Bank of New York Mellon Corp (NYSE: BK) Q4 2021 earnings call dated Jan. 18, 2022
Corporate Participants:
Marius Merz — Head of Investor Relations
Thomas P. Gibbons — Chief Executive Officer
Emily Portney — Chief Financial Officer
Analysts:
Glenn Schorr — Evercore ISI — Analyst
Brian Bedell — Deutsche Bank — Analyst
Betsy Graseck — Morgan Stanley — Analyst
Jim Mitchell — Seaport Global Securities — Analyst
Mike Mayo — Wells Fargo Securities — Analyst
Gerard Cassidy — RBC Capital Markets — Analyst
Ken Usdin — Jefferies — Analyst
Brennan Hawken — UBS — Analyst
Alex Blostein — Goldman Sachs — Analyst
Steven Chubak — Wolfe Research — Analyst
Presentation:
Operator
Good morning, and welcome to the 2021 Fourth Quarter Earnings Conference Call hosted by BNY Mellon. [Operator Instructions] Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY Mellon’s consent.
I will now turn the call over to Marius Merz, BNY Mellon’s Head of Investor Relations. Please go ahead.
Marius Merz — Head of Investor Relations
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.
Thomas P. Gibbons — Chief Executive Officer
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 many cases have already brought to the market. And the third was our approved 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 at each of these points in a moment. Together with the supportive market backdrop and 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 2 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, that’s 2% plus 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 impact of money market fee waivers. And expenses were up 5% year-over-year, reflecting our investments as well as the quality of revenue that we generate. Our pre-tax margin of 29%, as well as our return on tangible common equity of 17% were roughly in line with the prior year. And we returned $5.7 billion of capital, or 160% of earnings to our shareholders through common dividends and $4.6 billion of share repurchases. As I said earlier, 2021 was marked by outstanding sales performance and a meaningful increase in organic growth. In fact, organic growth was the highest that we’ve seen in a number of years.
In Asset Servicing, wins were up almost 50% compared to 2020, which has produced a meaningful pipeline of AUC/A. Our average deal size was up as we won larger and more complex businesses. And just as importantly, our retention rates also continue to improve. We believe this success is a testament to our service quality and it’s also a reflection of our broader capabilities, as well as our open architecture framework, which is resonating with our clients and is differentiating us in the marketplace.
I’d also like to call out our ETF business, which has delivered substantial growth and gained market share. Our ETF AUC/A grew by roughly 30%, which outpaced the broader market and that doesn’t yet include our recent win of approximately $350 billion [Phonetic] of BlackRock’s iShares. Issuer Services delivered meaningful organic growth on the back of the resumption of Depositary Receipts issuance and dividend activity, following what had been a COVID-related slowdown in 2020 and a continued strong sales performance.
Pershing gathered record new assets of about $160 billion, and continue to grow active clearing accounts in the mid-single digits, despite the headwind of de-converting a couple of large clients in the second half of the year. Growth has been notably broad-based across broker-dealers and registered investment advisors. Clients have told us numerous times that our ability to bring broker-dealer and RIA solutions together as one is a real differentiator, and we continue to benefit from our uniquely unconflicted role in the marketplace as we don’t compete with our clients.
Treasury Services delivered strong organic growth on the back of payment volumes recovering to above pre-COVID levels, and we improved the average price per payment transaction by about 5%, as we continue to shift the product mix towards higher value-added channels. Clearance and Collateral Management is now running at a record $5 trillion of collateral management balances. Balanced growth has benefited from our unique role as a primary player of U.S. government securities, and we’ve also seen continued growth in international balances.
Our Markets business has offset the impact of lower volatility and tighter spreads compared to the prior year with strong broad-based organic growth across FX and securities lending. Investment Management saw the highest net inflows into long-term products since 2017, driven by our LDI and fixed income strategies, but also including strong net inflows into our responsible investment funds, as well as strength in our initial suite of index ETFs. $70 billion of net inflows into cash products were the highest in over a decade. We optimized our money market fund line up to provide a more competitive and scalable offering. And with our new CIO in place, we’re thrilled to see strong inflows and improving market share.
And finally, our Wealth Management business acquired significantly more new clients in 2021 than in 2020. And I’m pleased to see how the team is executing against the strategic plan that we put in place a few years ago. We’ve continued to gain further traction in the larger, faster growing client segments and our expanded banking offering, both on the lending as well as the deposit side, has driven a meaningful uptick in the percentage of Wealth Management clients who also bank with us.
The second theme I mentioned earlier was innovation, and in some cases, it’s been outright disruption. This is probably the area that is most exciting for us. I cannot recall in my tenure at the company a year in which we launched or rolled out more innovative products and services than we did over the last 12 months. I’ll call out just a few. Digital assets, while still early days and recognizing that the regulatory landscapes in the space is still evolving, our investments in building an industry-first integrated digital and traditional assets offering are clearly showing positive initial results following the launch of our digital assets unit at the beginning of last year.
We solidified our leadership in servicing crypto funds, with the announcement of our partnership with Grayscale Investments over the summer. We’ve contracted with almost half of the pending funds in the U.S. and serviced most of the crypto funds in Canada. As I said, it’s still early days, but we’re excited about the disruptive potential of tokenization, as well as smart contracts and the associated opportunities both on the revenue as well as the efficiency side.
In terms of real-time payments, this is an area that we embraced early on and we continue to lead with innovative solutions to drive the proliferation of real-time payments in the U.S. You may remember that we were the first bank to originate a payment on the clearing houses’ real-time payments network several years ago. In late last year, we were the first to launch a real-time bill pay solution from billers and their customers. We’re pleased by the initial uptake. We’ve already onboarded additional clients, and the long list of interested prospects continues to grow.
As you know, the market for Treasury Services is large and it’s growing, but it’s still very fragmented and ripe for disruption. So, we’re excited about the market leadership coming out of our Treasury Services business. It really goes far beyond just real-time payments and includes examples by being able to leverage the cloud for wire payments and having been the first bank to complete a trade finance deal by using SOFR. Third item is the future of collateral. As the world’s largest global collateral manager, we continue to lead the charge on driving towards global collateral mobility and optimization by connecting distinct platforms, expanding the scope of eligible collateral and implementing new capabilities.
For example, last year, we introduced Chinese bonds as eligible collateral on our global tri-party platform. And we were the first bank to add agency mortgage-backed securities as collateral on overnight cleared and repo transactions. And another first, we started offering our clients the ability to accept collateral based on their ESG criteria through our digital platform.
And finally, I’d be remiss not to mention the Pershing X, which we introduced last quarter. Pershing X will design and build innovative solutions for the advisory industry, including a leading end-to-end wealth advisory platform that will help firms and their advisors solve the challenge of managing multiple and disconnected technology and data centers. While certainly a multi-year project, the team has hit the ground running. In this past quarter, we acquired Optimal Asset Management, which is not only an important step in our build-out of Pershing X, and that it will allow us to offer direct indexing capabilities to our advisory clients within Pershing, but it will also benefit our Investment Management business as well.
The third and the last theme is what we call one BNY Mellon. Now, I’ve always been proud of our collaborative culture here at BNY Mellon and as you know, our broader portfolio of businesses differentiates us from our competitors. Over the years, we’ve emphasized the interconnectivity of these businesses and the meaningful operational synergies between many of them. But we can still do a better job at delivering the whole firm to our clients. And so last year, we conducted a thorough review of the opportunities and further enhanced our setup for cross business collaboration. And I’ve been highlighting some of the most notable cross business client wins, such as Amundi, Lockheed Martin and Oak Hill on our earnings calls over the last couple of quarters. Our ability to seamlessly deliver a much broader set of capabilities from across our Securities Services, our Market and Wealth Services and Investment and Wealth Management businesses is a unique value proposition for our clients and our intensified collaboration efforts already driving higher revenues.
In summary, I’m pleased with the progress we’ve made over the last 12 months. And while we certainly have more work to do, I’m confident that the company is on the right path for sustainably higher organic growth. As we look to 2022 and beyond, we expect double-digit earnings per share growth, as we are determined to continue delivering consistent organic growth, which together with the current expectation for higher rates should enable us to generate positive operating leverage, while at the same time continue investing in the growth and efficiency of our businesses.
With that, I’ll turn it over to Emily.
Emily Portney — Chief Financial Officer
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 time, 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. Securities Services, which includes Asset Servicing and Issuer Services and Market and Wealth Services, which includes Pershing, Treasury Services and Clearing 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 the performance against our strategy.
With that, I will turn to Page 3, 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% [Phonetic], with roughly 60% of the increase driven by growth from new and existing business and 40% driven by higher market values. 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 pre-tax income. Investment and other revenue was $107 million and included a roughly $40 million valuation gain on a strategic equity investment. Our investments continue to payoff both strategically, as well as in the form of higher valuation. Net interest revenue was flat. Expenses were up 1%, or 6%, excluding notable items.
Our provision for credit losses was a benefit of $17 million, primarily driven by an improvement in the macroeconomic forecast. EPS was $1.01. This includes a $0.04 negative impact of litigation reserves and severance expense, as well as a $0.02 positive impact of the provision benefit. Pre-tax margin was 27%. And our return on tangible common equity was 17%.
Revenues [Phonetic] for the full year, which Todd summarized earlier on Page 4, total revenue grew by 1%, reflecting higher fee revenue, partially offset by lower net interest revenue. Fee revenue grew by 4%, or 9%, excluding the impact of fee waivers. Investment and other revenue was $336 million, a strong year with meaningful gains on our strategic equity per volume. And net interest revenue was down 12%.
Expenses were up 5%, both on reported basis as well as excluding notable items. Excluding the impact of notable items, nearly half of the increase was driven by higher net incremental investments and the remainder was roughly evenly split between revenue-related expenses and the unfavorable impact of the weaker U.S. dollar. Provision for credit losses was a benefit of $231 million. EPS was $4.14. Our pre-tax margin of 29%, as well as our return on tangible common equity of 17% were roughly in line with the prior year.
On to capital and liquidity on Page 5. Our Tier 1 leverage ratio, which is our binding capital constraint was 5.5%, down approximately 20 basis points sequentially, primarily driven by a return of $1.5 billion of capital to our shareholders in the quarter, including $1.2 billion of buybacks, partially offset by earnings. And we ended the quarter with a CET1 ratio of 11.1%, down approximately 60 basis points compared to the end of the prior quarter. Finally, our LCR was 109%, slightly lower than in the prior quarter.
Turning to our net interest revenue and balance sheet trends on Page 6, which I will talk about in sequential terms. Net interest revenue was $677 million in the fourth quarter, up 6% sequentially. This increase was driven by the impact of higher short-term rates on floating rate securities on investment portfolio, disciplined deposits and liability pricing and higher loan and securities balances in the interest-earning asset mix.
Average deposit balances increased slightly by 1% sequentially. And while interest earning assets were roughly flat, average loans increased by about 6%, with growth primarily driven by margin loans, collateralized loans in Wealth Management and growth in capital call financing. We also deployed some additional cash in HQLA securities, resulting in a quarter-over-quarter increase as an overall average investment securities portfolio of 2%.
Moving on to expenses on Page 7. Expenses for the quarter were $3 billion, up 1% year-over-year. Excluding the impact of notable items, expenses were up 6%, just over half of which was driven by incremental investments, net of efficiency rating [Phonetic] and the remainder by higher revenue-related expenses, including higher GAAP expenses.
A few additional details regarding noteworthy quarter-over-quarter expense variances. Staff expense was up 3%, driven by severance expense and incentive compensation. Net occupancy expense was up 11%, driven by expenses associated with exiting lease space as we continue to optimize our real estate upfront and some expenses related to return to the office. Business development expense increased, driven by higher marketing expenses as well as T&E. Other expenses was down due to lower litigation reserves.
On to Page 8 for a closer look at our new business segment. Securities Services reported total revenue of $1.8 billion, or up 5%. Let me just describe a little about what makes up this 5% increase. Fee revenue was up 6% and up 10%, excluding the impact of fee waivers. Investment and other revenue benefited from a gain on strategic equity investments. And net interest revenue was down 3% driven by lower interest rates, partially offset by higher loan and deposit balances. As I discussed the lines of business within our Securities Services and Market and Wealth Services segment, I will focus my comments on the Investment Services fees, details, which you can find in our financial supplement.
In Asset Servicing, Investment Services fees grew by 10%, excluding the impact of fee waivers, Investment Services fees were up 12%, primarily driven by higher activity from existing clients, higher market values and net new business. Our strong performance last year came on the back of already healthy sales in 2020, and we gained further sales momentum in 2021, as our continued investments in innovation are paying off.
In Issuer Services, Investment Services fees were down 3%. But excluding the impact of fee waivers, Investment Services fees were up 1%. Healthy growth in depository receipts was largely offset by the impact of the previously disclosed discontinued public sector mandate in Corporate Trust. FX revenue in our Securities Services segment increased by 6%, as solid volume growth from existing and new clients more than offset the impact of lower volatility.
Next, onto Market and Wealth Services on Page 9. Market and Wealth Services reported total revenue of $1.2 billion, up 1%, primarily driven by higher net interest revenue and fees. Fee revenue was up 1% and up 4%, excluding the impact of fee waivers. Net interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates.
In Pershing, Investment Services fees were down 2%. However, excluding the impact of fee waivers, Investment Services fees were up 3%, and the impact of clients lost earlier in the year was more than offset by growth on the back of higher market values, client balances and activity from existing clients. The business continued to see good underlying growth. Net new assets in the quarter were $69 million and clearing accounts were up 5% year-over-year.
In Treasury Services, Investment Services fees were up 4%. Excluding the impact of fee waivers, the Investment Services fees were up 8%, primarily driven by higher payment volume. And in Clearance and Collateral Management, Investment Services fees were up 7%, reflecting broad-based growth on the back of higher tri-party collateral management balances and clearance volumes, both in the U.S. and internationally.
Turning to Investment and Wealth Management on Page 10. Investment and Wealth Management reported total revenue of $1 billion, up 3%. Fee revenue was up 4% and 9%, excluding the impact of fee waivers. Net interest revenue was up 2% on the back of higher loan balances, partially offset by lower interest rates.
Assets under management grew to $2.4 trillion, up 10% year-over-year, reflecting higher market values and full-year net inflows into both long-term, specifically LDI and fixed income and cash products. For the quarter, we saw $31 billion of net inflows into cash and $4 billion of outflows from long-term products.
Investment Management revenue was down 1%. However, excluding the impact of fee waivers, revenue was up 6%, primarily driven by higher market values and full-year net inflows, partially offset by lower seed capital gains and performance fees.
Wealth Management revenue grew by 13%, driven by higher market values, the absence of a loss on a business sale in the fourth quarter of the prior year and higher net interest revenue on the back of healthy loan growth as we continue to deepen client relationships into banking. Client assets continue to grow at a steady pace and were $321 billion, up 12% year-on-year. Page 11 shows the results of the Other segment.
I will close with our outlook for 2022 on Page 12. I’ll start with a reminder that our outlook is based on the current forward curve. With that in mind, we currently expect NIR to increase by approximately 10% in 2022, primarily driven by higher rates and balance sheet mix, partially offset by an expectation for lower deposit balance. Our expectation for continued organic growth and lower fee waivers results in total fee growth of approximately 7% in 2022.
More specifically, we expect roughly 4%, up to 7% increase to be driven by the recovery of money market fee waivers based on the current forward curve and assuming some runoff in money market fund balances from current levels. We expect roughly 2% to be driven by organic growth and approximately 1% by market-driven factors. And as a reminder, we generally expect a quarterly run rate of around $60 million on investments and other revenues. But as you know, this line can be lumpy due to seed capital gains, strategic equity investments and other components.
For expenses, ex-notable items, we expect an increase of approximately 5.5% year-over-year. Roughly, 60% of the increase is expected to be driven by higher revenue-related expenses, which include higher distribution and servicing expenses associated with fee waivers and the impacts of inflationary pressures. The remainder is driven by investments, roughly half of which is just the annualization of incremental investment in the second half of last year.
Specific to the first quarter, I’d like to remind you that staff expenses were typically elevated due to long-term incentive compensation expense for retiring eligible employees. As a result, we expect first quarter expense and ex-notables to be up approximately 6% year-over-year. With regards to capital management, we expect to return roughly 100% of earnings, subject to changes in AOCI and deposit balances. Under the [Phonetic] sake of completeness, we continue to expect our effective tax rate for the year to be approximately 19%.
To sum up, and as Todd alluded to earlier, we expect to generate positive operating leverage on the back of continued organic growth and higher rates translating into higher NIR and lower fee waivers, while continuing to invest in the future growth and efficiency of our businesses.
With that, operator, please open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Glenn Schorr with Evercore ISI.
Glenn Schorr — Evercore ISI — Analyst
Hi. Thanks very much. I wonder if you could unpack the net interest revenue comment outlook 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.
Thomas P. Gibbons — Chief Executive Officer
Emily?
Emily Portney — Chief Financial Officer
Sure. 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 specific to the questions you asked, yes, we just use the forward curve. And as you know it, at the moment anticipates three rate hikes, 325 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.
Glenn Schorr — Evercore ISI — Analyst
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 in line 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.
Emily Portney — Chief Financial Officer
Sure.
Thomas P. Gibbons — Chief Executive Officer
Maybe I’ll take that one. So a lot in that one. But a 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 cloud 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 responsibility now for derivative players to have collateral against their uncleared margins. 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 are white labeling it for mid-sized banks there. So, I think some of the innovation that we’re seeing in the Treasury Services, we have not seen that drop to the bottom line yet. We’ve picked up — we’ve captured a little bit of market share and a little bit of a better price itself coming into this.
We’ve talked a fair amount about Pershing X, which is a significant multi-year investment that we are making in our Pershing platform, specifically on the advisers to simplify and make the advisory function much more productive for our clients. We made an acquisition of a direct indexing firm in the quarter. We decided to buy rather than build for speed to the market. And that group is going to be able to tailor portfolios and provide tax optimization down to the individual level. That hasn’t started yet.
So, that will start probably by the end of this year and we’ll be continuing to invest. So, we see that not as a 2022 event, but a 2023 and 2024. Nice growth in our Wealth Management business. And here, we’ve invested in some of the technology and we’ve won some recognition for the quality of some of the advise path and kind of the wealth management tools that we put in place for our clients there.
On the Asset Servicing side, we’ve talked about the digital assets unit that we put in place. It is garnering assets quite rapidly as we’ve gotten most of the pending ETF crypto assets that are coming in the U.S. and just in a very high percentage offshore, especially in Canada. We’ve also got the — we developed an ESG app where we’re starting to see some revenues flow on that. And we’re investing just in the basics of custody because we think we can capture more of the developing markets custody. So it’s kind of a mix. It’s got still some on to come, but some of it embedded in our run rate today.
Glenn Schorr — Evercore ISI — Analyst
Thanks, guys. Thanks a lot.
Operator
We’ll go next to Brian Bedell with Deutsche Bank.
Brian Bedell — Deutsche Bank — Analyst
Hi. Good morning, everyone. Happy New Year. If I can circle — if I actually start-off on fee revenue outlook assumptions really, just to 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 — yes, right, it’s like an advancement of the curve and expectations getting a little bit more aggressive in the market for Fed hikes impacts. 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 markets — that 1% market impact.
Emily Portney — Chief Financial Officer
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 — third or fourth hike. So, we do see — expect some runoffs 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.
Brian Bedell — Deutsche Bank — Analyst
No, go ahead.
Emily Portney — Chief Financial Officer
Yeah. 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 basis point, not 25 basis point, 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.
Brian Bedell — Deutsche Bank — Analyst
The equity market return assumptions within that 1% of fee contribution from sort of markets?
Emily Portney — Chief Financial Officer
Sure. So just to step back, total fee revenue up 7%, roughly 4% driven by the reduction of waivers, roughly 2% are 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.
Brian Bedell — Deutsche Bank — Analyst
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 U.K. and how that might influence the NIR assumption?
Emily Portney — Chief Financial Officer
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 where the Fed starts to actually tighten. So it’s — ultimately, balances, I mentioned, have already come down a bit from average fourth quarter levels. And in terms of betacular [Phonetic], 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.
Brian Bedell — Deutsche Bank — Analyst
And then just globally, like the Bank of England assumptions for…
Emily Portney — Chief Financial Officer
Yeah. It’s all the forward curve. It’s all the forward curve.
Brian Bedell — Deutsche Bank — Analyst
Same thing. Okay. Great. Okay. Thank you so much.
Operator
We’ll go next to Betsy Graseck with Morgan Stanley.
Betsy Graseck — Morgan Stanley — Analyst
Hi. Good morning.
Thomas P. Gibbons — Chief Executive Officer
Hey, Betsy.
Emily Portney — Chief Financial Officer
Good morning.
Betsy Graseck — Morgan Stanley — Analyst
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.
Thomas P. Gibbons — Chief Executive Officer
I’ll take it. Yes. Thanks, Betsy. This is Todd. I’ll take this one. 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 balance sheet, 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.
Betsy Graseck — Morgan Stanley — Analyst
Okay. So, you’re basically looking for the Fed to stop buying, but not actively shrink?
Thomas P. Gibbons — Chief Executive Officer
I don’t think they’ll actively — our estimate is that they won’t actively sell, but they will actively let maturities runoff. That’s definitely yes.
Betsy Graseck — Morgan Stanley — Analyst
Yeah. 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?
Thomas P. Gibbons — Chief Executive Officer
Emily, do you want to take that? You may want to start with that.
Emily Portney — Chief Financial Officer
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.
Betsy Graseck — Morgan Stanley — Analyst
Got it. Okay. So not that much differential outside of the call out on Pershing?
Thomas P. Gibbons — Chief Executive Officer
Yeah. But I do think, Betsy, we will see the operating margins in our security servicing business. Those are depressed right now, and I do think you’ll see those expand, both combination of greater efficiency and revenue mix.
Betsy Graseck — Morgan Stanley — Analyst
Okay. Q2 [Phonetic] rates is also little higher there.
Thomas P. Gibbons — Chief Executive Officer
Yeah. Exactly.
Betsy Graseck — Morgan Stanley — Analyst
Okay.
Emily Portney — Chief Financial Officer
We do — I mean, just further to Todd’s point, Securities Services, the margins there are depressed. They’re in a little over 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.
Betsy Graseck — Morgan Stanley — Analyst
Okay. Thanks so much, Todd and Emily. Appreciate it.
Thomas P. Gibbons — Chief Executive Officer
Thanks.
Operator
We’ll go next to Jim Mitchell with Seaport Global Securities.
Jim Mitchell — Seaport Global Securities — Analyst
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?
Emily Portney — Chief Financial Officer
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.
Jim Mitchell — Seaport Global Securities — Analyst
Sure.
Thomas P. Gibbons — Chief Executive Officer
And I would add something. 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 two 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 one-time kind of step-up. But those will have to — the market will have to play itself out. So, we do think that we are 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.
Jim Mitchell — Seaport Global Securities — Analyst
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.
Emily Portney — Chief Financial Officer
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.
Jim Mitchell — Seaport Global Securities — Analyst
Okay. Thanks.
Operator
We’ll go next to Mike Mayo with Wells Fargo Securities.
Mike Mayo — Wells Fargo Securities — Analyst
Hi. Can you hear me?
Thomas P. Gibbons — Chief Executive Officer
Yeah, Mike.
Emily Portney — Chief Financial Officer
Yeah. But there is some background noise.
Thomas P. Gibbons — Chief Executive Officer
Something in the background.
Mike Mayo — Wells Fargo Securities — Analyst
Is that better?
Thomas P. Gibbons — Chief Executive Officer
Yeah.
Mike Mayo — Wells Fargo Securities — Analyst
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’re 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 [Phonetic] 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?
Thomas P. Gibbons — Chief Executive Officer
Emily, do you want to take that?
Emily Portney — Chief Financial Officer
Sure, Mike. 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. 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, etc. 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.
Mike Mayo — Wells Fargo Securities — Analyst
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?
Emily Portney — Chief Financial Officer
I mean, ultimately, there’s many factors that go into — 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.
Mike Mayo — Wells Fargo Securities — Analyst
And are you being conservative?
Thomas P. Gibbons — Chief Executive Officer
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, 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 point [Phonetic].
Mike Mayo — Wells Fargo Securities — Analyst
Yeah. 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 a tenth, a fifth or just roughly, in broad terms, how much contraction of the balance sheet and why?
Thomas P. Gibbons — Chief Executive Officer
Emily, I’ll take that.
Emily Portney — Chief Financial Officer
Sure.
Thomas P. Gibbons — Chief Executive Officer
Are you going to take it? Go ahead, Emily.
Emily Portney — Chief Financial Officer
I can take it. Yeah. 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 runoff obviously from rates. When 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….
Mike Mayo — Wells Fargo Securities — Analyst
Okay. Thank you.
Emily Portney — Chief Financial Officer
….in this year. Yeah.
Mike Mayo — Wells Fargo Securities — Analyst
Right. Right. Thank you.
Thomas P. Gibbons — Chief Executive Officer
Thanks, Mike.
Operator
We’ll go next to Gerard Cassidy with RBC.
Gerard Cassidy — RBC Capital Markets — Analyst
Good morning, Todd. Good morning, Emily.
Thomas P. Gibbons — Chief Executive Officer
Good morning, Gerard.
Emily Portney — Chief Financial Officer
Good morning.
Gerard Cassidy — RBC Capital Markets — Analyst
Todd, 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 — that seems like a very strong number. How does that compare to a prior two 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?
Thomas P. Gibbons — Chief Executive Officer
Sure. So, we had run, for a couple of years there, Gerard, we were literally running negative organic growth. And so maybe four 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 with — around our whole bundle of what we can deliver some of the connectivity that we made to some of the OMS providers, our Data & 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.
Gerard Cassidy — RBC Capital Markets — Analyst
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?
Emily Portney — Chief Financial Officer
Sure. So —
Thomas P. Gibbons — Chief Executive Officer
Yeah, Emily. Yeah. Go ahead, Emily.
Emily Portney — Chief Financial Officer
Well, I guess — so thinking about just the payout and we could talk about AOCI, I’m not sure I recognize the number that you’re talking about, the $2 billion. But in any event, 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 in 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, etc. So it’s all there.
Basically, our capacity and the pace of the buyback is 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 AOCI. But all of that is baked in to the guidance. And the thing that — 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.
Gerard Cassidy — RBC Capital Markets — Analyst
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?
Emily Portney — Chief Financial Officer
The short-end.
Gerard Cassidy — RBC Capital Markets — Analyst
Okay. Great. Appreciate it. Thank you.
Operator
We’ll go next to Ken Usdin with Jefferies.
Ken Usdin — Jefferies — Analyst
Hi. Thanks. Good morning. I just want to 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 PRBs [Phonetic], are you solving for 5.5% at this point? Like how 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.
Emily Portney — Chief Financial Officer
Sure. So, I can take that, and Todd, you can add. So, Tier 1 leverage this quarter, as you guys can see, in the fourth quarter, it 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%.
Ken Usdin — Jefferies — Analyst
Okay. So, we consider all those factors, perhaps OCI, balance sheet size and you kind of sit somewhere in that zone?
Emily Portney — Chief Financial Officer
You got it.
Ken Usdin — Jefferies — Analyst
Okay. All right. And then second question just on that related point. If I back out premium amortization, looks like the securities portfolio yield is kind of getting to a flat point and 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.
Emily Portney — Chief Financial Officer
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.
Ken Usdin — Jefferies — Analyst
Understood. Okay. Thank you.
Operator
We’ll go next to Brennan Hawken with UBS.
Brennan Hawken — UBS — Analyst
Good morning. Thank you for taking my questions. Had a follow-up. So Emily, I think it seems like from your comments, when you backed in 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.
Emily Portney — Chief Financial Officer
Sure. So, I’ll take that, and Todd, if you want to add. So, you’re thinking about the expense, the distribution expense 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.
Thomas P. Gibbons — Chief Executive Officer
I’ve nothing to add to that.
Brennan Hawken — UBS — Analyst
Okay. There we go. All right. Thank you. Thanks for that color. 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 two, three 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.
Thomas P. Gibbons — Chief Executive Officer
Sure. So, I think your estimate of excess deposits is probably pretty close to what we’re currently thinking. But you’ve 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.
Brennan Hawken — UBS — Analyst
Okay. Got it. Thanks for taking my questions.
Operator
We’ll go next to Alex Blostein with Goldman Sachs.
Alex Blostein — Goldman Sachs — Analyst
Hey. Good morning, everybody. Just a couple of questions at this point. I heard the discussion around deposit betas perhaps being slightly higher this time around because governments [Phonetic] on the Treasury Services side of the business. Is there a way you can flush it 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?
Emily Portney — Chief Financial Officer
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.
Alex Blostein — Goldman Sachs — Analyst
Got it. Okay. That probably explains some of the deltas people are asking about on NII. So that helps.
Emily Portney — Chief Financial Officer
Yeah.
Alex Blostein — Goldman Sachs — Analyst
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?
Thomas P. Gibbons — Chief Executive Officer
Yeah. I’ll go ahead. We’ve been pretty consistent in targeting dividends around 30% [Phonetic], Alex. So, I think probably you will see the adjustment come in the form of the buyback, if there is one.
Alex Blostein — Goldman Sachs — Analyst
Got it. Got it. Okay. Thanks very much.
Thomas P. Gibbons — Chief Executive Officer
Maybe time for one more question.
Operator
Our final question comes from the line of Steven Chubak with Wolfe Research.
Steven Chubak — Wolfe Research — Analyst
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.
Emily Portney — Chief Financial Officer
Sure. So when we think about NIB, if you will, 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 the old numbers. I think net interest deposits are close to $90 billion or so. What you’ll see as deposits — as rates 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.
Steven Chubak — Wolfe Research — Analyst
And do you have any specific assumptions you can provide just in terms of the absolute level of contraction you’re contemplating?
Thomas P. Gibbons — Chief Executive Officer
Well, we’ve seen — [Speech Overlap] a little color there.
Emily Portney — Chief Financial Officer
Yeah, Todd. Go ahead.
Thomas P. Gibbons — Chief Executive Officer
What we’ve seen historically through these cycles is we’re operating somewhere around 30% of our total balance of noninterest-bearing. We’ve — and it’s a little bit tricky to pick up because of the U.S. versus non-U.S. But that’s definitely very high because of the level of interest rates. We’d expect that to drop into the low-20s, something like that.
Steven Chubak — Wolfe Research — Analyst
Got it. That’s helpful color. And then just for my follow-up, I might be dropping 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 it’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.
Emily Portney — Chief Financial Officer
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.
Steven Chubak — Wolfe Research — Analyst
Okay. That’s great. Thanks so much for taking my questions.
Thomas P. Gibbons — Chief Executive Officer
Thank you, Steven.
Operator
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.
Thomas P. Gibbons — Chief Executive Officer
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.
Emily Portney — Chief Financial Officer
Thank you.
Operator
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.