Categories Earnings Call Transcripts, Finance

State Street Corporation (STT) Q4 2021 Earnings Call Transcript

STT Earnings Call - Final Transcript

State Street Corporation  (NYSE: STT) Q4 2021 earnings call dated Jan. 19, 2022

Corporate Participants:

Ilene Fiszel Bieler — Global Head of Investor Relations

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Eric Aboaf — Executive Vice President and Chief Financial Officer

Analysts:

Alex Blostein — Goldman Sachs — Analyst

Jim Mitchell — Seaport Global — Analyst

Steven Chubak — Wolfe Research — Analyst

Gerard Cassidy — RBC — Analyst

Rob Wildhack — Autonomous Research — Analyst

Glenn Schorr — Evercore — Analyst

Brennan Hawken — UBS — Analyst

Mike Brown — KBW — Analyst

Brian Bedell — Deutsche Bank — Analyst

Presentation:

Operator

Good morning and welcome to State Street Corporation’s Fourth Quarter and Full Year 2021 Earnings Conference Call and Webcast. Today’s discussion is being broadcasted live on State Street’s website at investors.statestreet.com. This conference call is also being recorded for replay. State Street’s conference call is copyrighted and all rights are reserved. This call may not be recorded or rebroadcast or for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street’s website.

Now, I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

Ilene Fiszel Bieler — Global Head of Investor Relations

Good morning, and thank you all for joining us. On our call today, our CEO, Ron O’Hanley will speak first, then Eric Aboaf, our CFO, will take you through our fourth quarter and full year 2021 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterwards we’ll be happy to take questions. During the Q&A, please limit yourself to two questions and then requeue.

Before we get started, I would like to remind you that today’s presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our slide presentation.

In addition, today’s presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K. Our forward-looking statements speak only as of today, and we disclaim any obligation to update them even if our views change.

Now, let me turn it over to Ron.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Thank you, Ilene, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2021 financial results. Before I review our results, I would like to take a moment to acknowledge the dedication and strong performance of State Street employees during the past year. These team members remain central to the continued successful execution of our strategy, as we help to create better outcomes for the world’s investors.

Together, we accomplished a great deal in 2021 including higher fee and total revenue generation, successful execution against both sales effectiveness and client retention goals that is driving growth and business momentum, as well as announcing the proposed acquisition of Brown Brothers Harriman Investor Services. All of this would not have been possible without our employees’ hard work, skill and commitment.

Slide 3 of our presentation highlights the progress we made during 2021 with both — with both of our business segments performing strongly, as we advance towards achieving our medium-term financial targets. Within the Investment Servicing business, we enhanced — our enhanced core strategy combined with our strategic pivot to an enterprise outsourced solutions provider across the front, middle and back office manifested itself in stronger business momentum and revenue growth in 2021, which you can see along the top of the slide.

As we successfully diversify and broaden our wins by region and client segment, we achieved record AUC/A servicing wins of $3.5 trillion in 2021 and continue to deploy our enterprise outsourcing capabilities underpinned by our integrated front to back Alpha platform. We announced 9 additional Alpha wins in 2021, with 10 Alpha clients now live at year-end. We also continue to enhance our product capabilities in 2021 launching Alpha for private markets, as well as our new State Street Digital division.

At Global Advisors, we executed well against our long-term strategy, which contributed to a number of records for that business in 2021 including revenues, assets under management and ETF inflows. Importantly, Global Advisors full-year pre-tax margin expanded by over 6 percentage points in 2021 to a record 32% deepening the value of our investment management franchise to State Street’s results. Our SPDR business performed particularly well in 2021 gaining US ETF flow market share, including low cost and active in addition to the record inflows I just mentioned.

If I look back at 2021, I’m particularly pleased with our client impact. Improvement in our sales effectiveness and heightened focused on client satisfaction, service quality and retention across our businesses together with a favorable equity market backdrop hope to drive a stronger revenue performance. Notably, full-year servicing and management fees each reach our highest level on record in 2021, with total fee revenue increasing by 5% year-on-year and exceeding $10 billion for the first time.

While we delivered a strong revenue performance in 2021, expense management remained the [Phonetic] 2 5:51 key focus for us with company-wide productivity and engineering efforts achieving approximately $330 million of gross expense savings. Because of our strong revenue and sales performance in 2021, and the healthy pipeline in front of us, these efficiency savings allowed us to fund investments in our talent, technology and business in the fourth quarter to drive future growth.

Even with this increased investment, total expenses were well contained relative to revenue growth helping to drive a significant improvement in a number of key financial metrics that you can see on the bottom of the slide. Despite record low interest rates and excluding notable items, we delivered meaningful full-year pre-tax margin expansion, positive fee and total operating leverage and EPS growth in 2021, and we expect to do this again in 2022.

Turning to Slide 4, I will briefly touch on our fourth quarter highlights before Eric takes you through the quarter in more detail. 4Q, ’21 EPS increased 28% year-over-year or 18% excluding notable items. This strong year-over-year earnings growth was driven by solid total fee revenue growth, which more than offset interest rate headwinds on NII, leading to a good fourth quarter total revenue performance.

We delivered 130 basis points of total positive operating leverage in the fourth quarter, excluding notable items. Importantly, we again expanded State Street’s pre-tax margin, which increased by more than a percentage point relative to the year ago period to 28% in the fourth quarter, excluding notable items.

The solid business momentum that we saw during 2021 continued into the fourth quarter, which you can see in the middle of the slide. AUC/A increased to a record $43.7 trillion at quarter-end, and new asset servicing wins amounted to $332 billion for the quarter. AUC/A won, but yet to be installed was $2.8 trillion at quarter-end, while Charles River’s annual recurring revenue in the fourth quarter increased 9% year-over-year to $244 million.

At Global Advisors, assets under management totaled $4.1 trillion at quarter-end. Management fees increased to a record $530 million in the fourth quarter, benefiting from higher year-on-year average equity market levels and record inflows to our ETF franchise.

Turning to our balance sheet at the bottom of the slide, capital return remains a key part of our medium term targets, and we recognize its importance to our shareholders. As you know, we suspended common share repurchases in Q3 in connection with our intended purchase of Brown Brothers Harriman Investor Services. We currently expect to reinstate common share repurchases during the second quarter of this year, in line with our previous expectations.

To conclude my opening remarks, I am pleased with the strategic operational and financial progress we demonstrated in 2021. We meaningfully improved our full-year financial performance across a number of key metrics, creating value for our shareholders and advancing us towards our medium-term financial targets.

Looking ahead, I have four core strategic objectives for 2022, which are aimed at helping us achieve our vision for the organization and position the business for future success. First is to continue to grow revenue by executing on a number of key strategic priorities this year, including completion of our pivot to an enterprise outsourcer underpinned by our Alpha platform build out, continuing to develop key product offerings and capabilities, particularly private markets and further strengthening sales and client management capabilities and processes.

Second, the successful integration of BBH Investor Services is a key priority. The proposed acquisition is a financially compelling use of capital and once closed it will strengthen our market leadership creating the world’s largest custodian, expand and deepen our international reach, further propel our Alpha strategy and add strong talent that will supplement our focus on client and service excellence and expertise.

Third, as we did in 2021, we must continue to transform the way we work by driving increased productivity and efficiency throughout our organization. We are developing and implementing a simplified, scalable, configurable end-to-end operating model. This more scalable model will allow us to deliver increased client quality, operational capacity, speed and resilience.

Fourth, we must continue to build an even higher performing organization. Our [Phonetic] performance culture and improved employee experience will enable us to sustain a more diverse, engaged and empowered team with the experience, capabilities and desired behaviors required for further — for future growth.

These four goals reflect our relentless focus on performance and achieving our medium-term financial targets. I have confidence that we will be able to meet our strategic and client goals, while also delivering positive fee and total operating leverage and expanding our pre-tax margin each year through our medium-term horizon, aided by the strong momentum we are seeing across our businesses.

And with that let me turn it over to Eric to take you through the quarter in more detail.

Eric Aboaf — Executive Vice President and Chief Financial Officer

Thank you, Ron, and good morning, everyone. Before I begin my review of our fourth-quarter and full-year 2021 results, let me briefly discuss some of the notable items we recognized in the quarter outlined on Slide 5. First, we recognized acquisition restructuring costs, most of which were related to CRD and whose integration is now complete.

Second, we recognized the net repositioning release of $3 million, which consists of occupancy costs of $29 million as we continue to reduce our footprint and a release of previously accrued compensation costs were [Phonetic] $32 million, as attrition picked up and we redeployed staff more effectively than anticipated.

Third, we saw an opportunity to correct an imbalance in the competitiveness of our compensation program by accelerating expenses associated with certain deferred cash incentive awards. The impact of the acceleration increased expenses by $147 million in this quarter. This change will allow us to realign the mix of immediate versus deferred cash in our incentive compensation awards in future periods, which will make our pay practices competitive and enable us to better attract talent in an increasingly tight talent market. Our mix of deferred equity remains unchanged.

Finally, you’ll see that in the fourth quarter also benefited from a $58 million gain on sale of legacy LIBOR-based securities previously classified as held-to-maturity. This sale in this quarter is higher than usual tax benefit helped to offset some of the deferred compensation expense acceleration I just mentioned.

Turning to Slide 6, I’ll begin my review of both fourth-quarter and full-year 2021 results. As you can see on the top left of the slide, we finished the fourth quarter with strong revenue growth compared to 4Q, ’20. 4Q, ’21 fee revenue increased 4%, primarily reflecting strong growth in servicing fees, management fees and CRD revenues, only partially offset by lower FX trading services.

4Q expenses were well managed, delivering positive total operating leverage notwithstanding the significant 2021 NII headwind. 4Q pre-tax margin is up more than 1 percentage point year-on-year and ROE is up almost 2 percentage points.

On the right side of the slide, we show our full-year 2021 revenue performance. As Ron highlighted earlier, 2021 was a record year for us for fee revenues. And despite historically low interest rates in 2021, I’m quite pleased that for the full-year, we still delivered positive operating leverage of more than a percentage point improvement in pre-tax margin and EPS growth in the double-digits.

Turning to Slide 7, you’ll see our investment services balanced growth remains strong, as we saw a record AUC/A at the end of the fourth quarter of $43.7 trillion, a year-on-year increase of 13%, largely driven by higher market levels, client flows and net new business. Quarter-on-quarter AUC/A growth was muted, as markets were pretty mixed.

At Global Advisors, AUM at year-end increased 19% year-on-year and 7% quarter-on-quarter to a record $4.1 trillion. The year-on-year and sequential quarter increases were both primarily driven by higher market levels, coupled with net inflows. Of note, we reported strong net inflows during the fourth quarter of almost $80 billion. Our global SPDR ETF business recorded the highest ever quarter driven by strong US flows pushing total net ETF inflows to $107 billion for the full-year

Turning to Slide 8, you can see another quarter of good business momentum. Fourth quarter servicing fees increased 6% year-on-year. The increase reflects higher average equity market levels, client activity inflows and positive net new business again. These items were only partially offset by normal pricing headwinds and about a full point of currency translation.

On a sequential basis, I would remind you that, while the S&P was up on average, international markets were down, so markets were relatively neutral. Servicing fees were down 1%, primarily due to client activity and adjustments and the impact on appreciating US dollar, partially offset by another quarter of positive net new business.

AUC/A wins totaled a solid $332 billion in the fourth quarter, which gets us to a record $3.5 trillion new wins across client segments and regions for the full year, and our pipeline remains strong.

At quarter-end, AUC/A won, but yet to be installed amounted to $2.8 trillion with Alpha representing a nice proportion, which reflects a unique value proposition and our competitive strengths, as the only front to back offering from a single provider.

Turning to Slide 9, fourth quarter management fees reached a record $530 million, up 8% year-on-year and up 1% quarter-on-quarter, resulting in an investment management pre-tax margin of 34% for fourth quarter. The year-on-year management fee results primarily benefited from higher average equity market levels and strong ETF inflows. These year-on-year benefits were only partially offset by previously reported client asset reallocation and money market fee waivers of $20 million in the quarter. The quarter-on-quarter results were largely driven by a slight uptick in equity market daily averages.

As you can see on the bottom right of the slide, our franchise remains well-positioned, as evidenced by both strong quarterly momentum and full-year results. We are particularly pleased that the actions that we’ve previously taken over the years in our long-term institutional and ETF franchises delivered growth over the course of 2021.

Regarding management fee money market waivers, we currently expect that they will come in at approximately $5 million less in the first quarter of ’22 based on an anticipated March Fed rate hike, which will be included in our 2022 outlook.

Turning to Slide 10. Let me discuss the other important fee revenue lines in more detail. FX trading services was down 7% year-on-year, reflecting lower FX volatility and lower volumes in our standing instruction business. On a sequential basis, FX revenue increased 8%, primarily driven by higher FX volatility, partially offset by lower volumes.

Moving to Securities Finance, fourth quarter fees increased 16% year-on-year mainly reflecting higher client securities loan balances and new business wins and enhanced custody. On a sequential basis, fees were down 4% quarter-on-quarter, mainly as a result of lower agency balances.

Finally, fourth quarter software and processing fees were down 4% year-on-year and 2% lower quarter-on-quarter, largely driven by lower market-related adjustments, partially offset by continued growth in CRD, which I’ll turn to next.

Moving to Slide 11, I’d like to highlight our CRD and Alpha performance. We delivered strong standalone CRD results in the quarter with year-on-year revenue growth of 13%. Full-year standalone revenue growth was 11% year-on-year, which makes this the second year in a row, where we grew the business revenue in a double-digit range. The more durable SaaS and professional services revenues continue to grow nicely, as we onboarded and converting more clients to the cloud. SaaS clients now represent nearly half of our CRD client base.

In addition, we achieved record new bookings of $62 million for full-year 2021 with a healthy revenue backlog of $117 million at quarter-end, demonstrating the continued business momentum, as we head into 2022, supported by the State Street Alpha value proposition.

Turning to Alpha on the bottom right of the slide, full-year 2021 was a busy year, as we announced 9 new Alpha mandates and nearly doubled the amount of wins we’ve achieved since inception. At year-end, we have 10 total live Alpha clients.

We’ve also been busy enhancing our Alpha product offering this year, in addition to launching Alpha for private markets and our acquisition of Mercatus in the third quarter. We also went live with our Alpha Data platform in the fourth quarter, which is our cloud native platform, providing enterprise data management and access to all the data and analytics management and access to all the data and analytics that our clients use to perform their daily end-to-end investment processes.

Turning to Slide 12. Fourth quarter NII was down 3% year-on-year, mainly driven by the impact of a low 2021 interest rates on the investment portfolio yields, partially offset by another quarter of higher loan balances, as well as growth in deposits on the investment portfolio.

Relative to the third quarter, 4Q NII came in 1% lower, primarily as a result of the expected normalization of premium amortization. As you may recall, third quarter ’21 include an episodic benefit worth about $7 million, which we previously noted, wasn’t expected to repeat in fourth quarter. We do however see continuing [Phonetic] premium amortization slowing.

We like many of you are excited about the rise we’ve seen in long-end rates this year. However, short rates have been flat so far, and it’s really the prospect of Fed action in the March timeframe, which would have a significant benefit on NII.

On the right of the slide, we show our average balance sheet during the fourth quarter. Average assets increased 4% quarter-on-quarter, primarily driven by higher deposit levels. We consciously allowed average deposits to float up this past quarter, which we then expect to monetize in a period of rising interest rates.

Turning on Slide 13. Fourth quarter expenses excluding notable items were up 1% year-on-year, as we previously decided to increase incentive compensation to reflect strong year-on-year performance and pulled forward some investments in the business. At the end of the year, however, we also experienced some higher than expected episodic expenses. Medical costs were higher, as we saw a ramp-up in year-end claims. We saw some elevated IT vendor costs, and we realized higher marketing spend associated with GA volumes.

Compared to 4Q, ’20 on a line-item basis excluding notable items, compensation and employee benefits was up 2%, driven by higher incentive compensation and medical costs, partially offset by lower headcount and salaries. Notably, our continued focus on digitization, automation, as well as resource discipline, have helped us reduce our headcount this year by 2 percentage points even as we onboarded larger deals and processed more transaction volume.

Information systems and communications were up 11% due to continued investment in our technology infrastructure and resiliency as well as equipment expenses, as we move more activities to the cloud.

Transaction processing was down 7%, primarily driven by lower market data and brokerage costs. Occupancy was down 6%, reflecting the benefits from eliminating another 5,000 seats and achieving a 115% occupancy rate, and other expenses were down too.

Overall, we’re pleased this year with our continued ability to demonstrate productivity and expense discipline. Excluding the impact of currency translation worth approximately 1 percentage point, full-year 2021 expenses would have been flat and in a year, where fee revenue growth grew by mid-single digits, we meaningfully expanded our pre-tax margin and generated positive total and fee operating leverage, despite a challenging interest rate environment.

Moving to Slide 14. On the left side of the slide, we show the evolution of our CET1 and Tier 1 leverage ratios, followed by our capital trends on the right side of the slide. As you can see, we continue to navigate the operating environment with strong capital levels with or without the recent equity raise relative to our requirements. As of quarter-end, our standardized CET1 ratio of 14.2% increased 0.7 percentage points quarter-on-quarter, primarily reflecting an outsized reduction of about $5 billion in RWA related to the impact of FX, mark-to-markets and higher retained earnings.

We expect RWAs to increase in the first quarter to a more normalized business levels and the effects of expected regulatory changes coming in 2022, all of which has been previously considered in our capital guidance.

Our Tier 1 leverage decreased slightly quarter-on-quarter, mainly driven by higher client deposits. And lastly, we returned a total of $209 million to shareholders in that form of fourth quarter dividends.

As previously communicated, we expect our CET1 and Tier 1 leverage ratios to be at the lower end of our target ranges for the first half of 2022, inclusive of the implementation of SACCR and the expected closing of the Brown Brothers Investment — Investor Services acquisition.

Turning to Slide 15, you can see a summary of our 4Q, ’21 and full-year 2021 results. I’ve already covered fourth quarter in detail. So let me say a few words about our full-year results before jumping into our outlook for 2022.

In summary, we’re pleased with our strong performance this year. Notwithstanding the challenging interest rate environment, we delivered a 5% increase in total fee revenue for the year with servicing and management fees reaching our highest levels on record.

Our expenses for the full-year remain well-controlled, and despite higher revenue related costs and investments in our business and people. As a result, even in last year’s low rate environment, we delivered positive operating leverage, and we’re able to drive pre-tax margin and ROE closer to our recently enhanced medium-term targets.

And with that, I’ll turn to outlook. On Slide 16, let me cover our full-year 2022 outlook, as well as provide some thoughts on the first quarter, both of which do not yet include the previously announced acquisition of the Brown Brothers Investment Services. We continue to target a closing by the end of the first quarter, although the timing could fall in the second quarter.

We are in the process of obtaining the required regulatory approvals, some of which have already been secured. The process is proceeding at a slower pace than anticipated with many regulators around the world addressing the high volume of global M&A activity. That said, given the current higher equity market step off and new interest rate forward, we now expect about 25% year-on-year EBIT growth for the acquired business for each quarter in the first year post-closing instead of just 15% year-on-year EBIT growth in our original acquisition deal modeling.

Now, as I usually do, let me first share some assumptions underlying our current views for the full-year. At a macro level, our rate outlook largely aligns with the current forward curve and assumes we see three US rate hikes in 2022, but the first hike occurring in March. We are also assuming around 5 percentage point to point growth for equity markets in 2022, as well as further normalized FX market volatility, which influences our trading businesses.

As for currency translation, we expect the US dollar will be stronger for the year, which will be a headwind to revenues, but mostly offset as a benefit to expenses.

So beginning with revenue. For the full-year, we currently expect that fee revenue will be up 3% to 4%, with servicing fees growing 2% to 3% both include about a point of currency translation headwind for 2022. Regarding the first quarter of 2022, we expect fee revenue to be up 2% to 3% year-over-year given equity market expectations and continued business momentum, with servicing fees expected to be up 1% to 2% and management fees expected to be up 8% to 9%.

For full-year NII, depending on the timing of the projected rate hikes, we expect 2022 NII to be up 10% to 12% on a year-on-year basis. Regarding first quarter of 2022, we expect NII to be up 3% to 4% year-over-year and still flattish sequentially.

Now turning to expenses. As you can see in the walk, we expect expenses ex-notables will be up just 1.5% to 2% on a nominal basis in 2022, as we continue to invest in the business and our people, while driving both positive total and fee operating leverage. We currently assume that this includes a 1 percentage point benefit to expenses due to the stronger US dollar.

You can also see on the walk that for full-year ’22, we expect another year of growth saves of approximately 3 percentage points to 4 percentage points, which will help fund variable costs and ongoing business investment scenarios like Alpha, digital, tech infrastructure and automation.

Regarding the first quarter of ’22, we expect year-on-year expense growth to be largely in line with the full-year guide and includes a seasonal compensation expenses, which occur in the first quarter. All-in-all, our plan is to invest behind the revenues and deliver both positive total and positive fee operating leverage.

Finally, we estimate our effective tax rate to be in the 17% to 19% range for 2022.

And with that, let me hand the call back to Ron.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Thanks, Eric. Operator, we can now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Alex Blostein of Goldman Sachs.

Alex Blostein — Goldman Sachs — Analyst

Hey, good morning, guys. Happy new year to both of you. So maybe we can start unpacking some of the guidance. I’m sure, there’s going to be a good amount of follow-ups on the back of that as well. But maybe just starting with the fee guide really zoning in on servicing fees, State Street’s obviously made a considerable amount of improvement in retaining clients and winning new business. So maybe help us unpack within the 2% to 3% growth for the year, what sort of contemplated from markets in terms of the benefit of the 5% that you guys highlighted earlier? So how much of the market benefit versus the net new business and pricing, and I’m assuming BlackRock is included in this guidance as well. But how much of a drag in the servicing fee revenue you guys expect from loss of the BlackRock mandate?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Alex, it’s Eric. Happy New Year to you too. Let me cover fees and then servicing fees, which I think is where your focus. Our guide for total fee revenue is up 3% to 4% for the year. Our guide for servicing fee is up 2% to 3% and obviously that includes about a percentage point of headwind from foreign exchange. So in effect, the servicing fees are up, for example 3% to 4% in our guide adjusted for currency translation.

If you think about the drivers, we’ve factored in all the known events both our growth, our installations, net new business and so forth. If you want to peel it apart little more deeply, we start off at a good equity market level, and we expect some year-on-year growth from equity markets that’s probably worth about 2 percentage points of a tailwind to growth. Flows and client activity, which are variable is probably worth another percentage point and part of our kind of fee structures.

Net new business is — continues to tick up. We expect core net new business to be up 2%, and then [Phonetic], obviously includes all the new onboardings offset by any attrition. So that’s on a net basis. And then obviously, there’s just a usual 2% grind down of pricing. And that kind of gets you to the low end of our range. We think there is some upside, which is why adjusted for currency, the servicing fee guide is in the 3% to 4% range. And what it does is? It represents the continued acceleration of our business towards our medium-term targets, which are really in the 4% to 5% range.

Alex Blostein — Goldman Sachs — Analyst

Great. That’s perfect. And just maybe staying on the topic, but looking at the expense side of the P&L, the 1.5% to 2% growth, I think is contemplated on obviously the fee outlook that you just outlined. If we are in a tougher equity market backdrop, and let’s say, you guys don’t hit the 2% to 3% servicing fee growth or the 3% to 4% fee growth, what is sort of the bookends around the expense growth trajectory that will continue this year? So in other words like in flat equity markets, should we expect you to be below the guide on expenses, given there is maybe more flexibility or kind of the range is the range, and the revenue will be more kind of working independently?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Alex, it’s a fair question, and you can see that part of the way we create some, I’ll call it installation for ourselves, as we think about equity markets and where they might go, whether it’s up a lot, up modestly flat or down is that we’ve designed our plans with the view that we should and intend to deliver a couple of points of operating leverage and actually a couple of points of fee operating leverage right, that couple of points gives us some flexibility to handle some variability in the — in what happens in actuality in equity markets. I think — so certainly, we will move within our range based on what we see.

Obviously, if we see a market — an equity market correction of down 5% or down 10%, we’ll do everything we can to come in below our range. And certainly, we can flex in this business a — a full point can be flexed, it’s not easy, but it can be flexed, and that would be the approach that we take. But we’re confident with kind of the level of equity markets they are today, part of this — part of what we see is fairly nominal uptick in equity market. So we think this a good kind of middle of the fairway plan, but we’ll certainly flex it, we — to the extent that, that we can.

Alex Blostein — Goldman Sachs — Analyst

That’s great. Thanks very much for the color.

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Jim Mitchell with Seaport Global.

Jim Mitchell — Seaport Global — Analyst

Hey, good morning. Maybe you could just talk a little bit about the BBH. I appreciate the discussion around the increase in EBIT from rates. How much if [Phonetic] that can you speak to their off-balance sheet sweep deposits, maybe update us on the level of that? And how you think those acted a rising rate environment in terms of the sweep pieces [Phonetic], is it pretty similar to the spread on deposits?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Jim, it’s Eric. The business that Brown Brothers has run in the Investment Services side, it’s performing well. So what we’ve seen is with the higher equity markets we’ve seen their servicing fees come in a bit stronger for this coming year. I think that deposits both on balance sheet and the swept ones are within the range of what we’ve seen. And I think we describe those as bit under $10 billion on balance sheet and a bit over $65 billion swept, and they’re coming in right around that range and that’s our expectation for 2022.

The — both the on and off-balance sheet do have a good translation into higher revenues as rates move up. And the on-balance sheet betas are similar to ours, and we’ve had very nice betas in the early part of the — the last rate cycle and expect to have that again on ours and on theirs. And then the off-balance sweeps also have betas. They’re not quite as strong as deposits, but they are in the range actually, and that also will provide some very nice, I think fee growth, as we take on that business.

Jim Mitchell — Seaport Global — Analyst

Okay. Great. And then maybe just pivoting to the asset management business, you had record flows, strongest flows in many years. Can you just describe where the biggest drivers of that growth are coming from? What you’re doing to enhance that growth and is this more just the environment’s grade or do you think there is some sustainability to that net inflow?

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Jim, it’s Ron. Let me take that. I think that the growth is reasonably broad-based in the sense that it’s firstly from our investments and ongoing investments in the ETF business. So you saw lots of strength in the core SPDR offerings, which are really instruments of choice for the — for large institutional investors, and good growth in areas, where we have invested active ETFs, fixed income, the low cost ETFs non-US. So we expect to continue to see a good performance there, particularly as we’ve worked to solidify our position with institutional investors.

Secondly, in the institutional, in the traditional institutional space, the teams done a lot of work in developing products that are companions to the core index business. We have a great client roster, and we’ve seen some diversification in the — in that business.

Then finally, we’ve got a great cash business there. And obviously, it ebbs and flows as cash does itself, but we will also benefit a little bit from rising rate environment, as the remainder of the fee waivers goes away. So it’s really across the board.

Jim Mitchell — Seaport Global — Analyst

Okay. Thanks for the color.

Operator

Your next question comes from Steven Chubak with Wolfe Research.

Steven Chubak — Wolfe Research — Analyst

Hi, good morning.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Good morning.

Steven Chubak — Wolfe Research — Analyst

So first Eric, I just wanted to unpack some of the NII. The assumption is underpinning some of the NII guidance. I was hoping you could just share some insights in terms of what you’re contemplating, as the Fed initiates QT [Phonetic] in terms of just deposit flight broadly or deposit run off, and maybe deposit remixing out of non-interest bearing deposits? And just in terms of spot rates where you’re reinvesting today versus the back book yield?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure. Steve, it’s Eric. Let me do that in reverse order. I think the front book and the back book are starting to converge in the investment portfolio, and you’ll see that our investment portfolio yields took a another small tick downward this quarter in fourth-quarter. But starting in first quarter, we’ll see that relatively flat, and then you’ll see a slow progression upward. So we’re comfortable with where we are in terms of long rates. And obviously the higher the long rates come in, the better off we’ll be.

The NII uptick for this year, and then, let me get to the question around balances and quantitative tightening, I think is — it’s just comfortably dependent on the Fed increases. I think we’re showing 10% to 12% expectations in NII, little more than half of that is off of rising short-term US rates, about a little less than a quarter is off rising non-US short-term rates, and then, the last portion is off of the rise in long rates. So we’re really geared towards the front end rates and then, that flows through directly to balances.

For deposit balances, we currently expect U.S. and international deposit balances to be flattish, I’d say this year. And I think we’re all wrestling with what’s the pace of the Fed’s actions in terms of rising interest rates, when does that start, and then when do they start with the — with some amount of quantitative tightening. And I think it’s just helpful to book, and there has been a lot of discussion about quantitative tightening over the last week or two, certainly it will happen.

If you go back to the last cycle, which was just three years, four years ago, so not a long time away, quantitative tightening started two years after the first rate rise and a full-year after the second and third and fourth kind of that steeper part of the rate rising cycle. And so I think quantitative tightening though there will be a bid ask range on this, is something to expect in 2023, more than ’22, and we’ll thereby and then have some effect on deposits.

How much? It’s hard to tell. As you know this cycle we’ve controlled some of the uptick in deposits. We had pushed them off in third quarter as you recall, let them back in this quarter. We will certainly see some deposits ebb downwards in ’23 and ’24 perhaps or potentially just stay flattish because the question is the pace of the quantitative tightening.

And if you recall, last time around just I guess three years, four years ago, I think the Fed felt like it tightened too much, right and created some disruptions in the short-term money markets. And so, while we expect some tightening to happen in, let’s say a year and a half from now or thereabouts we’ll see. The — I think the pace of the tightening may be more moderate, but anyway, we’ll see. That’s a — that’s call it ’23 topic. I think 2022 should be fairly straight.

Steven Chubak — Wolfe Research — Analyst

Thanks for that context, Eric. And just for a follow-up on how you’re thinking about capital management. You spoke about re-initiating the buyback beginning in 2Q. I was hoping you can give us some context as to like what level of payout you’re planning, as we look ahead to ’22, ’23?

And just in terms of future changes to the capital regime, any guidance you can provide on the impact of SACCR or and preliminary thoughts on the impact of upcoming changes under a Basel IV regime, would be really helpful?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure. There is a lot there, Steven, your question. So let me take it kind of from the near end timeframe to further out. We’ve — I think we’re pretty comfortable with our capital guidance that we will be at the low end of our 10% to 11% range for CET1 in the first quarter, that includes both the SACCR being implemented and the confirmation of the Brown Brothers acquisition. So that I think will carry us through at the low end of our range for the first half of this year. And we were, I think comfortable with both of those.

As we go through the year in the second quarter, we’d certainly like to start the buyback. We’ll see at what pace. The pace of a buyback start will depend on the kind of the exact capital ratios, as we hit first quarter and then, second quarter, we’ll see how OCI swings either positively or negatively. And so I think that then sets us up to start buying back stock in the second quarter and then proceeding at pace in the third quarter, fourth-quarter and beyond.

And then I think at that point, we’re back to trying to or we’re not trying, but operating within our guidance that capital return should be in the 80% plus of earnings. And that puts us, I think in a way that we continue to return through dividends and buybacks capital in a nice comfortable way. So anyway a nice path forward. But first half of this year, I think low end of our ranges, and then in the second quarter and then third quarter, fourth-quarter, we start to reinstate and then accelerating buybacks to a comfortable level.

The Basel III refinements, Basel IV end game, there are different ways to [Indecipherable] out there. It will certainly come to pass. Clearly we’ll get some benefits on the loan book, but we have a smaller loan book than others. So we’ll probably get some headwinds from the fundamental review of the trading book, and then, some headwinds from the ops risk capital charges. So my guess is, it will be a bit of a headwind. But like I said before, it’s been all factored into our capital ratio guidance. We generate quite a bit of capital each year, and we feel comfortable that we can continue to deliver on our medium-term targets of returning 80% or more of earnings back to shareholders.

Steven Chubak — Wolfe Research — Analyst

That’s great color, Eric. And just quickly, can you — did you quantify the impact from SACCR, just so we could start to reflect that in our models?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Yeah. I didn’t in the prepared remarks, but the rough amount we carry typically about $115 billion of RWAs, which were less this quarter. SACCR is — will cost us in the first quarter just over $10 billion. And we’ve got offsetting actions worth about half of that, about half, so call it around $5 billion. So I think net basis, it’s probably worth about $5 of RWA. But as I said before in my prepared remarks, this is all been factored in to our capital guidance that we gave back over the last several quarters, and we’re confirming and affirming that we will be within our ranges in the first half of the year.

Steven Chubak — Wolfe Research — Analyst

Understood, Eric. Thanks so much for taking my questions.

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure.

Operator

Your next question comes from Gerard Cassidy with RBC.

Gerard Cassidy — RBC — Analyst

Good morning, Eric. Good morning, Ron.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Hi, Gerard.

Gerard Cassidy — RBC — Analyst

Eric, can you give us some further color on, you gave us good detail on the servicing fee growth, and how you expect to see that 3% to 4% growth this year with some new inflows, as you pointed out, but also from some equity improvement in the markets, I think you said about 2 percentage points of that number. When you take the — when you look at the equity portion, how important is the U.S. markets versus EMEA and the other markets? Can you kind of give us a flavor, is it generally geared towards the U.S. markets that drives your growth?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Gerard, it’s Eric. It’s really a mix. I think maybe almost, if I just think about the ranges, it’s a bit under half that’s driven by U.S. markets closer to probably, I don’t know, a third-ish of European markets. And then, Australia and emerging markets, just because of the — in some cases, the higher fee rates is also important. That could be worth 20%, 25%.

The other is remember we have, part of our book is fixed income assets that we service and so that’s why equity market tailwinds effect part of our book, but not all of our books. In rising rates we’ve got the opposite effect in — on the fixed income side.

What I — just as we from a planning purposes, as we go into the year though on a point-to-point basis or if we were to stay flat from now through the end of the year versus the average of last year of 2021 that and of itself should give us at least a point [Phonetic], 1.5 of servicing fee lift. And then what we’re talking about is whether the point-to-point growth from December 31st to — 2020 to December 31st can give us that extra 0.5. So I think that, that’s how you get the roughly 2 percentage point tailwind that we expect. Some of it is in a way baked in assuming markets don’t go down, and then, a smaller piece is coming from some modest appreciation [Phonetic].

Gerard Cassidy — RBC — Analyst

Very good. And then as a follow-up, you discussed it as, has [Phonetic] your peers about the expectation of rising interest rates and short-term rates, Fed fund rates in 2022. Can you share with us the duration of the fixed income portfolio? And what rates should we watch carefully, that would impact the AOCI, meaning the mark-to-market would be negative for the portfolio?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Yeah. We — the duration of the investment portfolio we inch down this quarter, you could have seen that in the NII slide that we had, I think we’re at about 2.9 years. So trended down a bit from the last quarters — last couple of quarters. And right now, we’re a little more comfortable. We’ve been investing in the belly of the curve, kind of a two year to five year range. I think the 10-year up through 2 percentage points is quite comfortable for us including from an OCI management standpoint.

I think if you get a good bid above 2 percentage points on the 10-year, you kind of have a — you kind of have a — you got a double effect, on one hand you get an OCI hit, which obviously accretes back over time, so it’s temporary, and the other hand, you celebrate higher rates flowing through the investment portfolio over the coming quarter. So I think it’s a mix, but net positive if we have some sort of spike at the back end. But it would affect, just the mechanics of how we operate quarter-to-quarter on the margin.

Gerard Cassidy — RBC — Analyst

I appreciate that. Thank you, Eric.

Eric Aboaf — Executive Vice President and Chief Financial Officer

Thank you, Gerard.

Operator

[Operator Instructions] Your next question comes from the line of Rob Wildhack with Autonomous Research.

Rob Wildhack — Autonomous Research — Analyst

Good morning, guys. You had another good quarter of loan growth here with average loans up 7.5% sequentially. What were the drivers there? And how sustainable do you think that is into 2022?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Rob, it’s Eric. Loan growth has been good for us, the last, say, couple of years to be honest. I think we’ve comfortably driven loan growth quarter-after-quarter, up in the low double-digits on a year-over-year basis. This quarter, we continue to see good client demand, but we also shifted some — we also added some CLOs in loan form, as we reduce the CLOs and securities form from the investment portfolio. So there was a bit of a shift.

That said, I think in general what we’re comfortable doing is continue to grow core loans because that’s we all know, we’d have [Phonetic] a shift every quarter. This is more, more episodic just as we rebalance and think about stress testing and how to operate efficiently with our multiple constraints. But we’re still comfortable continue to grow this loan portfolio in the low double-digit range. It won’t happen every quarter. There is a little bit of seasonality, but we continue to see quite strong demand from our alternatives clients and private equity capital call financing. We see demand in some parts [Phonetic] of the alternative and real estate markets that we play in.

And the biggest focus I would say is, as we lend more and deploy capital to our clients, a lot of what we do is work with them and make sure that’s part of a broader relationship because that’s where it really is remunerative for us and for them and helps us grow the — helps us build the reputation and the momentum to build the fee line as well.

Rob Wildhack — Autonomous Research — Analyst

Got it. Thank you. And then turning to expenses and operating leverage, the outlook implies maybe a 2 percentage point delta between fee growth and expense growth, but it also bakes in plus 5% or 6% from investments and variable costs. Do you think of that as an — still an elevated level of investment, and there is some more operating leverage available longer term or is this kind of the required level of investment going forward?

Eric Aboaf — Executive Vice President and Chief Financial Officer

No, it’s hard to forecast the future. The amount of investments is partly around what’s table stakes in the marketplace and partly around where do we see opportunities to differentiate our offerings. And clearly, you’ve seen us invest in particular in Alpha, in the front office and Alpha that spans into the middle and back office. And we’re also finding opportunities in the back office to invest through a sort of feature functionality enhancements and custody and some areas of accounting, which also is attractive in segment by segment.

So it’s hard for me to say what’s the necessary amount of investments. We think there is a range. We think last year we probably invested a bit less than this probably, instead of 5% to 6%, I’d say, there was probably a 1.5 [Phonetic] less of investments during 2021. So I think what you’ll see us, you’ll see us flex the amount of investments from one year to the next.

I think what we’re conscious of is that confidence in investing should come from seeing the revenue growth and seeing the revenue growth from past investments and that’s what we’re seeing. We’re seeing the revenue growth from the past investments that we’ve made across the franchise, and I think that gives us the confidence to continue to carefully invest, in some cases, accelerate that.

But I think in modest ways, I think the other part of our culture has been to — at the same time, as we invest, find productivity and savings and that’s — we think that’s an important part of how to run a business. But certainly a business that over time we’re digitizing and automating should come with productivity savings and engineering. And I think the other part of our business processes, and I think you’d hear this from our Senior Executives, the more we can drive in productivity saves, the more we feel comfortable in investing and that’s a very — that’s a virtuous circle.

Rob Wildhack — Autonomous Research — Analyst

Yeah. That’s helpful.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Rob — yeah, Rob, what I — this is [Phonetic] Ron.

Rob Wildhack — Autonomous Research — Analyst

I’m sorry, Ron. Go ahead.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

What I would just add to that is that it’s actually good news that we’re seeing opportunities to invest in the business because particularly as we’ve built out the Alpha platform, which was originally aimed at the asset management space and the traditional asset managers, we’re now starting to roll out our Alpha for private market. So it’s good that we’re seeing the opportunities.

But I would underscore Eric’s point that notwithstanding that goodness, we’re focused on is [Phonetic] continuing to eke out higher and higher productivity and we see more opportunity there. So we see the ability of this virtuous cycle to continue for quite a while longer. And the fact that there are investment opportunities is actually a good thing because it shows that notwithstanding the narrowness of our — of where we operate, there is plenty of spaces to grow.

Rob Wildhack — Autonomous Research — Analyst

Got it. And fair to characterize it then that this level of investment maybe last year and this year gives you the capacity and the room to play both offense and defense?

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Yes.

Rob Wildhack — Autonomous Research — Analyst

Great. Thank you.

Operator

Your next question comes from Glenn Schorr with Evercore.

Glenn Schorr — Evercore — Analyst

I like that, that Ron [Phonetic]. Question, on the deferred comp acceleration, I’m just curious what level employee are we talking? And I’m asking because the deferred portion obviously you’re saying to get practices more competitive, so that presumes that you were deferring more than peers and that going forward, you’ll have a higher cash piece going forward. I’m just curious on it’s probably included obviously in your expense guide, but what’s changing here and why was well [Indecipherable].

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Yeah. Glenn for the employees that are going to feel this would be are not our most senior employees. It would be kind of the middle senior, lower senior, if you will and down. So in our parlance, AVPs, VPs, MDs and some of the Senior Vice Presidents will see it [Phonetic].

Glenn Schorr — Evercore — Analyst

Okay.

Eric Aboaf — Executive Vice President and Chief Financial Officer

And then Glenn, just to give you a context. The — we’ve made this change. We had made one change five years back, and I think this now gets us to be competitive with the marketplace. And the way the facts that might help a little bit is way back when we had immediate cash in the 30% range of compensation for the average employee, the deferred cash was 40% and the equity — the deferred equity was 30%. That was a place that was completely out of market.

We fixed about two-thirds of that five years ago and got to 50% immediate cash, 20% deferred cash and 30% deferred equity. And now we’re with this final change, we’re going to take that up to the immediate cash to 60% to 65%, the deferred cash to just 5% to 10% mostly for the most senior folks. And then the deferred equity stays at 30%. So we think we’re now in line with the market, as part of this change.

What does happen is, you’ve got to crystallize some of the — some of these deferrals into the P&L in the current period. And then, what that allows us to do is going forward to add to the cash mix and because we’ve crystallized the previous deferrals those don’t hit the P&L in the future, but the new cash will hit the P&L in the future. So this will be neutral to subsequent periods on the expense line.

Glenn Schorr — Evercore — Analyst

Okay. Thank you. Very helpful. The one — I was going through your four objectives, Ron, and the first three, I think are straightforward and I think everyone has high confidence in your ability to do those. I’m curious on the how to and what you’re doing, what you’re going to measure, and number four, which was the must be a higher performance-oriented organization. Just curious, how you talk to us [Phonetic], how you are going to execute on that?

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Yeah. So I mean this is an ongoing objective of ours, Glenn, and it really is around performance culture. And if you think about culture, which is a very used and sometimes maligned term, for us it’s about desired behaviors and on the flip side kind of eliminating undesirable behaviors. So what we’re focused on is those desirable behaviors, all related to kind of driving performance.

I would argue that it’s even more important now than when we started a couple of years ago because on top of everything else that we need in terms of serving our clients and serving our shareholders, we’re now operating in this hybrid world for the foreseeable future. That puts a burden, new burdens and new requirements on managers particularly middle managers. So it’s all about being able to eke out the benefits, which are considerable in a hybrid world in terms of employee flexibility and some real estate cost savings and those kinds of things, but at the same time making sure that we’re continuing to deliver where we are. So we think about performance in terms of — and we think about culture and high performance in terms of behaviors.

Glenn Schorr — Evercore — Analyst

Thanks a lot, Ron.

Operator

Your next question comes from Brennan Hawken with UBS.

Brennan Hawken — UBS — Analyst

Good morning. Thanks for taking my questions. I wanted to circle back, Eric, I believe, I just wanted to kind of clarify some of the points you made. I think you talked about BBH and the EBIT growth expected to accelerate here in 2022 up to 25%. So just to make sure, I’m level setting correctly, you also talked about some strength in servicing if not all NII. That 25% should we apply that to the $375 million that you provided previously when you announced the deal, or did that actual number shift from expectation? And am I using the right baseline? And then for the other disclosures, you provided around the revenue and whatnot. Should we — did those shake out in line with expectations or did they work out to be a little better as you alluded to? And how should we think about that baseline when we think about three quarters of the year here for them?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Yeah. Let me — fair questions, Brennan. It’s Eric. We had as you remember accurately estimated their 2021 performance to be EBIT of about $375 million and they came in right around that level. So we’re comfortable with that as a base case. And if you recall, we had shown 17% growth from 2020 to ’21 in our — in some of our documentation, as we announced the Brown Brothers Investment Services acquisition.

From a deal model perspective at the time we had expected half of the ’21 base to grow at about 15%, so in line with the past, part of that was the equity market tailwinds continuing to play through, and part of that was just good business performance, the — our Brown Brothers colleagues and Investment Services really drive a nice set of initiatives each year to drive growth, client activity and so forth.

And what we’re finding now is because of the equity market step off and the interest rate environment, and we expect to be roughly at about a 25% EBIT growth from ’21 to ’22. I think a portion of that is the — is on the equity, it’s on the servicing fee line. A portion of that is on the fee line that comes from the sweep, remember that, that comes through the fees as well, and then a portion is from on-balance sheet NII, and I don’t have the pieces handy. But clearly the interest rate tailwind is probably the more significant of those factors and that will affect both the on-balance sheet and the swept deposits.

Brennan Hawken — UBS — Analyst

Okay. Great. Thank you for that clarification. And then a separate issue for my second question, it looks like there is a transitional leadership, it seems like Cyrus is retiring in the asset management business, that’s been a business, where there has been both speculation and open discussion with you all in the past about strategic direction, and whatnot. What does the transition in leadership present as far as an opportunity to shift strategic direction? And what can you let us know about your updated thoughts on that business and whether or not a leadership transition is impacting the direction you want to go? Thanks.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Yeah. Brennan, I mean, as you can maybe see from our results, we’ve invested in that business over the years, the investments are paying off. We like the business. It’s very complementary to the core servicing business having one of the largest asset managers, also as [Phonetic] our client of our core businesses have been able to let us have a bit of an R&D laboratory. There is client overlap in certain segments, like asset owners and sovereign wealth funds that we’ve gotten better and better at leveraging. So we like the business. We intend to stay in the business. Cyrus — under Cyrus’ leadership, they’ve done a great job, and the numbers speak for themselves there.

So I wouldn’t expect to see a broad strategic change here, certainly not in that direction, I just outlined. I mean, there is always opportunities to do more and do better in all of our businesses. So we will want to continue to do that. We’ve got a very strong talent base there. But this is an attractive business and one in which we will look inside and out and get the right person to take us to the next level here. But we have full intention of continuing to brought [Phonetic] and grow that business.

Brennan Hawken — UBS — Analyst

Okay. Thanks for taking my questions.

Operator

Your next question comes from Mike Brown with KBW.

Mike Brown — KBW — Analyst

Hi, good morning. Thanks for taking my questions. So I appreciate the update on BBH and the EBIT outlook there. And I guess as we move closer to that closing date, I was just curious that the change in the EBIT outlook and the operating environment, does that actually trigger any increase in the total consideration that will need to be paid, obviously, the implied valuation would be lower than that [Phonetic] announcements that was just one thought that cross my mind. And then the follow-up there is, can you just remind us of the unexpected fees synergies specifically which one is do you feel confident that you can deliver on sooner after the close versus the one that will take more time to come through? Thank you.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Yeah. Mike, why don’t I start that and I’ll turn the synergy part of the question over to Eric. But no, there is no contingencies in the purchase price either up or down other than the usual ones that you would expect in terms of risk management. So no, there is no — there is no additional payment that will be due here.

Eric Aboaf — Executive Vice President and Chief Financial Officer

And Mike, it’s Eric. Just on the synergies, I think each one of them has a cadence, some of which we did spell out. I think on the cost synergies, which is the opportunity and that’s obviously come — sometimes will come out of their base of expenses, sometimes our base of expenses, as we put the two together. We had estimated about 40% of our cost synergies would come in year one, and then the balance year two and three and that’s probably the single largest area.

In terms of the fee synergies, the balance sheet actions should come through relatively quickly. We can modulate the amount of sweep versus on-balance sheet deposits because we’ve got the capital resources plan for that. And I think that’s one of the ways that we create real value.

And then the last one on the fee revenue synergies, some of the FX kind of market, synergies come in a little more quickly, right, because it’s about offering a broader set of say, FX products on which we’re more capital intensive than simple swaps forward. That is more about setting up clients, and then quickly being there for them. And then some of the servicing ones take a little longer and part of the sales cycle, but I think there’s a good mix.

And obviously as we work on closing and bringing Brown Brothers in part of what we’ve been doing is, as you expect kicking the tires on what are the opportunities, how to go to the next round of definition on those, so that we can hit the ground running. And as I said when we announced the deal, we’d like to meet or exceed our targets. And I think the exogenous market tailwinds are part of that, but we’d also like to do it on through old fashion execution as well.

Mike Brown — KBW — Analyst

Okay. Great. Appreciate the color there. And maybe just one last one, just a quick clarification. Apologies, I missed, but did you quantify the discrete tax benefit or is the best way to think about that is just back into it after considering your typical tax rate?

Eric Aboaf — Executive Vice President and Chief Financial Officer

It’s — I wrestled Mike with that because there were actually a series of tax benefits that came through this quarter. There was some closing of the previous year tax books. There were some foreign credits that accrue in those jurisdictions, which then help our GAAP taxes, and then there are some foreign credits, but then kind of mapped back into the U.S. as a tax payments or [Phonetic] deduction. So there is a series of them.

I think the best way to do it is they probably take, our full-year tax rates are typically in the 17% to 19% range. So you take the midpoint of that, think about full-year this year now with these discrete, which were more elevated than usual in a good way, got us to closer to 15% tax rate. And I think the difference is probably the — you might call the lumpy piece.

What I do — what I would though also note is that I think tax planning has been the kind of thing that we’ve done for many years. We do it. We’re always on the bright side of the line and we do it carefully. We part of it being an international bank, we like other international banks are able to do some a modest amount of tax planning. And so you’ll see it, I think it’s — we see that come through the P&L annually. It just tends to be a little lumpy quarter-to-quarter, and it was a little more lumpy good than usual this particular quarter.

Mike Brown — KBW — Analyst

Okay. Understood. I appreciate. The [Phonetic] taxes are always complicated subject. So thanks for the — thanks for the color there, Eric.

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure. Thank you, Mike.

Operator

Your next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell — Deutsche Bank — Analyst

Great. Thanks. Good morning. Maybe just circle back on the deposit opportunity for BBH. Just to clarify, I think you said there is right now $10 billion of deposits at [Phonetic] on the balance sheet of BBH and then 55 [Phonetic] additional in the sweep program. And I think initially you’re planning to bring about the total of $20 billion inclusive of the deposits on the balance sheet over to sweep [Phonetic] to convert, initially, I think $14 billion was the conversion to get you to $20 billion. Maybe if you could just update us on the plan for 2022, if you do close at quarter-end in the first quarter of what you’d like to bring on?

And then maybe just talk more strategically about what — maybe what kind of portion of that sweep opportunity you might bring on to — on the balance sheet, I guess, capital permitting?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Brian, it’s Eric. I think you have a good estimate of those, just for the broader group. I think we said about $5 billion to $10 billion are on the balance sheet today, about $65 billion are off-balance sheet and swap. And as we consummate the acquisition and we’re targeting the first quarter. We said it — the end of the first quarter, we’re targeting. We said it could be in the second quarter. This stuff just takes time. We’re looking to bring on the $5 billion to $10 billion that they have on the balance sheet and probably another 10-ish [Phonetic] or so that is swap.

I think over time the question is really at what interest rate levels, do we operate at? If we’re at prevailing short rates of 50 basis points, let’s say, then on-balance sheet deposits aren’t terribly attractive. But when you hit prevailing short rates of 100 bps or 200 bps and obviously you can do this across different currencies, than you’re more inclined to bring more on-balance sheet. And so we think of it as a range.

I think we also though are quite — we want to be quite thoughtful about maintaining a program that works well. It works well for our clients and the Brown Brothers Investment Services clients. It works well for a number of global financial institution that they have relationships with that they sweep primarily dollar deposits to who appreciate those deposits.

And so we certainly want to maintain the program for sweep. We want to maintain it in size, but you can certainly see swings of another $10 billion beyond the initial move potentially. But we’re — I think we’ll see when we get there and part of it will be discussions with the clients themselves on one hand and part of it will be the — with the counterparties. And I think there will be a — there will be goodness and opportunity here in most circumstances.

Brian Bedell — Deutsche Bank — Analyst

That’s great color. And maybe just a segue to second question on deposit beta expectations. I think you mentioned you thought they might be the — similar to the last hiking cycle. Just to confirm that it seems like they moved around a bit during the cycle, but kind of ended up around, looks like a little over 30% of a deposit beta relative to Fed funds rate at the time. I don’t know maybe if you can clarify that and if you think that would be similar to this cycle? And then, obviously, if you would be treating those BBH deposits in a similar fashion or do they have a different profile?

Eric Aboaf — Executive Vice President and Chief Financial Officer

Sure. Brian, and it was actually a good opportunity, as we see rates rise and the likelihood of Fed funds. So we did get a chance to go back and revisit what we both said and what we saw in from a deposit beta standpoint back in 2015, 2016, 2017. I do expect the Brown Brothers deposits behave similarly to ours. They are primarily with asset managers. They are currency by currency similar to ours.

But if you go back, and I think we were good about disclosing our quarter-on-quarter interest bearing deposit betas and usually you have to do it by currency rates because of how the betas play through. But in the first rate, the first one or two rate hikes we saw and expect again to see deposit betas in call it 10% range, maybe 10% to 15% range, but it’s quite low. When you get to the third, fourth or fifth hike, you’re in the 30% range plus or minus, as you leg into the rate cycle.

And it’s really when you get in the past there in the fifth, sixth, seventh hike, where you’re likely to get closer to 50% interest-bearing deposit betas. Now, I’d like to get there. I — we’d be pleased with 50%, if we get there with that level of prevailing rates. But there’s, I think there is a good opportunity here because, in truth we’ve been quite limited in our ability to earn NII that covers our cost of capital and so a lot of this is just catch up to a levels that are more in line with the long-term averages.

Brian Bedell — Deutsche Bank — Analyst

That’s great color. Thank you.

Operator

There are no further questions. I’ll turn the call over to Ron O’Hanley for closing remarks.

Ronald P. O’Hanley — Chairman and Chief Executive Officer

Thank you, operator, and thanks to all on the call for joining us.

Operator

[Operator Closing Remarks]

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