Good morning, and welcome to the 2021 Second Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon's consent.
I will now turn the call over to Marius Merz, BNY Mellon Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone. Welcome to BNY Mellon's 2nd quarter 2021 earnings conference call. Today, we will reference our financial highlights presentation available on the Investor Relations page our website atbnymellon.com. Todd Gibbons, BNY Mellon's CEO, will lead the call.
Then Emily Portney, our CFO, will take you through the earnings presentation. Following Emily's prepared remarks, There will be a Q and A session. Before we begin, please note that our remarks include forward looking statements and non GAAP measures. Information about these statements and non GAAP measures are available in the earnings press release, financial supplement and financial highlights presentation, all available on the Investor Relations page of our website. Forward looking statements made on this call I'll speak only as of today, July 15, 2021 and will not be updated.
With that, I will hand it over to Todd. Thank you, Marius, and good morning, everyone.
Now I'm going to touch on a few of the highlights before I hand it over to Emily and she'll review our Q2 financial results So if we refer to Slide 2 of the financial highlights presentation, We reported EPS of $1.13 that's on $4,000,000,000 of revenue and we generated a return on tangible common equity of 19%. Fee revenue was up 4% year over year and it was up 10% excluding the impact of money market fee waivers. Average deposits were down 1% quarter over quarter. This together with strong capital generation drove an approximately 20 basis point increase in our Tier 1 leverage And we are pleased with the results of this year's supervisory stress tests, which once again demonstrated the resilience of our business model And the strength of our balance sheet even under severe stress. And we also welcome the Fed's decision to lift the recent restrictions on common stock dividends and share repurchases at the end of June.
Now taking a step back for a look at the broader operating environment, we continue to be impacted by the significant amount of excess cash in the system. We welcome the Fed's decision to raise the IOER and the overnight reverse repo rates by 5 basis points last month. That provided a bit of support to short term rates, although they continue to be exceptionally low by historical standards. Money market funds take up of the Fed's reverse repo facility increased from approximately $500,000,000,000 Prior to the Fed's action to north of $750,000,000,000 and they actually spiked to almost $1,000,000,000,000 at quarterend. This means that somewhere between 15% 20% of total U.
S. Money market fund assets are being parked at the Fed earning 5 basis points. Now given the significant amount of excess cash in the system and the expectation for further Fed balance sheet expansion, bank balance sheets will continue to be under pressure, But money market funds may provide some relief. Now let's turn to a few highlights across the franchise and I'll start with Asset Servicing. In Asset Servicing, we continue to see good momentum as clients increasingly transform their operating models And they're looking to us for open modular front to back solutions, including our leading data and analytics solutions That they can build their own businesses on.
As an example, we were awarded new business from Lockheed Martin and it was led by asset servicing, but it really leveraged We were awarded custody and a full suite of related services as Lockheed was looking to consolidate This large corporate asset owner win demonstrates the power of our omni offering to bring a wide breadth of services, Which includes data and analytics, leading FinTech partnerships and other capabilities from across the enterprise together, which happen to differentiate us from our competitors in this We also continue to drive innovation in digital assets. We are excited to have recently been mandated by Grayscale The largest digital currency asset manager to provide fund accounting and administrative services for the Bitcoin Trust. Once conversion to an ETF is SEC approved, we will be able to service the product as an ETF as well, while also providing our unique transfer agency and ETF basket creation services. On ETF more broadly, we continue to see good momentum And into ETF servicing with ETF AUCA reaching $1,100,000,000,000 at the end of June And we've now helped to launch over 100 ETFs year
to date.
We've also continued to strengthen our capabilities through additional partnerships with leading FinTechs. And last week, we announced the acquisition of Milestone. This acquisition will help us advance digitization and automation of If you recall, roughly about a year ago, we formed an alliance with Milestone to address an industry need Greater fund oversight and resiliency. Following on the success of this alliance, we saw an opportunity to build on the strategic relationship And further our capabilities in OCIO Services, cash allocation and fair value controls. I'd also like to highlight Recently announced partnerships with Sapphire and Evisort because both are terrific examples of how we are using open architecture to automate and digitize operations, improve the client experience and driving efficiencies.
Moving on to our Infrastructure Businesses, Pershing had another strong quarter benefiting from equity market strength and continued strong underlying fundamentals. The number of clearing accounts continues to grow at a healthy clip and we saw strong net new asset flows and the sales pipeline there remains robust. In May, we reshaped Pershing's operating model into 2 segments, Institutional Solutions and Wealth Solutions. And we did that to organize around our clients and align our expertise to best serve their needs. Aligning around these two segments enables us to focus our people, tech investments and process improvements to fuel growth.
Institutional Solutions serves capital markets firms, investment banks, hedge funds and alternative investment managers. Pershing's institutional platform provides clients with a single seamless experience backed by the strength and scale of BNY Mellon, Offering financing, collateral management, global trade execution, securities lending and syndicate capabilities. Now Wealth Solutions addresses the evolving and converging needs of our wealth minded broker dealer and RIA clients by delivering improved lending, Digitized account opening and streamlined asset transfers. Given the rapid growth in the Wealth Advisory segment, We are making significant new investments to further build out our advisory capabilities. In markets, we were able to offset some of the headwinds from meaningfully lower volatility and narrowing spreads by growing our client volumes significantly, reflecting the success of the initiatives we put in place to strengthen our capabilities And improved client targeting across our Investment Services business.
In fact, last week, Euromoney ranked us number 1 in 18 categories in its 2021 FX survey. And for the first time, we claimed the number one spot as real money overall market leader globally. In Treasury Services, we saw strong growth in quarterly payment volumes compared to the prior year and the business experienced healthy client wins in payments, Liquidity and trade across all geographic regions. In June, we introduced cross currency suites, The latest addition to our rapidly expanding liquidity management product suite and earlier in May we launched the first of its kind real time e bill and payment solution that we talked about in the past. We're the 1st bank leveraging the New York Clearing House's real time payments network to provide corporations with an instant digital consumer bill pay service.
And today we're actively collaborating with multiple billers and retail banks to drive the adoption of this new functionality. Our production pilots will continue this year and we're planning to scale them more broadly into 2022. In Investment Management, we had our 5th consecutive quarter of net inflows into long term products. We continue to see strong net inflows into cash products And we ended the quarter with record AUM. We've been making good progress in our realignment to transfer Mellon capabilities in fixed income, Equity and multi asset liquidity management to Insight, Newton and Dreyfus cash respectively.
And that was the purpose is to bring specialist investment At scale and we remain on track for completion of this in the Q3. We're pleased to see that we're already starting to drive efficiencies And feedback from clients and industry consultants has been quite positive. In the last month, Ewan Munro joined us as the new Head of Newton. Yuan brings 3 decades of experience with a proven track record in the investment industry, including extensive experience leading 1 of the UK's largest asset managers with a presence in the institutional intermediary and retail markets. And finally, in Wealth Management, we saw another quarter of strong client asset flows And client assets exceeded $300,000,000,000 for the first time.
The Financial Times named BNY Mellon the best private bank for digital wealth planning in North America And they're recognizing there our wealth online client portal and our proprietary goals based planning tool we call AdvicePath. Taken together, we're pleased with the increased momentum that we're seeing across the franchise, which is resulting in organic feed growth in excess of our 1.5% outlook for the year. Our strong performance in the first half of the year and significant capital generation have put us in a position to further accelerate investments in a number of meaningful growth and modernization opportunities in the second half. Now before I turn it over to Emily to review our 2nd quarter results and the outlook for the second half of the year in more detail, I'd like to provide a quick update on our Starting in September, we're planning to begin safely opening our offices around the world, Although dates and details may vary by location as we continue to monitor and as conditions evolve. We believe that in the process we have an opportunity to create a new and better way of working that makes us feel more connected, balanced and productive while maintaining flexibility.
The majority of our almost 50,000 colleagues around the world will therefore follow a hybrid model
Thank you, Todd, and good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year over year basis unless I specify Beginning on Page 3, total revenue was lower by 1% due to lower net interest revenue and higher money market Fee waivers partially offset by strong fee growth. Fee revenue grew 4% or 10% excluding the impact of fee waivers. This reflects the positive impact of higher market values, the favorable impact of a weaker U. S.
Dollar and higher client activity. Other revenue was $91,000,000 and included approximately $30,000,000 of investments, disposal and other income gains, And interest revenue was down 17%. Expenses increased 3% and about 2 thirds driven by the weaker U. S. Dollar.
Provision for credit losses was a benefit of $86,000,000 driven by an improvement in the macroeconomic forecast. And analysis of the main drivers of our quarterly results. Investment Services revenue was $3,000,000,000 down 4% year on year, mainly driven by lower client activity and organic growth in assets from existing clients, higher liquidity balances and market levels and the benefit of the weaker U. S. Dollar.
Investment and Wealth Management revenue of $1,000,000 increased 13% as higher market values and the benefit of the weaker U. S. Dollar more than offset the impact of fee waivers. Excluding fee waivers, fee and other revenue was up 21%. Money market fee waivers, net of distribution and servicing expense were $252,000,000 in the quarter, up $64,000,000 from the prior quarter, which impacted pre tax income by approximately $40,000,000 sequentially.
Higher waivers were driven by lower key bill and repo rates as well as higher average balances. Turning to Page 5. Our capital and liquidity ratios remain strong and well above internal targets and regulatory minimum. Our CET1 ratio was 12.6%, flat to Q1 under the standardized approach. And our Q1 leverage ratio, which is our binding capital constraint 6%, up approximately 20 basis points sequentially due to net capital generation and a 2% quarter over quarter decrease in average assets.
Average deposit balances declined by 1% as we've been successful at curtailing deposit growth by working with our clients to move excess deposits Finally, our LCR was 110% flat to the prior quarter. Turning to Page 6. My comments on net interest revenue will highlight the sequential changes. Q2 net interest revenue was $645,000,000 down 1.5%. The G Treats was largely driven by the impact of lower short term rates, continued elevated prepayment speeds and lower reinvestment Turning to Page 7, which provides some color on deposits and our securities portfolio trends and mix.
As mentioned, average deposit balances declined by a little over $3,000,000,000 sequentially, despite the Fed Act adding 360 Our deposits remain elevated versus a year ago, up $42,000,000,000 or 15%. We estimate that This growth is excess in nature and is expected to run off when rates rise. Turning to the securities portfolio, On average, the portfolio was flat to the Q1 and up approximately $7,000,000,000 or 5% over the prior year. Average loans increased about 7% both sequentially and year over year with growth primarily driven by Pershing Margin Loans, Wealth Management collateralized Loans and capital call financing as well as term secured loans to global financial institutions. Turning to Page 8.
As I mentioned earlier, expenses of approximately $2,800,000,000 for the quarter were higher by 3% versus the prior year with about Investments in Efficiency and Growth Initiatives. Turning to Page 9. Total revenue in the Investment Services Segment declined by 4% versus the prior year. FX revenue in Investment Services declined 7% year over year driven by lower volatility and spreads, partially offset by strong growth in client volume. On a sequential basis, FX revenue declined 21% on lower volumes, especially in emerging markets, Lower spreads and volatility.
Assets under custody and or administration increased by 21% year over year to $45,000,000,000,000 driven by higher market levels, net new business and a favorable impact of the weaker U. S. Dollar. As I discuss the Investment Services businesses, I will focus my comments on total fees in each business. Within the asset servicing line of business, we saw growth on the back of higher client activity and market levels, which more than offset lower FX revenue.
The growth was offset by a roughly 400 basis point impact from fee waivers. Fees and Pershing were up reflecting higher market levels and solid organic growth, partially offset by higher fee waivers and lower transaction volumes compared to an exceptional quarter a year ago. Clearing accounts were up 6%, mutual fund assets were up 33%, and we saw continued strong net asset flows of $40,000,000,000 in the quarter. Higher CLO, MTN and mortgage refi activity. This growth was offset by the impact of fee waivers in Corporate Trust.
Treasury services fees were up 11%, driven by higher payment volumes and a continued shift to higher margin products. In fact, on June 30, the business processed a record $3,200,000,000,000 in U. S. Dollar payment. Finally, clearing and collateral management fees were down slightly as continued strength in collateral management was offset by lower clearance volumes and lower intraday financing fees.
Elevated levels of U. S. Money Fund AUM and international demand for HQLA collateral are both providing long term tailwinds for our collateral management Page 10 summarizes the key drivers that affect the year over year revenue comparisons for each of our Investment Services businesses. Turning to Investment and Wealth Management on Page 11. Total Investment and Wealth Management revenues increased 13% versus the prior year.
Assets under management grew to a record $2,300,000,000,000 up 18% year over year, primarily due to higher The favorable impact of a weaker U. S. Dollar principally versus the British pound and net client inflows. We had net inflows of $25,000,000,000 in Investment Management revenue grew 13% due to higher market values, the benefit of a weaker U. S.
Dollar, higher performance fees and net inflows despite a 9% negative impact from fee waivers. Wealth Management revenue also grew 13% due to higher market Investment performance and growth in collateralized loans. Client assets in Wealth Management were a record $305,000,000,000 up 20% year over year. Page 12 includes the results of the other segments. I'll conclude with a few comments about the outlook.
As we think about the second half of twenty twenty one, based on the current forward curve, we now expect NIR on a full year basis to be down 14% compared to 2020. Also, using the forward curve and assuming flat balances, we estimate fee waivers net of distribution and servicing expense to be approximately $225,000,000 in the 3rd quarter, slightly better than the $252,000,000 this quarter, driven by the slightly higher short term rate outlook. This is estimated to have a modest pre tax benefit of $15,000,000 next quarter. With regard to fees ex waivers, recall that we guided at year end for growth to be about 3%. Given the strong first half of this year, we now expect full year fees ex waivers to be up between 7% 8%.
On expenses, we now expect the full year to be up closer to 4% excluding notable items. Approximately half of the year over year Growth is expected to be related to currency and the other half is pretty evenly split over higher volume and revenue related expenses and incremental investments in a number of attractive growth and efficiency opportunities. We still expect our full year effective tax rate to be approximately 19%. And with respect to capital returns, our Board just declared a cash stock repurchases over the next 6 quarters through the end of 2022. Considering the $2,000,000,000 of excess capital that we've accumulated And the significant amount of capital that we're generating, we expect to buy back well in excess of 100% of our earnings in the near term.
And remember, the SCB
Our first question comes from the line of Glenn Shore with Evercore ISI.
Hi, thanks very much and thanks for Taking away like 17 of my questions about outlook, that was helpful. Can I guess a follow-up on the expense question? So if you look at year on year, it was up 3%. I heard your guide. It was expenses were down 3% quarter on quarter.
Can we talk about The growth opportunity piece you mentioned, what growth opportunities are you investing in and what kind of payback Can we expect how do you think about that given your huge excess capital? I'm just my real question is why not invest more? So that's where I'm going
It's a great question, Glenn. Thank you. So as you have rightfully pointed out, we have been extraordinarily disciplined And on expenses and we've actually held them flat over the course of last 4 years. Everything that we're talking about here are investments in Growth and efficiency, just to name a few. So certainly digital assets and all the things we've talked about around digital assets, data and analytics, Advisory services in Pershing as well as the managed account space.
I highlight also electronic Payment and collection services and treasury services and then the remainder would be modernizing and automating our both our risk management and operations infrastructure. And really, as you alluded to, we had a very strong half. We have a very strong capital generative model. There are interesting opportunities. All of these have been properly vetted and truly will drive incremental growth and efficiencies.
So we feel now it's an important time
Glenn, you still there? I think we lost you.
Yes, sorry about that. I appreciate all that Emily. Maybe just a quick follow-up on Pershing. So in past you spoke about some maybe some headwinds in the second half. Are you able to quantify that just to give us that heads up on what to expect in the second half and maybe at the high level talk about the competitive backdrop there?
It seems like some yet another competitor is poking their nose and trying to get involved on the RA clearance side.
Sure. I can start and I'm sure Todd can add. Just in terms of the impact of the loss business that we had talked about in the past, going to be about $20,000,000 per quarter going forward. And that is by the way, Glenn baked into the forecast. So that is Embedded in there.
And yes, it is a competitive space and actually that particular piece of business that we're talking about was really we were just on the wrong side of M and A activity, so we do although we see a lot of growth and a lot of opportunity, there's certainly further consolidation as well.
Yes. And I would add that it's the consolidation that we've seen is actually a positive for us. So we've got a very robust pipeline. We continue to add a significant number of accounts over the course of the quarter and as well as seeing significant growth in funds. And we think there's opportunity to actually invest more.
So what we did this quarter is we actually separated the businesses into 2. 1 is the institutional side Where we have some unique capabilities with some very large clients and we've got some pretty good leads there that we're excited about. But also on the advisory and the broker dealer side, we think we can invest there and garner some more of what's a very fast growing industry. There is some competition there, but the consolidation has also provided some opportunity for us. So we do get every now and then you get a lumpy loss due We've looked at over history that really it hasn't changed.
We probably won more than we've lost, but we have pointed out that we'll have an impact in the 3rd quarter.
Our next question comes from Jim Mitchell with Seaport Research. Please go ahead.
Hey, good morning. Can you speak to your efforts on deposits? It seems like you had some success keeping deposits flat to down. Is that deliberate efforts on your report with less demand for your balance sheet? Maybe you could just speak to the deposit growth And how you think about it going forward?
Sure. I'll take that. So you're right. We have been proactively managing deposits Very successfully, we've been working with our clients and you can see that in our trends. So despite the Fed and Continuing to pump excess liquidity into the system, ultimately, we have managed our deposits and they're down 1% sequentially.
This has been very much a coordinated effort with our sales people and our clients and in terms of looking at what's excess on our balance We probably think we have about $25,000,000,000 to $50,000,000,000 that's still excess. But what we have been doing is looking at what is excess and actually working with our clients We move it to off balance sheet vehicles such as money market funds that's partially why you see a 9% growth in our money market fund balances that were Driving waivers. And we're fortunate too and that we have a very robust liquidity solutions business. We offer both in house as well as third party Solutions and that has been certainly very attractive to our clients as we endeavor to manage the balance sheet. And look, going forward, we will continue to do that.
It's we're comfortable where we are, but certainly we will continue to do that considering there We'll likely be more liquidity coming into the system.
Jim, it's a very disciplined process that Emily leads along with the salespeople treasury function. And we look at it client by client and the good news is we've been able to capture most of that in our money market funds or our liquidity direct offerings. So we are gaining market share there. And we've got a little bit of benefit when the Fed did increase The interest rate on excess reserves and the reverse repo that it made that alternative. It provided a bit of an outlet.
So We think even though the Fed will probably continue to provide liquidity and build their balance sheet that we should be able to manage it.
Right. That's helpful. And then just as a follow-up to that, if you think you've had success on the leverage ratio, when we think about the buyback that you're targeting over the 18 months, can you front load that? How do we think about the cadence of buybacks?
Sure, Emily?
Sure. So certainly the cadence of buybacks is going to be determined by lots of different factors, our capital position, our forward Outlook for earnings, etcetera. But you can definitely assume that considering we have about $2,000,000,000 Excess capital now and that's just against our binding constraint of Tier 1 leverage. Frankly, we have more excess capital when you actually think about what A normalized balance sheet size probably is when some of those excess deposits receive. So assuming Taking that into account, taking into account the fact that we've also committed to our shareholders that we will return 100% of earnings over time, it's Safe to assume that we'll probably front load that $6,000,000,000 of authorization that we received from the Board.
Okay. That's great. Thanks.
Next question comes from Alex Blostein with Goldman Sachs.
Hey, thanks. Good morning, everybody. So maybe just starting with the NIR guide for the back half, it looks like the amount continues to kind of grind lower a little bit and maybe given what the forward curve has done relative Last quarter, not particularly surprising, but curious if you guys feel like the most of the pain is now in the run rate. Is this the right So they're jumping off point to think about as we sort of start to pencil out into 2022.
Sure. So I hesitate to call a trough because every time we do it's not accurate. But in terms of just our forward Our outlook, we just use the forward curve when we project NIR. We don't try to get cute. Short Term rates are a bit lower in the forward curve than they were a couple of months ago.
Likewise, as you all have seen, the long end And likewise in terms of prepayment fees, they have been Elevated and although we do expect them to slow down by the end of the year, they're probably going to still be more elevated than we had originally anticipated. So all of those things are just baked into the 14% down year on year?
Yes. A couple of things. I mean, one of the key drivers is Short term rates when you look at LIBORs and obviously when you look at the Fed funds rate or the IOER. So The fact that that has stabilized and stabilized a bit in the forward curve at least out the next 6 months or so. So the downside drag to that Where we are is probably not likely to be much unless something else were to change.
And then we're going to have
to look at the impact of term As we do reprice assets as they come out of the investment portfolio, but our best guess right now is we're pretty close to the As we think through the money market fee waivers, it does feel like the support in the reverse repo program has probably bottomed that out.
Great. That's helpful. Thank you. I was hoping to dig through a couple of business line items as well, maybe just focusing on asset servicing for a second. It seems like the business, it seemed pretty decent momentum here when I sort of back out money market fee waivers from the asset servicing line, it looks like it was up 2% quarter over quarter, 7% year over year or so despite obviously moderating industry volumes backdrop.
Can you help us bridge maybe what sort of the sources of growth here are Sequentially and as we sort of thinking ahead over the next sort of 12 to 18 months, what do you expect to be the bigger contributors to growth here? I know there's a bunch of things that sort of go in there, right? There's Custody and admin business, but then there's also TripAdi repo and a couple of other things.
Yes. So let me start with The more traditional custody business. I think we are having quite a bit of success there. We've got we won a couple of very nice mandates This year, our sales growth is ahead of where it's been. The ETF business is growing very nicely.
We captured It's up significantly on a year over year basis. Our capabilities there are quite good. In our venture, it's with CIBC Mellon. We've actually won 11 The 16 ETFs that have been listed on the TSC, and so we're seeing healthy growth there. We've got about 100 opportunities in our digital asset space.
So that is getting some traction. And we've got really good flows across a number Of our existing organic flows with our existing clients. So it's a combination of all of that Alex.
Great. Thanks very much.
Our next question comes from Brennan Hawken with UBS.
Good morning. Thanks for taking my questions. I'd like to start with the balance sheet. You touched on the estimate of excess deposits. That was really helpful.
Thanks for that, Emily. Curious about what drove though on the funding cost side, the improvement quarter over quarter. Was there any noise in that or do you think that's sustainable? And then when we think about squaring the guide for balances, what are you assuming For deposit growth from here for the rest of the year? Thanks.
Sure. So, just on the funding side, really There was a benefit of off the lower rates there. So that was what was driving it, nothing else really notable.
Yes. A lot of our debt It is swap to floating. So as we saw lower LIBOR as we saw that through that as well.
Exactly. And then I think the other question was that they what was the second part of
the question? Balance sheet growth.
Oh, balance sheet growth, yes. We similar to what I had alluded to before, we will continue to monitor and proactively manage The balance sheet, we do have room should deposits go up further. But of course, like I said, based on the excess that we have, we'd like to kind of Stay where we are and frankly manage it down further.
Okay, got it. And then when we think about servicing The servicing revenue, and Alex touched on this a little. What was the contribution of activity This quarter, what was the benefit of new business? Was there some did that come in late in the quarter? From a I know we it's an imperfect way to model, but the way we all model this, it looks like the fee rate got hit this quarter.
So what were some of the dynamics there and how should we be thinking about that going forward?
I mean, if you're talking about like asset servicing versus AUCA, which I think is kind of what you're alluding to, AUCI was up 8% sequentially. It's about 1 third of that was market and currency driven and Remainer was really organic growth, so some really good signs of organic growth. When you look at that though against asset Servicing fees and revenues like when we think about it, it's generally helpful rather than look at the 8% to probably look at the Sorry, rather than look at the spot, to look at the average growth in ACA, which was about 5%. And then when you look at the asset services It was flat, but ex waivers was up 2%. And actually as we kind of reminded folks in the past, When we look asset servicing fees, only 50% or so are truly driven by asset levels, the remainder are driven by Account based fees and transaction fees.
So hopefully that helps.
Yes. When you get under it all, if you look at really what is the organic growth rate Underneath across the businesses and especially in the Investment Services business, when we look at fees only, if you exclude market appreciation or Appreciation and the currency impact waivers and some of the extraordinary volumes that we had in the Q2 of last year due to COVID. That's if you net that out and net the fee waivers out, we're seeing probably something like 2% or slightly better than 2% in For organic growth.
Great. Thanks for that color.
Our next question comes from Ken Usdin with Jefferies.
Hey, thanks. Good morning. Emily, on the fee So ex waivers, you talked about the improvement on your outlook to plus 7,8 plus 3. And I'm just wondering how much of that was just A pull through of the first half as you mentioned and or if you are actually more confident in what you're seeing in some of the core businesses following on the last few questions about The underlying growth that you are seeing in other fee areas?
Sure. So Ultimately, the 7% to 8% is fees ex waiver growth over the course of year on year. So you Have some of the numbers to do the math in the first half. We had about 8% growth in the second half. It will still be very, very healthy, but probably closer to 7%.
Okay. All right. So it was more of that just how good it's been and then stays is the way to think about it?
Exactly.
Okay, got it. And just coming back to the you laid out a lot of new product intros. You've been talking about this for a while. I guess the challenge for us is to understand how these product intros turn into revenues and the timeframe by which They do convert and you talked about the organic growth improving directionally over time. But how quickly can we start to see some of these improvements And new intros really starting to roll into the income statement.
And are there other ones that you can give examples of where they're live and now starting to be meaningful
Sure, Ken. So as we described in the past, if you looked at our organic growth over the past few years before last year, It was basically flat. And so now we are starting to see we're starting to get some traction as we've improved a number of our services Invested in our data and analytics capabilities and we've talked about our digital assets capabilities. So we're already starting to see some benefit in these Now that we're seeing an underlying growth rate more like 2%, we're already starting to see some benefit to things like our Custody and ETF servicing business around some of the digital assets. Our investments in the ETF business It's starting to come through and show up in the numbers a bit.
Some of the longer term investments that we're looking to make like Pershing, where we're really investing in the platform, We don't expect that to really turn into revenues for as long as 2 years. So it's some of these are very are longer Some of them are coming through as we talk about them. On the treasury services side, where you see us gaining some market share, we've had pretty healthy organic growth The multi currency sweeps has caught a lot of attention when we announced that. We have clients in it today and we think that will gain some traction over The next year or so and I would say the same thing with what we're doing with real time payments and collections. So it's we've mapped it out.
It's kind of all over the board. Some of them are as far as 2 or 3 years out. Some of the investments that we're making in custody, we would expect to have a return maybe a year out and some of them are starting To bump into and help us generate a positive organic growth rate of the 2% that we're seeing today.
And we'll take our next question from Brian Bedell with Deutsche Bank.
Just want to come back to the AUCA up to $45,000,000,000,000 from the $41,700,000,000 You mentioned about 2 thirds That was organic. Can you parse that out a bit between organic from the client base In terms of net inflows at your clients, it seems like $2,000,000,000,000 is a large number. So I just want Comment on the demand for cryptocurrency servicing, obviously, the Grayscale mandate, which is great. Are you seeing an increase in that demand in the second quarter versus what I know that began to spike up in the Q1?
Okay. So Brian, when you look at our flows and the growth on a year over year basis, about Half of it is flows that would include net new business and it would also include any lost business And any organic flows from existing clients. So hooking on some winners as they generate new funds That would be new business for us. And then the combination, so a little more than half is market and currency And the rest of it is coming from the client flows.
I'm sorry,
I meant on a sequential basis This is from the 41.7 to the 45.
Okay. On a sequential basis, that number is it's pretty similar. Probably
Actually, it's a bit more on a sequential basis, but more of it is based on net new business and currency and markets that are working for the year on year.
Yes. It's about fifty-fifty, not quite. Okay. And then you asked a question around demand for Bitcoin Services. And what we've mentioned earlier, we have initiated quite a few ETFs In Canada where they can be traded on the TSNC, so we've got 11 of the 16 ETFs that existed there and there is activity there.
And Grayscale, which is the largest asset manager of digital currencies, We've teamed up and partnered with them both to help them with the existing trust and when and if they get approval from the SEC to list The ETFs, they'll take on our TA and other capabilities there as well. So we are seeing some interest and then we're also seeing Some interest in the on the when I say the high net worth side. So there is some retail interest that we're hearing through some of the Pergin clients as well As other wealth management players.
It's worth just adding to that that we have been mandated on 6 of the
Okay, that's great. And then just a quick follow-up on the assumptions For NIR and the money market fund fee waivers, just you mentioned trying to move more of those excess deposits into money market funds. Just in the assumptions of the guidance that you gave, are you assuming some of that transfer from those excess In terms of both the fee waivers moving down, which It would be good if you are expecting an increase in money market fund balances. And then same with the balance sheet size as we move into year end given that guidance, is There an assumption of conversion of deposits to money market fund balances within that guidance?
Sure. I'll take both And I'm sure Todd will chime in. On the waiver side, really we're just using the forward curve and we're just assuming balances stay flat. As we just as we talked about a little bit before, the Fed actually taking some action with technical rates and raising the repo rate by the reverse repo rate Five basis points has been extraordinarily helpful and that has put a bit of a floor in terms of gross fund yields and so that is largely what's driving The improvement that we expect in the 2nd quarter from a run rate of about 200 what was 250 this quarter to about 225. So In terms of going forward, of course, as we start to recoup some of that, it's very dependent upon obviously We'll be very dependent upon balance levels, but that's going to be sometime in the future.
From a A positive perspective, we're as I mentioned before, we have a material amount of excess still on the balance sheet. We're fine in terms of where we are, but yes, we'd like to manage that down a bit.
So Brian, what I would add to that is, so yes, we're projecting that those balances They're going to come down a little bit in the number for NIR. And you got to remember when we had all this excess capital and there was nothing we can do about it, It wasn't particularly in our interest to push those balances away because they did make them even though it's modest, They did make a little bit of incremental income, but the return on capital was very poor. So now that we have the flexibility to manage our capital base Through the new regime, we very much want to be much more efficient with the usage of the balance sheet. Now we didn't try to marry that with how much if the balance sheet comes down, how much of that is going to pour is going to come into fee waivers. And remember, if we are growing the money market funds, we are waiving a pile of the fees as well.
So a few waivers go up a little bit We didn't try to solve that in the guidance that we gave you. We just made it But it's not going to be material and a material number.
Got it. That's great color. Thank you.
Our next question comes from Rob Wildhack with Autonomous Research.
Good morning, everyone. Just wanted to follow-up on a couple of the business lines you called out, particularly noticed that Issuer Services and Treasury Services performed well. You mentioned some of the drivers, particularly the new product in treasury services, but wondering how sustainable you think the growth rates seem this quarter are going forward?
Yes. I think we continue to see as we continue to invest in our payments platform and volumes Are moving nicely and we're capturing a little bit of market share. As we look out, we think it's sustainable that we can See some decent growth and we're introducing some new products that are getting some take up. So the real time payments for Collections is going to be a very interesting product and we've got a pretty robust pipeline for that and we look forward To announcing something in the not too distant future around opportunities there. And so I think the team has done a good job Of capturing that high margin business, I think the sales effort globally has been strong.
And I think we're well positioned To be a provider of services around the globe, we've got great relationships and I think we're benefiting from that. So I think there's a little bit of room for continued growth there. When it looks at issuers when we look at Issuer Services that includes Corporate Trust as well as the Doctor business. Corporate Trust, we've made good inroads in the CLO business. Frankly, a few years ago, we lost a little market share.
We're capturing that. We We've rebuilt our platform there and then very good growth in kind of the conventional debt Servicing. And Doctor's, they were very much impacted by COVID. And so now that we're seeing some of these global Company is paying dividends again. We're seeing a little more activity there.
And so I think there's room to sustain where we are and grow a bit off of it.
Just two quick things I'd add. On the treasury services space, it's a very fragmented market. So it's ultimately Even a little bit of share gain actually moves the needle considerably. And in Doctor, as Todd alluded to, Just the Q3 tends to be seasonally our best quarter. We had a very strong second quarter, again, as Ted alluded to with the resumption Of dividends and certainly issuance activity, so the step up will probably be a little bit less in the Q3.
Got it. Thank you.
And our final question comes from the line of Rajeev Bhatia with Morningstar.
Good morning. Just a quick question on your margin. So your investment servicing margin was 34%. Curious if you can provide any color on the pre tax margins of your of the various LOBs within there. So for example, I think several years ago, you spoke about issuer services and Treasury services being higher margin.
Okay. Rajeev, we don't disclose the operating margins across the various businesses. And we did benefit in that margin obviously from the reserve release because a lot of that is related to it. But we did see a little bit of But the operating margins of the various businesses,
Most of them are similar
to what we see across the total. But for example, currency collateral is a bit higher.
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.
Thank you, operator, and thanks everybody for joining us I know it's a very busy day. So we appreciate the engagement and look forward to talking to you soon. Thank you very much.