紐約梅隆銀行 (BK) 2021 Q1 法說會逐字稿

Good morning, and welcome to the 2021 First Quarter Earnings Conference Call hosted by BNY Mellon. (Operator Instructions) 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 Magda Palczynska, BNY Mellon Investor Relations. Please go ahead.

Good morning. Welcome to BNY Mellon's First Quarter 2021 Earnings Conference Call. Today, we will reference our financial highlights presentation available on the Investor Relations page of our website at bnymellon.com. Todd Gibbons, BNY Mellon's CEO, will lead the call. Then, Emily Portney, our CFO, will take you through our earnings presentation. (Operator Instructions)

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 supplements and financial highlights presentation, all available on the Investor Relations page of our website. 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 Todd.

Thank you, Magda, and good morning, everyone. I will touch on a few financial performance highlights and as well as 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 word 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 from the 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'm one of many business leaders who have seen many reasons to be positive in the period ahead when 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 of held in cash in household and available for spending is around 15% of GDP, which is way above model.

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 level high, and expectations for stronger growth is beginning to be reflected in the statement in the yield curve.

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've collaborated 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. We 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 $3.9 billion. 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 volume and volatility.

Asset Servicing and Pershing particularly benefited from positive client activity as well as market appreciation.

Operating margin of 29% is relatively flat year-over-year, not bad considering a significant loss in interest rate revenue. We had a credit provision release of $83 million. 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 prime volumes and continued new business momentum. Our open architecture strategy and platforms continue to gain traction with clients, powered by our data and analytics solutions.

In the first quarter, a large global asset manager in acquisition mode signed a multiyear agreement through Data Vault that's our cloud-based platform. The Vault allows our clients to integrate acquisitions quickly and easily interact with data to gain actionable insights to help drivers of these decisions.

We are proud to have been selected by Gabelli Funds, who launched its new actively managed ETF and that's a an ESG-themed product and to have been named an ETF Service Provider for First Choice Bitcoin ETF Trust.

During the first quarter, our ETF servicing platform launched a record $50 million fund and our ETF assets under custody or administration has now surpassed $1 trillion.

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 a new and creative way. The growing client demand for digital assets and improved regulatory clarity presents an opportunity for us to extend our current service offerings over time through this emerging field.

Moving to Pershing and Clearing and Collateral 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 a low rate environment, will impact Pershing in 2021 and mask the underlying good organic fee growth.

In Clearing and Collateral Management, clearing fees remained strong, and we expect healthy activity going forward. In Collateral Management, international teams were buoyant due to the new business wins.

In addition, as we announced earlier this week, we now accept Chinese bonds as collateral on our tri-party platform through Hong Kong Bond Connect. With the Chinese fixed income market only expected 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 to 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 and liquidity management with Insight, Newton and Dreyfus 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 and 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 million. We've implemented many positive changes in this business, including new sales teams, a broader investment and banking offering and new digital capabilities for clients. We were gratified by very high satisfaction scores in our year-end client survey, with all survey categories up year-over-year.

Now our proprietary goals-based planning tool, AdvicePath, was recently named as CIO 100 Award winner. This award recognizes 100 technology teams across industries that are 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, prepared in accordance with the past quarters' 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 lay down multiyear metrics and targets, including plans to enhance disclosure 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 fallout of the pandemic through fiscal and monetary stimulus. Much uncertainty remains, but equity markets have been generally optimistic, although somewhat volatile, and longer-term treasury yields have steepened, with the amount of liquidity in the system and in closing, the money market funds have driven short-term rates lower, in some cases, even negative. 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 of the financial highlights document. In the first quarter of 2021, we reported revenue of $3.9 billion and EPS of $0.97. This includes the impact of the reserve release of about $0.08 per share, partially offset by a $39 million renewable 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 activity for most of 2020.

Fee revenue, excluding fee waivers, grew 6%, driven by market levels, good organic growth and the positive impact of a -- of the weaker U.S. dollar. While client activity was down slightly versus the exceptional COVID-driven volumes and balances experienced 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 drive cleaner and simpler reporting. 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 Pages 19 and 20 of the financial supplement. Prior periods have also been reclassified.

Foreign exchange revenue had a strong quarter, up 24% on versus the fourth quarter, primarily on the back of high volumes, 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, first quarter of 2020 also benefited from an accrual adjustment that was not repeated in 2021. Provision for credit losses was a release of $83 million, primarily reflecting an improved macro outlook and CRE price index.

We had net recoveries of $1 million, and our portfolio remains high quality with approximately 85% of loans rated investment grade at March 31.

Pretax margin of 29% was relatively flat to last year, which is a strong outcome considering the impact of the low interest rate environment on fee waivers 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 fourth quarter of 2020 where indicated.

Investment Services revenue was $3 billion, down 8% year-on-year. The decline was primarily a result of lower net interest revenue, fee waivers and lower FX revenue. Each headwinds mask benefits from higher client volumes, liquidity balances, 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 of fee waivers.

Money market fee waivers, net of distribution and servicing expense, were $188 million in the quarter compared to the $175 million guidance that we've provided previously. The higher-than-expected waivers were driven by higher balances.

Turning to Page 5. Our capital and liquidity ratios remained strong and well above internal targets and regulatory minimums. Common equity Tier 1 capital totaled about $21.1 billion as of March 31, and our CET1 ratio was 12.6% under both the advanced and standardized approaches.

Tier 1 leverage was 5.8%, down 50 basis points from the fourth quarter, primarily due to higher 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 buffer that we maintain for the Tier 1 leverage ratio and, therefore, could go below 5.5% for a period of time. Finally, our LCR was flat compared to the fourth quarter at 110%.

In terms of shareholder capital returns, we purchased $699 million of common stock in the first quarter, in line with the Federal Reserve modified limitations that apply to all CCAR banks. We continue to pay our $0.31 quarterly dividend, which totaled $277 million 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%, with about 2/3 the decline driven by the impact of lower interest rates and the other 1/3 driven by other items such as day count and hedging activity. As a reminder, although average deposits increased again this 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 billion or 7% from the fourth quarter and up $70 billion or 27% from a year ago. As was the case in the fourth quarter, 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 fourth quarter and up approximately $26 billion or 20% over the prior year. Within the securities portfolio, we do continue to invest in non-HQLA securities primarily in non-agency CMBS, 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 portfolio opportunistically, such as in 40 Act lending and other margin lending as well as capital call financing.

Page 8 provides an overview on expenses, which we already 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 NIR and fee waivers and lower FX compared to the strong year-ago quarter. NIR was down 20%.

Fee and other revenue ex-waivers was up 2%. FX revenue in Investment Services had a strong quarter, up 18% from the fourth quarter and down 15% year-over-year as higher client volumes partially offset normalization of spreads and volatility.

Assets under custody and/or administration increased 18% year-over-year to $41.7 trillion 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 up slightly, excluding fee waivers, primarily reflecting higher client activity and higher market levels, partially offset by lower FX revenue through our comparably high period last year. The pipeline remains strong and win-loss ratios continue to improve.

Pershing had another strong quarter despite the impact of fee waivers. 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 billion in the quarter.

Transactional activity remains robust with average daily clearing revenue up about 30% from the fourth quarter, although we do not -- although we do expect this to normalize as we move to 2021. Issuer Services fees decreased, mostly driven by fee waivers and COVID-related dividend fee impact in DR.

Treasury Services fees were up modestly, ex waivers, 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 with tri-party balances and clearances increase was offset by slight declines in U.S. volumes and lower intra-day financing fees.

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. As noted earlier, total Investment and Wealth Management revenue in the quarter increased 10%. Overall assets under management held steady compared to the fourth quarter's record $2.2 trillion 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% in spite 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 first quarter, we had net inflows of $36 billion, including our fourth straight quarter of long-term inflows of $17 billion, driven by strong inflows in LDI and fixed income as well as index funds.

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% on the back of higher market.

Client assets grew for roughly $292 billion and were up 24% year-over-year, primarily due to high market values and inflows. Nonmortgage loans and client deposits are also up.

Now turning to the other segment on Page 12. The year-over-year revenue comparison was primarily impacted by the impairment of one 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, our full year guidance remains unchanged. This implies NIR on a full year basis will be down around 11% to 12% compared to 2020.

With regard to waivers using the forward curve to project, just like we do for NIR, we expect waivers, net of distribution and servicing expense to be around $220 million for the second quarter. This will have a modest negative impact to revenues of approximately $20 million 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 first quarter.

With regards to fees ex-waivers, the growth rate in the first quarter was significantly higher than previous full year guidance due to higher volume, but we expect those volumes to moderate going forward.

Regarding expenses, we previously guided to be up 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 will 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 proposal closely.

In terms of shareholder capital returns, we will continue to pay our quarterly dividend and will once again make open market share repurchases in compliance with the Federal Reserve to modified limitations, which will allow us to repurchase approximately $600 million of common stock in the second quarter.

Looking beyond the second quarter, the Federal Reserve latest communication to CCAR banks indicated that they will likely implement the STP framework for capital management in the third quarter, so we are following that guidance closely. We look forward to receiving the results of this year's stress test and operating under the stressed 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 third quarter.

With that, operator, can you please open up the line for questions?

(Operator Instructions) And our first question comes from the line of Brennan Hawken with UBS.

I was hoping to ask actually, Emily, about some of those comments on capital and Fed returning to the STP approach, which allows for capital returns. The Tier 1 leverage ratio is now inside your guided band with a buffer of 5.5% to 6%, I believe. You all have referenced that you have levers to 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 buffer 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 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 then, 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 excess, so it's nonoperational. We've been very successfully working with our clients to basically explore and move some of those nonoperational deposits to 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've sized that very carefully. It's basically to both absorb any impact to OCI given rate changes as well as also the -- any surge in balances. 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 the 5.5% for a period of time, of course, running certainly above the regulatory minimum.

Right, okay. That helps, and that's great to hear. And then one other question on the balance sheet. It seemed as though the interest-earning asset growth lagged deposit growth this quarter on an average basis, right, just looking at your balance sheet. Was that because some of those deposits may be temporary?

Maybe you all were in the process of encouraging some folks to consider off-balance sheet options like you referenced and, therefore, the -- 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 interest earning asset growth will catch up? I just wasn't -- it seemed a big gap, so I wasn't sure about that, right?

Yes. I mean, sure, so certainly -- and I think I just mentioned, so a significant portion of the deposit growth that we've seen, we do think is excess and so nonoperational. 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 basis points, which obviously is dilutive to NIM, but, of course, it is overall accretive to NIR, just obviously marginally so.

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 will invest is more in the 3- 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.

And we will take our next question from the line of Brian Bedell with Deutsche Bank.

Can you hear me?

Yes, Brian, we can hear you.

Very good. Just one more on the rate sensitivity and net interest revenue and fee rate, which was down, just the cadence as they move through the year and really into second quarter. And back a little bit to that deposit strategy with the excess deposits, is there an ability to put a little bit more on the securities portfolio as we move into the second quarter?

So what I'm trying to get at is there -- are we -- given your full year guidance, are we at sort of stability as you see it coming into the second quarter on NIR? Or is it maybe another dip down before we go up? And then similar to that, on the fee waiver, I think you said $220 million for the second quarter, 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?

Emily, do you want to take it?

Sure, so -- sure. So in terms of NIR, we don't really give ultimately 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, specifically 3 months and 6 months T-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 million. 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, et cetera, we think that waivers -- the size of waivers overall will peak in the second quarter at about $220 million.

And then by the way that would be probably, at the fees we're talking about, the gross yields, you'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 first quarter.

And look, I always like to remind people, albeit it's probably not until the latter half of 2022 or 2023, but if -- when Fed funds eventually hit 25, when the Fed moves, we will recover in excess of 50% of those waivers. And when it hit the 1%, it's very close to 100% of those waivers.

That's clear. And then the second question is on the organic growth. You said it did tick 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 DataVault. It sounds like that contract is not in, but the big one you mentioned is not in the run rate yet. But maybe if you could just talk about that momentum and the organic growth rate in driving that.

Sure. So thanks for the question, Brian. So the first quarter, we got the benefit, obviously, of a lot of activity. Hard to project exactly where that activity is going to go. But the guidance, I think, that Emily provided to you is probably not sustained at -- 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 Pershing that will impact us later this year. So Pershing has got pretty strong underlying organic growth to it, but it's going to be masked a bit by both the interest rates as well as the -- as well as that lost business that will impact in the second half.

But 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 ourselves, we continue to build the pipeline. We have another pretty big quarter for sales, a higher win loss ratios. Our win-loss ratios are improving and retention has continued to be good.

I mentioned the DataVault, and we have a number of clients in beta. We now signed a very significant one and building a deeper relationship with that client. A lot of interest in our -- in some of our analytics and our 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 look forward, we're pretty excited at what we might be able to do in the real-time payments space there.

Asset and 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 -- even in the core custody, our middle office functions, the payment system.

Clearing and Collateral Management, even -- it was off of an extraordinary good quarter last year, but we continue to pick up global assets. The fact that we've built up this Bond Connect capability in China is an exciting innovative service that we're providing to clients. And we're confident that, that's going to continue to grow.

So good underlying momentum helped by very strong activity in the first quarter.

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

Okay, a couple of questions. A little bit on the technical side, 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 -- are you going to be custodying the physicals? Just wanted to understand what the -- how wide the aperture is on this opportunity side.

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 can digitize the money market fund and make it an eligible asset to put into repo, which we couldn't do in the past, and we can make it much, much more efficient. 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 will be digitization of fiat currencies. We're already involved in a consortium with Finality, which is a central bank currency, which could trade 24/7 in digital form and is really just developing regulatory approvals for it now. So we do think there will be -- and they're already existing, digital currencies, fiat currencies.

And where every -- the thing that gets the hype is really around the cryptocurrencies that 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 3 of those by the end of the year as we're building things out with clients that are -- have shown institutional interest.

So yes, we would actually have the wallet, if you will, or be the custodian for the underlying cryptocurrency for any one of those particular digitized assets.

Okay. So you would actually be custodying the physicals, you're not going to be subcustodying that out to somebody else?

No. That is not our intent at this point.

And then what's the time frame for getting to market? Is that a 2021 or a '22 time frame?

We expect that you'll be hearing some things throughout -- towards the end of 2021, 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 -- how do you anticipate you will help them get more climate-friendly, so to speak?

Yes. So there's really 2 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 client -- climate. And we've been -- we're the only financial institution that have gotten that rating over the past 8 years. So that's what we're doing as a firm in 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 the license from their data providers. We're connected to 100 data providers. We got 2.5 million securities in that application. And there's kind of a constant feedback loop to the data providers. 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 as 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 ESG.

So it really goes in those 2 forms: one is the commercial element that we can help their businesses; and #2 is just doing the right thing for our own company.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

Maybe another question around capital. So I heard you guys, obviously, targeting over 100% payout. That's something that you guys have targeted for a little while as well. Can you help us kind of calibrate that against the significant buyback you have authorized currently?

Obviously, there could be some probably technical restrictions. Of course, the fund could ultimately get done in the third quarter given just the volume threshold, but maybe help us think through that relative to your comments and your willingness to kind of go below the 5.5% Tier 1 leverage. So I'm just kind of trying to think through how much you could ultimately get done.

Sure. So ultimately, you are correct in mentioning that we had approval. I'll just remind folks. The Board approval was given in the fourth quarter of last year to do buybacks up to $4.4 billion through the third quarter of this year. Given the Fed's limitations on the buybacks actually through the second quarter, it's probably going to be pretty unlikely that we could execute the entire tier, the $4.4 billion, just literally in terms of ADV, et cetera. But we will do as much as we are allowed.

And if assuming that the Fed does return to, or implement, I should say, the SCP 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 third quarter as much as we could do. And anything that we couldn't do, we would hope to catch up in the fourth quarter 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 targeting. 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 NIR guidance, what does that assume for premium am for the rest of the year?

Sure. So just talking about, first, deposits. You are right that the 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 -- close to, ultimately, I guess, the rate that we'd get to.

Of course, if rates actually went negative in the U.S., we could start charging for deposits. We certainly don't feel or haven't felt that, that is necessary. And ironically, if you do start charging for deposits, then you start to earn more -- earn money, earn more in NIR. So -- but that isn't the intention at the moment. In terms of your -- go ahead.

Let me just add something to that.

Sure, sure.

So I think in -- in the Fed guidance, Alex, that they've provided, they really have talked about what it means 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 second, Emily?

And second of it.

And -- sure, on the MBS prepayment space, just in our NIR projections, we've already taken into account a trajectory of MBS prepayments 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 speeds to slow down by about probably 15% to 20% by year-end.

Our next question comes from the line of Mike Mayo with Wells Fargo Securities.

We had some good fee growth in servicing, but you talked about, I would say, 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 guess.

Yes, Mike, I'll take that. So it's a -- I think it's a combination of things. 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. I mean, 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 in -- from the elevated levels that we saw in the first quarter.

What was interesting is the institutional business is probably a little more active in March and the retail business was probably a little more active in January and February.

Okay. So you're seeing a slowdown in retail trading as the quarter went on? I mean as people return back to work, do you think they trade less? 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 read that, except that 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 double the national average. We've got 15%. Households are holding 15% of GDP in cash. They're either going to spend it, investment -- 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 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 -- which is -- I mean, this is $220 million of fee waivers in the second 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 -- any other options there? Or just -- you just have to eat it and hope you get long-term goodwill?

So my -- what I...

Let me start, Emily, and you can follow up on it. So a lot of the excess balances is ending up in cash or even ending up in money market funds. So we considered it -- we continued to see this -- this cash build. So even though it's $220 million of fee waivers, it's -- 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 there -- think it provides a lot of upside when the market turns around, which we've reflected the last time we went through this cycle, and we can earn a little bit on it -- on it still.

And a little bit of good news is that the Fed speak recently has been pointing to the possibility to firm things up on the short end of the curve. And 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 from a few days ago when we gave that guidance, that fee waivers will be active by -- like they did during the first quarter.

That being said, it's a -- 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 NIR 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 are 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.

The only thing I just -- Mike, the only thing I just want to 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.

And our next question, it comes from the line of Kenneth Usdin with Jefferies.

I just had a follow-up on the Asset Services fee line. It was nice to see the 5% improvement sequentially. And I just wondered last quarter, you had mentioned some of the bulkier repricing and kind of onetime 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?

Emily, do 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-based -- asset levels. And the remaining 50% is based on transaction volumes. And transaction volumes across Asset Servicing, 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 strong. The average sized 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. Repricing -- the repricing that we did experience last quarter that was a bit lumpy was really totally tied to just a few large clients that happen to be going RFP at the same -- at the same time. This -- 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. And then just one more balance sheet question. In terms of Fed accommodation, the incremental deposits that flowed in and certainly seemed to land on your balance sheet. How are you just anticipating changes as you -- as we go forward with potential ends to QE? And how do 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?

Do you want to take that one?

Sure. Sure. So ultimately, we think when we basically, as the Fed increases reserves, we think roughly about 2% or so end up on our balance sheet. It's actually hard to tell and depend very much on the economic backdrop.

As I did mention, we do think a large portion of the deposits, which -- that we've seen and the growth in those deposits, especially in the last 2 quarters, is excess, so nonoperating. And we do think that, that would recede pretty quickly when interest rates start to normalize and monetary policy starts to normalize. I don't know, Todd, if you have anything to add to that.

Yes. I think if you go back to pre -- the COVID event, which really led to the spike, we've seen something close to $100 million 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 was what we call would fit into that excess definition.

So we'd imagine probably somewhere between $25 billion to $50 billion of that $100 billion increase would roll off.

Our next question comes from the line of Jim Mitchell from Seaport Global Securities.

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 the right way to 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 years 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 one is the short end of the curve. So we've got a significant number of assets that are pricing 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 fourth quarter and 2 basis points for 3-month LIBOR. 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, so when we keep the 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 offset. That benefit has been offset by what we saw in the short end of the curve.

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 and 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 as 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 we -- and Jim, we disclosed in the Q just some sensitivities that might be helpful as well for you to size that.

I got it. I just -- 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 off-line.

And our next question comes from the line of Steven Chubak from Wolfe Research.

This is Michael Anagnostakis 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 from here. And I appreciate the color on premium end 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?

Emily, do you want to take that?

Sure. So -- Sure. So I mean, our securities portfolio is basically flat to last quarter. And we are marginally increasing our non-HQLA within the quarter. But when we -- when I talked about the NIR guidance for the full year, still being about 11% to 12%, where the rate is just based on the forward curve, deposits basically remaining pretty much where they are, if not coming down a bit and MBS prepayment speeds going down. So those are the key assumptions.

Our next question comes from the line of Gerard Cassidy with RBC.

Todd, can you frame out for us when you think about your years in Bank of New York, the number of new products that Bank of New York has introduced over the years, I think of like custody of the nontraditional assets as one. When you think about the opportunities for this digital -- 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 over the years at Bank of New York, if you could compare that?

Yes. I think it's early to tell. I mean if you think of all the noise that's been doing [gone], 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 important players. 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. I -- there -- it will grow. I think the more important thing is that we need to give investors choice. And so if they do want to -- 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 help them to do that and when -- and in a way, that is -- it eliminates a lot of the counterparty risks that currently exist, 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 -- there's 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 as a -- I think it's a little early for me to really speculate.

I see. Okay. And then second, you guys -- go ahead, Emily.

The only -- Yes. I was just going to add one little thing, which is, it is much about retention as it also is about new business. Our clients are demanding integrated capabilities across digital assets as well as traditional -- traditional securities and currencies.

Got it. You guys have always told us, and you talked about it again today, the leverage ratio is the binding constraint, 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, one, 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 when we should get some relief on your balance sheet growth, which maybe would help the leverage ratio as well?

Let me start, Emily, and then you can add. If you think about it, we put a buffer on the leverage ratio for business as usual. This -- no, this isn't for stress test, but for business as usual. And that buffer really reflects the potential for a spike in interest -- excuse me, a spike in deposits or a decline due to -- in other comprehensive income based on the mark-to-market in the securities portfolio.

And so frankly, Gerard, we've seen the spike in 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 earlier questions, we probably, when things start to normalize, we probably have $50 billion of runoff in deposits. So that's an enormous amount, an enormous impact on that ratio. And also the coverage from the OCI that has to be that high.

So given the fact that we've already made this spike, it makes sense for us to go ahead and get them to our 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. So we've got plenty of room.

(Operator Instructions) And our next question comes from the line of Rob Wildhack from Autonomous Research.

If we could go back to the cryptocurrency and digital assets space for a second, you're clearly taking a few steps forward there with the announcements you made this 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 in 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.

And our final question comes from the line of Brian Kleinhanzl with KBW.

Yes. Two questions here. One on the Asset Servicing here, you -- thanks for the 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 though 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-based just as we think how pricing trends evolve here?

Do you want me to take that, Todd?

Sure, yes.

So I mean, the 50-50 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 we're pricing in Asset Servicing. About 50% of the revenue stream is based on asset levels and about 50% or so is based on transaction costs. So it's pretty much the norm.

Okay. And second question, I mean, you looked at Issuer Services and Treasury Services and the 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?

Sure. So both of those businesses are significant deposit-taking businesses or either we -- or either we take them to the -- back 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 brake -- we've broken out exactly what the split is, but it's a -- and it's a meaningful contribution to the -- obviously, to the operating margins because there's no expense associated 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, too, because there 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 where -- that's value that -- where we get a little of that value or we sweep it into a money market fund. And so that's a meaningful contributor to that business. And that's where there -- we're now seeing the kind of the late stages impact of fee waivers, and that's why the Issuer Services business was down sequentially and year-over-year. But we don't break out the very specific numbers, Brian.

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.

No. Thanks for all of your interest. And of course, any follow-up questions, you may reach out to Magda and our Investor Relations team, and we look forward to talking to you all soon. Take care.

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 2:00 p.m. Eastern Standard Time today. Have a great day.