The Bank of New York Mellon Corporation

Please stand by, we're about to begin. Good morning and welcome to the 2021 Third 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 Marius Merz, BNY Mellon Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our third quarter earnings conference call. Today, we will reference our financial highlights presentation, which can be found on the investor relations page of our website at BNYMellon.com. Todd Gibbons, our Chief Executive Officer, will open with his remarks Then Emily Portney, our chief financial officer, will take you through the presentation. Following their 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, October 19, 2021, and will not be updated. With that, I will turn it over to Todd.

Thank you, Marius, and good morning, everyone. I'll touch on a few highlights before I hand it over to Emily to review our third quarter financial results, and she'll give you the outlook for the remainder of the year in more detail as well. Our financial performance this quarter reflects healthy and broad-based organic growth across our businesses, as well as a supportive global markets backdrop. Now, if you refer to slide two of our financial highlights presentation, we reported EPS of $1.04 and generated a return on tangible common equity of 17%. Revenue was $4 billion, up 5% year-over-year, and fee revenue was up 6% year-over-year, That would have been 11% if you excluded the impact of money market fee waivers. This fee growth included almost 3% of organic growth across our franchise. During the quarter, we returned roughly $2.3 billion of capital to our shareholders, including almost $300 million of common dividends and $2 billion of buybacks. Our continued focus on innovation has led us to announce several groundbreaking new solutions this quarter that will meaningfully improve the client experience and represent exciting growth opportunities for us. Let me start with asset servicing. In the third quarter, we continue to see strong sales momentum. Year to date, wins are up almost 40% versus a year ago, and we are winning larger, more complex deals that span our product offering as clients increasingly see the value we can provide across the value chain. We had a number of exciting business wins this quarter, but one example I'd like to highlight is the work we're doing for Oak Hill Advisors, a leading alternatives investment firm. Oak Hill was receiving fund admin services from one of our competitors and performing middle office functions in-house. Due to our deep expertise and our ability to offer them a seamless solution across multiple services, we were able to win both mandates. This mandate is a real testament to our differentiated capabilities and the strength of our alternative servicing platform, which is seeing very nice fee growth this year of 10% plus. And we remain excited about our ability to scale this business and the growth opportunity for us ahead of us. We're also continue to see good momentum in ETF servicing where year to date, we have already helped clients launch more funds than during all of 2020. And then in our data and analytics business, our capabilities continue to resonate with our clients. This quarter, we signed two additional large asset manager clients to our next generation data management platform for what we call the Data Vault. And another large global asset manager went live bringing the total number of clients signed up or mandated to the vault to six. And we're also thrilled about an extension of our partnership with the Florida State Board of Administration, as they look to leverage our ESG data analytics app into their full investment cycle for 30 plus funds, spanning about $250 billion in assets under management. Now moving on to markets and wealth infrastructure businesses, Pershing had another good quarter and it was on the back of continued organic growth and accounts and new client assets. Over the last 12 months, Pershing generated over $100 billion of new assets, despite the headwind of the few clients lost to consolidation that we've previously mentioned. To give you just one example of our differentiated capabilities and the power of our broader interconnected franchise, a multi-billion dollar wealth management client recently approached Pershing for a strategic partner that can provide a broad set of integrated solutions. In a collaboration between our investment management, our wealth management, and Pershing businesses, we designed a series of risk-based models and turnkey investment solutions that are more cost-effective, tax-efficient, and portable for the end investors. This innovative solution, combined with our leading custodial services and technology, made Pershing the provider of choice. But we're not resting there. This past week, we announced the launch of a new business unit within Pershing, which we're calling Pershing X. This unit will deliver the industry's leading end-to-end platform in the wealth advisory space, offering a comprehensive set of advisory capabilities and helping financial services firms solve the challenge of managing multiple and disconnected technology tools and data sets for their advisors, fueling our clients and therefore our growth. Today, we're already the leading provider of custody and clearing services. And by adding front-end capabilities, Pershing will become uniquely well-positioned with RIAs and the broader wealth tech segment to capture share in one of the fastest growing segments in financial services. I'm also thrilled to welcome Ainsley Simmons to BNY Mellon, who will lead this effort for us. Ainsley has been a transformative leader in the advisory space, for 20 years. She has extensive experience across wealth management and digital, and she has helped launch several successful fintechs. Now, Pershing X is one of our most ambitious multi-year projects to date. The combination of our planned investments and the talent that we recruited, combined with the leading platform that we already have, will meaningfully enhance Pershing's future growth profile. In treasury services, we continue to see healthy growth in payment volumes. on the back of an improving global economy and net new business. In September, we announced that Verizon has become the first corporate client to roll out BNY Mellon's innovative real-time e-bills and payments functionality to its customers. Now, we've spoken about this a few times about the capability in the past, and we're just incredibly excited about its future. We see enormous opportunity across our client roster, as more retail banks enable their customers to receive and pay e-bills via the real-time payments network. As some of you have seen, CEOs from 23 of the largest banks in the country, including myself, signed a letter committing to bring these capabilities to the market. And we expect that 40% of digitally enabled U.S. consumer accounts will eventually have this functionality by year-end. With over 15 billion bills paid annually within the U.S., many of which are still paper-based, This ecosystem is ripe for disruption, which our innovative capability is built to address at scale. And we are uniquely positioned in the market as we don't compete with other banks in consumer banking or card issuing. As a result of our leadership in this space, we were recently recognized by the banker as the best transaction bank in payments. It's a real honor and we think it's just the beginning, so a lot more to come in this space. Turning to clearing and collateral management, the business continues to benefit from the higher collateral management balances. In fact, they reach a record $5 trillion at one point this quarter. Outside the U.S., we are seeing growth as clients continue to migrate from bilateral to tri-party. And domestically, recent growth has been driven by the elevated utilization of the Fed's reverse repo facility, where we are the sole clearer. Globally, we continue to implement new capabilities that allow clients to more efficiently mobilize collateral interoperability between our U.S. and international platforms and vice versa as part of our future of collateral program. Additionally, this quarter, we were the first bank to add agency MBS as collateral on overnight cleared repo transactions, and these are done via the Fixed Income Clearing Corporation's new general collateral-sponsored repo program. This new capability expands the universe of clients that now can indirectly transact with central counterparties as well as the scope of eligible collateral. And by sponsoring these transactions, we help our clients reduce costs and free up capital that could not otherwise be available on a bilateral basis. Last but not least, the recent deadlines for the phase five of non-cleared margin rules really differentiated us in the market and validated the multi-year investments we've been making in automation and client experience. While many across the industry really struggled and were ultimately unable to repaper all their counterparty relationships in time to meet these go-live deadlines at the end of September, BNY Mellon was lauded for having a more streamlined process for client onboarding experience and for having digitized and automated the collateral scheduled negotiation and amendment process. Once again, our automation has enabled our clients to do things better, faster, and cheaper. In markets, client volumes remain very strong on the back of continued organic growth, offsetting the headwind of lower volatility. This quarter, we also rolled out several enhancements to our liquidity direct platform that gives clients additional short-term investment options. Clients can now seamlessly invest their cash in commercial paper and ultra-short duration fixed income ETFs, and also now have the ability to select money market funds based on their ESG investing criteria and preferences, leveraging our ESG data analytics app. While still early days, client feedback so far has been extremely positive. Pivoting to our investment and wealth management business, in investment management, we saw our sixth consecutive quarter of net inflows into long-term products. And our initial suite of eight index ETFs, including the industry's first true zero fee ETFs in the largest equity and fixed income ETF categories, now exceeds $1 billion of AUM and is growing quickly. And we recently launched our first active ETF, the BMI Mellon Ultra Short Income ETF, sub-advised by Dreyfus. On the 1st of September, we successfully completed the transition of almost $200 billion of Mellon's AUM and over 2000 client mandates into Insight and Newton, as well as the integration of Mellon's cash capabilities with Dreyfus to drive further investment specialization at scale. This realignment positions us to better meet client's needs. It creates greater scale and it enhances the differentiation in the value proposition of our investment firms. Not only are we pleased with the timely completion of this project, but the feedback from clients and consultants has been very encouraging and we have experienced virtually no client attrition during this transition. And finally, in wealth management, the business continues to execute on its clear three-pronged strategy to focus on client acquisition, expand the investment and banking offering, and invest in technology to drive efficiency. Year-to-date, we've acquired about 40% more clients than over the same time period last year, and the average size of our new clients is up by over 20%. The business saw another strong quarter of net inflows and continued growth across lending and deposit products, and our investment performance remains strong. And so in summary, we're intensely focused on driving innovation across the franchise. In fact, we were recently named among Fast Company's 100 Best Workplaces for Innovators, a testament to our forward-thinking culture and our continued investments in our people, technology, efficiency, and growth. We're pleased with the continued pickup in organic growth, and we're continuing to make the investments necessary to drive further growth and efficiency. So with that, I'll hand it over to Emily.

Thank you, Todd, and good morning, everyone. As I 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. Starting on page three. Total revenues grew by 5%, reflecting higher fee revenue, partially offset by lower net interest revenue and higher money market fee waivers. Fee revenue grew by 6%, or 11%, excluding the impact of fee waivers. This reflects the positive impact of higher market values, strong organic growth, and the favorable impact of a weaker U.S. dollar. Money market fee waivers, net distribution and servicing expense were $233 million in the quarter, an improvement of $19 million compared to the prior quarter, driven by slightly higher average short-term interest rates. Other revenue was $129 million and included roughly $55 million evaluation gains on strategic equity investments. Net interest revenue was down 9%. Expenses increased 9% or 6%, excluding the impact of higher litigation reserves, a notable item this quarter, the impact of which you can see at the bottom of the slide. Provision for credit losses was a benefit of 45 million, primarily driven by an improved macroeconomic forecast, including an expectation for a continued recovery of commercial real estate prices. EPS was $1.04. HIGHER LITIGATION RESERVES NEGATIVELY IMPACT EPS BY $0.06, AND PROVISION BENEFIT HAD A $0.04 POSITIVE IMPACT THIS QUARTER. PRETEXT MARGINS WAS 29%. ON PAGE 4, WE SEE THE TREND ACROSS A FEW KEY METRICS OVER TIME. ON TO CAPITAL AND LIQUIDITY ON PAGE 5. OUR CAPITAL AND LIQUIDITY RATIOS REMAINED STRONG AND WELL ABOVE REGULATORY MINIMUMS AND ABOVE OUR INTERNAL TARGET. Our Tier 1 leverage ratio, which is our binding constraint, was 5.7%, down approximately 30 basis points sequentially, primarily driven by the return of 2.3 billion of capital to our shareholders, partially offset by earnings, and a 1% quarter-over-quarter reduction in average assets. We ended the quarter with a CET1 ratio of 11.7%, down 90 basis points compared to the end of the second quarter. Finally, our LCR was 111%, roughly flat compared to the prior quarter. Turning to page six and further details on net interest revenue. NIR for the third quarter was 641 million, down less than 1% sequentially. The impact of lower interest-earning assets and continued pressure on reinvestment yield was partially offset by lower premium amortization, the benefit of a full quarter of higher IOER, and lower deposit and funding costs. Turning to page 7 for some color on our balance sheet. Average deposit balance has declined by 2%, or approximately $6 billion, sequentially. This is as we continue to work with our clients to pursue off-balance sheet alternatives for their excess cash. This decrease in deposits drove an approximately equal size reduction of our average cash held at central banks. the size of our securities portfolio remained flat quarter over quarter. Average loans increased by about 1% sequentially and 14% year over year, with growth primarily driven by margin loans, secured loans to global financial institutions, collateralized loans and wealth management, and growth in capital call financing. Turning to page eight, as I mentioned earlier, expenses of $2.9 billion were up 9% year on year. Excluding the impact of a notable item that I also mentioned earlier, expenses were up 6%. Almost two-thirds of this increase was attributable to revenue-related expenses, and the remainder was evenly split between incremental investments and the unfavorable impact of the weaker U.S. dollar. On to page 9 for a closer look at our businesses. Investment services reported total revenue of $3 billion, up 3% year-on-year on higher fees, partially offset by lower net interest revenue and higher fee waivers. Excluding the impact of fee waivers, fee and other revenue was up 10%. Assets under custody and or administration increased by 17% to $45.3 trillion, roughly half driven by growth from new and existing clients and half driven by higher market value. As I discuss the individual investment services businesses, I'll focus my comments on the fee revenue for each business. In asset servicing, we saw strong growth despite the impact of fee waivers. That's on the back of higher market values and client activity, as well as higher FX revenue. Fee waivers impacted growth by roughly 400 basis points. In Pershing, fees were also up nicely, reflecting higher market values and continued underlying organic growth offsetting the impact of lost business and waivers. Waivers impacted fee growth by approximately 500 basis points. Incursion clearing accounts were up 4% and mutual fund assets were up 23%. Net new assets in the quarter were up $7 billion. Excluding the impact of the deconversion of client loss to consolidation that we have discussed previously, net new assets in the quarter would have been roughly in line with the second quarter. In issuer services, fees were down and included a roughly 600 basis point impact on fee growth from waivers. The resumption of issuance activity and seasonally higher dividend payments NDR were offset by a decline in corporate trust fees. In treasury services, healthy fee growth on the back of improved economic activity and net new business resulting in higher payment volumes was offset by approximately 700 basis points from fee waivers. Lastly, clearance and collateral management fees were up, primarily driven by growth in non-U.S. collateral management balances and higher clearance volumes, partially offset by lower intraday credit fees. FX revenue across all investment services increased by 17%, driven by higher client volumes as we're winning new business and growing with existing clients. This was partially offset by lower volatility and spread. Page 10 summarizes the key drivers underneath the year-over-year revenue story for each of our investment services businesses. Now turning to investment and wealth management on page 11. Investment and wealth management reported total revenue of $1 billion, of 12% year-over-year, primarily driven by higher market values, valuation gains on strategic equity investments, the benefits of the weaker US dollar, AND INCREASED PERFORMANCE FEES, ALL PARTIALLY OFFSET BY HIGHER FEE WAIVERS. EXCLUDING THE IMPACT OF FEE WAIVERS, FEES AND OTHER REVENUE WAS UP 18%. ASSETS UNDER MANAGEMENT GREW TO 2.3 TRILLION, UP 13% YEAR OVER YEAR, REFLECTING HIGHER MARKET VALUES, CLIENT INFLOWS, AND THE FAVORABLE IMPACT OF THE WEAKER U.S. DOLLAR, PRINCIPALLY VERSUS THE BRITISH POUND. In the third quarter, net inflows totaled $14 billion, driven by LDI and cash strategies. As Todd highlighted, the business has now seen its sixth consecutive quarter of net inflows into long-term products. Investment management revenue grew 13%, primarily driven by higher market values, equity income and gains, and strategic equity investments, the benefit of the weaker U.S. dollar and higher performance fees. Fee waivers negatively impacted revenue growth by 650 basis. Wealth management grew by 10%, primarily driven by higher market value. Client assets reached $307 billion of 16% year-on-year. Stage 12 shows the results of the other segments. I'll conclude with a few remarks about the outlook for the remainder of the year. Our guidance on NIR based on the current forward curve remains down 14% compared to 2020. Also, using the forward curve, we expect fee waivers in the fourth quarter to be roughly in line the third quarter. With regard to fees excluding waivers, given growth in the third quarter exceeded our expectations and given the continued momentum across the franchise, we now expect fees X waivers for the full year to be up closer to 8.5%. On expenses, we continue to expect the full year to be up about 5%, excluding notable items. And we also expect our effective tax rate for the year to be approximately 19%. And then lastly, with regards to buybacks, given we ended the quarter 20 basis points above our management target for Tier 1 leverage, the fact that we continue to have excess deposits that we expect to receive over time, And based on our expectation for continued strong capital generation, we intend to once again return capital well in excess of 100% of earnings to our shareholders in the fourth quarter. With that, operator, can you please open the line for questions?

Yes. If you'd 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. Our first question comes from the line of Steven Chubach with Wolf Research.

Hey, good morning, Todd. Good morning, Emily. Good morning, Steven. I wanted to start things off with just a question on the NIR guidance, Emily, that you just gave. I was hoping just to unpack the guide for 4Q, specifically what you're assuming in terms of deposit and balance sheet growth, liquidity, redeployment, and I guess last and certainly not least, premium amortization?

Sure. So why don't we first just start with the third quarter. In the third quarter, NIR was down very, very modestly. That was off the back of lower reinvestment yields, also lower interest-earning assets as we worked with our clients to actually manage especially excess deposits. We were able to offset that with some tweaks in the securities portfolio, and also we did see a benefit from premium amortization coming down that was both a mixture of us reducing the size of our MBS portfolio as well as the fact that prepayment speeds did slow down quarter to quarter. Our full year guide, as you just rightfully pointed out, remains at down 14% for the full year. In terms of kind of what's baked into the fourth quarter, look, I think we have more or less hit the trough. What's baked in there certainly will still have the impact of lower reinvestment yields as a headwind. We are expecting a further reduction in interest-earning assets because we will continue to work with our clients in terms of managing excess deposits. So perhaps we expect them to go down by about $5 billion to $10 billion. With respect to premium amortization, it's likely, you know, our expectation, our forecast based on rates is that it will be pretty much flat, you know, fourth quarter to third quarter. And look, there's probably some upside. I mean, certainly based on, you know, based on what we're seeing in terms of volatility and rates and even some movements by, for example, the Bank of England, et cetera. So there could be some upside.

That's great color, Emily. And just for a follow-up on expenses, I was hoping you could speak to the expense growth outlook. We've seen a number of upward revisions to the expense guidance over the course of the year. And I just want to gauge whether the current level of expense, it's about $2.85 billion extra litigation cost, is the right jumping off point for 4Q and maybe just longer term, what level of expense inflation is we should be underwriting on a more normal basis, just given the continued investments you cited in the business?

Sure. So within the quarter, so yes, expenses overall up 6%. We're still guiding for the full year expenses to be up 5% versus last year, obviously ex-notables. When you unpack the third quarter, about – Two-thirds of that is attributable to what we call revenue-related expenses, inclusive of an uptick in higher incentives. We obviously want to pay our people competitively and for the strong organic growth that we are seeing. About a third of that is split evenly between the impact of the weaker U.S. dollar, as well as the incremental investments that we have seen. So those are the investments in both in growth, in infrastructure, as well as efficiency. Also, it is worth mentioning that in the third quarter, we are starting to see an impact of a tighter labor market, both in terms of competition and in terms of cost. And also in the third quarter, there was an impact of a merit increase, which took effect in June. As we kind of look out, it's certainly too early to really comment on 2022. We're in the middle of the planning process. What I would say is that, yes, the uptick you're seeing in the second half of the year is really the jumping off point for next year. And ultimately, there are other headwinds As well, inflation, as I just mentioned, look, we're seeing, it's a good thing, but return to more normalized travel rates, so T&E is likely to go up. As we reopen the offices and return to the office, there'll be some additional expenses associated with that. Of course, we will continue to also increase achieve and identify efficiencies. We're working through the investment spends as we speak, going through the proverbial food fight, because as always, there's lots that we want to do. But what I would say is we're intensely focused on expense management. We will continue to be focused on expense management, but we're also going to invest through the cycle. And if I were to just give some color, I would just say that expenses in 2022, if I'm standing here today, will be modestly up from 2021.

Very helpful color, Emily. Thanks so much for taking my questions.

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

Hi. Well, this is good timing because I wanted to follow up on the food fight investment spend discussion. So software costs were up 8% year over year. And, Todd, you started off talking about some fintech-like initiatives And so I'm just wondering if maybe next year you want to spend more money. I mean, there's this tough tradeoff that you have in delivering results and investing for what you think could be a good effort. I didn't fully understand when you were talking about purging and the transaction banking payments. Maybe if you could just describe the total addressable market for that, how much you have and where you think you're getting, or some color around that, and then what type of spending that's going to involve. Thanks.

Okay, so Pershing X is, I think, an exciting opportunity for us. And so if you think about the registered investment advisor business, so if you think about Pershing, we're really the largest correspondent clearer. So we're a third-party clearer for broker-dealers in the retail space. And now registered investment advisor, and that business is actually growing, but it's not growing nearly as fast as the advisory space is growing. And so we are the custodian, we are the clearer, we are providing a lot of the back-end services for that business. But we think there's the opportunity for us to be an integrator in that business. And it's been growing. I haven't looked at the numbers recently, but it's been growing in the ballpark of 15%. And we've got a relatively small market share part of it, Mike. So we think there's an opportunity for us to pick up market share in a fast-growing segment. So that's why it's so exciting to us. In terms of the challenge that Pershing X will solve, if you think about it, advisors have these multiple technology tools, a bunch of different data sets that they're trying to integrate or trying to look at. Oftentimes they're logging into multiple systems and they're really reducing the advisory productivity. And that would be across things like financial planning, investment modeling, even some banking activities. And we have the ability to integrate our own private banks. So there's really no solution out there today that can tie that all together. And so that's what we mean. It'll be an open architected but an end-to-end solution. So we'll be integrating best-in-class services amongst some of our own. And it'll provide a digital capability and real good retail experience both to the advisor as well as to the investor itself. So that's our target for Pershing. I think your other question was around the e-payments. So in e-payments, this is using the Clearinghouse's real-time payment system. And we were the first to actually connect. And now this is a request for payment from a client, excuse me, our client, so Verizon, to their customers. And they send, you know, it'll come across your phone that your bill is ready. Here is your bill. Press this and make the payment in real time. Or you can even set a time when you want to make that payment to make sure that you've got funds in your account. That will connect as more and more banks connect to the real-time payment system. That broadens the capability of covering a very large percentage of the market. Currently, there are about 15 billion payments made in the U.S., so it's an enormous market, and we've got about 100 prospects showing significant interest in the capability we design.

Okay, so e-payments, big initiative, big opportunity. Pershing X, if I heard you correctly, big market, big opportunity. So in terms of funding these initiatives, great. You know, as far as, you know, investing in these areas specifically or more generally, I know you've done a lot of overhaul in the back office, a lot of overhaul with your tech talent. What sort of spending will this take, and should you be going faster or slower, or how do you decide that?

Yeah, I mean, so as you know, we've been increasing our tech spend over the past few years. A lot of that, as you pointed out, was in infrastructure and resiliency and building a sounder infrastructure to support the growth that we're looking to drive today. And so kind of the piece dividend from that, we are reinvesting in a number of the software and the app dev that we've talked about. So I kind of categorize it into three areas. One is we've talked about our initiatives. I mean, we just talked on two, purging and treasury, but we've got some very neat things going on in our data and analytics capability. We're digitizing things across the bank. The wealth platform we continue to invest in for our own wealth management activity. Corporate trusts, we're using smart contracts and developing a digital network for our clients to operate on. And investment management, so just about across our businesses, we continue to invest invest in technology. There's also ongoing infrastructure and risk management. I mean, our cyber defenses are not cheap and we need to continue to invest in them. We're doing a significant number of cloud conversions, as I think, across the company. Regulatory reporting requirements continue to go up. There's a lot of liquidity requirements as well as, you know, complying with the LIBOR requirements. and we will always be focused on data and resiliency. And then on the efficiency side, we've actually inventoried the number of things that we do manually, and we're looking to knock them out for automating when it can create some significant efficiencies and risk reduction. And we're also looking to modernize some of our core apps. So even in our treasury services, we're putting a very modern payments engine underneath all of this. So there are a lot of, the good news is there are a lot of opportunities, but it will come with some costs, and our intent is to increase our technology spend next year. All right, thank you.

Our next question comes from the line of Gerard Cassidy with RBC.

Good morning, Todd. Good morning, Emily. Todd, can you, or Emily, when I go back to the year-end 2019 pre-pandemic size of your balance sheet, you guys had assets about $382 billion and deposits of $259, let's call it. And then you had deposits at the Fed of $95 billion. Obviously, today, it's considerably higher. When the Fed finishes quantitative easing, assuming it's finished by next summer, can you kind of frame out for us what you think your balance sheet might look like as we go forward? Are customers going to be pulling deposits out? Do you think you'll shrink down? Not that you'll ever get to that year-in-19 level, but should we start to think about a continued falling in the size of the balance sheet?

So I'm happy to take that, and Todd certainly can chime in. So the way we think about deposit levels now, we probably still have around 10% to 15% of our deposits are excess, and they will eventually recede in a more normalized rate environment. But actually, core deposits overall are also up, just given the growth in AUCA, et cetera. So I mean, the core deposits are also up, but the excess is about 10% to 15%. The way we've been looking at it is certainly we've been kind of managing the growth in those deposits and very successfully so, so kind of in a targeted way looking at what we deem to be excess and working with our clients to pursue off-balance sheet alternatives for those particular balances. And if the Fed begins to taper when we all think they will or begins to taper soon, I think that does help in terms of kind of putting a lid to a degree on the growth of deposits from here. In terms of what we expect in, I guess, 2023 and beyond, yes, I think at the stage where the Fed actually hikes on multiple occasions, it's only at that point that we would probably see a decline in deposits, but the core itself is higher than it was in the fourth quarter of 2019.

And Gerard, I think if my memory serves me right, Gerard, that date was, you were picking an end date. It was actually, the averages were a little bit lower than that. So there is a significant amount of excess. It will start to, and that's why we're sitting on so much cash at central banks. We'll probably see a little less pressure, certainly, for deposit growth when the Fed starts to taper. But to Emily's point, the excess coming off is probably sometime thereafter.

Correct, Todd. They were period end numbers. Good memory. The follow-up question, you guys had a very robust share repurchase amount this quarter, as Emily pointed out, $2 billion, and it was guidance for the fourth quarter. The question is, if I recall correctly, you have a $6 billion program that I think expires at the end of next year. If you reach the $6 billion prior to the termination date, would you consider re-upping, assuming, of course, your capital ratio is permitted, would you consider re-upping the buyback if you use it all up before that termination date?

You know, the answer, Jordan, if you think about it, the stress capital buffer regime has actually made things a little more flexible for us. And so certainly the board recognizes that if we continue to produce the capital that we're likely to, and we buy back the excess capital that we've accumulated, we'll be in a position to come back to them and ask for more. So the answer is yes.

Great, thank you.

Our next question comes from the line of Jim Mitchell with Seaport Research.

Hey, good morning. Maybe just one on issuer service fees. They were flat sequentially and typically you'd have some seasonality. I think you mentioned some weakness on the corporate side, corporate trust side. Is that just pushed out? Should we expect some rebound in 4Q? Just how do we think about the trajectory in that business? And any more detail on the quarter would be great.

Sure. So in the issuer services, you really do have two businesses, depository receipts and corporate trusts, as you point out. Within DR, we definitely saw a resumption in both issuance and dividend activity, and that was really even on top of the normal uptick that we see in the third quarter. In corporate trust, the underlying business actually is performing really well. Volumes in structured products are up actually meaningfully, slightly offsetting a small decline in activity in munis. But the third quarter for corporate trusts, there were really two things that also impacted revenue. So one was a decline in reimbursable expenses. So we've got reimbursable expenses that are just a pass-through. And ultimately, so that impacts revenue does not have any impact whatsoever on PTIs. And also there was a discontinuation of a public sector mandate that started in this quarter, and we'll see the full effect of that in the fourth quarter, probably be another $10 million or so decline.

Okay. But no, nothing got pushed into 4Q. It just was those issues. Yep. Okay. And just maybe on the payments business, I think it's kind of an interesting – push you've already had some growth in treasury services so maybe you could just talk a little bit of what's been driving the accelerating growth of late i think it's a little too early to be expecting anything from these new initiatives and then i guess as we think about the new initiatives like this verizon deal and others potentially is that a first mover advantage type thing i guess how do you defend being the intermediary between the merchants and the banks Is it just simply being the first mover advantage? And what you think the possibility from a revenue standpoint could be from that business? Thanks.

Yeah, I mean, this is – and so a couple of things there. So effectively what we're doing is we're digitizing their collection experience. So we've been in the lockbox business, and now we're converting that to electronic through these requests for payments. And it is faster and cheaper for the provider. So the cost actually – for the utility in this case. So the cost to them on a per unit basis is down dramatically, and you also reduce float and other items. So we think it's hugely to their advantage. So we happen to have the collection relationship, and we can continue. Paper's not going away, that's gonna be a component of it, so we can provide the complete solution. So we just thought, we happen to be in a very nice position to do this. And we're not in the card or retail payments business to speak of in between it. So we happen to be very well positioned, and we got a little bit of a first mover advantage by being into the clearinghouse's real-time payments system right away. You know, in terms of how big can this grow, it could possibly move the needle a little bit and add a little something to our organic growth. I think it's a little too early to tell. We're excited about the relationship that we've got with Verizon. We're excited that this certainly stirred up a lot of interest, and we've got a pretty reasonable pipeline. But I just prefer at this point not to speculate on what that could be, Brian.

Okay. Yeah, thanks.

Our next question comes from the line of Brennan Hawken with UBS.

Good morning. Thanks for taking my question. I would like to explore the really robust core fee revenue growth that you guys have seen here. Todd, you made reference to a nearly 3% organic growth rate in the quarter, which is really quite good. So is it possible to break down the year-to-date or your expectations for 2021 and in the different components, how much of it came, you think, from organic, how much activity and volume related? I seem to recall that in the past you've said that half of your servicing business is market sensitive, so is that still the right way to calibrate when we think about the market impact or pricing dynamics? Is it possible to give some color around the composition?

Sure, Brian. I think, first of all, we should probably help you understand what we're describing as organic. So we do try to take the market impact out for interest rates and the equity markets. We also try to adjust, for example, for some of the unusual activity that came. For example, right now, money market funds are very large because of all this excess cash. deposits are very large because of this excess cash. So we try to knock that growth out of the calculation. And when we knock all of that out, because if you look at us growing, our revenue growth minus fee waivers is significantly higher than what we're talking about in terms of our organic growth, because that's getting the benefit of some of the market considerations. So once you knock all of that out, the numbers get to something like 2.5% or so for this year, which is much stronger than what we've seen in years past. Frankly, three years ago it was probably zero, maybe even slightly negative. Emily, you want to kind of march through some of the areas where we're actually seeing it?

And just to really break it down very clearly, so the 11% in fee growth ex-waivers we saw this quarter, year-on-year, 3% was organic growth. As Todd alluded to, about 6% of that was market impact, and the remainder was just impact of weaker U.S. dollar. In terms of the organic growth in that 3%, it was really broad-based. You know, when you look at purging, I think we talked a bit about, you know, continued growth in clearing accounts, mutual fund balances, and net new assets. In terms of treasury services, you know, we saw good growth in terms of payment activity. And, you know, on the back of both stronger economic, you know, a stronger macroeconomic backdrop, but also net new business. And also within treasury services, we've really shifted the product mix to be higher margin in that business. In asset servicing, you know, wins are up 40% year-to-date versus what they were last year. So that, too, is just speaking to the organic growth in that business. In FX, volumes were up significantly in some of that market, but a lot of that, too, is just based on investments in the FX platform that we've made. So it's really broad-based and strong.

Excellent. Thank you for all that color. And Emily, I'd like to explore some of your, I know it's very early to talk about 2022, but the expectation around expenses next year. A few questions on that. Would that modest growth be on a constant currency basis? And when we calibrate, I think you also had said that the back half of 21 is a decent base in which to build off of. Is that excluding the litigation that you guys had? And if so, could you size that for us? And when we think about modest, is there any way to calibrate that? Like, would you consider the 2021 expense growth to be modest or is it a bit more significant than that? Thanks.

So in terms of, you know, it's a bit early to really comment on 2022. We're obviously going through the entire planning process as we speak. As I did mention earlier, you know, the uplift in expenses that you're seeing in the second half of this year, you know, on the back of, you know, the investments that we are making is structural. So that, you know, those are permanent and that really, you know, will be baked into next year. As I also mentioned, you know, there are some headwinds. We're starting to see a bit of inflationary pressure. Like I said, you know, we're going to return to more kind of normalized, we think, you know, travel, and so T&E will likely go up. A bit of extra expense associated with, you know, return to the office. So, you know, there are headwinds, but of course, we're going to be looking to offset with efficiency. So, you know, I wouldn't want to put an actual number on it, but, you know, at this moment, I would say, you know, expenses for the full year next year will be modestly up, and that's just on a, you know, top line basis. They will be modestly up versus this year.

And, Brennan, we would adjust for the litigation reserves, so we would consider that part of the base.

Yeah, on a non-operating basis. I should have said that. Sorry.

Got it. And I know FX, should FX be a tailwind for you guys next year, just to follow up on that? Because I know it was a headwind this year.

It depends on where we go out. Right now, the dollar is showing a little bit of strength, which would create an expense tailwind, but it would be neutral to our pre-tax.

Right. Fair enough. Thank you.

Our next question comes from the line of Ken Euston with Jefferies.

Hi, good morning. I wanted to start by just asking you to talk a little bit more about asset servicing. You had really good underlying growth if we just keep SEC lending aside and fee waivers aside. And the deck mentions transaction activity and higher market levels. I'm just wondering if you can help us understand, like, How did the Collateral Business Act versus how did the Core Asset Servicing Act and what type of a net new wins quarter did you see on both sides? Thanks.

So, Emily, why don't I take the clearing of the collateral management business and you can take the rest of the asset servicing space. So, we saw good growth in the clearing and collateral management business as we have for a while now. In fact, One of the points I made in my remarks, for the first time we saw the collateral management numbers, our tripartite numbers exceed $5 trillion in the quarter. So we continue to see good growth there, and the profitability on the global collateral management continues to be strong. We've got innovation that is paying off there. So that attributed a bit to the growth. The other thing that we're doing, and we do this out of our markets business, but it's really a collateral management business, is the requirement to meet margining for over-the-counter derivatives transactions to meet margin requirements. And we're in phase five of six of that. And our teams did an excellent job of seamlessly onboarding a significant number of players. And that's starting to add a little bit of revenue to the So overall, that business continues to look pretty healthy and continues to show underlying organic growth. Want to comment on the rest of asset servicing?

Sure. As you think about asset servicing and just thinking about just the growth in our fees, or sorry, our AUCA, our assets under custody, they're up about 17% year on year on a spot basis. About half of that was driven by market, and the other half truly driven by growth, both from existing clients as well as new clients, probably split about 50-50. And just thinking through kind of where we're seeing a lot of that growth, about 30% of it is from investment managers, another 30% or so is from broker-dealers and banks. And then the remainder is really split between both the alternative space and the asset owner space. So we're seeing a nice uptick, and the pipeline is stronger than it was at this period last year.

Great. Thank you. And my follow-up is just coming back on the clearing business last quarter. You had said that you had expected about a $20 million impact from the deconsolidation that you discussed. Can you just help us understand how much of that was already out in the third quarter and how much more do you still expect, if any?

Sure. In Pershing, we had originally expected about a $20 million impact of the lost business due to just being on the wrong side of M&A. That is due to timing. That was a lot less. So I would think about it as the uptick will be about $15 million between the third quarter and the fourth quarter. We'll see the full impact.

Okay. Got it. Understood. All right. Thank you.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Great. Thanks very much. Good morning, folks. Most of my questions have been asked, but maybe just to follow on on a couple. So just going back on to the organic growth, obviously this is really tracking well, you know, going from zero-ish to now close to 3%. So maybe just a thought, I know 2022 is too early, but given these initiatives that you have and how you think about the revenue following through, are you optimistic that you can continue to improve upon that? you know, that 3% number and then just one on Pershing X, just in that aggregator system, does that require you to disintermediate that current custodian? So are you becoming the custodian in that process or rather would you sit on top of the current custodian and, you know, make it, you know, have a seamless aggregation of their technology services?

Okay, so why don't I take the Pershing question, and then Emily, I think you can probably handle the other one. But the Pershing, you know, Project X will be multi-custodial, so we'll actually be custodian and agnostic. Of course, we'd love to have a custodial business, but we'll be able to provide these capabilities regardless of who the custodian is, and we're working on that capability right now. And I must... I have to say this is going to – the purging in particular is probably the longest term of our investment. So this we're really investing for the future, and I think before we really start to see the revenues that we expect in that business, that's probably two or three years out. Most of the other ones that we've been talking about are a little more near term. Do you want to?

Sure. Again, we're in the middle of a planning process, so it's probably too soon to really comment on the expectations specifically for organic growth next year. But, you know, certainly we're really pleased with the momentum that we've seen this year. And, you know, we would hope to certainly achieve, you know, roughly the same amount of organic growth next year.

Okay. Okay, great. And then just quickly on net interest revenue on that 14% down guide. Not sure if I had the right base here, but does that imply – a slight downtick in NIR in 4Q versus 3Q? I know, Emily, you said you talked about the trough, and I wasn't sure if you were referring to 3Q or 4Q as the likely trough in NIR.

Yeah, I mean, you know, if you do the math, it would imply a very, you know, a slight downtick about, you know, 1% to 2% in the fourth quarter. But, of course, you know, rates are moving all the time. Like I said, we're seeing, you know, potential upside from some central banks even moving earlier than originally thought. So, you know, that's, you know, based on the last forecast, it's slightly down, but we think there's, you know, potentially some upside and hopefully it will be flat.

Okay. Okay, great. Thank you.

Our next question comes from Robert Wildhack with Autonomous Research.

Good morning, guys. One more on organic growth, if I can. How much of that is coming from competitive wins versus, say, more greenfield-type opportunities?

You want to take that? Yeah, competitive wins versus greenfield.

So, I mean, certainly when we look at the entirety of our wins, we're, you know, both, you know, wins of what we call new business. It can be new business from completely new clients as well as new business from existing clients. So as clients obviously launch new funds, et cetera, that's still new business, but it's new business with existing clients. And, of course, we're always very, very – focused on retention. So we're having the business already and still it's competitive out there, so making sure that we're retaining those deals where we are the incumbent. When you look at it, it's about 50-50 in terms of the breakdown from new versus just retention of existing business.

And I think to your point, we're definitely winning against the competition. And a couple of the ones that I even called out today, one in the alternative space that was a different service provider. We had a broader set of capabilities in addition to the ability to do the administration. So we won that business. We won a couple of large businesses over the last, takeaways over the last couple of quarters. So occasionally we lose them, but right now our win-loss ratio versus the competition is leaning toward our side. And we think that's because of the capabilities that we've got as well as the quality of the service that we've been delivering.

Okay, thanks. And just to stay on retention, how has the retention rate been trending and what kind of opportunities or things can you do to continue to improve the retention rate?

Our retention rates have been trending upwards, and we don't really disclose, but certainly they're trending upward, and they're, you know, they're very high. So, you know, well in excess of, you know, 70, 75%. So in terms of, you know, how, I mean, the first thing I would say is, you know, the first and foremost is just client service and basically performing, you know, performing well day in and day out. And that's what kind of gives you even the right to actually bid and to ultimately retain. So we're intensely, intensely focused on that. And then, of course, it's about talking to our clients, understanding their strategy. More and more, we're really working in a consultative manner with our clients, looking at their issues, their challenges, and and how we can bring the solutions of the entirety of the firm to bear to help them with their operating model and to get more efficient and to create alpha. So it's both just being good at the day-to-day and also ensuring that both our capabilities and our products are not only competitive but leading edge, and then working with our clients in a consultative and in a strategic manner.

Okay, thank you. Thanks, Robert.

And just as a reminder, if you'd like to ask a question, that is star 1 on your telephone keypad. Our next question comes from Michael Brown with KBW.

Great. Thank you, operator. I'm not sure if you guys gave this, but Emily, I was just you know, given most of your comments were on a year-over-year basis, I was just curious, given the move in the dollar and the strengthening that we recently saw, what was the sequential impact to revenues and expenses in the third quarter versus the second quarter from the move in the dollar?

Oh, gosh. Off the top of my head, I can't really – I don't have it off the top of my head, but, I mean, the good news is that actually we're pretty equally matched. So any – any benefit you have in revenues, you know, or any, sorry, any headwinds you have in expenses is pretty much equally offset in revenues. So from a PTI perspective, we're incredibly well hedged.

Right, okay. But it's going to be in the ballpark of 1% to 2% of the expense base.

Of the expense base, yeah.

Okay. And then just on the loan, book, it's up 14% year-over-year, the average loans, but just 1% sequentially, and that's the lowest growth rate we've seen in the last three quarters. Any particular reason there's a bit of a slowdown this quarter, and what's the expectation there going forward?

Just to point out, our loan book has grown by 14% year on year. There's been very healthy growth in the loan portfolio over time. Of course, growth in any one quarter can be lumpy. We did see some healthy growth. Loans on a spot basis are actually up to $64 billion. Some of the growth we're seeing is growth in margin loans, growth in collateralized lending in wealth. We're seeing growth in, you know, our term loans in terms of securities financing and also more demand in terms of capital call facilities. So, and look, we do think we have, you know, certainly, you know, we're proactively looking to grow the loan portfolio and We're very, you know, we feel that it's certainly an area that's in focus, and we've got, you know, capacity certainly to do so.

Okay, great. Thanks for that clarification. Thanks for taking my questions.

Thanks, Michael.

And with that, 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, thank you, everyone, for your interest, and obviously you can reach out to Marius and the IR team for any follow-ups. 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 p.m. Eastern Standard Time today. Have a great day.