Bank of New York Mellon Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 17, 2022

There are 16 speakers on the call.

Operator

Good morning, and welcome to the 2021 4th Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not I will now turn the call over to Marius Merz, BNY Mellon Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to our Q4 20 Relations page of our website at bnymelon.com. Todd Gibbons, our Chief Executive Officer, We'll open with his remarks. Then Emily Portney, our Chief Financial Officer, will take you through the earnings presentation. Following their remarks, there will be a Q and A session.

Speaker 1

Before we begin, please note that our remarks include forward looking statements And financial highlights presentation are available on the Investor Relations page of our website. Forward looking statements made on this call speak only as of today, January 18, 2022, it will not be updated. With that, I

Speaker 2

will turn it over to Todd. Thanks, Marius, And thank you everyone for joining us this morning. Emily will review our Q4 results and spend some time on our 2022 outlook in a moment. But before that, I'd like to touch on a few financial performance highlights for the full year and talk about the progress the firm has made across a number of dimensions in 2021. Last year was in many regards remarkable for BNY Mellon and I couldn't be prouder of the resilience, dedication and innovative mindset of our management team And our exceptional colleagues around the world.

Speaker 2

As I reflected on the year, there were 3 broad themes that really stood out to me. One was our outstanding sales performance and improved organic growth. The second one was the number of new and innovative solutions that we are working on And many cases have already brought to the market. And the third was our improved effectiveness in harnessing our unique one BOI melon culture And the capabilities that we have by delivering more comprehensive and differentiated solutions to our clients. Now I'll expand a little At each of these points in a moment.

Speaker 2

Together with a supportive market backdrop and a benign credit environment, Our meaningfully improved organic growth has allowed us to more than offset the stiff headwind that we had from lower interest rates and deliver a Solid and improved financial performance in 2021. Referring to Slide 2 of our financial highlights presentation, We reported EPS of $4.14 for the full year of 2021, that's up 8% year over year. Revenue of $15,900,000,000 was up slightly year over year as 2 plus percent organic growth And the benefit of higher market levels offset lower net interest revenue and higher fee waivers. Fee revenue was up 4% year over year And about 9% excluding the impact of money market fee waivers. And expenses were up 5% year over year, reflecting our investments as well as the quality of revenue that we generated.

Speaker 2

Our pretax margin of 29% as well as Our return on tangible common equity of 17%. We're roughly in line with the prior year. And we returned 5 $700,000,000 of capital or 160 percent of earnings to our shareholders through common dividends and $4,600,000,000 Share repurchases. As I said earlier, 2021 was marked by outstanding sales performance and a meaningful increase in organic growth. In fact, organic growth was the highest that we've seen in a number of years.

Speaker 2

In Asset Servicing, wins were up almost 50% compared to 2020, Which has produced a meaningful pipeline of AUCA. Our average deal size was up as we won larger and more complex businesses. And just as importantly, our retention rates also continue to improve. We believe this success is a testament to our service quality It's also a reflection of our broader capabilities as well as our open architecture framework, which is resonating with our clients It is differentiating us in the marketplace. I'd also like to call out our ETF business, which has delivered substantial growth And gained market share.

Speaker 2

Our ETF AUCA grew by roughly 30%, which outpaced the broader market And that doesn't yet include our recent win of approximately $350,000,000,000 of BlackRock's iShares. Issuer Services delivered meaningful organic growth on the back of the resumption of depository receipt issuance and dividend activity Following what had been a COVID related slowdown in 2020 and a continued strong sales performance. Pershing gathered record new assets of about $160,000,000,000 and continue to grow active clearing accounts in the mid single digits Advisors. Clients have told us numerous times that our ability to bring broker dealer and RIA solutions together as one Is a real differentiator and we continue to benefit from our uniquely un conflicted role in the marketplace as we don't compete with our clients. Treasury Services delivered strong organic growth on the back of payment volumes recovering to above pre COVID levels.

Speaker 2

And we improved the average price per payment transaction by about 5% as we continue to shift the product mix towards higher value added channels. Clearance and collateral management is now running at a record $5,000,000,000 of collateral management balances. Balance Growth has benefited from our unique role as a primary clear of U. S. Government securities.

Speaker 2

We've also seen continued growth in international balances. Our markets business has offset the impact of lower volatility and tighter compared to the prior year with strong broad based organic growth across FX and securities lending. Investment Management saw the highest net inflows into long term products since 2017, driven by our LDI and fixed income strategies, But also including strong net inflows into our responsible investment funds as well as strength in our initial suite of index ETFs. $70,000,000,000 of net inflows into cash products were the highest in over a decade. We optimized our money market line up to provide a more competitive and scalable offering.

Speaker 2

And with our new CIO in place, we're thrilled to see strong flows and improving market share. And finally, our wealth management business acquired significantly more new clients in 2021 than in 2020. And I'm pleased to see how the team is executing against the strategic plan that we put in place a few years ago. We've continued to gain further traction The larger, faster growing client segments and our expanded banking offering both on the lending as well as the deposit side It has driven a meaningful uptick in the percent of wealth percentage of wealth management clients who also bank with us. The second theme I mentioned earlier was innovation.

Speaker 3

And in

Speaker 2

some cases, it's been outright disruption. This is probably the area that is most exciting for us. I cannot recall in my tenure at the company a year in which we launched or rolled out more innovative products and services And recognizing that the regulatory landscape for this space is still evolving, our investments in building an industry 1st, integrated digital and traditional assets offering are clearly showing positive initial results following the launch of our digital assets unit At the beginning of last year, we solidified our leadership in servicing crypto funds with the announcement of our partnership with Grayscale Investments over the summer. We've contracted with almost half of the pending funds in the U. S.

Speaker 2

And service most of the crypto funds in Canada.

Speaker 4

As I

Speaker 2

said, it's still early days, but we're excited about the disruptive potential of tokenization as well as smart contracts To originate a payment on the Clearing House's real time payments network several years ago, in late last year, we were the first to launch our real time bill pay solution for billers And their customers. We're pleased by the initial uptake. We've already onboarded additional clients and the long List of interested prospects continues to grow. As you know, the market for treasury services is large and it's growing, But it's still very fragmented and ripe for disruption. So we're excited about the market leadership coming out of our Treasury Services business.

Speaker 2

It really goes far beyond just real time payments and include examples like being able to leverage the cloud for wire payments And having been the 1st bank to complete a trade finance deal using SOFR. 3rd item is the future of collateral. As the world's largest Global collateral manager, we continue to lead the charge on driving towards global collateral mobility and optimization by connecting distinct platforms, Expanding the scope of eligible collateral and implementing new capabilities. For example, Last year, we introduced Chinese bonds as eligible collateral on our global tri party platform. And we were the 1st bank to add agency mortgage backed Securities is collateral on overnight cleared repo transactions.

Speaker 2

In another first, we started offering our clients the ability to accept collateral based on their ESG criteria through our digital platform. And finally, I'd be remiss not to mention the lack of Pershing X, which we introduced last quarter. Pershing X will design and build innovative solutions for the advisory industry, including a leading end to end wealth platform that will help firms and their advisors solve the challenge of managing multiple and disconnected technology and data centers. While certainly a multiyear project, the team has hit the ground running. In this past quarter, we acquired optimal asset management, Which is not only an important step in our build out of Pershing X in that it will allow us to offer direct indexing capabilities to our advisory clients within Pershing, But it will also benefit our investment management business as well.

Speaker 2

The 3rd and last theme is

Speaker 3

what we call 1 BNY Mellon.

Speaker 2

Now I've always been proud of our collaborative culture here at BNY Mellon. And as you know, our broader portfolio of businesses differentiates us from our competitors. Over the years, we've emphasized the interconnectivity of these businesses and the meaningful operational synergies between many of them. But we can still do a better job at delivering the whole firm to our clients. And so last year, we conducted a thorough review of the opportunities And further enhanced our setup for cross business collaboration.

Speaker 2

Now I've been highlighting some of the most notable cross business client wins such as Mundy, Lockheed Martin and Oak Hill on our earnings calls over the last couple of quarters. Our ability to seamlessly deliver a much set of capabilities from across our security services, our market and wealth services and investment and wealth management businesses It's a unique value proposition for our clients and our intensified collaboration efforts are already driving higher revenues. In summary, I'm pleased with the progress we've made over the last 12 months. And while we certainly have more work to do, I'm confident that the company is on the right path for sustainably higher organic growth. As we look to 2022 and beyond, We expect double digit earnings per share growth as we are determined to continue delivering consistent organic growth, which together with the current With that, I'll turn it over to Emily.

Speaker 5

Thank you, Todd, and good morning, everyone. Before I review our financial results, I would like to spend a moment highlighting our new financial disclosures. Last month, we announced that starting with the 4th We're going to report Investment Services, which was our largest segment, as 2 new business segments Security Services, which includes Our 3rd segment, Investment and Wealth Management, remains unchanged. We made this change to increase the visibility of some of our most Differentiated businesses to better align our reporting with how we already manage the firm And to provide additional granularity for all of our stakeholders to better track our performance against our strategy. With that, I will turn to Page 3 and our results for the quarter.

Speaker 5

All comparisons will be on a year over year basis unless I specify otherwise. Total revenue for the Q4 was up 4%. Fee revenue also grew by 4% or 8%, excluding the impact of fee waivers. This reflects the benefit of higher market values and continued Elevate organic growth. While not on the page, firm wide AUCA of $46,700,000,000,000 increased by 14%, with roughly 60% of the increase driven by growth from new and existing business and 40% driven Higher market value.

Speaker 5

An AUM of $2,400,000,000,000 increased by 10%, reflecting higher market values and full year net income. Money market fee waivers, net of distribution and servicing expense, were 2 $343,000,000 in the quarter, an increase of $10,000,000 compared to the prior quarter, entirely driven by higher money market fund balances With no meaningful impact on pre tax income. Investment in other revenue was 107 And included a roughly $40,000,000 valuation made on a strategic equity investment. Our investments continue to pay off both strategically as well as in the form of higher valuation. Expenses were up 1% or 6% excluding notable items.

Speaker 5

Our provision for credit losses was a benefit of $70,000,000 primarily driven by an improvement in the macroeconomic forecast. EPS was $1.01 This includes a $0.04 negative impact on litigation reserves And severance expense as well as a $0.02 positive impact of the provision benefit. Pre tax margin was 27%, And our return on tangible common equity was 17%. Quickly for the full year, which Chad summarized earlier on page 4. Total revenue grew by 1%, reflecting higher fee revenue, partially Fee revenue grew by 4% or 9% excluding the impact of fee waivers.

Speaker 5

Investments and other revenue was $336,000,000 a strong year with meaningful gain on our strategic Equity portfolio. And net interest revenue was down 12%. Expenses were up 5%, both on a reported basis as well as excluding notable items. Excluding the impact of notable items, nearly half Expenses and the unfavorable impact of the weaker U. S.

Speaker 5

Dollar. Provision for credit losses was a benefit of $231,000,000 EPS was $4.14 Our pre tax margin of 29% As well as our return on tangible common equity of 17% were roughly in line with the prior year. On to capital and liquidity on Page 5. Our Tier one leverage ratio, which is our binding Capital constraint was 5.5%, down approximately 20 basis points sequentially, Primarily driven by the return of $1,500,000,000 of capital to our shareholders in the quarter, including $1,200,000,000 of buyback, partially offset And we ended the quarter with a CET1 ratio of 11.1% at approximately 60 basis points compared to the Finally, our LCR was 109%, slightly lower Turning to our net interest revenue and balance sheet trends on page 6, Which I will talk about in sequential terms. Net interest revenue was $677,000,000 in the 4th quarter, up This increase was driven by the impact of higher short term rates on floating rate securities on our investment Average deposits balances increased slightly by 1% sequentially.

Speaker 5

And while interest Earning assets were roughly flat. Average loans increased by about 6%, with growth primarily driven by margin loans, collateralized We also deployed some additional Cash in HQLA securities resulting in a quarter over quarter increase of the overall average investment securities portfolio of 2%. Moving on to expenses on Page 7. Expenses Expenses were up 6%, just over half of which was driven by incremental investments net of efficiency saving and the remainder by Higher revenue related expenses, including higher staff expenses. A few additional details Regarding noteworthy quarter over quarter expense variances.

Speaker 5

SaaS expense was up 3%, driven by severance expense expenses associated with exiting lease space as we continue to optimize our real estate footprint and some expenses Business development expense increased driven by higher marketing expenses as well as G and A. Other expenses was down due to lower litigation reserves. On to Page 8 for a closer look At our new business segment, security services reported total revenue of $1,800,000,000 or up 5%. Let me just describe a little about what makes up this 5% increase. Fee revenue was up 6% and up 10% excluding the impact of fee waivers.

Speaker 5

Investment and other revenue benefited from a gain on strategic equity investments. And net interest revenue was down 3%, As I discussed the lines of business Within our Security Services and Market and Wealth Services segment, I will focus my comments on the investment services In Asset Servicing, investment services fees grew by 10%. Excluding the impact of fee waivers, investment services fees were up 12%, primarily driven by higher activity from Our strong performance last Investments in innovation are paying off. In Issuer Services, investment services fees were down 3%. But excluding the impact of fee waivers, investment services fees were up 1%.

Speaker 5

Healthy growth FX revenue in our Security Services segment increased by 6% as solid volume growth from existing and new I am more than offsetting impact on lower volatility. Next, on to Market and Wealth Services On Page 9. Market and Wealth Services reported total revenue of $1,200,000,000 up 1%, primarily driven by higher net interest revenue and fee. Fee revenue was up 1% and up 4% excluding the impact Net interest revenue was up 2% on the back of higher loan balances, partially offset By lower interest rate. Encouraging, investment services fees were down 2%.

Speaker 5

However, excluding the impact of fee waivers, investment services fees were up 3%, and the impact of Clients lost earlier in the year was more than offset by growth on the back of higher market values, client balances and activity from existing clients. The business continued to see good underlying growth. Net new assets in the quarter were $69,000,000,000 and clear Accounts were up 5% year over year. In Treasury Services, Investment Services fees were up 4%. Excluding the impact of fee waivers, the investment services fees were up 8%, primarily driven by higher payment volume.

Speaker 5

And in Clearance and Collateral Management, Investment Services fees were up 7%, reflecting broad based growth on the back of higher Investment and Wealth Management on page 10. Investment and Wealth Management reported total revenue of $1,000,000,000 up 3%. Fee revenue was up 4% 9%, excluding the impact of fee waivers. Net interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates. Assets under management grew to $2,400,000,000,000 up 10% year over year, reflecting higher market values and Full year net inflows into both long term, specifically LDI and fixed income and cash products.

Speaker 5

For the quarter, we saw $31,000,000,000 of net inflows into cash and $4,000,000,000 of outflows from long term products. Investment Management revenue was down 1%. However, excluding the impact of fees waivers, revenue was up percent, primarily driven by higher market value and full year net inflows, partially offset by lower seed capital gains and performance fees. Wealth Management revenue grew by 13%, driven by higher market value, the absence of a loss on a business sale in the 4th quarter of the prior year and higher net interest revenue on the back of healthy loan growth as we continue to deepen client relationship Into banking. I assets continue to grow at a steady pace and were $321,000,000,000 up 12% year on year.

Speaker 5

Page 11 shows the results of the other segment. I will close with our outlook for 2020 2 on page 12. I'll start with a reminder that our outlook is based on the current borrowing curve. With that in mind, we currently expect NIR to increase by approximately 10% in 2022, primarily driven by higher rates and balance sheet mix, partially offset by an expectation for lower deposit balances. Our expectation for continued organic growth and lower fee waivers results in total fee growth 7% increase to be driven by the recovery of money market fee waivers based on the current forward curve and assuming some runoff And money market fund balances from current level.

Speaker 5

We expect roughly 2% to be driven by organic growth and approximately 1% by market And as a reminder, we generally expect a quarterly run rate of around 60,000,000 For investment and other revenue, but as you know, this line can be lumpy due to seed capital gains, strategic equity investments and other components. For expenses, ex notable items, we expect an increase of approximately 5.5% year over year. Roughly 60 And servicing expenses associated with fee waivers and the impact of inflationary pressures. The remainder is driven by investments, half of which is just the annualization of incremental investments in the second half of last year. Specific With regards to capital management, we expect to return roughly 100% of earnings, subject to changes in AOCI and deposit balances.

Speaker 5

And for the sake of completeness, we continue to Our effective tax rate for the year to be approximately 19%. To sum up, And as Todd alluded to earlier, we expect to generate positive operating leverage on the back of continued organic growth And higher rate, translating into higher NIR and lower fee waivers, while continuing to invest in the future growth and efficiency of our businesses. With that, operator, can you please open the line for questions?

Operator

Our first question comes from the line of Glenn Schorr with Evercore ISI.

Speaker 6

Hi, thanks very much. I wonder if you could unpack the Menasys revenue Comments of outlook for around 10%, maybe just trajectory wise, meaning I'm assuming you're assuming the forward curve. And so just talk about the timing as that comes in and you could combine that with how quickly the fee waiver recapture happened along that forward curve? Thanks.

Speaker 1

Emily?

Speaker 7

Sure. Good morning, Glenn, and good Happy New Year. I'm actually really glad you kicked off with NIR because it's the first time in a long time we've got something positive to say. So, NIR, as we mentioned, is expected to be up about 10% year on year. To give you color, just specific to the questions you asked, yes, we just use the forward And as you know, at the moment anticipates 3 rate hikes, 3 25 basis point rate hikes, the first being in March, although of course there In our outlook is that betas will largely retrace what we saw in the last cycle.

Speaker 7

They could be a little bit higher, Just given the change in our deposit mix, so for example, Treasury Services, the top deposit base there is about twice as big as it was In 2015 and obviously that business has higher betas, we expect our Securities portfolio to be roughly flat. Most of the reduction on the asset side will be coming from cash held at central banks and lower yielding HQLA. We do continue to be cautious on duration. In fact, over the last 6 We've brought duration in a bit and we've actually moved some HQLA into H10 to preserve capital. Also, we are expecting some healthy loan growth and for premium amortization to reduce a bit.

Speaker 7

The one just Glenn, one thing I do want to just point out is that for the Q1, just given that the first rate hike is not until March, Also, it's just worth mentioning, we've already seen deposits come down a bit from the 4th quarter average, where they were really at elevated levels due to kind of market dynamics. So you won't see much of that benefit sequentially in Q1.

Speaker 6

Okay. Got a lot there. Thank you. And maybe just one other good picture. I think I heard you say in the prepared 2% organic growth in 2022 ish, Which will be in line with 'twenty one and obviously better than 'twenty 19.

Speaker 6

So I guess the question is, when you look At investments you're making and combined with your fee outlook, I'm just curious how you can contextualize what's there related to markets that have already gone up, Business that has already been won to be implemented versus follow through and revenues related to new investment The investments that you're making in your business?

Speaker 8

Thanks.

Speaker 3

So, Kimberly, Maybe I'll take that one. So a lot in that one, but a couple of things. When I look at collateral management. That's one where we have been investing for quite a while and we invest in what we call the future of collateral, which is really making collateral around the world, which we thought would lead to growth in our especially in our international assets, which is exactly what it has done. Also benefiting from some of those capabilities is the unclear the responsibility now For derivative players to have collateral against their uncleared margins, We have now we're now going through Phase 6 of that.

Speaker 3

So we are picking up significant assets as a result of that. And we've also added certain innovations to our capabilities. For example, the ability To have ESG criteria established in a repo and what you'll accept on repo. So that's something that's shown some pretty interesting growth. So That's something where we have been gaining and it's shown up in the numbers and we continue to expect to continue

Speaker 2

I mean, one of the other interesting things

Speaker 3

that we've brought up is what we're doing in our treasury services and payments business. And I think we've reinvigorated that business with some meaningful investment. We were the first, as you know, to do an RTP, a real time payments Through this New York Clearing House, that was done essentially to test it, but now we were actually putting practical product in place. So we announced late last year a request for payment service that we're providing to utilities. That operation, we have multiple players on that platform.

Speaker 3

And we see opportunity whether it's brokerage firms, insurance companies, Corporates are white labeling it for midsized banks there. So I think some of the innovation that we're seeing in the treasury services, We have not seen that drop to the bottom line yet. We've picked up, we've captured a little bit of market share and a little bit of the better price itself coming into this. We've talked a fair amount about Pershing X, which is a significant multiyear investment that we are making in our Pershing platform, specifically on the advisors To simplify and make the advisory function much more productive for our clients, we made an acquisition of a direct indexing firm In the quarter, we decided to buy rather than build for speed to the market and that group is going to be able to tailor Portfolios provide tax optimization down to the individual level. That hasn't started yet.

Speaker 3

So that will start Probably by the end of this year, and we'll be continuing to invest. So we see that not as a 2022 event, but a 2023 2024. Nice growth in our wealth management business. And here we've invested in some of the technology, and we've won some recognition For the quality of some of the advice path and kind of the wealth management tools that we put in place for our clients there. On the asset servicing side, we've talked about the digital assets unit that we've put in place.

Speaker 3

It is garnering assets quite rapidly as we've gotten Most of the pending ETF crypto assets that are coming in the U. S. And just in a very high percentage off Sure, especially in Canada. We've also got the redeveloped NESG app, where we're starting to see some revenues flow on that. And we're investing just in the basics of custody, because we think we can catch we can capture more of the developing markets custody.

Speaker 3

So It's kind of a mix, still some on the come, but some of it embedded in our run rate today.

Operator

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

Speaker 9

Hi, good morning, everyone. Happy New Year. If I can circle If I actually start off on fee revenue, I have with assumptions really on the just start on the fee waivers and just the trajectory of that, Emily. Just to clarify, I think you said 3 rate hikes and the forward curve, I think the guidance was as of December 31. So I'm not sure if the Forward curve, sort of, you're right, it is like advancement of the curve and expectations are getting a little bit more Aggressive in the market for Fed hikes impacts us.

Speaker 9

So maybe if you could just walk through the Money market fee waiver trajectory through the year and really circling back to the portion that gets released after The first hike and then maybe after the second hike. Yes.

Speaker 10

And then just

Speaker 9

on the equity market assumption equity market return assumptions within that markets that 1% market impact.

Speaker 7

Sure. So a bunch there. So let me take the waiver outlook first. So remember, waivers are a function of both balances Also and rates. And you're correct, we are just looking at the full and our guidance is baked in the forward curve with 3 rate hikes.

Speaker 7

We have pointed out in the past that with the first 25 basis point hike, we would expect to recoup about 50% of the waivers. Having said that, we do also expect that balances to begin to decline a bit, especially by call it, the 3rd or 4th 3rd or 4th hike, so we do see expect some runoff in balances. So when you put it all Together, we would expect money markets on waivers to be a little less than half of what they actually were in 2021. Having said that, it's very important to note that as waivers dissipate, we also do see a rise in distribution expense, And that's been captured in the expense outlook. To give you an idea, just sorry.

Speaker 7

Okay. To answer the second question, which was more about sensitivity, just I think something that would probably be helpful, if we size the impact of both waivers That would be about $100,000,000 more in recouping waivers than what's in our guidance, And it'd probably be about $50,000,000 more in NIR. So a total, if the March hike was $50,000,000 not $25,000,000 it'd be about another You had one more part,

Speaker 9

but Equity market return assumptions within that 1% of fee contribution from sort of market.

Speaker 5

Sure.

Speaker 7

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

Speaker 9

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

Speaker 7

Sure. So, ultimately from a deposit perspective, we don't really expect much runoff in deposits From here until kind of again 3rd or 4th rate hike or the Fed starts to actually tighten. So, it's ultimately, balance, as I mentioned, have already come down a bit From average Q4 level. And in terms of beta in particular, just speaking specifically about betas, which is what I think you're probably getting We do think they'll be largely in line with the past. I mean, like I said, before, maybe a little bit higher, Treasury Services deposit balances are higher.

Speaker 7

Also just always keep in mind that our deposit base is largely institutional. Also in the 2015, 2016 period, we were trying to come into compliance with SLR, so we were pushing some deposits off balance sheet. But all of that Is it baked into the NIR guide that we gave?

Speaker 9

And then just the global rate like the Bank of England assumptions Forward.

Speaker 7

Yes, it's all the forward curve. It's all the forward curve.

Speaker 9

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

Operator

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

Speaker 11

Hi, good morning.

Speaker 3

Hi, Betsy.

Speaker 11

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

Speaker 3

Yes. Thanks, Betsy. This is Todd. I'll take this one. We right now, it depends on when they actually start to actually balance sheet, the guidance that we've heard is that's probably not an event until the second half.

Speaker 3

And so that's the estimates that we have put in To both, the betas and the size of the balances, whether it be money market balances, because it will certainly impact them Or it is deposit balances. But assuming that they don't start really letting Tough run off until the second half of the year. We don't see an enormous drawdown in the combination of money market balance The Fed's balance sheet just isn't going to contract that much in 2022. We might see that a little more rapidly in 2023 unless they were to do something even more Aggressive like selling. So we took the basic assumptions, market assumptions that we've seen And kind of that's implied in all of the guidance that Emily just gave you, which is a little bit of one off of balance sheet The Fed balance sheet in the second half, which starts to impact both deposits and money market balances as well.

Speaker 11

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

Speaker 3

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

Speaker 8

what's in the estimate. Okay.

Speaker 11

All right. And then the follow-up question I had on the expense discussion. Just thinking about how To model the expense ratios by the new segments that you've got, obviously, the new segments are really helpful. Really appreciate you breaking out the wealth piece. Can you give us some sense as to how we should think about modeling that expense ratio in the various segments as we go through 2022?

Speaker 2

Emily, you want to take that?

Speaker 5

You may

Speaker 3

want to start with that?

Speaker 7

Sure. Sure. So, I mean, I'll just Taking a step back first, just the overall expenses, 5.5%, and just to be clear, about 30% or 70 basis points are really revenue related. And I think volume related compensation, as well as, as I mentioned, the distribution that we will see an uptick in for money market funds as the waivers come back or as we get the dissipation, I should say, of waivers. About another 30% or 170 basis points again is merit, the normalization of business And then, the remaining, the And then the remaining 40% or 200% is due to higher investment spend.

Speaker 7

But

Speaker 5

just to

Speaker 7

be clear, half of that is, annualizing investments that we have made in the second half This year, as you all know, we had an uptick of investments in the second half of this year. I would think of it as not breaking it down Too much, I would say that it's a bit higher in ultimately in market And Wealth Services, given some of the investments that we're making, especially in Pershing X, as Todd alluded to, but we are making investments

Speaker 11

Got it. Okay. So not that much differential outside of the call out on Pershing?

Speaker 3

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

Speaker 11

Okay. SKU2 rates is also a little higher there?

Speaker 8

Yes. Yes. Exactly. Okay. Yes.

Speaker 7

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

Speaker 11

Okay. Thanks so much time, Emily. Appreciate it.

Speaker 8

Thanks, Ed.

Operator

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

Speaker 12

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

Speaker 7

revenues. Sure. So, I think you're getting at operating leverage and We're always incredibly focused obviously on operating leverage and delivering positive operating leverage. And next year, We are expecting just based on my guidance to grow revenues more than we are growing expenses, so that's good. And when we think about the future and just the expense spend, we do see that ultimately moderating in 20 So you'll see that coming down a bit in 2023 2024.

Speaker 7

And of course, we have we'll continue to see an uptick in rates and higher NIR will recoup probably the remainder of our waivers. That Plus the additional organic growth that we also will be delivering, we feel pretty confident that we'll be delivering even higher operating leverage

Speaker 4

And let me add something

Speaker 3

to that. We are doing something that's

Speaker 2

a bit unusual for us.

Speaker 3

For example, with Pershing X, we're making a very significant investment here that's probably got a 2 year payback. We've also been continuously investing in resiliency and I think we're getting in we're starting to get in front of that. And the inflationary pressures, hopefully, this is just a one time kind of step up. But those will have The market will have to play itself out. So we do think that we're spending a little faster than we would in a more normal environment.

Speaker 3

And we do expect that we will get more leverage out of our business model as we just continue to make it more scalable.

Speaker 12

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

Speaker 7

Sure. Yes, just more flexibility. We were also just opportunistic in terms of Rates and ultimately too, you have to prepare for if rates rise, there obviously will be a corresponding impact on OCI, All of those factors.

Speaker 12

Okay. Thanks.

Operator

We'll go next to Mike Mayo with Wells Fargo Securities.

Speaker 6

Hi, can you hear me? Yes,

Speaker 7

but there's some background noise.

Speaker 13

Is that better?

Speaker 5

Yes.

Speaker 13

Okay. I'm going to just give what I think I heard you say, then I'll let you correct me. What I think I heard you say is that This year is an investing year that you're guiding for 2% organic fee growth or 3% with markets versus expense growth of 5.5%. So it looks like you're spending about half of the benefits of the money market fee waivers to accelerated investments. And then after this investing year, 2023 2024, that moderates and then we should see more Of those benefits.

Speaker 13

So am I hearing that correctly? And I am I also interpreting You're taking a portion of these benefits to reinvest back in the business, especially in 2022. Sure, Mike.

Speaker 7

I'll take a stab at that. I think what you're asking very specifically is what A portion of the uptick from rates, both in NIR and recouping waivers, are we kind of reinvesting? I mean, I think that's what you're getting at. And I mean, just to be clear, and you can do the math, I gave you the math that the higher rate environment, both from a NIR perspective and from a waiver perspective is a bit over, call it, dollars 700,000,000 in revenues for the year with this forward curve, etcetera. The way I think about the expenses and what we're kind of reinvesting of That and based upon the expense guide I gave, you can also do the math that, call it, dollars 100,000,000 to $150,000,000 of the expense growth It is related to incremental investments net of efficiencies.

Speaker 7

So call it 20% or so of that is being reinvested.

Speaker 14

Okay.

Speaker 13

I guess, I'm just trying to reconcile when you Let's see. Merit, revenue related. So it's just the cost of doing business. The other question is, Why wouldn't the NII guide be higher assuming that the securities portfolio will remain flattish?

Speaker 7

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

Speaker 13

And are you being conservative?

Speaker 3

Mike, we do anticipate contraction of the balance sheet. So it's going to come from more short term cash That's paying a little bit lower yields. So when and I think your follow-up question is, are we being conservative? We're trying to reflect What exactly the market is indicating through forward curves. We're not trying we're not the guidance that we've given you isn't speculation.

Speaker 3

It's our best it's only speculation in the sense it's the best estimate for betas and for what's going to happen to the yield curve using the forward yield curve as

Speaker 13

Yes, last one. Just as the contraction of the balance sheet, like by how much and I mean, there's not much history for this, right, Going to this phase of the rate situation, so are you thinking a 10th, a 5th or just roughly In broad terms, how much contraction of the balance sheet and why?

Speaker 8

Emily, I'll take it.

Speaker 5

Sure. You want to

Speaker 4

take it?

Speaker 3

Go ahead, Emily.

Speaker 7

I can take it. Yes. Ultimately, to be clear, we did see I just want to remind her, we did see balance It's already come down from 4th quarter averages. We don't really attribute that to kind of runoff obviously from rates. From rate rises, it's more about just elevated levels and market dynamics in the Q4.

Speaker 7

And then from here, the way I kind of think about it is, We probably won't see much more runoff until the second half. But like I said, it's really after the Fed really hikes a few times. And I'd say kind of single digit reduction.

Speaker 14

Okay. Thank you.

Speaker 7

In this year. Yes.

Speaker 13

Right. Right. Thank you.

Speaker 3

Thanks, Mike.

Operator

We'll go next to Gerard Cassidy with RBC.

Speaker 8

Good morning, Todd. Good morning, Emily. Good morning, Gerard.

Speaker 5

Good morning. Todd, I want

Speaker 8

to come back to something you said in your prepared remarks that Your new business wins, I think you said are up 50% from 2019. Is that it seemed like a very strong number. How does that compare to a prior 2 year from 2016 to 2019 maybe? And second, What were the main drivers? Was it better products, better pricing?

Speaker 8

Your people are just hitting it harder. Can you give us some color on What drove that strong number?

Speaker 12

Sure. So we had run a

Speaker 3

for a couple of years Gerard, we were literally running negative organic growth. And so maybe 4 years ago, I would say some of the service levels were up to par and we turned that around. So we made a very significant investment And the quality of the service that we're delivering, we did make some we did provide some innovation with around Our whole bundle where we can deliver some of the connectivity that we made to some of the LMS providers, Our data and analytics capability and most importantly, the quality of our service in the asset servicing space and that became noticeable. And both the combination of investing in technology and the quality of service that we delivered, we started picking up some market share. And so I would say that was the primary driver.

Speaker 3

And it's been a mantra here. And in fact, when Emily was back to the Asset Servicing side, she did a great job of putting together Real analytics to support and understand exactly what was going on with our clients and adjust accordingly. So I think it's a combination of the 2. Clients are going to be with you. They expect that you're going to be investing for the long term that you've committed to it and we've demonstrated that.

Speaker 3

And number 2, You got to provide you got to do the basics, the meat and potato stuff for them as well.

Speaker 8

Very good. And as a follow-up, you guys gave, obviously the outlook for 2022, which is much appreciated. In that outlook, you talked about The share repurchase or the total payout ratio approximating 100% and subject to changes in the AOCI or maybe deposit balances. On the AOCI, if I saw it correctly, I may have not seen it correctly, but it looked like it was a negative $2,200,000,000 at the end of the 4th quarter. Can you share with us what drives that number and how it could affect the total payout ratio as the year progresses?

Speaker 5

Yes. Sure.

Speaker 8

Go ahead, Emily.

Speaker 7

Well, I guess, so thinking about just The payout and we can talk about AOCI. I'm not sure I recognize the number that you're talking about, the $2,000,000,000 But in any event, We were fortunate obviously this year or 2021, I should say, to be able to pay out 160%, obviously helped By the fact that we had excess capital limited by a lot of what we could do in 2020 and the Q1 of 2021, The guidance that we're going to pay out around 100% of earnings is Baked into that are AOCI assumptions, etcetera, so it's all there. Basically, our capacity and the pace of the buyback is going to depend certainly on Future earnings, the economic outlook, the size of the deposit base in any given quarter and what we're expecting and you're right, the trajectory of OCI. But all of that is baked in to the guidance. And the thing that frankly that's nice is that For these days in terms of capital management, we're now under the SCB framework, so we certainly can be much more dynamic and flexible.

Speaker 8

I see. And just on the AOCI, Emily, would short what rate what part of the yield curve has the biggest effect on your AOCI, the short end or the long end, The middle?

Speaker 7

The short end.

Speaker 8

Okay, great. Appreciate it. Thank you.

Operator

We'll go next to Ken Usdin with Jefferies.

Speaker 15

Hi, thanks. Good morning. I just want to follow-up on balance sheet positioning to Gerrard's question. So you're at the lower end of that Tier 1 leverage ratio zone 5.5 The 6 that you've talked about and I just want to understand a little bit deeper that flexibility with regards to changes in OCI versus prefs. Are you solving for 5.5 at this point?

Speaker 15

Like how you look at like where you want to be in that range? And to your point about SCB, How important does maintaining the buyback be versus just staying in a right zone of capital? Thanks.

Speaker 7

Sure. So I can take that and Todd, you can add. So Tier 1 leverage This quarter, as you guys can see, in the 4th quarter was 5.5%. If you really do the math, which you all have the all of the factors to be able It was 5.46%. So we did dip into the buffer just a bit.

Speaker 7

We always talked about the fact That would be entirely appropriate given the excess liquidity in the system and the growth in our deposits. So going Forward, we're going to be managing to 5.5%, and we're optimizing around a lot of different things, including OCI. But baked into our guidance is the certainly, our expectation that will be above 5.5

Speaker 15

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

Operator

You got it. Okay.

Speaker 15

All right. And then second question just on that related point. If I back out premium amortization, it looks like the

Speaker 7

Okay. So, a couple of different things there. So, look, the talking about reinvestment yields, we don't really disclose front book versus What I would say is that and this probably answers a bit of Mike's question earlier, which I hadn't thought about, But reinvestment yields will still continue to be a bit of a headwind over the course of 2022. So the yield that we're investing in now is still lower than ultimately the yield on maturity securities that are maturing. I think We would expect that to probably be a lot better matched or equally matched almost by the 4th It's really in the Q4, so that will still be a headwind.

Speaker 7

And look, we're thinking about and certainly Paying attention to OCI and as I mentioned in my earlier remarks, we did even move some HQLA to GM, exactly for that reason to preserve capital.

Speaker 15

Understood. Okay. Thank you.

Operator

We'll go next to Brennan Hawken with UBS.

Speaker 14

Good morning. Thank you for taking my questions. I had a follow-up. So Emily, I think It seems like from your comments when you backed into the components of expense growth, something like roughly 1 percentage point of the 5.5 is From the distribution side of the fee waivers. Number 1, if you could confirm that that's correct.

Speaker 14

And then Number 2, if we that means if we adjust for waivers because we all got very much used to adjusting for waivers from last year when When you guys were talking about the revenue ex waivers and then, wanting to drive more investment, it looks like ex waivers, We're looking at negative operating leverage here because you back out the 4% benefit from fee revenue, you've got Ex waivers and so it's negative fee operating leverage. Given that last year we were adjusting for the waivers Backing them out to consider where the fee operating leverage was. Why not maintain that same discipline now? And what's the major issue with holding back that fee operating leverage? Thanks.

Speaker 7

Sure. So, I'll take that and Todd, if you want to add. So, you're thinking about the expense, The distribution expected largely in the right way. And look, Your question about operating leverage is that our level of investment is not planned by nor dictated by Operating leverage, it's based upon the investments that we see and the future growth of the company. In terms of what you call Fee operating leverage, yes, you're right.

Speaker 7

In 2022, it will be negative. But we're not going to be apologetic about investing in the future of the company. We've continued to do that over the course of the cycle.

Speaker 14

And then the assumptions around the single digit decline in deposits. Are excess deposits still at 10% to 15 percent. And when we start to cross the 75 basis point, 2, 3 hikes Where you start to see an acceleration of deposit runoff, wouldn't that 10% to 15% of excess deposits Maybe if you could add a little color around some of those assumptions to help us square that circle would be helpful.

Speaker 3

Sure. So I think your estimate of excess deposits is probably pretty close to what we're currently thinking. But you got to remember underneath that there is some organic growth as well. So if you take the 10% to 15% and then you're growing 2% to 4% organically And then you don't look to see the Fed really contracting their balance sheet very aggressively until later in this We don't see a huge impact on this year. It's really going to depend around the betas.

Speaker 3

So you might see money bouncing around based on what we and others are willing to actually pay for it. So that's what's factored into it. But ultimately, I think those excess deposits Come down with mitigated somewhat by just normal growth.

Speaker 14

Okay, got it. Thanks for taking my questions.

Operator

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

Speaker 10

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

Speaker 7

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

Speaker 10

Got it. Okay. That probably explains some of the deltas people are asking about on NII, so that helps.

Operator

Yes.

Speaker 10

My follow-up just around capital management, again, thanks for the color around AOCI. Sorry if I missed the dividend versus buyback expectation. So as you think it forward within 100% payout ratio, what are you guys thinking in

Speaker 3

We've been pretty consistent in targeting dividends around 30%, Alex, so I think probably you will see the adjustment come in the form of the buyback, if there is one.

Speaker 10

Got it. Okay.

Operator

Our final question comes from the line of Steven Chubak with Wolfe Research.

Speaker 4

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

Speaker 7

Sure. So, when we think about, NIB, if Sorry, when you think about it and it's actually disclosed, so actually I can talk about the old numbers. I think net interest deposits are close To $90,000,000 or so, dollars 1,000,000,000 what you'll see as deposits, as rates What generally will happen is that they will somewhat some will roll off for sure, but others will actually just Kind of migrate into interest bearing deposits. So all of that is baked into our guidance.

Speaker 4

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

Speaker 3

Well, we've seen a little color there. We've seen historically through these cycles is, we're operating somewhere around 30% of our Total balance is non interest bearing. We've and it's a little bit tricky to pick up because of the U. S. Versus non U.

Speaker 3

S, But that is definitely very high because of the level of interest rates. We'd expect that to drop into the low 20s, something like that.

Speaker 4

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

Speaker 7

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

Speaker 10

Okay, that's great. Thanks so

Speaker 4

much for taking my questions.

Speaker 3

Thank you, Stephen.

Operator

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

Speaker 2

Nothing to add. Thank you very much for your interest in the firm and you can follow-up with Marius and the team afterwards if there are

Speaker 3

any further questions. Thank you very much and have

Speaker 8

a good day. Thank you.

Operator

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

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Earnings Conference Call
Bank of New York Mellon Q4 2021
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