State Street Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2022

There are 13 speakers on the call.

Operator

Good morning, and welcome to State Street Corporation's 4th Quarter and Full Year 2021 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.

Operator

This call may not be recorded or rebroadcast or 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 Fitzel Beeler, Global Head of Investor Relations at State Street.

Speaker 1

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 Q4 and full year 2021 earnings slide presentation, which is available for download in the Relations section of our website, investors. Statestreet.com. Afterwards, we'll be happy to take questions.

Speaker 1

During the Q and A, 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 1 or more items from GAAP. Reconciliations of these non GAAP measures to the most directly 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 ks. 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.

Speaker 2

Thank you, Eileen, and good morning, everyone. Earlier today, we released our Q4 and full year 2021 financial results. Before I review our results, I would like to take a moment to acknowledge the dedication and strong performance of State Street employees during the past year. These team members remain central to the continued successful execution of our strategy as we hope to create better outcomes for the world's investors. Together, we accomplished a great deal in 2021, including higher fee and total revenue generation, successful execution against both sales effectiveness client retention goals that is driving growth and business momentum, as well as announcing the proposed acquisition of Brown Brothers Harriman Investor Services.

Speaker 2

All of this would not have been possible without our employees' hard work, skill and commitment. Slide 3 of our presentation highlights the progress we made during 2021 with both of our business segments performing strongly as we advance towards achieving our medium term financial targets. Within the Investment Servicing business, we enhanced Our enhanced core strategy combined with our strategic pivot to an enterprise outsourced solutions provider across the front, middle and back office manifested itself in stronger business momentum and revenue growth in 2021, which you can see along the top of the slide. As we successfully diversify and broaden our wins by region and client segment, we achieved record AUCA servicing wins of $3,500,000,000,000 in 2021 and continued to deploy our enterprise outsourcing capabilities underpinned by our integrated front to back alpha platform. We announced 9 additional Alpha wins in 2021 with 10 Alpha clients now live at year end.

Speaker 2

We also continued to enhance our product capabilities in 2021, launching Alpha for private markets as well as our new State Street Digital division. At Global Advisors, we executed well against our long term strategy, which contributed to a number of records for that business in 2021, including revenues, assets under management and ETF inflows. Importantly, Global Advisors Full year pre tax margin expanded by over 6 percentage points in 2021 to a record 32%, deepening the value of our investment management franchise to State Street's results. Our Spider business performed particularly well in 2021, Gaining U. S.

Speaker 2

ETF flow market share, including low cost and active in addition to the record inflows I just mentioned. As I look back at 2021, I am particularly pleased with our client impact, improvement in our sales effectiveness and heightened focus on client satisfaction, Service quality and retention across our businesses, together with a favorable equity market backdrop, help to drive a stronger revenue performance. Notably, full year servicing and management fees each reached our highest level on record in 2021, with total fee revenue increasing by 5% year on year and exceeding $10,000,000,000 for the first time. While we delivered a strong revenue performance in 2021, expense management remained a key focus for us, with company wide and engineering efforts achieving approximately $330,000,000 of gross expense savings. Because of our strong revenue and sales performance in 2021 and the healthy pipeline in front of us, these efficiency savings allowed us to fund investments in our talent, technology and business in the Q4 to drive future growth.

Speaker 2

Even with this increased investment, total expenses were well contained relative to revenue growth, helping to drive improvement in a number of key financial metrics that you can see on the bottom of the slide. Despite record low interest rates and excluding notable items, We delivered meaningful full year pre tax margin expansion, positive fee and total operating leverage and EPS growth in 2021, and we expect to do this again in 2022. Turning to Slide 4, I will briefly touch on our Q4 highlights before Eric takes you through the In more detail, 4Q 2021 EPS increased 28% year over year or 18% excluding notable items. This strong year over year earnings growth was driven by solid total fee revenue growth, which more than offset interest rate headwinds on NII, leading to a good 4th quarter total revenue performance. We delivered 130 basis points of total positive operating leverage the Q4 excluding notable items.

Speaker 2

Importantly, we again expanded State Street's pretax margin, which increased by more than a percentage point relative to the year ago period to 28% in the 4th quarter, excluding notable items. The solid business momentum that we saw during 2021 continued into the Q4, which you can see in the middle of the slide. AUCA increased to a record $43,700,000,000,000 at quarter end and new asset servicing wins amounted to $332,000,000,000 for the quarter. AUCA 1 but yet to be installed was $2,800,000,000,000 at quarter end, while Charles River's annual recurring revenue in the 4th quarter increased 9% year over year to $244,000,000 At Global Advisors, Assets under management totaled $4,100,000,000,000 at quarterend. Management fees increased to a record $530,000,000 in the 4th quarter, benefiting from higher year on year average equity market levels and record inflows to our ETF franchise.

Speaker 2

Turning to our balance sheet at the bottom of the slide, capital return remains a key part of our medium term targets and we recognize its importance to our shareholders. As you know, we suspended common share repurchases in Q3 in connection with our intended purchase of Brown Brothers Harriman Investor Services. We currently expect to reinstate common share repurchases during the Q2 of this year, in line with our previous expectations. To conclude my opening remarks, I am pleased with the strategic operational and financial progress we demonstrated in 2021. We meaningfully improved our full year financial performance across a number of key metrics, creating value for our shareholders and advancing us towards our medium term Looking ahead, I have 4 core strategic objectives for 2022, which are aimed at helping us achieve our vision for the organization and position the business for future success.

Speaker 2

1st is to continue to grow revenue by executing on a number of key strategic priorities this year, including completion of our pivot to an enterprise outsourcer underpinned by our Alpha platform build out, continuing to develop key product offerings and capabilities, particularly private markets, and further strengthening sales and client management capabilities and processes. 2nd, the successful integration of BBH Services is a key priority. The proposed acquisition is a financially compelling use of capital and once closed, it will strengthen our market leadership by creating the world's largest custodian, expand and deepen our international reach, further propel our alpha strategy and add Strong talent that will supplement our focus on client and service excellence and expertise. 3rd, as we did in 2021, We must continue to transform the way we work by driving increased productivity and efficiency throughout our organization. We are developing and implementing a simplified, scalable, configurable end to end operating model.

Speaker 2

This more scalable model will allow us to Deliver increased client quality, operational capacity, speed and resilience. 4th, We must continue to build an even higher performing organization. Our performance culture and improved employee experience will enable us to sustain a more diverse, Engage an empowered team with the experienced capabilities and desired behaviors required for further for future growth. These four goals reflect our relentless focus on performance and achieving our medium term financial targets. I have confidence that we will be able to meet our strategic and client goals, while also delivering positive fee and total operating leverage and expanding our pre tax margin each year through our medium term horizon, aided by the strong momentum we are seeing across our businesses.

Speaker 2

And with that, let me turn it over to Eric to take you through the quarter in more detail.

Speaker 3

Thank you, Ron, and good morning, everyone. Before I begin my review of our Q4 and full year 2021 results, let me briefly discuss some of the notable items we recognized in the quarter outlined on Slide 5. First, we recognized acquisition and restructuring costs, most of which were related to CRD and whose integration is now complete. 2nd, we recognized the net repositioning release of $3,000,000 which consists of occupancy costs of $29,000,000 as we continue to reduce our footprint And a release of previously accrued compensation costs worth $32,000,000 as attrition picked up and we redeployed staff more effectively than anticipated. 3rd, we saw an opportunity to correct an imbalance in the competitiveness of our compensation program by accelerating expenses associated with certain deferred cash incentive awards.

Speaker 3

The impact of the acceleration increased expenses by $147,000,000 in this quarter. This change will allow us to realign the mix Immediate versus deferred cash in our incentive compensation awards in future periods, which will make our pay practices competitive and enable us to better attract talent in an increasingly tight talent market. Our mix of deferred equity remains unchanged. Finally, you'll see that in the 4th quarter also benefited from a $58,000,000 gain on sale of legacy LIBOR based securities previously classified as held to maturity. This sale and this quarter's higher than usual tax benefit helped to offset some of the deferred compensation expense acceleration I just mentioned.

Speaker 3

Turning to Slide 6, I'll begin my review of both 4th quarter and full year 2021 results. As you can see on the top left of the We finished the 4th quarter with strong revenue growth compared to 4Q 'twenty. 4Q 'twenty one fee revenue increased 4%, primarily reflecting strong growth in servicing fees, management fees and CRD revenues, only partially offset by lower FX Trading Services. 4Q expenses were well managed, delivering positive total operating leverage notwithstanding the significant 2021 NII headwind. 4Q pretax margin is up more than 1 percentage point year on year and ROE is up almost 2 percentage points.

Speaker 3

On the right side of the slide, we show our full year 2021 revenue performance. As Ron highlighted earlier, 2021 was a record year for us for fee revenues. And despite historically low interest rates in 2021, I'm quite pleased that for the full year, we still delivered positive operating leverage of more than a percentage point improvement in pre tax margin and EPS growth in the double digits. Turning to Slide 7, you'll see our investment services balance growth remains strong as we saw record AUCA CA at the end of the Q4 of $43,700,000,000,000 a year on year increase of 13%, largely driven by higher market levels, client flows and net new business. Quarter on quarter AECA growth was muted as markets were pretty mixed.

Speaker 3

At Global Advisors, AUM at year end increased 19% year on year and 7% quarter on quarter to a record 4,100,000,000,000 The year on year and sequential quarter increases were both primarily driven by higher market levels coupled with net inflows. Of note, we reported strong net inflows during the Q4 of almost $80,000,000,000 Our global Spider ETF business recorded the highest ever quarter, driven by strong U. S. Flows, pushing total net ETF inflows to $107,000,000,000 for the full year. Turning to Slide 8, you can see another quarter of good business momentum.

Speaker 3

4th quarter servicing fees increased 6% year on year. The increase reflects higher average equity market levels, client activity inflows and positive net new business again. These items were only partially offset by normal pricing headwinds and about a full point of currency translation. On a sequential basis, I would remind you that while the S and P was up on average, international markets were down, so markets were relatively neutral. Servicing fees were down 1%, primarily due to client activity and adjustments and the impact in appreciating U.

Speaker 3

S. Dollar, partially offset by another quarter of positive net new business. AECA wins totaled a solid $332,000,000,000 in the 4th quarter, which At quarter end, AUCA won but yet to be installed amounted to $2,800,000,000,000 with alpha representing a nice proportion, which reflects a unique value proposition and our competitive strength as the only front to back offering from a single provider. Turning to Slide 9, 4th quarter management fees reached a record $530,000,000 up 8% year on year and up 1% quarter on quarter, resulting in an investment management pre tax margin of 34% per 4th quarter. The year on year management fee results primarily benefited from higher average equity market levels and strong ETF inflows.

Speaker 3

These year on year benefits were only The quarter on quarter results were largely driven by a slight uptick in equity market daily averages. As you can see on the bottom right of the slide, our franchise remains well positioned as evidenced by both strong quarterly momentum and full year results. We are particularly pleased that the actions that we've previously taken over the years in our long term institutional and ETF franchises delivered growth over the course of 2021. Regarding management fee money market waivers, We currently expect that they will come in at approximately $5,000,000 less in the Q1 of 'twenty two based on an anticipated March Fed rate hike, which will be included in our 2022 outlook. Turning to Slide 10, let me discuss the other important fee revenue lines in more detail.

Speaker 3

FX Trading Services was down 7% year on year, reflecting lower FX volatility and lower volumes in our standing instruction business. On a sequential basis, FX revenue increased 8%, primarily driven by higher FX volatility, partially offset by lower volumes. Moving to Securities Finance. 4th quarter fees increased 16% year on year, mainly reflecting higher client securities loan balances and new Business Wins and Enhanced Custody. On a sequential basis, fees were down 4% quarter on quarter, mainly as a result of lower agency balances.

Speaker 3

Finally, 4th quarter software and processing fees were down 4% year on year and 2% lower quarter on quarter, largely driven by lower market related adjustments, partially offset by continued growth in CRD, which I'll turn to next. Moving to Slide 11, I'd like to highlight our CRD and alpha performance. We delivered strong standalone CRD results in the quarter with year on year revenue growth of 13%. Full year standalone revenue growth was 11% year on year, which makes this the 2nd year in a row where we grew the business revenue in the double digit range. The more durable SaaS and professional services revenues In addition, we achieved record new bookings of $62,000,000 for full year 2021 with a healthy revenue backlog of $117,000,000 at quarter end, demonstrating the continued business momentum as we head into 2022, supported by the State Street Alpha value proposition.

Speaker 3

Turning to Alpha on the bottom right of the slide, full year 2021 was a busy year as we announced 9 new Alpha mandates and nearly doubled the amount of wins we've achieved since inception. At year end, we have 10 total live Alpha clients. We've also been busy enhancing our Alpha product offering this year. In addition to launching Alpha for Private Markets and our acquisition of Mercatus in the 3rd quarter, we also went live with our Alpha data platform in the 4th quarter, which is our cloud native platform providing enterprise data management and access to all the data and analytics that our clients use to perform their daily end to end investment processes. Turning to Slide 12.

Speaker 3

4th quarter NII was down 3% year on year, mainly driven by the impact of a low 2021 interest rates on the investment portfolio yield, partially offset by another quarter of higher loan balances, as well as growth in deposits and the investment portfolio. Relative to the Q3, 4Q NII came in 1% lower, primarily as a result of the expected normalization of premium amortization. As you may recall, Q3 'twenty one included an episodic benefit worth about 7,000,000 which we previously noted wasn't expected to repeat in Q4. We do, however, see continued premium amortization slowing. We, like many of you, are excited about the rise we've seen in long end rates this year.

Speaker 3

However, short rates have been flat so far, and it's really the prospect of Fed action during the March timeframe, which would have a significant benefit on NII. On the right of the slide, we show our average balance sheet during the 4th quarter. Average assets increased 4% quarter on quarter, primarily driven by higher deposit levels. We consciously allowed average deposits to float up this past quarter, which we then expect to monetize in a period of rising interest rates. Turning to Slide 13, 4th quarter expenses excluding notable items were up 1% year on year as we previously decided to increase incentive compensation to reflect Strong year on year performance and pulled forward some investments in the business.

Speaker 3

At the end of the year, however, we also experienced some higher than expected episodic expenses. Medical costs were higher as we saw ramp up in year end claims. We saw some elevated IT vendor costs and we realized higher marketing And associated with GA volumes. Compared to 4Q 'twenty, on a line item basis, excluding notable items, Compensation and employee benefits was up 2%, driven by higher incentive compensation and medical costs, partially offset by lower headcount and salaries. Notably, our continued focus on digitization automation as well as resource discipline have helped us reduce our headcount this year by 2 percentage points, even as we onboarded larger deals and processed more transaction volume.

Speaker 3

Information Systems and Communications were up 11% due to continued investment in our technology infrastructure and resiliency as well as equipment expenses as we move more activities to the cloud. Transaction processing was down 7%, primarily driven by lower market data and brokerage costs. Occupancy was down 6%, reflecting the benefits from eliminating another 5,000 seats and achieving 115% occupancy rate. And other expenses were down too. Overall, we're pleased this year with our continued ability to demonstrate productivity and expense discipline.

Speaker 3

Excluding the impact of currency translation worth approximately 1 percentage point, full year 2021 expenses would have been flat And in a year where fee revenue grew by mid single digits, we meaningfully expanded our pretax margin and generated positive total and fee operating leverage despite a challenging interest rate environment. 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 side of the slide. As you can see, we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements. As of quarter end, our standardized CET1 ratio of 14.2% increased 0.7 percentage points quarter on quarter, primarily reflecting an outsized reduction of about $5,000,000,000 in RWA related to the impact of FX mark to markets and higher retained earnings.

Speaker 3

We expect RWAs to increase in the Q1 to more normalized business levels and the effects of expected regulatory changes coming in 2022, all of which has been previously considered in our capital guidance. Our Tier 1 leverage decreased slightly quarter on quarter, mainly driven by higher client deposits. And lastly, we returned a total of $209,000,000 to shareholders in the form of 4th quarter dividends. As previously communicated, we expect CET1 and Tier 1 leverage ratios to be at the lower end of our target ranges for the first half of twenty twenty two, inclusive of the implementation of SACCR and the expected closing of the Brown Brothers Investor Services acquisition. Turning to Slide 15.

Speaker 3

You can see a summary of our 4Q 'twenty one and full year 2021 results. I've already covered Q4 in detail, so let me say a few words about our full year results before jumping into our outlook for 2022. In summary, we're pleased with our strong performance this year. Notwithstanding the challenging interest rate environment, we delivered a 5% increase in total fee revenue for the year with servicing and management fees reaching our highest levels on record. Our expenses for the full year remained well controlled and despite higher revenue related costs and investments in our business and people.

Speaker 3

As a result, even in last year's low rate environment, we delivered Positive operating leverage and we were able to drive pretax margin and ROE closer to our recently enhanced medium term targets. And with that, I'll turn to outlook. On Slide 16, let me cover our full year 2022 outlook as well as provide some thoughts on the Q1, both of which do not yet include the previously announced acquisition of the Brown Brothers Investment Services. We continue to target a closing by the end of the Q1, although the timing could fall in the Q2. We are in the process of obtaining the required regulatory approvals, some of which have already been secured.

Speaker 3

The process is proceeding at a slower pace than anticipated with many regulators around the world addressing the high volume of global M and A activity. That said, given the current higher equity market step off and new interest rate forward, We now expect about 25% year on year EBIT growth for the acquired business for each quarter in the 1st year post closing instead of just 15% year on year EBIT growth in our original acquisition deal modeling. Now as I usually do, let me first share some assumptions underlying our current views for the full year. At a macro level, our rate outlook largely aligns the current forward curve and assumes we see 3 U. S.

Speaker 3

Rate hikes in 2022, with the first hike occurring in March. We are also assuming around 5 percentage point to point growth for equity markets in 2022 as well as further normalized FX market volatility, which influences our trading businesses. As for currency translation, we expect the U. S. Dollar will be stronger for the year, which will be a headwind to revenues, but mostly offset as a benefit to expenses.

Speaker 3

So beginning with revenue. For the full year, we currently expect that fee revenue will be up 3% to 4%, with servicing fees growing 2% to 3%, both include about a point of currency translation headwind for 2022. Regarding the Q1 of 2022, we expect fee revenue to be up 2% to 3% year over year Given equity market expectations and continued business momentum with servicing fees expected to be up 1% to 2% and management fees expected to be up 8% to 9%. For full year NII, depending on the timing of the projected rate hikes, we expect 2022 NII to be up 10% to 12% on a year on year basis. Regarding Q1 of 2022, we expect NII to be up 3% to 4% year over year Now turning to expenses.

Speaker 3

As you can see in the walk, we expect expenses ex notables will be up just 1.5% to 2% on a nominal basis in 2022 as we continue to invest in the business and our people, while driving both positive total and fee operating leverage. We currently assume that this includes a 1 percentage point benefit to expenses due to the stronger U. S. Dollar. You can also see on the walk that for full year 'twenty two, we expect another year of gross saves of approximately 3 to 4 percentage points, which will help fund variable costs and ongoing business investments in areas like alpha, digital, tech infrastructure and automation.

Speaker 3

Regarding the Q1 of 'twenty two, we expect year on year expense growth to be largely in line with the full year guide and includes the seasonal compensation expenses, which occur in the Q1. All in all, our plan is to invest behind the revenues and deliver both Positive total and positive fee operating leverage. Finally, we estimate our effective tax rate to be in the 17% to 90% range for 2022. And with that, let me hand the call back to Ron.

Speaker 2

Thanks, Eric. Operator, we can now open the call for questions.

Operator

Your first question comes from Alex Blostein of Goldman Sachs.

Speaker 4

Hey, good morning, guys. Happy New Year to both of you. So maybe we can start unpacking some of the guidance. I'm sure there's going to be Good amount of follow ups on the back of that as well. But maybe just starting with the fee guide, really zoning in on service and fees.

Speaker 4

State Street has obviously made a considerable amount of improvement in retaining clients and winning a business. So maybe help us unpack within the 2% to 3% Growth for the year, what sort of contemplated from markets in terms of the benefit of the 5% that you guys highlighted earlier? So How much of the market benefit versus net new business and pricing? And I'm assuming BlackRock is included in this guidance as well, but How much of a drag in the service and fee revenue you guys expect from loss of the BlackRock mandate?

Speaker 3

Alex, it's Eric. Happy New Year to you too. Let me cover fees and then servicing fees, which I think is where you're focused. Our guide for total fee revenue is up 3% to 4% for the year. Our guide for servicing fees up 2% to 3%, and obviously that includes about a percentage point of headwind from foreign exchange.

Speaker 3

So in effect, The servicing fees are up, for example, 3% to 4% in our guide adjusted for currency translation. If you think about the drivers, we've factored in all the known events, Both our growth, our installations, net new business and so forth. If you want to peel it apart A little more deeply, we start off at a good equity market level and we expect some year on year growth from equity markets that's probably worth 2 percentage points of a tailwind to growth. Flows and client activity, which are variable is probably worth another percentage point and part of our kind of fee structures. Net new business is continues to tick up.

Speaker 3

We expect Core net new business to be up 2% and that obviously includes all the new on boardings offset by Any attrition, so that's on a net basis. And then obviously, there's just the usual 2% grind down of pricing. And that kind of gets you to the low end of our range. We think there's some upside, which is why adjusted for currency, The servicing fee guide is in the 3% to 4% range. And what it does is it represents the continued Acceleration of our business towards our medium term targets, which are really in the 4% to 5% range.

Speaker 4

Great. That's perfect. And just maybe staying on the topic, but looking at the expense side of the P and L, The 1.5% to 2% growth, I think is contemplated on obviously the fee outlook that you just outlined. If we are in a tougher equity market backdrop and let's say you guys don't hit the 2% to 3% servicing fee growth or the 3% to 4% fee growth, What are sort of the bookends around the expense growth trajectory that we could see this year? So in other words, like In flat equity markets, should we expect you to be below the guide on expenses given there's maybe more flexibility or kind of the range is the range and the revenue will be more kind of working independently?

Speaker 3

Alex, that's a fair question. And you can see that part of the way we create some, I'll call it, Relation for ourselves as we think about equity markets and where they might go, whether it's up a lot, up modestly, flat or down, is that we've designed our plans with the view that we should and intend to deliver A couple of points of operating leverage and actually a couple of points of fee operating leverage, right? That couple of points Gives us some flexibility to handle some variability in what happens in actuality in equity markets. I think, so certainly we'll move within our range based on what we see. Obviously, if we see a market, an equity market correction of Down 5% or down 10%.

Speaker 3

We'll do everything we can to come in below our range. And Certainly, we can flex in this business. A full point can be flexed. It's not easy, but it can be flexed. And that would be the approach that we take.

Speaker 3

But we're confident with kind of the level of equity markets they are So we think this is a good kind of middle of the fairway plan, but we'll certainly flex it to the extent that we can.

Speaker 4

That's great. Thanks very much for the color.

Speaker 3

Sure.

Operator

Your next question comes from the line of Jim Mitchell with Seaport Global.

Speaker 5

Hey, good morning. Maybe you could just talk a little bit about The BBH, I appreciate the discussion around the increase in EBIT from rates. How much of that can you speak to their Off balance sheet sweep deposits, maybe update us on the level of that and how you think those act at a rising rate environment in terms of the sweep fees? Is it pretty similar to The spread on deposits?

Speaker 3

Jim, it's Eric. The business that Brown Brothers, it's Ron on the Investment Services side, it's performing well. So what we've seen is with the higher equity markets, we've seen their servicing fees Come in a bit stronger for this coming year. I think the deposits both on balance sheet and the swept ones are within the range of what we've seen. And I think we described those as a bit under $10,000,000,000 on balance sheet and a bit over $65,000,000,000 swept.

Speaker 3

And they're coming in right around that range and that's our expectation for 2022. Both the on and off balance sheet Do have a good translation into Higher revenues as rates move up. And the on balance sheet betas are similar to ours. And We had very nice betas in the early part of the last rate cycle and expect to have that again on ours and on theirs. And then the offbound sweeps also have betas.

Speaker 3

They're not quite as strong as deposits, but They're in the range actually and that also will provide some very nice, I think, fee growth as we take on that business.

Speaker 5

Okay, great. And then maybe just pivoting to the asset management business, you had record flows, Strongest flows in many years. Can you just describe where the biggest drivers of that growth are coming from? What you're doing to enhance that growth? And Is this more just the environment's great or do you think there's some sustainability to that growth to that debt inflow?

Speaker 2

Jim, it's Ron. Let me take that. I think that the growth is reasonably broad based in the sense that it's Firstly, from our investments and ongoing investments in the ETF business. So you saw Lots of strength in the core Spider offerings, which are really instruments of choice for large institutional investors And good growth in areas where we've invested active ETFs, fixed income, The low cost ETFs, non U. S.

Speaker 2

So we expect to continue to see A good performance there, particularly as we've worked to solidify our position with institutional investors. Secondly, in the traditional institutional space, the team's Done a lot of work in developing products that are companions to the core index business. We have a great client roster and we've seen some Diversification in that business.

Speaker 3

And then

Speaker 2

finally, we've got a great cash business there. And Obviously, it ebbs and flows as cash does itself, but we'll also benefit a little bit from rising rate environments As the remainder of the fee waivers goes away. So it's really across the board.

Speaker 5

Okay. Thanks for the color.

Operator

Your next question comes from Steven Chubak with Wolfe Research.

Speaker 6

Hi, good morning. So first, Eric, I just wanted to unpack some of the NII, the The assumptions underpinning some of the NII guidance, I was hoping you can just share some insights in terms of what you're contemplating as the Fed initiates QT In terms of just deposit flight broadly or deposit runoff and maybe deposit remixing out of non interest bearing deposits. And just in terms of spot rates, where you're reinvesting today versus the back book yield?

Speaker 3

Sure. Steve, it's Derek. Let me do that in reverse order. I think the front book and the back book are starting to converge in the investment portfolio and you'll see that our investment portfolio yields took Another small tick downward this quarter and Q4. But starting in Q1, we'll see that relatively flat and then you'll see flat and then you'll see a slow progression upward.

Speaker 3

So we're comfortable with where we are in terms of Long rates and obviously the higher the long rates come in, the better off we'll be. The NII uptick for This year and then let me get to the question around balances and quantitative tightening. I think It's just comfortably dependent on the Fed increases. I think we're showing 10% to 12% expectations in NII. A little more than half of that is off of rising short term U.

Speaker 3

S. Rates. About a Less than a quarter is off rising non U. S. Short term rates and then the last portion is off of The rise in long rates.

Speaker 3

So we're really geared towards the front end rates and then that flows through directly to balances. For deposit balances, we currently expect U. S. And international deposit balances to be Flattish, I'd say, this year. And I think we're all wrestling with What's the pace of the Fed's actions in terms of rising interest rates?

Speaker 3

When does that start? And then when do they start With some amount of quantitative tightening. And I think it's just helpful to book in There's been a lot of discussion about quantitative tightening over the last week or 2. Certainly, it will happen. If you go back to the last cycle, which was just 3, 4 years ago, so not a long time away, quantitative tightening started 2 years after the first rate rise and a full year after the second and third And 4th, kind of that steeper part of the rate rising cycle.

Speaker 3

And so I think quantitative tightening, So there'll be a bid ask range on this. It's something to expect in 2023 more than 'twenty 2. And we'll thereby and then have some effect on deposits. How much is hard to tell. As you know, this cycle, we've controlled some of the uptick in deposits.

Speaker 3

We had pushed them off in 3rd quarter, as you recall, let them back in this quarter. We'll certainly see some deposits ebb downwards in 'twenty three and 24 perhaps or potentially just say flattish, because the question is the pace of the quantitative tightening. And if you recall last time around, just I guess 3, 4 years ago, I think the Fed felt like it tightened too much, Right, and created some disruptions in the short term money markets. And so while we expect some tightening to happen in, Say a year and a half from now or thereabouts, we'll see. I think the pace of the tightening Maybe more moderate, but anyway, we'll see.

Speaker 3

We'll see. That's call it a 'twenty three topic. I think 2022 It should be fairly straight.

Speaker 6

Thanks for that context, Eric. And just for a follow-up on how you're thinking about capital management. You spoke about reinitiating the buyback beginning in 2Q. I was hoping you can give us some context as to like what level of payout You're planning as we look ahead to 2022, 2023. And just in terms of future changes to the capital regime, Any guidance you can provide on the impact of SAKR or and preliminary thoughts on the impact of upcoming changes under Basel IV regime would be really helpful.

Speaker 3

Sure. There's a lot there, Steve, in your question. So let me take it Kind of from the near end timeframe to further out. We've I think we're pretty comfortable with our capital guidance that We'll be at the low end of our 10% to 11% range for CET1 in the Q1. That includes both the SACR being implemented And the consummation of the Brown Brothers acquisition.

Speaker 3

That I think will carry us through at the low end of our range for the first half of this year. And we're, I think, comfortable with both of those. As we go through the year in the Q2, we'd certainly like to start the buyback. We'll see at what pace the pace of a buyback start will depend on the kind of the Exact capital ratios as we hit Q1 and then Q2, we'll see how OCI swings either Positively or negatively. And so I think that then sets us up to start buying Back stock in the Q2 and then proceeding at pace in Q3, Q4 and beyond.

Speaker 3

And then I think at that point, we're back to Trying to or not trying, but operating within our guidance that capital return should be in the 80% plus of earnings. And that puts us, I think, in a way that we continue to return through dividends and buybacks capital in a nice comfortable way. So anyway, a nice path forward. But First half of this year, I think low end of our ranges. And then in the second quarter and then 3rd quarter, 4th quarter, we start to reinstate and then accelerate in buybacks to a comfortable level.

Speaker 3

The Basel III refinements, Basel IV Endgame, There are different ways, different vocabulary out there. It will certainly come to pass. Clearly, we'll get some benefits on the loan book, though we have A smaller loan book than others. We'll probably get some headwinds from the fundamental review of the trading book and then some headwinds from The ops risk capital charges. So my guess is it will be a bit of a headwind, but like I I said before, it's been all factored into our capital ratio guidance.

Speaker 3

We generate quite a bit of capital each year, And we feel comfortable that we can continue to deliver on our medium term targets of returning 80% or more of earnings back to shareholders. That's great color, Eric.

Speaker 6

And just quickly, can you did you quantify the impact From Saker, just so we could start to reflect that in our models?

Speaker 3

Yes, I didn't in the prepared remarks, but the rough amount, We carry typically about $115,000,000,000 of RWAs, it was a little less this quarter. SACR is will cost us in the Q1 just over 10,000,000,000 And we've got offsetting actions worth about half of that, about half, so call it around $5,000,000,000 So I think net basis, it's probably worth about $5 of RWA. But as I said before in my prepared remarks, This has all been factored into our capital guidance that we gave back over the last several quarters and we're confirming and affirming that will be within our ranges in the first half of the year.

Speaker 6

Understood, Eric. Thanks so much for taking my questions.

Speaker 3

Sure.

Operator

Your next question comes from Gerard Cassidy with RBC.

Speaker 7

Good morning, Eric. Good morning, Ron.

Speaker 2

Hi, Gerard.

Speaker 7

Eric, can you give us some further color on You gave us good detail on the servicing fee growth and how you expect to see that 3% to 4% Grow this year with some new inflows as you pointed out, but also from some equity improvement in the markets. I think you said about 2 percentage points of that number. When you take the when you look at the equity portion, how Important is the U. S. Markets versus EMEA and the other markets.

Speaker 7

Can you kind of give us a flavor? Is it generally geared toward the U. S. Markets That drives your growth?

Speaker 3

Gerard, it's Eric. It's really a mix. I think maybe almost If I just think about the ranges, it's a bit under half that's driven by U. S. Markets, Closer to probably, I don't know, a third ish of European markets.

Speaker 3

And Australian emerging markets just because of the, in some cases, the higher fee rates is also Important that could be worth 20%, 25%. The other is, remember, we have part of our book is fixed income Assets that we service and so that's why equity market tailwinds affect part of our book, but not All of our book and rising rates, we've got the opposite effect on the fixed income side. What I just as we from Planning purposes as we go into the year though, on a point to point basis or If we were to say flat from now through the end of the year versus the average of last year of 2021. That in and of itself should give us at least a Point, point and a half of servicing fee lift. And then what we're talking about is whether the point to point growth from December 31 to 2022 December 31st can give us that extra half a Point.

Speaker 3

So I think that's how you get the roughly 2 percentage point tailwind that we expect. Some of it is in a way baked in, assuming markets don't go down and A smaller piece is coming from some modest depreciation.

Speaker 7

Very good. And then as a follow-up, You discussed it as have your peers about the expectation of rising interest rates and short term rates that fund rates In 2022, can you share with us the duration of the fixed income portfolio? And what rates Should we watch carefully that would impact the AOCI, meaning the mark to market would be negative for The portfolio?

Speaker 3

Yes, we the duration of the investment portfolio, we inched down this quarter. You could have seen that In the NII slide that we had, I think we're at about 2.9 years. So trended down A bit from the last quarters, last couple of quarters. And Right now, we're a little more comfortable. We've been investing in the belly of the curve, kind of the 2 to 5 year range.

Speaker 3

I think the 10 year Up through 2 percentage points is quite comfortable for us, including from an OCI management standpoint. I think if you get a good bit above 2 percentage points on the 10 You kind of have a you got a double effect. On one hand, you get an OCI Head, which obviously accretes back over time. So it's temporary. And on the other hand, you celebrate higher rates flowing through the investment portfolios over the Coming quarter.

Speaker 3

So I think it's mix, but net positive if we have some sort of spike at the back end, But it would affect just the mechanics of how we operate quarter to quarter on the margin.

Speaker 7

I appreciate that. Thank you, Eric.

Speaker 3

Thank you, Gerard.

Operator

Your next question comes from the line of Rob Walt Heck with Autonomous Research.

Speaker 8

Good morning, guys. You had another good quarter of loan growth here with average loans up 7.5% sequentially. What were the drivers there and how sustainable do you think that is into 2022?

Speaker 3

Rob, it's Eric. Loan growth has been good for us the last, say, couple of years, to be honest. I think we've comfortably Driven loan growth quarter after quarter, up in the low double digits on a year over year basis. This Quarter, we continue to see good client demand, but we also shifted some we also added some CLOs in loan form as we reduced the CLOs in securities form from the investment portfolio. So there was a bit of a shift.

Speaker 3

That said, I think in general, what we're comfortable doing is continue to grow Core loans because that's we won't always have a shift every quarter. This is more episodic just as we rebalance and think about Stress testing and how to operate efficiently with our multiple constraints. But we're still comfortable continuing to grow this loan portfolio In the low double digit range, it won't happen every quarter. There's a little bit of seasonality, but we continue to see quite strong demand from our Alternatives clients and private equity capital call financing, we see demand In some parts of the alternative and real estate markets that we play in. And the biggest focus I'd say is as we lend more and deploy capital to our clients, A lot of what we do is work with them and make sure that's part of a broader relationship because that's where it really is renumerative Yes, for us and for them and helps us grow the helps us build the reputation And the momentum to build the fee line as well.

Speaker 8

Got it. Thank you. And then Turning to expenses and operating leverage, the outlook implies maybe a 2 percentage point delta between fee growth and expense growth, but Yes, that also bakes in plus 5% or 6% from investments in variable costs. Do you think of that as still an elevated level of investment and there's some more Operating leverage available longer term or is this kind of the required level of investment going forward?

Speaker 3

It's hard to forecast the future. The amount of investments is partly around What's table stakes in the marketplace and partly around where do we see opportunities to differentiate our offerings. And clearly, You've seen us invest in particular in Alpha, in the front office and Alpha that spans into the middle and back office. We're also finding opportunities in the back office to invest through a set of feature functionality enhancements in custody In some areas of accounting, which also is attractive and segment by segment. So it's hard for me to say what's The necessary amount of investments.

Speaker 3

We think there's a range. We think last year we probably invested A bit less than this, probably instead of 5% to 6%, I'd say there was probably a 0.5 Less of investments during 2021. So I think what you'll see us, you'll see us flex the amount of investments from 1 year to the next. I think what we're conscious of is that confidence in investing should come from seeing the revenue growth And seeing the revenue growth from past investments and that's what we're seeing. We're seeing the revenue growth from the past investments that we've made across the franchise.

Speaker 3

And I think that gives us the confidence to continue to carefully invest, In some cases, accelerate that, but I think in modest ways. I think the other part of our culture has been At the same time as we invest, find productivity and savings. And that's we think that's an important part of how to run A business, but certainly a business that over time we're digitizing and automating should Come with productivity savings and engineering. And I think the other Part of our business processes, and I think you'd hear this from our senior executives, the more we can Drive and productivity saves, the more we feel comfortable in investing and that's a very that's a virtuous circle.

Speaker 9

Yes, that's helpful.

Speaker 2

Rob, Rob, what I would just add to that is that it's actually good news that we're seeing Opportunities to invest in the business, because particularly as we've built out the Alpha platform, which was originally Aimed at the asset management space and the traditional asset managers, we're now starting to roll out Alpha for Private Markets. So it's good that we're seeing the opportunities, but I would underscore Eric's point Notwithstanding that goodness, what we're focused on is continuing to eke out higher and higher productivity, And we see more opportunities there. So we see the ability of this virtuous cycle to continue for quite a while longer. And the fact that there are investment opportunities is actually a good thing because it shows that Notwithstanding the narrowness of our of where we operate, there's plenty of spaces to grow.

Speaker 8

Got it. And fair to characterize it then that this level of investment maybe last year and this year gives you the capacity and the room to play both Offense and defense?

Speaker 10

Yes.

Speaker 8

Great. Thank you.

Operator

Your next question comes from Glenn Schorr with Evercore.

Speaker 11

I like that, that rhymes. Question, on the deferred comp acceleration, I'm just curious, what level employee are we talking? And I'm asking because The deferred portion, obviously, you're saying to get practices more competitive, so that Presumes that you were deferring more than peers and that going forward you'd have a higher cash piece going forward. I'm just curious on It's probably included obviously in your expense guide, but what's changing here and why was what I was thinking?

Speaker 2

Yes. Glenn, for the employees that are going to feel this would be are not our most senior employees. It would be kind of The middle senior, lower senior, if you will, and down. So in our parlance, AVPs, VPs, MDs and some of the Senior Vice Presidents will see you.

Speaker 3

Okay. And then, Glenn, just to give you context, we've made this change. We had made one change 5 years back and I think this now gets us to be competitive with the marketplace. And the way The facts that might help a little bit is, way back when we had immediate Cash in the 30% range of compensation for the average employee. The deferred cash was 40% and the equity, the deferred equity was 30 That was a place that was completely out of market.

Speaker 3

We fixed about 2 thirds of that 5 years ago and got to 50% immediate cash, 20% deferred cash and 30% deferred equity. And now we're with this Final change, we're going to take that up to the immediate cash to 60% to 65%, the deferred cash to just 5% to 10%, Mostly for the most senior folks and then the deferred equity stays at 30%. So we think we're now in line with the market as part of this change. What does happen is you've got to crystallize some of these deferrals into the P and L in the current period. And then what that allows us to do is going forward to add to the cash mix.

Speaker 3

And because we've crystallized the previous deferrals, those don't hit the P and L in the future, But the new cash will hit the P and L in the future. So this will be neutral to subsequent periods on the expense line.

Speaker 11

Okay. Thank you. Very helpful. The one I was going through your 4 objectives, Ron. And the first I think are straightforward and I think everyone has high confidence in your ability to do those.

Speaker 11

I'm curious on the how to and what you're doing, what you're going to measure And number 4, which was the must be a higher performance oriented organization. Just curious on how you talk to how you're going to execute on that?

Speaker 2

Yes. So I mean, this is an ongoing objective of ours, Glenn, and it really is around Performance culture. And if you think about culture, which is a very used and sometimes maligned For us, it's about desired behaviors. And on the flip side, kind of eliminating undesirable behaviors. So what we're focused on is those desirable behaviors, all related to Kind of driving performance.

Speaker 2

I would argue that it's even more important now than when we started a couple of years ago because on top of everything else that we need in terms of serving our clients and serving our shareholders. We're now operating we're now all operating in this hybrid world for the foreseeable That puts a burden, new burdens and new requirements on managers, particularly middle managers. So it's all about being able to eke out the benefits, which are considerable in a hybrid world in terms of employee flexibility and some real estate cost savings and those kinds of things, but at the same time, Making sure that we're continuing to deliver where we are. So we think about performance in terms of and we think about Culture and high performance in terms of behaviors.

Speaker 11

Thanks a lot, Ron.

Operator

Your next question comes from Brennan Hawken with UBS.

Speaker 12

Good morning. Thanks for taking my questions. I wanted to circle back, Eric, I believe I just wanted to kind of clarify some of the points you made. I think you talked BBH and the EBIT growth expected to accelerate here in 2022 up to 25%. So Just to make sure I'm level setting correctly, you also talked about some strength in servicing, it's not all NII.

Speaker 12

That 25%, should we apply that to the 3.75% that you provided previously when you announced the deal? Or did that Actual numbers shift from expectation, and am I using the right baseline? And then For the other disclosures you provided around the revenue and whatnot, should we did those shake out in line with expectations? Or Did they work out to be a little better as you alluded to and how should we think about that baseline when we think about 3 quarters of a year here for them?

Speaker 3

Yes. Let me fair questions, Brennan. It's Eric. We had, As you remember, accurately estimated their 2021 performance to be EBIT of about $375,000,000 and they came Right around that level. So we're comfortable with that as a base case.

Speaker 3

And if you recall, we had shown 17% growth from 2020 to 2021 and some of our documentation as we announced the Brown Brothers Investment Services acquisition. From a deal model perspective at the time we had Expected off of the 2021 base to grow at about 15%, so in line with the past. Part of that was the equity market tailwinds continued to play through. And part of that was just good business performance. Our Brown Brothers colleagues and Investment Services really drive a nice set of initiatives each year to drive growth, client And what we're finding now is because of the equity market step off and the interest rate environment.

Speaker 3

And we expect to be roughly at about a 25% EBIT growth from 'twenty one to 'twenty two. I think a portion of that is on the equity is on the servicing fee line. A portion of that is on the fee line that comes from the sweeps. Remember that comes through the fees as well. And then a portion is from on balance sheet NII.

Speaker 3

And I don't have the pieces handy, but clearly the interest rate Tailwind is probably the more significant of those factors and that will affect both the on balance sheet and the swept deposits.

Speaker 12

Okay, great. Thank you for that clarification. And then a separate issue My second question, it looks like there's a transitional leadership, seems like Cyrus is retiring in the Asset Management business. That's been a business where there's been Both speculation and open discussion with you all in the past about strategic direction and whatnot. What does the transition in leadership present as far as an opportunity to shift Strategic direction and what can you let us know about your updated thoughts on that business and whether or not a leadership

Speaker 2

Yes, Brennan. I mean, as you can Maybe see from our results, we've invested in that business over the years and the investments are paying off. We like the business. It's very complementary to the core servicing business, having one of the largest asset managers, Also as our client of our core business has been able to let us have a bit of an R and D laboratory. There's client overlap in certain segments like asset owners and sovereign wealth funds that we've gotten better and better It's leveraging.

Speaker 2

So we like the business. We intend to stay in the business. Under Cyrus' leadership, they've done a great job. And the numbers speak for themselves there. So I wouldn't expect to see a broad strategic change here, Certainly not in that direction I just outlined.

Speaker 2

I mean there's always opportunities to do more and do better in all of our businesses. So we'll want to continue to do that. We've got a very strong talent base there, but this This is an attractive business and one in which we will look inside and out and Get the right person to take us to the next level here. But we have full intention Of continuing to run and grow that business.

Speaker 12

Okay. Thanks for taking my questions.

Operator

Your next question comes from Mike Brown with KBW.

Speaker 9

Hi, good morning. Thanks for taking my questions. So I appreciate the update on BBH and the EBIT outlook And I guess as we move closer to that closing date, I was just curious that the change in the EBIT outlook and the operating environment, does Does that actually trigger any increase in the total consideration that will need to be paid? Obviously, the implied valuation Would be lower than that announcement, so that was just one thought that crossed my mind. And then the follow-up there is, can you just remind us of The unexpected fee synergies specifically, which ones do you feel confident that you can deliver on sooner after the close versus the one that will take more time to come through?

Speaker 9

Thank you.

Speaker 2

Yes, Mike, why don't I start that and I'll turn the synergy Part of the question over to Eric. But no, there's no contingencies in the purchase price either up or down Other than the usual ones that you would expect in terms of risk management. So no, there's There's no additional payment that will be due here.

Speaker 3

And Mike, it's Eric. Just on the synergies, I think each one of them has a cadence, some of which we did spell out, I think, on the cost synergies, which is The opportunity and that's obviously sometimes will come out of their base of expenses, sometimes our base of expenses as we put the 2 together. We had estimated about 40% of our cost synergies would come in year 1 and then the balance year 2 and 3, and that's probably the single largest area. In terms of the fee synergies, the balancing actions should come through relatively quickly. We can modulate the amount of swept versus on balance sheet Deposits because we've got the capital resources planned for that, and I think that's one of the ways that We create real value.

Speaker 3

And then the last one on the fee revenue synergies. Some of the FX Kind of market synergies come in a little more quickly, right, because it's about offering a broader set of, say, FX products, some of which were more capital intensive than simple swaps forward. That is more about Setting up clients and then quickly being there for them. And then some of the servicing ones Take a little longer in part of the sales cycle, but I think there's a good mix. And obviously, as we work on Closing and bringing Brown Brothers in.

Speaker 3

Part of what we've been doing is, as you Expect kicking the tires on what are the opportunities, how to go to the next round of definition on those so that we can hit the ground running. And as I said, when we announced the deal, we'd like to meet or exceed our targets. And I think The exogenous market tailwinds are part of that, but we'd also like to do it on through Old Fashion execution as well.

Speaker 9

Okay, great. Appreciate the color there. And maybe just one last one, just a quick clarification. Apologies if I missed, but did you quantify that discrete tax benefit? Or is it the best way to think about that is just back into it after considering your typical tax rate?

Speaker 3

It's I wrestled, Mike, with that, because there were actually a series of tax benefits that came through this quarter. There was some closing of The previous year tax books, there were some foreign credits that accrue in those jurisdictions, which then help our GAAP taxes and then there are some Foreign credits have been kind of mapped back into the U. S. As a tax payment as a deduction. So there There's a series of them.

Speaker 3

I think the best way to do it is to probably take our full year tax rates In the 17% to 19% range, so you take the midpoint of that. Think about full year this year now with these Discrete, which were more elevated than usual in a good way, got us to closer to 15% Tax rates, I think the difference is probably the you might call the lumpy piece. What I do What I would though also note is that I think tax planning has been The kind of thing that we've done for many years, we do it. We're always on the bright side of the line and we do it carefully. We Part of it being an international bank, we like other international banks are able to do some modest amount of tax planning.

Speaker 3

And so you'll see it I think it's We see that come through the P and L annually. It just tends to be a little lumpy quarter to quarter and it was a little more lumpy good than usual this particular quarter.

Speaker 9

Okay, understood. I appreciate the taxes are always complicated subject. So thanks for the thanks for the color there.

Speaker 3

Sure. Thank you, Mike.

Operator

Your next question comes from Brian Bedell with Deutsche Bank.

Speaker 10

Great. Thanks. Good morning. Maybe just circle back on the deposit opportunity for BBH. Just to clarify, I think you said there's right now $10,000,000,000 of deposit debt on the balance sheet at BPH and then $55,000,000 additional in the sweep program.

Speaker 10

And I think initially you were planning to bring about a total of $20,000,000,000 inclusive of the deposits on the balance sheet over to State Street. So convert initially I think $14,000,000,000 was the conversion to get you to 20 Maybe if you could just update us on the plan for 2022, if you do close at quarter end in the Q1, What you'd like to bring on and then maybe just talk more strategically about maybe what kind of portion of that sweep opportunity you might Bring on to on the balance sheet, I guess, capital permitting.

Speaker 3

Sure, Brian, it's Eric. I think you have a Good estimate of those just for the broader group. I think we said About $5,000,000,000 to $10,000,000,000 are on the balance sheet today, about $65,000,000,000 are off balance sheet and swapped and As we consummate the acquisition and we're targeting the Q1, we said it the end of the Q1 we're targeting. We said it could be in the 2nd quarter. This stuff just takes time.

Speaker 3

We're looking to bring on The 5 to 10 that they have on the balance sheet and probably another 10 ish or so that is swept. I think over time, the question is really at what interest rate levels do we operate at? If we're at prevailing short rates of 50 basis points, let's say, then on balance sheet deposits aren't Terribly attractive, but when you hit prevailing churn rates of 100 bps or 200 bps and obviously you can do this across different currencies, then you're more inclined to bring more on balance sheet. And so we think of it as a range. I think we also though are quite we want to be quite thoughtful about maintaining a program that works Well, it works well for our clients and the Brown Brothers Investment Services clients.

Speaker 3

It works well for a number of global financial that they have relationships with that they sweep primarily dollar deposits to who appreciate those deposits. And so we certainly want to maintain the program For suites, want to maintain it in size, but you can certainly see swings of another 10,000,000,000 Beyond the initial move potentially, but we're I think we'll see when we get there. And part of it will be discussions with The clients themselves on one hand and part of it will be with the counterparties and I think there will be goodness and opportunity here in most circumstances.

Speaker 10

That's great color. And maybe just a segue to second question on deposit beta expectation. I think you mentioned you thought they might be similar to the last hiking cycle. Just To confirm that, it seemed like they moved around a bit during the cycle, but kind of ended up around, looks like a little over 30% of a positive beta relative to Fed funds rates at the time. I don't know, maybe if you can clarify that and if you think That would be similar this cycle and obviously if you would be treating those DBH deposits in a similar Fashion or do they have a different profile?

Speaker 3

Sure, Brian. And it was actually a good opportunity as we see rates rise and The likelihood of the Fed funds, we did get a chance to go back and revisit what we both said and what we saw from a Deposit beta standpoint back in 2015, 2016, 2017. I do expect the Brown Brothers deposits behave similarly to ours. They are Primarily with asset managers, they are currency by currency similar to ours. But if you go back and I think we were good about disclosing our quarter on quarter interest bearing deposit betas and usually you have to do it by currency, right, because of how the betas play through.

Speaker 3

But in the first rate, the first 1 or 2 rate hikes, We saw and expect again to see deposit betas in call it 10% range, maybe 10% to 15% range, It's quite low. When you get to the 3rd, 4th or 5th hike, you're in the 30% range, plus or minus as you leg into the rate cycle. And it's really when you get in the Past there in the 5th, 6th, 7th hike where you're likely to get closer to 50% interest bearing deposit betas. Now I'd like to get there. We'd be pleased with 50% if we get there with that level of prevailing rates.

Speaker 3

But there's I think there's a good opportunity here Because in truth, we've been quite limited in our ability to earn NII That covers our cost of capital. And so a lot of this is just catch up to a levels that are more in line with the long term averages.

Speaker 10

That's great color. Thank you.

Operator

There are no further questions. I'll turn the call over to Ron O'Hanley for closing remarks.

Speaker 2

Thank you, operator, and thanks to all on the call for joining us.

Operator

Thank you for participating. You may disconnect at this time.

Powered by Quartr
Earnings Conference Call
State Street Q4 2021
00:00 / 00:00