紐約梅隆銀行 (BK) 2022 Q1 法說會逐字稿

Good morning, and welcome to the 2022 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 hand the call over to Marius Merz, BNY Mellon Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to our first quarter 2022 earnings call. Today, we will reference our financial highlights presentation, which can be found on the Investor Relations page of our website at bnymellon.com. I'm joined by Todd Gibbons, our Chief Executive Officer; Robin Vince, President and CEO-elect; and Emily Portney, our Chief Financial Officer. Todd will provide introductory remarks, and then Emily will take you through the earnings presentation. Following their remarks, there will be a Q&A session.

Before we begin, please note that our remarks include forward-looking statements and non-GAAP measures. Information about these statements and non-GAAP measures are available in the earnings press release, financial supplement and financial highlights presentation, all available on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, April 18, 2022, and will not be updated.

With that, I will turn it over to Todd.

Thank you, Marius, and thank you, everyone, for joining us this morning.

Referring to Slide 2 of our financial highlights presentation. We continue to see healthy underlying momentum across most of our businesses and reported revenue of $3.9 billion, which was roughly flat year-over-year, and it was up 2% if you exclude the impact of government sanctions and the additional actions that were taken related to Russia.

Now we're in an increasingly uncertain environment, including the war in Ukraine, volatile markets, and persistently higher inflation, which will require more meaningful monetary policy adjustments. It is in times like these that our strong, lower risk balance sheet and the resiliency of our business model differentiates us.

In the face of the tragic events occurring in Ukraine, we ceased new banking business in Russia and suspended investment management purchases of Russian securities. Since the beginning of the war, we stepped up our humanitarian efforts as well as the support for our employees and the members of our community who have been impacted. And we continue working for our multinational clients that depend on our custody and record-keeping services to manage their exposures.

Expenses of $3 billion were up 5.5% as we continue to invest in further growth and efficiency initiatives. And we reported EPS of $0.86, and that included an $0.08 impact related to Russia. We continue to generate a significant amount of capital and returned close to 60% of earnings to our shareholders, primarily through common dividends.

Throughout the quarter, we took actions in the investment securities portfolio to temper the immediate impact to capital from higher interest rates. And we expect higher rates to be both a positive for fees and net interest revenue going forward. Emily will discuss the details for the quarter shortly, but let me briefly touch on a few business highlights.

In Asset Servicing, we managed to keep the strong sales momentum with which we entered the year. Wins and win rates improved off of what had been a healthy quarter a year ago. Won and mandated AUC/A is up meaningfully both year-over-year and quarter-over-quarter, producing a strong pipeline of AUC/A to be installed in 2022 and beyond. And our retention rate was an exceptional 97%.

Our ETF business continues to stand out, having increased the number of funds serviced by 4% since the beginning of the year. And we were recognized as Best ETF Custodian at the ETF Express European Awards last month. We also continued building momentum as a leader in digital assets, having been selected by Circle as primary custodian for their USD coin reserves.

And late last week, we announced an exciting data and digital collaboration with Aon. Together, we will focus on supporting the ESG needs of clients globally, leveraging our collective data and analytics capabilities and unique data sets to help clients make better, more informed investment strategy decisions by providing enhanced data sets, advanced analytics and actionable insights into ESG portfolio level exposures.

In Pershing, year-over-year comparisons continue to be impacted by the previously disclosed lost business in the second half of last year. And remember, the first quarter of last year was exceptionally strong on the back of elevated transaction activity. Now while there are puts and takes here that can impact the amount of organic growth in any given quarter, we remain extremely excited about Pershing's prospects.

Our clients are doing well and as they capture new assets, we're growing with them. And we're well positioned to benefit from a number of secular growth trends, such as the rapid growth in number of breakaway advisors and digitally oriented wealth firms. Of course, consolidation in the sector can leave us on either side of any particular transaction. But over time, we find that our clients who are typically the largest and most complex players in the industry are more often than not on the acquiring side.

And in Pershing X, we continue to make solid progress since announcing the initiative back in October. Following on last quarter's acquisition of Optimal Asset Management, this quarter, we made several key hires, which completed the filling out of our leadership team. And we folded Albridge's wealth reporting and data aggregation tool under the Pershing X umbrella. This alignment strengthens Pershing X's data offering allows it to draw on Albridge's engineers to accelerate development of the platform and provides clients with access to a broader suite of technology solutions.

Shifting to Clearance and Collateral Management. There, we delivered a strong quarter of organic growth on the back of higher securities clearance volumes and as collateral management balances remained elevated at a record $5 trillion in the quarter. Market volatility is driving dealer demand for U.S. treasuries and we're also seeing a promising pickup in new collateral balances related to our future of collateral initiatives with asset balances already being mobilized to the EMEA region and growing, providing our clients with optimization and funding benefits.

Treasury Services also delivered another solid quarter of growth, driven by higher payment volumes and an improved product mix. The business continued to build on its recent track record of industry first. This quarter being the first bank to successfully connect to and send a message on the FedNow real-time payment system. And we're excited to welcome Jennifer Barker to the company as the new CEO of the business starting in May. Jennifer brings almost 2 decades of global client experience in the Treasury Services industry, and she is the perfect leader to build upon the business' recent success and innovative track record.

In Investment Management, given the environment, it's not surprising to see some challenges as clients in higher earning funds rebalance and de-risk. That said, investment performance remained strong with over 80% of our top 30 strategies by revenue in the top 2 quartiles on a 3-year basis. We're also seeing good traction with our expanding suite of passive and active ETFs.

We launched the BNY Mellon responsible Horizon's Corporate Bond ETF managed by Insight and total ETF AUM grew by 8% quarter-over-quarter. I also want to highlight an exciting new share class for the Dreyfus Government Cash Management Fund called BOLD. This share class, which provides investors the opportunity to make a direct social impact supporting Howard University and a historically black college and university already grew to over $1 billion in AUM with the only weeks of launch at the end of February.

We also continue to be pleased with the healthy growth that we're seeing in Wealth Management, client acquisition rates continue trending in the right direction and our improved digital tools and expanded banking offerings are driving deeper client relationships as evidenced by the solid loan and deposit growth.

As an example, during the quarter, we successfully completed the initial rollout of LoanPath, our new digital platform for investment credit lines, which allows us to streamline our processes and significantly improve the client experience at the same time. Across the franchise, we're honored to have once again been recognized by Fortune for making both its World's Most Admired Companies in 2022 as well as its Blockchain 50 list, which recognizes 50 companies around the world for deploying blockchain technology to speed up business processes, increase transparency and potentially save substantial costs for the industry. We're also proud to have been named to Barron's 100 Most Sustainable Companies list, which recognizes the companies that score highest across 230 environment, social and governance indicators.

Now before I turn it over to Emily, I'd also like to touch on my decision to retire as CEO on August 31 and the appointment of Robin as my successor. When I joined BNY Mellon 36 years ago, I was drawn by the company's rich history, its special culture and the important place it occupies in the global financial system. Over the last 4 decades, we have undergone an incredible transformation from the traditional commercial bank that we once were to the globally significant lower risk financial services company that we are today.

And I'm particularly proud of what we've accomplished over the last couple of years. With a new leadership team in place, we launched a compelling agenda for growth and innovation under which we've already seen a meaningful pickup in organic growth. We've also really evolved our culture. Today, we're much more performance-oriented and client-centric, we're more nimble in our decision-making and we're doing a lot better at connecting the dots across our differentiated businesses.

When our strategic ambitions and the strength of our franchise were tested by the global pandemic, our people once again rose to the occasion. And not only delivered on our commitments to our clients, communities and shareholders, but we also continued to make significant progress in our journey to position the company for the future.

In Robin, we have found an outstanding leader to build on this agenda and to lead BNY Mellon into its exciting next chapter. Having known Robin as a client for almost a decade, I was thrilled to recruit him to the company in 2020 and to work directly with him the last 2 years. Since then, he has not only had a profound impact on the company through his leadership of Pershing, Treasury Services, Clearance and Collateral Management and our Markets businesses, but he has been a trusted strategic adviser to me and the rest of the executive management team. Robin and I are working closely together and with our executive committee to ensure a seamless transition in the next couple of months.

With that, I'll turn it over to Emily.

Thank you, Todd. And I'll add my congratulations, to you, on your retirement, and I want to thank you for your leadership and mentoring over the years. So good morning, everyone. As I walk you through the details of our results for the quarter, all comparisons will be on a year-over-year basis unless I specify otherwise.

Starting on Page 3. Total revenue was flat and included an approximately $90 million reduction related to Russia, a notable item this quarter. Fee revenue was down 3% or flat excluding the impact related to Russia. The benefit of higher market values as well as continued momentum across many of our businesses was offset by the impact of lost business in Pershing and Corporate Trust in the prior year, lower FX revenue of elevated levels in the first quarter of last year and the unfavorable impact of a stronger U.S. dollar.

While not on the page, firm-wide AUC/A of $45.5 trillion increased by 9%, of which 8% is growth from new and existing clients and 1% is driven by the impact of higher market values, net of currency headwinds. AUM of $2.3 trillion increased by 2% year-over-year, reflecting cumulative net inflows and higher market values, partially offset by the unfavorable impact of the stronger U.S. dollar.

Money market fee waivers, net of distribution and servicing expense were $199 million in the quarter, an improvement of $44 million compared to the prior quarter. This reflects the benefit of higher average short-term interest rates, partially offset by higher money market fund balances. Once again, our growth in money market fund balances meaningfully outpaced the industry. Together, the impact of lower waivers and higher balances drove a sequential increase in pretax income of close to $60 million.

On a year-over-year basis, fee waivers had a de minimis impact to our fee revenue. Investment and other revenue was $70 million. And net interest revenue increased by 7%, reflecting higher interest rates on interest-earning assets, change in mix and lower funding expense. Expenses were up about 5.5% or 6% excluding notable items. Provision for credit losses was $2 million. The benefit from the continued improvement in the credit portfolio, led by commercial real estate was more than offset by a $15 million reserve build on interest-bearing deposits with banks in Russia.

And our effective tax rate was approximately 17%, as expected, due to the annual vesting of stock-based awards in the first quarter, which provided a seasonal benefit. EPS was $0.86 and included an $0.08 negative impact of the notable items related to Russia. Pretax margin and ROTCE were 23% and 15%, respectively, on a reported basis; and 25% and 17%, excluding notable items.

On to capital and liquidity on Page 4. Our consolidated Tier 1 leverage ratio, which continues to be our binding constraint, was 5.3%, down 15 basis points sequentially. The sharp rise in interest rates resulted in a $1.5 billion impact to unrealized losses in our available-for-sale securities portfolio. And we distributed roughly 60% of our earnings to our shareholders, predominantly through dividends. The impact of the reduction of capital on our Tier 1 leverage ratio was partially offset by the benefit of a smaller balance sheet quarter-over-quarter.

Our CET1 ratio was 10.1%, down approximately 100 basis points compared to the end of the prior quarter, primarily reflecting the negative mark-to-market of the AFS portfolio as well as an approximately 30 basis point impact from the adoption of SA-CCR. Finally, our LCR was 109%, consistent with the prior quarter.

Turning to our net interest revenue and balance sheet trends on Page 5, which I will talk about in sequential terms. Net interest revenue was $698 million, up 3% sequentially. This increase reflects higher rates as well as continued growth in loan balances, partially offset by lower cash and securities balances. Average deposit balances declined by 3%, while average interest-earning assets were down 2% sequentially. Within this, loan balances were up nicely, about 3% sequentially.

Moving on to expenses on Page 6. Expenses for the quarter were $3 billion, up about 5.5% year-over-year and up 6% excluding notable items from last year. This increase primarily reflects investments net of efficiency savings, and it also reflects higher revenue-related expenses, which were partially offset by the favorable impact of the stronger U.S. dollar.

A few additional details regarding noteworthy quarter-over-quarter expense variances. Staff expense was up 4%, reflecting the annual vesting of long-term stock awards for retirement-eligible employees. Distribution and servicing expense was up 5%, reflecting higher distribution costs associated with money market funds. And net occupancy expense was down 8% as we continue to optimize our real estate portfolio.

Turning to Page 7 for a closer look at our business segments. Securities Services reported total revenue of $1.8 billion, flat compared to the prior year. Excluding the impact of the reduction related to Russia, revenue was up 4%. Fee revenue was down 5% and up 1% excluding the impact of Russia. And net interest revenue was up 6%, reflecting higher interest rates, partially offset by lower deposit balances.

As I discuss the lines of business within our Securities Services and Market and Wealth Services segment, I will focus my comments on the investment services fees for each business, which you can find in our financial supplement. In Asset Servicing, investment services fees grew by 5% primarily reflecting higher market values and net new business, partially offset by slightly lower transaction activity from existing clients. As Todd mentioned earlier, our sales momentum continues to be strong compared to the first quarter of last year.

Our Issuer Services business was significantly impacted by the reduction related to Russia. Investment services fees were down 43%. Specifically, we accelerated amortization of deferred costs for Depository Receipt services of Russian companies, which is a contra revenue item. Excluding this impact, investment services fees were down approximately 9%, and this primarily reflects lower depositary receipt fees and the impact of lost business in the prior year in Corporate Trust.

Next, Market and Wealth Services on Page 8. Market and Wealth Services reported total revenue of $1.2 billion, flat compared to the prior year. Fee revenue was also flat. And net interest revenue was up 2%, reflecting higher interest rates and higher loan balances, partially offset by lower deposit balances.

In Pershing, investment services fees were down 6%. This reflects the impact of lost business in the prior year as well as lower transaction activity versus a very active first quarter of last year, partially offset by the impact of higher market values. Pershing continued to deliver solid underlying growth. Clearing accounts continued to grow at a 4% annualized growth rate, and we gathered net new assets of $18 billion in the quarter.

In Treasury Services, investment services fees were up 4% as the business saw growth from both new and existing clients and continued to gain traction in higher-margin products such as digital payments. And in Clearance and Collateral management, investment services fees were up 8%, reflecting both higher tri-party collateral management balances as well as higher clearance volumes.

Now turning to Investment and Wealth Management on Page 9. Investment and Wealth Management reported total revenue of $964 million, down 3%. Fee revenue was also down 3%. Investment and other revenue was a negative $8 million and included losses on seed capital. And net interest revenue was up 19%, reflecting higher interest rates as well as higher deposit and loan balances. As mentioned earlier, we ended the quarter with assets under management of $2.3 trillion, up 2% year-over-year.

This increase primarily reflects the benefit of cumulative net inflows into both cash and long-term products as well as higher market values, partially offset by the unfavorable impact of the stronger U.S. dollar. As it relates to flows in the quarter, we saw $1 billion of net outflows from long-term products and $11 billion of net outflows from cash. Having said that, LDI continued to be a bright spot with $17 billion of net inflows.

In Investment Management, revenue was down 6%. Higher market values were more than offset by lower seed capital results and lower equity income as well as the unfavorable impact of the stronger U.S. dollar, which is more impactful in Investment Management, given that approximately 50% of our revenue is earned in foreign currencies. Wealth Management revenue grew by 4%, primarily reflecting higher net interest revenue and higher market value. Client assets of $305 billion were up 4% year-over-year, reflecting higher markets and cumulative net inflows. And we continue to see healthy growth in both deposits and loans as we've expanded our banking offering and deepened our client relationships.

Page 10 shows the results of the Other segment.

I will close with an update on our outlook for the full year of 2022. Obviously, given the backdrop of geopolitical uncertainty, rapidly evolving global monetary policy and the continued overhang of the pandemic, the macroeconomic environment is very uncertain.

For our outlook, we assume a scenario where interest rates follow the forward curve and market values stay relatively flat to where they were at the end of the first quarter. With this in mind, we project full year NIR to be up roughly 13% compared to 2021. Embedded in this assumption, we expect the correlation between rates and deposit runoff to be consistent with what we have seen in the past.

We now expect fee revenue to be up 4% to 5%. This includes a tailwind of about 5% from the reduction of fee waivers, organic growth of 1% plus and a 1% to 2% headwind from the impact of Russia, market value, currency and other factors. For expenses, ex notable items, we now expect an increase of approximately 5%, slightly lower than our previous guidance.

With regards to capital management, we've taken a number of actions to reposition our portfolio to reduce the impact of higher rates and credit spreads. For example, we lowered duration in the AFS portfolio, reduced credit exposure and moved assets to HTM. These actions have reduced our AOCI rate sensitivity by about 25% going forward.

Having said that, we remain cautious on buybacks in the near term. And based on the environment we described earlier, we ultimately expect to return at least 75% of earnings to shareholders this year. We do continue to expect to return close to 100% of earnings to our shareholders over time.

Last but not least, we continue to expect our effective tax rate for the year to be approximately 19%.

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

(Operator Instructions) We will now take our first question from Brennan Hawken from UBS.

First, Todd, congrats on your pending retirement and Robin, congrats on the new role. I look forward to working closer with you. Before a question though for Robin, I'd love to drill down a little bit Emily on what you talked about. More tactically around the actions you've taken with the balance sheet to reduce the AOCI sensitivity. Could you maybe expand on that a bit and touch on some of the specific actions in greater detail and what impact we could expect on the outlook for NIR and how that might inform your updated expectation?

So Brennan, I'm just taking a quick step back, I do want to do a shout-out to our CIO because I think that came really did -- do a great job in terms of both optimizing NIR but also protecting against AOCI volatility during the quarter. As I mentioned in my prepared remarks and I'll give a bit more color, we shortened the duration of AFS portion of the portfolio. It's now a little over 1.5 years, down from more than 2 years at the end of last quarter. We've transferred longer-dated securities to HTM. You'll notice that HTM now as a proportion of the securities portfolio is about 40%. That's up from about 36% at the end of last year. We've also reduced convexity and credit risk in the portfolio.

And so all of these things, I mean, we did -- obviously, there was a reduction in AOCI of $1.5 billion during the quarter, but it would have been larger if had we not taken these actions. And as you rightfully point out, these actions have also made us a lot less sensitive to rising rates going forward. And as I also, I think, mentioned, we've reduced -- just to put a finer point on it. we've reduced DV01 in the AFS portfolio in excess of 25% just through the actions that we carried out this quarter. So as you can tell, we've been managing the portfolio very actively, we'll continue to monitor it and be very nimble.

Great. Robin, maybe one for you. Stepping back and widening out here. Understand that you've just been named to the job. But you're not new to Bank of New York, for sure. So at this point, can you provide any details or plans about your goals or targets? Or maybe at least like a road map for when we could expect to hear more from you about your goals and your plans?

Sure. Brennan, and I appreciate the comment and the question. So you're right. I'm not completely new to the firm, which is certainly an advantage for me in coming in and taking on the role. But I will say that I'm being very diligent, as Todd referred to earlier on in his comments about the transition. And so we're working very closely together. And I don't want to be complacent about the fact that there's a great opportunity for a CEO-elect to have the opportunity to come in and to really benefit from a transition.

Having said all of that, when I joined the firm, I was really struck by the breadth of the franchise. I mean, 93% of the world's top investment managers or clients of ours -- as are 97% of the world's top 100 banks. And that breadth, coupled with the depth of the franchise, that real client trust that we've talked about before is a super powerful foundation. And so job #1 for me is to really build on that. And that's been an investment that Todd has been very focused on during his time as CEO.

Now what I also would reflect on is some of the things that I've been focused on in the Market and Wealth Services businesses. And the first of those is innovation. You've seen that we've launched Pershing X. We've been very focused on real-time payments in the Treasury Services space. And that concept of really driving innovation across the enterprise is another important pillar of how I think about the firm and the opportunity that's ahead of us.

Another thing that we've been doing in that segment, which I'm very excited about across the company is really deepening the wallet, connecting the dots across the firm, helping clients that are existing clients of the firm to do more with us. And that whole ethos of ONE BNY Mellon, I think is a real important and deep vein for us to continue to mine.

And then the last point that I mention is operating leverage and focus on margins. In that segment, we had a 41% margin in the first quarter and having run operational businesses in the past. I'm very focused on operating leverage, and that will continue to be a focus of mine along with these other pillars. So that's how I'm thinking about the world. But I'd just remind you that I'm still in the transition and enjoying working with Todd, and we're already focused on making this a smooth and effective handover.

We will now take our next question from Mike Mayo from Wells Fargo.

Well, what I was going to ask you, Robin, I asked that at the shareholder meeting, but maybe just a little bit more about your background. I just say that when Northern changed their CEO, they said "The old CEO is more about marketing and I'm more about numbers". When State Street changed, their CEO, they said, "Well, the new CEO was more about understanding asset management and their clients." Anything else -- since we don't know you as well as Todd, who's been there for in his fourth decade, anything else about your background that you could share that could give investors confidence as you are about to enter the CEO role in several months.

Sure, Mike. Well, I'm all about being a great all-around CEO. But to answer the sort of question a bit more directly in terms of my background, I feel like I've been prepared for this role over the course of my career. I started off in the markets business, and I ran the money markets business at my prior organization, which was a great opportunity to really get into the markets, capital markets, interest rates and really the client franchise.

And of course, a lot of those same clients are clients of ours and so that was a great formative start for me. I ran operations at my prior firm. I was a Treasurer. I was the Chief Risk Officer. I was the CEO of the International Bank. I operated internationally. And so when I put all of that together, I think it really gives me the opportunity having touched a lot of different aspects of our franchise and our activities to really bring all of that to bear in the role going forward. And I'm very excited about that. And as I joined the firm, I commented before, I've been struck by a few things, including the depth and breadth of the franchise, but also the culture of the firm. And I think that there's a lot of opportunity for us, and I'm excited to have at it.

And so to summarize, you kind of want to have like ONE BNY Mellon and improve the wallet share. And hopefully, I'm not sure if you guys can gives us now. I don't think so, Todd. There's not too many firms that do it. But what's your market share by large client, where was it a few years ago? And where do you hope it to be? Do you have any metrics around that? Or do you think we can get that in the future?

Yes. We haven't disclosed that publicly, but what I would say is we have grown with our clients, and we have continued to increase market share with our largest clients over the past couple of years especially in our servicing business -- our Asset Servicing business. And I think some of the stats that we even did disclose this morning that Emily mentioned. We retained 90 -- actually, I mentioned that. We retained 97% of all of the business that we rebid on, which is an enormously high number. And we've got some capabilities, I mean, the investments that we've made in service quality. And some of that is in some of the technology that we've got around that, keeping us much closer to our clients, much better informed, much more responsive.

The investments that we've made in our data management and data analytics, where I think we are the leader, not only in the servicing capabilities, but also the fact that we can -- we've got the ability to bundle all of the back-office services not just custody and accounting and administration. But TA as well as a differentiator. So I think we are seeing increased market share. I haven't disclosed it specifically against the major clients. But I think the fact that we are with just about every one of the major clients which have reflects that.

We will now take our next question from Ken Usdin from Jefferies.

Emily, I wanted to ask you a little bit on net interest income and some of the changes that you're referencing. So I guess to start, can you help us understand your point about historical reference of deposits versus QT or rates environment. We saw the positives come down this quarter. Can you tell us what you're expecting to see out of the balance sheet going forward?

Sure. So when it comes to deposits and runoff, what I'd first say is that we're just using the forward curve. So assume that it's just as baked into the forward curve, Fed funds is about 2.5% by the end of the year. Also, we're just assuming that betas largely retraced what we've seen in the last cycle. It means that we will get to the end-state faster, but they're going to largely retrace, it's correlated to rates and largely retraced what we've already seen.

So with all that said, we would expect deposits to probably run off maybe about 10% over the course of this year. And that's from where we are in the average of the first quarter. We've already seen them come down a bit from the fourth quarter. And just as a reminder, our deposit base is largely institutional, NIBs. Part of the growth you've seen has been in NIBs and so we expect that to kind of normalize too over time.

And the other thing I would mention is that as we see deposit runoff, we also could see a migration to money market funds. And if that does indeed happen, then obviously, that could be a nice tailwind for us as well.

Okay. Got it. And then in terms of the shortening up of the duration, can you tell us how I don't know if you can size the magnitude of how much that might have changed your current views of full year NII up 13 versus what it might have been otherwise? And how you're now redirecting incremental cash flows into the portfolio versus what you might have done otherwise, if rates haven't gone up this quickly?

Yes. We are -- we've obviously shortened duration across the portfolio. We've swapped fixed floating. And considering just the uncertain environment, we're also continuing to be cautious and nimble.

Okay. And then you mentioned the more cautious on buybacks in the near term and maybe returning 75% this year. How will you evaluate that? Obviously, we can do math on what it means for this year. But in terms of how much could the swings in AOCI continue to impact even being able to do 75%.

Sure. So as I mentioned in my prepared remarks, we still intend to return 100% of our earnings to our shareholders over time, and that's, of course, across dividends and buybacks. We've been cautious, and I think it's been appropriate to be somewhat defensive in this environment with the uncertainty and, of course, the reduction in AOCI. But given the assumptions in our forecast, we feel pretty confident that we would expect to return at least 75% of our earnings to our shareholders over this year. And the nice thing about SCB and the SCB framework is that we can be nimble, we can be flexible. And ultimately, depending upon the runoff we see we might be able to do more.

We will now take our next question from Steven Chubak from Wolfe Research.

I wanted to ask a follow-up on the NII guidance. I appreciate the color Emily on the deposit balance trajectory based on what we experienced last cycle. I was hoping you could just speak to the deposit beta assumptions underpinning the guidance for the full year? And also how much of a helper was premium am this quarter? And how much of a benefit do you expect to realize over the course of the remainder of this year?

So from a beta perspective, as I said before, we just expect betas to largely retrace what we've seen historically. It does mean you'll get to the end-state faster. In the first rate rise, it's generally and what we've experienced is very much as we've been expecting in line with expectations, kind of betas of 35% to 40%.

By the time we kind of get towards year-end and we have many more rate hikes, that will be probably closer to -- betas would be closer to 70-plus percent, which is kind of where we ended in the last rate cycle. In terms of -- what was your last -- sorry, I missed the question.

Sorry. The premium amortization...

Yes. It was helpful this quarter. I don't have it right off hand. But it was obviously -- definitely helpful this quarter, but -- and we just expect it with rates rising as we go forward, it will continue to be a bit helpful. But frankly, at a more modest level.

Understood. And maybe just switching over to the fee side. You spoke to fee revenue up 4% to 5%. And I believe, Emily, and I'm sorry if I missed this, you alluded to organic growth of 1% plus being the underlying assumption. I know you had been running at 2% plus of late. And wanted to get a sense is that organic growth guide more reflection of conservatism, challenging macro or just what you're actually seeing in the backlog of new mandates.

It's definitely not so much on -- at all on the mandate side. We still -- fundamentally, our businesses are in really good health. The growth is really just considering the more challenging environment that we're in. And specifically, when you look at market levels or client activity across some businesses have slowed down, you're seeing or we're expecting a bit more risk-off behavior. And so the particular businesses, which are probably most -- which are going to be most impacted, we think, are Investment Management, Corporate Trust, Depositary Receipts to a lot lesser extent, Asset Servicing. And so that's what's all baked into the 1-plus-percent guide. But the fundamentals are very good and we feel pretty good about that considering the challenging environment.

I couldn't agree more. And just one follow-up, ticky-tacky modeling question. Just on the Asset Servicing line. I believe in the slides you flagged a gain on strategic equity investment. I was hoping that you could size that for us.

We don't disclose that in -- we only disclose that concrete (sic) [discrete] item.

I would just add to that, Emily. So if you look at our investment and other income, it was about in line with the guidance that we had given. On the Asset Servicing, we do have some investments that we've said and some FinTechs that we work very closely with strategically and they've performed pretty well. But as you might imagine, in this down cycle in the first quarter, we got hit pretty hard in our seed capital and some of our other things. So net-net, they basically offset each other.

Will now take our next question from Alex Blostein from Goldman Sachs.

Congrats again to both Todd and Robin here. So my first question is around the kind of connectivity between organic growth and operating leverage in the business. So organic growth sounds like 1-ish percent this year. Fees were flattish year-over-year. Expenses, up 5%, right? So I understand that there's obviously investments that you guys are making in the business. But when you think about this on a 18 to 24 months out, should we expect BK to get to a point where fee growth is more in line with expense growth. I think this kind of dovetails maybe some of Robin's comments earlier around his focus on operating leverage.

So what I would say is, look, we are very focused on driving positive operating leverage. And I just would remind you that overall, for -- if you look at our total revenues, we will be -- our plan is to deliver positive operating leverage this year. And frankly, that's with the impact of the Russia notable items. So I think that's pretty good.

In terms of fee -- when we think about just fee revenue versus expenses, what I would say is that when you look at our -- the guide that we gave for the rest of the year, our expense guide does include slightly more inflationary pressures as well as the investments, of course, that we've talked about extensively that we think are very compelling and some will pay off sooner and some will pay off a bit over the course of the next couple of years. And as we talked about, it's way too early to kind of talk about like what it's going to look like in say, 24, 36 months out. But we have said that, ultimately, over time, we would expect expense growth, the rate of growth to moderate.

All right. We'll stay tuned for that. My second question around maybe the Issuer Services business and really DR specifically. I think in the earlier release when you guys announced the Russia loss this quarter, there's a comment there around just a more subdued level of revenue growth. I think there's an ongoing effect from the Russia exited business as well.

Can you just level set us what the DR business does in revenues now per year kind of net of these changes on a run rate basis? And then ultimately, how should we think about any other sort of geopolitical risk within that business? I don't know to what extent China is part of that revenue stream?

Emily, you want me to take it or you want it?

Sure. Go ahead.

So I think there's a couple of questions there. So Russia was -- it was a material component of the total DR revenue. And the indication that we gave is there was a contra hit on kind of prepaid expenses there. So that got reversed in the first quarter, and that was the most of the $88 million that we were talking about. And on a go-forward basis, we'd expect probably something like $20 million -- probably $15 million a quarter specifically from DRs.

There are -- I mean, China is an important market to us, too. So we saw what we have seen, Alex, is a little bit of fewer transactions. Fewer new issuance in China a little bit down, and that's reflected in those numbers. We don't break out the entire ADR revenue line. It's a small -- a modest percentage of the total Issuer Services. But it is impactful and it did, as you can see, it hit the bottom line in the first quarter.

We will now take our next question from Glenn Schorr from Evercore. (Operator Instructions)

We will now take our next question from Betsy Graseck from Morgan Stanley.

This is Ryan Kenny on behalf of Betsy. Just a question on the Pershing X initiative that was announced a few months ago. Wondering if you could dig in more on what specific areas you're looking to grow in and help us size the investment dollars, timing and the ROI of the investments here. And any expected impact on margins?

Sure, Ryan. So look, it's an investment that we're excited about. As we step back from our Pershing business, where as you know, we're a real market leader in that business. We touch about 15% of RIA accounts in the U.S. We touch a little over 30% of all RIAs with $1 billion or more in AUM.

One of the things that we've heard from our clients is that the world is getting increasingly complex for them as they think about how to really pull all of the capabilities that they need to run their businesses together. And as we've really listened to our customers on that point, we decided that there was a great opportunity for us to help solve some of those problems. And so collecting the various different capabilities focusing on the data and the smooth movement of data across those various capabilities we saw that as an opportunity to really deliver something new and incremental to our customer base.

And we've tried to speed our way along that we hired, as you know, Ainslie Simmonds to run that for us. She's recently completed the rounding out of her top leadership team. We to speed our way to market with the acquisition of a direct indexing capability in the fourth quarter, Optimal Asset Management. That was an example of a bolt-on capability that we think can just help us to accelerate. But we've disclosed before, we're not expecting this to drop much to the bottom line over the course of the next couple of years. This is an investment in positioning Pershing and the aggregate wealth management platform services platform for the future. And so this is an investment in the medium to long term, we think it's important our customers very much want it, and we're excited for it.

We will now take our next question from Brian Bedell from Deutsche Bank.

Great. Well, first of all, congrats again, Todd and Robin. And Robin, looking forward to working with you.

The first question is just on the short-term second quarter outlook. I know Emily, you gave the outlook for the full year. Maybe just to focus a little bit on the pace coming into the second quarter on the recoupment of fee waivers. And any commentary on the sort of near-term trajectory of NIR for the second quarter?

Yes. We really decided to give more of a full year guide second quarter. But I mean to size what you're thinking about, I think, specifically on waivers, if we do see the Fed raise rates by 50 basis in May as I think we're all kind of expecting. Obviously, that will be a nice uptick in terms of recruiting waivers and it's to the tune of, call it, like $100 million or so is what I -- is how I'd estimate it.

Okay. Okay. And then to focus a little bit longer term on the organic revenue growth outlook, the 1% plus. Just I guess if we do get a better -- let's say, if we get a risk on backdrop in the second half as opposed to the current sort of view of a challenging market backdrop, how might that influence that organic revenue growth outlook? Is that enough to put you back in that 2% area? Or do you really -- there's a lot of things you're working on to really build that organically. And if you could just remind us the sensitivity of fee revenue to equity markets, global equity markets improvement? And then just lastly, whether you would be considering any type of major acquisitions to accelerate revenue growth? Or really, it's just going to be a focus on organic.

So I'll take a couple of parts to that, and Todd or Robin might want to chime in about the inorganic opportunities. But in terms of organic growth, I mean, just remember, when we define organic growth, we are normalizing for market appreciation or depreciation, but it is fair that risk-on or risk-off risk behavior associated with that could also impact organic growth. And so what I would say is, it's hard, we don't really say like what's the sensitivity. But yes, there certainly could be more upside if you see more risk on behavior and ultimately, that means more trading, more transaction volume, et cetera. So that is upside. So it's certainly not out of the realm of possibility that it could be higher. In terms of -- what was your second question?

The equity -- the fee revenue sensitivity to -- so like every 10% increase in equity market.

Sure. Yes. We've disclosed this. I think you can find in the K. So basically, any like a 5% move in equity markets is kind of happening gradually throughout the year is about an additional $75 million in revenue.

Yes. Great. And then (inaudible).

Todd, do you want me to take inorganic or you want to?

Yes. Why don't you go ahead and take it. So before you do Emily, before you do Emily, I just want to add. So Brian, just that 5% was -- that was not an average at $75 million. That means if it goes up on average over the course of the year, yes, (inaudible).

Yes. That makes sense.

Okay, you want to follow up on inorganic, Emily?

Sure. I mean on inorganic, what I would say and Todd and I have been very consistent on this, is that we are -- of course, we always are evaluating inorganic opportunities. But at the same time, the bar is really, really high. And it's not high just from a return perspective, it's also very high from an execution risk perspective. So we have been doing several deals, but they've been mostly kind of digestible bolt-on things that are adding capabilities or markets or clients. And we will continue to look out for those.

We will now take our next question from Michael Brown from KBW.

I just wanted to ask about -- start with the average loans were up 3% sequentially and 18% year-over-year. So I just wanted to ask a little bit about where you're seeing the strongest demand? And what are your expectations moving forward and the ability to meet that demand given the expected trajectory of the deposit balances from here?

So actually, we've been very proactively growing the loan portfolio. So yes, as you mentioned, it's up 3% on average and 18% year-on-year. We will continue -- it's our expectation to continue to grow that over the course of this year. And where we're seeing it is really on a couple of different areas. So capital call facilities, certainly, trade finance, likewise, margin loans, CCLs and mortgages and in Wealth, so let pretty much across the board. And that's -- we want to be there and leverage our balance sheet for our clients when it makes sense.

Okay. And then just thinking about the capital ratios today in your comment on returning 75% of net income, any thoughts on the trajectory in terms of the quarterly pace, just given that the Tier 1 leverage is at 5.3% or ended the quarter at 5.3%. It seems like the buybacks may need to be a bit more back-half weighted as the capital ratios kind of accrete higher from here? Is that a fair expectation?

I'm not going to really comment on kind of how it's going to be paced throughout the year. I think you can kind of look at all of our ratios and make your own assumptions. But -- and the thing I would just remind everyone again is that the SCB framework is really, allows us to be very nimble and very flexible.

We will now take our final question from Gerard Cassidy from RBC.

Emily, can you share with us -- and if it's not available, maybe you could answer it in a different way. But in your quarterly and 10-Ks, you and your peers always give us a 100 basis point parallel shift in the curve leads to an x percent increase or decrease in net interest revenue. How does that -- how do you stand today at the end of the first quarter versus the end of the fourth quarter? Do you have that number? And if you don't -- will it be lower by 30% or 40% compared to the fourth quarter?

It's -- we don't -- we will obviously be updating that when we release the Q. What I would say is we're much more sensitive, of course, to short-term rates than long-term rates. That continues, of course, to be the case. And you'll see more of that when we actually release the Q.

Okay. Very good. And then following up on the Tier 1 leverage ratio. I think last quarter, you mentioned that you guys trying to manage to 5.5%. Obviously, you're slightly below that today. Where do you think -- how low can it go from where we are today? Or just your views on how you're managing that number.

So in terms of Tier 1 leverage, we've always said that given the extraordinary circumstances we're in and all of the excess liquidity in the system that we would be -- it makes perfect sense to dip into our buffer to a degree, which is what we've done. We would expect, of course, as we start to see some probably deposit runoffs that will take a lot of pressure off Tier 1 leverage.

And what I'd also just flag is that by the end of the year, it's not -- it's likely -- actually not out of the realm of possibility, but frankly, probably likely that our binding constraint will become CET1 versus Tier 1 leverage. And frankly, I think if you're toggling between Tier 1 and Tier 1 leverage in CET1, that actually is very good. It means you're managing your balance sheet optimally.

Great. And then just quickly, on the HTM, I think you said you lifted your HTM portfolio of 40% of total securities. Is there a limit on how high you would take that to?

There isn't a limit per se, but we obviously do that every with our partners in Risk, and we're always making sure that whatever we move there is high-quality liquid assets that generally speaking, you can repo it. Repo those assets, et cetera. So I wouldn't expect it to increase a lot more from here.

Gerard, it's Todd. I'll follow up. I just want to add to -- I mean, Emily made, I think, all the right points around the capital ratios and the Tier 1 leverage. But remember, we're probably too precise when we give you a number of something like 5.50. If you remember, that's a 150 basis point buffer to what the requirement is. And the reason it's there is because we recognize that you could have a spike in the balance sheet and for us, it's not a risk spike. It's because deposits have increased, and we've certainly seen that through the quantitative easing over the past couple of years or you could have a sell-off and some impact in the OCI. That's exactly why the buffer is there.

So eating into the buffer in this type of situation is exactly what we would expect. And it's not really particularly constraining to us. as we still have that 130 basis points to Emily's point in our modeling, if things run the way we would expect them off of the forward curve those deposits are going to come down 10% or so, and that's going to free up quite a bit of Tier 1 leverage.

And basically -- and we're estimating that we're going to get pretty close to common equity in Tier 1, which is a great place to be. And it also means common equity is a little easier to manage because that's a risk-based asset ratio where we can manage. It's not just what comes on to the balance sheet. So I want to make that clear, well probably in the future, we should give you guidelines sort of more ranges, and we can kind of calculate where we are in the range.

Very good, Todd. And a great run Todd with Bank of New York, and good luck with you next endeavor.

Appreciate it, Gerard. Thank you. So it is top of the hour. Operator, do we have any other questions?

There are no further questions in the queue, sir.

Okay. Thank you, everybody. Thank you for joining us today. Look forward to following up. I guess you can call Marius if you have any follow-up questions. Be well.

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. Thank you.