Computershare Limited (CPU) Earnings Call Transcript & Summary

Welcome, everybody, to the Computershare FY '22 Half Year Results. Following the presentation, we will open the call for questions. [Operator Instructions] I'll now hand over to our first speaker, Chief Executive Officer, Stuart Irving.

Good morning, everyone, and welcome to Computershare's 1H FY '22 Results Conference Call. I'm joined today by Nick Oldfield, our Chief Financial Officer; and Michael Brown from our Investor Relations team. On this call, I'll take you through the key highlights of our results and the outlook for the second half of FY '22. And we did release a presentation pack to the ASX, and it's also on our website. There's a lot of information in the deck for you. And as usual, on these calls, I'll focus my remarks on the opening pages of the presentation. Nick will then take you through the slides on the financial results. Then after some concluding remarks, we'll open up the call for questions. And as a reminder, we will be talking in U.S. dollars and in constant currency, unless we state otherwise. So let's get started on Page 2. Now there are a number of highlights I'd like to call out. First, the momentum we enjoyed in the second half of last year has clearly continued. Management earnings per share has increased by 4.5%, and this includes the dilution from the rights issue. Excluding the rights issue and the contribution from CCT, EPS increased over 10% in the legacy business. Growth was led by an increase in management revenue, careful cost controls, driving margin expansion and outperformance in our recently acquired Computershare Corporate Trust business in the U.S. EBIT ex MI, which really reflects our operating performance, increased strongly by over 16%, with this margin expanding by 150 basis points to over 14%. And I'm pleased to see the operating leverage come through and also the rejuvenation in the legacy business. And that's an impressive performance by the team, and I'm grateful for the dedication to execution to deliver such strong numbers. Moving to Slide 3. Let me summarize the first 6 months' performance. The main highlight is that our global growth businesses are driving the strong operating performance. As you know, we have been investing for some time now to strengthen and scale our key global growth businesses. These investments are delivering the anticipated returns. I'll call out Issuer Services and Employee Share Plans. They're performing well. We are winning market share with our proprietary technology platforms and improved customer experience, and we are benefiting from strong equity markets. Register Maintenance, our largest business, delivered higher revenues and profits. We delivered a 22% increase in new client wins versus 1H FY '21. We also now manage over 38 million shareholder accounts around the world. That's up over 1.5 million accounts since this time 2 years ago. And I'm encouraged by these lead indicators. It reflects the investments we have made in the front office, client experience and product innovation. Governance Services revenues also reported 30% growth. The results demonstrate our improving traction in this large and complementary market. However, Corporate Action revenues was down with lower participation in Hong Kong IPOs and less rights issues, which has both been meaningful contributors in the year before. Employee Share Plans delivered the fastest rate of profit growth across the group with management EBIT, excluding margin income, up 122%. Now I have waited a while to report a triple-digit organic earnings growth number. Pleasingly, recurring client paid fees, higher transaction volumes and the contribution from cost synergies, all added to the impressive performance. Now I will call out there is an equity market sensitivity in this business with share prices and transaction fees. But our book is well balanced, and as we have seen before, there is an interesting countercyclicality in this business. When equity markets are weak, employees typically overissue new equity to compensate. And we have had to delay the rollout of the EquatePlus software in some jurisdictions. Cross-border travel restrictions prevented us from getting the teams in country to execute the upgrades. And this has meant a longer period of running dual systems, which leads to a higher cost to achieve synergies. Employee share units under administration increased versus the pcp, which will provide latent earnings power for the group. And more companies are issuing more equity remuneration, and that's a structural growth trend we are increasing our leverage to. Overall, U.S. Mortgage Services still remains subdued, although industry fundamentals are beginning to improve. Rising interest rates should increase the value of the MSRs we own and reduce portfolio runoff rates. And with the lifting of regulatory restrictions, we do expect an increase in loan servicing activity in the second half of the year with further recovery in FY '23. And we are reducing the capital employed in this business. We spent a net $9.5 million on MSRs and also increased subsets in UPB by 21%. And with our commitment to improve ROIC, we are managing our costs carefully, too. We're putting in place initiatives to improve servicing and fulfillment efficiency and reduce our costs. Across the Atlantic, we have returned our U.K. Mortgage Services to profitability. We've also completed a strategic review of the business, and the sales process is underway. Now as you would know, the challenger bank landscape, which was supporting the growth strategy, changed in the U.K. during our ownership. And I think the business would be better served by an owner willing to deploy more capital via originating or acquiring asset books to build scale. Computershare Corporate Trust, the business we acquired from Wells Fargo in November, is exceeding our expectations. Now we have the keys and are fully immersed in the business. We are delighted with the acquisition, and the timing of the deal is in the new outlook for rising interest rates should benefit shareholders. Gross and trust fee revenues drove the BEAT in the half, and we've made a good start with integrating the new business and are working towards delivering the expected synergy benefits and 15% as post-tax return on invested capital. Now let's move to Business Services with a little bit of a mixed bag. Revenue was down nearly 30%, and EBIT ex MI [ halved ]. Canadian Corporate Trust delivered a consistent result. We won new trust mandates, and debt under administration continues to grow. However, the Chapter 11 Bankruptcy claims market was tough with less case filings as companies found way to refinance. Like Class Actions, it relies on large, lumpy projects, and we're working hard on what we can control there. So that's a summary of the first half. Let's move along to Slide 5 to the outlook. We are upgrading our full earnings guidance for the year. In August, we expected full year earnings to be around $0.534 per share. That was an increase of around 2% versus the PCP. And that included the 8 months contribution from CPT and the full impact of the additional shares that we all got cheap from the rights issue, which completed in April. FY '22 management EPS is now expected to increase by around 9%. EBIT ex margin income, reflecting our operating performance, is now expected to increase by around 13% compared to the original guidance of 3%. Legacy EBIT ex MI has been upgraded by 2.8% to $359.7 million, but the more meaningful change is a $22 million increase in CCT EBIT ex MI. About 1/3 of this reflects anticipated increased fee income from mandates that we have won; another 1/3 from the 2 months benefit from the higher-level money market fees that we anticipate in Q4, and these fees are driven by interest rate assumptions that are generally capped at around 10 basis points; and the remaining 1/3 is temporary cost savings, which most will come back into FY '23. And to be clear, it does not include any synergy benefits at this stage as they are ahead of us. And also, just to be clear, guidance assumes a full year of ownership of the U.K. Mortgage business. So what is really driving the upgrade? Well, the results for the first 6 months of the year are ahead of expectations. Our global operating businesses continue to perform well. CCT's earnings contribution is running ahead of plan, and we expect to benefit from a 25 basis points interest rate rise in the United States in Q4. Beyond this year's guidance, expectations are also firming for further interest rate rises. And Computershare is well placed to benefit. Simple sensitivity analysis suggests a 100 basis points increase in interest rates on our 2H exposed average balances would equate to an annualized EPS increase of $0.26 per share. Now let me hand over to Nick, who will take you through the earnings bridge starting on Page 4.

Thank you, Stuart, and good morning, everyone. So let's -- yes, let me start with that earnings bridge for the first half on Slide 4. So in 1H '21, we generated $0.218 per share of management EPS. Note, this is shown on a pre-rights-issue basis. Now moving to the legacy business. In 1H '22, as Stuart mentioned, we've seen a reduction in our event-based revenues. And collectively, they reduced earnings by $0.0548 per share relative to the PCP. Other headwinds included the impact of inflation and U.S. tax. On the former, we have seen a fair amount of wage pressure together with certain key supplier costs increasing during the half. Together, this totaled $0.0195 per share. We implemented a general wage increase in October, so there's a slightly larger impact of inflation to come in the second half. And on the latter point, our U.S. profits were a bit higher than expected, driving our BEAT expense. This reduced EPS by $0.072. On the positive side, we did benefit from some nonrecurring items, the largest of which was an insurance claim seat. There were some nonrepeating items in 1H '21 also, and taking the 2 together, the net benefit was $0.0269 in the half. And then to our cost out program. Positively, they delivered $0.0346 per share, more than offsetting the impact of inflation. I'll provide a bit more detail on these later. Operational growth -- earnings growth for the half was $0.0431 per share. Register Maintenance, Governance Services and Employee Share Plans were the key contributors here. These all combined to deliver 10.6% growth of EPS in respect of the legacy business. Before taking into account the rights issue, management EPS would have been $0.241 per share. And finally, to CCT. In the 2 months of ownership, we got a $0.0116 per share contribution from that business. We then deducted the dilutionary impact of the rights issue, which was $0.025 per share to generate $0.2276 per share of management EPS in total. This is an overall increase of 4.5%. I'll now move to the overall financial result on Slide 10. Group revenue ex MI was 4.5%. Adjusting for the CCT acquisition, organic operating revenue growth was down 2.2%. Excluding event-based revenues in CTT, operating revenue, excluding margin income, was up 3.6%. Including margin income as well as CCT, total revenue for the group rose 4.6% over the PCP. There's more detail on revenue on Slide 27, including revenue and margin income across each business stream. EBIT increased 14.2% to $217.9 million, while EBIT excluding margin income increased 16.7% to $157.8 million. Adjusting for CCT, it was up 15.5% to $156.1 million. The EBIT excluding margin income margin was up 150 basis points to 14.4%, again, largely due to the growth in Employee Share Plans supported by our cost management initiatives. Interest expense was slightly lower, reflecting the lower net debt for much of the period prior to the completion of the CCT acquisition. Our income tax expense was higher at $53.9 million, and the ETR was slightly higher for the period, too, at 28.2%. As you've heard, this was largely reflective of profit mix, less earnings in Hong Kong, more in the United States. And we expect this trend to continue through the second half with a slightly higher ETR range for FY '22 of 27% to 29%. The management NPAT overall was up 16.5% at $137.4 million. Our statutory results are shown on Slide 46. Statutory NPAT was $92.1 million, with the difference attributable to the amortization of non-MSR acquired intangible assets of $20.4 million; acquisition-related expenses of $20.4 million, which was largely attributable to CCT and the ongoing Equatex integration net of a $12.5 million gain on sale related to the disposal of our investment in the Milestone Group and $3.7 million associated with our cost-out programs, the main contributor being the U.K. Mortgage Services restructuring. I'll now jump back to Slide 8 to talk about margin income, which was broadly in line with expectations at $62.1 million at actual rates. This includes a $7.5 million contribution from CCT. Average deposit balances for the legacy business were $21.4 billion, whilst for CCT, they were around $19 billion. And this averages to $6.4 billion on a weighted basis for 1H '22, reflecting the 2 months of ownership. Total average deposit balances for the first half of FY '22 were therefore around $28 billion. Now here, legacy balances were around $3 billion in the PCP, reflecting the growth in stock funds we saw in 2H '21. Now note, these balances do not typically generate any yield due to the fee arrangements in place for these transactions. And so we classify them as nonexposed. This helps explain why the yield on our legacy balances is around 13 basis points lower compared to the PCP. As you've heard from Stuart, we're upgrading our margin income expectations for the year to be around $152 million, with about $41.3 million of this coming from CCT. This improved outlook is largely driven by rate rises. We're assuming 25 basis point rate rise in the U.S. in the fourth quarter. We've also seen 2 rate rises in the U.K. since the end of 2021, albeit these are less meaningful as more of our GB-powered balances are hedged. This drives a higher yield expectation in 2H '22 on the legacy book of around 59 basis points on balances of around $19.7 billion. Whilst the CCT book yield is anticipated to increase to around 33 basis points. The lower yield on the CCT book reflects the current lack of tenor and hedging within this portfolio. We do expect the CCT yields to rise in time, albeit not the levels of the legacy book due to the nature of the underlying clients of agents. There's more detail about balances on Slides 49 to 52, including some new disclosure on the future average weighted yield on our hedge book on Slide 52. Next, I'd like to talk about our operating expenses. On Slide 16, we show the bridge in operating costs between the 1H '21 and 1H '22. We've drawn out the reduction in underlying operating expense so you can see how the cost out programs are having an impact. They realized $23 million of benefit in 1H '22, more than offsetting the impact of underlying inflation. $17 million of this came from the ongoing restructuring program in U.K. Mortgage Services. This program is expected to complete in the second half with increased total anticipated savings of $81.5 million. You can see this on Slide 17. The remaining $6 million comes from our other cost-out programs, the largest contributor being the synergies arising from the Equatex integration. Overall, operating expenses for the half were $654.5 million. This reflects $65.3 million of new expense from CCT. Note, we are yet to deliver any meaningful synergies here. It also reflects a benefit of $9 million associated with delayed recruitment due to ongoing market challenges. This shouldn't unwind in the second half. You'll also note the cost of sales reduced from $202.9 million to $189.2 million. This is largely driven by the sales mix changing. Total operating expense is detailed on Slide 48. On Slide 17, we show the impact of all our cost-out initiatives. You can see we're reducing our cost-out savings for the period through to FY '24 by $1.5 million relative to our prior estimates. This reflects an $8.3 million deferral in the synergies we anticipate from the global EquatePlus rollout. Note, we still expect to deliver these, but they will just be delivered later than FY '24. And it also reflects an increase in the benefits from the U.K. Mortgage Services restructuring program of around $6.5 million taking the overall savings to $81.5 million. At the same time, we have increased the expected cost to achieve by $25 million. This is attributable to the delays in the global rollout of the EquatePlus, driven by the pandemic and our ability to deploy global resources onto the program. The total gross multiyear benefit target out to FY '24 is now estimated to be $275 million relative to cost to achieve of $225 million to $230 million. And I'll finish with some comments on our balance sheet and cash flow on Slide 18. In the period, we generated $203.3 million of net operating cash flow, representing an EBITDA to cash conversion rate of around 66% at actual rates. The net cash outflow was $633.4 million after spending $713 million on acquisitions and net of disposals, and $101.9 million on dividends. Net MSR spend was $9.5 million. We completed 5 capital recycling transactions over the half, generating receipts of $114.8 million, which netted off our purchase expenditure of $124.3 million. This is reflective of our intent to build a capital-lighter U.S. Mortgage Servicing business and was key to helping drive the increase in our subservicing portfolio over the half. Free cash flow after CapEx and net MSR spend was $181.5 million. The net debt almost doubled from the prior half, reflecting the use of the right issue proceeds to fund the completion of the CCT acquisition in November. We also took the opportunity to restructure our debt during the half, issuing $800 million of public debt and extending our maturity profile to 4.6 years. The net debt-to-EBITDA ratio increased to 2.02x, still within our neutral zone. And looking ahead, we expect this ratio to organically reflect repair, and it should be around the bottom of our neutral range by the end of FY '22. I'll now hand back to Stuart for some closing remarks.

Thank you, Nick. Now let's move on to conclusions. So we've started the year well. 1H FY '22 has been better than we originally expected. You can see that in the first half results and the upgrade to full year guidance. Our key global growth businesses have momentum and are winning market share. And of course, our job is to outperform the positive growth trends in these sectors and deliver the expected operating leverage. Now event activity will fluctuate in our smaller, more cyclical businesses, but we continue to look for and execute plans to strengthen these businesses and also improve the performance. We are very pleased with the CCT acquisition and the combination of growing, long-duration recurring fee revenues and increased leverage to rising rates they provide us with. There's a lot of work to do but there is also a great deal of upside. And finally, I'm encouraged that we're executing on our stated strategy to build a simpler, stronger Computershare with higher returns. Our goal is to have high-quality global businesses with scale and strong recurring revenues that can deliver sustained performance. And we'll continue to invest our free cash flow in growth and new technology and balance this with the conservative capital structure and also returns for shareholders. So thanks very much for your time, and I'll now hand back to the operator to open the lines for questions.

[Operator Instructions] Our first question comes through from Nigel Pittaway from Citigroup.

First of all, just a question on mortgage servicing in the U.S. Can you make some comments on what's driving down the base servicing fee in that business? Is that due to mix? Or what sort of...

Okay. Nick, I might ask you to take that question, please?

Yes, absolutely, Michael. Nigel, it's all about mix. What you'll see in the portfolio is that the -- whilst the portfolio was up a little bit, the mix between subservicing and owned MSRs has changed with a large increase in subservicing. And typically, subservicing attracts lower revenues than owned MSR, and that's why that base servicing fee has declined during the half.

Okay. And then obviously, the UPB for nonperforming loans has come down. I mean, how much of that is due to the transactions you did in the half? And when do you expect that to start trending up? I mean, you've obviously talked before about a wave of NPLs, which has probably gotten a little less likely. But can you make some comments about how you're expecting that to trend?

Yes. The run down in the special servicing on the nonperforming servicing is all really due to the monitoring that's been in place. Our special servicing portfolio has run down during the normal course, but there's just been no new volume to replace it to offset that because with the moratorium in place, no one has been moving -- no one has been moving distressed assets. No one has been really buying or being able to do too much with nonperforming loans. We do -- look, we do anticipate there will be special servicing opportunities in time. But you're right, there isn't going to be the wave that perhaps we thought there would be 12 to 18 months ago when we were in the sort of the height of the pandemic. Our forbearance portfolio, as an example, has run out or run down significantly with a lot of borrowers being able to take advantage of strong job markets, rising property values and lower interest rates to refinance. So we do think the fundamentals are good over the medium term for special servicing. There's still significant numbers of borrowers in forbearance, and foreclosures are at the lowest point they've been since the year 2000. So we do anticipate with the moratorium lift, things will start to improve there. It will just take time for it to come through.

Okay. And maybe just to finish off with a sort of bigger picture question. I mean, obviously, Stuart, you talked about the rejuvenation of the legacy business. But I mean, as you went through, you did say, obviously, revenue ex margin income and ex CCT was down 2.2%, albeit obviously, transaction revenues have played their part. I mean, if you're ready to sort of rejuvenate the business, does that envisage a period where that revenue could grow more strongly? I mean, I know it's unfair to strip out margin income really. But can you maybe just make some comments on that?

Yes. So I mean, the rejuvenation there's also a little bit of recovery and, to be perfectly honest, in these businesses. I think the -- I mean, what's really pleasing for me, if you look at Register Maintenance, these are the revenues that we have a little bit more control over. I mean, obviously, the event-based revenues have come off a little bit and Stakeholder Relationship Management, Corporate Actions and also Bankruptcy is quite significantly. But the ones where we're working hard in terms of our offering, our front office, you can see that really coming through in the Register Maintenance, which has been a fairly reasonable story over the last few reporting periods in terms of what we've been able to do, and then obviously in an Employee Share Plans. So as I said on the main call, the event-based businesses can be a little bit cyclical and they go up and down. I think what's important to me is continuing to have exposure to some of these structural growth trends in our Issuer Services business also the Employee Share Plans business, our new CCT business with a strong recurring revenues. So that's what I'm particularly pleased about.

The next question comes through from Ed Henning from CLSA.

Just further on Nigel's questions on the U.S. Mortgage Servicing business. You touched on the margins falling due to the mix. Can you just talk about the growth in that business? If you do get continued growth in subservicing, which pushes down your margin a bit, it helps your capital. And then the potential growth for UPB, or is the growth going to come through any other revenue lines like fulfillment and foreclosure? Just -- if you could just touch on the growth where it's coming through from the U.S. Mortgage Servicing business would be great?

Nick, why don't we stay with you on that question?

Yes, no problem. Thanks, Michael. So Ed, look, the growth will come from the combination of an increase in the portfolio, so -- which will drive base servicing fees higher. So we do anticipate the portfolio starting to grow in the second half. And just to give you a feel, runoff volumes are currently much slower than they were a year ago. So January 2022 was about 40% slower than January 2021, which gives you a feel for the sort of the impact of runoff, the impact of sort of a rising rate environment. And so we've always said that a rising rate environment is the best one for us in this business line. It slows runoff. It drives -- helps with margin income perspective, and it increases the value of the MSR portfolio as well. So we anticipate that the portfolio will start to grow again in the second half of '22, so at the bottom now, and that growth will largely come from subservicing. It will largely be on the prime side in the near term. We -- as I said, in response to Nigel's question, there are -- we are confident there will be special servicing opportunities, but it will just take a bit longer to come through, and that's more sort of FY '23 in our lines rather than second half of '22. But then the other servicing -- or other fees line, which includes things like fulfillment, we also anticipate improvements there in the second half as well. We've got some clients in the pipeline where we're anticipating stronger volumes in the second half. So it will be a mixture of base service fees and other fees.

Okay. And then just a second question. Can you just touch on a little bit more about your decision looking to sell the U.K. Mortgage Servicing business? And then thinking more broadly about your other businesses in your portfolio, what are your return hurdles to think to potentially sell other business units that you're currently holding?

Stuart, why don't I ask you to take that question?

Thanks, Ed. So I mean, we see mortgage back then. When we entered into that business in a period where there was a range of challenger banks coming into the market, looking to take market share for mortgages off the traditional High Street banks in the U.K. Computershare was fairly successful in getting a number of them as our clients and working with them to bring their products to the market. However, during our ownership, clearly, the market changed, had a number of challenges, Brexit and other bits and pieces. But -- so you then got to think about where is that growth coming from, and the market, the challenger banks and we -- it is the growth that we've had has really been asset acquirers who are buying sort of large portfolios of loans and need a service there. And when we were sort of looking strategic review of the business, we felt that you either had to try and obtain more scale or the business may be better owned by someone who had a willingness to deploy capital to acquire these assets or indeed create their own origination flow. So that was really just the determination of why we'd like to exit that business. So we have a sale process ongoing at the moment. And no guarantees that anything will close, of course. But we will go through that process. But that's really the thinking behind it.

Okay. And then just more broadly on your -- the rest of your business portfolio. How should we think about return hurdles? Or is it just about really the growth outlook? If you can't see that, then you might have some business reviews of other divisions.

So look, we regularly sort of review the portfolio. And it's been a little bit of a -- if you look back over the last 24 months, it's been a little bit of an up and down. There's been parts of the portfolio that performed really well for -- only for such 6-month period and then it tailed away, et cetera, et cetera. So look, we will always look. I mean, we have a stated objective of trying to invest in businesses that give us the exposure to long-term structural growth trends, the recurring revenues, et cetera. And that's very much where we want to deploy the capital. So look, we will continue to review the group portfolio. We said that we are trying to simplify the group in some shape or form, and that starts with our disclosures there. But at the moment, it's only the U.K. Mortgage Service business that we're in a process and looking to exit. But we'll continue to look and refine as time goes by.

The next question comes through from Andy Chuk from Macquarie.

First question is on the U.S. Mortgage Servicing business. Can you provide some color around the UPB growth for the second quarter? Or my number still about 3% compared to the first quarter. And maybe just an update on JV partners as well.

Good. Nick, off to you.

Sure. So look, the growth in the portfolio was probably a little bit more pronounced in the second half than second half of the half, so fourth quarter of 2021 versus the third. We did see runoffs start to slow as the -- as we went through the half. And so we saw better growth in the -- towards the back end of the half relative to the front end, Andy. So I think that's how I would look at that. And as I said in response to an earlier question, that runoff has continued to slow through the start of this half. And that's really a reflection of mortgage rates going both. And in January, in particular, we bounced quite considerably in the U.S. In terms of capital-light, we've been in discussions with a partner for some time. But where we've got to is that, as we've worked through that, the financial outcomes of that and that opportunity, we don't think are as attractive as actually doing stand-alone deals in their own right. In the half, we did 5 capital-light transactions where we were selling MSRs, converting them into subservicing. And that's certainly contributed towards that rising subservicing that you see during the half. And it's been -- it's clear to us that at the moment, we've got plenty of partners who want to work with us. We've got, as I said, big demand to acquire those MSRs. And the financial outcomes for doing those as stand-alone deals far outweighs the -- what -- how to make permanent vehicle in place to partner with constantly would deliver. And so for the time being, we're doing capital-light. We're doing those transactions. We're just not doing it to the capital a permanent vehicle. I'm sure we'll probably get there in time, but we need to work through the financials a bit more to make sure we get the right outcomes. But as I say, we are delivering on a capital-light basis through the stand-alone transactions for now.

Next question just around margin income balances. Just checking, has all the CCT margin income balances have been transferred over yet? And if not, how much more is there to go? And how long would you expect that to take?

They did not [indiscernible] over to directly into Computershare. The vast majority of them are still sitting with Wells Fargo. We -- the treasury teams are actively planning the transition of some of these assets. Part of that is almost a little bit client by client, and some of them have moved over and are in the Computershare bank network of partners. But the vast majority of these balances at the moment, given that we said that it would probably take 6 to 12 months to transition, the balances were only 3 months. And there's only a small amount has come across.

Okay. Got it. And then just the last question around the yields. So how long could we expect to take to optimize the yield on those CCT balances to be in line of Computershare?

Look, that's a good question. I mean, you can quite clearly see from the table that the achieved yields on the Wells, which is lower than the achieved yield that you've got on the Computershare legacy book. I think we have to be a little bit careful in the Computershare legacy. We've got in many cases, many billions which are 3-, 4-, 5-year money, right, which you can put duration into. So you can get yield enhancement, and then when you age that out, that's why the Computershare legacy book would appear higher. So I don't think you can assume that the yield of the balances coming over from Wells because you don't have as much ability to fluctuation and as some of our other assets in our legacy book will exactly match. We are confident that these balances within Computershare, we can work the balances harder and get yield enhancement, notwithstanding anything happening with interest rates. At the moment, just assume that they'll eventually match exactly what you see in the Computershare world because it's also doing with duration in different times.

The next question comes through from Kieren Chidgey from Jarden.

I just have a couple of follow-up questions. So firstly, on U.S. Mortgage Services. I understand obviously the mix impact that's coming through with subservicing being lower margin and, obviously, there's a bit less nonperforming UPB in there as well. But sort of to stand back, and you're obviously targeting a bit more subservicing mix ahead, do you think the cost base is appropriately primed for this change in mix, given we do have a negative EBIT around that business?

Yes, Kieren, you're right. I mean with it -- I mean, it was obviously a negative EBIT. I mean, obviously, we think that we can do sort of better from that perspective. I mean, I think that the business itself is still cash flow positive, although as you point out, the EBIT is disappointing. There is a range of sort of improvement strategies. We're not just sitting back waiting for the macro environment to come back. And part of that was some of these capital-light transactions where we sell MSR-owned, we switched that into captive servicing, which reduces a little bit more on the capital light. We've got cost-outs. We have a targeted program to reduce the average cost per loan -- servicing costs that we have internally by about a year, and we are a fair way down the track in terms of doing that. So look, we do have more to do. But the business actually came in pretty much very, very close to our expectations in the first half. But I think as we sort of more importantly look forward in that business with some of these strategies that we've got, we will see us cautious return to some of the foreclosures. I think also rates will help. Obviously, we lost north of $25 million in margin income just in that business alone with the rates coming down. So we do have a path to profitability, improved margins and also a higher ROIC that we're doing. But we're just really at the start of that recovery at the moment.

Okay. And secondly, just on CCT, and thanks for sort of the decomposition earlier around the improved profitability outlook. Just on the third sort of you highlighted coming through, I guess, mandate wins. Maybe you can unpack that a little bit more just in terms of what you're seeing across the broader market? My understanding is CCT sort of probably has a stronger market share in some of securitized into the market and sort of whether or not it's just a general uplift in market conditions there coming out of COVID or whether or not the business is actually gaining a bit of market share.

There's no doubt that market conditions have been positive and we've been able to take advantage of that. And I think that even though that is just the overall market lift in these particular products, there's always a risk when there's a new owner. We're not a big American bank, that some of that work may not come our way. So it is pleasing to see that, that is continuing to go with that uplift. Yes. So it's a little bit of general market conditions. And we've been able to benefit from that and win these mandates, which will give us these recurring revenues. So I hope that it was just sort of clear in terms of that $20-plus million uplift. 1/3 was the general market conditions, 1/3 was the MMF and now a little bit of timing and cost, which will come back in '23 and '24. So hopefully, that was helpful.

Yes. And there is money market sort of opportunity, shifting to $6 billion that you'd identified when you announced that deal. Can you give us an update on your current thinking around the timing of that and the current quantum?

Yes. So look, when we're going through diligence and we had to identify the balances that were in there because the previous order had a strategy of moving balances off their balance sheet and then putting that into MMF world because it didn't come into the balance sheet, but that was our stated goal. So we sort of identified roughly around about $6 billion of balances that over time would actually be able to move in. Look, our first priority is -- on these MMF balances is trying to get perhaps to the upper end of the fee with the 10 basis plus points perhaps. So that's our priority in terms of taking advantage of those rate increase in getting that uplift in the MMF piece. And then generally from a timing perspective, we will work through FY '23 and a little bit into '24 in terms of trying to get these balances out of MMF and then into our client balances pool, right? So it's going to be sort of a split sort over '23, '24. That's probably the best estimate that I can give you at the moment.

Okay. All right. And maybe just a final question around cost inflation. You've clearly highlighted there was a $9 million benefit from some delayed hiring initiatives this period, and it sounds like you're flagging a bit of a return or bounce back of that in the second half of the year. But just wondering sort of how you're thinking about BAU cost growth outside of what you're able to offset through your cost programs to the business overall, just given we are seeing higher wage inflation, and particularly, I think, in some of those lower-cost jurisdictions we rebased ourselves in the U.S.

Yes, you're right. And I don't want to be flipping in terms of the risk of inflation in Computershare. I think, here, we're pretty fortunate in terms that we had sort of -- we have deployed a range of cost-out programs and strategies that we're already in train that has given us certain protection against the rising costs that we do see in our organization. If you look at some of the legacy business ultimately roughly being flat as we go into '22, part of that will be the flow-through of the wage inflation pressure. There's only a few months of that in the first half of '22. We'll have 6 months of that in the second half of '22. We are also seeing -- we called it out quite clearly. There's around about $9 million of deferred hires, which is just really the delay in hiring into the marketplace. So that's not a permanent benefit that will flow through at some stage. I think attrition will remain higher. And we're also seeing certain costs of materials, insurance costs going up. We still distribute a lot of documentation to shareholders around the world. I can't get guaranteed pricing on an envelope more than 1 month out, right, changes this. So it is a challenge. Certainly, we've had some protection with our established programs. We're certainly working hard. We've got a team actually in our U.S. Mortgage Services business at the moment looking at other ways we can take costs out. We're trying to find other ways because we're not immune to inflation and it will impact us. And it's up to us to try to find ways to get the group more efficient so it has a small impact as possible.

The next question comes through from Matt Dunger from Bank of America.

Stuart, I just wondered if I could ask you a question on the second half '22 guidance bridge from Slide 6. You're noting a small improvement in the operational earnings growth. Is it fair to say you're expecting some improvement in the second half in event-based businesses, understanding there is some seasonality there. But Issuer Services in the first half of '22, revenue there being down by about $80 million versus the second half of '21. So what sort of seasonal outlook are you expecting? And what sort of recovery in event-based businesses are factored in?

So from an event-based businesses perspective, I'm not sure I'm going to see any particular recovery. We were coming off some tough comps. In FY '21, Corporate Actions were particularly buoyant. There was a lot of rights issues, especially in the Northern Hemisphere, very large, very complicated rights issues. And they've been kind of replaced by some very large sort of corporate restructures or acquisitions, right, that you tend to get paid more for a rights issue than you do a cash-based M&A. So we think that there isn't going to be a strong recovery in -- that you'll see in Corporate Actions. Stakeholder Relationship, that's always been a little bit lumpy. Again, I think that will remain pretty flat. I think that continued growth will be some of the new client wins that we have. Equity markets remain roughly at the same levels that they are today. Our plans business should continue its momentum through, and that's really where the operating earnings growth is going. But as I say, it's relatively flat as we sort of factor in some of the -- full 6 months of some of the cost pressures that we're seeing around the group. I don't think Bankruptcy is going to come back in the second half either. Class Actions remain subdued. But as I said, that will be offset by some of the momentum that we've got in the registry business, the Governance Services businesses, our Corporate Trust businesses, et cetera. And we also expect to see better performance in U.S. Mortgage Services.

Excellent. And just if I could confirm on the CCT synergies. You previously talked about $17 million of the $80 million being achieved by year 2. Slide 15 looks at the separation and integration plan. That implies there's a lot being done in 12 to 24 months post acquisition. Is there any potential to accelerate some of those synergies?

Well, it's not easy dealing with some of these big American banks in Natalia. We'd love to struggling to get access to some of the platforms at the moment. So look, I don't think there'll be an opportunity to accelerate while it's still in their environment. What we did say was we will spend the first of 18 to 24 months pulling out the existing platforms out of the Wells Fargo environment and getting it into Computershare. And that will deliver us some synergies because we should be able to do that a little bit more efficiently and a little bit more nimbly. But then some of the business transformation, some of the invest in some of the new systems and products to really kick in year 3, 4, 5, and that's really where the bigger synergies will actually come through. So the first 18 months is really about the lift and shift of that business out of the bank. So I'm not hugely confident even in bringing forward synergies. And even though we can see that the business is performing better, which goes to the second half earnings upgrade, et cetera, that's not because of synergies pull forward at all.

The next question comes through from James Cordukes from Credit Suisse.

Look, just a question on Corporate Trust. You've got the $50 billion of money market funds there. You're flagging the rate is going from 3 basis points to 10 basis points, hopefully from 1st of May. Should we expect that rather significant benefits to fall to the bottom line in FY '23? Is the cycle that full period benefit from the higher rates? Or are there any other offsets?

Nick, why don't you take that one?

Yes, no problem. Thanks, Michael. So James, the uplift in the money market funds in the -- that we've called out in the fourth quarter, so they increased to 10 basis points, we expect that to be consistent through FY '23. The -- so providing -- so the balances -- the money market balances should be about the same, subject to any that we can recapture and put into client deposits that we talked about earlier. But now they should get a full 10 basis points for the full year as opposed to just the last couple of months through this half. And yes, they will flow to the bottom line.

Yes. And look, just another question on Corporate Trust. You've got about $10 billion of balances that are not exposed to rates. Historically, Wells Fargo generated some income on those. In the first half, you generated no income. Should we -- there is 2 questions around that. Should we expect that to recover in time? And two, how does that impact your recapture opportunity given you're recapturing from a 10 basis point spread on money market funds to not much on -- based on the first half spread that you're generating on those nonexposed balances?

Well, the money market funds if we recapture them, we would -- we recapture them into exposed rather than nonexposed. And that's the first thing. The nonexposed balances in CCT, the key reason that they're not earning very much in the way of yield at the moment is simply because of where rates are. And so a little bit like our own legacy book. As rates rise, we would expect the yield on nonexposed balances to improve, albeit it just won't be at the same level as we should be able to generate on the exposed book.

We have no further questions at this time. I'll now hand back to Stuart Irving for any additional or closing remarks.

Well, thanks very much, everyone, for joining the call today. I look forward, along with Nick and Michael, of meeting many of you over the coming days. Much appreciate it. Cheers.

That concludes the Computershare FY '22 Half Year Results Presentation. Thank you once again for joining us today. You may all disconnect.