State Street Corporation

Good morning and welcome to State Street Corporation's fourth quarter and full year 2022 earnings conference call and webcast. Today's discussion is being broadcasted live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or distribution, in whole or in part. without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to introduce Eileen Fiesel-Biller, Global Head of Investor Relations at State Street.

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O'Hanley, will speak first. then Eric Abloff, our CFO, will take you through our fourth quarter and full year 2022 earnings slide presentation, which is available for download in the investor relations section of our website, investors.statestreet.com. Afterwards, we'll be happy to take questions. During the Q&A, please limit yourself to two questions and then re-queue. Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation, also available in the IR section of our website. In addition, today's presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views change. Now, let me turn it over to Ron.

Thank you, Eileen, and good morning, everyone. 2022 is an unpredictable year for many of the world's investors and the people they serve. Despite a market rebound in the fourth quarter, 2022 was the worst year for financial markets since the global financial crisis. Both fixed income and equity markets fell, impacted by the war in Ukraine, and several macroeconomic headwinds, including broken supply chains, price and wage inflation, dramatically higher global interest rates, U.S. dollar strength, and heightened fears of global economic recession, which remain today. The uncertainty created by these factors contributed to a meaningful year-over-year decline in global financial markets, as well as increased market volatility impacting flows. Despite these difficult macro conditions, State Street performed well. As a result, we continue to progress in 2022 towards achieving our medium-term targets. Our durable 4Q and full-year 2022 results were driven by a strategy underpinned by our relentless focus on innovation, the power of our distinct value proposition, and State Street's diversified products and services, all of which continue to resonate with clients as demonstrated by yet another year of strong, organic, net-new servicing wins. As we continue to execute against our strategic agenda, we achieved a great deal in 2022. Slide three of our investor presentation shows our full year highlights and the progress we made towards achieving our strategic goals in 2022. In a challenging operating environment and compared to what was a very strong year for our business in 2021, we again delivered positive total operating leverage, pre-tax margin expansion, and a higher return on equity, as you can see on the left of the slide. We drove continued business momentum, including $1.9 trillion of total new asset servicing wins, delivered total revenue growth, and demonstrated ongoing expense discipline in the face of inflationary pressures, and our continued investment in the resiliency and capabilities of our businesses, as you can see on the right-hand bottom of the slide. While weaker average market levels created fee revenue headwinds for our investment servicing and asset management businesses in 2022, our balance sheet businesses, combined with higher interest rates in our deposit strategy, produced materially higher net interest income as compared to 2021. In addition, our foreign exchange trading services and front office software and data businesses produced double-digit year-over-year fee growth manifesting the desired results of our investments in these businesses and demonstrating the revenue diversification of our business model. Turning to slide four of our presentation, I will review our fourth quarter highlights. Business momentum was solid in the fourth quarter, with new AUCA asset servicing wins amounting to $434 billion, driven by broad-based wins across client segments. We reported two new alpha mandates in the quarter, and expand to 12 existing alpha relationships, seven of which added additional back and middle office offerings. Helped by this sales performance, our AUCA installation backlog was 3.6 trillion at quarter end. At Global Advisors, quarter end assets under management totaled 3.5 trillion, supported by another good quarter of ETF inflows. Turning to our fourth quarter financial performance, Before Q22, EPS was 1.91 or 2.07, excluding notable items, up 7% year-over-year, or 4% higher year-over-year, excluding notable items. The year-over-year EPS growth in a challenging market environment was supported by the resumption of common share repurchases in the fourth quarter, as we focused on returning capital to our shareholders. Even in a year marked by economic and political disruptions, Total revenue for the fourth quarter was the highest on record, increasing 3% year-over-year, as lower total fee revenue was offset by very strong NII results, which increased 63% relative to the year-ago period, primarily driven by higher global interest rates, plus our balance sheet positioning and effective execution of our deposit management strategy. As we meaningfully invested in our people in business, we remained focused on expense discipline in the fourth quarter, with total expenses down 3% year-over-year, or flat year-over-year, excluding notable items, in part supported by the stronger U.S. dollar. This was achieved by our relentless and ongoing focus on operational productivity, simplification, and automation. Turning to our balance sheet and capital, our CET1 capital ratio increased to a strong 13.6% at year-end, Recognizing the importance of capital return to our shareholders and having already announced a 10 percent per share increase to our common stock dividend earlier in 2022, we resumed share repurchases in the fourth quarter, buying back a total of $1.5 billion of State Street's common stock. For 2023, it is our intention to return up to 200 percent of earnings in the form of common stock dividends and share repurchases, subject to market conditions and other factors. We expect our business mix, balance sheet strategy, and earnings momentum will enable us to do so while maintaining prudent capital ratios within our target range. Accordingly, as we announced this morning, our board of directors has authorized a new common stock purchase program of up to $4.5 billion through the end of 2023. To conclude my opening remarks, I am pleased to be reporting the third year in a row of pre-tax margin expansion and higher return on equity. which demonstrates the successful progress we have made towards achieving our financial goals. Now, let me hand the call over to Eric, who will take you through the quarter in more detail before I discuss our strategic priorities for 2023.

Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth quarter and full year 2022 results, let me briefly discuss some of the notable items we recognize in the quarter outlined on slide five. First, we recognize acquisition restructuring costs, including wind down expenses related to the Brown Brothers Investor Services acquisition transaction, which we are no longer pursuing. Second, we recognize 70 million of repositioning costs consisting of an employee severance charge of 50 million to eliminate approximately 200 middle and senior manager positions largely related to our investment services business as we continue to streamline our organizational structure. We also recognize $20 million of occupancy charge in the quarter to help us further shrink our occupancy costs. We expect these actions to generate a total run rate savings of roughly $100 million. Lastly, we recognize the benefit of $23 million in the quarter related to the settlement proceeds from the 2018 FX benchmark litigation resolution, which is reflected in the FX Trading Services GAAP revenue line. Taken together, we recognize notable items of $78 million pre-tax or 16 cents a share. Now turning to slide six, I'll begin my review of both our fourth quarter 22 and full year 22 results. As you can see on the top left of the table, despite the dynamic and challenging operating environment, the diversity and durability of our business model allowed us to finish the fourth quarter with solid results. Total revenue for the quarter increased 3% year over year or 5% year-over-year excluding notable items, as lower fee revenue was more than offset by robust and high growth of 63%, which I'll spend more time discussing later in today's presentation. We also continued to demonstrate prudent expense management, which enabled us to deliver positive operating leverage in the quarter. And pre-tax margin is up more than four percentage points year-on-year, while ROE is up more than a percentage point this quarter as well. On the right side of the slide, we show our full year 2022 performance. Notwithstanding the challenging operating environment we saw in 2022 for the year, I'm quite pleased that we again delivered positive operating leverage and nearly a percentage point improvement in pre-tax margin. As Ron mentioned, it has been three consecutive years of margin expansion and ROE improvement. Turning to slide seven, During the quarter, we saw period-end AUCA decrease by 16% on a year-on-year basis, but increased 3% sequentially. Year-on-year, the decrease in AUCA was largely driven by continued lower period-end market levels across both equity and fixed-income markets globally, a previously disclosed client transition, and the negative impact of currency translation, partially offset by net new business installations. Quarter-on-quarter AUCA increased as a result of higher quarter-end equity market levels and the positive impact of currency translation. At Global Advisors, we saw similar dynamics play out. Period-end AUM decreased 16% year-on-year and increased 7% sequentially. The year-on-year decline in AUM was largely driven by lower period-end market levels, some institutional net outflows and the negative impact of currency translation which was partially offset by $22 billion of net inflows in our SPDR ETF business. Quarter-on-quarter, the increase in AUM was primarily due to higher quarter-end market levels, ETF net inflows, and the positive impact of currency translation, partially offset by cash net outflows. Turning to slide 8, on the left side of the page, you'll see fourth quarter total servicing fees down 13% year-on-year, largely driven by lower average market levels, lower client activity adjustments and flows, normal pricing headwinds, and the negative impact of currency translation, partially offset by net new business. Excluding the impact of the currency translation, servicing fees were down 10% year on year. Sequentially, total servicing fees were down 1%, primarily as a result of the client activity adjustments and flows. On the bottom panel of this page, we've included some sales performance indicators, which highlight the good business momentum we again saw in the quarter. As you can see, AUCA wins in the fourth quarter totaled a solid $434 billion, driven by strong, broad-based traditional wins across client segments and regions, including expanding relationships with existing alpha clients. At quarter end, AUCA won, but yet to be installed, totaled $3.6 trillion, with alpha representing a healthy portion, which again reflects a unique value proposition of our strategy. Turning to slide nine, fourth quarter management fees were $457 million, down 14% year-on-year, primarily reflecting lower average market levels and the negative impact of currency translation, which represented about two percentage point headwinds. Quarter-on-quarter, management fees were down 3%, largely due to equity and fixed-income market headwinds. As you can see on the bottom right of the slide, notwithstanding the difficult and uncertain macroeconomic backdrop in the year, our franchise remains well-positioned, as evidenced by our continued strong business momentum. In ETFs, we saw solid full-year net inflows in the U.S. with continued momentum in market share gains in the spider low-cost equity and fixed-income segments. In our institutional business, There's a continued momentum in defined contribution with $48 billion of inflows in the full year, including target date franchise net inflows of $21 billion, offset by industry-wide outflows in institutional index products. In our cash franchise, we still gained 60 basis points of market share in money market funds in 2022, even though first half inflows reversed in fourth quarter. On slide 10, you see the strength of our diverse revenue growth engines with both FX trading services and software and processing up double digit teens year on year in a difficult year. Relative to the period a year ago, fourth quarter FX trading services revenue X notables was up 15%, primarily reflecting higher FX spreads, partially offset by lower FX volumes. Our global FX franchise was able to effectively monetize the less liquid market environment which was driven by sharp moves in the U.S. dollar. Sequentially, FX Trading Services' revenue X notables was up 8%, mainly due to higher direct and indirect revenue. Securities finance performance in the fourth quarter was more muted, with revenues up 1% year-on-year. Sequentially, revenues were down 6%, mainly reflecting downward pressure on spreads due to lower specials activity and year-end risk-off activity by clients. Fourth quarter software and processing fees were up 16% year on year and 17% sequentially, primarily driven by higher front office software and data revenues associated with CRD, which were up 28% year on year and 25% sequentially. Lending fees for the quarter were down 10% year on year, primarily due to changes in product mix and flat quarter on quarter. Finally, other fee revenue of $18 million in the fourth quarter was flattish year on year and up $23 million quarter on quarter, largely due to the absence of negative market-related adjustments. Moving to slide 11. On the left panel, you'll see fourth quarter front office software and data revenue increased 28% year-on-year, primarily driven by multiple on-premise renewals and continued growth in software-enabled revenue associated with new client implementations and client conversions to our cloud-based SaaS platform environment. Turning to some of the front office and alpha business metrics on the right panel, the 21 million of new bookings in the quarter was once again well diversified across client segments, including asset owners, wealth, and private markets, as well as across asset classes, particularly in fixed income. Front office revenue backlog and pipeline remains healthy, giving us confidence in the future growth of this business. As for alpha, we are pleased to report two new alpha mandate wins this quarter in the insurance and asset owner client segments. Now turning to slide 12, fourth quarter NII increased 63% year-on-year and 20% sequentially to $791 million. The year-on-year increase was largely due to higher short and long-term market interest rates and proactive balance sheet positioning. partially offset by lower deposits. We have a well-constructed balance sheet, including both U.S. and foreign-climbed deposits, a scale-sponsored repo franchise, and high-quality loan and investment portfolio that was consciously configured to benefit from rising global rates. Sequentially, the increase in NII performance was primarily driven by higher global market rates working through our balance sheet. On the right of the slide, we show our average balance sheet during the fourth quarter. Year on year, average assets declined 6% and increased 3% sequentially, primarily due to deposit levels as well as currency translation impacts. The U.S. client deposit beta, excluding some new deposit initiatives, was about 65 to 70% during the fourth quarter. Foreign deposit betas for the quarter were much lower, in the 20 to 50% range, depending on currency. Our international footprint continues to be an advantage. Total average deposits were up sequentially. We saw a sequential quarter reduction in non-interest-bearing deposits of 5 percent, which was more than offset by higher NII accretive interest-bearing deposits that will help support high-quality client loan growth and selective expansion of the investment portfolio. Turning to slide 13. Fourth quarter expenses, excluding notable items, were once again proactively managed in light of the tough fee revenue environment and flat year-on-year or up approximately 3% adjusted for currency translation. We have been carefully executing on our continued productivity and optimization savings efforts, which generated approximately $90 million in year-on-year gross savings for the quarter or approximately $320 million for 2022. achieving near the top end of our full-year expense optimization guidance of 3% to 4%. These savings enabled us to drive positive operating leverage and pre-tax margin expansion, while partially offsetting continued wage inflation headwinds and continued investments in strategic parts of the company, including alpha, private markets, technology, and operations automation. On a line-by-line basis, compared to 4Q21, Compensation employee benefits were down 1%, as the impact of currency translation and lower incentive compensation was partially offset by higher salary increases associated with nearly 6% wage inflation and higher headcount. Headcount increased 9%, primarily in our global hubs, as we added operations personnel to support growth areas such as alpha and private markets, invested in technology talent, and insourced certain functions. There was also a portion of the headcount increase associated with some hiring catch-up post-COVID. We expect headcount to increase more modestly in 2023. Information systems and communications expenses were down 5% due to benefits from our insourcing efforts and continued vendor pricing optimization, partially offset by technology and infrastructure investments. Transaction processing was up 1%, mainly reflecting higher broker fees and market data costs, partially offset by lower sub-custody costs related to lower equity market levels. Occupancy was down 17%, largely due to an episodic lease-backed real estate transaction associated with the sale of our data centers, which was worth approximately $12 million. And other expenses were up 12%, primarily reflecting higher professional fees and travel costs. Moving to slide 14. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right of the slide. As you can see, we continue to navigate the operating environment with strong capital levels relative to our requirements. At quarter end, standardized CET1 ratio of 13.6% increased 40 basis points quarter on quarter, primarily driven by episodically lower RWA, partially offset by the resumption of share repurchases in the quarter. With respect to RWAs, it's worth noting that we saw unusually low RWAs this quarter, worth about $10 billion, largely driven by our markets, businesses, and some specific currency factors. We would anticipate a similar amount of normalization of RWA in the 10 to $15 billion range going into first quarter. Our Tier 1 leverage ratio of 6% at quarter end was down 40 basis points quarter on quarter, mainly due to the resumption of share purchases in fourth quarter. We were quite pleased to return $1.7 billion to shareholders in the quarter, consisting of $1.5 billion of common share repurchases and $220 million in common stock dividends. Lastly, as Ron mentioned earlier, we announced this morning that our Board of Directors has authorized a new common stock repurchase program of up to $4.5 billion for the end of 2023. And as I said in December, We expect to execute this buyback at pace and get back to our target ranges for both the ET1 and Tier 1 leverage market conditions and other factors dependent. Turning to slide 15, let me cover our full year 2023 outlook as well as provide some thoughts on the first quarter, both of which have significant potential for variability given the macro environment we're operating in. In terms of our current macro expectations, as we stand here today, We expect some point-to-point growth in global equity markets in 2023, which equates to global equity markets being down about 2% each point year-on-year on a full year average basis. Our rate outlook for 2023 largely aligns with the forward curve, which I would note is moving continuously. However, we currently expect to reach peak rates of 5% for Fed funds, 3.25% at the ECB, and 4.5% at the Bank of England. As for currency translation, we expect the US dollar to be modestly stronger than the major currencies on average, but less than what we saw last year. As such, currency translation is likely to have a half point or less impact on both revenues and expenses. In light of the macro factors I just laid out, we currently expect that full year total fee revenue will be flat to up 1% X notable items, but servicing fees likely flattish and management fees down a bit. largely due to a modest reclassification of revenue out of fees into NII. Regarding the first quarter of 2023, we currently expect fee revenue to be down 1% to 2% ex notable items on a sequential quarter basis, given some normalization of foreign exchange market volatility that impacts our trading business, with servicing fees expected to be up 1% to 2% and management fees expected to be down 1% to 2%. We expect full-year 2023 NII to be up about 20% on a year-over-year basis after a very strong 2022. This is dependent, of course, on the outcome of rate hikes and deposit mix and levels. After a significant step-up in fourth quarter 2022 NII, we expect first quarter 2023 to be flattish. And after the first quarter of 2023, we expect to see a slight 1% to 2% of sequentially quarterly attenuation of NII throughout the remainder of 2023, then with a stabilization expected in 2024. Turning to expenses, as you can see in the walk, we expect expenses ex-notables will be up 3.5% to 4% on a nominal basis in 2023, driven partially by wage and inflationary pressures and continued investment in the business and our people. while still driving positive operating leverage. You can also see on the walk that for a full year 2023, we expect growth saves of approximately 3%, which will help offset inflationary pressures and variable costs and ongoing investments in areas like private markets and alpha and further automation. Regarding the first quarter of 2023, on a year-over-year basis, we expect expenses X notable items to be up about 2%. Finally, taxes should be in the 19 to 20% range for 2023. This outlook would deliver a fourth consecutive year of margin expansion and advances us towards our medium-term target goal of 30%, as well as deliver positive operating leverage and strong NPS growth for our shareholders. And with that, let me hand the call back to Ron.

Thanks, Eric. As we enter 2023, we see an uncertain environment. On the positive side, many supply chains have been repaired. The outlook for energy supply is better than anticipated, particularly in Europe, and developed world inflation may have peaked. We foresee continued rising interest rates in the short term, but at a slower pace. The most significant known risks are geopolitical, including the Russia-Ukraine war, China from an economic performance and policy perspective, and the United States as it approaches its debt ceiling. Turning to slide 17, even with another year of economic and geopolitical uncertainty ahead of us, we continue to be very clear in our strategic priorities for 2023, focusing on what we can control. We plan to deliver further growth, drive innovation, and continue to enhance shareholder value as we further progress State Street towards its medium-term targets. First, we are targeting further improvements in our business growth and profitability by leveraging State Street's alpha value proposition and enhancing its private markets capabilities as we aim to become the leading investment servicer platform and enterprise outsource solutions provider in the industry. We intend to maintain and extend our leadership positions in a number of key businesses. In global markets, we aim to expand wallet share as a leading provider of liquidity, financing, and research solutions to investment professionals. At Global Advisors, we aim to build on our strengths in areas such as ETFs and cash while organically accelerating growth efforts in fast-growing segments where we can win. Second, as we have over the past several years, we must continue to transform the way we work by driving increased productivity and efficiency throughout our organization as we build out a simplified, scalable, configurable, and to end operating model. As we lead with client service excellence, productivity will become a core differentiator of our value proposition. Third, we must continue to build a higher performing organization. We are strengthening execution skills and increasing accountability, thereby fostering an even more results-oriented culture required for future growth. Our fourth priority is supported by, and the intended outcome of, the first three priorities, and is aimed at achieving our financial goals, meaning another year of positive operating leverage, margin expansion, and higher returns. To conclude, supported by our distinctive value proposition and diversified offerings, as well as our ability to manage State Street through challenging environments, I believe we will be able to execute on each of these strategic priorities in 2023 as we advance towards achieving our financial goals. all while being an essential partner to the world's investors and the people they serve. And with that, operator, we can now open the call for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Glenn Shore from Evercore. Please go ahead.

Hi, thank you very much. I like the NII outlook. I want to ask a little question on that. You've been a big beneficiary of higher rates. I'm curious on the deposit side, down almost 10% year on year in the quarter, but actually up a drop sequentially. I wanted to think about, or could you tell us what you're thinking about for a that you have stable outlook for 23 for deposits. We've seen a lot of fear in the banks in deposit runoff and data and attrition. So curious what gives you that confidence for the flat deposits for the year. Thanks.

Eric, you know, we've we've navigated through interest rate cycles before. Right. And so we have a fair amount of internal data. We also have, I think, an engagement with our clients that really understands the multiple avenues for them of putting their cash. Clients broadly with us have a trillion dollars of cash. Some of that's in deposits, some of that's in our sponsored repo program, some of that's in our global advisors, money market complex, some of it's in our sweet products in our State Street Global Link franchise. And so what we're seeing is that clients are, you know, shifting gently their deposits between different categories, but they also need an outlet for that cash. They need an outlet for that cash at a reasonable price, at a reasonable ability to move it and use it as necessary. So, you know, with that as context, I think we continue to see some expected rotation out of non-interest bearing into interest bearing. That's been happening, I think, at a reasonable pace and kind of in line more or less with what we've seen before. And we expect that to continue for the next few quarters. At the same time, clients do have cash, especially given the risk-off environment. But in general, they all sit on cash as part of their investment planning. And we found that they're engaged with us to leave cash on our balance sheet. They like the flexibility. They like some of the pricing. And obviously, some cash comes in at non-interest bearing, some at lower rates when it's very transactional, some at rates that are closer to market levels. And so it's an ongoing engagement with them. And the visibility we have is reasonably good. It can always change. you know, deposits as a result seem to be in the zone now. You know, after a couple quarters in the first half of the year of coming down a bit, seem to be flattening out. I won't say that we won't see a little bit of seasonality. Occasionally, you know, in January into February, we see a downtick. And then March, as folks prepare for tax payments, is up, and then April is down. So we'll see, you know, some of that kind of uh uh movement but but on average we expect deposits to be uh flattish uh you know from uh you know going going forward into into next year and through the uh for the bulk of the year I appreciate that color that's good uh you know you mentioned repo so maybe I'll just have my follow-up question in the slides I noticed you created this inventory platform for peer-to-peer repo I I would love know a minute tutorial on what what it's for who's it for and how you get paid how that you will get paid for that thanks sure um you know this is part of the the you know i think innovation heritage that we have you know here at state street uh you know across the franchise but inclusive of the global markets area you know we our sponsored repo program which is now you know 100 billion dollars in size was started in 2005, I think, if I go back to the history books, and is now a $100 billion franchise, as an example. And we do this in FX, we do this in SEC lending. Venturi is a repo offering that instead of working through our balance sheet or one of the clearing corporations, which is how we do repo today, actually directly connects lenders and borrowers of securities and cash. And so it's just another platform, so to speak, another venue that clients seem to want to engage with. A big part of it early on is working with the asset owners, those who have long books, securities, and cash. And what we find is sometimes when they may want to make margin calls, for example, or have margin calls, They want to raise cash without selling securities, right? And so natural question of, well, where do I repo? Do I repo through a bank structure? Or do I repo with someone who's on the other side of that trade, right, who actually wants to lend against securities? And so we find that there are counterparties on the other side of that trade who would be interested in doing that. And what Venturi does is it actually connects borrowers and lenders. with direct access to one another. So they have both the underlying collateral as the stabilizing force, and then they have the counterparty rating. And with different counterparties, you get slightly different pricing, and sometimes that flow through is actually positive and quite appealing both to the lenders and borrowers. So that's a little bit of it in a nutshell. like to grow it to some amount during the course of the year. Early returns are positive. But I'll put in the bucket of innovation and how to connect folks in the capital markets, but connect folks who are our core clients and provide additional services for them.

Great tutorial. Thanks.

Thank you. Your next question comes from the line of Betsy Gladstock from Morgan Stanley. Please go ahead.

Hi, good morning.

Hi, Betsy.

Okay, one follow-up question on NII and then a question on expenses. Just the follow-up question on NII, Eric, I just wanted to make sure I understood the cadence, the pace that you are and I should follow. I know you use the word attenuate, but we had a debate over here as to which way attenuate was going to traject. So sorry to ask the ticky tacky, but appreciate it.

That's all right, Betsy. We want to be transparent, and sometimes language always matters, as you say. our our perspective is we've got a very nice step off point from uh fourth quarter nii we we said we'd be roughly flattish into the first quarter um and then uh we expect it to trend downward so attenuate downwards let's say uh one to two percent for the next few quarters just as you see you know you see a tailwind of interest rates uh uh uh creating a a positive but you see That continued rotation out of net interest-bearing deposits being a headwind, and the net of that is down in, we think, 1% to 2% for a couple quarters. And then towards the end of the year and into 2024, we see rough stabilization, partly because we've kind of burned out on the non-interest-bearing rotation. and then we get to a more stabilized area. But all in, we expect full year NII to be up about 20% year over year, and we'll take it from there.

Got it. Yeah, no, that's helpful. And then on the expense side, I know you mentioned that the benefit of the actions you've taken, am I right, $100 million run rate? I just wanted to understand when that comes into play. The, you know, 2023, is that immediate in one queue, or is that something that comes in over time? Just thought that would be helpful. Thanks.

Yeah, roughly about half of that comes in in 23. You know, the payback on most of these actions is about five quarters, so roughly half comes in on a fiscal 2023 basis. And then, you know, we'll hit the run rate, you know, I think within – quarters, whatever, six-ish or something after these actions. Most of these actions are in the next few, well, let's call it the next quarter. The run rate then built to $100 million. So good payback and the kind of actions we want to keep taking in this kind of environment.

Yeah, so your point, and that was my final follow-up, which was, do you feel this is the extent or if, for whatever reason, you know, top line disappoints based on, you know, macro not working out or what have you. Is there more that you would consider doing going forward?

Ron, maybe I'll take that. I mean, we we've obviously got a pattern of investments that we're intending to execute. We've also got an ongoing program in place that we've really had running now since 2019. So we certainly, if the environment were to change materially, we would think about those investments. We'd also think about being more aggressive. I mean, we have more or less in the background continued to take a lot of gross expense out of the system every year. We see an ongoing ability to do that. But we also want to keep investing in the business. So there is a balance there, but to the extent to which things started to go south in an unanticipated way, we do have levers.

Thank you.

Thank you. Your next question comes from the line of Ken from Jefferies. Please go ahead.

Thanks. Good morning. I was wondering if you had any kind of just, well, post-game thoughts, post the BBH decision, And within that, just, you know, you acknowledged and put forth this $4.5 billion capital plan. Just, you know, how will we think about just your commitment to that now as opposed to whatever thoughts you might have about acquisitions going forward? Thank you.

Ken, I mean, as we've always said, we've got a very clear strategy, and M&A is not a strategy. M&A is a way to to help execute a strategy, to move it faster, to enable it to get further than was anticipated. But it's not a strategy by itself. We are very comfortable with our organic strategy. BBH was a scale-enhancing acquisition that we would have liked to have done, but it doesn't materially change – in fact, it doesn't change at all our strategy. So at this point where we sit, we have a strategy that we like. We have a strategy that we're executing against. There's some big milestones that we're confident we're going to be delivering on in 2023. And therefore, we are committed to that share buyback. Okay, great.

And then on servicing fees, can you help us understand in your flat to plus one What's the impact of the BlackRock ETF deconversion? Where are we in that process? And how much, if any, has already been recognized of that expected revenue attrition at this point? Thank you.

Yeah, maybe just answer that in the various components. I think you saw the BlackRock transition begin at the end of last year was $10 million in the quarter, sort of called a $40 million run rate. That continues to transition out in 23 and in 24. There's obviously just a natural schedule that you would expect that we've worked closely with them on. And so it'll impact our servicing fees during 23, during 24, and into 25, just when you think about the year-on-year comparison basis. I think if you want to model it out broadly, we've said in our last regulatory filing, we said it was worth about 2% of fees. As of the December 31 point that we just crossed, It's now about 1.7% of fees. And, you know, I'll let you sort of build it from there. But it's included in our forecast. It'll continue to be included in our forecast. You know, we think about net new business, right? We've got to sell. We always have a bit of attrition. And we'll, you know, we want to continue to be net ahead. And as you've seen us in the last couple of years, we've been net positive with net organic growth. broadly, and then, you know, with BlackRock specifically, they continue to be a very important client of ours. We have continued and kept a good amount of business that we do with them. We're strong providers for them in alternatives, which is growing quickly, and we've also been awarded new business over the last year. And so, you know, I think it'll just be part of the outlook that I give you as we go forward.

Okay, great. Thanks, Eric.

Thank you. Your next question comes from the line of Alex from Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for the question. Maybe just to follow up on Ken's last point around servicing fees, you know, I guess if you take your run rate servicing fees at the end of the year, it still implies a pretty wide gap versus where you guys expect to end for 2023. So maybe just provide a little bit more granularity where the ramp is going to come from. So, you know, I know equity market is one thing, and you guys are assuming, I think, 10-ish percent growth in global equity. So that certainly helps. But off of the kind of $4.8-ish billion run rate that you exit to get to, I don't know, 5.1, that's a 6% growth. That's feels wider than we've seen in the past. So I'm just curious whether it's new business or something else that you see on the horizon that will help you bridge that gap.

Yeah, Alex, if you, you know, I think I tend to spend a little more time on the full year to full year kind of servicing fees. Sounds like you're modeling the, you know, the last four quarters and then the next four quarters, which obviously model as well and we have in our budget. It's really a combination of factors, right? So, um, there's, uh, on a, on a, if you start with fourth quarter of 22 and then work forward, you know, we expect, uh, some appreciation equity markets. We'll see if that plays out and we'll obviously stay in touch with you all. We think that'll be a tailwind. Um, we think Klein flows and activity in particular should not be a headwind like it was in 2022, maybe neutral, maybe a positive. just as clients have adapted to this new environment. And so we see the new year, this new year, as a time when they're going to be trading, investing, building positions. So we'll see if that plays out. That'll be part of it. Then we have net new business. And so we do have a good pipeline, both in the traditional servicing and alpha area. And I think as part of that, we continue to mine our existing client base because the share wallet growth can be positive there. And then finally, there's always some amount of normal pricing headwinds, but that's factored in. But you kind of have to go through those four areas. And remember, we're assuming some growth in equity markets on a point-to-point basis. But we'll see if that plays out.

I gotcha. All right, that's helpful. Maybe just to follow up around the balancing strategy, heard the NII guide and the deposit commentary all make sense. When it comes to the tailwinds from sort of repricing the fixed portfolio, the fixed securities portfolio, can you help us frame what the roll-on, roll-off dynamic looks like today, and also whether or not there are some more you know, opportunistic action, you guys might take luck routine with both BK and Northern over the last month or so, with respect to just maybe reaccelerate some of the lower yielding securities, you know, roll off into something that might be a little more attractive here.

Yeah, let me describe it as follows. The investment portfolio has an average duration of a bit over two and a half years, so-called average maturity of five years. And so you go through the math, and that means about 20% of it rolls on, rolls off in a typical year. It'll move around a bit. I think what we found, and that's invested across the curve. It's invested in various currencies, so there's a mix. So you tend to get, as you have roll-off, roll-on, somewhere between 1, 1.5 to sometimes 2.5 percent tailwind for that particular quarter of the amounts that are rolling off and rolling on. And so that's what's actually been one of the factors that's been doing the yields and the yield improvement. on the portfolio and both how it was designed and what we're pleased to see. So that'll be a gentle tailwind, assuming five-year rates stay more or less where they are and European rates continue to float up. And so we'll just have to, that'll be one of the tailwinds that we see. In terms of more dramatic action, we obviously, You know, always think about what we might do. What we've noticed is that if you have, you know, high risk-weighted asset positions in your, or risk-weighted asset intensive positions in your portfolio, you know, then what happens, you know, you could take the loss, you reinvest, and it helps accelerate a buyback, right? That's why I think a number of players are doing that. Doing just for vanilla instruments, you know, treasuries, agencies, government-guaranteed securities, you know, I think the benefits are a little closer to a push. You know, we could take some losses through the P&L that are already in the equity account through AOCI. you put on NII in the future. I think that's just moving around of the financials, and we just don't find that that's a particularly compelling trade to do. We'll always evaluate. We'll always see if we have specific positions that might need some adjustment, but we don't see that as particularly compelling. It's not really compelling economically. and the financial benefits you guys can kind of model out either way. So I think we're pleased with the ability to continue to manage the portfolio in line with our current processes, and they've been remunerative. The NII is up significantly this past year and up another 20% next year, and we've got a tailwind. I think it bodes well for where we are and where we're going.

Yeah, I got you. Great. Thanks so much.

Sure.

Thank you. Your next question comes from the line of Brian Bettle from Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. On the net interest revenue outlook for 23, Eric, can you talk a little bit about what you view as sensitivity to say if we had rate cuts in the back half of the year, I don't think that's assumed in your outlook, but just if you can talk about that dynamic and whether you think that would just be offset by reducing the deposit beta. And then also on the foreign deposit beta that you talked about, which is much better than U.S., do you expect that to continue or do you see incremental foreign deposit betas moving higher from here?

Yeah, let me do it in reverse order. The U.S. versus foreign currency betas, in our experience, this cycle, prior cycles, do tend to run at different levels, partly because the U.S. has this structure of non-interest-bearing versus interest-bearing deposits, right? So the client deposit betas are on a subset of the total. And partly because the international markets just operate a bit differently, how we're paid and how those expectations have been set over, I'll call it decades for the industry, operate differently. So I think as we look into the next few quarters, we think the U.S. client deposit data is actually new money that we bring in on an initiative basis. you know, it's going to be in that 65% to 70%. And the international betas, we think, will continue in the 20% to 50% range when you look at, you know, euros, pound sterling, Canadian dollars, Aussie dollars, and some of the other currencies. So we think they're kind of in the – they're going to be in this zone. And that gives us some ability to continue to take advantage of the – of the interest rate increases. If I then work through the other part of your question, what happens with rate cuts, that's in our expectations. That's in the forward curves, especially for the US, that there could be a December cut. There's some probability there could be a cut before that. I think it doesn't dramatically affect, because they are late in the year, the rate cuts don't dramatically affect The NII forecast, so we'll kind of take it as it goes. I do think as you're intimating, there's a bit of this offset, which is if the Fed's cutting rates, then there's probably going to be even more cash that clients keep on hand and deposits in the system. So there'll probably be some offsetting impact. And obviously with the U.S. betas higher, conveniently rate cuts actually at some point help with NII as well. So I think there's a fair amount of, there's a range of scenarios, let's call it in the second half of next year. And so my guess is, Brian, we're going to be having this conversation often with you. And we'll certainly keep you posted as we see some of those scenarios develop or or there's more variability.

That's super helpful. And then just maybe on asset servicing, just maybe an update on how you're seeing the pricing headwinds fold out for this year. And also, obviously, you typically do get a pricing headwind just from a mixed shift toward ETFs, but maybe if you could talk about whether you think that might be offset by some of the growth in alternatives. And then I know I think there's an expense offset, too, or I should say I believe the margin is the same on ETS versus, say, mutual funds, so you get an expense offset. Maybe if you just want to confirm that.

Yeah, Brian, I think the pricing experience that we're seeing in the industry has been stable and consistent over the last few years, and we expect it to be consistent in into next year and beyond. We just have the standard. Because our contracts are tied to equity markets, when they roll over every four, five, six years, typically, folks are thinking, what do they expect equity markets to be? They know we're going to get paid. They're going to pay us more in the coming years, and they want to share some of that. And so there's a a partial pricing offset, but it's in the 2% headwind per year on servicing fees and relatively consistent.

Brian, it's Ron. The mutual fund to ETF shift, I mean, there's been some high profile conversions of mutual funds to ETFs, but that's There's not a lot of that going on. More typically what you're seeing is ETFs being added to lines. And, yes, the economics are different. The revenues, fees are lower, but also particularly when you're at scale like us, the expenses are much lower. So it's not meaningful in this overall revenue kind of guide that we're giving you. Yeah, perfect. Great. Thank you so much.

Thank you. Your next question comes from the line of Brennan Hawkins from EBS. Please go ahead.

Good morning. Thanks for taking my questions. So I'd like to start on capital. So the buyback sends a strong message. Ron, very encouraging to hear about your comments on M&A. But I wanted to clarify that the buyback is up to $4.5 billion. So does the upper end of the range there assume that you're going to see some AOCI accretion, and is the quarterly range of 120 to 200 million still the right way to think about it if rates are stable?

Brendan, it's Eric. The answer is yes and yes, right? If you think about it, we've forecasted, you know, just so you guys, just as you have, you know, earnings and coming through the P&L, George Munro, AOCI in that range, 120 to 200 million a quarter. It bounces around a little bit and it may with movements in rates, but the pull-to-par has been good to us and will be a nice tailwind. There's some normalization of RWAs, which I mentioned into the first quarter. Then there is some RWA growth in our plans because we want to continue to lend more to clients and support more with their foreign exchange or hedging activities, so we'll continue to do that. And then there's the buyback. And, you know, our plan is just to, you know, at pace, you know, get back into our range. And, you know, that authorization, you know, comfortably gets us there.

Okay. Excellent. And then a couple folks have touched on it before, but maybe if we think about the fee revenues, You know, can you please update us on the impact of market moves to fee revenues and whether or not there's also a corresponding impact on the expense side, too? I'd assume there's at least some degree of impact there. Thanks.

Yeah. Let me do it this way. I think as we've been relatively consistent here, and I think the the guidance will hold a 10% average change in, let's call it an increase in equity markets, right, will typically lead to about a 3% increase in servicing fees, you know, if you have both of those on average. So that's the kind of gearing we have. It's higher on management fees, 10% higher equity and markets tend to be closer to a 5% increase in management fees. On the expense side, it moves around a bit, but I think it's a 10% average increase in equity markets, probably close to... let's say, around, with a range, around a percentage point increase in expenses. Could be a little bit less. It kind of depends. But, you know, our subcustodian costs have a gearing towards equity markets and fixed income markets. Market data in some cases does as well. So, you know, it could be half a point, could be a point. And that's part of the you know, what we have in the expense walk and outlook that we've given. And in some ways, you know, I think we're actually pleased to see that particular expense increase because that particular expense increase comes with real revenue growth. And that's, you know, that then delivers EBIT and earnings growth when you bring it all together.

Excellent. Thank you for that, Cora.

Thank you. Your next question comes from the line of Steven Chipak from Wolf Research. Please go ahead.

Hey, good morning. So, Eric, I actually have a two-parter, if you'll indulge me, just on some of the NII guidance. First, I was hoping you could provide just some guardrails on your assumptions for NIV outflow, given you're relatively close to the trough that we saw last cycle. And for the second part, just since you alluded to NII stabilizing beyond 23, even as NID remixing pressures abate and reinvestment tailwinds start to work through the balance sheet, I was curious why NII isn't actually growing beyond 2023. Is that a function of rate cuts, international mix? Any perspective would be really helpful. Oh, all right.

Well, the crystal balling into 2024, I've got to tell you, we've got a lot of variability playing out right now, whether it's economic, whether it's central banks. And I think I'd, um, I know there's a lot of talk about what's happening in NII, uh, where we, where do we go to? And then, you know, does it, uh, uh, you know, what happens after we get to a peak? So I was, I was just trying in 2024 to kind of level set that we see, uh, stability. There's a scenario where you see growth, you know, there's scenarios where, We may not, but it's hard. You're getting far out on our forecasting and predictions, to be honest. So let's come back to that maybe in the middle of the year. That'll be a good conversation. In terms of non-interest bearing, you saw non-interest bearing on average was about $44 billion this quarter, this quarter meaning fourth quarter. you know, it was down, you know, 5% sequentially. It's bounced around quarterly, you know, but we see, I don't know, you could have, you know, off the $44 billion, you could have a, you know, $4 billion rotation out next quarter. You could see that again into the next quarter. Then it starts, or it could be $3 billion, and then two, and so on and so forth. So we're I think we're at this level where, you know, we've seen some amount of rotation. We think it's going to continue roughly at the pace that it's been going. You know, so it could be anywhere between, you know, two, three, and four billion a quarter. But you could have some changes to that. What we do think is that We'll continue to see some of it in the first half of the year, and then it just starts to slow down into the second half. And what we've done is use that kind of base case into our modeling, and it's all factored into the 20% increase in NII that we expect for next year.

That's great. In my defense, Eric, since you did talk about stabilization, I felt like I had to take advantage of that window of opportunity. I look forward to talking about it a little bit more in the middle in the middle of the year. Just one more for me on capital management. I was hoping you could just speak to or give us some insight into the cadence. Should we expect that buyback to be executed rapidly or be a little bit more front-loaded here? And just given the commitment or at least a strong effort to optimize your capital levels, how are you scenario planning for the Basel IV proposal or update that we should be getting from the Fed early in 2023?

Yeah. All fair, and it's the kind of discussion we have internally. You know, we want to front load the buyback. You know, you saw us, you know, start particularly strong this past quarter. we want some amount of front loading. On the other hand, it's actually quite stabilizing to the stock to have buybacks on a consistent basis. So I think we don't want to front load at an extreme and we don't want to be ratably flat through the year at the extreme either because it gives, I think, it's a good kind of market practice to have some, I'll call it front loading, but reasonable consistency in the buyback as well. I think then the goal is to get into our target range at pace. And then we'd love to operate in the middle of our range over time. That's kind of how a range is set up. But I think what we always have to do is look out on the horizon. Are the economic conditions worsening? And so then you may be want to run close to the upper end of a range to insulate and prepare? Or are they particularly benign and they're particularly good uses of capital and you might want to be at the lower end? Similarly, I think we'll learn more about Basel III and some of the changes in capital rules. Maybe that comes with other changes in capital rules. We don't know. And I think later this year we'll evaluate. And that's another reason to either run towards different areas of the range as well. It all factors in, but I think we're quite comfortable with the direction, where we want to go, and then we'll think about what's on the horizon and plan for that.

That's great. Thanks so much for taking my questions.

Thank you. Your next question comes from the line of Javard Cassidy from RBC. Please go ahead.

Good afternoon, guys. Eric, as a follow-up on the stock repurchase commentary, did you guys, and especially now that you referenced it would be more front-end loaded, did you guys consider an accelerated share repurchase program?

Gerard, we did, and I think what the accelerated share of purchase program typically does is operate in such a way that the stock buyback is accelerated within the course of the quarter, right, within the three-month period. There are typically some benefits of that. You tend to add a penny or around that to EPS. It's actually interesting, in a high interest rate environment, you also lose the NII benefit of the capital. So we've actually found that the ASRs tend to be a push, roughly. And so we often do a more typical buyback within the available trading days in the quarter in a way that's fairly market practice as a way to return the cash and the capital to all of you.

Very good. And then I know you pointed to the RWA benefit. You had this quarter for the CET1 ratio, and I think you said in your slides your targeted range is 10% to 11%, which, of course, you're above at this time. Do you have any guidance on when you think you may reach your targeted 10% to 11% CET1 range?

You know, it'll depend on – let me say it this way. We want to return the capital at pace, and I've given some bookends as to what that means, and that's, I think, a forecast you guys can build off of. And we want to get to our target range, right? We don't want to wait until, I don't know, next Christmas, right? That would not be at pace in my nomenclature. At the same time, there's just a range of what... what will move, right? If RWAs lighten again, it'll take a little longer. If they go back and we fully utilize our limits in our various businesses and areas, then it might be a little more quickly. So it's hard to pin it down, but as I said, we'd like to execute the buyback at pace. We'd like to get back into our range at pace. And you know, we're driving that direction.

Great. Appreciate it. Thank you.

Thank you. Your next question comes from the line of Mike Mayo from Wells Fargo Securities. Please go ahead.

Hi. Well, thanks for all the answers on the cyclical factors. I always wanted to ask about the structural endgame, a strategic endgame post Brown Brothers. And the reason I ask, I count five restructuring in the last 20 years. They seem to come around like the dolphin at the Olympics. The fourth quarter is yet one more quarter with notable items. I count notable items in 18 of the last 20 quarters. And I do get some of it. Like you have incredible headwinds, mutual funds, markets, technical debt. You've been reinventing yourself front to back, straight through processing, serving clients, more agile tech. And I also recognize what you said at the start, that the ROE and the margins improved for a couple years in a row. But when I look at fees to expenses, that has gone the other way. And it seems like maybe one root issue is fixed costs. So really the question is, a concrete question, what percent of your expenses are fixed? How does that compare to the past? I assume they've come down. And where would you like to take that? And then more broadly, what is the endgame strategy after Brown Brothers? Thanks.

Let me start on that, Mike, because there's a lot in there. A comment on – I'm not going to comment on past restructurings. I'll comment on this one. We had made some changes to the way we organize ourselves. We talked about that back in the middle of the year. And there's some benefits we can take out of that. In terms of simplifying the management structure, having a smaller number of senior managers, we're going to take advantage of that. It's consistent with simplifying our business. It creates accountability, and we stand by the need to have done that restructuring. In terms of where do we take this business going forward, it has a lot of benefits to it. It's very tied to investment markets over time. investment markets grow, they don't shrink. So the actual, if you will, unit pricing, while the unit pricing may go down, overall pricing actually, overall revenues actually more times than not have a tailwind. We like that business. It's also one that is changing fundamentally from being a kind of a back office, show me the lowest price kind of thing to much more of an enterprise outsourcing business. We are very new in that. We're very early in that transition, and we think by far we are the best position to take advantage of that in terms of the technical capabilities that we have, the people capabilities that we have, the position we have in the marketplace. We've made initial inroads and wins in that, but there's development that we've talked about that will be delivered in 23 and beyond, but a lot of it in 23. that will only help strengthen our position. So we see the end game here in terms of the core investment servicing business as being one which is much more akin to an outsourcing services business, much less susceptible to kind of these instantaneous, I'm going to put it to RFP, and it's just a stickier business. And we are very respectful and wary of our competitors because You know, having an edge and a lead can be easily caught up on, but right now we believe we have that edge and lead and we're going to capitalize on it. In the investment management business, again, similar kinds of changes there. We're seeing, you know, an increased desire for the kinds of things that we do, systematic and otherwise. Asset allocation, which we are very, very good at. is now an area that everybody's talking about after literally decades of reliance on the 60-40 model. Guess what? It didn't work or it doesn't work at all times. It will lead to a lot of thinking and demand for that. So we like our businesses. We like where we are strategically. In terms of what's going to happen, will there be other Brown brothers out there? What I do think that you will see over time is an increasing number of competitors where this may not be their core business saying enough is enough. The capital requirements or in terms of the investment capital requirements are much too high, mostly about the technology. If it really does continue into an outsourcing kind of environment like we believe it will, it's going to put more demands to invest in the business. And if this is business 42 of your 80 business structure, you might decide you don't want to be in this business. So that's how we see it going forward.

That was expansive. Thank you. The fixed cost part of the question, you don't report it that way, but just in rough terms, I guess. So in the asset servicing, less RFPs, lowest price, this enterprise outsourcing, okay. Investment management, more holistic instead of the the old model, but still as you transition, you have a certain degree of fixed costs that are tough to manage. I mean, it's not quite like a brokerage firm where you reduce bonuses. So is there any way just to ballpark how much of your expenses are fixed costs? And I think they've come down from the past. You're probably trying to floor them more.

Mike, it's Eric. All good questions. I think that this is actually an industry which used to be variable cost intensive, right? It was very manual. And when you had a new piece of business, you actually had to hire fund accountants who were working on ledger paper first and then on the Excel sheets next. And so it's quite manually intensive and variable in nature. It's actually as we've automated, think about the data centers, you've talked about the movement of the cloud, the developers that we have. This business has really evolved to a fixed and semi-fixed cost-oriented business in truth. And that means that for certain types of business, we bring on custody business, core custody, kind of the most automated and the oldest part of what sits in our franchise. That comes in, you plug it in, and the computer is just processed a few more times Not overnight, but literally, you know, in nanoseconds. Right. And so this is become a more fixed cost business. And so what we need to do is think about how do we want to manage those fixed costs? How are they deployed? You know, the development dollars in technology. How do we shape that each year? Because we can, if we, if we do that right, we'll add feature functionality and that'll bring in new business over time. That'll help retention. Uh, and, um, you know, that'll help, uh, growth. And so this is, uh, more of a fixed cost business and semi fixed costs, you know, where, where is it? It's, it's more 80, 20 fixed and semi-fixed than, uh, uh, than 20 80. And I think it's actually has evolved. And so what's important for us to do is to make sure that we have the products and the offerings and the client coverage to support that and to at new business, at the right type of new business, and then where there are variable cost components. We've talked about some of the more manual and complex areas, right? Servicing for privates, for example, is still quite manual. It's complicated. There are not standard systems. Typically in the industry, there's very little in third-party software that one could avail oneself of. Those are the variable areas where we need to continue to find ways to automate and streamline, and that's part of what we're doing with the ongoing investment program that we have underway. All right. Thank you.

Thank you. Your next question comes from the line Rob Wildhack from Autonomous Research. Please go ahead.

Hi, guys. AUCA wins in the fourth quarter were pretty good. And Eric, you called out a strong pipeline there. What level of new business wins are you expecting in 23? And do you see those coming from any specific client category, cohort, service area, anything like that?

You know, as we have said, the pipeline remains strong. I think we're pleased with wins this year. Wins were about a trillion nine for the full year. What I have said is, and I think we feel good about this target or line in the sand, is we've said to drive the kind of organic growth that we'd like, we want to win about a trillion five per year of new business. We did that this past year. We did it in spades, closer to double that in 2021. Uh, and, um, so, and that's, that's our expectation. We, we, we, we expect, and we, we think that's, uh, uh, that's, that's par, you know, for, uh, for 2023 as well. Obviously we want to sell more than that, right? We want to bring in new, more new clients or, or further deepen relationships with existing clients. I think what we feel good about here is both the new business this year, the, you know, the trillion, uh, nine that has come in has come in at good fee rates. the fee rates of the new wins are actually in line with our overall fee rate this year. And so that means that as it onboards, it'll be neutral or even accretive to the fee rate. So that's important. That's an important part of the program. In terms of segments, it's been broad-based. I mean, this past quarter, for example, was broad-based across regions. Literally, I think it was a third, a third, a third. And we saw particularly strong growth this past year in Asia. We'd like to repeat that again. I think we have an intensity on Europe and North America as well. So I'd say it's not one particular segment or one particular region. It's fairly broad, but it's a good pipeline overall.

Got it. And then you also mentioned some higher renewals in the alpha business. Wondering if you could talk about the retention rate there. How's the retention among front to back clients compared to your more traditional back or middle office only clients?

Yeah, Rob, I mean, in terms of fully installed alpha clients, the retention rate is 100%. And you wouldn't expect it to be much less than that simply because it's still relatively new. I think that there's a real commitment that's made on both sides of the house when you enter into these things. First of all, to actually rewire the firm around, for the client to rewire around front to back is a lot of effort on their part. And while there's a lot of commonality across these clients, there's a lot on our part that we need to do to install it. So the contracts are longer, but the reality is that the switching costs have also gone up dramatically in these front to back things. So we would expect more, but we also recognize that we've got to earn that. I mean, we've got to, right now there's a, when that happens, there's a huge dependency on the part of the client in us delivering every day. And so we take that responsibility quite seriously.

Got it. Thanks, Ron.

Thank you. Your next question comes from the line of Vivek Jenecha from J.P. Morgan. Please go ahead.

Thank you. Just a couple of little details for you, Eric. You mentioned RWA came down by about $10 billion in your expect to see another decline, 10 to 15 billion. Any color on what you did there? And is it sustainable post 1Q?

Yeah, let me just clarify. RWA was lower than expected in the fourth quarter by about 10 billion. And in first quarter, we expected to reverse, in other words, to move back up by 10, 12, 15 billion dollars. And it's just driven by some of the underlying volatility in our business. For example, overdrafts were lighter than expected this quarter. They moved around by a few billion dollars, and that moves RWA by a few billion dollars each quarter. In the FX book, you know, we run a very sort of typical forward book, you know, two weeks, four weeks, six weeks forward. And as you have U.S. dollar appreciation or depreciation, you can get you can get $5 billion moves in RWA relatively easily. So that's just the volatility that we saw. We tend to be quite careful to stay within our RWA internal limits. That's why we tend not to have upswings in RWA, but we tend to have these beneficial quarters now and then. And we'll just note them to you so you can model out our capital ratio trends.

Great. Um, second, another little detail for you, your software processing and data. Could you parse that into data versus CRD since that's not combined? Uh, since you've got this big growth rate there, what's going on underneath? How much is data? How much is.

Sure. It's a, it's a, it's a combination. I mean, the, the bulk of that is really around Charles river, uh, and the franchise that we, uh, you know, we purchased back in 2018, which has really given us the kind of growth that we had expected. So you can go back and compare the size of the franchise. I think at the last disclosure, I think we probably showed it a year ago, and compare it to that software and data line and get a kind of percent adjustment. But it's the large, you know, it's the large majority, I'll say, of that line. Data to us is a very appealing offering that supplements what's sometimes sold with the Charles River Offering, sometimes with Alpha and the Middle Office, sometimes sold as supplemental to just custody and accounting because it's such a high value and informative kind of window, sometimes for risk management purposes, sometimes for client transparency purposes for our asset manager or asset owner client. And so it's actually one of the faster growing areas of that area. And that's why we put it together because it's actually a software type sale, but an important one.

Yeah, Vivek, it's Ron. Let me just add to that because we've done a lot of innovation in this area, new product development, and we do expect that to continue to grow, as Eric said, because everybody's interested in simplifying their operations, simplifying and getting control of their tech debt and innovating on the technology side. But in addition, there's a data management, data control in some parts of the world with some investors, it's also location of data. Where does the data actually both move and rest? So this is an increasingly, this is a growth area. It goes beyond asset managers, large asset owners in particular are very interested in this. So we see it as a way to extend what we're doing broadly in the alpha arena.

And just to clarify on CRD, Eric, to your comment earlier, when you had previously talked about it was growing in sort of a low double-digit range, this was a year or two ago when it was broken out, is that still the pace at which it's just continuing to grow, or is that as it matures, slowing down a little bit, or is it accelerating any granularity, you know, any color on that?

Yeah. No, it continues to go at pace. I'd say it moves around depending on some of the on-premise renewals that still flow through the P&L, you know, high single digits, low double digits. And what we've done is continue to – the team continues to drive kind of the core CRD offerings. You know, it started with an equity product. It's moved to equity and fixed income, which are now industry – I think industry – you know, at peer levels, in some cases industry leading. And then what we've done is supplemented that, you know, for example, we purchased a small company called Markatus, which was kind of a front end portion of a Charles River type offering. And so we've added a kind of private markets area to what I'll call the broader Charles River complex. So this is an area that I think will continue to grow. probably twice the rate of State Street help lead us forward, but also is the tip of the spear of how we engage with clients, new clients, existing clients in broader ways. And that's why the core software, I think, is an important product. And what I think I've been pleased with, especially this year, which has been all over the place economically and politically, Even with equity markets up and down, software and software growth, core Charles River data, software for private, continues to grow in this double-digit range, low double-digit range through thick and thin. And that helps balance out, I think, the growth dynamic of the company.

Thank you.

Thank you. That would be for our last question. I'll be turning the call over back to Mr. Ron O'Hanley for closing remarks.

Thank you, Operator, and thanks to all for joining us.

Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect your lines. Have a lovely day.