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Operator
Good morning and welcome to State Street Corporation's third-quarter conference call and webcast.
Today's discussion is being broadcast live on State Street's website at www.statestreet.com/stockholder.
This call is being recorded for replay.
State Street's call is copyrighted.
All rights are reserved.
The call may not be recorded or rebroadcast for distribution in whole or in part without express written authorization from State Street; and only the authorized broadcast of this call is housed on State Street's website.
At this time, I would like to introduce Kelley MacDonald, Senior Vice President for Investor Relations with State Street.
Please go ahead.
Kelley MacDonald - IR
Good morning, everyone.
Before Ron Logue, our Chairman and CDO, and CFO Ed Resch begin their remarks, I would like to remind you that during this call we may make forward-looking statements relating to the Corporation's business and financial goals, plans, and prospects, and its business environment, among other things.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in State Street's 2006 annual report on Form 10-K and its subsequent filings with the SEC.
We encourage you to review those filings including the sections on risk factors concerning any forward-looking statements we make today.
Any such forward-looking statements speak only as of today, October 16, 2007, and the Corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.
In addition, information related to this webcast, including information concerning and reconciliations of non-GAAP measures referred to in this webcast, is available on the Investor Relations section of our website, www.statestreet.com/stockholder, under the heading annual reports and financial trends.
I would also like to remind you that this morning we will be using several slides to illustrate some of the material that Ed Resch will present regarding conduits.
You can access these from our website, and some are also included as an addendum in our trends package, which is also available on our website.
Now, I will turn call over to Ron.
Ron Logue - Chairman, CEO
Thank you, Kelley.
Good morning.
We have a lot to cover this morning.
We have organized this discussion into three parts.
First, I will focus on the strength of our fundamental business, asset servicing and asset management, which is obvious when you look at the numbers.
I will comment on our stronger than usual new business wins; discuss better than anticipated success with the integration of Investors Financial; and in general terms, talk about our asset-backed commercial paper program and State Street Global Advisors' active fixed income funds that have received press coverage lately.
Ed will then provide specific detail with respect to our results, the investment portfolio, and our asset-backed commercial paper program.
I will then return and discuss in general terms some of the lessons learned from the unprecedented market turmoil this industry has experienced this quarter and describe some of the things we think we need to do to protect this Company from similar events in the future while, at the same time, as we did this quarter, find ways to benefit from market disruptions in the future.
State Street this morning reported a strong nine-month performance, with increasing revenue and operating earnings per share in each successive quarter.
Excluding the tax adjustments recorded in the second quarter of 2006 and the merger and integration costs recorded in the third quarter of 2007, our operating earnings per share for the first nine months of 2007 grew 21%, and our revenue grew 25% compared to the same period in 2006.
In the third quarter, our operating earnings per share grew 39% and our revenue grew 48% compared to the year-ago quarter.
We achieved 15.8% operating return on equity compared to 16.4% in the third quarter of 2006.
Excluding the revenue from Investors Financial, comparing the third quarters of both years, revenue grew 34% and operating earnings per share grew 45%.
Excluding the merger and integration costs, we once again achieved positive operating leverage on a sequential quarter basis and when compared with the prior year's quarter.
This marked the 12th consecutive quarter in which we achieved positive operating leverage compared to the prior year's quarter.
Strength in our asset servicing and asset management businesses continues to drive our results, with servicing fees in the third quarter up 37% and management fees of 26% compared to a year ago.
While market conditions in the third quarter presented challenges, which I will address in a minute, it also created more opportunities in foreign exchange and in securities finance than we usually expect in the third quarter, which has historically been a softer quarter for these businesses.
Revenue from foreign exchange increased 98% from the year ago quarter, and 29% from the second quarter.
Securities finance was up 90% from the third quarter of 2006 and up 2% from the second quarter of 2007, a seasonally strong quarter.
But it is the strong results this quarter in our core businesses, asset servicing and asset management, and continual new business wins which will drive consistent revenue growth.
We had a particularly strong quarter for new business wins, both in asset servicing and in asset management.
In asset servicing, we won 281 new mandates, which represented $825 billion in assets.
In asset management, we won 61 new assignments, which represented $26 billion in net new assets.
Three of the new large asset servicing wins we cannot name yet; but some of those we can include -- on the servicing side, Credit Suisse Asset Management Australia has contracted with State Street to provide custody services for over AUD11 billion in assets.
State Street was awarded a $20 billion mandate to service [Paulfin and Company], a fast-growing hedge fund manager; services include middle office servicing, accounting, as well as tax and treasury services.
State Street was also appointed to provide servicing for GBP26 billion or $52 billion in Pearl Group Limited, an owner-manager of UK insurance funds; services there include custody, fund accounting, derivatives processing, securities finance, and transition management.
State Street was appointed by the National Pension Service, South Korea's social security system, to provide global custody, securities lending, and related services.
State Street has also been appointed to provide a comprehensive range of investment services to Lucida plc, a UK bulk annuity provider; we will provide global custody, investment accounting, performance measurement, securities finance, transition management, and compliance monitoring requirements.
State Street has been appointed to provide custody, administration, and transfer agency services for the newly launched offshore funds of the Abu Dhabi Investment Company, a government-owned investment company based in the United Arab Emirates.
State Street won an award from Bank] of America's Excelsior Funds, which they acquired as part of their acquisition of the U.S.
Trust Company, for which we will provide custody, fund accounting, reporting, and compliance services for $22 billion in assets.
The Minnesota State Board of Investment rehired State Street for five years as master custodian for $59 billion in pension and state operating funds.
I would also like to call to your attention the wins from 10 new funds in private equity servicing, the result of two acquisitions we have made, Investors Financial and [Palmary].
We now service 85 clients with $82 billion in private equity assets in three locations.
We also won but cannot specifically name yet three large US mandates representing more than $335 billion in assets, for which we provide custody and accounting, out of the $825 billion in new wins this quarter.
State Street Global Advisors also added significant new business.
The Illinois State Board of Investment hired State Street Global Advisors to manage $276 million in an MSCI EAFE Index fund.
SSgA was selected by the Pensions Trust for Charities and Voluntary Organizations in the UK to manage a GBP602 million enhanced equity mandate.
From the Teachers Retirement System of the State of Illinois, State Street Global Advisors won $270 million in indexed managed funds.
Taiwan's Bureau of Labor Insurance has granted State Street Global Advisors a $200 million mandate to run the fund's passive fixed income assets.
The EUR33.4 billion Fonds de Reserve in France has renewed State Street Global Advisors for a two-year contract to implement FRR's tactical allocation and its currency risk hedges.
As I mentioned earlier, net new business at SSgA in the third quarter was $26 billion.
Now let me turn to our balance sheet.
Net interest revenue and net interest margin again performed very well, achieving a 75% increase in fully taxable equivalent net interest revenue compared to the third quarter of 2006, and a net interest margin of 173 basis points during the third quarter of 2007.
Our investment portfolio is performing as expected.
None of the securities have been downgraded or put on credit watch.
As you can see from the improvement over the past year in net interest margin, our strategy is bearing results.
Ed will provide further details about these results in our outlook in a minute.
On the expense side, excluding the merger and integration costs, our expenses grew at a rate less than the rate of growth in revenue, which resulted in about 260 basis points of positive operating leverage on a sequential quarter basis.
We achieved positive operating leverage of about 580 basis points in the third quarter of 2007 compared with the third quarter of 2006, our 12th consecutive quarter of positive operating leverage compared on this basis.
Let me now offer some background to our asset-backed commercial paper program, which has garnered significant interest during the past few months.
As I am sure you are aware, the market for fixed income products continues to be challenging.
State Street has sponsored an asset-backed commercial paper program since 1992.
We created these programs in the US, Europe, and Australia primarily for our mutual fund customers who invest in the commercial paper for their money market funds.
We currently sponsor and administered four asset-backed commercial paper programs.
The ratings on the assets backing the CP are primarily triple-A or double-A.
Most of the assets benefit from asset-specific credit enhancement.
In addition, State Street provides liquidity and credit facilities to the conduits, as we have disclosed in our SEC filings in the past.
We do not have concerns as to the overall quality of the underlying assets in the conduits.
It is important to help our investors understand the differences between our conduits and those of many commercial bank sponsors.
We included a Moody's chart in our trends package on page 10, which you can download from our investor relations website.
It provides an overview of our conduits as of September 30, 2007, versus a peer group of 30 bank sponsors of multiseller conduits as of June 30, 2007, including a summary of the asset composition and ratings of the assets held in the conduits.
A review of these slides should provide you with a view as to the high quality of our assets versus the peer group.
During the quarter, we saw the spread between the rates paid on commercial paper issued by the conduits and the yield on the assets narrow for a period of time.
This pricing has put some pressure on our margins in this business.
However, you should note that this business represents less than 1% of our total annual revenue; so the amount of decline is not material to State Street overall.
As we have noted, the commercial paper has been sold to customers every day.
However, it has been our practice, if needed, to hold a small amount of the paper on our balance sheet from time to time.
The holdings of State Street sponsored asset-backed commercial paper at September 30, 2007, were about $730 million, which is primarily related to our Australian conduits.
At no point in the quarter or subsequently have we held more than $1.250 billion of conduit asset-backed commercial paper on our balance sheet.
The backup lines and letters of credit currently remain undrawn.
As of yesterday, October 15, we held about $222 million on our balance sheet.
Let me now comment on the recent press coverage of the active fixed income funds at State Street Global Advisors.
We disclosed this morning, as of September 30, 2007, SSgA manages $2 trillion in assets, of which $244 billion is in fixed income.
Of these fixed income assets, approximately $36 billion is fixed income that is actively managed, including government bonds, credit, and structured products.
12 of these strategies with exposure to subprime represented about $7.8 billion on June 30, 2007, and about $2.6 billion on September 30, 2007.
These asset-backed securities are primarily rated triple-A or double-A.
The disappointing performance of these strategies was further exacerbated by some customers who redeemed their assets at the height of the market disruption.
A complaint was recently filed against State Street Global Advisors by Prudential Insurance Company.
The basis of the complaint is that we allegedly did not correctly communicate the investment objective of the funds.
We deny this allegation and intend to vigorously defend our position.
Our pipeline remains strong and we haven't had any major disruptions to the normal course of our business.
In fact, as I mentioned earlier, we recorded $26 billion in net new business at SSgA in the third quarter, and our total fixed income assets under management increased by more than $20 billion since June 30, about $1 billion of which is in active fixed income.
As I said, we are pleased to achieve strong results for both the third quarter and the first nine months of the year.
The consolidation of Investors Financial is now well underway, and we are confident that we will achieve our customer revenue retention target of 90%.
Given success of the consolidation to date, we more than halved our expected EPS dilution from $0.14 to $0.06 this year, and from breakeven to modestly accretive next year.
Starting this quarter, we will track our progress each quarter through 2008 so you can evaluate our results, just as we did with the Deutsche Bank transaction.
As you can see from the press release issued this morning, the performance of the business we acquired from Investors Financial was excellent, adding $221 million in revenue.
We reported $0.05 dilution per share from the acquisition, ahead of our model that we provided in February when we announced the transaction.
The consolidation is proceeding according to plan.
We have also retained key talent from Investors Financial and have outlined plans for conversion with the customers.
Their accounts are being converted according to our plans.
As they convert, we are removing the costs on schedule.
Let me reiterate our updated goals for the year that we discussed last quarter.
Excluding the merger and integration costs in 2007 and the impact of tax adjustments in the second quarter of 2006, we expected growth in operating earnings per share of 10% to 15% on revenue growth of 20% to 22%.
We also expected to achieve operating return on equity of 14% to 17%.
Based on the nine-month performance and assuming the markets remain relatively stable, our full-year outlook now calls for us to perform above the top of these ranges.
Now I will turn the call over to Ed who you will provide some of the details of our financial performance, further information about the asset-backed commercial paper program, as well as some details as to our expectations for the rest of the year.
Ed Resch - EVP, CFO, Treasurer
Thank you, Ron.
Good morning, everybody.
The first nine months of the year demonstrated the strength of our business.
We reported strong growth in both fee and net interest revenue.
Please note that all of the numbers I'm presenting will include the results of Investors Financial, except where I specifically note that there is a difference.
Our growth in asset servicing, asset management, and securities finance revenue continues at a combined rate of about 23% compared to the first nine months of 2006.
Securities finance and trading services revenue, particularly foreign exchange, was unexpectedly strong in the third quarter, given the volatility in the market.
We continue to expand globally introducing new services to a broad base of customers.
We reported strong net interest revenue growth of 75% on a fully taxable equivalent basis, comparing the third quarter of 2007 with the third quarter of 2006.
On the same basis, net interest revenue was up 21%, comparing the third quarter of 2007 with the second quarter of 2007.
Our net interest margin improved to 173 basis points in the third quarter, up 51 basis points from last year's quarter and up 9 basis points from the second quarter.
Obviously, the positive trends I mentioned last quarter continued into this quarter.
I will provide more detail on our net interest income and margin in a few minutes.
We achieved positive operating leverage compared to the third quarter of 2006, as well as when comparing the third quarter of 2007 with the second quarter of 2007.
For the 12th consecutive quarter, our assets under custody were at a record level for State Street at the end of the quarter.
Our assets under custody were $15.1 trillion compared to $11.3 trillion on September 30, 2006.
The custody assets from Investors Financial stood at $1.9 trillion as of September 30, 2007.
Our assets under management of $2.0 trillion also stood at a record level at the end of this quarter.
As Ron noted, the business acquired from Investors Financial continued to perform well.
As we reported this morning, total revenue compared to the third quarter of 2006 including Investors Financial was up 48%; and excluding Investors Financial total revenue was up 34%.
In the third quarter, we saved an annualized $120 million, excluding certain variable expenses that are tied to the revenue increases from the acquired Investors Financial business.
Our expectations are still that we will remove $350 million in annualized costs from the Investors Financial cost base, with approximately $230 million in annualized cost to be removed over the next 15 months.
As we convert clients' accounts, we will be able to reduce the expense base at Investors Financial.
Due to the continued strength in revenue growth from customers we acquired from Investors Financial, we now expect the acquisition to be about $0.06 dilutive to 2007 earnings per share, a reduction of more than half of our original $0.14 dilutive outlook.
I hope you have had an opportunity to review our earnings press release distributed this morning.
Please review the financial statements included with our earnings press release and in our financial trends package on our website for detailed information on our financial results.
Now to discuss the results.
We reported earnings per share of $0.91 including the merger and integration charges associated with Investors Financial.
This was up 10% compared to $0.83 per share from the prior year quarter, and down 15% compared to the second quarter of 2007.
Excluding the merger and integration costs, operating earnings per share were $1.15, up 39% from last year and up 7% from the second quarter.
Revenue totaled $2.2 billion for the quarter, an increase of 47.9% from last year's third quarter, compared with a 42% increase in expenses, excluding the merger and integration costs, to $1.5 billion.
Compared to the second quarter of 2007, revenue was up 16.6% and expenses increased 14.0%, excluding the merger and integration costs.
Return on equity was 12.6%, or 15.8% excluding the impact of the merger and integration costs, compared with a return on equity of 16.4% from the third quarter of last year and with 19.2% in the second quarter of 2007.
Servicing fees were up 37% from the third quarter of 2006, and up to 22% from the second quarter.
Management fees were up 26% from the third quarter of 2006, and up 5% from the second quarter.
Performance fees were about $19 million, down from $29 million a year ago, and down slightly from $20 million in the second quarter of 2007.
Unusually strong volatility in our foreign exchange business drove a 98% increase in foreign exchange trading revenue compared with the third quarter of last year, and up 29% from the second quarter.
Brokerage and other fees were up $38 million or 66% to $96 million from the previous year's third quarter.
This increase was due primarily to $21 million in fees from Currenex.
Brokerage and other fee revenue was up 12% from the second quarter of 2007.
Also, due to fixed-income market disruptions, we saw more volume in securities finance than we usually see in the third quarter.
Securities finance revenue was up 90% from last year's third quarter due primarily to higher volumes and improved spreads; and was up 2% compared to this year's second quarter due to the additional revenue from the Investors Financial business, partially offset by slightly lower spreads and slightly lower volumes.
At quarter end, we had $678 billion in securities on loan.
The duration on the securities lending book was 27 days.
Net interest revenue on a fully taxable equivalent basis increased $206 million or 75% from $275 million to $481 million, and was up $84 million from the second quarter.
In addition, compared to the third quarter of 2006, net interest margin of 173 basis points was up 51 basis points and up 9 basis points from the second quarter of 2006.
The favorable trends that I cited during the first- and second-quarter calls continued in the third quarter -- higher levels and a favorable mix of customer deposits; a continued favorable non-US rate environment; a higher yield on reinvestments in our securities portfolio; and a higher level of low-cost funds.
Of course, we added about $13 billion in average assets from Investors Financial, which also contributed to the increase in net interest revenue.
Due primarily to the Investors Financial assets we acquired, we increased the average size of the investment portfolio from $61.2 billion a year ago to $74.6 billion during the third quarter, and up from $67.7 billion in the second quarter of 2007.
Mortgage-backed securities in the third quarter of 2007 represented about 41% or $30.9 billion of the average investment portfolio.
Floating rate asset-backed securities in the third quarter of 2007 represented about 34% of the average investment portfolio or $25 billion.
The credit quality of the portfolio at September 30, 2007, has remained about the same as at last year end.
95% is invested in triple- or double-A rated securities.
As of September 30, 2007, 89% was invested in triple-A and 6% in double-A rated securities.
None of our investment portfolio securities were downgraded or put on the watch list last week by Moody's.
I said on last quarter's conference call that if the current trends we saw continued, we expect our net interest margin for the full-year 2007 to be in the range of 155 basis points.
Since the trends continued and in fact improved in the third quarter, plus the benefit we expect to receive from the recent 50 basis point rate reduction by the Fed, we now believe we will be above that level for 2007, more likely in the range of 160 to 170 basis points.
This assumes that market trends continue; that our transaction deposits continue to run at these historically high levels; and we continue to benefit from the favorable mix of customer deposits.
Looking toward 2008, we expect the net interest margin to improve to an average for the year in the range between 185 to 195 basis points.
This outlook for next year assumes that the current high level of transaction balances and spreads continue, and that we maintain the existing favorable mix of customer liabilities.
We expect to see the investment portfolio reprice upwards as older fixed-rate securities mature in a generally stable interest rate environment worldwide.
The balance sheet is expected to grow between 5% and 10% over normalized 2007 levels.
Our duration gap has not changed significantly from year end.
Our assets are about 12 months and our liabilities are about nine months.
The investment portfolio duration is about 1.5 years, down slightly from 1.6 years in the third quarter of 2006, and down from 1.7 years in the second quarter of 2007.
Since there has been continuing interest in the asset-backed securities collateralized by subprime mortgages held in the available-for-sale portfolio, which totaled $6.6 billion at September 30, 2007, let me provide some detail.
First of all, these securities have been issued with subprime mortgages as collateral, and they are 73% triple-A rated and 27% double-A rated.
They have performed very well.
The current percentage breakdown, which is down from 80% triple-A and 20% double-A in the first quarter, reflect the paydowns we have received.
Each vintage year from 2003 through 2006 has outperformed the Moody's performance data.
All of the assets purchased in 2006 and the small amount that we purchased in 2007 are triple-A rated.
In addition, these securities have an average 37.6% credit enhancement on them, versus a 5% to 8% historical cumulative loss experience in the marketplace.
So what that means is that even if losses were to double, we still have more than twice as much cushion as we need before we would have a loss.
So we remain very comfortable in terms of our entire asset-backed position, including the position that is backed by the subprime mortgages.
Now I will provide more detailed on comparable expenses.
Salaries and benefits expenses were up 43% from the third quarter of 2006, and up 13% from the second quarter of 2007, largely attributable to the costs associated with the staff that joined State Street from Investors Financial, as well as the impact of incentive compensation due to our improved performance and benefits expense.
Transaction processing expenses increased, up 36% compared to the year-ago quarter, and 17% from the second quarter of 2007, due to increased volumes in the asset servicing business.
Other expenses were up 81% compared to the year-ago quarter, and up 16% compared to the second quarter of 2007, due primarily to costs associated with Investors Financial.
The effective tax rate for the quarter was 35%.
Again, I would like to remind you that in a few minutes I will refer to several slides that are available on our website.
But now, let me share with you our capital plans and answer some of your questions about the asset-backed commercial paper conduits.
First, remember that during the first half of 2007, we ran our ratios higher than our targeted levels due to the expected impact from the acquisition of Investors Financial and the planned share repurchase associated with that transaction.
The principal capital ratio that we manage to is the Tier 1 leverage ratio.
We will continue to target between 5.25% and 5.75%, but may allow this to drift upwards toward 6% if conditions warrant.
On July 20, 2007, we executed a $1 billion accelerated share repurchase program.
At September 30, 2007, our Tier 1 leverage ratio stands at 5.35%.
Our tangible common equity ratio is 3.49%.
Our tangible common equity ratio reflects the growth in the balance sheet from increased customer deposits and the increased level of liquidity we carried in response to market conditions in the third quarter.
Due to the high level of interest in our asset-backed commercial paper program, I will take a few minutes to refer you to several slides which are available on our website.
For your information, the data provided by Moody's is as of June 30, 2007; and State Street's data is presented in the aggregate as of September 30, 2007.
I would like to begin by describing our approach to conduits.
First, they are driven by customer demand for high-quality, highly-rated commercial paper.
These are principally our customers that manage money market mutual funds.
The conduits are managed by our structured products group and are subject to a rigorous credit review process, which includes independent oversight of all asset purchases.
The conduits are included in our contingency plans both in terms of funding and capital.
We believe our approach to the asset-backed commercial paper market is different than most other programs, in that no assets from State Street's balance sheet are sold to the conduits.
Rather, they are sourced from the market.
The first conduit was created in 1992; and now in 2007 we have four.
The expansion over time of the conduits has been in response to customer demand for asset-backed commercial paper.
The financial performance of the conduits during this time period has been very strong.
They have never suffered a credit loss on any asset they purchased, evidence of the strong credit discipline that I just referred to.
Also, State Street in its capacity as a liquidity and credit provider has also never experienced a loss from having to fund under those facilities.
State Street plays several roles -- administrator, liquidity provider, and dealer, for which we earn fees; but also note that we have 10 other dealers across the four conduit programs.
Those fees are paid out of the difference between the yield on the assets versus the yield on the commercial paper in the conduits.
The fees associated with the program are reported on the processing fees and other revenue line in our income statement.
The fees represented about $61 million in 2006 revenue, and year-to-date in 2007 were about $50 million.
What are the ratings on the assets that are held for use in the conduits?
If you would please turn to slide 1.
Let me make sure you're all aware.
Most of the assets are pools of consumer assets and are investment grade.
Now let me detail some of the aggregate ratings of the assets within the four conduits that back the commercial paper.
62% is triple-A; 15% is double-A; 8% is single-A; and 10% is not rated by a rating agency.
However, I should point out that our enterprise risk management group reviews all purchases in the conduits; and the assets in this group are structured to maintain a P-1 or similar conduit rating.
Those three categories represent 95% of the total.
The remaining 5% is rated triple-B.
Let me differentiate these ratings from the average ratings of holdings of a multiseller peer group using data provided by Moody's, which is graphed on page 10 in the trends package provided on our website also.
First, let me reiterate.
The assets in State Street's sponsored conduits are not sourced from our balance sheet.
While State Street's conduits hold 62% in triple-A rated securities, a peer group of the major multiseller conduits holds 12%.
While State Street's conduits hold 15% in double-A rated securities, the peer group holds 13%.
While State Street holds 10% that are not rated, the peer group holds 41%.
While State Street holds 5% rated as triple-B, the index of the major multiseller bank sponsors holds 13%.
And while State Street holds essentially no assets rated below triple-B or below investment grade, the peer group holds 10%.
The point of this detail is to provide data that will help you differentiate generally between the commercial paper issued by our conduits and that of other programs.
These comparisons may help you understand the confidence we have in the quality of our assets.
What is the country of origin of the assets and to whom do we sell this commercial paper?
Please turn to slide 2.
The asset allocation is as follows.
About 42% of the assets originate from the United States; 30% from continental Europe and the United Kingdom; and 22% from Australia.
The weighted average maturity of the conduit assets is about four years.
The conduits historically sell the asset-backed commercial paper in four currencies, with about two-thirds of the asset-backed commercial paper denominated in US dollars.
A little more than 20% is denominated in euros and sterling.
About 15% is denominated in Australian dollars.
What type of assets are represented in the conduits?
Please now turn to slide 3.
Let me outline in the aggregate the types of high-quality assets in the four conduits against which the commercial paper is issued.
First, mortgages.
US residential mortgage-backed securities represent about 15% and have an average FICO score of 712 at origination.
Australian mortgages represent about 18%.
European mortgages represent about 15%.
UK mortgages represent about 8%.
Next after the mortgage-backed securities are student loans, which total about $3.3 billion or 11% the total, almost 83% of which are protected by a 97% guarantee by the US federal government.
Next in order are auto and equipment loans, which represent about 9% of the assets or $2.6 billion.
Then credit cards receivable, which represent about 7% of the assets or $2.1 billion.
And finally, other, which includes mostly trade receivables, CLOS, and business and commercial loans, 17% or $5 billion.
These assets are sourced from third parties, and not from State Street's balance sheet.
No single asset class represents more than 2% of total portfolio assets, except trade receivables at 3%.
For the sake of time, I will not review the characteristics of each of the asset types held within the conduits.
But if you later review the other slides I provided you can see in more detail their characteristics as well as our risk and control procedures.
So what happened in the third quarter?
Overall, the asset-backed commercial paper program performed very well in a period of extreme market stress.
We believe that our asset quality was a major point of differentiation for our conduits during a period of time when some weaker programs faded away and the overall asset-backed commercial paper market contracted significantly.
There were immaterial, negative financial consequences to State Street in the third quarter as revenue from the conduits declined to about $11.1 million in the third quarter, from $13.8 million in the third quarter of 2006 and from $17.4 million in the second quarter of 2007.
As the third quarter progressed and investors became increasingly concerned about the credit quality of the underlying assets in conduits, the rates that issuers had to pay on asset-backed commercial paper increased.
These rates are generally quoted to spread over the relevant index; for example, the overnight rate or one-month LIBOR.
For State Street, our asset-backed commercial paper spreads widened out to as much as 50 to 75 basis points over the overnight rate, and 60 to 80 basis points over the one-month rate.
These spikes did not last long, as they occurred in the weeks leading up to the FOMC meeting in mid-September at which time the Fed decided to lower the Fed funds target rate by 50 basis points to 4.75%.
This move helped to contract spreads.
Since the FOMC meeting, our spreads have gradually contracted to current levels of around 5 to 20 basis points versus the overnight rate, depending on the currency, and 0 to 35 basis points versus the one-month rate, again depending on the currency.
Our overall weighted average maturity of the commercial paper at the end of the third quarter of 2007 was approximately 15 days compared to approximately 21 days at the end of the third quarter of 2006, and approximately 22 days at the end of the second quarter of this year.
The conduits are separate legal entities in which State Street has no direct ownership.
They meet the requirements of FIN 46R and are therefore unconsolidated.
Similar to most conduit structures, the conduits have third-party investors in the form of subordinated debt, who are in a first-loss position, bearing the majority of the expected losses of the conduits as defined by the accounting rules, FIN 46R.
We held $730 million in State Street sponsored asset-backed commercial paper on our balance sheet at September 30, 2007, most of which was associated with the two Australian conduits, which are much smaller than either of the other two.
We believe that because September 30 is the year end for several major Australian banks, there was a negative effect on our ability to place asset-backed commercial paper in the Australian market at quarter end.
At no point during the quarter did we hold more than $1.25 billion of the conduits' asset-backed commercial paper on our balance sheet.
As of yesterday, October 15, 2007, we held approximately $222 million on our balance sheet.
I realize you are probably interested in implications for State Street should assets come on to our balance sheet under existing contractual arrangements with the conduits or as a result of the consolidation of the conduits.
We do not anticipate the consolidation of the conduits, but present the following information for purposes of illustration, given the amount of interest this topic has received.
It is possible that assets could come on to State Street's balance sheet as a result of existing contractual relationships between State Street and the conduits, as we have disclosed in our notes to our financial statements.
State Street provides the conduits with liquidity lines that backstop the asset-backed commercial paper.
These are referred to as liquidity asset purchase agreements, and they are provided to enhance the level of protection that a holder of the conduit's commercial paper has, beyond the high asset quality of the conduits that I have already spoken about.
If a credit problem occurred with an asset in one of the conduits, subject to certain conditions, the liquidity asset purchase agreement could be invoked by the conduit, requiring State Street to purchase the asset from the conduit at par.
In the event the fair value of the asset is less than par, State Street would be required to take the loss upon purchase of the asset.
In the recent market, with spreads on virtually all asset classes except US treasuries having widened, this would result in a loss.
This loss may be recovered in future periods, depending on State Street's action after the asset is purchased.
It is also possible that conduit assets and liabilities could come on to State Street's balance sheet through a consolidation of one or all of the conduits.
This would occur if State Street failed to meet the accounting requirements for nonconsolidation under FIN 46R, which is a complex accounting standard.
This is assessed each quarter and more frequently if events warrant.
If consolidation were to occur pursuant to FIN 46R, then the conduit assets and liabilities would come on to State Street's balance sheet at fair value.
State would recognize an extraordinary loss at the date of consolidation if the fair value of the assets exceeded the fair value of liabilities, as they do in today's market conditions.
This loss would reverse back into income over the remaining lives of the assets assuming the assets were held to maturity and State Street recovered the full principal amount of the securities, as anticipated.
To quantify the income statement impact to State Street if all of the conduits' assets were purchased under the liquidity asset purchase agreements, or a consolidation event were to occur in the future, using September 30, 2007, estimated fair values, the loss would be approximately $215 million after tax.
If the assets are the result of a consolidation under FIN 46R, this would be an extraordinary loss for financial reporting purposes.
From a funding standpoint, the risk I just described is included in our contingency funding plan.
We believe that we can access multiple sources of liquidity to fund such asset purchases.
Our sources of this liquidity include sales of other assets, repo-ing assets, issuing corporate commercial paper, issuing bank CDs and time deposits, and accessing the Fed discount window.
We in fact, as part of our contingency plan in the third quarter, raised approximately $7 billion of incremental liquidity given the market environment.
This is one of the causes of our balance sheet growth in the quarter.
In terms of the impact on our capital ratios if a consolidation did occur, however, our capital ratios -- primarily the tangible common equity ratio -- would be stressed for a period of time.
The potential for such stress is in fact considered in our contingency plan.
From a regulatory capital perspective, the consolidation of the conduits' assets and liabilities would cause only a modest reduction in the Tier 1 and total risk-based capital ratios.
The impact on the Tier 1 leverage ratio depends on how and when the consolidation might occur, since this ratio is a function of the Company's average assets over the entire quarter.
Based on our current projections, we believe that we will remain well capitalized from a regulatory capital standpoint.
If all of the assets and liabilities of the conduits came on to our balance sheet, our tangible common equity ratio would be adversely affected.
While this ratio would be lower than our internal target, we would need a few quarters to re-establish our tangible capital ratio within our target ranges.
So in conclusion, the first nine months of the year represented a strong performance for State Street.
We are continuing to balance growth in revenue against our expenses so as to achieve positive operating leverage on an annual basis.
We hope that the information we have provided about our conduit program has allowed you to differentiate between our program and those of other sponsors.
We continue to be confident about performing above the top of the ranges for 2007 that we have provided, assuming markets remain relatively stable.
Now, I will turn the call back to Ron.
Ron Logue - Chairman, CEO
Ed, thank you.
Well, looking back over the quarter, I am struck not only by the significant performance of our core business but also by our ability to react to what has clearly been an uncharacteristic fixed-income market.
One of the reasons we have been able to do this is that State Street has a long-established conservative risk compliance and credit capability.
We have talented people who not only perform credit analysis for us but who also outline scenarios for managing risk, whether it affects our balance sheet, our conduits, or our investment management business.
Regarding the conduits, I have been asked recently -- will you get out of this business?
Or will you reduce the size of this program?
As we discussed earlier today, this program supports our core business.
Since we entered the business in 1992, we have never experienced a credit loss through this program.
So, no; we will not exit the business.
We apply strict risk and compliance procedures to the assets we purchase and will continue to do so.
We will, however, review this program in the light of the type of market disruptions we have experienced and maintain a program that is consistent with our ability to absorb the assets on our balance sheet, if necessary, without significantly impacting our capital ratios.
This issue is not about credit quality or liquidity.
It is about balance sheet capacity.
So let me summarize.
We have received excellent feedback from the Investors Financial customers with whom we are planning conversions.
We have added employees to State Street who have been recognized for their customer service and who will contribute to our ongoing success.
The acquisition strengthened our lead in our high-growth businesses, such as services for mutual funds, hedge funds, offshore funds, and investment manager operations outsourcing.
And we have added the capability to service private equity investments.
SSgA continues to offer more than 250 different strategies to our investors across the globe.
We continue to prudently manage our balance sheet to improve the return from our net interest revenue without taking significant credit or interest rate risk.
At the same time, growth in our non-US businesses continues to outpace the growth in the United States as we execute against our goal of achieving 50% of our total revenue from non-US sources.
Finally, we have taken significant US customers and significant assets away from our competitors this quarter.
We now begin the last quarter of 2007 with strong nine-month results from both State Street and the acquired Investors Financial business, and with our consolidation of Investors Financial, exceeding expectations.
We have confidence that we should be able to exceed the financial targets we established for growth in revenue and operating earnings per share, an achievement of operating return on equity, assuming markets remain relatively stable.
Now, Ed and I are happy to take your questions.
Operator
(OPERATOR INSTRUCTIONS) Mike Mayo from Deutsche Bank.
Mike Mayo - Analyst
Good morning.
New business for servicing of $825 billion, I guess that is 5% of assets under custody.
How much of that is in third-quarter results?
And who are you winning that from?
Ron Logue - Chairman, CEO
There is not a lot in the third-quarter results, because some of them are big transactions that will begin taking place fourth quarter and into the first quarter.
We are winning them from all of the traditional competitors.
Mike Mayo - Analyst
The big guys?
Like in the big four or so, or smaller?
Ron Logue - Chairman, CEO
Big guys.
Mike Mayo - Analyst
Okay.
If it is 5% of assets under custody, should we assume that servicing revenues will go up 5%?
Or is there a multiplier effect?
Ron Logue - Chairman, CEO
Well, there could be a multiplier effect depending on the products and services that they buy right away.
Traditionally, you start with custody and accounting and sell other products.
Lately, we seem to be selling more products sooner in the cycle.
Mike Mayo - Analyst
Investors Financial had $350 million of savings.
How much have you achieved in the third quarter?
Ron Logue - Chairman, CEO
I think we said 120.
Ed Resch - EVP, CFO, Treasurer
$30 million in the quarter.
Mike Mayo - Analyst
$30 million?
Ed Resch - EVP, CFO, Treasurer
$30 million in the quarter, right.
Mike Mayo - Analyst
Of the $350 million?
Ed Resch - EVP, CFO, Treasurer
That is the $120 million annualized, Mike.
Mike Mayo - Analyst
You said the margin, 1.73% in the third quarter, next year should go between 185 and 195.
Ed Resch - EVP, CFO, Treasurer
Correct.
Mike Mayo - Analyst
So if we take the midpoint of that, that would get us to NII 10% higher.
Or will you be doing something with the balance sheet that would make NII not go up that much?
Ed Resch - EVP, CFO, Treasurer
I think our thinking right now is more in the former camp, Mike.
Mike Mayo - Analyst
Would that be due to IFIN or due to the core business?
The reason I say that is you will be getting $0.05 more if you eliminate the dilution from IFIN.
If the margin improves the way you say it will, that would be another $0.05.
I don't want to double count.
Ed Resch - EVP, CFO, Treasurer
You're not double counting.
IFIN is a contributor to that.
It is part of it.
But you have to remember, the IFIN effect on the portfolio was about 1/6 or 1/7 the size of the State Street portfolio.
So the main driver is still the improvement.
It is the State Street side of the equation, if I can call it that.
It relates to the assets that are maturing in the portfolio, that are the older ones, as well as the strong flows that we have talked about now for several quarters on the State Street side.
Mike Mayo - Analyst
Your guidance in the past, you have tried to be conservative.
But if you take the $1.15 plus the $0.05, the margin, plus the $0.05 for IFIN, you're up to a $1.25 run rate.
Times 4 you get to a $5 run rate before any growth.
So I want you to pull us back down to earth here.
What was kind of above trend this quarter?
Maybe if you can address FX, trading volumes, and at least this quarter's NII.
The reason I say that is we don't have those numbers for the second quarter without IFIN.
Ed Resch - EVP, CFO, Treasurer
Right.
The things that were above trend in the quarter, Mike, were the things that you mentioned.
The securities lending, which normally as a sequential quarter declined, it obviously did not do that this year.
A contributor to that was IFIN.
But again, not the main contributor to the relative strength in the third quarter.
Mike Mayo - Analyst
How much was sec lending up without IFIN?
Ed Resch - EVP, CFO, Treasurer
Sec lending was up $3 million in total; IFIN was $7 million of that.
So the old State Street was down a little bit sequentially.
So you have the strength in sec lending; you have the volatility in the marketplace, given what went on the fixed-income markets driving really strong FX.
Mike Mayo - Analyst
How much was FX, baseline?
Ed Resch - EVP, CFO, Treasurer
Hold on.
IFIN contributed $22 million to the sequential quarter increase.
Mike Mayo - Analyst
Okay.
Ed Resch - EVP, CFO, Treasurer
Okay?
Then you had the NAR performance that we have already talked about.
So if you put that all together and say that we performed in line with our expectations coming into the quarter, we would have been right around what Street consensus was for the quarter.
Okay?
So you can almost say that around $0.20 of the overperformance was due to those factors.
IFIN's overperformance, FX, NAR, and sec lending.
So, that is what really drove it.
So I think your $1.25 construction times 4 is a little bit aggressive, given what I just said about the strength in the third quarter.
Mike Mayo - Analyst
Okay, so maybe closer to $1.05 times 4, or is that penalizing too much?
Ed Resch - EVP, CFO, Treasurer
I don't want to go to (multiple speakers).
Mike Mayo - Analyst
That's fine.
Then, just on deed ABCP discussion, everything you were talking about, the $250 million loss, the hit to capital, that is all hypothetical, still, correct?
Aside from the little bit you took on.
Ed Resch - EVP, CFO, Treasurer
Absolutely.
Mike Mayo - Analyst
What percentage probability or just color can you give on that likelihood of this coming on the balance sheet?
Ed Resch - EVP, CFO, Treasurer
Well, it is clearly greater than zero, because who knows what could happen?
But we think it is very, very remote that a consolidation event would occur.
Based on our history that we talked about, from the standpoint of our conduit performance on the asset side, as well as the implications to that of State Street as never having had a credit loss in the conduits or a liquidity asset purchase agreement called by the conduits against State Street, I think you can say the same thing about that side of the equation.
Mike Mayo - Analyst
How much did revenues go down this quarter due to ABCP?
That wasn't clear.
Ed Resch - EVP, CFO, Treasurer
In the range of 5 to $10 million.
Mike Mayo - Analyst
Okay.
So we might not see that come back?
Ed Resch - EVP, CFO, Treasurer
We might.
Mike Mayo - Analyst
Lastly, or actually two more.
The Barclays' contract with IFIN, if you have a renegotiation, will we hear about it?
Have you had one?
Can you comment?
Ron Logue - Chairman, CEO
If we have one, you will hear about it.
We continued the process through the quarter.
Service is good.
We are still doing all of the processing that IFIN did.
Mike Mayo - Analyst
Then lastly, the fixed-income funds that are actively managed, dealing with subprime, went from $8 billion down to $3 billion in the last three months.
So does that mean your potential legal exposure is $5 billion?
If it isn't, can you size the potential risk?
Ron Logue - Chairman, CEO
It is hard to size potential risk, Mike.
People got in and out.
There were withdrawals, transfers, during that period of time.
So it is a difficult thing to do.
Mike Mayo - Analyst
All right, thank you.
Operator
Nancy Bush with NAB Research.
Nancy Bush - Analyst
Good morning.
Ron, just sort of a qualitative question for you, first.
All the press coverage that you got during the third quarter about the funds and the ABCPs, etc., how much did you have to ramp up the time spent, sort of client handholding during the period?
Were there substantial worries that were voiced by your clients as a result of all this?
Sort of what was the client reaction is the sort of the bigger question.
Ron Logue - Chairman, CEO
Well, I think the media made more out of it than actually happened, Nancy, to be honest with you.
First of all, as I'm sure you know, we are known for constant client coverage, so there weren't any gaps there.
We were constantly dealing, using the relationship managers that we have dealing with the clients.
Were there more questions?
Yes, but nothing to the extent that there was panic in the streets here.
I think as I said, the media made more out of this than what actually happened.
Nancy Bush - Analyst
Okay.
Also, your commentary about the ongoing size of the ABCPs, in your commentary, your comment about what happened, are you ascribing some likelihood to a reoccurrence of what happened in the third quarter?
In other words, do you see the market as having changed in some way that we get more of these 6-standard-deviation events that will play into your thinking about the ongoing size of the conduits?
Ron Logue - Chairman, CEO
Well, there is no question that will play into our thinking about the conduits.
As I said, I don't think anybody would have anticipated a 100% loss of liquidity.
It is tough to create a contingency plan for something like that.
But for a period of time, that is exactly what happened.
So I think we need to rethink some of that, especially as it relates to our capital.
We are going to do that.
Nancy Bush - Analyst
Okay.
Also, Ed, a question for you.
The Fed, the benefit of the Fed cut, would you just remind us how this plays into ongoing margin and when the benefit sort of runs out?
Assuming that we have sort of a one and done event here.
Ed Resch - EVP, CFO, Treasurer
Well, with everything else is being held constant -- which is hard to do, Nancy -- a 50 basis point cut as the Fed just did is worth about $50 million to us on net interest revenue on an annualized basis.
A lot of that, given where we are constructed, is front-loaded today.
So there would be more in Q4 and Q1 than there will be next Q2 and Q3.
But we are still in a position where a 25 basis point cut is worth about 25 or $30 million to us on an annualized basis.
Nancy Bush - Analyst
Ron, one other question for you if I may.
Have there been any changes in portfolio management at SSgA as a result of the issues with the funds?
Or is -- if you would just remind us what the long-term record of these funds is, and whether clients are still interested in that long-term record.
Ron Logue - Chairman, CEO
Well, there have been no changes, Nancy.
The long-term record has been very good.
I think a proof point is the fact that we added about $1 billion in active fixed-income in the quarter.
Nancy Bush - Analyst
All right, thank you very much.
Operator
Brian Bedell from Merrill Lynch.
Brian Bedell - Analyst
Thanks.
Good morning, guys.
Just a few questions.
Starting out with the business wins, you said they are funding over the next -- essentially funding over the next couple of quarters.
These are mostly custody and accounting mandates?
Do you have also sec lending assignments and FX built in there as well?
Ron Logue - Chairman, CEO
Yes.
Brian Bedell - Analyst
You do?
Okay.
So that sort of lead into the next question.
Clearly, the volumes and volatility were very strong in the quarter.
But what, if you had to dimension roughly what proportion of third-quarter upside in FX and sec lending was due to just your cross-sell into your other custody mandates, and also I think TIAA-CREF was coming online in sec lending.
Ron Logue - Chairman, CEO
Yes, that's hard to say.
Obviously, as we keep adding customers, the FX securities lending seems to be at -- I have not really gauged that from that point.
But my bet would be that it is relatively small.
Brian Bedell - Analyst
Okay, but you're saying basically these new mandates are coming on with additional cross-sell as well?
Ron Logue - Chairman, CEO
Yes.
Brian Bedell - Analyst
Okay, so -- and the pricing of these mandates, should we assume that they are -- clearly I am sure the larger deals are priced lower given the scale and size argument with that.
But should we expect roughly similar pricing on assets under custody overall with these deals?
Ron Logue - Chairman, CEO
I guess I characterize them as market price.
Anytime there is accounting with it, it is not a commodity kind of pricing.
Brian Bedell - Analyst
Right, right.
Okay, great.
Ed, your target of 185 to 195 on the NIM for '08, what are your assumptions for the Fed funds rate, say at the end of '08 and the European Central Bank rates on that?
Ed Resch - EVP, CFO, Treasurer
I will give you all the assumptions that underlie that, Brian.
In terms of Fed funds, our current assumption is that it will be a 4.75% flat throughout all of '08.
Aussie dollars will stay where they are until the middle of the year, when they will increase 25 basis points.
The euro will increase one more time this year and then go up to 4.25 and stay flat.
The pound will stay where it is, 5.75, flat from now through the end of next year.
Japanese yen will have one more increase, 25 basis points and be 75 basis points flat for all of next year.
Brian Bedell - Analyst
Okay, so fairly static conditions.
If the Fed cuts further and the ECB sort of stays in your target range, is there upside to your NIM guidance based on that?
Ed Resch - EVP, CFO, Treasurer
Sure, it depends how and -- how much and when the Fed were to cut.
But based on what I said before in terms of a Fed rate cut, all else equal, that is a positive event for us.
Brian Bedell - Analyst
Right, okay.
Ed Resch - EVP, CFO, Treasurer
I would say modestly, though, Brian.
I mean, assuming it is another 25, because there is not a huge impact to the numbers I gave for '08.
Brian Bedell - Analyst
Right, right.
Then just for the rates that you're paying on foreign deposits, you were able to keep that low again.
Can you talk about your confidence in your ability to keep that, say, well below the ECB rate going forward?
Ed Resch - EVP, CFO, Treasurer
Well, you know, as the foreign central banks have raised rates, we have had the ability to lag, as we have talked about.
That will work itself through in a quarter or so if they stop raising, and things will catch up.
Brian Bedell - Analyst
Right.
So that -- I mean, in other words, you have come down from that 365 in the first quarter to 329 in the second quarter and then 325 this quarter.
So what you're saying is we should expect upside pressure on that in the fourth quarter and first quarter?
Ed Resch - EVP, CFO, Treasurer
Yes.
Brian Bedell - Analyst
Back up to where it is sort of what you were before in the first quarter?
Ed Resch - EVP, CFO, Treasurer
Yes, I think that is a good guess.
Brian Bedell - Analyst
Okay.
Just within, Ron, if you just want to talk about the -- one question on the conduit again, with your plans for the future size of that.
If you were not to buy any assets into the conduit, if you were to stop doing that, how long would it take to run off?
I know you don't want to close it to zero; but just to gauge the size (multiple speakers).
Ron Logue - Chairman, CEO
I think Ed quoted the weighted average maturity of four years.
Brian Bedell - Analyst
Right, okay.
So we should just straight-line that basically?
Ron Logue - Chairman, CEO
Yes.
Brian Bedell - Analyst
Are your plans -- is your plan to sort of let that run down for the time being?
Ron Logue - Chairman, CEO
Yes.
I don't want to necessarily telegraph anything we are going to do there.
But we are definitely going to look at in terms of relationship to the capital ratios.
And obviously compare that to the market conditions and take advantage of the market conditions; and conversely don't be disadvantaged by the market conditions at that period of time.
Directionally, you're right.
Brian Bedell - Analyst
Right, just in terms of -- yes.
Just (inaudible) clearly the earnings contribution doesn't seem to support any kind of additional hit to capital that you bring on.
Ron Logue - Chairman, CEO
Right.
Brian Bedell - Analyst
Just I think you mentioned quickly on IFIN, you said the retention is currently on track.
You have retained all of the clients so far, or most of the clients?
Ron Logue - Chairman, CEO
On the top 30, we only know of one that is leaving.
Brian Bedell - Analyst
Okay, so is it fair to say you are ahead of your 90% retention target as of right now?
Ron Logue - Chairman, CEO
Oh, yes.
Brian Bedell - Analyst
Okay, great.
The $141 million in M&I charges, what should we expect for charges going forward from the M&I line?
Ed Resch - EVP, CFO, Treasurer
Brian, we are going to be in line with what we had modeled.
It is just that the nature of the charge this quarter was front-loaded.
The main driver of the charge was because we abandoned our old headquarters building at 225 Franklin Street.
So over $90 million of the $140 million is because of that.
But we are going to be over the transaction, right in the middle of the range we put out.
Brian Bedell - Analyst
Okay, so most of it is already put through, essentially, or a good chunk of it is already charged off.
Ed Resch - EVP, CFO, Treasurer
Yes, but the range was 250 to $275 million.
So we're going to be in the middle of that for the whole transaction.
Brian Bedell - Analyst
Right, and that is coming through '08, essentially?
Ed Resch - EVP, CFO, Treasurer
Yes.
Brian Bedell - Analyst
Okay, great, thanks very much.
Operator
Banc of America, Ken Usdin.
Ken Usdin - Analyst
Thanks.
Good morning.
Hi, Ron.
Ed, could you just walk through again on the capital side, 3.5% TCE this quarter.
Just any idea of when you expect to kind of rebuild; how gradual that will be; and then your plans for just future capital management.
When might we see you buying back stock in the future?
Any changes to capital management strategy?
Ed Resch - EVP, CFO, Treasurer
Right.
Well, in terms of the TCE, we can rebuild that fairly quickly just based on internal capital generation.
I would expect that we would be above 4% -- again, holding everything constant -- within two quarters, based on how much we can move it in a quarter.
It is in the range of 40 basis points or so per quarter up.
In terms of the accelerated share repurchase, that is still ongoing.
When it is concluded, we will obviously announce that, but that is still progressing.
In terms of the fourth quarter, I think it is fair to say, given everything that we have talked about today on the call relative to capital and other things, we are not going to be buying back any stock in the fourth quarter.
As we move forward into '08, we will be still carrying forward our philosophy of buying enough to offset comp-related dilution; but committing to not much beyond that.
We want to retain our flexibility from a capital standpoint.
So back to, I would say, kind of business as usual, at least at this point, going into '08 from a capital standpoint.
Ken Usdin - Analyst
Okay, got you.
On IFIN, you mentioned $30 million, a $120 million run rate this quarter.
I know you are on track to get 350.
Can you just talk about where you are as far as timing of getting to 350?
Are you ahead of plan at all?
Are we going to see kind of ratable?
Can you run us through now your current thinking as far as that deal model of recognition of cost saves?
Ed Resch - EVP, CFO, Treasurer
Yes, I think that the deal model as we outlined it is basically in line from an expense reduction standpoint, where the reductions will occur pretty much ratably over time as we have modeled it, lined up with the conversions that I talked about.
The real increment from a performance standpoint on the IFIN transaction versus the deal model has been on the revenue side, where we have had stronger revenue than we anticipated.
We have had, as Ron noted, higher than a 90% revenue retention rate.
Saying it another way, we have had less than 10% attrition.
So the driver of the halving of the dilution, or a little bit better than halving of the dilution, is on the revenue side.
So expenses will come out as we modeled, ratably.
Most to be accomplished by the end of next year.
Maybe we will have a little bit spilling over into the first quarter of '09 from an expense standpoint.
Ken Usdin - Analyst
From an accretion dilution perspective, can we take the kind of same magnitude of change in '07 and take that to the magnitude of accretion versus the original flat guidance?
Or is there even a little bit more pickup because you get into the business going better than you expected, also?
Ed Resch - EVP, CFO, Treasurer
I would not extrapolate the strength this quarter into '07.
I think that we had a better start from a revenue standpoint, as I pointed out, than what we had modeled.
But as we think about '08 right now, based on everything we are seeing with the customers and all the conversion plans that are in place, we are going to do better than flat next year; but I wouldn't want to get too far into that at this point.
Ken Usdin - Analyst
Okay.
Then last thing, just on IFIN also, just on the revenue side.
Can you give us even just some color of any examples of revenue synergies?
I know you hadn't quantified any.
You had still the net negative synergy built into your model upfront.
Can you talk about your outlook on revenue synergies, and any examples you have already gotten, or magnitude of such?
Ron Logue - Chairman, CEO
Ken, this is Ron.
We are pretty sure we are going to get some cross-sell revenues.
Those things are beginning to start.
But you are not going to see anything in the third quarter and in the fourth quarter of any substance.
A lot of that will happen as those accounts get converted.
So we don't see a whole lot there right now in terms of what we consider cross-selling, as you know.
There was no cross-sell revenue in the deal model.
Ken Usdin - Analyst
Right, so that is not in your plan for '08, either?
Ron Logue - Chairman, CEO
Well, some will be, but it is not necessarily in the plan.
Ken Usdin - Analyst
That is what I mean.
It is not in the plan for --?
Ron Logue - Chairman, CEO
No, no.
Ken Usdin - Analyst
All right, thanks a lot.
Operator
Gerard Cassidy with RBC Capital Markets.
Gerard Cassidy - Analyst
A question on the business wins.
I know it is a sensitive subject, but how much of the business wins may have been due to your large competitor that is going through an integration?
Just versus pure, plain old, good old-fashioned business wins.
Ron Logue - Chairman, CEO
Hard to tell, Gerard.
I think there is a lot of other thinking going on when big organizations move.
A lot of it really has to do with accounting, not necessarily custody.
Some of these situations are caused by a realization that accounting no longer wants to be internalized.
Usually when that happens, there are not too many organizations that they can go to and get things done at scale, if they are a big organization.
So that plays a big role.
Gerard Cassidy - Analyst
I see.
Ed, on your outlook for the different interest rate environments from the different parts of the world, can you list the top two which have the biggest impact on the margin?
Ron Logue - Chairman, CEO
Sure.
Ed Resch - EVP, CFO, Treasurer
Yes, the biggest one by far is the US rate environment.
Then I would probably say the euro after that, Gerard.
Gerard Cassidy - Analyst
Great, thank you.
Operator
Dave Hilder with Bear Stearns.
Dave Hilder - Analyst
Good morning and congratulations on a great performance, and thanks for the guidance.
Just a couple of unrelated questions.
Ron, it certainly sounds like directionally you are thinking about reducing the size of the conduits.
Is that fair?
Ron Logue - Chairman, CEO
Well, we are going to take a look at it.
I think it is very, very important that we protect our capital ratios.
I think probably the one big variable this quarter is the kind of market disruptions that we have seen.
I think we need to make sure that we can be prepared for very unusual -- I guess I would use the word unprecedented -- market type disruptions coming from different angles.
One of the ways to deal with that is to insure your capital ratios, and I think that is important.
So over time, directionally, you're going to see us do things that protect those ratios.
And this could be one of those things.
Dave Hilder - Analyst
That certainly sounds like a good strategy.
In the quarter, Ed, could you tell us what roughly the amortization of intangibles expense was?
Ed Resch - EVP, CFO, Treasurer
Sure.
Okay.
For, let's see, for Q3, $15 million, plus another $17 million, so $32 million of intangible amortization.
That includes both Currenex and IFIN.
Dave Hilder - Analyst
Okay, great.
Thank you.
On the IFIN, the one of the top 30 clients of IFIN that you know is leaving, I assume that is not Barclays.
Ron Logue - Chairman, CEO
No.
Dave Hilder - Analyst
This is a tougher one.
On the Prudential suit, Ron, you describe the complaint as really outlining a disclosure communication issue.
But the complaint also notes that State Street was an ERISA fiduciary; and as I understand it, the standard of judgment there would be higher for liability.
Really more of a prudent investor standard rather than simply a disclosure issue, as you might have in a different type of action.
Ron Logue - Chairman, CEO
As you might imagine, I really can't comment based on the litigation, Dave.
Dave Hilder - Analyst
Okay, well, I did want to give you a chance.
Ron Logue - Chairman, CEO
Okay.
Dave Hilder - Analyst
Thanks very much for all the information you have provided.
Ron Logue - Chairman, CEO
You're welcome.
Operator
(OPERATOR INSTRUCTIONS) Andrew Marquardt from Fox-Pitt Kelton.
Andrew Marquardt - Analyst
Good morning, guys.
Sorry if I missed it, but in terms of the net interest margin outlook, can you talk about the sensitivity to the ECB and changes in the rates there?
Ed Resch - EVP, CFO, Treasurer
Well, it is the second most important currency after the US dollar.
But still, the vast majority of the sensitivity as it relates to our rate expectations is relative to the US dollar.
So I wouldn't want to put it in terms of a basis point effect on NIM, but it is not terribly significant relative to the dollar.
Andrew Marquardt - Analyst
Okay.
Then, what would be the scenario that would make the margin in general go down for you guys?
It seems like there are a lot of factors that are making it go up.
Ed Resch - EVP, CFO, Treasurer
Well, I think the biggest one would be if we saw a reduction in the currently favorable customer flows that we have talked so much about.
If they were to decline overall, if there were to be less transaction accounts, which are very a low-cost of financing, or there was to be a less attractive mix.
That is probably the biggest potential risk, if I can call it that, to what we said in terms of the margin.
But again, we don't see those things happening; and that is why we gave the guidance that we gave relative to next year.
Andrew Marquardt - Analyst
Great, that's helpful.
Lastly, in terms of the asset-backed CP programs, can you comment at all about the news around the creation of the super conduit over the weekend and then early this week, and how that might affect your dealings with the situation?
Any color on that?
Ron Logue - Chairman, CEO
Well, it is probably something that is beneficial for the market.
But it's not really going to affect us because we don't have any SIVs, as you know.
So you wouldn't see us participating in any way.
But anything that can calm the market is going to be a plus for us.
Andrew Marquardt - Analyst
Okay, thank you.
Ron Logue - Chairman, CEO
I think we could take one more question.
Operator
Tom McCrohan from Janney Montgomery Scott.
Tom McCrohan - Analyst
Hi, thanks for taking the call.
Great results.
A couple follow-up questions, most have been answered.
The treasury-led master conduit that is being discussed in the papers, are you guys participating in those discussions in any way?
Ron Logue - Chairman, CEO
No, we are not.
Tom McCrohan - Analyst
Would you benefit from that in any way?
Or give (multiple speakers)?
Ron Logue - Chairman, CEO
No, we don't think so because we don't have any SIVs.
Other than the market generally benefiting it would help us.
But we have no need to participate.
We don't have any of those type of assets, so there would be no direct benefit.
Tom McCrohan - Analyst
No direct benefit?
Great.
In connection with the relatively weak US dollar, can you guys just quantify, if at all, how your results could have been benefiting from a weak US dollar?
Ed Resch - EVP, CFO, Treasurer
Yes, overall, Tom, it is a couple percentage points of revenue growth on an annual basis.
That is obviously offset for the most part by a similar growth in expenses, given the fact that we are matched pretty much in terms of revenue and expense by currency.
Tom McCrohan - Analyst
Perfect, okay.
My last pass, this is really just again on the TCE ratio.
Ed, from your earlier comments, it seemed like the ratio is really adversely impacted somewhat from you guys taking a more defensive posture during the quarter.
You talked about being a little more liquid.
You had previously talked about a projected pro forma TCE ratio of about 4.4%, I believe, after you guys closed the IFIN deal.
So can we just assume that the 3.5% ratio we saw this quarter is primarily a function of simply this posturing?
Ed Resch - EVP, CFO, Treasurer
That is part of it.
As I said we, as part of our contingency planning, given the market events that we saw, raised incremental liquidity.
That at quarter end was about $7 billion.
That was held and obviously invested on the asset side in short-term instruments.
So yes, that is part of it.
But again, it is going to take us a couple of quarters, all else equal, to build our ratio back to where we want it to be.
Tom McCrohan - Analyst
When you talked about growth next year in the balance sheet of 5 to 10 off of kind of a normalized balance sheet, you're normalizing pretty much for the added liquidity?
Ed Resch - EVP, CFO, Treasurer
Well, yes, right.
Exactly.
So if you take out the incremental liquidity we had in the third quarter, and you can kind of roll the balance sheet forward and apply a growth rate to it.
Tom McCrohan - Analyst
So what would have been a normalized balance sheet this quarter?
Ed Resch - EVP, CFO, Treasurer
Take about $7 billion off the average.
Tom McCrohan - Analyst
Take $7 billion off?
Okay.
Ed Resch - EVP, CFO, Treasurer
Yes.
Tom McCrohan - Analyst
Great, thanks very much.
Operator
There is no additional time for further questions.
I would like to turn the call back to Mr.
Logue for additional or closing remarks.
Ron Logue - Chairman, CEO
Thank you, and thank you all for attending.
I know we gave you an awful lot of data today.
We thought it was very important, given what has happened in the third quarter, that you have what you need that would hopefully differentiate some of the programs we have from some of the others.
Again, I thank you very much for the time.
Operator
Thank you, everyone, for your participation.
That does conclude today's conference.
Everyone have a great day.