Northern Trust Corp (NTRS) — Q3 2022 Earnings Call Transcript

Thank you, Victor. Good morning, everyone, and welcome to Northern Trust Corporation's third quarter 2022 earnings conference call. Joining me on our call this morning are Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Mark Bette; and Briar Rose from our Investor Relations team. Our third quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This October 19th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 18th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements on Page 11 of the accompanying presentation, which will apply to our commentary on this call. During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming everyone to our third quarter 2022 earnings call. In the third quarter, we continue to execute well through a challenging operating environment. Compared to the prior year, revenue grew 7% as the elimination of fee waivers and the favorable impact from higher interest rates more than offset the significant headwind from weaker equity and fixed income markets, asset outflows, and unfavorable currency movements. Expense growth of 9% reflected inflationary impacts across our cost base, particularly within our compensation and equipment and software lines. EPS was flat, and we generated a return on average common equity of 14.9%. New business activity in Wealth Management was encouraging, and we continue to engage actively with new and existing clients. In Asset Management, weak markets and institutional cash outflows reduced assets under management, yet we saw continued growth in our alternatives, tax-advantaged equity, and ETF complex. Within Asset Servicing, we continue to win new mandates, and our backlog of new clients that haven't yet been onboarded has expanded meaningfully and is expected to transition over the coming quarters. In closing, we remain well positioned to navigate the current macroeconomic and market uncertainty from a position of strength. Our new business pipeline remains robust, and our capital position continues to be strong. In a slowing growth environment, we've also begun prudently tightening our expense controls and focusing on realizing productivity benefits from the investments we've made over the past several years. I'll now turn the call over to Jason.

Thank you, Mike, and let me join Jennifer and Mike in welcoming you to our third quarter 2022 earnings call. Let's dive into the financial results for the quarter, starting on Page 2. This morning, we reported third quarter net income of $394.8 million. Earnings per share were $1.80, and our return on average common equity was 14.9%. Results for the quarter included a $17 million pension settlement charge within the employee benefits expense category. Recall that in the first quarter of this year, we implemented an accounting reclassification of certain fees, which will continue to impact the year-over-year comparisons as noted on this page. Let's move to Page 3 and review the financial highlights of the quarter. Year-over-year, revenue was up 7%, and expenses increased 9%. Net income was flat. In the sequential comparison, revenue was down 1%, and expenses were up 1%, while net income was also flat. Return on average common equity was 14.9% for the quarter, up from 13.7% a year ago, and down from 15.7% in the prior quarter. Looking at the results in greater detail, starting with revenue on Page 4. Year-over-year, unfavorable currency translation impacted revenue growth by approximately 200 basis points. Trust, investment, and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, down 3% from last year and down 6% sequentially. All other remaining noninterest income declined 8% from the prior year and 2% from the prior quarter. Net interest income, which I'll discuss in more detail later, was $525 million, up 47% from a year ago and 12% sequentially. Let's look at the components of our trust and investment fees on Page 5. For our Asset Servicing business, fees totaled $603 million, down 4% year-over-year and down 6% sequentially. Within Asset Servicing, custody and fund administration fees were $407 million, down 12% year-over-year and down 6% sequentially. Custody and fund administration fees decreased sequentially, primarily due to unfavorable markets, unfavorable currency translation, and lower transaction volumes. Custody and fund administration fees decreased from the prior year quarter, primarily due to unfavorable currency translation and unfavorable markets, partially offset by new business. Assets under custody and administration for Asset Servicing clients were $12 trillion at quarter-end, down 19% year-over-year and down 7% sequentially. Both the year-over-year and sequential declines were primarily driven by unfavorable markets and currency translation. Investment management fees within Asset Servicing were $136 million, up 20% year-over-year and down 8% sequentially. Investment management fees decreased sequentially, primarily due to unfavorable markets and asset outflows. Investment management fees increased from the prior year quarter primarily due to lower money market fund fee waivers and the accounting reclassification previously discussed, partially offset by asset outflows and unfavorable markets. Assets under management for Asset Servicing clients were $873.7 billion, down 25% year-over-year and down 8% sequentially. Both declines were driven by asset outflows, weaker equity and fixed income markets, and unfavorable currency translation. Moving to our Wealth Management business, trust, investment, and other servicing fees were $475.5 million, down 1% compared to the prior year and down 5% from the prior quarter. Within the regions, the year-over-year declines were primarily driven by unfavorable market impacts, partially offset by the elimination of money market fund fee waivers. Sequentially, the decline within the regions was primarily driven by unfavorable markets. Within Global Family Office, the year-over-year growth was driven by lower fee waivers and new business, partially offset by unfavorable markets. Sequential decrease was mainly related to unfavorable markets. Assets under management for our wealth management clients were $336 billion at quarter-end, down 10% year-over-year and down 5% on a sequential basis. Both year-over-year and sequential declines were driven primarily by unfavorable markets. Moving to Page 6. Net interest income was $525.3 million in the quarter and was up 47% from the prior year. Earning assets averaged $132 billion in the quarter, down 8% versus the prior year. Average deposits were $118 billion and were down 9% versus the prior year, while loan balances averaged $41 billion and were up 8% compared to the prior year. On a sequential quarter basis, net interest income grew 12%. Average earning assets declined 6%. Average deposits declined 8%, while average loan balances were up 2%. The net interest margin was 1.58% in the quarter, up 60 basis points from a year ago and up 23 basis points from the prior quarter. The prior year quarter increase was primarily due to higher average interest rates and favorable balance sheet mix shift. The sequential increase is primarily due to higher average interest rates. Turning to Page 7. Expenses were $1.2 billion in the quarter, 9% higher than the prior year and 1% higher than the prior quarter. On a year-over-year basis, expense growth benefited by approximately 300 basis points due to currency translation. The current quarter's expenses included a $17 million pension settlement charge within the employee benefits category. This compares to similar charges in the prior year quarter of $6.9 million and $20.3 million in the prior period quarter. Also included in the current quarter is the impact of the previously mentioned accounting reclassification, which increased other operating expenses by $9.4 million compared to the prior year. Compensation expense was up 12% compared to the prior year and up 1% sequentially. The year-over-year growth was primarily driven by higher salary expenses, partly due to inflationary pressures, partially offset by favorable currency translation. The sequential increase is primarily due to higher salary expenses, partially offset by lower incentives and favorable currency translation. Outside services expense was $221 million and was up 5% from a year ago and up 4% sequentially. The year-over-year increase is primarily driven by higher consulting and technical service costs, partially offset by lower third-party advisory fees. The sequential increase is primarily due to higher technical services and consulting costs. Equipment and software expenses of $212 million were up 15% from a year ago and up 4% sequentially. The year-over-year growth was primarily driven by higher software costs due to continued investments in technology, as well as inflationary pressures and higher amortization. The sequential increase is primarily due to higher software amortization expense. Occupancy expense of $51 million was down 5% from a year ago and up 1% sequentially. The other operating expense of $82 million was up 1% from a year ago and down 9% sequentially. The sequential decline was primarily due to lower miscellaneous expenses in the current period. Turning to Page 8. Our capital ratios remained strong with our common equity Tier 1 ratio of 10.1% under the standardized approach, down from the prior quarter's 10.5%. Our Tier 1 leverage ratio was 7%, up from 6.7% in the prior quarter. An increase in net unrealized losses on the available-for-sale securities portfolio was a primary factor in this quarter's change in capital ratios. Accumulated other comprehensive income at the end of the current quarter was a loss of $1.8 billion with the loss in the third quarter totaling approximately $300 million. As previously announced, in the third quarter we increased the quarterly common stock dividend by 7% or $0.05 a share to $0.75 per share. During the quarter, we returned $159.5 million to common shareholders through cash dividends of $158.4 million and share repurchases of $1.1 million. The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet to both weather the uncertain economic conditions and to support our clients' needs. We approached the end of the year on solid footing and remain well positioned to serve our clients and communities while generating long-term value to our shareholders. And with that, Victor, please open the line for questions.

Hi, good morning...

Good morning, Betsy.

Hi. How are you doing?

Really well.

I did want to just dig in a little bit on the expense side. And when I listen and look at the results, there are some areas where it feels like maybe the inflation is impacting a little bit. I know you're being very disciplined in how you're investing. But I just wanted to make sure I understand how you're thinking about managing the expense base as we go through this inflationary environment? And is there an opportunity to pull back on some of the consulting side, professional services side? Or should we anticipate that the kind of rate of change we’re seeing in this quarter should persist? Thanks.

Sure. Well, let me start with a direct answer to the question. And yes, there are things we can do, and we've been focused on to address expense growth. And so let me - predominantly, even within this period, in mid-September, we announced internally some additional expense controls. We always have those in place, but we meaningfully ramped up expense controls, particularly around hiring. That's obviously the largest component of where we see expense increases. That's our largest line. And so that will have - that will lead us to have just a higher bar on where we have increases in expenses and particularly from a hiring perspective. That's not to say that we are going to stop investing in the - that we're not going to continue investing in the things around technology and other areas where we know we've had important investments to take place. But at the same time, we do see an opportunity for us to raise that bar to try and tamp down the growth that we've seen in expenses.

Okay. And then just separately, as I'm thinking through the growth profile here, you've got some nice exposure to international, at the same time, we've got the strong dollar weighing on the results to a certain extent. Maybe you could help us think through the impact of the dollar and if we excluded that, how results would have looked this quarter? Thanks.

Sure. Well, at a super high level, the company has a very natural hedge from a currency perspective. And so this quarter, it was very roughly, call it, 200 to 300 basis points in impact on both the revenue side and the expense side. And so the dollar does play in, but it plays on both the revenue and the expense side. The other impact that’s not as symmetrical is how the dollar plays, is how currency plays in more from an asset level perspective. That played into asset level movements in both assets under custody, as well as assets under management, and something people won't typically think about, it even played in on the deposit decline. You think about the movement we've had, and we can talk about that in more detail, but even the deposits had a downward move in value of about $1.5 billion in aggregate across all currencies.

Okay. I got it. Thanks.

Sure.

Hey, guys. Good morning. Sorry, didn't catch my name there. So a couple of questions. I guess, one, obviously, deposit outflows sounds like picked up in September relative to sort of the last update that we heard from you guys at the Barclays conference, I think you said around 120, came in a little bit lower. But the mix, in particular, I think, was a little bit more pronounced too, with noninterest-bearing declining substantially. So maybe just an update on sort of how the quarter has progressed, but also more importantly, where the deposits stand today and the mix, noninterest-bearing and interest-bearing, as well as any of your sort of updated thoughts on where the deposit levels could ultimately trough out? It looks like the noninterest-bearing piece is getting pretty close to the kind of pre-COVID levels, but curious to get your thoughts there.

Sure. So first of all, on the deposit levels and where they were relative to our expectation, they actually came in really close particularly given what I mentioned earlier and that the currency effect of the non-USD and so where they landed at the quarter - where they averaged actually was pretty close. And I mentioned that because as we get to the next quarter, I think it's very difficult to predict in general. But let me hit mix first. You're right, noninterest-bearing dropped significantly during the quarter. And that's something we expect to happen. A lot of our financial services clients that use our balance sheet are often in noninterest-bearing accounts, but the rate - as rates rise off of zero, they have the opportunity to move into interest-bearing accounts, and they did that. A very high percentage of the accounts that are eligible to do that have done so at this point, which gets to your point, Alex, that we're kind of at, in some ways at those pre-COVID levels. That's not to say we won't see additional movement there. But we think, certainly, a lot of it has already taken place. And then the third part of your question is where do we see things today? Just looking at the first two weeks of the quarter, deposits behaved about what we would anticipate. They tend to come down a little bit at this point in the quarter. And so we're in that kind of 110 to 115. What we expect to happen between now and the end of the quarter is an interesting dynamic. There are two forces working against each other. One is with quantitative tightening and the yield curve being higher and clients across the board continuing to look at how they can allocate non-operational, but more investment cash continues to put downward pressure. But in the short run, there's an offset to that. There's an upward pressure in the seasonality that we've seen in the fourth quarter, which tends to have more of an upward pressure. And so it's difficult to see which one of those is going to have stronger influences. But best guess is you might call it flat from here. And so that 110, 115 level, but appreciating that there are big forces moving against each other.

Got it. Thanks for that. I appreciate the color. And I guess speaking of institutions looking to earn a little bit extra yield on their cash. When I look at Northern securities portfolio, you guys are yielding, I think, about 1.8% and the market rates they're probably closer to 4, maybe a little higher. Now geographically, could be different with the mix. But obviously, an attractive opportunity to reprice there. I guess with AOCI losses already running through your capital, any appetite to sell down, I guess, some of the lower-yielding securities without necessarily changing the profile of fixed versus floating and kind of keeping the overall duration of the portfolio in a similar place. But I guess, crystallizing some of the losses, but picking up incremental NII in the current environment?

Yeah. So we talk about it a lot. And I think an important dynamic for everyone to know, and I know you appreciate this 100% is that the economics of taking the loss, reinvesting that lower amount at the higher yield, the efficiency of markets are just telling you that over time, the impact of that should be relatively equal. Now the second component, though, is that there may be other reasons to do that. You might have a view that the yield curve is going to change significantly. You might want to handle other ratios by doing that. It's not to say that we wouldn't do it, but it's just to say that the quick trade of taking the loss and reinvesting at a higher rate is not as easy and it's not as beneficial. We care about just the long-term value of what the securities portfolio is yielding, not just the NII or NIM in the short run.

Right, fair enough. Thanks, guys.

You bet. Thanks, Alex.

Good morning, Mike.

I had two [Technical Difficulty]

Yeah. Let me answer - I'm getting a lot of static in the background, and I want to make sure that – I want to make sure we answer your question right. You want to - any way you can try and clarify your line...

Is that any better?

Dramatically.

Good. Go forward it, Mike.

So much for my iPod. Look, are the tailwinds done? And Jason, you correctly predicted the NIM going back toward levels of 2019, you know, elimination of fee waivers; those are good. On the other hand, I guess, you still have some tailwinds from the uninstalled business, which really isn't clear why that's so much higher or the delays, are you just winning business? On the other hand, you have the headwinds from the lower stock markets. Is that going to continue? Or is that mostly in the numbers now? So if you can help me with the tailwinds and the headwinds question. And the reason I ask that is because you got those tailwinds and you still had negative operating leverage. So it's - are you just a hostess your business model? Or can you have revenues grow faster than expenses?

Yeah. So a couple of things in there. Let me try and hit them, but certainly ask me to clarify then I don't get all of them. One, on rates, is it done? The answer is no. we still have upward movement. In fact, we look just within the quarter at the month, September was at just a tiny bit above 160. And so we got into that level. And - so - and even at this point, betas will be much higher, but won't be 100%. And so we'll get an incremental lift. And then the third dynamic of that is that as the securities portfolio is repricing, just Alex's question earlier, it takes time, but we have opportunity to reinvest at these higher rates. So not done yet. Second, on the pipeline of business that has taken longer to come, some of the opportunities we have in Asset Servicing in particular, in the one not onboarded category are very big and they're chunky. Those just take longer. The volatility in the markets, we think is just made clients want to make sure that everything is lined up properly. That one not onboarded category is significantly higher than it is on average, but it's - we're confident about it coming through. The stock market dynamic, you're right, this - usually, we talk about operating leverage, and the numbers are just much smaller. Can we get the expense growth plus a little bit of market lift to match? In this environment, the macro environment is just dominating what's happening to both expense growth and revenue growth. I've been saying all year, we cannot - they are false positives in the operating leverage. There are false negatives in the fee operating leverage. This is a year where we have to just understand that those numbers are dominated by the macro factor; it's not typical. It doesn't change our long-term financial model.

And on the one not onboarded category, can you size that to some degree and give us some sense of timing?

Yeah, I can give a sense of timing, which is it's actually - it's more back half of '23 that we're scheduling some of this stuff coming into play. That seems a long way away, but it’s just that's us making sure and working very closely with clients to make sure everything is lined up properly. From a sizing perspective, we don't tend to give a number on that, but what I can tell you is that it's meaningfully higher than - that aggregate is meaningfully higher than what it has been historically. The pipeline - and then outside of the one not funded, the asset servicing business will tell you that the pipeline activity is also very high.

Okay. Thank you.

You bet. Thank you, Mike.

Good morning, Ken.

Hey, morning, Jason. Follow up on that organic growth side. Can you just talk about the Wealth business? And if you could also try to separate the markets from just where organic growth is there? And any updates in terms of is there a same type of holdback at all in terms of customers moving, coming over, bringing assets over given the environment?

Yeah. Actually, I'm really glad you asked that because the Wealth business is - the journey is very different. The Wealth business, the organic growth there was higher first half of the year. They - the business is still doing well, but they don't feel - but the one not funded is not as strong relative to history as the asset servicing business. Now both of those client channels will tell you, importantly, their win rates in the market are very attractive, and they are very consistent with what they have been historically. So it's just about for Wealth, their view is equity markets are lower, less capital markets activity, and it's put just less money in motion. Year-to-date, organic growth in wealth has been in line with historical levels. First half strong, frankly, higher than normal. Second half looks lighter, but money in motion is down, fewer IPOs, fewer liquidity events, but importantly, their sense is their win rate in the market is consistent with what it has been historically.

Okay. And then if I could just ask one follow-up to Alex's question. So if there's more room to go on the NIM, the challenge is overcoming the magnitude of that size decline in the balance sheet. So how far out is your line of sight? I know you're not going to give specific guidance, but in terms of NII growth being able to continue post the third quarter result?

No, I mean, the way you're framing the algorithm is right. It's just we - rates are - it's going to start to flatten out. And our betas this coming quarter, we're anticipating that we're anticipating betas of 80% in this coming quarter. The benefits are just flattening out, but as rates go higher, we're still getting a benefit and the repricing of the securities portfolio is a positive lag effect to that effectively. All that said, the volume levels matter a lot as well. Just as rates were increasing, we talked about the importance of loans. That's where the real yield is, but we can't ignore the fact that when volumes are coming down, it puts pressure on the securities portfolio and on money market assets, which has an impact less on NIM, but more on NII.

Right. I got it. Okay. Thank you.

Thank you.

Morning, Brennan.

Hey, Jason, I'm glad you said good morning, because my line cut out when you said my name. Okay. I'd love to ask a question about what you're seeing here so far. Number one, just to clarify, the 110 to 115, that's kind of like the range you've been seeing in deposits quarter-to-date, right? And assuming that's the case and as you said, hard to predict. But if we do end up that seeing some continued pressure on the deposit side, is - should we expect that wholesale funding line to plug the gap to the extent that AFS securities cannot come down quick enough? Should we think that, that line is going to continue to grow if the deposits remain under pressure?

Yeah, you're right in that that's what we think - that's the last fulfillment mechanism on the balance sheet, and we don't use that - there's no strategic initiative there to use it, but it does in the short run act as the fulfillment mechanism, depending on what's happening. The good news is there's a positive carry - there's a positive carry on that, and rates are decent. So it helps NII, but we don't use it as a way to push and lever the balance sheet more than we need to. We use it as effectively just a fulfillment mechanism.

Okay. Right. So that's sort of the output to the extent that you don't have a - you need to plug. That makes sense. And then when we think about non-operating deposits, where do we stand in total for non-operating versus where we were at the peak of the last rate hiking cycle. Have we retraced that decline? And you spoke to the shifting of non-operating from noninterest-bearing and interest-bearing. I'm guessing that's what's driving up the betas. What kind of magnitude impact does that - because I'm guessing the non-op is a more demanding customer base on the beta side? Is that fair?

Yeah, it is. It is, for sure. There’s actually another layer within there, which we've talked about a little bit. So it's good for us to find continue asking more detail on it. But even within the nonoperational, there's financial and non-financial. The financial nonoperational are the areas where there's the highest rate sensitivity and frankly, it's also the area we have to have the highest amount of runoff anticipation. So that - and you're right, that component is - it continues to be the higher runoff in terms of volume level so far. So if I look at the numbers, it is across all the categories we look at. It's the single - it's the single highest decline on a percentage basis even this quarter. That said, there are declines in other areas as well. Even within the operational base was down, I'll call it, 5% to 10%. But that's more that client base looking at different investment options and saying, I might have - with the yield curve at and flat at zero, might not have been looking to ladder in treasury securities or look at an active fixed income portfolio, but now they're very much looking to do that as they talk to their advisers. Very different dynamics at play.

Okay. All right. Thanks for the color.

You bet. Thank you.

Good morning, Brian.

Good morning. Great. Just first, one clarification on the deposit beta of 80% that you just mentioned, Jason. That's an incremental beta as opposed to, say, an absolute level that you'd be at in the fourth quarter. Is that correct?

I want to make sure I understand. So yes, that’s the - as we think about incremental rate changes that's the beta that we're experiencing on those incremental changes.

On the incremental, yeah. Yeah, that's what I wanted to clarify, yeah. And then maybe just on expenses. I guess one question just around the seasonality expectations because you have some of the cost controls in place that you mentioned that you initiated in September. So how should we think about the typical seasonal lift in outside services and equipment software, for example, that we usually see? And then also short term, just the pension charges, is that - should we think of that as more recurring or really sort of you're kind of done with that?

Sure. I'll hit the first one just on expenses. And then Lauren is here and can also talk on the pension settlement accounting issues. So on expenses, we've mentioned that in - the depreciation is higher. So in equipment and software, in particular, we're anticipating another lift in the fourth quarter similar to what we had in the third quarter. Despite the expense actions we're taking to part of that is just baked into our base right now, particularly from a depreciation and amortization perspective. That said, we'll be looking hard at expenses even within that line item. We've also talked about the importance of us investing in technology. But we'll see that similar lift going into the fourth quarter. And then from - and then consulting is without a doubt, one of the key areas where we're looking very hard to make sure that anything that comes on at this point is critical and that we're handling that with a very high bar of what we're doing, but it's very correlated M&A instances as well to what we're doing from an equipment and software perspective. With that, Lauren, do you want to talk on pension for a second?

Sure. So as we think about pension, we definitely would expect to see that recur in the fourth quarter. The fact that we have triggered this accounting mechanism of the settlement accounting does mean that our run rate of pension expense in the current year is lower, but we will expect to see that in the fourth quarter. It is difficult to predict whether that's something that we would expect to see going forward into 2023.

Okay. Okay. Great. And if I could just squeeze one more in there on expenses. In terms of the onboarding of the clients, you also expect - typically, we see expenses in advance of that, particularly if they're more larger complex assignments and asset servicing. Is that similar dynamic that we may see either now or in the first half of next year in advance of the onboarding of this client?

This is Mike. I would say we’ve already experienced some of that. So it's Jason has mentioned, some of these transitions just are taking longer for a number of reasons. I think part of it, too, is that if you look at the pipeline right now on the asset servicing side, it's a high proportion of asset managers, and those mandates just tend to take longer to transition in than for asset owners. We've been at work in doing that and incurring some of the expenses that go with it. As those start to transition in, it kind of normalizes into the rate.

Yeah, perfect. Thanks so much for the color.

Good morning, Glenn.

Hello there. So I guess in some way, you're a bit of a microcosm of the inflation issue we have in the market. So my question on the expense side is, is headcount up 11 comp up like 12 and that's half the expense dollars. So is it fair for me to assume that we could be more careful going forward, but this higher level of dollars on employee comp and benefits is probably going to be with us for a while, just like the market fears overall? In other words, you can't take comp away that you just gave?

Yes, Glenn, I think that's true in general. Just to expand on that, I would say that for us at least, we've gone through a time period here with inflation but also tremendous competition for the best talent. As you know, that's where we look or one of the ways we look to differentiate ourselves. It’s very important to us to make sure that we were retaining the best talent and also attracting new talent as well. Yes, we've had that increase in comp that is then part of the run rate going forward. The question is what happens to the rate of growth going forward. We're looking at that very carefully, I would say, but we need to be competitive on that front. The other part, as Jason mentioned, we've added a number of additional partners, employees for us. That's something which was very appropriate as we invest in taking care of our clients, invest in technology, invest in resiliency. So it all makes sense; we just going forward have to be really, really focused on making sure that we're only adding for very critical roles so that the growth rate of headcount is appropriate.

I hear you're not alone there. One question on - when markets are going off a lot like they used to, you would have plenty of clients that would have either fee ceilings or fee caps such that your fees just don't scale up as markets go up. My question is, does it work that way in reverse? And markets fallen like 22% this year. Do we have any protection on the way down, whereas maybe fees might not drop as much as the markets would imply going forward?

So a couple of thoughts there. One, even within the contracts that are asset-based, a lot of the components of them are flat. And so as you see increases and decreases the fee rates don't move 100% in the same magnitude. Secondly, outside of that, there are certain volume - there are certain transactions that are charged for on a per unit basis. That in and of itself adds a layer that doesn't - that's uncorrelated in many ways to the level of assets. Even this quarter, one of the things we experienced as we think about organic growth and particularly in the asset servicing business, that was another dynamic transaction volumes were down. That may have had some correlation with markets being down, but we actually think it was more correlated to just the volatility where a lot of the managers that the asset manager clients we have were doing less because of the particularly the currency volatility. Different dynamics at work, but without a doubt, the trust fees won't move 100% in line with markets.

Yeah. Maybe one last one on Wealth Management. Big difference in the AUM change year-on-year, down 10 versus down 25 for asset servicing. I'm assuming that's mostly mix and wealth management clients holding 20 something percent in cash. So I wonder if you could, a, confirm that; and b, talk about what clients are now doing with that all that cash?

Sure. From a - from a wealth perspective, the clients may take a different approach and saying, they're thinking about investing and they might - it's more of an asset class change for them, an asset allocation change by class. The institutional market, those clients will often think differently, and they might be moving between providers. They might be moving and they've got more options to think about what their existing option sets are. I will say, in general, our - if you think about deposits and the money market funds combined, the wealth just the movements tend to not be as extreme. Deposits might be a better place to look at that. They've actually just been flatter. The wealth clients just tend to be ironically, I mean we all think about that component of the market maybe being more moving around more, but I think it's the nature of our specific clients that they tend to move less and just be more patient through cycles.

Okay. Thank you for all that.

Sure.

Good morning, Gerard.

Good morning, Jason. Digging a little deeper into the decline year-over-year of assets on the custody administration you touched on it in your prepared remarks. Can you share with this how it breaks out between just market conditions and fixed income versus equity? You already discussed a lot about the deposit issues. And then also, would the dollar may have contributed to that decline? And lastly, were there any customers that left?

Sure. So AUCA is down, call it, 6.5%. Markets were over half of that. Currency to your point and observation was about a third. We've got a significant international exposure higher than what most people realize in AUC and in fact, only 70% is USD. Client outflows were the remainder. Not a heavily significant portion of either AUC or of the decline itself. Importantly, the decline in AUC that was related to outflows, it was related to our asset manager clients' underlying business having outflows. Our asset owners are rebalancing, but there is no material change in our client base or in our wallet share. The business just emphasizes that win rate continues to be high and consistent, but this was a dynamic of our underlying clients having outflows. Over time, that works in our favor. Our clients do well. It’s - and we grow with them. This period was one where particularly the asset managers had outflows, which impacted AUC.

Very good. And then second, asking the revenue question a little differently. Can you share with us what percentage of your fee revenues are variable rate price, meaning you charge maybe a couple of basis points to your customer as a percentage of assets under custody? So as assets under custody go up and down, revenues, of course, follow. Where does that stand today?

Yeah. Maybe something just to give you a quick sound bite that we could come back on. It’s different across asset servicing. Let me offer a couple of things that might be helpful to you. In asset servicing, 40% of the fees are not asset value sensitive. They're driven by transaction volumes and account-level fees or flat fees of the asset-sensitive fees, that's 60%, about 75% operate on a month lag, and about 25% on a quarter lag. If I transition to wealth management, I'll split it between the family office and the regions because they're different. In the family office, probably about a third of the fees are sensitive to equity markets in some ways and about 10% are sensitive to the fixed income markets. So close to half overall. In the regions, about half, a little bit more are sensitive to equity markets, but a quarter are sensitive to fixed income. That should give you a good tool set to work from.

Yeah, it does. Thank you.

Sure.

Thanks, morning. Thanks for taking my questions. A couple of questions here. Capital. Your CET1 is down to 10.1%. Mike, you've always wanted to keep a gap versus your peers that gap has really disappeared for the moment. What are you thinking, especially if rates stay high for a while? What is your plan in terms of trying to bring back that gap?

So Vivek, you're right as to our objective on capital there. And I would say that hasn't changed. What has changed, as you know, with rates, the impact of AOCI on that. Over time, that will accrete back into capital, and that's our plan, if you will, is to allow the capital ratio to continue to be in the range that we've had for some time period. Right now, it's just in the lower part of that range as a result of AOCI.

Okay. So no plans to shrink the balance sheet or anything in the near term to try and do anything about it?

Yes. So I would say there are no specific plans around that, Vivek, but we do look at risk-weighted assets very closely because it is - that's a proxy then for the amount of capital that's being deployed in that activity and are we getting the right return. Jason talked about the size of the balance sheet earlier and the fact that we do get positive returns across all of those activities, but some of them more than others. We've never looked to just expand the balance sheet if it was going to be in low-returning activities. So that will be the same and in this environment, every dollar of RBA is precious.

Got it. Different question, a little detailed one. Jason, you mentioned other operating expenses were down due to lower miscellaneous expenses. Is it sustainable at this lower run rate given the cost sort of focus that you've got? Or is that just temporary and comes back?

There's a lot of different factors going within that line item. It’s just a difficult one to predict. We tend - we try to call out the big moves, but difficult to say that there's any trend within that. There's nothing we'd call out at this point.

Okay. One last one, if I may. You mentioned Investment Management is seeing outflows how much and which products are you seeing there?

Across AUM in general, the decline about 7%, the majority of that is within Asset Servicing. From an asset class to your perspective, it's a combination of mostly cash but also equity and then also set lending cash collateral pools. But at the same time, markets drove about 40% of the decline, and currency was the remaining approximately 10%.

Okay. Thank you.

You're welcome.

Morning, Brennan.

Hey, Jason, I'm glad you said good morning, because my line cut out when you said my name. Okay. I'd love to ask a question about what you're seeing here so far. Number one, just to clarify, the 110 to 115, that's kind of like the range you've been seeing in deposits quarter-to-date, right? And assuming that's the case and as you said, hard to predict. But if we do end up that seeing some continued pressure on the deposit side, is - should we expect that wholesale funding line to plug the gap to the extent that AFS securities cannot come down quick enough? Should we think that, that line is going to continue to grow if the deposits remain under pressure?

Yeah, you're right in that that's what we think - that's the last fulfillment mechanism on the balance sheet, and we don't use that - there's no strategic initiative there to use it, but it does in the short run act as the fulfillment mechanism, depending on what's happening. The good news is there's a positive carry - there's a positive carry on that, and rates are decent. So it helps NII, but we don't use it as a way to push and lever the balance sheet more than we need to. We use it as effectively just a fulfillment mechanism.

Okay. Right. So that's sort of the output to the extent that you don't have a - you need to plug. That makes sense. And then when we think about non-operating deposits, where do we stand in total for non-operating versus where we were at the peak of the last rate hiking cycle. Have we retraced that decline? And you spoke to the shifting of non-operating from noninterest-bearing and interest-bearing. I'm guessing that's what's driving up the betas. What kind of magnitude impact does that - because I'm guessing the non-op is a more demanding customer base on the beta side? Is that fair?

Yeah, it is. It is, for sure. And there's actually another layer within there, which we've talked about a little bit. So it's good for us to find continue asking more detail on it. But even within the nonoperational, there's financial and non-financial. And not the financial nonoperational or the areas where there's the highest rate sensitivity and frankly, it's also the area we have to have the highest amount of runoff anticipation. And therefore, it's the area where we do the shortest and least yielding investing on the other side of it. And so that - and you're right, that component is - it continues to be the higher runoff in terms of volume level so far. If I look at the numbers, it is across all the categories we look at. It's the single - it's the single highest decline on a percentage basis even this quarter. And that said, there's declines in other areas as well. Even within the operational base was down, I'll call it, 5% to 10%. But that's more that client base looking at different investment options and saying, I might have - with the yield curve at and flat at zero might not have been looking to ladder in treasury securities or look at an active fixed income portfolio, but now they're very much looking to do that as they talk to their advisers. Very different dynamics at play.

Okay. All right. Thanks for the color.

You bet. Thank you.

I just wanted to ask about the volatility that we saw in the gilt market, we saw some headlines about some challenges related to processing for your business. You had some context around the situation there? And will there be any financial impact related to the volatility there and specifically for your business?

Yes. So Mike, you've given the background there largely just that there has been a significant amount of both volumes and volatility in the gilt market, and we have a meaningful client base of U.K. pensions that are affected by that. A number of those pension clients also utilize liability-driven investment strategies and managers that provide those strategies. Likewise, we have some very meaningful clients on that front. So we’ve been in the middle of that volume and volatility and have been doing everything that's required to be able to handle that. Needless to say, it has presented challenges for all of the players in that marketplace as it continued to work its way through. I would say still uncertain, in our expectation is that although some of the volumes may have come down here more recently, we are prepared that they could pick back up again and that the volatility has not gone away. From that perspective, we've been very focused on taking care of the clients, making sure that everything is getting done. As far as any particular financial exposure or anything like that, there's no change to the business model for us or necessarily exposures or things like that.

Okay. Very good. And just - on share buybacks, I don't think we really heard much about that on this call and certainly were very low this quarter. If I heard Jason's comment correctly before, it sounds like a lot of focus will probably be on rebuilding the CET1 ratio. So is it fair to assume that the buybacks will probably be relatively muted here and maybe just dependent on how the AOCI accretes back into capital? Or just any thoughts on the framework for thinking about buybacks would be helpful.

Yes. I think you got it largely right that with AOCI, it billion to $2 billion on a cumulative basis, that’s a high amount. We care about our CET1 levels. We've got -- obviously, we've got strong -- very strong capital positions, but we think about it so much on a relative basis as well and an aggregate basis. We feel good about the capital levels but also have a, I'd say, a bias toward making sure we're - we stay relatively where we want.

Good morning, Gerard.

Jason, just a quick follow-up on the beta that you mentioned; incrementally, 80% for the upcoming quarter is what you pointed out. Can you - two parts to the question. How does that compare to the last tightening cycle is 80% at this point, normal or similar, I should say, not normal -- and second, if rates continue to go higher let's say, another 75 to 100 basis points, will the incremental beta approach 100%?

So in terms of where it is relative to prior cycles, it has not been linear in this cycle. Each rate hike seems to have its own dynamic to it. And another dynamic is that historically, we've seen the most of the dynamic come from the Fed. But in this cycle and the mix of our deposits, there's more impact from non-USD currencies, and so you've got to play that in as well. It's really important. The betas also behave very differently, even within USD; the wealth deposits behave differently. They don't flatten out as much. Even at higher levels from here, which gets to the second part of your question, does it level off completely at some point? It does not up another 100 basis points for sure. But each currency behaves differently. Depending on where we are, it behaves differently, too. Betas were very high in non-USD negative rates. You can imagine clients were highly demanding of getting 100% of the benefit as they were in negative territory as they got to 0 and a little bit above, the conversations change. The dynamics of what alternatives look like and the shape of the yield curve matters. All those things come into play, but the direct answer is we don't anticipate a flattening even at a - even with another 100 basis point lift, but we'll continue to see higher betas as we get there.

Very good. And then, Mike, just to follow up on the pension answer that you gave over with the London or U.K. accounts. Is it safe to assume that you guys are primarily acting as agent for those customers rather than any balance sheet risk or you're not underwriting LDI products?

Correct. We are not an LDI product provider, if you will, on the asset management side. And you're right, we're the asset servicer for either the U.K. pension or for the LDI manager that's our client. So yes, we're acting as agent for them. Now with sales of gilts with moving collateral around -- there's a tremendous amount of movement of cash and bonds as a part of that. We will act as a go-between because of that. That can create temporary exposures, if you will, which is what would be the case. That’s normal as part of the offering that we have for them. With all of the increases in volumes and volatility that I talked about, we've put additional resources to doing everything we can to make sure that we can handle those. That's really been our position on it. I can’t predict where it’s going to go, but we’re trying to be prepared for this to continue for some time.

Sure. Thank you.

Thanks, Victor, and thanks, everyone, for joining us today. We look forward to speaking with you again very soon.