BlackRock reported its Q4'21 earnings Friday, which says the advisor expects fee waivers to cease as we get into 2022. CFO Gary Shedlin comments, "For the fourth quarter, BlackRock generated revenue of $5.1 billion and operating income of $2.1 billion, up 14% and 11%, respectively, from a year ago.... Fourth quarter base fees and securities lending revenue of $4 billion was up 17% year over year, primarily driven by 11% organic base fee growth and the positive impact of market data on average AUM, partially offset by higher discretionary money market fee waivers versus a year ago and strategic pricing investments over the last year."
He tells us, "We incurred approximately $135 million of gross discretionary yield support waivers in the fourth quarter, essentially the same as the third quarter, bringing total waivers to approximately $500 million for the full year. Given the current prospects for higher rates in the near term, we now anticipate most of these waivers would cease shortly after the first 25 basis point increase in the Fed funds rate, resulting in a one-half basis point increase to our annualized effective fee rate. Recall that approximately 50% of these gross fee waivers are generally shared with distributors, reducing the impact on operating income."
Shedlin explains, "Institutional index net outflows of $118 billion in 2021 reflected equity net outflows ... partially offset by fixed income net inflows as many large clients rebalanced portfolios after significant equity market gains or tactically shifted assets to fixed income and cash. BlackRock's institutional active franchise generated a record $169 billion of net inflows in 2021, reflecting broad-based strength across all product categories and the funding of several significant OCIO mandates. We are seeing strong momentum in our OCIO business, evidenced by another significant core fixed income funding in the fourth quarter."
He also says, "Finally, BlackRock's cash management platform generated $44 billion of net inflows in the fourth quarter and $94 billion of net inflows in 2021 as we continued to grow market share in a persistent low-rate environment by leveraging our scale, product breadth, technology and risk management on behalf of clients. It has been another strong year for BlackRock. Our global scale and diverse platform allow us to continue investing for the future, whether in good markets or more challenging ones, and our differentiated business model remains incredibly well positioned to sustain industry-leading organic growth and deliver long-term shareholder value."
During the Q&A, Shedlin replies, "We think we have very sticky assets.... We're obviously very well-positioned in terms of our broad-based fixed income platform. So whether it's unconstrained, high yield, total return or short duration, I think we've got that, so we're ready for a rotation. And more importantly, I think, really, is if rates go up, a bunch of cash is likely to come off the sidelines."
He adds, "So that will enable us to basically move that cash into other asset classes. And as I mentioned in my remarks, very importantly, we waived $500 million of fees last year in our cash business. That first 25 basis point move by the Fed, and many people think that could come as early as the first quarter, we think that will free up almost all of those waivers. That will have about a half a basis point increase on our annualized effective fee rate. And obviously, we've talked about while we share roughly half of that with our distributors, that will drop a significant amount of incremental profitability to the bottom line."
BNY Mellon also reported earnings Tuesday (see the earnings transcript here), and discussed money fund fee waivers. On the earnings call, CEO Todd Gibbons states, "Revenue of $15.9 billion was up slightly year-over-year as 2-plus percent organic growth and the benefit of higher market levels offset lower net interest revenue and higher fee waivers. Fee revenue was up 4% year-over-year and about 9% excluding the 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 generated."
He continues, "$70 billion of net inflows in 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 flows and improving market share."
CFO Emily Portney comments, "Money market fee waivers, net of distribution and servicing expense, were $243 million in the quarter, an increase of $10 million compared to the prior quarter, entirely driven by higher money market fund balances with no meaningful impact on pretax income."
She tells us, "Our expectation for continued organic growth and lower fee waivers result 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."
During the Q&A, Portney responds, "Waivers are a function of both balances also and rates. And you're correct, we are just looking at the full -- and our guidance is baked in the forward curve with three rate hikes. We have pointed out in the past that with the first 25 basis point hike, we would expect to recoup about 50% of the waivers. Having said that, we do also expect that balances to begin to decline a bit, especially by, call it, the third or fourth hike. So we do ... expect some runoff in balances."
She adds, "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."
