortgage loans and client deposits are also up. Now turning to the other segment on page 12. The year-over-year revenue comparison was primarily impacted by the impairment of one renewable energy investment, as noted earlier. The expense increase primarily reflected incentive comp accrual reversals in the year-ago quarter. A few comments about the outlook. As we think about the balance of 2021, for NIR, our full-year guidance remains unchanged. This implies NIR on a full year basis will be down around 11 to 12% compared to 2020. With regard to waivers, using the forward curve to project just like we do for NIR, we expect waivers net of distribution and servicing expense to be around 220 million for the second quarter. This will have a modest negative impact to revenues of approximately 20 million due to lower rates partially offset by higher balances. So for the second half of the year, we do expect to be more in line with the first quarter. With regards to these X waivers, the growth rate in the first quarter was significantly higher than previous full-year guidance due to higher volumes, but we expect those volumes to moderate going forward. Regarding expenses, we previously guided to be up about 1.5% excluding notable items. Given the higher expenses this quarter, we now expect them to be up about 2%. As a reminder, on a constant currency basis, we guided that we would be flat year on year. And that will now be up about 50 basis points. Finally, in terms of our effective tax rate, we still expect it to be approximately 19% for 2021. However, we are monitoring the latest federal tax proposals closely. In terms of shareholder capital return, we will continue to pay our quarterly dividends and will once again make open market share repurchases in compliance with the Federal Reserve's modified limitations, which will allow us to repurchase approximately 600 million of common stock in the second quarter. Looking beyond the second quarter, the Federal Reserve's latest communication to C-CARB banks indicated that they will likely implement the SBB framework for capital management in the third quarter. So we are following that guidance closely. We look forward to receiving the results of this year's stress test and operating under the stress capital buffer framework, which will allow for more flexibility and should mean that we can return more than 100% of earnings to shareholders starting in the third quarter. With that, operator, can you please open up the line for questions?

Of course, thank you. And if you would like to ask a question, please press star 1 on your telephone keypad. Again, it is star 1 if you would like to ask a question. And our first question comes from the line of Brennan Hawken with UBS. Please go ahead.

Good morning. Thanks for taking my question. I was hoping to ask, actually, Emily, about some of those comments on capital and Fed returning to the SEP approach, which allows for capital returns. The Tier 1 leverage ratio is now inside your guided band with the buffer of 5.5 to 6, I believe. You all have referenced that you have some levers to pull. which might help on that front. So could you maybe walk us through some of those dynamics, and then also how rigid is that buffer that you've applied? It seems to be a bit above peers, and so would you or are you in a position where you could allow yourselves to go underneath that buffer for a period of time, you know, given the unusual growth? Sure.

Thanks for the question. So we are managing our deposits very closely. Having said that, we will absolutely continue to support our clients with our balance sheet, and we're comfortable with where deposits are now. But, of course, it goes without saying that, you know, over the course of the last 12 months, there have been, you know, a lot of additional reserves in the system, liquidity in the system. And so we've seen a surge in those deposits. A large portion of that surge is excess, so it's non-operational. We've been very successfully working with our clients to basically explore and move some of those non-operational deposits to off-balance sheet vehicles. Thankfully, we have a good platform in Liquidity Direct that has lots of alternatives. It's an open platform. So that has been very effective. You are correct in pointing out, as I did mention in my prepared remarks, that given the unprecedented liquidity in the system, we would feel comfortable dipping into our tier one leverage buffer. We do hold a very significant buffer in excess of 150 basis points over reg minimums. We've sized that very carefully. It's basically to both absorb any impact to OCI given rate changes as well as also any surge in imbalances. And given that's really what we've seen and the buffer is really there for this particular kind of unprecedented environment, ultimately we would feel comfortable dipping below the 5.5% for a period of time. Of course, running certainly above the regulatory minimum.

Okay, that helps. That's great to hear. And then one other question on the balance sheet. It seemed as though the interest-earning asset growth lagged deposit growth this quarter on an average basis, just looking at the average balance sheet. Was that because some of those deposits may be temporary? Maybe you all were in the process of of encouraging some folks to consider off-balance sheet options like you referenced. And therefore, you know, when we gauge balance sheet growth here this quarter, we should more pay attention. Which one should we pay attention to more? Which one is more indicative? Is it the interest-earning asset growth or is it the deposit growth? Or is it just that you'll be putting more money to work and therefore the interest-earning asset growth will catch up? I just wasn't. It seemed a big gap, so I wasn't sure about that.

Thank you. Yeah, I mean, sure. So certainly, and I think I just mentioned, so a significant portion of the deposit growth that we've seen we do think is excess and so non-operational. So it's very hard to really redeploy that into the securities portfolio or the loan portfolio for any real duration. So as a result, a lot of that is just sitting at the Fed earning 10 basis points, which obviously is diluted to NIM, but of course it is overall accretive to NIR, just obviously marginally so. So when we think about just NIR in general, we really just use the forward curve to project. And despite, of course, the steepening of the long end of the curve, we did see the short end grind lower. and also the duration of the curve where we invest is more in the two- to five-year mark, and that didn't go up as much as the long end. But, of course, you know, to the extent the curve does continue to steepen and or shift upwards, that will be extraordinarily helpful.

Thanks for the call.

And we'll take our next question from the line of Brian Bedel with Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. Can you hear me?

Yes, Brian. We can hear you. Great. Thanks. Just one more on the rate sensitive and net interest revenue and fee waivers. Just to cater to the move through the year, really into second quarter, and back a little bit to that deposit strategy with the excess deposits, is there an ability to put a little bit more in the securities portfolio as we move into the second quarter? quarter so what I'm trying to get at is are we given your full year guidance are we at sort of stability as you see it coming into the second quarter on NIR maybe another dip down before we go up and then similar to that on the C wave as I think you said 220 for the second quarter but then I'm not sure if I got this correct that you thought that was going to improve in the back half and that was based on balances can you clarify that

Sure. So in terms of NIR, we don't really give ultimately quarter-by-quarter balances and so much of it is dependent upon or quarter-by-quarter projections and so much of it is dependent upon obviously the rate curve. deposit levels and MBS prepayment and other factors, all of which are baked into our projections. And what I would say, as I just reconfirmed, is that our full year projection for NIR is still the same as the original guidance given, which is 11% or 12% down year on year. So that hasn't changed fully. In terms of waivers, so waivers are a function of two things, basically short-term rates, specifically three-month and six-month TUDOs as well as repo rates, also a function of money market fund balances. And actually what we saw this quarter is actually both rates grind lower, balances go higher. As a result, waivers overall were a bit higher than originally anticipated at $188 million. The total impact, however, was slightly positive to revenues. And again, just we used the forward curve to also project waivers. Looking at the forward curve, also the historical relationship between rates and money market balances, et cetera, we think that the size of waivers overall will peak in the second quarter at about $220 million. And then, by the way, that would be probably, as the fees we're talking about, the gross yields we're talking about, probably slightly negative to revenues. But then we would expect the second half of the year to be more in line with the first quarter. And, look, I always like to remind people, albeit it's probably not until the latter half of 2022 or 2023, But, you know, if when Fed funds, you know, eventually hit 25, you know, when the Fed moves, we will recover in excess of 50% of those waivers. And, you know, when it hits 1%, it's, you know, very close to 100% of those waivers.

Definitely, that's super clear. And then the second question is on organic growth. You said that it did stick up to 2% this quarter. Maybe if you could just talk about the drivers of that. I know, Todd, you mentioned organic. You know, very good demand for data analytics with the data vault. It sounds like that contract is not in. The big one you mentioned is not in the run rate yet. But maybe if you could just talk about that momentum and the organic growth rate and track it with that.

Sure. So thanks for the question, Brian. So the first quarter, We got the benefit, obviously, of a lot of activity. Hard to project exactly where that activity is going to go, but the guidance I think that Emily provided to you is probably not sustainable at this level. But we did get some nice new wind, which is reflected in that. You know, purging volumes were particularly high, very good flows in a number of their accounts, so we're seeing a lot of good growth. with existing clients as well with balances there. We do expect them, as I said, to moderate somewhat. And I also did point out that on the previous call that we had some lost business in Pershing that will impact us later this year. So Pershing's got pretty strong underlying organic growth, so it's going to be masked a bit by both the interest rates as well as the as well as that loss business that will impact in the second half. But we are seeing sustained momentum across just about all of our businesses, strong pipelines. And so as we've converted the pipeline to sales, we continue to build the pipeline. We have another pretty good quarter for sales. Our higher wind loss ratios are improving, and retention has continued to be good. I mentioned the data vaults, and we had a number of clients in beta. We're now assigned a very significant one and building a deeper relationship with that client. A lot of interest in some of our analytics and our applications that we've described to you before. We're actually seeing recovery in payment flows, too. So Treasury Services, which is largely commercial payments, and a lot of it's global. We're seeing good recovery back on economic recovery. And we're also picking up some market share. We've got some pretty interesting opportunities there as we look forward. We're pretty excited what we might be able to do in the real-time payments space there. Asset and wealth management had positive flows. We're seeing meaningful improvement in wealth And we've been talking about the investments that we're making across the businesses, even in the court custody, our middle office functions, the payment system, clearing collateral management. It was off of an extraordinary good quarter last year, but we continue to pick up global assets. The fact that we built up this BondConnect capability in China is an exciting, innovative opportunity. service that we're providing to clients and we're confident that that's going to continue to grow. So good underlying momentum helped by very strong activity in the first quarter.

That's great. Thank you.

Thanks, Brian.

Our next question comes from the line of Betsy Grisek with Morgan Stanley. Please go ahead. Hi, good morning.

Hi, Betsy.

Good morning.

Okay, a couple of questions. A little bit on the technical side on the build-out that you're doing around the digital assets, the cryptocurrencies and that kind of thing. Could you remind us the kind of pace that you're anticipating being able to roll this out and are you going to be custodying the physicals? I just wanted to understand what the how wide the aperture is on this opportunity side.

Okay. Sure, Betsy. I'll take it, Todd. So when we talk about our digital asset efforts, what we're talking about is digitizing traditional securities so that they're more easily mobilized. You know, things like you could digitize a money market fund and make it an eligible asset to put into repo, which you couldn't do in the past, and you can make it much, much more efficient. We think there's going to be quite a bit of that activity as well as smart contracts and what that might be able to do for the corporate trust and other businesses. So that's one element of it. The other thing that we're going to see is we think there will be digitization of fiat currencies. We're already involved in a consortium with Finality, which is a central bank currency which could trade 24-7 in digital form and is really just developing regulatory approvals for it now. So we do think there will be, and there already exist digital currencies, fiat currencies. And the thing that gets the hype is really around the cryptocurrencies, but we would be digitizing, excuse me, we would be customizing those as well. So we have been working on a prototype, and we expect to be offering capabilities across all three of those by the end of the year as we're building things out with clients that have shown institutional interest. So, yes, we would actually have the wallet, if you will, or be the custodian for the underlying cryptocurrency or any one of those particular digitized assets.

Okay, so you would actually be custodying the physicals. You're not going to be sub-custodianing that out to somebody else?

That is not our intent at this point.

And then what's the timeframe for... you know, getting to market, is that a 2021 or a 22 timeframe?

We expect that you'll be hearing some things throughout, toward the end of 2021, but it may be a little bit earlier for some elements of it.

Okay. And then the other theme I wanted to just touch base on was around the climate comment that you had in your prepared remarks, Todd. I mean, part of it is asking the question, what can you do? Is this about your own footprint? Or is this also about working with your clients? And if it's working with your clients, how do you anticipate you will help them get more, you know, climate-friendly, so to speak?

Yeah, so there's really two elements to it, Betsy. One is what we're doing as an enterprise, our own carbon footprint, for example. We've been very active. We published recently in February, we published a Considering Climate at BNY Mellon report, which gave very specific examples of what we've done around carbon waste and other environmental related activities. We are carbon neutral. We have been for an extended period of time. And we've been named, you know, as by the CDP, we're the one of five financial institutions that have been given an A rating on climate. And we're the only financial institution that have gotten that rating over the past eight years. So that's what we're doing as a firm in managing paper and our carbon footprint. In terms of what we're also doing is we're providing services to clients. For example, we're the largest trustee on green bonds, and we can certainly help clients establish the trustee function that goes along with that. But in addition, in the asset servicing space, one of the things that has come out of our data and analytics capability is a very interesting application on ESG, and allowing our clients to customize reviews of their own portfolios. And we use a crowdsourcing technique that's unique. And we offer a cloud-based solution. The client basically brings the license from what data providers. We're connected to 100 data providers. We've got 2.5 million securities in that application. And there's kind of a constant feedback loop to the data provider, so they're constantly enhancing the amount of information that they might have on a particular security. So we're excited about that. We have quite a few clients on it now, and we're just contracting them for permanent usage. And in addition to that, in our investment management space, We're building quite a few ESG products. And in the servicing space, we were just awarded an attractive ETF that was based around ESG. So it really goes in those two forms. One is the commercial element that we can help our businesses. And number two is just doing the right thing for our own company.

Okay. Thank you. I appreciate that.

Thanks, Betsy.

Can I? Our next question comes from the line of Alex Bostein with the Goldman Sachs. Please go ahead.

Hey, good morning, Todd and Emily. Hope you guys are doing well. Maybe another question around capital. So I heard you guys obviously targeting over 100% payout. That's something that you guys have targeted for a little while as well. Can you help us kind of calibrate that against the significant buyback you have authorized currently Obviously, there could be some, you know, probably technical restrictions in terms of how much you could ultimately get done in the third quarter given just the bottom threshold. But, you know, maybe help us think through that relative to your comments and willingness to kind of go below the 5.5% Tier 1 leverage. So, just kind of trying to think through how much you could ultimately get done.

Sure. Ultimately, you are correct in mentioning that we had approval. I'll just remind folks, the board approval was given in the fourth quarter of last year to do buybacks up to $4.4 billion through the third quarter of this year. Given the Fed's limitations on the buybacks actually through the second quarter, it's probably going to be pretty unlikely that we could execute the entirety of the $4.4 billion, just literally in terms of ADV, etc., but we will do as much as we are allowed. And assuming that the Fed does return to or implement, I should say, the SCB framework, which does allow for much more flexibility, we would intend to certainly execute in excess of 100% of – or return, I should say, in excess of 100% of earnings in the third quarter – as much as we could do, and anything that we couldn't do, we would hope to catch up in the fourth quarter in that program.

Got it. That's helpful. And then maybe we can unpack some of the NIR dynamics a little bit more. So two questions there. I guess one, deposit costs, I think we're roughly flattish, I guess, sequentially just in terms of what you guys are charging. Is there room for that to grind a little bit lower as you're trying to optimize the balance sheet, or there's not a whole lot you guys could do in terms of pushing pricing on deposits to clients? And then I wanted to clarify your comments around premium amortization. I don't know if I missed it, but what was it in the quarter in your full-year NIR guidance? What does that assume for premium AM for the rest of the year?

Sure. So just talking about first deposits, you are right that the deposit rates are relatively flat. And remember, that's an average across non-U.S. dollar as well as U.S. dollar. We are charging in, for example, euros and for Japanese yen. We're not, of course, charging in the U.S. I mean, look, I don't know if this is the trough, but this is probably pretty much close to you know, close to, you know, ultimately, you know, I guess the rate that we'd get to. Of course, if rates actually went negative in the U.S., we could start charging for deposits. We, you know, certainly don't feel or have felt that that is necessary. And ironically, you know, if you do start charging for deposits, then, you know, you start to, you know, earn money, you know, earn more in NIR. But that isn't the intention at the moment.

Let me just add something to that. So I think in the Fed guidance, Alex, that they provided, they really have talked about being mean to them to limit any possibility of negative rates for any sustainable time. And we've seen repo rates go negative a little bit. So we do think that there are probably policy actions if that were to dip down. But as we go through the – as we – scrub through the nature of the deposits that we've gotten, and obviously there's very limited value to them now. We've got a whole capital against them now. We are grinding them down, but there's not a whole lot more to grind down.

On the NBS prepayment speeds, just in our NIR projections, we've already taken into account a trajectory of NBS prepayment slowing down just based upon the rise in rates. So just to think about it in terms of sizing, we would expect the NBS prepayment speeds to slow down by about probably 15% to 20% by year end.

Great. Thank you very much.

Thanks, Alex.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi. We had some good fee growth in servicing, but you talked about how to do the volumes that should moderate. Is that kind of expectations around purging, and what are you seeing, purging or retail behavior? You have a window into that world, I think.

Yeah, Mike, I'll take that. So I think it's a combination of things. So we've seen a lot of activity in the trading space. We have seen retail activity that was very high, as you know, and Pershing does see some of that. But it's been in the institutional side as well as the retail side. and we would expect that to subside somewhat from the elevated levels that we saw in the first quarter. What was interesting is the institutional business was probably a little more active in March, and the retail business was probably a little more active in January and February.

Okay, so you're seeing a slowdown in retail trading in quarter 101. I mean, as the people return back to work, do you think they trade less or anything related to that?

Do you think their supervisors keep an eye on what they're doing at their desks a little bit more? I'm not sure I'd read that. But, you know, it's very hard to say, Mike, because what you've got to remember is there is a massive amount of cash sloshing around the system, and it's got to go somewhere. You know, one of the things that I pointed out, the savings rate doubled the national average. We've got 15% and households are holding 15% of GDP in cash. They're either going to spend it, invest it, or just let it lose value sitting in cash. So our guess is that we're probably going to see lower activity, but my guess is as good as yours.

Okay, and then just one last question on the fee waivers. I mean, your customers must love you. I mean, this is, you know, $220 million in fee waivers in the second quarter coming up. I mean... Hopefully you're building some long-term goodwill, but shareholders don't benefit from that. You said you're not going to charge for deposits. Any other options there, or do you just have to eat it and hope you get long-term goodwill?

Let me start, Emily, and you can follow up on it. A lot of the excess balances is ending up in cash or even ending up in money market funds. So we continue to see this cash build. So even though it's $220 million of fee waivers, a lot of that's just driven by excess balances that we don't think are going to be there. when interest rates recover, just like we think the excess reserves in the system will obviously contract. That being said, we do think it provides a lot of upside when the market turns around, which we reflected the last time we went through this cycle. And we can earn a little bit on it still. And A little bit of good news is that the Fed speak recently has been pointing to the possibility to firm things up on the short end of the curve. And we've actually seen the forward rates kind of improve a little bit recently. So we're making the assumption that using the forward curve from a few days ago when we gave that guidance that fee waivers will be acted by like they did during the first quarter. You know, that being said, it is a significant hit to earnings. We think we'll recover it. We still ran a 29% operating margin even with that environment. And the other thing that we've done is between NIR and fee waivers, we think we are now at or very close to the trough. I mean, it could obviously worsen if interest rates even got a little bit lower, but we think we are close to the trough. And so the business model is now going to start to grow, you know, to grow off of this level. Great. Thank you.

The only thing I just might add to that is just remember that a large portion of those waivers are really just funds that we distribute. So, you know, we're kind of the recipient of, you know, just lower fees versus competitive waivers that we're actually offering in asset management.

Great. Thank you for that.

And our next question that comes from the line of Ken Usen with Jefferies. Please go ahead.

Thanks. Good morning. Just had a follow-up on the asset services view line. It was nice to see the 5% improvement sequentially. And I just wondered, You know, last quarter you had mentioned some of that bulkier repricing and kind of one-time things. This quarter you mentioned that there's a little bit of, you know, elevated activity. Just wondering from like an outlook perspective, anything we should know just about kind of the trajectory of onboarding new wins and are we kind of, do we have a clear line of sight on any, you know, expected meaningful repricing this year? Thanks.

Emily, you want to take it?

Sure. So, you know, we did see a nice uptick in terms of asset servicing fees. They were up 5% actually sequentially. And just 50% of that is due to asset-based levels, and the remaining 50% is based on transaction volumes. And transaction volumes across asset servicing, all of our businesses in asset servicing, was up significantly, double digits in some cases, quarter on quarter. As Todd alluded to, we do expect that volume to moderate a bit in the second half, Having said that, we also feel that there's very strong fundamentals across the business. Our pipeline is strong. The average size deals in the pipeline are bigger. Retention stats are very strong, and we're also making significant investments in the business that are resonating with clients. In terms of The repricing, there's nothing really structural that we observe. The repricing that we did experience last quarter that was a bit lumpy was really totally tied to just a few large clients that happened to be going RFP at the same time. It's always been a pretty modest headwind for the business that we've been able to offset with new business, retention, growth with our existing clients, and further efficiency.

Got it. Thanks for that, Emily. And then just one more balance sheet question. In terms of set accommodation, the incremental deposits that float in and certainly seem to land on your balance sheet, how are you just anticipating changes as we go forward with potential ends to QE and how do you think your balance sheet would act versus the more traditional regional banks in terms of the retention of the deposits that have flowed in? Thank you.

Sure.

So ultimately, you know, we think when, you know, we basically, as the Fed increases reserves, we think roughly about 2% or so, you know, ends up on our, you know, on our balance sheet. You know, it's actually hard, you know, hard to tell and depends very much on the economic backdrop. As I did mention, you know, we do think a large portion of the deposits which, you know, that we've seen in the growth in those deposits, especially in the last two quarters, is excess, so non-operating. And we do think that that, you know, would recede pretty quickly, you know, when interest rates start to normalize and monetary policy starts to normalize. I don't know, Todd, if you'd have anything to add to that.

Yeah. Yeah. I think if you go back to, you know, pre the COVID event, which really led to a spike, we've seen something close to $100 billion of balance increases. Some of that was intentional as we built relationships and comes naturally with the growth in our businesses. But a significant amount of that was what we call, would fit into that excess definition. So we'd imagine probably somewhere between $25 to $50 billion of that $100 billion increase would roll off.

Got it. Okay. Thank you. Thanks, Ken.

Our next question comes from the line of Jim Mitchell from Seaport Global Security. Please go ahead.

Hey, good morning. Maybe just if I think about your guidance on NII, it does seem like the implication is that NII is sort of stabilizing here, and I assume that implies sort of securities yields are going to kind of hold in at current levels. So if we kind of assume a static balance sheet going forward, and I know that's not necessarily the right way to think about it, but if we assume, you know, try to isolate what could be the inflection point? You know, what level of rates, I mean, I think you've indicated the two to five year is important. You're not going to go further out than that. You know, we've had the five year now at 83 basis points moving higher.

Do we need to see that translate into the two to three year? I mean, what level of rate structure should we start to see maybe yields going the other way? Why don't I start, Emily, and then you can add. So, I think there are really two key elements to it, Jim. Number one is the short end of the curve. So we've got a significant number of assets that are pricing off of LIBOR or short-term indices. And once again, this quarter, we saw, for example, one month LIBOR was down three basis points from its average in the fourth quarter, and two basis points for three-month LIBOR. So that offset the benefit of the move on the longer part of the curve. But the steepening out to five years, we keep a duration of around two and a half years, so that would mean there's going to be significant assets out there that roll off and get reinvested. It's helpful, and it will slowly come into it, but it's basically been offset. That benefit has been offset by what we saw in the short end of the curve.

No, that makes sense. I was just trying to think through, you know, assuming short rates are pretty stable from here, what kind of gets – what at the longer end really starts to help you?

Yeah, I mean, you know, five and ten years because what that does is it extends the duration of the mortgage-backed securities so their yields pick up because the amortization premium declines. As stuff gets reinvested to maintain the duration that currently exists in the portfolio, it would go into higher levels. So it would be helpful here.

And, Jim, we disclosed in the queue just some sensitivities that might be helpful as well for you to guide that.

I got it. I was just trying to get a sense of what level of rates in the middle of the curve would be helpful. But we can always talk about that offline. Thanks. Thanks, Jim.

And our next question comes from the line of Steven Chewbacca from Wolf Research. Please go ahead.

Hey, good morning. This is Michael, and I'm the for Steven. I'm just following up on the NII guide, and you gave some detail around where you're deploying some of that excess liquidity from here, and I appreciate the call around premium AM as well. Maybe you could just provide some color around how much of that deployment is contemplated in the NII Guide for the securities portfolio?

Sure. So, I mean, our securities portfolio is basically flat to, you know, flat to last quarter, and we are marginally increasing our non-HQLA within the quarter. But, you know, when I talked about the NIR guidance for the full year still being about 11 to 12%, you know, where, you know, the rate curve, you know, just based on the forward curve, deposits basically remaining pretty much where they are, if not coming down a bit. And, you know, MBS prepayment speeds slowing down. So those are the key assumptions.

Thank you for taking my question. Thanks, Stephen.

Our next question that comes from the line of Gerard Cassidy with RBC. Please go ahead.

Good morning, Todd. Good morning, Emily. Hi, Gerard. Todd, can you frame out for us, when you think about your years at Bank of New York, the number of new products that Bank of New York has introduced over the years? I think of like custody of non-traditional assets as one product. When you think about the opportunities for this digitalization and the cryptocurrencies that you guys are working on that you've already talked about, how big can this be? And again, comparing it to other new ventures that you've been involved with over the years at Bank of New York, if you could compare that.

Yeah, I think it's early to tell. I mean, if you think of all the noise that Bitcoin got, it's still only about 10% of gold, and gold as a customized asset is not that important, frankly, right? So it's getting a lot of hype. I do think decentralized finance is coming. I do think fintechs are going to be important players, and I do think that we can position ourselves well and work with fintechs to build opportunities. I think you're going to see it in payments. I think you're going to see it, you are going to see it in custody. It's hard for me to say just how big of an opportunity that is at this point. It will grow. I think the more important thing is that we need to give investors choice. And so if they do want to mobilize assets faster, we need to be able to help them to do that. If they do want to be able to hold some nontraditional assets, just as they went into alternatives and other things, we need to be able to help them to do that in a way that eliminates a lot of the counterparty risk that currently exists, which is high, and also enables them to get reporting on a consolidated basis in valuations and so forth, which is also critically important. And so there are a number of ETFs coming out that are crypto-related. There is, you know, there's obviously good underlying growth on a very small base. We think it's an important part of the full product capability. How big it ultimately becomes, I think, it's just a little early for me to really speculate.

I see. Okay, thank you. And the second thing you guys touched on. Go ahead, Emily.

I was just going to add one little thing, which is it's as much about retention as it also is about new business. Our clients are demanding integrated capabilities across digital assets as well as traditional securities and currencies.

Got it. Thank you. You guys have always told us, and you talked about it again today, the leverage ratio is the binding constraint and not the CET1 ratio. You pointed out, Emily, that it may dip down below 5.5%, but still well above the regulatory minimums. We understand that. At what point would the leverage ratio actually come into play where you would have to back away from your buybacks? Even though you have the CET1 ratio, not a problem, but at what point do you say, we've got to slow it down because the leverage ratio has fallen too far down. And as part of that, is the leverage ratio really linked to the QE, meaning the deposit growth? And should we get a tapering, then we should get some relief on your balance sheet growth, which maybe would help the leverage ratio as well.

So, yeah, let me start, Emily, and then you can add. If you think about it, we've put a buffer on the leverage ratio for business as usual. Now, this isn't for stress testing, but for business as usual. And that buffer really reflects the potential for a spike in deposits or a decline due to other comprehensive income based on the mark-to-market and the securities portfolios. And so, frankly, Gerard, we've seen the spike in deposits. And could it go up a little bit higher? Yeah, it may. But our view now is part of the reason for the buffer has already taken place. And as I indicated on one of the earlier questions, we probably, when things start to normalize, we probably have $50 billion of runoff in deposits So that's an enormous amount, an enormous impact on that ratio. And also the coverage from the OCI has to be that high. So given the fact that we've already made the spike, it makes sense for us to go ahead and dip into our buffers. And Emily said going to a 5% probably is not an unreasonable thing in this environment. If we were in an environment where we were a year ago, I'm not sure I would say that.

The only thing I might add is just, I mean, even if we were, you know, like as Todd just said, we'd be comfortable going towards 5%, but even there, you know, you would need a considerable increase in deposits, you know, there from where we are today. We've got plenty of room.

Very good. Thank you. Thanks, Roger.

And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Rob Wildhack from Autonomous Research. Please go ahead.

Good morning, guys. If we could go back to the cryptocurrency and digital asset space for a second, you're clearly taking a few steps forward there with the announcements you made this quarter. Is Is that because you think we've hit some kind of inflection point in that part of the market, or is it just more of a natural evolution of your service?

Yeah, Rob, I would say it's more of a natural evolution. We're having deep discussions working with clients, the institutional side. And we started to see this toward the end of last year and the beginning of this year. that the institutional side was getting more and more interested in digital assets. And so we started working with them for solutions across a broad part of our business. Okay, thanks. Okay, Rob, thank you.

And our final question comes from the line of, Brian Kleinhanzel with KPW. Please go ahead.

Yeah, thanks. Two questions here. One on the asset servicing area. Thanks for the update on how the underlying pricing is with 50% for asset levels and 50% for transaction volumes. Where do you want to take those percentages, though, longer term? Is that the mix that you're at, and this would be steady state from here, or are you trying to get more transaction volume-based, just as we think? how pricing turns it off here.

Do you want me to take that, Todd?

Sure.

So, I mean, you know, the 50-50 split is just the nature of the beast and the nature of the business. So it's not like we are trying to move that in any direction. And for pretty much, you know, years, that's just really the dynamics of how we're pricing and asset servicing about About 50% of the revenue stream is based on asset levels, and about 50% or so is based on transaction costs.

So it's pretty much the norm.

Okay. The second question, I mean, you looked at issuer services and treasury services and revenue drivers both being impacted by interest rates above and beyond. The money market fee waivers, is there any way to allocate what part of those revenues are kind of driven by interest rates as we think about asset sensitivity on a go-forward basis?

Sure. So both of those businesses are significant deposit-taking businesses, or either we take them on balance sheet or off balance sheet through sweeps into money market funds. And so the interest rate impact, it's a meaningful contribution to both of them. I don't think we've broken out exactly what the split is, and it's a meaningful contribution, obviously, to the operating margins because there's no expense associated with the NIR. What we've seen in Treasury services is an intentional build in deposits over the past year as we've built out those relationships, and it's very much related to the activity in the accounts because there needs to be cash in the accounts to make payments, and there's some frictional cash that tends to come with that. Money market fee waiver is a little less important there, but if you think about the corporate trust business, What issuers will do is they'll put cash a day or two in advance of payments that need to be made on issues that were the trustee and the paying agent. And typically that's value where we get a little of that value or we sweep it into a money market fund. And so that's a meaningful contributor to that business. And that's where we're now seeing kind of the late stages impact of fee waivers, and that's why the issuer services business was down sequentially and year over year. But we don't break out the very specific numbers, Brian. Okay, thank you for the questions. Operator, go ahead.

That does conclude our question and answer session for today. I would now like to hand the call back over to Todd with any additional or closing remarks.

No, thanks. Thanks for all of your interest. And, of course, any follow-up questions, you may reach out to Magda and our investor relations team and look forward to talking to you all soon. Take care.

Thank you. Thank you. This does conclude today's conference 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 Standard Time today. Have a great day.