Eric Aboaf: Yes. Let me describe it as follows. The investment portfolio has an average duration of a bit over two and half years, so call it average maturity of five years. And so you go through the math, and that means about 20% of it rolls on, rolls off in a typical year. It will move around a bit. I think what we found, and that’s invested across the curve, it’s invested in various currencies, so there’s a mix. So you tend to get as you have rolled-off, rolled-on somewhere between 1%, 1.5% to sometimes 2.5% tailwind for that particular quarter of the amounts that are rolling off and rolling on. And so that’s what’s actually been one of the factors that’s in billing the yields and the yield improvement on the profile and both how it was designed and what we’re pleased to see.
So that will be a gentle tailwind assuming five-year rates stay more or less where they are and European rates continue to float up. And so we’ll just have to — that will be one of the tailwinds that we see. In terms of more dramatic action, we obviously always think about what we might do. What we’ve noticed is that if you have high risk-weighted asset positions in your risk-weighted asset-intensive positions in your portfolio, then what happens, you could take the loss, you reinvest, and it helps accelerate a buyback, right. That’s why I think a number of players are doing that. Doing the — just the — for vanilla instruments, treasuries, agencies, government-guaranteed securities, there’s — I think the benefits are a little closer to a push.
We could take some losses through the P&L. They’re already in the equity accounts through AOCI, you put on NII in the future. I think that’s just moving around of the financials, and we just don’t find that that’s a particularly compelling trade to do. We’ll always evaluate well. So we see if we have specific positions that might need some adjustment. But we don’t see that as particularly compelling. It’s not really compelling economically. And the financial benefits you guys can kind of model out either way. And so we — I think we’re pleased with the ability to continue to manage the portfolio in line with our current processes, and they’ve been numerous. The NII is up significantly this past year and up another 20% next year, and we’ve got a tailwind and it — I think it bodes well for where we are and where we’re going.
Alexander Blostein: I got you. Great, thanks so much.
Operator: Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.
Brian Bedell: Great, thanks, good morning folks. Actually on net interest revenue outlook for 2023, Eric, can you talk a little bit about what you view as sensitivity to say if we had rate cuts in the back half of the year, I don’t think that’s assumed in your outlook, but just if you can talk about that dynamic and whether you think that would just be offset by reducing the deposit beta? And then also on the foreign deposit beta that you talked about, which is much better than U.S. Do you expect that to continue or do you see incremental foreign deposit betas moving higher from here?
Eric Aboaf: Yes, let me do it in reverse order. The U.S. versus foreign currency betas in our experience, this cycle, prior cycles, do tend to run at different levels, partly because the U.S. has the structure of noninterest-bearing versus interest-bearing deposits. So the client deposit betas are in a subset of the total and partly because the international markets just operate a bit differently, how we’re paid and how that — those expectations have been set over, I’ll call it, decades for the industry, operate differently. So I think for the — as we look into the next few quarters, we think the U.S. client deposit betas ex any new money that we bring in on an initiative basis is going to be in that 65% to 70% and the international betas, we think will continue in the 20% to 50% range when you look at Euros, Pound Sterling, Canadian Dollars, Aussie Dollars and some of the other currencies.
So we think they’re kind of in the — they’re going to be in this zone and that gives us some ability to continue to take advantage of the interest rate increases. If I then work through the other part of your question, what happens with rate cuts, that’s in our expectations, that’s in the forward curves, especially for the U.S., that there could be a December cut. There’s some probability there could be a cut before that. I think it doesn’t dramatically affect because they are late in the year. The rate cuts don’t dramatically affect the NII forecast, so we’ll kind of take it as it goes. I do think you’re — as you’re intimating, there’s a bit of this offset, which is if the Fed’s cutting rates, and there’s probably going to be even more cash that clients keep on hand and deposits in the system, there’ll probably be some offsetting impact.
And obviously, with the U.S. betas higher, conveniently rate cuts actually at some point help with the NII as well. So I think there’s a fair amount of — there’s a range of scenarios, let’s call it, in the second half of next year. And so my guess is, Brian, we’re going to be having this conversation often with you. And we’ll certainly keep you posted as we see some of those scenarios develop or there’s more variability.
Brian Bedell: That’s super helpful. And then just maybe on asset servicing, just maybe an update on how you’re seeing the pricing headwinds fold out for this year and also obviously, you typically do get a pricing headwind just from a mix shift towards ETFs, but maybe if you could talk about whether you think that might be set offset by some of the growth in alternatives? And then I know I think there is an expense offset too or I should say, I believe the margin is the same on ETFs versus say, mutual funds, so you again an expense offset, so maybe if you just want to confirm that?
Eric Aboaf: Yes, Brian, I think the pricing experience that we’re seeing in the industry has been stable and consistent over the last few years, and we expect it to be consistent into next year and beyond. We just have the standard because our contracts are tied to equity markets, when they roll over every four, five, six years, typically, folks are thinking whether they expect equity markets to be. They know we’re going to get paid, they’re going to pay us more in the coming years, and they want to share some of that. And so there’s a partial pricing offset. But it’s in the 2% headwind per year on servicing fees and been relatively consistent.
Ronald P. O’Hanley: Yes. Brian, it’s Ron. The mutual fund to ETF shift, the — I mean there’s been some high-profile conversions of mutual funds to ETFs. But that’s — there’s not a lot of that going on. More typically, what you’re seeing is ETFs being added to lines. And yes, the economics are different, the revenues fees are lower, but also particularly when you’re at scale like us, the expenses are much lower. So it’s not meaningful in this overall revenue kind of guide that we’re giving you.
Brian Bedell: Yeah, perfect, great. Thank you so much.
Operator: Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.
Brennan Hawken: Good morning, thanks for taking my questions. So I’d like to start on capital. So the buyback sends a strong message. Ron, very encouraging to hear about your comments on M&A. But I wanted to clarify that the buyback is up to $4.5 billion. So does the upper end of the range there assume that you’re going to see some AOCI accretion and is the quarterly range of $120 million to $200 million still the right way to think about it, if rates are stable?
Eric Aboaf: Brennan, it’s Eric. The answer is yes and yes, right? If you think about it, we forecasted just you guys just as you have earnings and coming through the P&L, AOCI in that range, $120 million to $200 million a quarter, it bounces around a little bit and it may with movements in rates. But the pull apart has been good to us and will be a nice tailwind. There’s some normalization of RWAs, which I mentioned into the first quarter, then there is some RWA growth in our plans because we want to continue to lend more to clients and support more with their foreign exchange or hedging activity so we’ll continue to do that. And then there’s the buyback. And our plan is just to at pace, get back into our range and that authorization comfortably gets us there.
Brennan Hawken: Okay, excellent. And then a couple folks have touched on it before, but maybe if we think about the fee revenue, can you please update us on the impact of market moves to fee revenues and whether or not there also a corresponding impact on the expense side to I’d assume there’s at least some degree of impact there? Thanks.
Eric Aboaf: Yes, let me do it this way. I think as we’ve — we have been relatively consistent here and I think the guidance will hold a 10% average change in let’s call it, an increase in equity markets, right, will typically lead to about a 3% increase in servicing fees, if you have both of those on average. So that’s the kind of gearing we have. It’s higher on management fees, 10% higher equity and markets tend to be closer to a 5% increase in management fees. On the expense side, if I — it moves around a bit, but I think it’s a 10% average increase in equity markets. Probably close to let’s say around — the range around a percentage point increase in expenses could be a little bit less, it kind of depends. But our subcustodian costs are — have a gearing towards equity markets and fixed income markets, market data, in some cases, does as well.
So it could be half a point, could be a point, and that’s part of the what we have in the expense walk and outlook that we have given and in some ways I think we are actually pleased to see that particular expense increase because that particular expense increase comes with a real revenue growth and that’s EBIT and earnings growth when you bring it all together.
Brennan Hawken: Excellent, thank you for that color.
