The Bank of New York Mellon Corporation

Good morning and welcome to the 2021 Fourth Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent. I will now turn the call over to Marius Merz, BNY Mellon Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our fourth quarter 2021 earnings 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 earnings 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 January 18, 2022, and will not be updated. With that, I will turn it over to Todd.

Thanks Marius. And thank you everyone for joining us this morning. Emily will review our fourth quarter results and spend some time on our 2022 outlook in a moment. But before that, I'd like to touch on a few financial performance highlights for the full year and talk about the progress the firm has made across a number of dimensions in 2021. Last year was in many regards remarkable for BNY Mellon, and I couldn't be prouder of the resilience, dedication, and innovative mindset of our management team and our exceptional colleagues around the world. You know, as I reflected on the year, there were three broad themes that really stood out to me. One was our outstanding sales performance and improved organic growth. The second one was the number of new and innovative solutions that we're working on, and in many cases have already brought to the market. And the third was our approved effectiveness in harnessing our unique one BNY melon culture and the capabilities that we have by delivering more comprehensive and differentiated solutions to our clients. Now I'll expand a little bit at each of these points in a moment. You know, together with a supportive market backdrop and a benign credit environment, our meaningfully improved organic growth has allowed us to more than offset the stiff headwind that we had from lower interest rates and deliver a solid and improved financial performance in 2021. Referring to slide two of our financial highlights presentation, we reported EPS of $4.14 for the full year of 2021. That's up 8% year-over-year. Revenue of $15.9 billion was up slightly year-over-year as two plus percent organic growth and the benefit of higher market levels offset lower net interest revenue and higher fee waivers. Fee revenue was up 4% year over year and about 9% excluding the impact of money market fee waivers. And expenses were up 5% year over year, reflecting our investments as well as the quality of revenue that we generated. Our pre-tax margin of 29% as well as our return on tangible common equity of 17% were roughly in line with the prior year. And we returned $5.7 billion of capital or 160% of earnings to our shareholders through common dividends and $4.6 billion of share repurchases. You know, as I said earlier, 2021 was marked by outstanding sales performance and a meaningful increase in organic growth. In fact, organic growth was the highest that we've seen in a number of years. In asset servicing, wins were up almost 50% compared to 2020, which has produced a meaningful pipeline of AUCA. Our average deal size was up as we went larger and more complex businesses and, just as importantly, our retention rates also continue to improve. We believe this success is a testament to our service quality and it's also a reflection of our broader capabilities, as well as our open architecture framework, which is resonating with our clients and it's differentiating us in the marketplace. I'd also like to call out our ETF business, which has delivered substantial growth and gained market share. Our ETF AUCA grew by roughly 30%, which outpaced the broader market. And that doesn't yet include our recent win of approximately $350 billion of BlackRock's iShares. Issuer services delivered meaningful organic growth on the back of the resumption of depository receipt issuance and dividend activity following what had been a COVID-related slowdown in 2020. And it continued strong sales performance. Virgin gathered record new assets of about $160 billion and continue to grow active clearing accounts in the mid-single digits, despite the headwind of deconverting a couple of large clients in the second half of the year. Growth has been notably broad-based across broker-dealers and registered investment advisors. Clients have told us numerous times that our ability to bring broker-dealer and RIA solutions together as one is a real differentiator. And we continue to benefit from our uniquely unconflicted role in the marketplace as we don't compete with our clients. Treasury services delivered strong organic growth on the back of payment volumes recovering to above pre-COVID levels. And we improved the average price per payment transaction by about 5% as we continue to shift the product mix towards higher value added channels. Clearance and collateral management is now running at a record $5 trillion of collateral management balances. Balanced growth has benefited from our unique role as a primary clear of U.S. government securities, and we've also seen continued growth in international balances. Our markets business has offset the impact of lower volatility and tighter spreads compared to the prior year, with strong broad-based organic growth across FX and securities lending. Investment management saw the highest net inflows into long-term products since 2017, driven by our LDI and fixed income strategies, but also including strong net inflows into our responsible investment funds, as well as strengthen our initial suite of index ETFs. $70 billion of net inflows into cash products were the highest in over a decade. We optimized our money market fund lineup to provide a more competitive and scalable offering. And with our new CIO in place, we're thrilled to see strong flows and improving market share. And finally, our wealth management business acquired significantly more new clients in 2021 than in 2020. And I'm pleased to see how the team is executing against the strategic plan that we put in place a few years ago. We've continued to gain further traction in the larger, faster-growing client segments. And our expanded banking offering, both on the lending as well as the deposit side, has driven a meaningful uptick in the percentage of wealth management clients who also bank with us. The second theme I mentioned earlier was innovation in some cases it's been outright disruption, this is probably the area that is most exciting for us. You know I cannot recall my tenure at the company year in which we launched or rolled out more innovative products and services than we did over the last 12 months. i'll call out just a few digital assets, while still early days and recognizing that the regulatory landscape for the space is still evolving. Our investments in building an industry-first integrated digital and traditional assets offering are clearly showing positive initial results following the launch of our digital assets unit at the beginning of last year. We solidified our leadership in servicing crypto funds with the announcement of our partnership with Grayscale Investments over the summer. We've contracted with almost half of the pending funds in the US and service most of the crypto funds in Canada. As I said it's still early days but we're excited about the disruptive potential of tokenization as well as smart contracts and the associated opportunities, both on the revenue, as well as the efficiency side. In terms of real time payments, this is an area that we embraced early on, and we continue to lead with innovative solutions to drive the proliferation of real time payments in the US, you may remember that we were the first. bank to originate a payment on the Clearinghouse's real-time payments network several years ago. In late last year, we were the first to launch a real-time bill pay solution from billers and their customers. We're pleased by the initial uptake. We've already onboarded additional clients and the long list of interested prospects continues to grow. As you know, the market for treasury services is large and it's growing, but it's still very fragmented and ripe for disruption. So we're excited about the market leadership coming out of our treasury services business. It really goes far beyond just real-time payments and include examples like being able to leverage the cloud for wire payments and having been the first bank to complete a trade finance deal using SOFR. The third item is the future of collateral. As the world's largest global collateral manager, we continue to lead the charge on driving towards global collateral mobility and optimization by connecting distinct platforms, expanding the scope of eligible collateral and implementing new capabilities. For example, last year we introduced Chinese bonds as eligible collateral on our global tri-party platform. And we were the first bank to add agency mortgage-backed securities as collateral on overnight cleared repo transactions. And another first, we started offering our clients the ability to accept collateral based on their ESG criteria through our digital platform. And finally, I'd be remiss not to mention the launch of Pershing X, which we introduced last quarter. Pershing X will design and build innovative solutions for the advisory industry, including a leading end-to-end wealth advisory platform that will help firms and their advisors solve the challenge of managing multiple and disconnected technology and data sets. While certainly a multi-year project, the team has hit the ground running In this past quarter, we acquired optimal asset management, which is not only an important step in our build-out of Pershing X, in that it will allow us to offer direct indexing capabilities to our advisory clients within Pershing, but it will also benefit our investment management business as well. The third and last theme is what we call One BNY Mellon. Now, I've always been proud of our collaborative culture here at BNY Mellon, and as you know, our broader portfolio of businesses differentiates us from our competitors. Over the years, we've emphasized the interconnectivity of these businesses and the meaningful operational synergies between many of them. But we can still do a better job at delivering the whole firm to our clients. And so last year, we conducted a thorough review of the opportunities and further enhanced our setup for cross-business collaboration. Now, I've been highlighting some of the most notable cross-business client wins, such as Mundi, Lockheed Martin, and Oak Hill, on our earnings calls over the last couple of quarters. Our ability to seamlessly deliver a much broader set of capabilities from across our security services, our market and wealth services, and investment and wealth management businesses is a unique value proposition for our clients in our intensified collaboration efforts already driving higher revenues. In summary, I'm pleased with the progress we've made over the last 12 months. And while we certainly have more work to do, I'm confident that the company is on the right path for sustainably higher organic growth. As we look to 2022 and beyond, we expect double digit earnings per share growth as we are determined to continue delivering consistent organic growth, which together with the current expectation for higher rates should enable us to generate positive operating leverage while at the same time continue investing in the growth and efficiency of our business. With that, I'll turn it over to Emily.

Thank you, Todd. And good morning, everyone. Before I review our financial results, I would like to spend a moment highlighting our new financial disclosures. Last month, we announced that starting with the fourth quarter, we're going to report investment services, which was our largest segment, as two new business segments. Security services, which includes asset servicing and issuer services. and market and wealth services, which includes Pershing treasury services and clearance and collateral management. Our third segment investment and wealth management remains unchanged. We made this change to increase the visibility of some of our most differentiated businesses to better align our reporting with how we already manage the firm and to provide additional granularity for all of our stakeholders to better track our performance against our strategy. With that, I will turn to page three and our results for the quarter. All comparisons will be on a year-over-year basis, unless I specify otherwise. Total revenue for the fourth quarter was up 4%. Fee revenue also grew by 4%, or 8%, excluding the impact of fee waivers. This reflects the benefit of higher market values and continued healthy organic growth. While not on the page, Firm-wide AUCA of 46.7 trillion increased by 14%, with roughly 60% of the increase driven by growth from new and existing business, and 40% driven by higher market value. And AUM of 2.4 trillion increased by 10%, reflecting higher market values and full year net inflows. Money market fee waivers, net of distribution and servicing expense, were $243 million in the quarter, an increase of $10 million compared to the prior quarter, entirely driven by higher money market fund balances with no meaningful impact on pre-tax income. Investment and other revenue was $107 million and included a roughly $40 million valuation gain on a strategic equity investment. Our investments continue to pay off both strategically as well as in the form of higher valuation. Net interest revenue was flat. Expenses were up 1% or 6% excluding notable items. Our provision for credit losses was a benefit of 17 million, primarily driven by an improvement in the macroeconomic forecast. EPS was $1.01. This includes a 4 cent negative impact of litigation reserves and severance expense, as well as a 2 cent positive impact of the provision benefit. Retax margin was 27%. And our return on tangible common equity was 17%. Quickly for the full year, which Todd summarized earlier on page four. Total revenue grew by 1%. reflecting higher fee revenue partially offset by lower net interest revenue. Fee revenue grew by 4%, or 9%, excluding the impact of fee waivers. Investment and other revenue was $336 million, a strong year with meaningful gains on our strategic equity portfolio. And net interest revenue was down 12%. Expenses were up 5%, both on a reported basis, as well as excluding notable items. Excluding the impact of notable items, nearly half of the increase was driven by higher net incremental investments. And the remainder was roughly evenly split between revenue related expenses and the unfavorable impact of the weaker US dollar. Provision for credit losses was a benefit of 231 million. EPS was $4.14. Our pre-tax margin of 29%, as well as our return on tangible common equity of 17%, were roughly in line with the prior year. On to capital and liquidity on page five. Our 2-1 leverage ratio, which is our binding capital constraint, was 5.5%, down approximately 20 basis points sequentially. I'm rarely driven by the return of one and a half billion of capital to our shareholders in the quarter, including 1.2 billion of buyback, our sales debt by earnings. And we ended the quarter with a CET one ratio of 11.1% at approximately 60 basis points compared to the end of the prior quarter. Finally, our LCR was 109% slightly lower than in the prior quarter. Turning to our net interest revenue and balance sheet trends on page six, which I will talk about in sequential terms. Net interest revenue was $677 million in the fourth quarter, up 6% sequentially. This increase was driven by the impact of higher short-term rates on floating rate securities on our investment portfolio, disciplined deposits and liability pricing, and higher loan and securities balances in the interest earning assets. Average deposit balances increased slightly by 1% sequentially. And while interest earning assets were roughly flat, average loans increased by about 6% with growth primarily driven by margin loans, collateralized loans and wealth management, and growth in capital call financing. We also deployed some additional cash in HGLA securities resulting in a quarter over quarter increase of the overall average investment securities portfolio of 2%. Moving on to expenses on page seven. Expenses for the quarter were 3 billion of 1% year over year. Excluding the impact of notable items, expenses were up 6%. Just over half of which was driven by incremental investments net of efficiency savings and the remainder by higher revenue related expenses including higher staff expenses. A few additional details regarding no worthy quarter over quarter expense variances. Staff expense was up 3% driven by severance expense and incentive compensation. Net occupancy expense WAS UP 11%, DRIVEN BY EXPENSES ASSOCIATED WITH EXITING LEASE SPACE AS WE CONTINUE TO OPTIMIZE OUR REAL ESTATE FOOTPRINT AND SOME EXPENSES RELATED TO RETURN TO THE OFFICE. BUSINESS DEVELOPMENT EXPENSE INCREASED DRIVEN BY HIGHER MARKETING EXPENSES AS WELL AS T&A. OTHER EXPENSES WERE DOWN IN THE LOWER MITIGATION RESERVES. ON TO PAGE 8 FOR A CLOSER LOOK AT OUR NEW SIGNATURE. SECURITY SERVICES REPORTED TOTAL REVENUE OF 1.8 BILLION OR UP 5%. LET ME JUST DESCRIBE A LITTLE ABOUT WHAT MAKES UP THIS 5% INCREASE. FEE REVENUE WAS UP 6% AND UP 10% EXCLUDING THE IMPACT OF FEE WAIVERS. INVESTMENT AND OTHER REVENUE BENEFITED FROM A GAIN ON STRATEGIC EQUITY INVESTMENT. And net interest revenue was down 3%, driven by lower interest rates, partially offset by higher loans and deposit balances. As I discuss the lines of business within our security services and market and wealth services segment, I will focus my comments on the investment services fees, each of which you can find in our financial supplement. In asset servicing, investment services fees grew by 10%. Excluding the impact of fee waivers, investment services fees were up 12%, primarily driven by higher activity from existing clients, higher market value, and net new business. Our strong performance last year came on the back of already healthy sales in 2020. And we gained further sales momentum in 2021 as our continued investments in innovation are paying off. In issuer services, investment services fees were down 3%. But excluding the impact of fee waivers, investment services fees were up 1%. Healthy growth in depository receipts was largely offset by the impact of the previously disclosed discontinued public sector mandate in corporate. FX revenue in our security services segment increased by 6% as solid volume growth from existing and new clients more than offset the impact of lower volatility. Next, on to market and wealth services on page nine. Market and wealth services reported total revenue of 1.2 billion, up 1%, primarily driven by higher net interest revenue and fees. Fee revenue was up 1% and up 4% including the impact of fee waivers. The interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates. In Pershing, investment services fees were down 2%. However, excluding the impact of fee waivers, investment services fees were up 3%, and the impact of clients lost earlier in the year was more than offset by growth on the back of higher market values, client balances, and activity from existing clients. The business continued to see good underlying growth. Net new assets in the quarter were 69 billion, and clearing accounts were up 5% year over year. In treasury services, investment services fees were up 4%. Excluding the impact of fee waivers, the investment services fees were up 8%, primarily driven by higher payment volume. And in clearance and collateral management, investment services fees were up 7%, reflecting broad-based growth on the back of higher tripartite collateral management balances and clearance volumes, both in the US and internationally. Turning to investment and wealth management on page 10. Investment and wealth management reported total revenue of $1 billion, up 3%. Fee revenue was up 4% and 9% excluding the impact of fee waivers. Net interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates. Asset center management grew to $2.4 trillion, up 10% year-over-year, reflecting higher market values and full-year net inflows into both long-term, specifically LDI and fixed income, and cash products. For the quarter, we saw $31 billion of net inflows into cash and $4 billion of outflows for long-term products. Investment management revenue was down 1%. However, including the impact of fees waivers, revenue was up 6%, primarily driven by higher market values and full-year net inflows, partially offset by lower seed capital gains and performance fees. Wealth management revenue grew by 13%, driven by higher market value, the absence of a loss on a business sale in the fourth quarter of the prior year, and higher net interest revenue on the back of healthy loan growth as we continue to deepen buying relationships into banking. High assets continue to grow at a steady pace and worth $321 billion of 12% year-on-year. Page 11 shows the results of the other segments. I will close with our outlook for 2022 on page 12. I'll start with a reminder that our outlook is based on the current forward curve. With that in mind, we currently expect NIR to increase by approximately 10% in 2022, primarily driven by higher rates and balance sheet mix, partially offset by an expectation for lower deposit balances. Our expectation for continued organic growth and lower fee waivers results in total fee growth of approximately 7% in 2022. More specifically, we expect roughly 4% of the 7% increase to be driven by the recovery of money market fee waivers based on the current forward curve and assuming some runoff in money market fund balances from current level. We expect roughly 2% to be driven by organic growth and approximately 1% by market driven factors. And as a reminder, we generally expect a quarterly run rate of around 60 million for investments and other revenue. But as you know, this line can be lumpy due to seed capital gains, strategic equity investments, and other components. For expenses, X notable items, we expect an increase of approximately 5.5% year over year. Roughly 60% of the increase is expected to be driven by higher revenue-related expenses, which include higher distribution and servicing expenses associated with fee waivers and the impact of inflationary pressures. The remainder is driven by investments, roughly half of which is just the annualization of incremental investments in the second half of last year. Specific to the first quarter, I'd like to remind you that staff expenses are typically elevated due to long-term incentive compensation expense for retirement eligible employees. As a result, we expect first quarter expenses X notables to be up approximately 6% year over year. With regards to capital management, we expect to return roughly 100% of earnings subject to changes in AOCI and deposit balances. And for the sake of completeness, we continue to expect our effective tax rate for the year to be approximately 19%. To sum up, and as Kat alluded to earlier, we expect to generate positive operating leverage on the back of continued organic growth and a higher rate, translating into higher NIR and lower fee waivers, while continuing to invest in the future growth and efficiency of our businesses. 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 Glenn Shore with Evercore ISI.

Hi, thanks very much. I wonder if you could unpack the net interest revenue comments of Outlook for around 10%, maybe just trajectory-wise, meaning I'm assuming you're assuming the forward curve. And so just talk about the timing as that comes in, and you can combine that with how quickly the fee waiver recapture happens along that forward curve. Thanks. Emily? Sure.

Sure. Sure. Good morning, Glenn, and happy New Year. I'm actually really glad you kicked off with NIR because it's the first time in a long time we've got something positive to say. So NIR, as we mentioned, is expected to be up about 10% year on year. To give you color, just specific to the questions you asked, Yes, we just used the forward curve, and as you know, it at the moment anticipates three rate hikes, 325 basis point rate hikes, the first being in March, although, of course, there's talk about the first one being a bit more, and we can talk about the sensitivity there. Deposit betas obviously come back into play. The expectation in our outlook is that betas will largely retrace what we saw in the last cycle. They could be a little bit higher, but Just given the change in our deposit mix, so for example, Treasury Services, the top deposit base there is about twice as big as it was in 2015, and obviously that business has higher betas. We expect our securities portfolio to be roughly flat. Most of the reduction on the asset side will be coming from cash held at central banks and lower yielding HQLA. We do continue to be cautious In fact, over the last six weeks, we've brought duration in a bit and we've actually moved some H2LA into HTM to preserve capital. Also, we are expecting some healthy loan growth and for premium amortization to reduce a bit. Just one thing I do want to just point out is that for the first quarter, just given that the first rate hike is not until March, Also, it's just worth mentioning we've already seen deposits come down a bit from the fourth quarter average where they were really at elevated levels due to kind of market dynamics. So you won't see much of that benefit, you know, sequentially in Q1. Okay.

Got a lot there. Thank you. And maybe just one other good picture. I think I heard you say in the prepared 2% organic growth in 22-ish, which would be in line with 21 and obviously better than 20 and 19. So I guess the question is when you look at investments you're making and align it with your fee outlook, I'm just curious how you can contextualize what's What's there related to markets that have already gone up, business that has already been wanted to be implemented, versus follow-through and revenues related to new investments, the investments that you're making in new businesses?

Thanks. So, Emily, maybe I'll take that one. So a lot in that one here. But a couple of things.

When I look at collateral management, that's one where we have been investing for quite a while, and we invest in what we call the future of collateral, which is really making collateral interoperable around the world, which we thought would lead to growth, especially in our international assets, which is exactly what it has done. Also, benefiting from some of those capabilities is the responsibility now of for derivative players to have collateral against their uncleared margins. We're now going through phase six of that, so we are picking up significant assets as a result of that. And we've also added certain innovations to our capabilities. For example, the ability to have ESG criteria established in a repo and what you'll accept on repos. So that's something that's shown some pretty interesting growth. That's something where we have been gaining and it's shown up in the numbers and we continue to expect to continue to gain. I mean, one of the other interesting things that we've brought up is what we're doing in our treasury services and payments business. And I think we've reinvigorated that business with some meaningful investment. We were the first, as you know, to do an RTP, a real-time payments through the New York Clearinghouse. That was done essentially to test it, but now we were actually putting practical product in place. So we announced late last year a request for payment service that we're providing to utilities. That operation, now we have multiple players on that platform. And we see opportunity, whether it's brokerage firms, insurance companies, corporates, or white labeling it for mid-sized banks there. So I think some of the innovation that we're seeing in the Treasury service is We have not seen that drop to the bottom line yet. We've picked up, we've captured a little bit of market share and a little bit of the better price stuff coming into this. We've talked a fair amount about Pershing X, which is a significant multi-year investment that we are making in our Pershing platform, specifically on the advisors to simplify and make the advisory function much more productive for our clients. We made an acquisition of a direct indexing firm in the quarter. We decided to buy rather than build for speed to the market, and that group is going to be able to tailor portfolios and provide tax optimization down to the individual level. That hasn't started yet, so that'll start probably by the end of this year, and we'll be continuing to invest. So we see that not as a 2022 event, but a 2023 and 2024 event. nice growth in our wealth management business. And here we've invested in some of the technology and we've won some recognition for the quality of some of the advice paths and kind of the wealth management tools that we've put in place for our clients there. On the asset servicing side, we've talked about the digital assets unit that we've put in place. It is garnering assets quite rapidly as we've gotten most of the pending ETF crypto assets that are coming in the US and just in a very high percentage offshore, especially in Canada. We've also got the, we developed an ESG app where we're starting to see some revenues flow on that. And we're investing just in the basics of custody because we think we can catch, we can capture more of the developing markets custody. So it's kind of a mix, still some on the come, but some of it embedded in our run rate today.

Thank you.

We'll go next to Brian Bedell with Deutsche Bank.

Good morning, everyone. Happy New Year. If I can circle, if I actually start off on fee revenue with assumptions, really start on the fee waivers and just the trajectory of that, Emily. Just to clarify, I think you said three rate hikes and the forward curve, I think the guidance was as of December 31st, so I'm not sure if the forward curve, you know, sort of, right, it's like advancement of the curve and expectations getting a little bit more you know, aggressive in the market for FedHikes impact. So maybe if we could just walk through the money market fee waiver trajectory through the year and really circling back to the portion that gets released after the first hike and then maybe after the second hike. And then just on the equity market assumption, equity market return assumptions within that market, that 1% market impact.

Sure. So a bunch there. So let me take the waiver outlook first. So remember, waivers are a function of both balances also and, you know, and rates. And you're correct. We are just looking at the full and our guidance is baked in the forward curve with three rate hikes. We have pointed out in the past that with the first 25 basis point hike, we would expect to recoup about 50% of the waivers. Um, having said that, uh, we do also expect that balances to begin to decline a bit, especially by call it, you know, the third or fourth, you know, third or fourth hike. So we do see, you know, expect some runoff in, in, uh, in balances. Um, so when you put it all together, um, we would expect, uh, money markets on waivers to be a little less than half of what they actually were in 2021. Having said that, it's very important to note that as waivers dissipate, we also do see a rise in distribution expense, and that's been captured in the expense outlook. To give you an idea, you know, just, sorry. To answer the second question, which was more about sensitivity, just, you know, I think something that would probably be helpful, if if we sized the impact of both waivers and frankly, NIR, if we had say a 50 basis point hike in March versus a 25 basis point hike, that would be about $100 million more in recouping waivers than what's in our guidance. And it'd probably be about 50 million more in NIR. So a total, you know, if the March hike was 50, not 25, it'd be about another 150 million more in terms of revenues versus what I've guided. And then I think you had one more part.

The equity market return assumptions within that 1% of fee contribution from sort of markets.

Sure. So just to step back, total fee revenue up 7%. roughly 4%, you know, driven by the reduction of waivers, roughly 2% organic growth, and then 1% from market-driven factors. Market appreciation is kind of a little over 2%, but it's offset by lower fund fees and some currency headwinds just based on the average for, you know, FX rates over the course of 2021.

Got it, got it. And if I could just circle back on the NIR deposit runoff assumptions in terms of the magnitude. that you're expecting and then also just the assumptions for global short-term rates, I guess, particularly in the UK and how that might influence the NIR assumption?

Sure. So, ultimately, from a deposit perspective, we don't really expect much runoff in deposits from here until kind of, again, you know, third or fourth rate hike or the Fed starts to actually tighten. So, you know, it's, you know, ultimately it's, you know, balances, as I mentioned, have already come down a bit from average fourth quarter levels. And in terms of the particular, just speaking, you know, specifically about betas, which is what I think you're probably getting at, we do think they'll be largely in line with the past. Like I said, you know, before, maybe a little bit higher. Treasury services deposit balances are higher. Also, just always keep in mind that our deposit base is largely institutional. Also, in the 2015-16 period, we were trying to come into compliance with SLR, so we were pushing some deposits off balance sheet, but all of that is baked into the NIR guide that we gave.

And it's just the global rate, like the Bank of England assumptions for – It's all – yeah, it's all the forward curve.

It's all the forward curve.

Same thing. Same thing. Okay, great. Okay. Thank you so much.

We'll go next to Betsy Grasick with Morgan Stanley.

Hi. Good morning.

Hi, Betsy.

Good morning. I wanted to follow up on that discussion we just had and ask about how you're thinking about the impact of QT, quantitative tightening, on deposits. Is the Fed expected to shrink the balance sheet, potentially starting as early as March?

Thanks, Betsy. This is Todd. I'll take this one.

Right now, it depends on when they actually start to actually shrink the balance sheet. The guidance that we've heard is that's probably not an event until the second half, and so that's the estimates that we have put in to both the betas and the size of the balances, whether it be money market balances, because it will certainly impact them, or it is deposit balances. But assuming that they don't start really letting stuff run off until the second half of the year, we don't see an enormous drawdown in the combination of money market balances because the Fed's balance sheet just isn't going to contract that much in 2022. We might see that a little more rapidly in 2023 unless they were to do something even more aggressive like selling. We took the basic assumptions, market assumptions that we've seen, and that's implied in all of the guidance that Emily just gave you, which is a little bit of runoff of balance sheet, of the Fed balance sheet in the second half, which starts to impact both deposits and money market balances as well.

Okay, so you're basically looking for the Fed to stop buying but not actively shrink.

I don't think they'll actively, our estimate is that they won't actively sell, but they will actively let securities run off.

That's what's in the estimate. All right. And then the follow-up question I had on the expense discussion, just thinking about how to model the expense ratios by the new segments that you've got. Obviously, the new segments are really helpful. Really appreciate you breaking out the wealth piece. Can you give us some sense as to how we should think about modeling that expense ratio in the various segments as we go through 22?

Emily, you want to take that? You may want to start with that.

Sure. Sure. So, I mean, I'll just, you know, taking a step back first, just the overall expenses, you know, 5.5%, and just to be clear, about 30% or 170 basis points are really revenue-related expenses. I think volume-related compensation as well as, as I mentioned, the distribution expenses that we will see an uptick in for money market funds as the waivers come back or as we get the dissipation, I should say, of waivers. About another 30% or 170 basis points again is merit, you know, the normalization of business expenses and some also expenses just related to occupancy as we return to the office and baked in there too is inflation, which is not insignificant. And then the remaining 40% or 200% is due to higher investment spend But, you know, just to be clear, half of that is annualizing investments that we have made in, you know, in the second half of this year. As you all know, we had an uptick of investments in the second half of this year. I would think of it as, you know, we're not breaking it down to too much, you know, and ultimately in market and wealth services, you know, given some of the investments that we're making, especially in Pershing X, as Todd alluded to. But we are making investments across the firm. So I would say, you know, a bit higher there, but, you know, the rest kind of in or around the average. Got it.

Okay, so not that much differential outside of the call-out on Pershing. Mm-hmm.

Yeah, but I do think, Betsy, we will see the operating margins in our security servicing business. Those are depressed right now, and I do think you'll see those expand, both combination of greater efficiency and revenue mix.

Okay. SKU2 rates is also a little higher there.

Yeah. Yeah. Exactly. Yeah. Okay. Yeah.

We do. I mean, just further to Todd's point, you know, security services, the margins there are depressed. You know, they're in a little over 20, you know, 21% for the year. And we do expect, and I talked about this, you know, at the last conference I was at, we do expect that to, you know, grow in excess of 30, you know, 30 plus percent over the medium term. And as Todd alluded to, part of that is certainly profitable growth and, of course, efficiency. And the other part of that is obviously just a more normalized rate. Okay.

Thanks so much, Todd and Emily. Appreciate it.

Thanks. We'll go next to Jim Mitchell with Seaport Global Security.

Hey, good morning. Maybe just a follow-up on the expense question. I guess this is about the second year in a row, close to 6% growth. Just how do you, and I understand all the inflationary and other moving pieces, but how do we think about longer term? You know, if you're doing 2% organic growth, hopefully doing better, is the notion that you can get expense growth down to similar to the organic growth and then sort of market and other things drive sort of operating leverage? Or how do we think about the long-term trajectory of expenses relative to revenues?

Sure. So I think you're getting at operating leverage. And we're always incredibly focused, obviously, on operating leverage and delivering positive operating leverage. And next year, we are expecting, just based on my guidance, to grow revenues more than we're growing expenses. So that's good. When we think about the future and just the expense spend, you know, we do see that ultimately moderating in 2023 and 2024. So, you know, you'll see that coming down a bit in 2023 and 2024. And, of course, we, you know, have, you know, we'll continue to see an uptick in rates and higher, you know, NIR will recoup probably the remainder of our waivers. That plus the additional organic growth that we also will be delivering, we feel pretty confident that we'll, you know, we'll be delivering even, you know, higher operating leverage, you know, 2023, 2024. But we are delivering positive operating leverage in 2022.

Sure, sure. I would add something. And let me add something to that. You know, we're doing something that's a bit unusual for us. For example, with Pershing X, we're making a very significant investment here that's probably got a two-year payback. We've also been continuously investing in resiliency, and I think we're starting to get in front of that. And, you know, the inflationary pressures, hopefully this is just a one-time kind of step up. But, you know, the market will have to play itself out. So we do think that we're we're spending a little faster than we would in a more normal environment. And we do expect that we will get more leverage out of our business model as we just continue to make it more scalable.

Right. Okay, that's all very helpful. And just as a follow-up, if you're expecting deposits in the balance sheet to shrink as the Fed raises rates, why the need to issue preferred just flexibility? I'm just trying to understand the preferred issuance.

Sure. Yeah, just more, you know, more flexibility. We were also just opportunistic in terms of rates. And, you know, ultimately, too, you know, you have to prepare for if rates rise, you know, there obviously will be a corresponding impact on OCI. So, you know, all of those factors.

Okay.

Thanks.

We'll go next to Mike Mayo with Wells Fargo Securities. Hi, can you hear me?

Yeah, but there's some background noise. Is that better? Yep. Okay. I'm going to just give what I think I heard you say, then I'll let you correct me. What I think I heard you say is that this year is an investing year, that you're guiding for 2% organic fee growth or 3% with markets, versus expense growth of 5.5%. So it looks like you're spending about half of the benefits of the money market fee waivers to invest. I'm not saying a cause and effect, but that's the way the math works. You said, you know, 40% of that increase in spending relates to accelerated investments. And then after this investing year, 2023 and 2024, that moderates, and then we should see more of those benefits. So am I hearing that correctly, and am I also interpreting that you're taking a portion of these benefits to reinvest back in the business, especially in 2022? Sure, Mike.

Yeah, I'll take a stab at that. I think what you're asking very specifically is what portion of the uptick from rates, both in NIR and recouping waivers, are we kind of reinvesting? I mean, I think that's what you're getting at. And, I mean, just to be clear, and you can do the math, I gave you the math, that the higher rate environment, both from a NIR perspective and from a waiver perspective, is you know, a bit over call it 700 million in revenues for the year with this forward curve, et cetera. The way I think about the expenses and what we're kind of reinvesting of that and based upon the expense guide I gave, you can also do the math that call it, you know, 100 to 150 million of the expense growth is related to incremental investments net of efficiencies. So, you know, call it 20% or so of that is being reinvested.

Okay. I guess I'm just trying to reconcile when you said 2% organic fee growth with 5.5% expense growth, some of that is just for factors outside of investing, as you said, inflation, occupancy, merit, revenue-related. So it's just the cost of doing business. The other question is why wouldn't the NII Guide be higher assuming that the securities portfolio will remain flattish?

I mean, ultimately, there's many factors that go into, you know, many factors that go into our NIR guidance. So it's a, you know, it's a mix of, I suppose, probably the main reason is deposits coming off a bit. That would probably be the largest reason.

And are you being conservative? Mike, we do anticipate contraction of the balance sheet. So it's going to come from more short-term cash that's paying a little bit lower yields. And I think your follow-up question is, are we being conservative? We're trying to reflect what exactly the market is indicating through forward curves. The guidance that we've given you isn't speculation. It's only speculation in the sense it's the best estimate for betas and for what's going to happen to the yield curve using the forward yield curve as the guidance for it.

Yeah, last one. Just the contraction of the balance sheet, like by how much, and there's not much history for this, right, going to this phase of the rate situation. So are you thinking, you know, a tenth, a fifth, or just roughly – In broad terms, how much contraction of the balance sheet and why?

Emily, I'll take it.

Sure.

Are you going to take it? Go ahead, Emily.

I can take it. Yeah. Ultimately, to be clear, we did see – I just want a reminder – we did see balances already come down from fourth quarter averages. We don't really attribute that to kind of runoff, obviously, from rates. From rate rises, it's more about just elevated levels and market dynamics in the fourth quarter. And then from here, the way I kind of think about it is we probably won't see much more runoff until the second half. Like I said, it's really after the Fed really hikes a few times. And, you know, I'd say kind of single-digit, you know, reduction.

Okay. Thank you.

In this year. In this year.

Yeah. Right. Right. Thank you. Thanks, Mike.

We'll go next to Gerard Cassidy with RBC.

Good morning, Todd. Good morning, Emily. Good morning, Gerard. Good morning. Todd, I want to come back to something you said in your prepared remarks that your new business wins, I think you said, are up 50% from 2019. It seemed like a very strong number. How does that compare to a prior two years, you know, from 2016 to 2019 maybe? And second, what were the main drivers? Was it, you know, better products, better pricing? Your people are just hitting it harder? Can you give us some color on what drove that strong number?

Sure. So we had run, for a couple of years there, Gerard, we were literally running negative organic growth. And so maybe four years ago, I would say some of the service levels weren't up to par, and we turned that around.

So we made a very significant investment in the quality of the service that we're delivering.

We did provide some innovation around our whole bundle, what we can deliver, some of the connectivity that we made to some of the OMS providers,

our data and analytics capability, and most importantly, the quality of our service in the asset servicing space. And that became noticeable. And both the combination of investing in technology and the quality of service that we delivered, we started picking up some market share. And so I would say that was the primary driver and And it's been a mantra here. In fact, when Emily was back on the asset servicing side, she did a great job of putting together real analytics to support and understand exactly what was going on with our clients and adjust accordingly. So I think it's a combination of the two. Clients are going to be with you. They expect that you're going to be investing for the long term, that you've committed to it, and we've demonstrated that. And number two, you've got to do the basics, the meat and potato stuff for them as well.

Very good. And as a follow-up, you guys gave, obviously, the outlook for 2022, which is much appreciated. In that outlook, you talked about the share repurchase or the total payout ratio approximating 100%, and subject to changes in the AOCI or maybe deposit balances. On the AOCI, if I saw it correctly, I may have not seen it correctly, but it looked like it was a negative $2.2 billion at the end of the fourth quarter. Can you share with us what drives that number and how it could affect the total payout ratio as the year progresses?

Sure. Go ahead, Emily.

Well, I guess. So thinking about just the payout and we could talk about AOC. I'm not sure I recognize the number that you're talking about, the $2 billion. But in any event, we were fortunate, obviously, this year or 2021, I should say, to be able to pay out 160%, obviously helped by the fact that we had excess capital limited by a lot of what we could do in 2020 and the first quarter of 2021. The guidance that we're going to pay out around 100% of earnings is baked into that, our AOCI assumptions, et cetera, so it's all there. Basically, our capacity and the pace of the buyback is going to depend certainly on you know, future earnings, the economic outlook, the size of the deposit base in any given quarter and what we're expecting. And you're right, the trajectory of OCI. But all of that is baked in to the guidance. And the thing that, you know, frankly that's nice is that, you know, for these days in terms of capital management, we're now under the SEB framework, so we certainly can be much more dynamic and flexible.

I see, and just on the AOCI, Emily, what part of the yield curve has the biggest effect on your AOCI, the short end or the long end, the middle?

The short end.

Okay, great. Appreciate it. Thank you.

We'll go next to Ken Easton with Jefferies.

Hi, thanks. Good morning. I just want a follow-up on balance sheet positioning to Gerard's question. So, you know, you're at the lower end of that tier one leverage ratio zone, five and a half to six that you've talked about. And I just want to understand a little bit deeper, you know, that flexibility with regards to changes in OCI versus PREFs. Are you solving for five and a half at this point? Like, how will you look at, like, where you want to be in that range? And to your point about SEB, you know, how important does maintaining the buyback B versus just staying in a right zone of capital. Thanks.

Sure. So I can take that, and Todd, you can add. So tier one leverage this quarter, as you guys can see, in the fourth quarter was 5.5%. If you really do the math, which you all have all of the factors to be able to do it yourselves, it was 5.46%. So we did dip into the buffer just a bit. We always talked about the fact that that would be entirely appropriate given the excess liquidity in the system and the growth in our deposits. So going forward, we're going to be managing to 5.5%, and we're optimizing around a lot of different things, including OCI. So baked into our guidance is certainly our expectation that we'll be above 5.5%.

Okay, so we consider all those factors, perhaps OCI, balance sheet size, and you kind of sit somewhere in that zone.

You got it.

Okay, all right. And then second question, just on that related point. If I back out premium amortization, it looks like the securities portfolio yield is kind of getting to a flat point in what looks like the mid-140s. Can you talk about just What you're finding in terms of front book versus back book, and again, does that OCI risk change your view of how you're investing in the securities portfolio from here? Thanks again, Emily.

Okay, so a couple of different things there. So look, talking about reinvestment yields, we don't really disclose front book versus back book. What I would say is that, and this probably answers a bit of Mike's question earlier, which I hadn't thought about, But, you know, reinvestment yields will still continue to be a bit of a headwind over the course of 2022. So, you know, the yield that we're investing in now is still lower than ultimately the yield of securities that are maturing. I think we would expect that to probably be a lot better matched or equally matched almost by the fourth quarter. It's really in the fourth quarter. So that will still be a headwind. And look, we're thinking about and certainly paying attention to OCI. And as I mentioned in my earlier remarks, you know, we did even move some HQLA to HTM exactly for that reason, to preserve capital.

Understood. Okay. Thank you.

We'll go next to Brennan Hawkins with UBS.

Good morning. Thank you for taking my questions. I had a follow-up. So, Emily, I think it seems like from your comments when you backed into the components of expense growth, something like roughly one percentage point of the 5.5 is from the distribution side of the fee waivers. Number one, if you could confirm that that's correct. And then number two, that means if we adjust for waivers, because we all got very much used to adjusting for waivers from last year when you guys were talking about the revenue, ex-waivers, and then wanting to drive more investment. It looks like ex-waivers, we're looking at negative operating leverage here because you back out the 4% benefit from fee revenue. That gets you to a 3% fee revenue growth ex-waivers. If I'm right on the 1%, you're at 4.5% on expenses ex-waivers. And so negative fee operating leverage um given given that last year we were adjusting for the waivers and backing them out to consider where the few fee operating leverage was why not maintain that same discipline now and what's um what's the major issue with holding back uh that uh that the operating leverage thanks sure so um i'll i'll uh take that and todd if you want to add so

You're thinking about the expense, the distribution expected largely in the right way. And look, your question about operating leverage is that our level of investment is not planned by nor dictated by operating leverage. It's based upon the investments that we see and the future growth of the company. Uh, in terms of, uh, what you call fee operating leverage, uh, yes, you're right. It's in, in 2022, it will be, you know, it will be negative. Um, but we're not going to be apologetic about, you know, investing in the future of the company. And we've continued, um, you know, to do that over the course of the cycle.

Okay.

There we go. All right. Thank you. Um, thanks for that color. And then, um, The assumptions around the single digit decline in deposits, are excess deposits still at 10 to 15%? And when we start to cross the 75 basis point, two, three hikes, where you start to see an acceleration of deposit runoff, wouldn't that 10 to 15% of excess deposits burn off pretty quickly? Or do you have a different view or have the excess deposit levels changed? You know, maybe if you could add a little color around some of those assumptions to help us square that circle, it would be helpful.

Sure. So, I think your estimate of excess deposits is probably pretty close to what we're currently thinking. But you've got to remember underneath it there is some organic growth as well. So if you take the 10 to 15 and then you're growing, you know, 2% to 4% organically, and then you don't look to see the Fed really contracting their balance sheet very aggressively until later in this year, we don't see a huge impact on this year. It's really going to depend around, you know, the beta. So you might see money bouncing around based on what we and others are willing to actually pay for it. So that's what's factored into it, but ultimately I think those excess deposits will come down with mitigated somewhat by just normal growth.

Okay, got it. Thanks for taking my questions.

We'll go next to Alex Bloestein with Goldman Sachs.

Hey, good morning everybody. Just a couple of questions at this point. I heard the discussion around deposit betas perhaps being slightly higher this time around because of the Treasury services side of the business. Is there a way you can flush that out a little bit more just to give us a sense of what you expect for deposit betas in this cycle versus the prior cycle?

Yeah, I'm not going to break it out by line of business, but, you know, in the last In the last cycle, I think the first 25, with the first 25 basis point hike, it was about, betas were about 25%. And in this, we're kind of expecting closer to like, you know, I guess 35 to 40-ish percent. And that's overall on average across all of our businesses.

Got it. Okay. That probably explains some of the deltas people are asking about on NII, so that helps. Yes. Okay. My follow-up just around capital management, again, thanks for the call around AOCI. Sorry if I missed. The dividend versus buyback expectation, so as you think it forward with a 100% payout ratio, what are you guys thinking in terms of dividend growth versus the buyback and the preference there?

Yeah, I'll go ahead. You know, we've been pretty consistent in targeting dividends around 30%, Alex.

So I think probably you will see the adjustment come in the form of the buyback, if there is one. Got it. Got it.

Okay. Thanks very much.

Maybe time for one more question. Our final question comes from the line of Steven Chubach with Wolf Research.

Hi. Thanks for squeezing me in here. Emily, I just want – I know you spoke about deposit beta assumptions underpinning the NII guidance. You gave some color on deposit runoff. I was hoping you could just provide some color specifically on what you're assuming in terms of noninterest-bearing deposit declines and some deposit remixing over the course of the year.

Sure. When we think about NIB, if you will, what we call non-interest-bearing deposits, we probably think we still have anywhere – well, actually, sorry. When you think about it – and it's actually disclosed, so actually I can talk about the real numbers. I think net interest deposits are close to $90 or so billion. What you'll see as deposits – as rates hike, what generally will happen is that some will roll off for sure, but others will actually just kind of migrate into interest-bearing deposits. So all of that is baked into our guidance.

And do you have any specific assumption you can provide just in terms of the absolute level of contraction you're contemplating?

Well, we've seen a little color there. What we've seen historically through these cycles is, you know, if we're operating somewhere around 30% of our total balance is non-interest-bearing, and it's a little bit tricky to pick up because of the U.S. versus non-U.S., but that is definitely very high because of the level of interest rates.

We'd expect that to drop into the low 20s, something like that.

That's helpful, Culler. And then just for my follow-up, I might be jumping the gun here, but I wanted to see if you guys have done any preliminary work or analysis around Basel IV and how that might impact minimum capital requirements. I know you guys are constrained by leverage today. There's some speculation that under the new capital regime, the inclusion of operational risk and standardized in particular, just given that's such a big piece of your overall RWA today, could have a meaningful impact on overall capital requirements. I know we don't have a proposal yet from the Fed, but even any preliminary thoughts around how you're handicapping that potential risk would be really helpful.

Sure. I mean, we're obviously very involved with the conversation with regulators, and you're correct that the inclusion of operating risk will be a bit of a headwind in terms of capital, but there are other factors that are coming off So net-net, we think it's going to be relatively – we'll be relatively neutral.

Okay. That's great. Thanks so much for taking my questions. Thank you, Stephen.

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.

Nothing to add. Thank you very much for your interest in the firm, and you can follow up with Marius and the team afterwards if there are any further questions. Thank you very much, and have a good day.

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