Good morning, and welcome to the 2021 First 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 Magna Polchszska, BNY Mellon Investor Relations. Please go ahead.
Good morning. Welcome to BNY Mellon's Q1 2021 earnings conference call. Today, we will reference our financial highlights presentation available on the Investor Relations page of our website at bnymelon.com. Todd Gibbons, BNY Mellon's CEO, will lead the call. Then Emily Portney, our CFO, will take you through our 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 Forward looking statements made on this call speak only as of today, April 16, 2021, and will not be updated. With that, I will hand over to Paul.
Thank you, Magda, and good morning, everyone. I will touch on a few Financial performance highlights and some other business developments and hand it over to Emily to review the results in more detail. But first, I wanted to spend a minute discussing the environment in which we're all operating. As I reflect on the past year, the worry that keeps coming to mind for me is resilience. The resilience of our business model, our global financial infrastructure and of course our clients and our employees.
Indeed, we saw the resilience of the financial system itself due to the lessons learned from the previous financial crisis and to the quick and decisive action Government and regulators. And now we're moving from a period of resilience to a period that we are all optimistic will be one of recovery and growth. While we all remain clear eyed about the challenges that still exist, I am one of many business leaders who have seen many reasons to be positive in the period ahead When we move past the COVID cloud, the optimism stems from the confluence of several factors, including the deployment of the vaccine, Potential strength from consumers. Now in the U. S.
Households have been saving at extraordinary levels. Currently, the savings rate is running about 14% and that's more than twice the 30 year average. The amount held in cash in household and available for spending is around 15% of GDP, which is way above normal time. In addition, monetary Stimulus and further U. S.
Government spending plans are likely to accelerate GDP growth. So we expect significant GDP growth going forward, Assuming the pandemic is managed as expected, the strong economy is likely to keep activity and asset levels high And expectations for stronger growth is beginning to be reflected in the steepening of growth. Now I also wanted to touch on the future of work and general productivity. The pandemic has driven remarkable levels of innovation and technology adoption and companies have now become accustomed to a new way of working. We've proven our ability to maintain high quality service for our clients, adopt and deploy new technologies quickly We collaborate with one another virtually over this past year.
We're going to take the best of what we've learned to continue to innovate and drive enhanced value for our clients and our employees, including assessing what our workforce and workplaces will look like. We intend to embrace hybrid working arrangements Define future work that continues to position us as an employer of choice in our industry. Now with that, let me turn to some highlights on our performance where we see momentum across our businesses. Starting on slide 2, we reported revenue of 3,900,000,000 Fee revenue excluding the impact of money market fee waivers increased 6% year over year against the prior year quarter that had exceptional Pandemic related volumes and volatility. Asset Servicing and Pershing particularly benefited compulsory client activity as well as market appreciation.
Operating margin of 29% is relatively flat year over year, not bad considering the significant lost We had a credit provision release of $83,000,000 EPS of $0.97 was down $0.08 from last year And return on tangible common equity of 16%. Turning to our businesses now. The strength in asset servicing revenue reflects higher markets, robust client volumes and continued business momentum. Our open architecture strategy and platforms continue to gain traction with clients, powered by our data and analytics solutions. In the Q1, a large global asset manager in acquisition mode signed a multi year agreement for Datavol, that's our cloud based platform.
Evolve allows our clients to integrate acquisitions quickly and easily interact with data to gain actionable insights to help drive their business decision. We are proud to have been selected by Gabelli Funds to launch its new actively managed ETF And that's an ESG themed product and to have been named the ETF service provider for First Trust SkyBridge's Bitcoin ETF Trust. During the Q1, our ETF servicing platform launched a record 51 fund and our ETF Assets under custody or administration has now surpassed $1,000,000,000,000 We recently also announced the establishment of a new digital assets unit, Which is building a multi asset platform that will allow us to custody traditional as well as digital assets, including cryptocurrencies in an integrated way. The growing client demand for mutual assets and improved regulatory clarity presents an opportunity for us to extend our current Service offerings over time to this emerging field. Moving to Pershing and Clearing and Platter Management.
Pershing benefited from continued elevated transaction volumes, equity market strength and strong underlying fundamentals. As I mentioned last quarter, We did lose a couple of clients due to consolidation and this together with the low rate environment will impact Pershing in 2021 and mask the underlying good organic fee growth. In Clearing and Claro Management, clearing fees remain strong and we expect healthy activity going forward. Within collateral management, international fees with Voyant due to new business wins. In addition, as we announced earlier this week, We now accept Chinese bond as collateral on our Tripartic platform through Hong Kong Bond Connect.
With the Chinese fixed income market only to grow. Demand has been mounting for such a solution, which until now has not existed. This is another example of BNY Mellon's continued innovation to drive value for our clients. Now turning to Investment and Wealth Management. We recently announced the realignment of Mellon's capabilities in fixed income, equity and multi asset liquidity management With Insight, Knewton and Driisys cash respectively.
This will enhance the scale and capabilities of our specialist firms And strengthen their research platforms, operations as well as global reach. We've had a year of consistent quarterly long term inflows Investment performance across our top strategies continues to be strong. In Wealth Management, higher markets helped to drive client assets to a record level of almost $300,000,000,000 We've implemented many positive changes in this business, including new sales team, A broader investment and banking offering and new digital capabilities for clients. We are gratified by very high satisfaction scores in our year end survey with all survey categories up year over year. Now our proprietary goals based planning tool AdvicePath was recently named the CIO 100 Award Winner.
This award recognizes 100 technology teams across the industry They're driving growth through digital transformation. So a lot has been happening to build momentum for growth with existing and new clients. Moving beyond financial performance, I want to spend a minute on ESG, something that is top of mind for our investors, employees and our clients. We are committed to ensuring that we use our reach, market influence and resources to address pressing ESG issues. Our goals include offering our clients leading analytical solutions, empowering ESG investors with new investment strategies And encouraging and enabling ESG financing.
Last month, we published our first report on how we're managing the impacts of climate change on our business, We've paired in accordance with the past 4 years from climate related financial disclosures or TCFD guidelines. I encourage you to read it as it includes Examples of where we are where we have initiatives in place related to climate risks and opportunities and lays out multiyear metrics And targets including plans to enhance disclosures around how we're doing our part to help the environment. Now let me close with where I opened. The year started with continued extraordinary efforts by the U. S.
Government and Federal Reserve to address the economic fall off of the pandemic through fiscal and monetary stimulus. Much uncertainty remains, but equity markets have been generally optimistic, although some are volatile and longer term treasury yields have steepened. But the amount of liquidity in the system and inflows into money market funds have driven short term rates lower, in some cases So there are many positive factors that support our business model, but short term rates continue to be a challenge. Our business has proven to be resilient and we're well poised for organic growth. Moreover, we continue to bring innovative solutions to the market to help our clients and help them grow.
With that, I'll hand it over to Emily to review our results in more detail.
Thank you, Todd, and good morning, everyone. I will walk you through the details of our results for the quarter. All comparisons will be on a year over year basis unless I specify otherwise. Beginning on Page 3 The financial highlights document. In the Q1 of 2021, we reported revenue of $3,900,000,000 and EPS of $0.97 This includes the impact of the reserve release of about $0.08 per share, partially offset by a 39,000,000 Energy investment impairment of about $0.04 per share.
Revenue was down 5% and EPS was down 8%. As expected, results were negatively impacted by continued low interest rates and associated money market fee waivers and the absence of share repurchase activities for most of 2020. Fee revenue excluding fee waivers grew 6%, driven by market level, good organic growth and the positive impact of a weaker U. S. Dollar.
While client activity was down slightly versus the exceptional COVID driven volumes and balances a year ago, it was stronger than we had anticipated. As a reminder, last quarter we guided to about 1.5% organic growth for the year. In this quarter, organic growth was greater than 2%. Beginning this quarter, we reclassified a few revenue line items, which drives cleaner Basically, we took investments in other income out of our fee revenue and created a new reporting line, which includes investment and other income as well as other trading, variable interest entities and securities gains and losses. The reclassifications had no impact on total revenue and the details can be found on Page And 20 of the financial supplement.
Prior periods have also been reclassified. Foreign exchange revenue had a Strong quarter up 24% versus the 4th quarter, primarily on the back of high volume and was 6% lower versus an exceptional prior year. Net interest revenue was down 20%. Expenses increased 5% year over year, which is a bit higher than prior guidance due to higher revenue related expenses, Higher litigation costs and the appreciation of our stock price associated with equity awards. As previously disclosed, Q1 of 2020 also benefited from an accrual adjustment that was not repeated in 2021.
Provision for credit losses was a release of $83,000,000 primarily reflecting an improved macro outlook and CRE Price Index. We had net recoveries of $1,000,000 and our portfolio remains high quality with Approximately 85 percent of loans rated investment grade at March 31. Pretax margin of 29% was relatively flat to last This is a strong outcome considering the impact of the low interest rate environment on fee waivers and NIR, both of which have de minimis expenses associated with them. ROE was 8.5% and ROTCE was 16.1%. Page 4 sets out a trend analysis of the main drivers of the quarterly results and is adjusted from notable items for the Q4 of 2020 were indicated.
Investment Services revenue was $3,000,000,000 down 8% year on year. The decline was primarily a result of lower net interest revenue, market levels and a weaker U. S. Dollar. Investment Services fee and other revenue ex waivers was up 2%.
Investment and Wealth Management revenue increased 10% as higher market value, modest equity investment gains compared to losses a year ago and a weaker U. S. Dollar offset the impact from fee waivers. Money market fee waivers, net Distribution and servicing expense were $188,000,000 in the quarter compared to the $175,000,000 guidance that we provided previously. The higher than expected waivers were driven by higher balances.
Turning to Page 5. Our capital and liquidity ratios remain strong and well above internal targets and regulatory minimum. Common Equity Tier 1 Capital totaled about $21,100,000,000 as of March 31st and our CET1 ratio was 12 point percent under both the advanced and standardized approaches. Tier 1 leverage was 5.8%, down 50 basis points from the 4th quarter, primarily due to high deposits. We continue to monitor the impact of liquidity in the system on our balance sheet.
We will continue to support our clients' cash management needs, while at the same time managing our Tier 1 leverage ratio, which is our binding constraint. Over the last year, excess deposits have grown substantially. Taking the unprecedented environment into consideration, we are comfortable utilizing a portion of our internal Finally, our LCR was flat compared to the 4th quarter at 110%. In terms of shareholder capital returns, we purchased $699,000,000 of common stock in the Q1 in line with the Federal Reserve modified limitations that apply to all CCAR Banks and continue to pay our $0.31 quarterly dividend, which totaled $277,000,000 this past quarter. Turning to Page 6.
My comments on net interest revenue will highlight sequential changes. Q1 net interest revenue was down 3.7 percent with about 2 thirds of the decline driven by the impact of lower interest rates and the other one third driven by other items such as day count and hedging activity. As a reminder, although average deposits increased again quarter, they had minimal NIR value in the current low short term rate environment. Turning to Page 7, which summarizes deposits and securities trends. As mentioned, deposit balances continued to grow and on average were up $21,000,000,000 or 7% from the 4th quarter and up $70,000,000,000 or 27% from a year ago.
As was the case in the Q4, again in Q1, a larger driver of the growth was excess liquidity in the system, driven by monetary and fiscal stimulus. Turning to the securities portfolio. On average, the portfolio was flat in the 4th quarter and up approximately $26,000,000,000 or 20% over the prior year. Within the securities We do continue to invest in non HQLA securities, primarily in non Agency MBX, munis and investment grade corporate bonds, as we look to improve yields while maintaining our conservative risk profile. We also continue to grow the loan Page 8 provides an overview on expenses that we largely covered earlier.
Turning to Page 9. As mentioned earlier, total investment services revenue year on year declined by 8% due to the impact of low interest rates on And lower FX compared to the strong year ago quarter. NIR was down 20%. Fee and other revenue ex waivers was up FX revenue and Investment Services had a strong quarter, up 18% from the 4th quarter and down 15 18% year over year to $41,700,000,000,000 on the back of higher market values and client inflows. The favorable impact of a weaker U.
S. Dollar and net new business. As I move To the business line discussion, I'm going to focus my comments on fees. Asset Servicing fees were slightly excluding fee waivers, primarily reflecting higher client activity and higher market levels, partially offset by Lower FX revenue through a comparably high period last year. The pipeline remains strong and win While fees were down, they would have been up excluding fee waivers.
Year over year, clearing accounts were up 5%, Mutual fund assets were up 24% and we saw continued strong net new asset flows of $28,000,000,000 in the quarter. Transactional activity remains robust with average daily clearing revenue up about 30% from the 4th quarter, although we do expect this to normalize as we move through 2021. Issuer Services fees decreased mostly driven by fee waivers and COVID related dividend fee impact in Doctor. Treasury Services fees were up modestly at flavors on the back of higher payment volumes and higher money market fund balances and a continued shift to higher margin products. Clearance and collateral management fees were down slightly, primarily Due to elevated volumes in the year ago quarter, continued organic growth in our non U.
S. Business for tri party balances and clearing fees increased was offset by slight declines in U. S. Volumes and lower intraday financing fees. Page Turning to Investments and Wealth Management on Page 11.
As noted earlier, total Investment and Wealth Management revenue in the quarter increased 10%. Overall assets under management held steady compared to the 4th quarter's record $2,200,000,000,000 and were up 23% year over year, primarily due to higher market values, the positive impact of a weaker U. S. Dollar and net inflows. Investment Management revenue grew 13 percent despite over 700 basis points negative impact from fee waivers as a benefit of higher market levels, Equity investment gains in the current quarter compared to losses a year ago and a weaker dollar more than offset lower performance fees against a strong year ago quarter.
In the Q1, we had net inflows of $36,000,000,000 including our Straight quarter of long term inflows of $17,000,000,000 driven by strong inflows in LDI and fixed income as well as index Investment performance remains strong with more than 80% of our top 30 strategies having peer rankings ranked in the top 2 quartiles on a 3 year basis, up from 73% a year ago. Wealth Management revenues were up 5 Now turning to the other segment on Page 12. The year over year revenue comparison was primarily impacted by the impairment of 1 Renewable Energy Investment as noted earlier. The expense increase primarily reflected incentive comp accrual reversals in the year ago quarter. A few comments about the outlook.
As we think about the balance of 2021, for NIR, $20,000,000 due to lower rates, partially offset by higher balances. So for the second half of the year, we do expect to be more in line with the With regards to EX waivers, the growth rate in the Q1 was significantly Higher than previous full year guidance due to higher volumes, but we expect those volumes to moderate going forward. Regarding expenses, we previously guided to be About 1.5%, excluding notable items. Given the higher expenses this quarter, we now expect them to be up about 2%. As a reminder, on a constant currency basis, we guided that we would be flat year on year and that will now be up about 50 basis points.
Finally, in terms of our effective tax rate, we still expect it to be approximately 19% for 2021. However, We are monitoring the latest federal tax proposals closely. In terms of shareholder capital return, We will continue to pay our quarterly dividend and will once again make open market share repurchases in compliance with the Federal Reserve's modified limitations, which will allow us to repurchase approximately $600,000,000 of common stock in the Q2. Looking beyond the 2nd quarter, The Federal Reserve's latest communication with CCAR Banks indicated that they will likely implement the SPD framework for capital management in the 3rd quarter. We are following that guidance closely.
We look forward to receiving the results of this year's stress test and operating under the stress capital buffer framework, which will allow for more flexibility and should mean that we can return more than 100% of earnings to shareholders starting in the Q3. With that, Operator, can you please open up the line for questions?
Of course. Thank you. And our first question comes from the line of Brennan Hawken with UBS. Please go ahead.
Good morning. Thanks for taking my question. I was hoping to ask actually Emily, about some of those comments on capital and Fed returning to the SEB approach to last capital returns. The Tier 1 leverage ratio is now inside your guided band With the buffer of 5.56, I believe. You all have referenced that you have some levers pull, Which might help on that front.
So could you maybe walk us through some of those dynamics? And then also, How rigid is that offer that you've applied? It seems to be a bit above peers. And so would you or are you in a position where you could allow yourselves to go underneath that buffer for a period of time Given the unusual growth in the odd deposits?
Sure. Thanks for the question. So we are very managing our deposits very closely. Having said that, we will absolutely continue to support our clients with their balance sheet and we're comfortable with where deposits are now. But of course, it goes without saying, over the course of the last 12 months, there have been a lot of additional Reserves in the system, liquidity in the system, and so we've seen a surge in those deposits.
A large portion of that surge is So it's non operational. We've been very successfully working with our clients to basically explore and move some of those non operational Off balance sheet vehicles, thankfully, we have a good platform and liquidity direct that has lots of alternatives. It's an open platform. So that has been very effective. You are correct in pointing out as I did mention in my prepared remarks that Given the unprecedented liquidity in the system, we would feel comfortable dipping into our Tier 1 leverage buffer.
We do hold a very significant buffer in excess of 150 basis points over reg minimums. We size that very carefully. It's to both absorb any impact to OCI given rate changes as well as also the any surge in imbalances. And given that's really what we've seen and the buffer is really there for this particular kind of unprecedented environment, ultimately, we would feel comfortable dipping below 5.5% for a period of time, of course, running certainly above the regulatory minimum.
Right. Okay. That helps. That's great to hear. And then one other question on the balance sheet.
It seems as though the interest earning asset growth lagged deposit growth this quarter on an average basis, right, just looking at the average balance sheet. Was that because some of those deposits maybe Temporary, maybe you all were in the process of encouraging some folks to consider off balance sheet options like you referenced. And therefore, When we gauge balance sheet growth here this quarter, we should more pay attention which one should we pay attention to more? Which one is more indicative? Is it The interest earning asset growth or is it deposit growth?
And or is it just that you'll be Putting more money to work and therefore the industry asset growth will catch up. I just wasn't it seemed a big gap, so wasn't sure about that.
Yes. I mean, sure. So certainly, and I think I just mentioned, so a significant portion of the deposit growth that we've We do think is excess and so non operational. So it's very hard to really redeploy that into the securities portfolio or the loan portfolio for any real duration. So as a result, a lot of that is just sitting at the Fed earning 10 10 basis points, which obviously is dilutive to NIM, but of course, it is overall accretive to NIR, just obviously marginally So when we think about just NIR in general, we really just use the forward curve to project.
And despite, of course, the steepening of the long end of the curve, we did see the short end grind lower. And also the duration of the curve where we invest is more in the 2 to 5 year mark and that didn't go up as much as the long end. But of course, to the extent the curve does continue to steepen and or shift upwards, that will be extraordinarily helpful.
Thanks for the color.
And we'll take our next question from the line of Brian Bedell with Deutsche Bank. Please go ahead.
Thanks. Good morning folks. Can you hear me?
Yes, Brian. We can hear you.
Great. Thanks. Just one more on the rate sensitive and then interest revenue and fee waiver Just the cadence as we move through the year, really into the Q2 and back a little bit to that With the excess deposits, is there an ability to put a little bit more in the securities portfolio as we move into the second quarter? So what I'm trying to get at is, are we given your full year guidance, are we at sort of stability As you see it coming into the 2nd quarter on NIR, maybe a little bit down before we go up. And then similar to that on the fee waiver, I think you said It's 220 for the Q2, but then I'm not sure if I got this correct that you thought that was going to improve in the back half And that was based on balances.
Can you clarify that?
Sure.
So in terms of NIR, we don't really give Quarter by quarter balances and so much of it is dependent upon or quarter by quarter projections and so much of it is dependent upon obviously the rate curve, deposit levels and MBS prepayment and other factors, all of which are baked into our projections. And what I would say, as I just reconfirmed, is that our Full year projection for NIR is still the same as the original guidance given, which is 11% or 12% down year on year. So that hasn't changed Fully. In terms of waivers, so waivers are a function of 2 things, basically Short term rates, so that's specifically 3 months 6 months Q bills as well as repo rates, also a function of money market fund balances. And actually what we saw this quarter is actually both rates grind lower, balances go higher.
As a result, waivers overall were a bit Higher than originally anticipated at $188,000,000 They were that the total impact, however, was slightly positive to revenues. And again, just we use the forward curve to also project waivers. Looking at the forward curve, also the historical relationship Between rates and money market balances, etcetera, we think that waivers, The size of waivers overall will peak in the 2nd quarter at about $220,000,000 And then by the way, that would be probably at As the fees were talking about the gross deals, we're talking about probably slightly negative to revenues, but then we would expect the second half of the year to be more in line with the Q1. And look, I always like to remind people, albeit it's probably not till the latter half of twenty twenty two or 2023. But if when Fed funds eventually hit 25, is when the Fed moves, we will recover in That's 50% of those waivers and when it hits the 1%, it's very close to 100% of those waivers.
That's super clear. And then the second question is on organic growth. You said that it did pick up to 2% this quarter. Maybe if you could just talk about the drivers of that? I know Todd, you mentioned Very good demand for data analytics with the data evolve.
It sounds like that contract is not in, the big one you mentioned is not in the run rate yet, but maybe if you could just talk about that momentum in the organic growth rate and tracking that?
Sure. So thanks for the question, Brian. So the Q1, we got the benefit obviously of a lot of activity. It's hard to Exactly where that activity is going to go, but the guidance I think that Emily provided to you is probably Not sustainable at this level, but we did get some nice new wins, which Is reflected in that. Pershing volumes were particularly high, very good flows in a number of their accounts.
So we're seeing a lot of good growth On with existing clients as well with balances there. We do expect them, as I said, to moderate somewhat. And I also did point out that on the previous call that we had some lost business in That will impact us later this year. So, Port Pershing has got pretty strong underlying organic growth. 2 of it is going to be masked A bit by both the interest rates as well as the as well as that loss business that will impact in the second half.
Well, we are seeing sustained momentum across just about all of our businesses, strong pipelines. And so as we've taken as we've converted the pipeline to sales, We continue to build the pipeline. We had another pretty good quarter for sales. Our higher win loss ratio with our win loss ratios are Improving and retention has continued to be good. I mentioned that the data evolves and we had a number of clients Beta will now sign a very significant one and building deeper relationship with that client.
A lot of interest In our some of our analytics and applications that we've described to you before, we're actually seeing recovery in payment flows too. So treasury Services, which is largely commercial payments and a lot of it's global. We're seeing good Recovery back on economic recovery. And we're also picking up some market share. We've got some pretty interesting opportunities there as we Pretty exciting what we might be able to do in the real time payments space there.
Asset Wealth Management had Positive flows. We're seeing meaningful improvement in wealth. And we've been talking about the investments that we're making across the businesses, both in even in the core custody, our middle office functions, The payment system, clearing and collateral management, it was off of an extraordinary good quarter last year, But we continue to pick up global assets. The fact that we built up this Bond Connect Capability in China is an exciting innovative service that we're providing And we're confident that that's going to continue to grow. So good underlying momentum Helped by very strong activity in the Q1.
That's great color. Thank you.
Thanks, Brian.
Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning.
Hi, Betsy.
Good morning.
Okay. A couple of questions, a little bit on the technical side on the On the build out that you're doing around the digital assets, the cryptocurrencies and that kind of thing. Could you remind us The kind of pace that you're anticipating being able to roll this out and Are you going to be custodying the physicals? Just wanted to understand what the How wide the aperture is on this opportunity, sir?
Okay. Sure, Betsy. I'll take it. It's Todd. So when we talk about our digital asset efforts, what we're talking about is Digitizing traditional securities so that they're more easily mobilized.
Things like you could digitize you could digitize the money market fund and make it an eligible asset to put into repo, which couldn't do in the past and you can make it much, much more We think there's going to be quite a bit of that activity as well as smart contracts and What that might be able to do for the Corporate Trust and other businesses. So that's one element of it. The other thing that we're going to see is we think there'll be digitization of Fiat We're already involved in a consortium with Fidelity, which is a central bank currency, which Which we trade 20 fourseven in digital form and is really just developing regulatory approvals for it now. We do think there'll be and there already exist in digital currencies, And where everything is the thing that gets the hype is really around the cryptocurrencies, but we would be digitizing excuse me, we would be Customizing those as well. So we have been working on a prototype and we expect to be offering Capabilities across all three of those by the end of the year as we're building things out with clients that have shown Institutional Interest.
So yes, we would actually have The wallet, if you will, or be the custodian for the underlying cryptocurrency or any one of those particular digitized assets.
Okay. So you would actually be custodying the physicals, you're not going to be sub custodying that out to somebody else?
That is not our intent at this point.
And then what's the timeframe for getting to market? Is that a 2021 or 2022 timeframe?
We expect that you'll be hearing some things throughout the end of 20 1, but it may be a little bit earlier for some elements of it.
Okay. And then the other thing I wanted to just touch base On was around the climate comment that you had in your prepared remarks, Todd. I mean part of it is asking the question, what can you do? Is this about your own footprint? Or is this also about working with your clients?
And if it's working with your clients, how do you anticipate you will help them get more climate friendly, so to speak?
Yes. So there's really two elements to it, Betsy. One is what we're doing as an enterprise, our own carbon footprint, for example. And we've been very active. We published Recently in February, we published a considering climate at BNY Mellon report, which gave very Specific examples of what we've done around carbon waste and other environmental related activities.
And we are carbon neutral. We have been for an extended period of time. And we've been named as by the CDP, We're the 1 of 5 financial institutions that have been given an A rating on climate and we've been we're the only financial institution that Gotten that rating over the past 8 years. So that's what we're doing as a firm and managing paper and our carbon footprint. In terms of what we're also doing is we're providing services to clients.
For example, we're the largest Trustee on green bonds and we can certainly help clients establish the trustee function that goes along with that. But in addition, in the asset servicing space, One of the things that have come out of our data and analytics capability is a very interesting application on ESG and allowing our clients to customize reviews of their own portfolios. And we use a crowdsourcing technique that's unique. And we offer a cloud based solution. We the client basically brings From what data providers were connected to 100 data providers.
We got 2,500,000 secondurities in that And there's kind of a constant feedback loop to the data provider, so they're constantly enhancing The amount of information that they might have on a particular security. So we're excited about that. We have quite a few clients on it now and we're just contracting them That's for permanent usage. And in addition to that, in our investment management space, We're building quite a few ESG products. And in the servicing space, we were just awarded An attractive ETF that was based on DSG.
So it really goes in those two forms. 1 is the commercial element that we can help our businesses. Number 2 is just doing the right thing for our own company.
Okay. Thank you. Appreciate that color.
Thanks, Betsy.
Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.
Hey, good morning, Todd and Emily. Hope you guys are doing well. Maybe another question around capital. So I heard you guys Obviously targeting over 100 percent payout, that's something that you guys have targeted for a little while as well. Can you help us kind of calibrate that against buyback, you have authorized currently.
Obviously, there could be some probably technical restrictions in terms of how much you could ultimately get done in the Q3 given just the volume threshold. But maybe help us think through that relative to your comments and willingness to kind of go below the 5.5% tier one leverage. So just kind of trying
to think through much you could ultimately get done? Sure.
So ultimately, you are correct And mentioning that we had approval, I'll just remind folks, the Board approval was given in the Q4 of last year Actually through the Q2, it's probably going to be pretty unlikely that we could execute the entirety of the $4,400,000,000 just literally in terms of ADV, etcetera. But we will do as much as we are allowed. And assuming that the Fed does return to or implement, I The SCB framework, which does allow for much more flexibility, we would intend to certainly execute in excess of 100% of or return, I should say, in excess of 100% of earnings in the 3rd quarter as much as we could do and anything that we couldn't do, we would hope to catch up in the Q4 in that program.
Got it. That's helpful. And then maybe we can unpack some of the NIR dynamics a little bit more. So two questions there. I guess one, Deposit costs, I think, were roughly flattish, I guess, sequentially just in terms of what you guys are charging.
Is there room for that to grind a little bit lower as you're trying to optimize the balance sheet or there's not a whole lot you guys could do in terms of pushing pricing on deposits to clients? And then, I wanted to clarify your comments around premium amortization. I don't know if you if I missed it, but what was it in the quarter and your full year And what
does that assume for premium AM
for the rest of the year?
Sure. So just talking about first You are right that deposit rates are relatively flat. And remember, that's an average across non U. S. Dollar As well as U.
S. Dollar, we are charging in, for example, euros and for Japanese yen. We're not, of course, charging for the U. S. In the U.
S. I mean, look, there I don't know if this is the trough, but this is probably pretty much Close to ultimately, I guess, the rate that we get to. Of course, if We went negative in the U. S. We could start charging for deposits.
We certainly don't feel or have ourselves that that is necessary. And ironically, if you do start charging for deposits, then you start to earn money, earn more in NIR. So, But that isn't the intention at the moment. In terms of your
Let me just add something to that. So I think in the Fed guidance, Alex, that they provided, they really have talked About being mean for them to limit any possibility of negative rates for any sustainable time. And we've seen repo rates go negative A little bit. So we do think that there are probably policy actions if that were to dip down. But as we go through the as we Scrub through the nature of the deposits that we've gotten and obviously there's very limited value to them now.
We've got a whole capital against them Now we are grinding them down, but there's not a whole lot more to grind down.
Yes. And then, I think the second one is
On the MBS We've already taken into account a trajectory of MBS prepayment slowing down just based upon the rise in rates. So just to think about it in terms of sizing, we would expect the MBS prepayment fees to slow down by about probably 15% to 20% by year end.
Great. Thank you very much.
Thanks, Alex.
Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead. Hi.
You had some good fee growth in servicing, You talked about how to see the volumes that should moderate. Is that kind of expectations around Pershing and what are you seeing Pershing or retail behavior, you have a window into that world, I think.
Yes, Mike, I'll take that. So it's a I think it's a combination So we've seen a lot of activity in the trading space. We've seen a We have seen retail activity that was very high, as you know, and Pershing does see some of that. But it's been in the institutional side as well as the retail side, and we would expect that to subside somewhat From the elevated levels that we saw in the Q1. What was interesting is the institutional business is probably little more active in March and the retail business was probably a little more active in January February.
Okay. So you're seeing a slowdown in retail trading as the quarter went on? I mean, as the people return back to work, do you think A trade last or anything related to that?
Do you think their supervisors keep an eye on what they're doing at their desks a little bit more? I'm not sure I'd read that into it. But it's very hard to say, Mike, because what you got to remember is there is a massive amount Of cash sloshing around the system and it's got to go somewhere. One of the things that I pointed out, the savings rate doubled the national average. We've got 15% and households are holding 15% of GDP in cash.
They're either going to spend it, invest it or just Let it lose value sitting in cash. So, our guess is that we're probably going to see lower activity, but it's my guess is as good as yours.
Okay. And then just one last question on the fee waivers. I mean, your customers must love you. I mean, can this is $220,000,000 fee waivers in the 2nd quarter coming up. I mean, hopefully, you're building some long term goodwill, but shareholders don't benefit from that.
So I mean, you said you're Not going to charge for deposits or I mean, what are any other options there or just you just have to
eat it and hope you get
Long term goodwill.
Let me start, Emily, and you can follow-up on it. A lot of the excess balances is ending up in cash or even ending up in money market funds. So We considered it we continue to see this cash build. So even though it's $220,000,000 Fee waivers, it's awesome. A lot of that's just driven by excess balances that we don't think are going to be there When interest rates recover, just like we think the excess reserves in the system will obviously contract.
That being said, we do think it provides a lot of upside when the market turns around, which we've Like the last time we went through this cycle and we can earn a little bit on it still. And a little bit of good news That the Fed speak recently has been pointing to the possibility to firm things up on the short end of the curve. We've actually seen the forward rates kind of improve a little bit recently. So we're making the assumption that using the forward curve a few days ago when we gave that guidance that fee waivers will be active like they did during the Q1. That being said, it is a significant hit to earnings.
We think we'll recover it. We still ran a 29% operating margin even with that environment. And the other thing that we've done is between IR and fee waivers, we think we are now at or very close to the trough. I mean, it could obviously worsen if interest rates even a little bit lower, But we think we are close to the trough. And so the business model is now going to start to grow off of this level.
Great. Thank
you. Mike, the only thing I just might add to that is just remember that a large Portion of those waivers are really just funds that we distribute. So it's where the kind of the recipient of just Lower fees versus competitive waivers that we're actually offering in asset management.
Great. Thank you for that.
And our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. Just had a follow-up on the Asset Services fee line. It was nice to see the 5 And improvement sequentially. And I just wondered, last quarter you had mentioned some of that bulkier repricing and kind of one time things.
This quarter you mentioned That there's a little bit of elevated activity. Just wondering from like an outlook perspective, anything we should know just about Kind of the trajectory of onboarding new wins and are we kind of do we have a clear line of sight on any expected meaningful repricing this year? Thanks. Meaningful repricing this year? Thanks.
Emily, you want to take it?
Sure. So, we did see a nice uptick in terms of asset servicing fees. They were up 5% actually sequentially. And just 50% of that is due to asset base asset levels And the remaining 50% is based on transaction volumes and transaction volumes across asset All of our businesses in asset servicing was up significantly double digits in some cases Quarter on quarter. As Todd alluded to, we do expect that volume to moderate a bit in the second half.
Having said that, we also feel that there's very strong fundamentals across the business. Our pipeline is Strongly average size deals in the pipeline are bigger. Retention stats are very strong and we're also making significant investments in the business that are resonating with clients. In terms of the repricing, There's nothing really structural that we observe re pricing. The re pricing that we did experience Last quarter that was a bit lumpy, it was really totally tied to just a few large clients that happened to be going RFP at the same time.
This is it's always been a pretty modest headwind for the business that we've been able to offset with new business retention, growth with our existing clients and further efficiency.
Got it. Thanks And then just one more balance sheet question in terms of Fed accommodation, the incremental deposits that flowed in and certainly seem to land on your balance sheet. How are you just anticipating changes as we go forward with potential ends to QE? And how you think your balance sheet would act versus the more traditional regional banks in terms of the retention of the deposits that have flowed in? Thank you.
You want to say your name?
Sure.
So ultimately, We think when we basically as the Fed increases reserves, we think roughly about 2% or so ends up on our balance sheet. It's It's hard to tell and depends very much on the economic backdrop. As I did mention, we do think a large Portion of the deposits which that we've seen in the growth in those deposits, especially in the last two quarters is excess, so non operating. And we do think that that would recede pretty quickly when interest rates start to normalize and monetary policy starts Tom, if you have anything to add to that?
Yes. I think if you go back to pre the COVID event, We've seen something close to $100,000,000 of balance increases. Some of that was intentional as we built relationships and comes naturally with the growth in our businesses. But a significant amount of that What we call, we would fit into that excess definition. So we'd imagine probably somewhere between $25,000,000,000 $50,000,000,000 of that $100,000,000,000 increase would roll off.
Got it. Okay. Thank you.
Thanks, Ken.
Our next question comes from the line of Jim Mitchell from Seaport Global Securities. Please go ahead.
Hey, good morning. Maybe just if I Think about your guidance on NII, it does seem like your the implication is that NII is sort of stabilizing here. And I assume That implies sort of securities yields are going to kind of hold in at current levels. So if we kind of assume a static balance sheet going forward, and I know that's not necessarily right when I think about it, but if we assume try to isolate what could be the inflection point, what level of rates I mean, I think you've indicated the 2 to 5 year is important. You're not going to go further out than that.
We've had the 5 year now at 83 basis points Moving higher. Do we need to see that translate into the 2 to 3 year? I mean, what level of rate structure should we start to see maybe Yields going the other way.
Why don't I start, Emily, and then you can add. So I think there are really 2 Key elements to it, Jim. Number 1 is the short end of the curve. So we've got a significant number of assets that are pricing off of Off of LIBOR or short term indices. And once again, this quarter, we saw, for example, 1 month LIBOR was down 3 basis points from its average in the 4th quarter and 2 basis points for So we got a that offset the benefit of the move on the longer part of the curve.
But the steepening out to 5 years, we keep a duration of around 2.5 years, so that would mean there's going to be significant Assets out there that roll off and get reinvestment is helpful and it will slowly come into it, but it's basically been That benefit has been offset by what we saw in the short end of the quarter.
No, it makes sense. I was just trying to think through, Assuming short rates are pretty stable from here, what kind of gets what at the longer end really starts to help you?
Yes. I mean, 5 10 years because what that does is it extends the duration of the mortgage backed Securities, so their yields pick up because the amortization of premium declines as stuff and we're constantly reinvesting And stuff gets reinvested to maintain the duration that currently exists in the portfolio, it would go into higher levels. So this it would be helpful here.
And Jen, just to we disclosed in the queue just some sensitivities that might be helpful as well for you to drive that.
Yes, I got it. I just trying to get a sense of what level of rates in the middle of the curve would be helpful, but we can always talk about that offline. Thanks.
Thanks, Jim.
And our next question comes from the line of Steven Chubak from Wolfe Research. Please go ahead.
Hey, good morning. This is Michael Landesakis on for Steven. Just following up on the NII guide and you gave some detail around where you're deploying some of that excess liquidity And I appreciate the color on PREMIUM AN as well. Maybe you could just provide some color around how much of that deployment is contemplated in the NII guide for the securities portfolio?
Sure.
So, I mean our securities portfolio is basically flat to last quarter and we are marginally For the full year, still being about 11% to 12%, where the rate curve, it's just based on the forward curve, Deposits basically remaining pretty much where they are, if not coming down a bit and MBS
Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Good morning, Todd. Good morning, Emily.
Good morning. Hi, Gerard.
Todd, can you frame out for us when you think about your years at Bank of New York, the number of new products The Bank of New York has introduced over the years, I think of like custody of non traditional assets As one, when you think about the opportunities for this digitalization and the cryptocurrencies that you guys are working on that you've Already talked about, how big can this be? And again, comparing it to other new ventures that you've been involved with over the years at Bank of New York, if you can Compare that.
Yes. I think it's early to tell. I mean, if you think of all the noise that Bitcoin got, So it's still only about 10% of gold and gold as a customized asset is not that important frankly, right? So It's getting a lot of hype. I do think decentralized finance is coming.
I do think fintechs are going to be an important player. And I do think that we can position ourselves Well and work with FinTechs to build opportunities. I think you're going to see it in payments. I think you're going to see it you are going to see it in custody. It's hard for me to say just how big of an opportunity that is at this point.
It will grow. I think the more important thing is that we need to give investors choice. And so if they do want to mobilize assets faster, we need to be able to help them to do that. If they do want to be able to hold some nontraditional assets just as they went into alternatives and other things, we need to be able to assets just as they went into alternatives and other things, we need to be able to help them to do that. And in a way that is it eliminates a lot of Counterparty risk that currently exists, which is high, and also enables them to get reporting on a consolidated basis And valuations and so forth, which is also critically important.
And so there are a number of ETFs coming out That are crypto related. There is obviously good underlying growth on a very small base. We think it's an important part of the full product capability. How big it ultimately comes, I think it becomes a little early For me to really speculate.
I see. Okay. Thank you. And then second, you guys cut go ahead, Emily.
I was just going to add one little thing, which is it's as much about retention as it also is about new business. Our clients are demanding integrated
You guys have always told us and you talked about it again today, the leverage ratio is the binding constraint and not the CET1 ratio. You pointed out, Emily, that It may dip down below 5.5%, but still well above the regulatory minimums. We understand that. At what point would the leverage ratio actually come into play where you would have to back away From your buybacks, even though you have the CET1 ratio, not a problem. But when at what point do you say We've got to slow it down because the leverage ratio has fallen too far down.
And then as part of that, is the leverage ratio Really linked to the QE, meaning the deposit growth and should we get a tapering, then we should get some relief on your balance sheet growth, which maybe would help the leverage ratio as well?
So, yes, let me start, Emily, and then you can add. If you think about it, we put a buffer on the leverage ratio Business as usual, now this isn't for stress testing, but for business as usual. And that buffer really reflects the potential for a Fine due to and other comprehensive income based on the mark to market in the securities portfolio. And so frankly, Gerard, we've seen the spike And deposits and could it go up a little bit higher? Yes, it may.
But our view now is Part of the reason for the buffer has already taken place. And as I indicated on one of the We probably when things start to normalize, we probably have $50,000,000,000 of runoff in deposits. So that's an enormous amount, an enormous impact on that ratio. And also the coverage from the OCI debt has to be that high. So Given the fact that we've already made the spike, it makes sense for us to go ahead and dip into buffers.
And then we said going to a 5% probably is not an unreasonable thing in this environment. If we were in an environment where we were A year ago, I'm not sure I would say that.
The only thing I might add is just, I mean, even if we were like as Todd just said, we'd be comfortable going towards 5%. But even there, If you're still you would need a considerable increase in deposits there from where we are today. We've got plenty
of room.
Very good. Thank you.
Thanks,
Mellon. And our next question comes from the line of Rob Wildhack from Autonomous Research. Please go ahead.
Good morning, guys. If we could go back to the cryptocurrency and digital asset space for
a second, you're clearly taking
a few steps forward there with the announcements you made Quarter, is that because you think we've hit some kind of inflection point in that part of the market? Or is
it just more of a natural evolution of your service?
Rob, I would say it's more of a natural evolution. We're having deep discussions working with clients, The institutional side, and we started to see this toward the end of last year and the beginning of this year that the institutional side was getting more and more interested in digital assets. And so we started working with them for Solutions across a broad part of our business. Okay. Thanks.
Okay, Rob. Thank you.
And our final question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.
Yes, thanks. Two questions here. 1 on the asset servicing here. Can you update on how the underlying pricing is With 50% for asset levels and 50% for transaction volumes, where is do you want to take those percentages longer term? Is that the mix that You're at and this
would be steady state from here or are you
trying to get more transaction volume basis as we think how pricing trends evolve here?
Do you
want me to take that Todd?
Sure.
So I mean, the fifty-fifty split is just the nature of the beast and the nature of the business. So it's not like we are trying to move that in any direction and for pretty much years that's just really the dynamics of how Price and asset servicing about 50% of the revenue stream is based on asset levels and about 50 Or so it's based on transaction costs. So it's pretty much the norm.
Okay. The second question, I mean, you looked at issuer services and treasury services, and revenue drivers both being impacted by interest rates above and beyond the money market Fee waivers, is there any way to allocate what part of those revenues are kind of driven by interest rates as
we think about asset sensitivity on
a go forward basis? Thanks.
Sure. So both of those businesses are significant deposit taking businesses Either we take them to the on balance sheet or off balance sheet through sweeps into money market funds. And so The interest rate impact, it's a meaningful contribution to both of them. I don't think we've broken out exactly what But the split is, but it's a meaningful contribution to the obviously to the operating margins because there's no expense With the NIR. What we've seen in treasury services is an intentional Build in deposits over the past year as we've built out those relationships and it's very much related to the activity in the accounts Because it needs to be cash and accounts to make payments and there's some frictional cash that tends to come with that.
Money market fee waiver is a little less important there. But if you think about the corporate trust business, What issuers will do is they'll put cash a day or 2 in advance of payments that need to be made On issues that we're the trustee and the paying agent and typically that's value that Where we get a little of that value or we sweep it into our money market fund. And so that's a meaningful contributor to that And that's where they're we're now seeing the kind of the late stages impact of fee waivers and that's why the issuer service Business was down sequentially and year over year. Thanks. We don't break out the very specific numbers, Brian.
Okay. Thank you for the questions. Operator, go ahead.
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.
No, thanks for all of your interest. And course, any follow-up questions, you may reach out to Magda and our Investor Relations team and look forward to talking to you all soon. Take care.
Thank you. Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2 o'clock p. M.
Eastern Standard Time today. Have a great day.