Computershare Limited (CPU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Computershare Limited Acquisition of Wells Fargo Corporate Trust Services and Equity Raising Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Stuart Irving, Chief Executive Officer and President. Please go ahead.

Good morning, everyone, and welcome to today's call. It's a special day for Computershare, and we're glad you can join us. On the call today, I have Nick Oldfield, our Chief Financial Officer; and also Michael Brown from our Investor Relations team. And today, we'll take you through our transformational acquisition in Corporate Trust and also the underwritten accelerated renounceable entitlement offer to partially fund the transaction. Now we've released a presentation pack to the ASX, and it is on our website. And I'm really just going to refer to the first 2 pages of the pack on this call. And then as the operator said, we'll then open up for questions. And just as a reminder, we will be talking in U.S. dollars, unless we state otherwise. And we do want to provide you with plenty of detail today, so we'll show you some very clear disclosures in this deck. But as well as the numbers, I will also talk about why this acquisition is so attractive, why we like the Corporate Trust sector and what our integration and growth plans are going forward. So let's make a start on Page 7. So today, we're announcing the acquisition of the assets of Wells Fargo Corporate Trust Services, or CTS as it's called in the U.S. As many of you will know, we have been looking at accelerating our growth strategy in the U.S. Corporate Trust market for a significant period of time. Now this purchase catapults us to a clear top 4 market position overall, with CTS holding a #1 market position across a range of the products. But before we get into the business, I'm sure a number of you are wondering how was Computershare able to buy this asset, what about other local players and PE firms and how did this acquisition come about? Well, we've been patiently courting Wells for a couple of years on the asset, and we've got a good business relationship with Wells elsewhere in the group. And given that they're now simplifying their business, the timing has worked for both organizations. And Computershare did have some advantages in the process. Banks own most of the other Corporate Trust providers, and they have to put significant reserves against the assets and their total cost would be higher. We would also -- we also have a U.S. banking license, also credit ratings, and you need all of those to operate in Corporate Trust. And of course, not all PE firms have them. We know how to extract the businesses that are entwined with their parents. Now we've done more complex separations and transitions on this before and delivered the expected synergies. But it is hard [indiscernible] and technical. And again, this may well put some other people off. And we were also able to do detailed DD on the ground. We have lots of resources in the U.S., and we've had full access to the business. And we've been able to satisfy ourselves that we know exactly what we're buying and what we can do with it. So fortunately, given the investments we have made and the platform we have built, we were very well placed here. Before we go further, let me just recap on what Corporate Trust actually does. Corporate Trust provides governance and administration services for corporate and government bond issues. A corporate trustee is formally appointed via trusteed for the life of the bond to ensure the bondholders' rights are appropriately administered and maintained. Now CTS commenced operations over 80 years ago and now administers a portfolio of over 26,000 mandates. The average life of these mandates is over 9 years and its relationships with the bond issuers can be over 20 or even 30 years. It has an excellent reputation and very strong client retention. Now these appointments provide a growing stream of recurring trust fees. Recurring revenues make up more than 75% of total income. And in calendar year 2020, CTS had total revenues of around $480 million, revenue ex margin income of $390 million and an EBITDA of approximately $84 million. The business has around 2,000 full-time employees, mainly located around the Midwestern states. And the purchase price for the acquisition is $750 million. The full spend, including regulatory capital and liquidity and standup CapEx is around $1 billion. Now the standup costs are a little bit higher than we would typically expect. It's all about us standing up a business that was deeply integrated across a larger bank and setting it up to run in the Computershare environment, and that tech infrastructure is not coming over. Most of it is one-off IT and systems-related costs, and we have a deep handle on what needs to be done. Now we are funding the deal with a mix of new debt facilities and equity via fully underwritten renounceable entitlement offer, and we think that this is important and a fair structure for all eligible shareholders. And we're paying 8.9x EV LTM EBITDA pre-synergies for the acquisition. We also have a detailed plan to deliver $80 million of cost synergies over the next 5 years. As a reminder, for the first couple of years, we will be focusing on separating the business from Wells. And then as we integrate it into Computershare, that's when we'll deliver the majority of the savings. Now this leads us to ultimately a 15%-plus management earnings per share accretion on a pro forma FY '21 basis, including full run rate synergies. And as we build and integrate this business, we have a clear pathway to 15%-plus ROIC in CTS in over 4 years. Post completion and including the equity raise, our approach to capital management is maintained and the net debt to management EBITDA leverage ratio will be around 2.5x. Now that is a little over our neutral range. But after 12 months, with the operational cash flow we generate across all of our businesses, we expect to be back under -- back into our neutral zone under 2.25x. And as many of you know, our balance sheet does delever organically. I'm now on to Page 8, and I'll talk you through a little bit of the strategic rationale. Now some of you will have heard me say that outside Issuer Services, our existing Corporate Trust business is a jewel in our crown. We know this business very well. CTS has many of the same attributes to what we have been successfully doing in Canada for over 20 years, and in the U.S. market itself over the past 4 years. We are the clear market leader in Canada, and this acquisition is a continuation of our strategy to build share in the U.S. Now the key members of the CTS management team are transferring across to Computershare. And with their combined 26 years of average industry experience, we have a lot of expertise that we can leverage to grow the business and continue to improve the returns. Now we like Corporate Trust because it has structural growth. The volumes of bond issuance and securitization programs have grown by around 7% to 8%, that's 7% to 8% per annum over the last 25 years. This is a market where $20 trillion of CT assets under administration, and this business has high-quality compounding fee revenues. The barriers to entry are significant, too. Our U.S. Corporate Trust business has multiple regulatory licenses and approvals, even though we were only ranked #8 in that market. And importantly, Corporate Trust is capital light and has scope for high returns on invested capital. After the initial standup, CapEx costs, integration and regulatory and liquidity costs, we do not need to invest significantly more capital in this business to grow. It is capital light, just like our Issuer Services business. And the 15% ROIC pathway we map out on Page 9 is based on continuing organic growth, cost savings and the interest rate curves as they are today. And we're not armchair economists speculating on margin income or relying on any moves in rates to generate these returns. But why do I mention interest rates? Well, simply because there's over $60 billion of third-party cash balances that will transfer over. And to be clear, we bought CTS for its strategic appeal as a stand-alone operating business. That discipline was absolute. That these growing balances and the optionality to interest rates they provide may deliver meaningful value when interest rates eventually trend up. However, let me break up the $60 billion. Around $17 billion of that is very similar to the deposits we already have at Computershare. So going forward, that type of deposit doubles in the group. And finally, there's an additional $40 billion or so of average balances in money market funds. Now these earn a basis points fee. And we also believe that we can switch around $6 billion or more of these deposits out of MMF and into our traditional higher-yield client deposit buckets after we complete. Now this recapture strategy from MMF into balances has been driven through a reverse of the Wells' strategy to move these balances off their balance sheet. Now including Computershare's own $17 billion of average daily balances that we announced in February, we expect to have around $80 billion of average client balances in Q2 FY '22. Now even for a miserable dyer old Scott like me and a miserly grumpy Yorkshireman like Nick, when and if rates rise, we might even be able to crack a smile as clearly, we will see further benefits. And finally, speaking more about what I love, there is lots of scope for product improvement and technology innovation here. We can improve the customer experience, enhance existing products to deliver additional revenue streams and lower the total cost to serve and drive a digital-first strategy in an industry that has typically not invested in tech. The business very much reminds me of U.S. registry in the 1990s. And overall, that strategy didn't work out too badly for us. So I'm now going to hand over the call for Q&A. Thank you.

[Operator Instructions] Your quick first question comes from Ed Henning with CLSA.

Can you just touch on how you think about the competitive environment in the U.S.? Do banks potentially price cheaply to get the full customer relationship? Or is there a risk of that? And is -- how do you, I guess, compete on a stand-alone basis? And is there any difference between the U.S. and Canada, please?

Thanks, Ed. I guess one of the key questions I always ask when we're looking at an acquisition is what will happen when we changed the name above the door, right? Is it going to be detrimental as far as sales activities because we're not a large U.S. bank, for example? Will it actually be a benefit? We spent a great deal of time talking with the management team. And clearly, while Wells has a lot of deep expertise in this marketplace, the consensus is that with Computershare and our ability to apply new technology and services that enhance the client experience, there should not be any significant client attrition issues or there should be no impediments to be able to grow new clients. Conversely, they believe that it will actually create a better opportunity. Some of the management feel that they've been a little bit hamstrung in some of the things they've been able to do. And as Computershare provides us a leaner model for them, we believe that there will be no risk because Computershare's name is above the door. As far as Wells is concerned, Wells have always been a competitor of ours for a number of years in the registry space. And they use that share of wallet very well in terms of bundling products. But they didn't really bundle it by lowering the price of some of the adjunct product. It was all about the lending component at the corporate level. So you don't see contracts that are sort of just in terms of market rates, et cetera, in this business that are potentially out of whack. So we believe that we will have a very strong proposition in Computershare, and I'm quite happy to go toe to toe against the other competitors in the marketplace.

And is there any difference between the competitive environment in Canada and the U.S.? Because obviously, you're competing against all banks in both places?

Not significantly. I mean, there's a decent amount of crossover. The relationships form a part of it. It ultimately comes down to services, relationships with the legal firms that do these structures and their comfort in terms of dealing with you. And clearly, because we're bringing over all of the CTS management team, all that will remain intact. And we're also protecting ourselves to make sure that we've got retention there as well. So it's not a business where there's 1 or 2 rainmakers in it. It's not like that. That would certainly be a risk and something that I've seen in other businesses in Computershare that we tend to avoid. So I think that, as I said before, our offering going forward in Computershare will certainly be able to stand up in the marketplace and the competitive and deal dynamics across the bank. I think I don't see particular risk to client attrition, and I also believe we will be competitive in winning new business.

And just one last one to follow-on from that. Do you think or is there an option to get any distribution alliance with Wells or a bank to partner with them? Or you just don't think you need it as you don't need it in Canada to be successful?

So we have -- as part of negotiating this transaction, we have a large number of contracts with Wells as far as partnership going forward across a range of the products. I think that should there be any referrals, they are still more than happy to refer it into this business for a period of time. We have a servicing contract with them outside of the TSA, et cetera, that goes for a significant period of time. So I think, again, we were able to derisk that element to that. We have a very strong relationship with Wells even before this transaction with the work that we do across Computershare. So I think any sort of bank referral policy with -- from Wells will still be able to be maintained going forward.

Your next question comes from Andrei Stadnik with MS.

I wanted to ask 2 questions. First question, just around revenue recognition and Slide 18, because I think you mentioned, Stuart, that balances have been growing at 7% to 8%, yet trust fees are growing a more 3% CAGR. So how should we think about that gap? And is there any revenue recognition or any pricing pressures?

Andrei, I might ask Nick. Who's on the line, to take that one, please.

Yes. Thanks, Michael. So look, I think the first way to look about -- or look at or think about the revenue is, Slide 18 talks about the fee revenue, the fees that the business is being paid for servicing a range of the products. The -- in terms of the accounting that goes with that, there is a little bit of booked revenue, which will go to the revenue recognition point. That really depends on the product mix, what the underlying product that is being serviced. But the element of deferred revenue isn't particularly material. And so you won't see sort of significant revenues deferred out to future periods. Beyond the sort of the trust fee revenue that you see on Slide 18, there's obviously also a couple of aspects of revenue that we should think about. The first one is margin income, as Stuart already talked about, which is very similar to what Computershare does already. And then the fees that we earn on from the money market funds and the balances that are invested in money market funds. And again, that's their fees that are sort of earned on -- earned immediately, and that's most of the revenue recognition associated with those either.

And I want to ask a second question around the $257 million of transaction and transition costs. Kind of 2 parts to this. Just want to confirm that the numbers we can see on Slide 14, the $110 million and the $103 million, actually both part -- whether they're both part of this $257 million. And also, what is the rough feel in terms of the timing over the period of which the $7 million will be spent to invest it?

Okay. Do you want me to take that as well, Michael?

Yes, please, Nick. That would help.

Yes. So firstly, the $210 million of execution costs that we call out on Slide 14, Andrei, they are -- those expenses are spread out over the first couple of years. And that really covers the separation or the extraction of the business out of Wells Fargo and the period of the transitional services agreement that we've negotiated with Wells. Could rise. And then there's a further sort of $21 million, which is -- sorry, $21 million, which is part of the sort of the longer-term transformation, and that's going to be incurred over the years 3 to 5. The $257 million that you sort of called out on, which is on Page 10, that's not to be confused with the $210 million of execution expense. The $257 million is really the upfront costs associated with the acquisition and standing of the business within Computershare environment. So we've got a regulatory capital requirement of around $115 million. There's some upfront CapEx of $103 million. Remember, this is an asset transaction that's compared to [indiscernible], so we need to create the environment for the business within the Computershare organization. And then there's some transaction costs of about $38 million.

Okay. And so just -- so then just to double check -- there's $257 million. And then the substantial addition to that is this extra standup CapEx of $103 million. Am I reading that correctly?

The $103 million is included within the $257 million, which is part of our upfront standup expense. Over and above the $257 million -- or over and above the $103 million of CapEx, which is included in that $257 million, there is $210 million of transitional expense, which is the cost of extracting the business out of Wells Fargo and integrating it into Computershare, and that will largely be spent over the first couple of years of the acquisition.

Your next question comes from Simon Fitzgerald with E&P.

Just the first one, could you just remind us in terms of the current size of the Corporate Trust business, both in the U.S.A. and Canada that's just Computershare at this point in time pre the acquisition in terms of revenue?

Nick, why don't you take that? There's a page in the deck that lays out some of those details.

You're right, sorry. Yes.

So like our U.S. business is pretty small from a Corporate Trust perspective. This was all part of our -- it's kind of like the Computershare where we identify a market that we want to expand in it. We move into that in a fairly small way, taking time to speak with the clients, speak with the operators, speak with people in the business, find out where they think there's operations or where things could improve. And through that, look, I think we were sort of, depending on the product, maybe #8 or 9 in the U.S. marketplace. So fairly small as you calculate that, whether it's on deal size or deal amount or whatever the tables are. Up in Canada, we were sort of #1 in the marketplace across the vast majority of products. So this acquisition is all about expanding ourselves into the attractive U.S. markets, right?

Okay. Then just the second question, and I understand the standup CapEx that's required, you've been clear about that in terms of separating the business from Wells Fargo. But in terms of the additional regulatory capital, can you just sort of run us through that, just given that you've been in the business for 20 years, as you've mentioned, you also have multiple regulatory licenses already at this stage?

Yes. So Computershare acquired a federal banking license back in 2005, for those that have been following the stock for that long, and that's with part of the aquifer of transaction, which prior to be known by DTC was part of Bank of Boston. So we've had that trust structure in the U.S. for a significant period of time. We've got good relationships with the OCC. And normally, we're not a deposit-taking institution, but that aside, we still have to maintain regulatory capital as part of that regime. And that regulatory capital is sort of calculated out. It's really all about -- much more about your operational costs more than anything else when you're not a deposit-taking institution. Clearly, this business increases our size of our trust company and the operations. And as a result, you would expect an increase in terms of the regulatory capital that we would have to provide. Just one thing interesting, Simon, as part of this transaction is with the full agreement of the seller, we've actually been engaged with the OCC right throughout this entire process, saying that we're contemplating looking at it and then giving them a little bit of details as we went through due diligence and then firming up our brands, et cetera. So we've spent a fair amount of time with the regulator. So we're pretty confident around where we think that regulatory number will be. But that's the reason why there will be an increase. It's not about the deposits because our strategy is very, very different. And it's the same strategy that we've had in Computershare for a number of years. It's more just about the enlarged part of the organization, which is why we have that increase in our regulatory capital.

Okay. And just a final question, just to be really clear on this bit. In terms of the $1 billion of capital deployed, the $210 million is not included in that, is it in terms of the execution costs?

No, because they'll flow through the business's P&L, right?

Understood.

So that's -- like it's TSA charges. And at the moment, the business is getting charged internal costs that now these internal costs wrap up into a TSA, things like that, and it will all flow through the P&L of the business.

Your next question comes from Karen [indiscernible] with [ Jardin ].

Just a couple of questions. On the revenue mix, just wondering if you can give us -- obviously, you've broken out between trust fees and margin income. But from a product perspective, what proportion would be relating to more conventional debt products as opposed to structured products?

Yes. Look, I think there's -- up in Canada, we're sort of comparing against the mix. We've got a fair amount of detail about that. We haven't put that in the disclosures today herein. But what we intend to do is have an Investor Day later in the year. We'll break that all out. We'll give you where we are in specific products, in specific markets, et cetera, and be able to provide that information. Certainly, the Wells business takes us into the -- more of the structured products that we haven't been in, in the U.S. before, but we're also in some of these structured products up in Canada. So it's products that we understand very, very well, but we will break that out on the track.

All right. I mean for now, I'm just trying to get a sense of, I guess, what the key driving -- drivers are of the business? Is it sort of corporate debt issuance? Is it RMBS growth? How should we think about -- what's actually going to drive volume over time?

Probably both of these things track because we are -- the CTS business is probably #1 in RMBS in the U.S. marketplace.

Okay. And the -- there was a question on sort of the trust fees, which obviously includes some initial upfront fees. I think you mentioned that sort of more through the life of the transaction. Are they basis point fees in terms of sort of basis points?

No. There is no basis point fees at all. They're much more akin to what you see in the registry in terms of fee for service for providing administration. It's not got anything to do with the debt size of that component or anything along these lines is much more of an administrative fee structure.

Yes. Okay. And I mean, lastly, just off the back of that, obviously, we've been in a falling interest rate environment for a lot of the period post GFC in recent years, in particular. How do you feel about the growth outlook of this business, putting the interest rate leverage aside and the margin income in a rising interest rate environment?

Yes. So I think there's a couple of things. I mean we know that trust fees outside of margin income have been very consistent in terms of the growth, and we see that it's up 3% per annum, both up in Canada and also there because it sort of have ties with the underlying issue of debt and securitizations in the marketplace. I think that there's also opportunities in our business case to perhaps work the balance sheet a little bit harder. Now that is not relying on any interest rate increases. But for example, the CTS business doesn't put term into some of the deposits for yield enhancement and things like that. They've been moving things off balance sheet and into MMFs, and we can reverse some of that back there. So look, we do believe that we will be able to, on a like-for-like basis, improve the margin income revenues just as we apply Computershare's treasury strategies. So we think that's the sort of positives going forward to the business outside of the general rate environment.

And so just a final question on the global opportunity post this deal. You've obviously got Canada in this sort of significantly upsize the U.S. Are there sort of opportunities more globally that would make more sense sort of off the back of this?

It's a great question. As I said in my opening speech, certainly in the U.S., it feels as though like transfer agency in 1990s. These businesses are no longer core to some of the banks, some of the investment that you actually have to do for efficiencies. They tend not to be high up in the priority queue within some of the investment areas. Clearly, our focus will be on executing this. This is a large transaction for Computershare. We've got to extract it out the bank, we've got to get the synergies. But I do believe that there will be some market consolidation. We have looked at other assets. And I think just in terms of some of the scale was a little bit tough for us. But what we're doing in the U.S. in terms of spending time in the market and understanding it, we've got the same strategy right at the moment happening in Hong Kong and elsewhere. Look, it really comes down to why we actually find Corporate Trust attractive at the end of the day. And that's a business we understand very well. We've been in it in a long time. We have recurring revenue base. It's got structural growth underneath as far as in the trust and securitization progress, and it's capital light, unlike mortgage services. So that's the thing that we like. And I think that there's also opportunities to upgrade sort of the tech and the client experience. These are all the things that we like about this business, and I think there may well be opportunities down the track that we will be focusing very much on executing this transaction and not taking our eye off this prize.

Your next question comes from Andy Chuk with Macquarie.

I just wanted to follow up on Andrei's question around the balance growth of 7% and cost fee revenue growth of 3%. It kind of feels like there's a bit of pricing pressure. Could you possibly comment on the pricing environment and the outlook?

What environment -- the pricing environment?

Yes.

Right. So I mean, obviously, there's pressure on the balances from a pricing pressure just because of yields at the moment. For us, pretty well understood. And I think generally, in the marketplace, when we've been speaking -- prior to speaking with the management team here, the pricing pressure they see, they believe that they can reverse by some of the plans that we have for self deployment of better reporting functions, more digitization of the process rather than the manual side of things. So look, I think that's their view -- I mean, I don't think that there's not sort of all-out pricing wars. I mean, these contracts is -- if you're servicing the asset well and you're timely and accurate on your reporting, then they are renewed and then invariably renewed at slightly higher prices to sort of reflect that environment, and if we can work on the cost line there. So I'm not seeing any sort of competitive sort of strong pricing pressure at the moment. And obviously, it's on to Computershare. And I know that the management team coming across are excited. There are going to be a bigger fish in a smaller pond in the Computershare Group. They've got a list of things that they believe that will enhance their business and enhance that fee growth. And we're aware of what they are. And as part of our not only moving it out of Wells, but then the ongoing transformation of that business, we should be able to improve where that -- you see that 3% at the moment. But that will take time.

[indiscernible] scaling. So with the acquisition, obviously, a lot more scaling now in the business. Can you just talk through what kind of benefits we can expect? Does it help you guys win more mandates? Or is it more focused on the margins side?

Look, I think it does help us win more mandates, being able to have that scale. I mean clearly, the initial focus is going to be around client retention. I mean I think that the dynamics of this business, I mean, just from a client attrition perspective, it's even lower than registry, which is quite amazing. I mean that's 2% per annum. This is lower than that. So we're just going to make sure that we continue to perform as we go through this transformation on that client retention piece.

Your next question comes from Matt Dunger with Bank of America.

I just wondered if I could ask about the opportunity you noted, Stuart, on opportunity to optimize the term of the balances. What term could you run these balances on? Would it be similar to the existing or longer?

Look, similar to the existing is probably the best way to sort of categorize it. I mean, obviously, with these balances, there's a mixture of what we call exposed and nonexposed. But as I said, the business doesn't put into term. Our treasury teams have analyzed this in fair amount of detail, working with the business management and understanding the balances, how long that money hangs around for, how can we actually optimize it under the Computershare treasury model. And as a result, part of our returns, we do believe we'll get slight yield enhancement by deploying some of these strategies as well. I mean I think it would be fair, and I'm not trying to be disparaging to Wells, but these -- the balances within CTS were not optimized for the benefit of the CTS business themselves. The balance has kind of moved up into the mother ship, so to speak. So I think that we do have a reasonable amount of opportunity to certainly get that yield enhancement and get sort of higher-margin income revenues on that basis. But again, and just to reiterate, this is not a margin income play by Computershare. This is very much about taking what we have, rates will be what rates are and making the balances work harder like we have done in the rest of the group.

Great. And just a second question, if I may. Given the capital commitment that you're making to acquire this business, does the transaction have a bearing on the previous $150 billion mortgage servicing UPB target?

Yes. So I mean, obviously, as part of this transaction, we went through all the cash flows and inflows and outflows. And we're still committed to acquiring MSRs at an appropriate run rate in our mortgage service business.

[Operator Instructions] Your next question comes from David Pace with Greencape.

I guess, looking back over history, you've done a number of scale acquisitions. I'm just wondering whether internally, you maintain an integration playbook of thoughts and whether that makes disintegration any easier?

David, it's a great question. And I think it is. And I think that -- I've seen other organizations try to carve things out of [indiscernible] and struggled for a period of time. I mean I feel very, very confident. I cut my teeth in Computershare extracting businesses out of U.S. banks, yes. We acquired assets from Bank of Montreal in the U.S., which was the Harris Trust acquisition. We took the entire Corporate Trust division and the Transfer Agency division at the same time out of Scotiabank up in Canada. I've done transactions with Fifth Third, SunTrust to name but a few. And then most lately, Bank of New York Mellon, which was around about a $550 million acquisition and extracted out that. We do have a playbook. And certainly, the teams hear it very much directly to me when I talk about the fundamental principles of transition services agreement and how we're going to work with that. We do have to maintain a long-term relationship. We know how to stand up these businesses. So I think that it really places us ahead of any potential competition because of our track record. And we've made mistakes along the way. We haven't got everything right, but we have learned from that. And let me tell you, it's pretty hard in the technology team and the ops team when they come in and talk about their transition plans because I'm all over it and asking all the awkward questions. I think that [indiscernible]. We've actually -- the management that we're going to put up here. And there's going to be an integration CEO that will report directly into me, that individual just spent the last 2 years doing the European Equatex integration, taking that out of Switzerland and getting our clients onto it. So look, I'm not going to pretend that it's going to be easy taking a business with 80 years worth of technical well throughout Wells. The reason we've been doing due diligence in that exclusive period for so many months is to really understand that. So I do think we've got an advantage there. We've got the experience, and I'm confident about what we can achieve certainly in that first 2 years of getting it extracted and standing it up and then it will be on to the sort of the bread and butter of digitizing and getting the other synergies.

[Operator Instructions] Your next question comes from Nigel Pittaway with Citi.

Just a quick question. I mean, obviously, if you look at sort of your competitors now in the U.S. trustee market, they are mostly all sort of banks. And you sort of half touched on this, but what advantage and disadvantages do you think that gives you in terms of sourcing business in this space?

It's a great question. I've probably asked that about 20 years ago, Nigel, when we were buying transfer agency businesses, all your competitors are the banks, right? And are they well-loved businesses in the bank? Are they investing in these businesses in the banks? Are they high up the priority queue in the back to be able to provide additional services, more enhanced reporting tech, enhanced products for clients? And I don't think these businesses are. I'm not trying to diss these organizations in any shape or form. I mean, clearly, they're large. But we have the gentleman that ran all of the Corporate Trust business for Bank of New York Mellon on our board, Joe Velli, who's heavily involved in it. Steve Rothbloom in the U.S. ran Corporate Trust for Harris Bank when they sold it to Bank of New York Mellon. And in fact, knows a number of the Wells management team as well. So look, I mean, banks, they're larger, formidable. Sometimes that makes them a little bit slow from a nimbleness perspective. And I think that we can take advantage of that modernized experience for the clients and be very, very competitive in the marketplace.

Okay. And then just maybe just on -- I mean, obviously, you've been very clear that the first couple of years are all about separating it from Wells. I mean to what extent do you think that sort of does restrict you over the first couple of years in doing what you ultimately will want to with the business moving forward?

Well, I mean, if you look at the synergy profile, the synergies -- look, we think we've got a very good line of sight about what these synergies are in the first couple of years. But the first order of the day is extraction. Clearly, whilst we're doing that, we're also thinking about product development, how it's going to look and what our priorities are for year 3, 4 and 5. We've got a good handle on that. But it will be a delicate dance as we extract the business out of Wells to make sure that it continues to operate well, and everybody knows what the pathway forward is, both from a client perspective and panel perspective, et cetera. So look, I think that when you don't fully -- look, whilst we might own it, but while we don't fully control the real estate, you are hampered a little bit. And I think that's exactly what we've shown in the synergy profile. I completely agree with you, right? There's probably things that we'd love to do a lot faster, but we've got to do this transition correctly. Clients come first in terms of making sure and maintaining the services and the quality. And then once we actually get it off, we've got far -- much more leeway to be able to introduce the changes we want to see. And again, it's exactly what's reflected in the synergy profile.

[Operator Instructions] Your next question comes from with Karen [indiscernible] with [ Jardin ].

Just a follow-up question on margin income leverage. Are the hedges sort of within their business? And how should we think about sort of, I guess, how quickly or how directly that leverage to rising rates comes through?

There is no current hedges in their balances. When you think of the exposure, a little bit like Computershare, you're going to have the exposed balances and the nonexposed balances, probably around about $8 billion or so that sits in that exposed bucket, and $10 billion or so that sits in the nonexposed bucket where you get the full benefit from a rate rise. But as I said, one of our target is to remove some of the funds that have been put into MMF -- out of MMF and back into our deposit strategy. And as I said earlier, part of returns is not waiting on rates to rise, again, would not bake that in the fall, but we do believe we'll get yield enhancement by applying the treasury policies that we have in place with Computershare today.

There are no further questions at this time. I'll now hand back to Mr. Irving for closing remarks.

Hello, first of all, a big thank you for joining us at such short notice this morning. Having given we've been courting the asset for so long, it's actually great to be able to talk to you about it. Lots of hard work ahead at Computershare. But we are very pleased to expand on one of our best businesses. We have said that outside issuer services, Corporate Trust is a little bit of a jewel in the crown. And it clearly squarely is in our strategy and also in our core competencies. Now just a reminder why we like Corporate Trust. High-quality, structural growth, recurring revenues, cash generation and scope for technologies to drive efficiencies and also the optionality to rates that we've talked about. We have a clear path to 15% ROIC in CTS, and we know what we have to do to separate and integrate and how to do this. And we have done harder ones before. So thank you again, and we look forward to updating you as we progress. Really appreciate it.

That does conclude our conference for today. Thank you for participating. You may now disconnect.