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Bank of New York Mellon Corp
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Good morning, and welcome to the 2020 Fourth Quarter Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon’s consent.
I will now turn the call over to Magda Palczynska, BNY Mellon Investor Relations. Please go ahead.
Good morning. Welcome to BNY Mellon’s Fourth Quarter 2020 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. Following Emily's prepared 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, January 20, 2021, and will not be updated.
With that, I will hand over to Todd.
Thank you, Magda. Good morning, everyone. Let me start with a brief summary of the fourth quarter financial results, which Emily will then review in more detail, and then I’ll come back with some thoughts on our franchise and our outlook for 2021.
Starting on Slide 2, in terms of the fourth quarter, we reported revenue of $3.8 billion and earnings per share of $0.79 or $0.96 after excluding notable items, which Emily will cover in a few minutes.
Turning to the full year 2020 financial results on Slide 3, and I’m referring to them on an adjusted basis. Earnings per share of $4.01 were flat to the prior year on revenues of $15.9 billion. Fee revenue increased over 5%, excluding notable items and almost $370 million impact of fee waivers in 2020.
Expenses were flat as our cost discipline and productivity gains essentially offset incremental investment, and the operating margin was solid at 30%.
Now, we have a lower risk fee-based business model that positioned us well for this environment. We had no net charge-offs. We also delivered strong results from the two rounds of Federal Reserve stress tests announced in June and December. Our model is highly capital-generative, and our Common Equity Tier-1 ratio increased to 13.1% from 11.5%.
When I shared my 2020 priorities with you a year ago, of course, no one expected that the world would change so rapidly and dramatically. Throughout the pandemic, we have supported employees, clients and our communities and we are proud to provide the infrastructure for several critical government programs for COVID relief, including the term asset-backed securities loan facility, the municipal liquidity facility, the primary dealer credit facility and the payment protection program. Now, while navigating the extraordinary environment, we continue to advance our long-term growth in net agenda across all of our businesses.
That agenda includes accelerating our digital and data transformation, investing in several growth opportunities and leveraging the power of the open architecture platforms and solutions we provide to help our clients grow their businesses.
In Asset Servicing, we have seen no let-up in client onboarding this year. This is a testament to our focus on client experience data and digitization. Half of our AUC/A growth in Asset Servicing year-over-year was from organic growth with new and existing clients, and we built positive momentum. We closed out the year with significantly higher win ratios and retention rates and had our best sales quarter in the last 10 in the fourth quarter of 2020. Once onboarded, these wins will start to benefit revenue in late 2021.
We’ve been pursuing a strategy of moving up and across client value chains beyond just supporting operations to revolutionize data and digital-enabled solutions across front, middle, and back offices. For example, we were recently mandated one of the largest asset managers in Europe to provide front-to-back services adding custody, accounting and transfer agency.
This includes a collaboration to integrate an order management system to deliver portfolio and risk management, improved sales and distribution and operational efficiencies. This is another example of our open-architected security servicing platform, which we call OMNI.
We are currently integrated with the leading OMS provider that covers 98% of the addressable market and our partnerships are starting to help us win business as the above example illustrates. We also have a leading data and analytics business and are now building on our twenty year track record in software and service to create robust, cloud-based data and analytics capabilities.
With the help of several new clients, who are early adopters, we have introduced a new platform called the Data Vault, which allows clients to quickly onboard and manage both structured and unstructured data from many sources. To share one example, we were selected by Janus Henderson to transform their global data platform, including implementing the Data Vault, which will help improve the quality and ease of access to investment information across the enterprise.
We also have a suite of new business application for the front office, such as our ESG Investment Analytics application, which has recently won a significant award, as well as our Distribution Analytics offering to help clients with asset growth. These applications together with the Vault, position us well to drive growth.
Pershing is one of the unique businesses that differentiates us from our custody peers that helps us build deep relationships and is a powerful source of additional connectivity to the fast-growing wealth estate. Fourth quarter results in Pershing benefited from elevated transaction volumes, which are expected to moderate a bit in 2021, as well as continued strong underlying fundamentals. Net new assets for the year were $82 billion.
Pershing’s business, which includes over 600 broker dealers and 500 registered investment adviser firms, is a very attractive and efficient platform for our Asset Servicing clients to access their points of distribution. In fact, today, through Pershing, asset managers have placed $1 trillion of their product and continue to value this unique opportunity that only we can offer.
Clearance and Collateral Management fees were up in 2020, excluding the disposal of an equity investment last year and are – and we continue to innovate in this space. For example, as a result of intense collaboration between our market business, asset servicing, Clearance and Collateral Management and Group Treasury, we are in the process of launching an innovative solution that offers clients the ability to pledge money market fund shares to meet Tri-party collateral obligations across a wide range of transaction types, such as repo and securities lending agreements, securities note programs, collateralized deposits, and also allows segregation of initial margin for derivative contracts, all in our straight-through processing models. So, clients can now buy money market funds on our LiquidityDirect platform and seamlessly pledge them as collateral in these types of transactions.
In Treasury Services, where we delivered good performance, we have continued investing in automation and are advancing our real-time payments capabilities. We are actively working on an exciting, large-scale commercial payments pilot with one of the world’s largest builders. This capability is expected to reach tens of millions of consumers via their retail banks throughout 2021, leveraging continued adoption across the RTP network that’s called - that’s known as the Real Time Payment system.
Within Investment Management, flows have been largely in step with industry trends, and we’ve offset equity outflows with strong fixed income cash and LDI inflows. We’ve had three straight quarters now of long-term inflows and have improved investment performance. Across the top-30 ranked strategies by revenue, 75% are in the top two quartiles on a three year basis compared to just over 70% a year ago.
In 2020, we launched eight ETFs with more to come this year. We’ve also been building out sustainability funds, such as the Future of Humans Fund with UBS and a series of Mellon funds focused on pressing global themes, for example, aging populations.
Finally, we continue to build out our leadership team. John Tobin was recently named as Chief Investment Officer of Dreyfus Cash Investment Strategies bringing into this role deep and broad money market industry expertise. We will continue to build on our leadership across the entire cash ecosystem to position our business for long-term growth.
And just a couple of weeks ago, we announced that Euan Munro would be joining us as CEO of Newton in June. Newton has a proven and highly relevant track record in the investment industry spanning three decades. He will be a great addition to Newton. So we are excited to have both of them join Hanneke’s team.
Before I hand over to Emily, I’d be remiss if I did not comment on our push of BNY Mellon towards ever greater diversity and inclusion. We have one of the most diverse Fortune 500 boards, and our Executive Committee has become increasingly diverse.
To accelerate progress in our most underrepresented ethnic populations and help position our firm as a competitive choice with Black and Latinx graduates and experienced professionals, we set some concrete short-term representation goals in the U.S. It’s important on many levels. And we know diversity is highly correlated to long-term financial performance.
And finally, during the year, I made a number of appointments to my leadership team. We have a highly motivated group of talented employees implementing our strategy, which is centered on driving growth, creating differentiated value for our clients digitizing and optimizing our operating model and fostering a high-performance culture that is focused on delivering excellent client service in new and innovative ways.
With that, Emily will now review our fourth quarter results in more detail, after which I will make some concluding remarks.
Thank you, Todd, and good morning, everyone. I will walk you through the details of our results for the quarter and briefly review the full year as well. All comparisons will be on a year-over-year basis, unless I specify otherwise.
Beginning on Page 4 of the financial highlights document, in the fourth quarter of 2020, we reported revenue of $3.8 billion and EPS of $0.79. Both the current and prior year quarters included a number of notable items. The fourth quarter 2020 results included an unfavorable $0.18 per share impact from charges related to litigation, severance expenses, losses on two non-core business sales and lease exits and real estate sales.
For real estate, the charge is a result of plan to exist around 8% of our overall footprint, and we expect this will be breakeven on an annualized basis within a year. Remember, our results in the fourth quarter of 2019 benefited from a gain on the sale of an equity investment, partially offset by severance and litigation expenses and net securities losses.
When excluding these notable items, the fourth quarter of 2020 revenue was down 2% and EPS was down 5%. Results were negatively impacted by continued low interest rates and associated money market fee waivers.
Net interest revenue was down 17%. Excluding notable items and fee waivers, fees grew 5%, driven by the impact of higher market levels and continued positive momentum across most of our businesses.
FX and other trading was roughly flat due to $33 million of fee capital hedge losses in the fourth quarter of 2020 or about 18% negative impact to that line item year-over-year, which is offset in investment and other income.
Expenses are down 1% on both a reported and adjusted basis, with adjusted results due to savings in G&A and distribution and servicing expenses, offset by continued investment in technology and the unfavorable impact of a weaker U.S. dollar. Our provision for credit losses was $15 million reflecting reserve additions related to our commercial real estate portfolio.
Pretax margin of 24% or 29%, excluding notable items, which considering the impact of interest rates and waivers, which have minimal expenses associated with them, showed the resiliency of our model.
ROE was 6.9% and ROTCE was 13% and included approximately 150 basis points and 300 basis point impact respectively for the notable items. We also continued to generate substantial excess capital as our CET1 and Tier 1 capital each increased by about $700 million this quarter.
Page 5 sets out a trend analysis of the main drivers of the quarterly results and is adjusted for notable items where indicated. Investment Services revenue was $2.9 billion, down 4%. The decline was primarily a result of lower net interest revenue and fee waivers. These headwinds masked benefits from higher market levels, volumes and liquidity balances, as well as strong underlying momentum across many of our businesses, which I’ll get into later.
Investment and Wealth Management revenue increased 2% as higher market values and the impact of the weaker U.S. dollar, along with improved investment performance, offset the impact from fee waivers. The impact of money market fee waivers on our consolidated fee revenue, net of distribution and servicing expense was $134 million in the quarter, at the lower end of the $135 million to $150 million we previously guided to and an increase of $33 million quarter-on-quarter.
Whereas in prior quarters, most of this impact was felt largely through Pershing or clearing service lines and, to a lesser extent, Investment Management. This quarter, we began to see a more meaningful impact within Asset Servicing and Issuer Services. We have provided you with a detail of the impact by business in the Appendix of this highlight deck.
Turning to Page 6 and 7, setting out full year results and trends, our full year 2020 results demonstrated resiliency and balance sheet strength during an unprecedented time. Excluding notable items, fees grew 3% despite a roughly 250 basis point negative impact from fee waivers. Full year expenses were essentially flat on an operating basis expenses, in line with the guidance we have provided throughout the year.
Operating EPS was flat despite the impact from low interest rates and as we absorbed a higher credit provision. And we delivered a solid pre-tax margin and strong ROTCE for a challenging year.
Turning to Page 8. Our capital and liquidity ratios remained strong and well above internal targets and regulatory minimum. Common Equity Tier-1 capital totaled $21.9 billion as of December 31 and our CET1 ratio was 13.1% under the advanced approach and 13.4% under the standardized approach.
Tier 1 leverage was 6.3%, down 20 basis points from the third quarter due to higher deposits. As we’ve noted in the past, we are comfortable operating with a ratio of around 5.5% to 6% versus the 4% regulatory minimum. Our current Tier 1 leverage ratio is well above our target. Finally, our LCR in the fourth quarter was 110%.
In terms of shareholder capital return, we continue to pay our $0.31 quarterly dividend, which totaled $278 million this past quarter, and are looking forward to resuming open market share repurchases in the first quarter. This will be in compliance with the Federal Reserve’s modified limitations that apply to all CCAR banks and allows us to repurchase approximately $625 million of common stock in the first quarter.
We look forward to operating under the stressed capital buffer framework, which will give us more flexibility in terms of capital return.
Turning to Page 9, my comments on net interest revenue will highlight sequential changes. Q4 net interest revenue was down 3%, primarily driven by the impact of lower short-term rates and although our deposits increased significantly in the fourth quarter, they had minimal NIR value.
Turning to Page 10, which summarizes deposits and securities trends. Deposit balances continued to grow over the course of the quarter and on average were up $28 billion or 10% from the third quarter and $75 billion or 32% from a year ago. On a sequential basis, a larger driver of the growth was excess liquidity in the system, driven by monetary and fiscal stimulus.
On a year-over-year basis, strategic deposit initiatives across Treasury Services, Asset Servicing and Wealth Management business tied to underlying transaction activity, which supports our client relationships with degeneration objectives, was a significant driver of growth. The average rate paid on interest-bearing deposits was negative six basis points, minimally changed from the third quarter.
As a reminder, about one-quarter of our deposits are in foreign currencies, including euro and yen, which had negative rates. In the U.S., our average interest-bearing deposit cost was about 4 bps.
Turning to the Securities portfolio, on average, the portfolio was flat to the third quarter and approximately $35 billion over the prior year or 27%, as we deployed a significant portion of the growing deposit base throughout the year.
As the bar chart shows to the right, we continued to gradually increase our non-HQLA securities to increase yields while maintaining our conservative risk profile. As a result, average non-HQLA securities, including trading assets, was $36 billion in the fourth quarter, up $24 billion from a year ago.
Turning to Page 11. We’ll provide you with some color on our asset mix and specifically the loan portfolio. Exposures and statistics at year end were largely similar to the third quarter. As a reminder, our portfolio is predominantly investment grade and, for the year, we experienced net recovery.
We recorded a $15 million provision this quarter as we internally downgraded a modest number of names primarily in our commercial real estate portfolio. Our assumptions around the macro-outlook, as well as the relative weighting of the scenarios were largely unchanged from the last quarter and we continue to closely monitor this portfolio, particularly the commercial real estate exposure in other sectors more acutely impacted by the current environment. Page 12 provides an overview on expenses, which we covered earlier.
Turning to Page 13. As mentioned earlier, total Investment Services revenue year-on-year declined by 4%, mostly due to the impact of low interest rates. NIR was down 14%. These were flat or up 5%, excluding $113 million of fee waivers.
FX and other trading revenue had a strong quarter as FX revenue grew by over 30% in Investment Services, driven by higher volumes and volatility.
Assets under custody and administration increased 11% year-over-year to $41.1 trillion and we continued to see organic growth with new and existing clients as well as the benefits from higher market values and the impact of a weaker U.S. dollar.
As I move to the business line discussion, I’ll focus my comments on fees. Within Asset Servicing, fees were up modestly as higher market levels and FX and higher liquidity service fees partially offset the impact of fee waivers, lumpy repricing associated with a few client renewals and lower tax lending.
In Pershing, continued strong underlying fundamentals offset the impact of fee waivers. Clearing House was up 5%, mutual fund assets up 10% and we saw continued strong net new asset inflows of $28 billion in the quarter. Transactional activity also remained high as it did for most of 2020 and we would expect that to normalize a bit as we head into 2021.
Issuer Services fees decreased 3%, primarily due to the impact of waivers. Ex-waivers, mid-single-digit growth in DRCs was offset by a small decline in Corporate Trust.
Treasury Services fees were up. Our payment volume growth, particularly in the second half of the quarter, and the increased fees also reflect the improved product mix and client wins and higher money market fund and deposit balances on the back of targeted initiatives.
Clearance and Collateral Management fees were down slightly. Good organic growth in our non-U.S. business, where Tri-party balances and clearances both grew double-digits was offset by declines in U.S. volumes, lower intraday financing fees and the absence of income associated with an equity investment divested last year.
Page 14 summarizes the key drivers that affected the year-over-year revenue comparison for each of our Investment Services businesses.
Turning to Investment and Wealth Management on Page 15. As noted earlier, total Investment and Wealth Management revenue in the quarter increased 2%. Overall assets under management grew to a record $2.2 trillion and were up 15% year-over-year, primarily due to higher market value, $73 billion of inflows and the positive impact of the U.S. dollar weakening.
In the fourth quarter, we had net inflows of $20 billion, including long-term strategies inflows of $15 billion, driven by a second straight quarter of inflows in LDI as well as fixed income. Wealth Management had its strongest flow quarter in two years, resulting in positive organic growth in the quarter.
Investment Management Revenue grew 3% as the benefit of higher market levels and a weaker dollar were offset by the impact of fee waivers. Fee waivers impacted growth by about 300 basis points. Wealth Management fees were down 1% due to the sale of our Canadian wealth management business. Client’s assets grew to a record $286 billion and were up 8% year-over-year.
Now, turning to our Other segment on Page 16, the year-over-year revenue comparison was primarily impacted by the gain of an equity investment in the fourth quarter of 2019 and a business share loss in the current period. Expenses increased, reflecting severance and real estate impairment charges noted earlier.
And now, a few comments about the outlook, before I turn it back over to Todd. First, the more recent usual caveat that the macroeconomic environment remains fluid. So, as we think about full year 2021, for NIR, our guidance remains unchanged and that a run rate slightly lower than the fourth quarter, call it about 3%, remains a good proxy for the quarterly run rate expected this year.
Although recent yield curve deepening provides a modest tailwind, short-term rates have continued to decline. Also, we expect MBS prepayment fees to remain at current levels despite the deepening yield curve as mortgage rates have only risen slightly.
Finally, we are currently planning for average deposits for the year to be slightly lower than our fourth quarter average as we help our clients redeploy liquidity into more efficient investments on our platform.
For transaction-related fees, we expect volumes to normalize a bit versus healthy levels we saw in the fourth quarter. On money market fee waivers, we still expect to be at a full run rate in the first quarter. We now, however, expect the impact of first quarter waivers net of distribution expense benefit to be approximately $175 million, assuming short-term rates stay at current level.
So, as we think about full year fees for the entire company, we expect them to be relatively flat as the impact of equity appreciation, organic growth and the weaker dollar will be offset by fee waivers and lower volume. Excluding labors, fees would be up 3%. By the way, we assume equity market will rise approximately 5% from the beginning of 2021.
Regarding expenses, we continue to expect them to be flat for the full year on an operating and constant currency basis, but due to recent weakening of the dollar, this means that in absolute terms full year expenses are now projected to increase by approximately $150 million or 1.5%. This currency impact is offset by a light increase in fee revenue, as previously discussed.
Finally, in terms of our effective tax rate, we expect it to be approximately 19% for 2021. Specific to the first quarter, the items I just mentioned will have a proportionate impact. But as a reminder, first quarter staff expenses are typically higher relating to long-term incentive compensation expense for retirement-eligible employees.
Also, in the first quarter of 2020, we made an accrual adjustment that reduced the expenses that will not be repeated this year. As a result, we expect first quarter total expenses to be up 3% to 4% year-over-year, including the impact of currency.
With that, let me turn it back over to Todd.
Thank you, Emily. Before opening up for questions, let me share some final observations, speaking to Slide 17 and 18, our franchise is powered by a wide breadth of services and capabilities. This differentiates us and certainly makes us unique amongst our closest peers. We are a top three provider across asset servicing, issuer service, clearance and collateral management as well as Pershing and we rank among the leading players in more fragmented businesses, such as Wealth Management, Investment Management and Treasury Services. This gives us a strong platform and scale, both of which are crucial for success.
We are responding to the evolving needs of our clients and actively connecting different parts of the company to drive growth. While significant pandemic-related challenges remain, we are entering 2021 with confidence and momentum in our core franchise, at the same time, overall revenues year-over-year will be impacted by the full effect of low interest rates, money market fee waivers and the absence of COVID-related transaction activity.
For the full year, we expect to deliver modest organic fee growth similar to 2020, which we expect to accelerate beyond 2021, as our growth initiatives gain traction. As we look out to 2021, I have three overarching priorities for the company. One, execute our growth initiatives; two, scaling and digitizing our operating model; and three, fostering a high-performance culture that is focused on delivering excellent client service in new and innovative ways.
While focusing on these priorities, we will continue to vigilantly manage operating expenses, which we expect to be flat for 2021 on a constant currency basis. Between 2018 and 2021, we’ve funded approximately $1.1 billion in new investments by generating internal efficiencies with no increase in expense. We will continue to invest in technology, although with profiles that is more focused on initiatives to grow and make the business more efficient.
Turning to capital returns, we are pleased that we can resume share repurchases in the first quarter. We remain committed to returning at least 100% of our earnings to shareholders over time, including the excess capital we have built since the second quarter of 2020. We have the capacity to drive meaningful EPS growth through buybacks.
In conclusion, we have navigated an extremely challenging year of wealth. Our capital generative and low-risk models delivered what it is supposed to do in terms of stability and capital generation. I am proud of the leadership team and the dedication and hard work of our employees during unprecedented and challenging times.
And with that, operator, can you please open the line for questions?
[Operator Instructions] And we’ll take our first question from Brennan Hawken from UBS. Please go ahead.
Todd, good morning. Thanks for taking my questions. Emily, there was a lot of walk through there on the revenue guide. So I just wanted to make sure I heard that correctly and understand where I should index. You guys provide a lot of disclosure on Slide 22. Is the right starting point that we use, the fee revenue ex fee waivers and notable items for 2020 which is the 13.1? And then we layer in the difference in various impacts that you laid out and then take the new runrate for fee waivers expected in 1Q and then kind of annualize that. Is that the right way to think about it? And how does the strengthening of the dollar play into that? Sorry.
Sure. So, just – I guess, just to clear, I will break that each and every piece, but ultimately if you look at our full year 2020, if you actually take into account and try to spell as, as best as possible the impact of waivers likewise, we are expecting an increase in our market appreciation, as well as we are going to have some favorability in terms of the weakening dollar, if you put all of that together, year-on-year revenues will be essentially flat and up 3% ex fee waivers.
Got it. Okay.
That’s fee revenue, Brennan.
That’s fee, yes – alright. That’s fee revenue, yes.
And that is assuming – through the dollar is going to be, but we just, you just spot the dollar at year end.
Fair enough. So, that 12.77 is the number we should focus on to be flat basically, ex on those puts and takes?
Yes.
That’s great. Excellent. And then, expenses flat, which is in line with what you gave in December on a constant currency, but we’ve seen the weakening dollar. And so, when we think about the expense line, if the dollar remains unchanged from where we are now and of course we can calibrate that through the year depending on the different trackers, we’ll see a roughly 1.5% uplift on the operating expense line from the 2020 level. Is that fair?
Correct. Correct.
Okay. Okay. Excellent. Thanks. I just wanted to try to clarify some of that. And when we think about the deposits dropping from the 4Q average level, are we – is it fair to assume that we’ll probably shake out at a level that’s above the third quarter? Or are you guys thinking that we might actually even revert to down to that level or below? Is there any help you can provide in trying to think about how to gauge the magnitude of that normalization in the deposit side?
Sure. So, ultimately, we are projecting deposit to be relatively flat from here or potentially to decline a bit. Now in turn, as we could see excess liquidity in the system, but of course, we are monitoring our capital ratios and we have to optimize the returns to shareholders so we will be actively very proactively managing the size of the balance sheet. So that’s what we – that’s ultimately, roughly track from here, or slightly lower.
Okay. Great. Great. Thanks very much for clarifying.
And we’ll go ahead and take our next question from Ken Usdin from Jefferies. Please go ahead.
Hi. Thanks. Good morning. Emily, just a follow-up on the organic growth outlook. Just wondering if you could help us put in context like just what that measures, right? Is it’s not necessarily a stock measure, just a revenue growth. So like you say, it’s taking the core building blocks of the segments and just kind of measuring the unit growth and how do you put that 1.5 into context with the overall fee guide, right? Can you – I don’t know if you can maybe just walk us through that. Thanks.
Sure. So, when we think about organic growth, we define it as pretty much growth excluding market appreciation or depreciation excluding currency impact and excluding waivers. So, I mean, that’s generally how we think about it. I think Todd had mentioned that we – in – over the course of 2020, it was around between 1% and 2%. We are expecting it to remain pretty much stable at that – at those levels. So that’s embedded into the fee forecast that I’ve just given.
Right. Okay. And that’s helpful. And then, just a specific question on Asset Servicing fees that on the income statement side, seeing that there was a little bit of a – there was an increase in fee waivers in that 11.38 number, but even if you exclude that, Asset Servicing was down. The press release mentioned something about some repricing. I am just wondering if you can walk through just what happened pushes it close there? Why the core was down sequentially? Whether it be organic growth repricing activity, et cetera? Thank you.
Sure. So, we had – in Asset Servicing in the fourth quarter, we had higher – we were helped by higher market levels, higher FX and other trading and higher liquidity balances. But that was offset by waivers. Sec lending was down a bit. And yes, you are correct. There was a bit of some lumpy repricing in the quarter. Ultimately, we don’t control actually the timing obviously of repricing we happen to have had two or three large relationships repriced on the back of renewal. So we ultimately retained the business, but that was a modest headwind as well.
Okay. And then, I guess, just as a quick follow-up to that, is that probably rebates? Does it kind of build off of here? Or how do you think about those repricing versus renewals as you think forward? Thanks.
Sure. Sure. So, as you all know, repricing is very lumpy. You will see the full impact of those repricings throughout the year. But it’s not like we’ve seen anything structural or underlying – an underlying change in the trend of repricing. It’s always been a modest headwind that we’ve offset with greater efficiency and net new business.
Thank you.
And we’ll take our next question from Betsy Graseck from Morgan Stanley. Please go ahead.
Hi, can you hear me?
Yes. Morning, Betsy.
Hi. Okay. So, first question just on I think the deposit commentary. Wanted to get a better understanding as to why you think deposits aren’t going to be continuing to increase as much as they have been? I mean, I think the Fed is still increasing the size of the balance sheet, I expect that you would get some benefits from that?
Yes. I think, I can start and I am sure Emily will join in on this. I would expect that the Fed is going to continue to buy securities which kind of adds to the deposit base and there is still some question exactly how the very large balances that sit at the U.S. treasury at the Fed was going to align those down. So the two of them could increase the overall reserves and deposits in the system. That being said, we can manage some of that and now that we are back – and we did that a number of years ago. So, we targeted some of the less valuable balances and once we are able to use our capital, that’s not how we are going to use it, because it’s not lumpy – it won’t be particularly efficient. So, we’ve demonstrated that we can do that and of course, any valuable deposits we will take on. But if they are just short-term with very little benefit to them, we’ll discourage that.
Okay. That three year pricing, or what have you? I guess, the other question, Todd is, you mentioned, one of the strategies here that you are going to be executing on this year is to increase the efficiency and the delivery of the products and services. I wanted to understand how you are thinking about that with regard to some of the OCC rules that have been out there recently regarding stable coin? I am just wondering, how much does the block chain initiatives that you’ve got underway drive that efficiency improvement? Or is that more of a hobby and does it matter that the OCC has approved banks for stable coin? Does that factor into your strategy? Thanks.
Yes. I think, it clarifies things a bit. And there is a fair amount of activity and by the way we have appointed somebody in front of – what I would call the token invasion efforts. They are really across three fronts and they are seeing some acceleration around tokenized assets, tokenized fee up currencies and ultimately also cryptocurrencies. So we are seeing a lot more interest in cryptocurrencies and customizing in other services associated with it. We’ve done a little bit there. We have a custodian for a futures contract and it’s kind of getting a start. In terms of tokenized currency, I believe that a number of utilities sell and there is an optionality from this and investor and a persistent development from the beginning and we do see that having meaningful applications. And we are also involved in tokenizing assets and we are looking at what we might be able to do to tokenize into Tri-party repo committed to make it more – even more efficient. So, I think it’s going to be an important element here and we are investing. Not hugely underwrite now. It’s not – I don’t see a lot of independent revenues but it’s something that we will definitely be on that before we got time. Betsy, are you still there?
Thank you. Yes, appreciate that.
And we’ll move to our next question from Brian Bedell from Deutsche Bank. Please go ahead.
Hi. Great. Thanks. Good morning, folks. Emily, just a quick one on the net interest revenue outlook. The – I think you were trying it after a 3% drop in 1Q versus 4Q would be the guidance would be stable for 2Q, 3Q, 4Q. Just wondering what the headwinds are if we are – if we get out the steeper yield curve, I guess, what you ensure is the forward curve your assumption was that? And then, what would be the headwinds that would keep that stabile if we were to see a steepening yield curve and lower prepaid fee doesn’t happen here?
Sure. Hi, Brian. So, you got that spot on. Our guidance is, take the fourth quarter runrate. This came about, call it about 3% and that’s a good proxy not only for the first quarter but when you think through the average runrate for the rest – for the year, based on what we know now, we don’t try to get queued. We just use the forward curve and despite a steepening of the curve, we are still very sensitive to short end rates which have actually come down. Also, when you think about where we play the duration of our investments, that part of the curve is actually not up as much as the longer end. And I guess, the last thing I would just point out about prepayments fees that you’ve mentioned is that, despite a steepening of the curve, we really haven’t seen mortgage rates increase that much. So we are not expecting those at the moment anyway to really decline much. So, that’s really all of this of course is subject to change based on the rate environment. But that’s how we are projecting.
Okay. That’s clear. And then, I think…
Hey, Brian, I just add it to make sure it perfectly clear. I mean, when you think about the steepness of the yield curve, we’ve seen that. But we’ve also seen short-term rates come on in a little bit and that’s meaningful. So, if we do continue to see it and we continue to – and that starts to slowdown prepayments fees or even more it’s – than we would expect prepayments fees. So that, but all we do is we use the current markets expected future rates really the forward curve. So that’s what you saw. It’s actually in that estimate.
Yes. Okay. That really makes sense. And then – and maybe, Todd, just going back to some of the initiatives you mentioned in the early part of the call, and trying to just triangulate that with the organic growth rate. So the 1.5% organic growth rate, I think that implies 10%, sort of $15 million organic revenue expectations for 2021, and then you mentioned, five different initiatives, the front to back mandates, the Data Vault, ESG investment analytics, the collateral management, money market, on track how do you repo solutions and the commercial payments of your current payment, that’s something as well. Are those more – just to get a flavor, are those contributing more to – I guess, you know what? If we could sort of frame what portion of the organic revenue growth in 2021 may be attributable to that? Or is it really more for in 2022 continue potentially the organic growth rate improving in 2022, that’s the result of these initiatives?
Yes. I mean, a little bit of both. So, part of the – with very strong sales in the fourth quarter, but most of those won’t be implemented right, until the end of – towards the end of the year. So we can have de minimis impact on the revenues for this year. But they’ll go into next year. Some of those are because of the – of what we’ve done around the Data Analytics, the Data Vault and with Janus Henderson, they are the early adopters. So, that will take some time to implement. And then, we think we are gaining some additional traction. When we look at some of the applications, we’ve had many, many, many demonstrations and many users on a trial basis, for example on our ESG. So that’s starting to build some momentum. The Collateral Management program that we are investing and we don’t expect – we expect to start seeing some of the benefits of that toward the end of the year. So, there is a little benefit in the organic growth rate this year. And we would expect that to accelerate a bit next year.
Okay. Fair enough. Thank you.
[Operator Instructions] And we’ll take our next question from Mike Mayo from Wells Fargo. Please go ahead.
Hi.
Good morning, Mike.
Hello.
Hello.
A question on positive trend and one maybe negative trend. But on the negative trend, you said you had elevated transaction volumes in Pershing and they should moderate. Have they moderated already? And we’ll kind of see through the – how the market situation if those transaction volumes are moderating and on the positive side, you said Asset Servicing had the best sales in ten quarters in the fourth quarter and that should help that in about a year. How you will close these deals in the pandemic environment? I mean, are you closing deals that have resumed? Are these existing relationships as I keep hearing, right, getting new relationships, it’s tough. So, just wanted some color behind both of those trends.
Yes. We – one of the big transactions that we are closing with entirely in virtual, that was with a very large – and a lot of these have been entirely virtual. And we’ve built a very good relationship with that particular organizations, large European asset manager, in fact and we are right before the pandemic, right at the time, I was going to travel to see them and unfortunately wasn’t able to do it. So, there have been from soup to nuts, things slowed down for a while. But it’s getting a little more normalized on the institutional front. I’d say, on the wealth front, within the digital, that’s a little bit more challenging, Mike. But on the institutional front, it’s certainly not on a deal. But we’ve had many instances of where we’ve been able to handle that. In terms of your question around Pershing, I mean, we are only a couple of weeks into the New Year and volumes generally have stayed pretty strong relative to the fourth quarter. I just think it’s a little bit too early to call. Our estimate is certainly – we’ve normalized a bit. Maybe they won’t, maybe we’ll stay up here. But that’s our best guess at this point.
You had a third question in there and I don’t recall what it was, Mike. But I’ll try to take it.
We’ll just really read through the capital markets when you think things settle down. But it sounds like they haven’t settled down yet based on what you are saying with Pershing?
Yes. I think that’s right. I mean, you are seeing more retail activity than you’ve historically seen.
Great. Alright. Thank you.
Thanks, Mike.
We’ll take our next question from Alex Blostein from Goldman Sachs. Please go ahead.
Great. Good morning, Todd. Good morning, Emily. Just a follow-up around the organic growth target that you guys put out there of 1.5%. Can you talk a little bit about what you are assuming for pricing dynamics within that across sort of your various businesses? Obviously it sounds like Q4 maybe was a bit of an anomaly of several large accounts just going to happen to reprice at the same time, but maybe give us a sense kind of what that unit repricing looks like? Is it 1%, 2%, kind of what that is? And how did you incorporate that into your guidance? Thanks.
Yes. Emily, why don’t you take that? Do you want to take it?
Sure, I’ll start and we’d see that. So, I mean, repricing pressure is just the norm in our businesses. So, it’s always a headwind, but a very modest headwind. And we routinely and always offset that more than offset that with greater efficiency and net new business. So, look, there has been some lumpy repricing, but we don’t see any underlying structural change or trend. So, from that perspective it’s not hugely material.
And part of our pricing schedules too are graduated. So the value of the assets increase, the pricing does reflect that volume. So, - but this is specific to repricing for existing clients and they benefit from some of the operating efficiencies and the growth in their own business. And typically, it’s fairly – it’s been fairly stable for a number of years. The down draft on that and it’s just a little lumpy this year. We see it going back to normal. But that lumpiness will have a little bit of an impact on 2021.
Got it. Understood. And then, just a clarification around NIR. It sounds like you guys are assuming MBS prepayments will remain at current levels for 2021. Can you just remind us what premium amortization was in the fourth quarter? And any sort of sensitivity you guys can provide around that with respect to prepayment fees?
Sure.
As you have it.
I am afraid of getting this close. But I think, let’s follow-up with IRS on it.
Okay. Sounds great. Thanks.
Thanks, Alex.
We’ll take our next question from Rajiv Bhatia from Morningstar. Please go ahead.
Hey. Good morning. Just a quick question on the Pershing LOB. Within Pershing, how does your revenue growth compare independent broker/dealer clearing channel versus RA subsidy? And how big of a headwind the consolidation within the independent broker/dealer space what’s helped clearing firms, with LPO?
Yes. And so, we are growing faster in the registered advisory firms and then the broker/dealer side of business. But the broker/dealer size of business is a still meaningful and it’s a large component of it. And so, as we look into next year, some of the consolidations, the self-clearing decisions at last had very strong growth that we’ve seen. So, that’s going to be a little bit of a drag for Pershing for this year. It’s basically offsetting that the pipeline continues to be very strong especially in the advisory space.
Got it. Thanks.
Just, Todd, just going back about, it’s still on the causes – just I didn’t have it on my fingertips. MBS prepayment fees or MBS prepayments were about a headwind of $173 million in the quarter. And yes, you are correct, we just are expecting despite a steepening yield curve at the moment for that to remain stable.
Rajiv, do you have a follow-up question?
No. Thank you.
Okay. Thank you.
We’ll take our next question from Brian Bedell from Deutsche Bank. Please go ahead.
Great. Thanks for taking the follow-up. Just – Todd, just want to circle back on the front to back mandate that you are going to – the largest ones that you’ve been servicing. But just wanted to get a flavor of how many others that you are dealing given that you are integrated with virtually all of the providers? Is that a sizable set of mandate for you if we consider other contracts and maybe then just if they are with some joint uses there?
Okay. Sure. So, I mean, we’ve integrated now with six platforms, partnerships with Bloomberg, Aladdin and so forth and through that, we are offering custodian size information around liquidity and it’s kind of a unique capability that we are able to do transactions holdings and so forth. And I think what it does is very much enriches the experience of doing business with us. So I think it’s helped us to retain relationships. I think it’s helped us to grow a couple of relationships that I just indicated. So we are starting to get some traction with it.
Moving on to the data business, which we’ve been in for some time. But now we’ve cloud enabled it and made it much richer capability. We’ve had a number of large data clients that have operating it – we are now starting to convert some of them. So, I think it’s not just what they can do with us, but for the first time now, we are starting to see some meaningful wins that I would attribute, maybe not entirely to it, but certainly that was a helpful driver.
Okay. That’s helpful. And just as – can consolidation in the RA space, can you have some benefit from that or is that – do you’ve seen this sort of providers going to the self-clearing option?
Yes. As we look back historically, more often, we are winners to it. But there are – there can be different locks. And so, the acquirer had a – I think it was self-clearing or had some other approach - and so, or some other provider. So, typically, we’ve found that we’ve won more recently. We had a couple losses.
Thank you. Fair. That’s all.
Thanks, Brian.
And we’ll take our next question from Brian Kleinhanzl from KBW. Please go ahead.
Great. Thanks. One of you just kind of walk through again the Tier-1 leverage comments that you made. I guess, this quarter where it was at 6.3%, but then you gave that your target was 5.5% to 6%, but then you said, you felt you are well above where you needed to be. It seems like you are just above kind of what you are targets are. How does that impact your aspirations of capital returns?
Sure. And so, Tier-1 leverage is 6.3%. I think we’ve been pretty clear that we are comfortable running more the rate between 5.5% to 6%. So that does imply that we have significant excess capital. And you can assume that we are going to look to return that to shareholders over the course of the year. We are committed to do so.
Brian, the other thing that I would add to that, Brian, is that we have excess deposits right now. And so, since we are not able to do anything with our capital, we did – we are not really pushing them away or managing on this as carefully as we could. Once we get back into a normal capital management cycle, deposits that aren’t worth anything we are not going to keep them here.
And so, when you talk about the deposits, how does that play into the money market fee waiver that you are anticipating pushing those off into the money market funds, which has been the driver of the fee waivers or if that were to happen that could be an incremental negative to the fee waiver guidance?
Sure. I can take that. So, I mean, the fee waiver guidance and the increase in that is really tied to what we are seeing in the short end and tepo rates and repo rates have actually come down since we originally projected and that’s really what the 175 now that I mentioned. You are correct. There is a lot of excess reserves if that all ends up in money markets, that could ultimately put more pressure. So, that is a potential risk. The one thing also just what were on waivers that I would just would highlight is that, Pershing did hit its full runrate in terms of waivers in the fourth quarter. So, you will start to see those waivers increasing in other lines of business. So, Asset Servicing, Issuer Services, high end Treasury Services, for example.
But Brian, if money market mutual funds increase as the balances increase, we will certainly waive more fees. But net-net, we have more fees. And so, it’s just that we wouldn’t get the 100% of the component that we get. So they’ve basically been relatively stable. So when we do these comparisons, the lines have been relatively flat. So that has increased any noise. So if money is moved into money market funds, there probably will be even much less fees than they typically would have been, but there are probably still some dips on fees.
Got it. Thank you.
Thanks, Brian. Okay that was our last question operator?
That concludes our question and answer session. I would now like to turn the call back over to Todd for any additional or closing remarks.
No. Thanks for your interest and obviously if you can – you can call IR to follow-up on any clarifications. Have a good day.
Thank you. This concludes today's conference call and webcast. A replay of this conference call and webcast will be available on the BNY Mellon Investor Relations website at 2 o'clock P.M. Eastern Time today. Have a great day.