Good morning, and welcome to the 2021 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 Marius Merz, BNY Mellon Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to our fourth quarter 2021 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. Todd Gibbons, our Chief Executive Officer, will open with his remarks. Then, Emily Portney, our Chief Financial Officer, 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, January 18, 2022, and will not be updated. With that, I will turn it over to Todd.

Thanks, Marius. And thank you, everyone, for joining us this morning. Emily will review our fourth quarter results and spend some time on our 2022 outlook in a moment. But before that, I'd like to touch on a few financial performance highlights for the full year and talk about the progress the firm has made across a number of dimensions in 2021. Last year was, in many regards, remarkable for BNY Mellon. And I couldn't be prouder of the resilience, dedication and innovative mindset of our management team and our exceptional colleagues around the world. As I reflected on the year, there were three broad themes that really stood out to me. One was our outstanding sales performance and improved organic growth. The second one was the number of new and innovative solutions that we are working on and, in many cases, have already brought to the market. And the third was our improved effectiveness in harnessing our unique One BNY Mellon culture and the capabilities that we have by delivering more comprehensive and differentiated solutions to our clients. Now I'll expand a little bit on each of these points in a moment. Together with the supportive market backdrop in a benign credit environment, our meaningfully improved organic growth has allowed us to more than offset the stiff headwind that we had from lower interest rates and deliver a solid and improved financial performance in 2021. Referring to slide two of our financial highlights presentation, we reported EPS of $4.14 for the full year of 2021, that's up 8% year-over-year. Revenue of $15.9 billion was up slightly year-over-year as 2-plus percent organic growth and the benefit of higher market levels offset lower net interest revenue and higher fee waivers. Fee revenue was up 4% year-over-year and about 9% excluding the…

Thank you, Todd. And good morning, everyone. Before I review our financial results, I would like to spend a moment highlighting our new financial disclosures. Last month, we announced that starting with the fourth quarter, we're going to report Investment Services, which was our largest segment, as two new business segments, Security Services, which includes Asset Servicing and Issuer Services, and Market and Wealth Services, which includes Pershing, Treasury Services, and Clearance and Collateral Management. Our third segment, Investment and Wealth Management, remains unchanged. We made this change to increase the visibility of some of our most differentiated businesses to better align our reporting with how we already manage the firm and to provide additional granularity for all of our stakeholders to better track our performance against our strategy. With that, I will turn to page three and our results for the quarter. All comparisons will be on a year-over-year basis unless I specify otherwise. Total revenue for the fourth quarter was up 4%. Fee revenue also grew by 4% or 8% excluding the impact of fee waivers. This reflects the benefit of higher market values and continued healthy organic growth. While not on the page, firm-wide AUC/A of $46.7 trillion increased by 14%, with roughly 60% of the increase driven by growth from new and existing business and 40% driven by higher market value. And the AUM of $2.4 trillion increased by 10%, reflecting higher market values and full year net inflows. Money market fee waivers, net of distribution and servicing expense, were $243 million in the quarter, an increase of $10 million compared to the prior quarter, entirely driven by higher money market fund balances with no meaningful impact on pretax income. Investment and other revenue was $107 million and included a roughly $40 million valuation gain on…

Yes. Our first question comes from the line of Glenn Schorr with Evercore ISI.

Hi. Thanks very much. I wonder if you could unpack the net interest revenue comment outlook of around 10%, maybe just trajectory wise, meaning I'm assuming you're assuming the forward curve. And so just talk about the timing as that comes in, and you can combine that with how quickly the fee waiver recapture happens along that forward curve. Thanks.

Emily?

Sure. Good morning, Glenn, and happy New Year. I'm actually really glad you kicked off with NIR because it's the first time in a long time we've got something positive to say. So NIR, as we mentioned, is expected to be up about 10% year-on-year. To give you color, just specific to the questions you asked, yes, we just use the forward curve and, as you know, at the moment, anticipate the three rate hikes, 3 25 basis point rate hikes, the first being in March. Although, of course, there's talk about the first one being a bit more and we can talk about the sensitivity there. Deposit betas obviously come back into play. The expectation in our outlook is that betas will largely retrace what we saw in the last cycle. They could be a little bit higher just given the change in our deposit mix. So for example, Treasury Services, the deposit base there is about twice as big as it was in 2015, and obviously, that business has higher betas. We expect our securities portfolio to be roughly flat. Most of the reduction on the asset side will be coming from cash held at central banks and lower-yielding HQLA. We do continue to be cautious on duration. In fact, over the last six weeks, we've brought duration in a bit, and we've actually moved some HQLA into HTM to preserve capital. Also, we are expecting some healthy loan growth and for premium amortization to reduce a bit. The one - just, Glenn, one thing I do want to just point out is that for the first quarter, just given that the first rate hike is not until March, also it's just worth mentioning we've already seen deposits come down a bit from the fourth quarter average where they were really at elevated levels due to kind of market dynamics. So you won't see much of that benefit sequentially in Q1.

Okay. Got a lot there. Thank you. And maybe just one other big picture. I think I heard you say in the prepared, 2% organic growth in '22-ish, which would be in line with '21 and obviously better than '20 and '19. So I guess the question is, when you look at investments you're making and combined with your fee outlook. I'm just curious how you can contextualize what's there related to markets that have already gone up, business that has already been won to be implemented versus follow-through and revenues related to new investments - the investments that you make in new businesses? Thanks.

So Emily, maybe I'll take that one. So a lot in that one, but couple of things. When I look at collateral management, that's one where we have been investing for quite a while. And we invest in what we call the Future of Collateral, which was really making collateral interoperable around the world, which we thought would lead to growth in our - especially in our international assets, which is exactly what it has done. Also benefiting from some of those capabilities is the unclear - the responsibility now for derivative players to have collateral against their uncleared margins. We have - now we're now going through phase 6 of that. So we are picking up significant assets as a result of that. And we've also added certain innovations to our capabilities. For example, the ability to have ESG criteria established in a repo and what you'll accept on repo. So that's something that's shown some pretty interesting growth. So that's something where we have been gaining and have shown up in the numbers and we continue to expect to continue to gain. I mean, one of the other interesting things that we've brought up is what we're doing in our treasury services and payments business. And I think we've reinvigorated that business with some meaningful investment. We were the first, as you know, to do an RTP, real time payments, through the New York Clearing House. That was done essentially to test it, but now we are actually putting practical product in place. So we announced late last year a request for payment service that we're providing to utilities. That operation, we have multiple players on that platform. And we see opportunity, whether it's brokerage firms, insurance companies, corporates or white labeling it for midsized banks there. So…

Got it. Thank you.

We'll go next to Brian Bedell with Deutsche Bank.

Hi. Good morning, everyone. Happy New Year. If can - if I actually start off on fee revenue outlook assumptions, really just start on the fee waivers and just the trajectory of that, Emily. Just to clarify, I think you said three rate hikes. And the forward curve, I think the guidance was as of December 31. So I'm not sure if that forward curve sort of...

Correct.

Right. It's like advancement of the curve expectations, so getting a little bit more aggressive in the market for Fed hikes impact. So maybe if you could just walk through the money market fee waiver trajectory through the year and really circling back to the portion that gets released after the first hike and then maybe after the second hike. And then just on the equity market assumption - equity market return assumptions within that market, that 1% market impact?

Sure. So a bunch there. So let me take the waiver outlook first. So remember, waivers are a function of both balances also and rates. And you're correct, we are just looking at the full - and our guidance is baked in the forward curve with three rate hikes. We have pointed out in the past that with the first 25 basis point hike, we would expect to recoup about 50% of the waivers. Having said that, we do also expect that balances to begin to decline a bit, especially by, call it, the third or fourth hike. So we do see -- expect some runoff in balances. So when you put it all together, we would expect money market fund waivers to be a little less than half of what they actually were in 2021. Having said that, it's very important to note that as waivers dissipate, we also do see a rise in distribution expense, and that's been captured in the expense outlook. To give you an idea just - sorry. To answer the second question, which was more about sensitivity, just I think something that would probably be helpful. If we size the impact of both waivers and, frankly, NIR, if we had, say, a 50 basis point hike in March versus a 25 basis point hike, that would be about $100 million more in recouping waivers than what's in our guidance. And it'd probably be about $50 million more in NIR. So a total - if the March hike was 50, not 25, it'd be about another $150 million more in terms of revenues versus what I've guided. And then I think you had one more part, but...

The equity market return assumptions within that 1% of fee contribution from sort of markets.

Sure. So just to step back, total fees - total fee revenue up 7%, roughly 4% driven by the reduction of waivers, roughly 2% organic growth and then 1% from market-driven factors. Market appreciation is kind of a little over 2%, but it's offset by lower fund fees and some currency headwinds just based on the average for FX rates over the course of 2021.

Got it. Got it. And then if I could just circle back on the NIR deposit runoff assumptions in terms of the magnitude that you're expecting and then also just the assumptions for global short-term rates, I guess, particularly in the UK and how that might influence the NIR assumption.

Sure. So ultimately, from a deposit perspective, we don't really expect much runoff in deposits from here until kind of, again, third or fourth rate hike or the Fed starts to actually tighten. So it's - ultimately, balances, as I mentioned, have already come down a bit from average fourth quarter levels. And in terms of betas, in particular, just speaking specifically about betas, which is what I think you're probably getting at, we do think they'll be largely in line with the past. Like I said before, maybe a little bit higher, Treasury Services deposit balances are higher. Also just always keep in mind that our deposit base is largely institutional. Also in the '15, '16 period, we were trying to come into compliance with SLR, so we were pushing some deposits off balance sheet. But all of that is baked into the NIR guide that we gave.

And then just the global rate, like the Bank of England assumptions for...

Yes, it's all the forward curve. It's all the forward curve.

Okay, great. Okay, thank you so much.

We'll go next to Betsy Graseck with Morgan Stanley.

Hi, good morning.

Hi, Betsy.

I wanted to follow up on that discussion we just had and ask about how you're thinking about the impact of QT, quantitative tightening, on deposits with the Fed expected to shrink the balance sheet potentially starting as early as March?

I'll take it. Yes, thanks, Betsy. This is Todd. I'll take this one. We - right now, it depends on when they actually start to actually shrink the balance sheet. The guidance that we've heard is that's probably not an event until the second half. And so that's the estimates that we have put in to both our - the betas and the size of the balances, whether it be money market balances because it will certainly impact them or it is deposit balances. But assuming that they don't start really letting stuff run off until the second half of the year, we don't see an enormous drawdown in the combination of money market balances because the Fed's balance sheet just isn't going to contract that much in 2022. We might see that a little more rapidly in 2023, unless they were to do something even more aggressive like selling. So we took the basic assumptions - market assumptions that we've seen and kind of that's implied in all of the guidance that Emily just gave you, which is a little bit of runoff of balance sheet - of the Fed balance sheet in the second half, which starts to impact both deposits and money market balances as well.

Okay. So you're basically looking for the Fed to stop buying but not actively shrink.?

I don't think they'll actively - our estimate is that they won't actively sell, but they will actively let maturities run off. That's...

Yes, okay. All right. And then the follow-up question I had on the expense discussion, just thinking about how to model the expense ratios by the new segments that you've got. Obviously, the new segments are really helpful, really appreciate you breaking out the wealth piece. Can you give us some sense as to how we should think about modeling that expense ratio in the various segments as we go through '22?

Emily, do you want to take that? You may want to start with that one.

Sure, sure. So I mean I'll just - taking a step back first, just the overall expenses, 5.5%. And just to be clear, about 30% or 170 basis points are really revenue-related. And think volume-related, compensation, as well as, as I mentioned, the distribution expenses that we will see an uptick in from money market funds as the waivers come back or as we get the dissipation, I should say, of waivers. About another 30% or 170 basis points again is merit, the normalization of business expenses and some also expenses just related to occupancy as we return to the office, and baked in there too is inflation, which is not insignificant. And then the remaining 40% or 200% is due to higher investment spend. But just to be clear, half of that is annualizing investments that we have made in the second half of this year. As you all know, we had an uptick of investments in the second half of this year. I would think of it as - we're not breaking it down too much. I would say that it's a bit higher in, ultimately, in Market and Wealth Services given some of the investments that we're making, especially in Pershing X, as Todd alluded to, but we are making investments across the firm. So I would say a bit higher there and - but the rest kind of in and around the average.

Got it. Okay. So not that much differential outside of the call-out on Pershing?

Yes. But I do think, Betsy, we will see the operating margins in our Securities Servicing business. Those are depressed right now, and I do think you'll see those expand, both combination of greater efficiency and revenue mix.

Okay. Q2 rate is also a little higher there?

Yes. Exactly.

Yes. We do - I mean just further to Todd's point, Securities Services, the margins there are depressed. They're in a little over 20 - 21% for the year. And we do expect, and I talked about this at the last conference I was at, we do expect that to grow in excess of 30 plus percent over the medium term. And as Todd alluded to, part of that is certainly profitable growth and, of course, efficiency. And the other part of that is obviously just more normalized rates.

Okay. Thanks so much Todd and Emily. Appreciate it.

Thanks.

We'll go next to Jim Mitchell with Seaport Global Securities.

Hey, good morning. Maybe just a follow-up on the expense question, I guess this is about the second year in a row close to 6% growth. Just how do you - and I understand all the inflationary and other moving pieces. But how do we think about longer term, if you're doing 2% organic growth, hopefully doing better. Is the notion that you can get expense growth down to similar to the organic growth and then sort of market and other things drive sort of operating leverage? Or how do we think about the long-term trajectory of expenses relative to revenues?

Sure. So I think you're getting at operating leverage, and we're always incredibly focused, obviously, on operating leverage and delivering positive operating leverage. And next year, we are expecting, just based on my guidance, to grow revenues more than we're growing expenses, so that's good. And when we think about the future and just the expense spend, we do see that ultimately moderating in 2023 and 2024. So you'll see that coming down a bit in 2023 and 2024. And of course, we have - we'll continue to see an uptick in rates, and higher NIR will recoup probably the remainder of our waivers. That, plus, the additional organic growth that we also will be delivering, we feel pretty confident that we'll be delivering even higher operating leverage in 2023, 2024. But we are delivering positive operating leverage in 2022.

And let me add something to that. We're doing something that's a bit unusual for us. For example, with Pershing X, we're making a very significant investment here that's probably got a 2 year payback. We've also been continuously investing in resiliency, and I think we're getting - we're starting to get in front of that. And the inflationary pressures, hopefully, this is just a onetime kind of step-up. But those will have to - the market will have to play itself out. So we do think that we're spending a little faster than we would in a more normal environment. And we do expect that we will get more leverage out of our business model as we just continue to make it more scalable.

Right. Okay. That's all very helpful. And just as a follow-up, if you're expecting deposits in the balance sheet to shrink as the Fed raises rates, why the need to issue preferred, just flexibility? I'm just trying to understand the preferred issuance.

Sure. Yeah, just more flexibility. We were also just opportunistic in terms of rates. And ultimately, too, you have to prepare for, if rates rise, there obviously will be a corresponding impact on OCI, so all of those factors.

Okay, thanks.

We'll go next to Mike Mayo with Wells Fargo Securities.

Hi, can you hear me?

Yeah…

Is that better?

Yeah.

Okay. I'm going to just give what I think I heard you say, then I'll let you correct me. What I think I heard you say is that this year is an investing year, that you are guiding for 2% organic fee growth or 3% with markets versus expense growth of 5.5%. So it looks like you're spending about half of the benefits of the money market fee waivers to invest. I'm not saying a call is in effect, but that's the way the math works. You said 40% of that increase in spending relates to accelerated investments. And then after this investing year, 2023 and 2024, that moderates and then we should see more of those benefits. So am I hearing that correctly? And am I also interpreting that you're taking a portion of these benefits to reinvest back in the business, especially in 2022?

Emily, do you want to take it?

Sure, Mike. I'll take - yeah, I'll take a stab at that. I think what you're asking very specifically is what portion of the uptick from rates, both in NIR and recouping waivers, are we kind of reinvesting. I mean I think that's what you're getting at. And I mean, just to be clear, and you can do the math, I gave you the math, that the higher rate environment, both from an NIR perspective and from a waiver perspective, is a bit over, call it, $700 million in revenues for the year with this forward curve, et cetera. The way I think about the expenses and what we're kind of reinvesting of that and based upon the expense guide I gave, you can also do the math that, call it, $100 million to $150 million of the expense growth is related to incremental investments net of efficiencies. So call it 20% or so of that is being reinvested.

Okay. I guess I'm just trying to reconcile when you said 2% organic fee growth with 5.5% expense growth, some of that is just for factors outside of investing, as you said, inflation, occupancy, merit, revenue related. So it's just the cost of doing business. The other question is, why wouldn't the NII guide be higher assuming that the securities portfolio will remain flattish?

I mean, ultimately, there is many factors that go into our NIR guidance. So it's a mix of - I suppose probably the main reason is deposits coming off a bit. That would probably be the largest reason.

And are you being conservative?

Mike, we do anticipate contraction of the balance sheet. So it's going to come from more shorter term cash that's paying a little bit lower yields. So - and I think your follow-up question is, are we being conservative? We're trying to reflect what exactly the market is indicating through forward curves. We're not trying -- we're not -- the guidance that we've given you isn't speculation. It's our -- it's only speculation in the sense it's the best estimate for betas and for what's going to happen to the yield curve using the forward yield curve as the guidance for it.

Yes. Last one, just the contraction of the balance sheet, like by how much? And I mean there's not much history for this, right, going to this phase of the rate situation. So are you thinking 1/10? 1/5? Or just roughly, in broad terms, how much contraction of the balance sheet and why?

Emily, I'll take it...

Sure...

Are you going to take it? Oh, go ahead, Emily.

I can take it. Yes, ultimately, to be clear, we did see -- just a reminder, we did see balances already come down from fourth quarter averages. We don't really attribute that to kind of run off obviously from rates -- from rate rises. It's more about just elevated levels and market dynamics in the fourth quarter. And then from here, the way I kind of think about it is we probably won't see much more runoff until the second half. But like I said, it's really after the Fed really hikes a few times. And I'd say kind of single-digit reduction in this year, yes.

Okay. Thank you.

In this year, yeah.

Right, thank you.

Thanks, Mike.

We'll go next to Gerard Cassidy with RBC.

Good morning, Todd, good morning Emily.

Good morning, Gerard.

I want to come back to something you said in your prepared remarks that your new business wins, I think you said are up 50% from 2019. Is that - it seems like a very strong number. How does that compare to a prior 2-year - from 2016 to 2019 maybe? And second, what were the main drivers? Was it better products? Better pricing? Your people are just hitting it harder? Can you give us some color on what drove that strong number?

Sure. So we had run for a couple of years there, Gerard, we were literally running negative organic growth. And so maybe 4 years ago, I would be - I would say some of the service levels weren't up to par, and we turned that around. So we made a very significant investment in the quality of the service that we're delivering. We did make some - we did provide some innovation whether it's around our whole bundle, what we can deliver, some of the connectivity that we made to some of the OMS providers, our data and analytics capability and, most importantly, the quality of our service in the asset servicing space, and that became noticeable. And both the combination of investing in technology and the quality of service that we delivered, we started picking up some market share. And so I would say that was the primary driver, and it's been a mantra here. And in fact, when Emily was back on the Asset Servicing side, she did a great job of putting together real analytics to support and understand exactly what was going on with our clients and adjust accordingly. So I think it's a combination of the two. Clients are going to be with you. They expect that you're going to be investing for the long term, that you've committed to it, and we've demonstrated that. And number two, you got to provide - you've got to do the basics, the meat and potato stuff for them as well.

Very good. And as a follow-up, you guys gave, obviously, the outlook for 2022, which is much appreciated. In that outlook, you talked about the share repurchase or the total payout ratio approximating 100% and is subject to changes in the AOCI or maybe deposit balances. On the AOCI, if I saw it correctly, I may have not seen it correctly, but it looked like it was a negative $2.2 billion at the end of the fourth quarter. Can you share with us what drives that number and how it could affect the total payout ratio as the year progresses?

Yes, Emily, you have the data...

Sure. So...

Yes, go ahead, Emily.

Well, I guess - so thinking about just the payout, and we can talk about AOCI, I'm not sure I recognize the number that you're talking about, the $2 billion. But in any event, the - our - we were fortunate, obviously, this year, or 2021, I should say, to be able to pay out 160%, obviously helped by the fact that we had excess capital, limited by a lot of what we could do in 2020 and the first quarter of 2021. The guidance that we're going to pay out around 100% of earnings is baked into that our AOCI assumptions, et cetera. So it's all there. Basically, our capacity and the pace of the buyback is you're going to depend certainly on future earnings, the economic outlook, the size of the deposit base in any given quarter and what we're expecting and, you're right, the trajectory of OCI. But all of that is baked into the guidance. And the thing that's, frankly, that's nice is that for these days, in terms of capital management, we're now under the SCB framework so we certainly can be much more dynamic and flexible.

I see. And just on the AOCI, Emily, would - what rate - what part of the yield curve has the biggest effect on your AOCI? The short end or the long end? The middle?

The short end.

Okay, great. appreciate it. Thank you.

We'll go next to Ken Usdin with Jefferies.

Hi, thanks. Good morning. I just want a follow-up on balance sheet positioning to Gerard's question. So you're at the lower end of that Tier 1 leverage ratio zone, 5.5% to 6% that you've talked about. And I just want to understand a little bit deeper that flexibility with regards to changes in OCI versus press. Are you solving for 5.5% at this point? Like how do you look at like where you want to be in that range? And to your point about SCB, how important does maintaining the buyback be versus just staying in a right zone of capital? Thanks.

Sure. So I can take that, and Todd, you can add. So Tier 1 leverage this quarter, as you guys can see, the fourth quarter was 5.5%. If you really do the math, which you all have the - all of the factors to be able to do it yourself, it was 5.46%. So we did dip into the buffer just a bit. We always talked about the fact that, that would be entirely appropriate given the excess liquidity in the system and the growth in our deposits. So going forward, we're going to be managing to 5.5%. And we're optimizing around a lot of different things, including OCI. So baked into our guidance is the - certainly, our expectation that we'll be above 5.5%.

Okay. So we consider all of those factors, perhaps OCI, balance sheet size and you kind of sit somewhere in that zone?

You got it.

Okay. All right. And then second question, just on that related point. If I back out premium amortization, it looks like the securities portfolio yield is kind of getting to a flat point and it looks like the mid-140s. Can you talk about just what you're finding in terms of front book versus back book? And again, does that OCI risk change your view of how you're investing in the securities portfolio from here? Thanks again, Emily.

Okay. So a couple of different things there. So look, the talking about reinvestment yields, we don't really disclose front book versus back book. What I would say is that - and this probably answers a bit of Mike's question earlier, which I hadn't thought about, but reinvestment yields will still continue to be a bit of a headwind over the course of 2022. So the yield that we're investing in now is still lower than ultimately the yield of maturity - securities that are maturing. I think we would expect that to probably be a lot better matched or equally matched almost by the fourth quarter. It's really in the fourth quarter. So that will still be a headwind. And look, we're thinking about and certainly paying attention to OCI. And as I mentioned in my earlier remarks, we did even move some HQLA to HTM exactly for that reason, to preserve capital.

Understood. Okay, thank you.

We'll go next to Brennan Hawken with UBS.

Good morning. Thank you for taking my questions. I had a follow-up. So Emily, I think it seems like from your comments, when you backed into the components of expense growth, something like roughly 1 percentage point of the 5.5% is from the distribution side of the fee waivers. Number one, if you could confirm that that's correct. And then number two, if we - that means if we adjust for waivers, because we all got very much used to adjusting for waivers from last year when you guys were talking about the revenue ex waivers and then wanting to drive more investment, it looks like ex waivers, we're looking at negative operating leverage here because you back out the 4% benefit from fee revenue. You've got - that gets you to a 3% fee revenue growth ex waivers. If I'm right on the 1%, you're at 4.5% on expenses ex waivers. And so it's negative fee operating leverage. Given that last year, we were adjusting for the waivers and backing them out to consider where the fee operating leverage was, why not maintain that same discipline now? And what's the major issue with holding back that fee operating leverage? Thanks.

Sure. So I'll take that, and Todd, if you want to add. So you're thinking about the expense, the distribution expected largely in the right way. And look, your question about operating leverage is that our level of investment is not planned by nor dictated by operating leverage. It's based upon the investments that we see and the future growth of the company. In terms of what you call fee operating leverage, yes, you're right, in 2022, it will be negative. But we're not going to be apologetic about investing in the future of the company, and we've continued to do that over the course of the cycle.

I have nothing to add to that.

Okay. There we go. All right. And then the assumptions around the single digit decline in deposits, are excess deposits still at 10% to 15%? And when we start to cross the 75 basis points of 2, 3 hikes, where you start to see an acceleration of deposit runoff, wouldn't that 10% to 15% of excess deposits burn off pretty quickly? Or do you have a different view? Or have the excess deposit levels changed? Maybe if you could add a little color around some of those assumptions to help us square that circle would be helpful.

Sure. So I think your estimate of excess deposits is probably pretty close to what we're currently thinking. But you got to remember, underneath it, there is some organic growth as well. So if you take the 10% to 15% and then you're growing 2% to 4% organically, and then you don't look to see the Fed really contracting their balance sheet very aggressively until later in this year, we don't see a huge impact on this year. It's really going to depend around the betas. So you might see money bouncing around based on what we and others are willing to actually pay for it. So that's what's factored into it. But ultimately, I think those excess deposits will come down with mitigated somewhat by just normal growth.

Okay, got it. Thanks for taking my questions.

We'll go next to Alex Blostein with Goldman Sachs.

Good morning, everybody. Just a couple of questions at this point. The - I heard the discussion around deposit betas perhaps being slightly higher this time around because is on the Treasury Services side of the business. Is there a way you can flush that out a little bit more, just to give us a sense of what you expect for deposit betas in this cycle versus the prior cycle?

Yeah. I'm not going to break it out by line of business. But in the last cycle, I think the first 25 - with the first 25 basis point hike, it was about - betas were about 25%. And in this, we're kind of expecting closer to like, I guess, 35 to 40-ish percent, and that's overall on average across all of our businesses.

Got it. Okay. That probably explains some of the deltas people are asking about on NII. So that helps. My follow-up, just around capital management. Again, thanks for the color around AOCI. Sorry if I missed the dividend versus buyback expectations. So as you're thinking forward within a 100% payout ratio, what are you guys thinking in terms of dividend growth versus the buyback and the preference there?

Yes, I'll go ahead. We've been pretty consistent in targeting dividends around 30%, Alex. So I think probably you will see the adjustment come in the form of a buyback, if there is one.

Got it, okay. Thanks very much.

Our final question comes from the line of Steven Chubak with Wolfe Research.

Hi. Thanks for squeezing me in here. Emily I just want - I know you spoke about deposit beta assumptions underpinning the NII guidance. You gave some color on deposit runoff. I was hoping you could just provide some color specifically on what you're assuming in terms of non-interest-bearing deposit declines and some deposit remixing over the course of the year.

Sure. So when we think about NID, if you will, what we call non-interest-bearing deposits, we probably think we still have anywhere - well, actually, sorry, when you think about it, and it's actually disclosed, so actually I can talk about real numbers, I think net interest deposits are close to $90 o -so billion. What you'll see as deposits, as rate hike, what generally will happen is that they will - some will roll off, for sure, but others will actually just kind of migrate into interest-bearing deposits, so all of that is baked into our guidance.

And do you have any specific assumptions you can provide just in terms of the absolute level of contraction you're contemplating?

Well, we've seen - I'll add a little color there. What we've seen historically through these cycles is we're operating somewhere around 30% of our total balance is non-interest-bearing. We've - and it's a little bit tricky to pick up because of the US versus non-US. But that is definitely very high because of the level of interest rates. We'd expect that to drop into the low 20s, something like that.

Got it. That's helpful color. And then just for my follow-up, I might be jumping the gun here, but I wanted to see if you guys have done any preliminary work or analysis around Basel IV and how that might impact minimum capital requirements. I know you guys are constrained by leverage today. There's some speculation that under the new capital regime, the inclusion of operational risk and standardized, in particular, just given that's such a big piece of your overall RWA today, could have a meaningful impact on overall capital requirements. I know you don't have the proposal yet from the Fed, but even any preliminary thoughts around how you're handicapping that potential risk would be really helpful.

Sure. I mean we're obviously very involved with the conversation with regulators. And you're correct that the inclusion of operating risk will be a bit of a headwind in terms of capital, but there are other factors that are coming off. So net-net, we think it's going to be relatively - will be relatively neutral.

Okay. That’s great. Thanks so much for taking my questions.

Thank you, Steven.

And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Todd with any additional or closing remarks.

Nothing to add. Thank you very much for your interest in the firm, and you can follow up with Marius and the team afterwards if there are any further questions. Thank you very much. And have a good day.

Thank you.

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