道富銀行 (STT) 2010 Q3 法說會逐字稿

Good morning, and welcome to the State Street Corporation's third-quarter call and webcast.

Today's discussion is being broadcast live on State Street's website at www.StateStreet.com/stockholder.

This call is also being recorded for replay.

State Street call is copyrighted.

All rights are reserved.

The call may not be recorded for rebroadcast or distribution in whole or in part without expressed written authorization from State Street, and the only authorized broadcast of this call is held on State Street's website.

At the end of today's presentation, we will conduct a question-and-answer session.

(Operator Instructions).

Now I would like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street.

Thank you.

Before Jay Hooley, our President and Chief Executive Officer; and Ed Resch, our Chief Financial Officer, begin their remarks, I would like to remind you that during this call we will be making forward-looking statements.

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 2009 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 19, 2010, and the corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I would also like to remind you that you can find a slide presentation regarding the corporation's investment portfolio as well as our third-quarter earnings press release, which includes reconciliations of non-GAAP measures referred to on this webcast, in the investor relations portion of our website.

Now I will turn the call over to Jay.

Thanks Kelley and good morning.

Strengthened servicing fee and good cost control drove the results in the third quarter.

We achieved operating basis earnings per share of $0.86, which was an increase of 21% compared with $0.71 in the third quarter of last year and down modestly from the very strong second quarter of this year.

Based on our new wins and strong pipeline, we expect the momentum in service revenue to continue.

In asset management we continue to experience growth in passive and income oriented ETF products, as investors continue to remain conservative.

Additionally the impact of the Intesa and Mourant acquisitions, which closed last quarter, supported our strong revenue growth.

I'll make a few comments about our performance, and I will ask Ed to provide a more detailed financial perspective, and after that we will open the call to your questions.

On an operating basis, comparing the results of the third quarter with the third quarter of 2009, total revenue increased 8.4%, and total expenses increased 3.1%.

As a result we achieved 530 basis points of positive operating leverage.

Total revenue in the quarter declined less than 1% from the second quarter of 2010, which I think is a good achievement given the cyclical strength of the second quarter results and the weakness in the worldwide trading markets.

Our servicing fee revenue increased 19% from the third quarter of last year and was up 3% from the second quarter of this year, reflecting the impact of the acquisitions and the installations of last year's large wins, as well as new business won since January.

As I said in the second quarter conference call, the large Morgan Stanley mandate is now fully included in the run rate for the third quarter.

We converted the State of New Jersey in the third quarter and are just now converting the State of Ohio.

Year to date, as of September 30, 2010, we added 1.1 trillion of new servicing mandates.

We've already installed about 286 billion of those and expect to install about 800 billion in the fourth quarter and into 2011.

This pace of wins and installs gives us confidence in the strength of our servicing fee revenue.

We've added new business pipelines.

We have active new business pipelines with particular strength outside of the US in our alternative investment servicing business.

The acquisitions horrible of Intesa Sanpaolo's securities services business and Mourant International Finance Administration are on track to meet our expectations for the year and contributed modestly to our financial results for the quarter, excluding the merger and acquisition integration costs.

We're optimistic that our market-leading position in Italy will lead to cross-sell opportunities and new mandates from Italian clients.

The revenue from our asset management business declined slightly both from last year's third quarter and this year's second quarter.

This decline was due primarily to a continuous movement out of active strategies and into passive and ETF strategies.

Although net new business at SSgA was slightly negative in the quarter, down $3 billion, flows into passive and ETFs were positive, offset by negative flows from cash, largely from our securities lending business.

As expected, trading services revenue declined from a year-ago quarter due to weak volumes in worldwide trading markets.

The sequential quarterly decline in trading services revenue was principally due to the servicing strength in the second quarter.

Demand has not returned to the securities finance markets.

In addition this quarter the spread between Fed Fund and three-month LIBOR declined from both the year-ago third quarter and the second quarter of 2010, negatively affecting revenue.

Given all the turmoil in the securities lending business over the past two years, we're especially pleased to have been named as the number one provider in Global Investors 2010 Equity Lending Survey.

Our capital ratios continue to remain strong with our tier 1 risk based capital at 15.8%, our tier 1 leverage ratio at 8.3%, and our tangible common equity ratio at 6.9%.

Regarding the recently released Basel III proposal, we're pleased that the G20 on the Basel committee are beginning to clarify requirements for capital adequacy for banks around the globe.

We await the finalization of Basel III requirements and further clarification of how these capital standards will be applied within the United States.

While there's still uncertainty about the amount of buffers we will need to have, we believe we are in compliance with Basel III as we know it today.

Turning to new business, in the third quarter of 2010 we won $477 billion in assets to be serviced.

Among the many encouraging themes I see in the new business pipeline, the demand for servicing alternative assets remains a highlight.

This quarter we added 29 new clients in our alternative investment services business, and assets under administration as of September 30, 2010 increased from $620 billion as of June 30, 2010, to $629 billion in the third quarter.

In the broader investment servicing business, we also continue to see strong growth.

A few of the highlights include --

State Street has been appointed to provide custody services for Banca Mediolanum's Italian assets.

State Street will also serve as the sole global custodian for the Mediolanum Group.

We expanded our relationship with Martin Currie, which chose State Street to provide custody and accounting for GBP6.3 billion in assets.

We also expanded our relationship with Sun Life and will provide custody and accounting services for about GBP4 billion for Lincoln National in the UK, making a total of GBP6 billion in assets serviced.

State Street has expanded its relationship with Lloyds Banking Group to provide custody fund accounting, financial reporting and compliance and transfer agent services for 27 Luxembourg-based funds across SICAVs.

Pyramis Global Advisors, the institutional investors division of Fidelity Investments, selected State Street to provide custody, fund accounting and fund administration services for the launch of its Irish funds during the fourth quarter.

State Street has been selected by LaSalle Investment Management to provide fund administration services as well as transfer agency services for approximately $2 billion in assets on behalf of LaSalle Property Fund.

And State Street has been appointed by Altrinsic Global Advisors, LLC, a Greenwich, Connecticut based investment manager, to provide custody and fund administration services for Altrinsic's new Irish domestic usage funds.

State Street Global Advisors also added new mandates during the quarter, including Stichting pension funds they hold.

The Dutch defined benefit scheme has hired State Street Global Advisors to manage its European equity brief with about EUR600 million.

State Street Global Advisors has been selected by Lincoln Financial Group to sub-advise variable insurance products, which include a range of its ETF products, as well as eight individual, sub-advised Lincoln funds.

SSgA has been named by Pegaso Pension Fund of Italy, a public pension scheme for employees of Italian gas and electric utilities, to manage more than EUR60 million in active fixed-income assets.

And finally, SSgA won a $3 billion global equity mandate from the retiree medical benefits trust for the United Auto Workers.

Now turning to our expenses -- given the current environment, we have applied a keen focus on aggressively managing expenses in the short term, while calibrating expenses against the expected business environment for the longer term.

Compared to the third quarter of 2009, salaries and benefits expenses increased at a slower rate than the growth in operating basis revenue, and compared to the second quarter, salaries and benefits were essentially flat, excluding the $41 million reduction in incentive compensation related to the securities finance charge recorded in the second quarter.

Let me share our view of the current economic environment and the outlook for our business.

Although we continue to believe the economy in the United States will improve, the recovery appears to be somewhat anemic and is affected by the uncertainty in Europe.

Market economists are forecasting real annualized GDP growth in the United States of about 2.3% for the fourth quarter of 2010, a slight decline from the earlier outlook.

The economic growth is not strong enough to drive meaningful gains in employment, credit is tight, and the housing sector appears to have bottomed out at depressed levels in most geographic areas, but is mixed by region.

And consumer spending has been cautious.

The daily average of the S&P 500 as of September 30, 2010, is about 1118 year to date, and as you recall, our outlook is based on an 1125 average.

Also I remind you, one of our assumptions in providing an outlook for 2010 was that trading markets would strengthen a bit in the second half of 2010 compared to the first half, an improvement that has not yet occurred.

Our net interest revenue, however, has strengthened somewhat above our outlook described on our second quarter call, an improvement that is supporting our outlook for 2010.

I will now turn the call over to Ed, who will provide further detail about our financial performance in the third quarter, and I will return to provide several comments affecting our outlook for the remainder of 2010.

And then we'll open up the call for questions.

Ed?

Thank you Jay.

Good morning everyone.

This morning I will review three areas.

First, the results of the third quarter.

Second, the investment portfolio, as well as our outlook for net interest margin in 2010.

And third, a review of our strong capital position.

This morning all of my comments will be based on our operating basis results as defined in today's earnings news release.

Comparing the third quarter of 2010 with the third quarter of 2009, servicing fee revenue increased 19%, primarily due to the impact of the two acquisitions, new business, and increases in daily average equity market valuations.

Management fee revenue declined 3%, primarily due to the mix of business, as investors increasingly chose passive or ETF investment strategies.

Compared to the second quarter, our servicing fee revenue increased by 3%, and operating basis net interest revenue was up 10%.

Asset management revenue declined slightly, by 2%, due to the continuing shift in business mix to favor passive investing strategies.

Providing further details on the trading services and securities finance lines -- foreign exchange revenue declined 30% compared to the third quarter of 2009 and 42% compared to the second quarter of 2010, with both declines due to lower volatilities and slightly lower volumes.

Trading markets were significantly weaker than we expected.

Brokerage and other revenue, which is reported as part of trading services revenue, increased about 3% compared to the third quarter of 2009, primarily due to increases in electronic trading and transition management, but was down 14% compared to the second quarter of 2010, due principally to lower revenue from both of these areas.

Securities on loan averaged $382 billion for the third quarter of 2010, down $17 billion compared with $399 billion for the third quarter of 2009 and down $39 billion compared with $421 billion for the second quarter.

Compared to the second quarter, securities finance revenue declined from $109 million to $68 million, primarily due to seasonality in the second quarter, a lower level of demand, and the compression in the average spread between Fed Funds and three-month LIBOR.

This average spread declined to 19 basis points in the third quarter, compared to 24 basis points in the second quarter of 2010.

Compared to the third quarter of 2009, revenue also declined from $105 million, due primarily to compression of 6 basis points in the average spread between Fed Funds and three-month LIBOR.

Average lendable assets for the third quarter of 2010 were about $2.2 trillion, flat with the second quarter of 2010 and up about 5% from $2.1 trillion in the third quarter of 2009.

As of September 30, 2010, the duration of the securities finance book was approximately 24 days, up from the unusually low 17 days in the second quarter of 2010, and down from 29 days in the third quarter of 2009.

Compared to the second quarter of 2010, processing and other fee revenue of $71 million decreased 18%, due primarily to lower revenue from taxed advantaged investments, and was up 58% from the third quarter 2009, due to the impact of higher fees from structured products.

Operating basis net interest revenue increased about 20% from the third quarter of 2009 due to higher yields in the investment portfolio following the adjustment of the composition of our U.S.

Treasury securities position in the second quarter, as well as the full quarter impact of the Intesa acquisition.

Compared to the second quarter, operating basis net interest revenue was up about 10% due to the full quarter impact of securities purchased in the second quarter, the impact of the Intesa deposits, and a modest improvement in funding costs.

Operating basis net interest margin of 177 basis points, which excludes discount accretion, was up 21 basis points from the third quarter of 2009 and was up 11 basis points from the second quarter of 2010.

Including discount accretion of $189 million in the third quarter of 2010, $172 million in the second quarter 2010, and $279 million in the third quarter of 2009, net interest margin was 236 basis points, compared with 221 basis points and 247 basis points, respectively.

In the third quarter of 2010 we recorded about $91 million in net gains from sales of available-for-sale securities, and separately, about $74 million of other than temporary impairments, resulting in $17 million of net gains related to investment securities.

The OTTI was primarily due to increases in expected future credit losses from US non-agency mortgage-backed securities.

To recap where we are relative to future discount accretion, we recorded $189 million of discount accretion in the third quarter of 2010, so we now expect about $3.6 billion in discount accretion to accrete into interest revenue over the remaining lives of the former conduit assets.

There has been no change in our view relative to credit.

We continue to expect a total of about $750 million to accrete into interest revenue in 2010, and $550 million in 2011.

As you are undoubtedly aware, a significant number of assumptions go into the estimate of future discount accretion over the remaining lives of the assets, including that we hold the securities to maturity, estimated prepayment speeds, expected future credit losses across various asset classes, and sales to date.

Regarding operating basis expenses, third quarter 2010 expenses increased 3.1% compared to the third quarter of 2009, due primarily to increases in salaries and benefits as a result of the Intesa and Mourant acquisitions, offset partially by a decline in other expenses.

The 6% increase in salaries and benefits expense was due primarily to costs associated with the employees added in connection with the two acquisitions.

Other expenses declined 15% from the third quarter of 2009, primarily due to the impact of a $50 million insurance recovery.

Expenses in the third quarter of 2010 increased 3% from the second quarter of 2010, primarily due to increases in salaries and benefits.

Salaries and benefits expense increased 5% compared to the second quarter of 2010, due primarily to the impact of the $41 million reduction in incentive compensation in the second quarter of 2010 related to the securities finance charge, as well as the full quarter impact of the costs associated with the Intesa employees.

Of course the accrual for incentive compensation is subject to company performance.

Information systems and communications expense increased $16 million or 10% compared to the third quarter of 2009 and was up $7 million or 4% from the second quarter of 2010, both due to the full-quarter impact of the Intesa acquisition.

Transaction processing increased 11% from the third quarter of 2009 due to the impact of the two acquisitions, and increased about 1% compared to the second quarter of 2010 due to higher transaction volumes.

Other expenses increased 2% from the second quarter of 2010 due primarily to increases in securities processing costs, offset partially by a higher level of recoveries.

Our operating basis tax rate for the third quarter is 28.1%, in line with our previous outlook, and down from 29.1% in the second quarter of 2010 due to changes in the geographic mix of our earnings.

Now let me turn to the investment portfolio.

Our average investment portfolio in the third quarter increased about 16% to $98.2 billion compared to the third quarter of 2009.

This increase is due primarily to the continuing execution of our reinvestment strategy, offset partially by maturities and sales of selected securities.

During the third quarter we invested about $4.7 billion in highly rated securities at an average price of 99.73, with an average yield of 2.07% and a duration of approximately 1.28 years.

Those $4.7 billion are primarily composed of the following securities, 89% of which are rated AAA.

$1 billion in agency mortgage-backed securities.

$200 million in non-agency mortgage-backed securities.

$3 billion in asset-backed securities, including about $800 million of foreign RMBS, which are mostly UK and Dutch issues, and about $1.2 billion in student loans.

Additionally there's another $500 million in autos, $300 million backed by credit card receivables, and $200 million in CLOs.

Additionally, $100 million in commercial mortgage-backed securities, and $400 million in corporate and municipal bonds.

The aggregate net unrealized after-tax losses in our available-for-sale and held-to-maturity portfolios as of September 30, 2010, were $281 million, a $713 million or 72% improvement from the second quarter of 2010, an improvement of about $2.7 billion or 91% from September 30, 2009, and an improvement of $6 billion or 96% from December 31, 2008.

As of last Friday, the net unrealized loss was $122 million, an improvement of about 57% from September 30, 2010.

In our investment portfolio slide presentation, we have updated the data through quarter end for you to review.

As of September 30, 2010, our portfolio is 82% AAA or AA rated.

The duration of the investment portfolio is about 1.32 years, up slightly from the second quarter of 1.28 years and up from the third quarter of 2009 of 1.07 years.

The duration gap of the entire balance sheet as of September 30, 2010, is 0.32 years, down slightly from 0.34 years at June 30, 2010.

The number of downgrades from major rating agencies slowed from the second -- slowed from the level experienced in the second quarter.

The majority of the downgrades was in non-agency asset-backed and mortgage-backed asset classes.

I will now provide some of the assumptions we used in determining our 2010 outlook for net interest revenue and net interest margin.

We continue to believe we should invest through the cycle and to invest in highly rated agency mortgage-backed securities and highly rated asset-backed securities.

Following the acquisition of the Intesa business, given the uncertainty in Europe, we decided to leave the majority of the acquired customer deposits primarily in the ECB, as we continued to monitor market conditions in the euro zone.

As a result of the decision to invest in certain U.S.

Treasuries during the second quarter, as well as reflecting the strength of the first three quarters of 2010, we now expect our net interest margin in 2010 for the full year, excluding conduit related discount accretion, to be slightly above the high end of the range of 155 to 165 basis points that we disclosed last quarter.

We expect this outlook to be supported by the higher yields we earned on the recent treasury security purchases, slower prepayment speeds, and a slightly smaller average balance sheet.

We continue to expect the Bank of England rate to remain at 50 basis points for the rest of the year, the ECB rate to remain at 100 basis points for the rest of the year, and the Fed to keep the overnight Fed Funds rate at 25 basis points for all of 2010.

We expect the S&P 500 to average about 1125 in 2010, up about 19% from 948, which was the average in 2009.

Finally, I'll review our capital ratios.

In the third quarter, State Street Corporation's capital ratios remained strong.

As of September 30, 2010, our tier 1 leverage ratio stood at 8.3%, our tier 1 capital ratio stood at 15.8%, and our tangible common equity ratio was 6.9%.

So in conclusion, we are pleased our operating basis results for the third quarter.

Despite continued weakness in our trading results, but given the strength of our core business and the slight increase in net interest margin, we continue to expect our operating basis earnings per share for the year to be slightly above the adjusted operating basis, $3.32 per share, recorded in 2009.

Now I'll turn the call over to Jay to conclude our remarks.

Thanks Ed.

In the face of weak trading markets, the achievement of revenue growth compared to last year's third quarter confirms the strength of our strategy.

In addition, the performance of the third quarter compared to the second demonstrates our ability to calibrate expenses against revenue.

Very importantly, our service fee momentum continues, reflecting client wins from the first three quarters of 2010.

As I mentioned, the acquisitions are proceeding in line with expectations.

Together they're modestly accretive, and equally important, both are contributing new clients to State Street, to whom we can sell additional services.

In asset management State Street Global Advisors continues to position itself to benefit from the increased demand from passive strategies, ETF investments, and defined contribution plans.

Looking to the future, if the economic recovery remains anemic and the trading markets continue to be weak, our industry will face continued challenges in market-sensitive businesses.

Overall, I'm pleased with our performance in the third quarter, particular given the weakness in trading markets.

The growth of our core servicing business, the contribution of our two acquisitions, as well as improvement in the net interest revenue, reinforce our confidence in achieving operating basis earnings per share slightly above the adjusted operating basis level of $3.32 in 2009.

Now Ed and I are happy to take your questions.

(Operator Instructions) Howard Chen, Credit Suisse.

Jay, just a longer-term question to begin with.

You have alluded to the opportunity that the current financial services reform may bring to asset servicing, maybe akin to what we have seen in the past with middle office outsourcing.

Could you just give us a flavor for what -- as we get more clarity here, what maybe fits in that bucket?

Where are we in that conversation with potential customers?

And maybe how you've framed that opportunity longer term?

Sure, Howard, I'm happy to do that.

As you know, the regulatory reform led by Dodd-Frank is far but finalized.

We view it as a framework, although it is pointing to a few things.

I would say the most tangible thing that we are focused on right now that could result in an opportunity would be some of the movement to immobilize certain securities, most notably derivatives.

So if you look at some of the derivative regulation and the expectation that some large percent of over-the-counter derivatives will be forced to be cleared through central counterparties, we view that as something that's interesting.

We think somebody like State Street as a processing oriented bank might be able to play a role there.

So I would say that's the narrowest thing that we're focused on right now, I would say.

The other thing we are paying attention to is, I think some of this regulation, depending on how it gets ultimately meted out, could result in some meaningful shift in the non-trust bank sectors.

And whether or not that provided opportunities for -- on the trust and custody side of the business is yet to be determined.

Okay, thanks.

And then switching gears, I appreciate all the comments on Basel III and you know your view of being compliant.

Risk-adjusted capital seems really, really strong.

Do you see longer term having to change anything to your liquidity and leverage profile for what the Basel committee has suggested so far?

You know, I would just repeat what I said before, and then maybe Ed can weigh in here.

I think it is very positive that the Basel committee has started to clarify, and I think we all expect that in Korea next month we will see the global standards for Basel III be finalized.

And then I hope and expect that the US regulators will move swiftly to interpret what that means in this country.

And you know -- Ed, I don't know if you'd add anything with regard to -- I think the question was more around liquidity.

Yes, I just echo what you said basically, which is that I think so far we have received a lot of clarity, which is good, but we haven't received certainty in terms of some of the rules.

So really until we can work through all those final acquirements, I think it's a little premature to give specific comments on aspects of Basel III, but I broadly agree with what Jay said, and we'll obviously have to work through the effects on us as we get more clarity in terms of the final rules.

Okay, understood.

Then Ed, on the NIM, appreciate the guidance for 2010, but just qualitatively how do you think about the opportunity to put more of that liquidity to work on the asset side and any further flexibility on the funding side as to what you showed this quarter?

Well, you know, we are still of a view that we should continue investing through the cycle.

We think of ourselves as being opportunistic in terms of taking some gains, which we have done this year, as well as selling out some securities we feel are possibly a little weaker.

So we've been a little more aggressive there this year as the market has presented certain opportunities.

Generally, I would say that we're still in a pretty conservative mindset, only investing at the top of the stack, investing in some US Treasuries, as I mentioned in the second quarter and I talked about a bit today.

We're comfortable with our liquidity position.

I think overall there's the possibility that the balance sheet could move a little bit to a smaller size as customers reinvest conservatively in the market.

We're seeing a little bit of a movement out of the customer deposits, and that money is being put back to work, which we think is overall a good thing.

So I think we're comfortable with where we are, Howard, and I really don't see us changing much in the way of philosophy, either on the asset or the liability side as we move forward.

Okay, thanks.

Then just a quick numbers one, Ed -- and apologies if I missed this in the release.

Could you just quantify the size of the insurance recovery within this quarter's results, and any further outlook there that you have on that?

Five zero.

It was 50 in the quarter, Howard.

And as far as outlook goes, it's significantly premature to say.

We are pursuing various claims that we feel are valid claims coming out of some of the things in the last couple of years, but no comments are worth mentioning right now because I don't have anything concrete.

Okay.

Thanks so much for taking the questions.

Glenn Schorr, Nomura Securities.

Numbers question on the average balance sheet.

So I appreciate the detail you gave us on the purchases that you've made with the yield of I think you said in the range of 2.07%.

How does the -- in the investment securities portfolio -- the average yield for treasury and agency securities go up by almost 30 basis points when your purchases are made below that?

Is there a lot of stuff running off?

No, Glenn.

It's mainly due to the repositioning of the Treasury element of the portfolio that we did in the second quarter.

How -- do you mind reminding us of how big that was?

Yes, that was $8 billion, where we moved from bills which were yielding about 17 basis points into a laddered structure of T notes with an average duration of less than 5 years, about 4 3/4 years.

So we picked up from 17 basis points up to about 200 basis points by doing that in the second quarter.

That is the driver of the increase.

Okay, cool, I get it.

And then did you -- I apologize if I missed it.

Did you give us any color on flows inside SSgA, both the active and passive side?

We didn't, but I can give you a little bit of color, Glenn.

The -- I mentioned broadly the broader trends are we're still seeing flows out of active into passive.

Cash is down in the quarter, largely because of the securities lending collateral pool investments.

But I think the number to use for the quarter was $25 billion in net new flows into passive and ETF products -- to give you some color.

So cash down quantitative through passive, and ETF up -- were generally the trends in the marketplace.

And also active is down.

Active was an outflow?

Yes (multiple speakers) active to passive.

Understood.

And on the passive and ETF side, there was -- I guess that was actually building momentum over the last couple of quarters.

You seeing it.

$25 billion is a nice number.

Do you still see that pipeline and those forward conversations building?

And is there -- is it picking up outside the US, as I see it?

I would say steady.

It is -- the move into passive has come off a bit since last year and earlier this year.

But I would say still pretty steady.

And I don't think I'd distinguish US/non-US.

I think that marketplace is looking for some departure points of confidence, but right now I would say there's still a fair amount of money going to our beta strategies, and we're the recipient of -- we're the beneficiary that.

Robert Lee, KBW.

First I'd like to start maybe with some of the new -- the $477 billion of new business wins.

Maybe get a little bit more color on the components of that.

For example, you know, how much of that was cross-sell existing clients versus new clients?

Maybe US versus global?

Just trying to get a better feel for some of the places that's coming from.

Sure, Robert.

Let me -- I think it's -- consistent with the past, you can look at a 70/30 mix as far as the existing customer expansion versus new customer acquisition -- is generally in line with what the makeup of the $477 billion would be.

And well diversified.

Not only US/non-US, but across different vertical segments, funds.

If I were to point to two distinguishing traits of that pipeline, it would be the following.

One -- and I mentioned it in my remarks.

One is we continue to see disproportionate opportunities broadly in the alternative sector.

That's not only coming from new funds, new assets, but it's coming from -- I'll use hedge funds just as one example -- hedge funds, determining that they would outsource previously in-sourced activities.

The other distinguishing trait or trend within the pipeline -- and this is a point where I think we continue to be differentiated in the marketplace -- is the bigger deals almost all have a middle office component.

So we continue to see significant demand in the integrated solution which include the middle office, I think a place where we continue to look different than other competitors in the market.

So those two things aside, geographically, pretty well diversified; also pretty diversified across large and small customer segments.

Okay.

And one of the things I think a lot of investors sometimes struggle with, you have these positive -- these good new business trends, but in trying to get a feel for what that translates -- could potentially translate into for kind of net new revenues, means which -- maybe to venture a number out there, if we're looking at $477 billion of net new wins, should we be thinking that, all else equal, that's $50 million in annualized revenue?

Or how should we be thinking of that?

Yes.

I mean, that's -- given the diversity of the mix, it's hard to put a number.

What I try to do is to try to give you a little sense of implementation progress as a means to try to give you some sense of how these assets translate to revenues.

So I think on the -- we've got 287 of $1.1 trillion that is -- been installed, a good part is that in the third quarter, later in the third quarter, and the other -- there's another $800 billion which will ladder in fourth quarter, first quarter, which tend to be big implementation quarters, and the beginning of 2011.

So that's probably the closest I can do to give you some sense of how new commitments become revenues.

Appreciate it.

Then one last question, going back capital and Basel III.

I understand the -- until things are completely finalized, the reluctance to kind of talk about what you are new targets may be for capital ratios and whatnot.

But best guess at this point, if we're thinking of capital deployment, I mean, are you thinking that first part of next year, first quarter, you hope as things move along, you think you could be in a position to begin announcing or talking about some specific capital action, whether its dividends or share repurchase?

Yes, the -- I would only point to I think it's very positive that some of these overhangs like Basel III are starting to get clarified.

And I think the more quickly they get clarified, my expectation -- this is my expectation -- the sooner we would be in a position to take capital actions.

So you know if you presume that in November we get global standards and the US regulators move swiftly to clarify those on a domestic basis, I would hope -- and it's just hopeful -- that in the first half of 2011 that we would be in a position to look at capital actions other than acquisitions, which I think are fair game today.

Mike Mayo, CLSA.

Can you comment on the client retention for the Intesa acquisition?

Sure Mike.

We had set an internal target which is pretty consistent with past acquisitions and performance of -- in excess of 90%, well on our way to achieving if not exceeding that, and to my knowledge there isn't any material customer that is considering not moving ahead with us.

Separately, you mentioned a stronger net interest margin.

Can you just give the simple reason why the margin might increase despite the lower interest rate?

Yes, Mike, a couple of reasons.

One is that we have the U.S.

Treasury trade that I've talked about that we put on in the second quarter.

Secondly, we have, in the third quarter at least, the full quarter of Intesa, which we did not have in Q2.

And in the third quarter versus the second quarter we had some LIBOR floaters reprice when LIBOR had spiked up, so we were fortunate in that regard.

And offsetting each other we've had some slower prepayment speeds, which have an effect of keeping some of the higher yielding assets (technical difficulty) balance sheet longer than what we had originally thought, and against that you have a slight decline in earning assets as some of the asset sales took in the quarter opportunistically were made.

So you have a couple of competing factors there.

But overall we think that we're going to be for the full year slightly above the top end of the 165 range that I talked about.

Then separately, Jay, I think you mentioned it, that low rates create challenges.

Are you suggesting challenges above and beyond what we saw this quarter?

Should we expect some incremental weakness ahead?

Yes, a little bit of -- it this constrained environment continues, you know, I think it depends on what the factors are.

My commentary was pointed at obviously the trading markets, but the lack of risk-taking in the world right now impinges on our cross-border trading, on our securities lending business.

I think on the portfolio, on the asset side of the portfolio -- Ed, you might make a comment or two on the assets on the portfolio.

Yes, Mike, if this environment continues, there will be a slight negative effect, at least over the short term.

Certainly that's a comment that applies to the fourth quarter versus the third quarter.

And you know, it also applies frankly as you move farther out into time.

The longer rates stay low, then the more challenged we are on the portfolio to generate earnings.

And with that pressure, why do you feel okay about the full year operating EPS target, that is the fourth quarter?

Well, again, I think if you look at what we said about the margin, okay, it's going to be slightly above the 165 top end of the range.

So we feel reasonably comfortable that the margin is not going to fall off a cliff from Q3 to Q4.

And then coupled with that, overall we're going to we believe have good servicing fee results, as we've had all year, as we anticipated, and we're going to keep a real close eye on expenses, as we have all year.

So put all that together, and that's why we feel comfortable with being slightly above the [332].

Nancy Bush; NAB Research, LLC.

I'm sorry if I missed this, if you addressed this in the first 15 minutes or so; I was on another call.

But I'm sure you saw the very long article on securities lending in the New York Times yesterday morning.

And two things jumped out at me.

Number one, the reporter had not much of a clue what securities lending actually was.

But the second part was that many of these -- or some of these institutional accounts that are supposedly sophisticated investors are not all that sophisticated.

And I'm wondering if you're sort of interactions with securities lending clients, particular on the public funds side, in the future is going to be different just to protect yourself from litigation?

Because some of these people seem to want a risk-free return but not by -- but with a greater yield than Treasury bills.

So would you just address the whole sec lending litigation and [protecting] (technical difficulty) [yourself] issue?

Sure, Nancy.

And I did see the article.

And I think we have been pretty good throughout this period in being very transparent with our customers about what risks they're taking on based on their reinvestment choices, and as you might imagine through this stress period, some people had short memories, and so we had to reinforce that choice that they made.

And I think going forward -- and I would say this not just about securities lending -- we're doing everything in our power to make sure that whenever we have an arrangement with a customer, regardless of what it is, there's full transparency, there's repeated conversations and reminders to know what risks they are taking.

I think that in the second quarter we discussed some of the actions we'd taken in our securities lending program in order to provide liquidity to customers.

That was received very well by customers, that we were thinking -- putting ourselves in their shoes and working through the issues that they're working through.

So I think the tone of dialogue with our customers around securities lending is good, open and transparent, and I think we all need to do more of that going forward.

Well, is it just your thought (technical difficulty) I'm assuming we're going to continue to have volatility in this market and when rates begin to rise, we may have more volatility than we want.

Do you guys feel that you will have to sort of build extraordinary litigation reserves for those kinds of claims?

Or do you feel okay with the education process?

Well, you know, I feel okay with the education process.

Having said that, we're all subject to if somebody has a different recollection or sees things differently, we're probably going to face more of that.

But I feel very good about -- and I'll contain my comments to securities lending, but it's across the whole business.

We have been very out front with the portfolio choices one has to reinvest.

They can pick and choose whether they want a separate account where they have full control, whether they want a co-mingled account, what their risk appetite is.

I expect that when markets normalize that we'll see customers wanting to take more risk in order to gain more return on their securities lending.

I think that -- and this is a statement broader than State Street customers -- the industry has educated itself significantly through this period, and I expect that once we get to something that's more normal, customers will be better informed, (technical difficulty) providers will be even more transparent, and I would hope that it doesn't turn frequently to litigation.

And would you just remind us where you are?

If there is any outstanding litigation remaining in that area at this point?

We have a couple of situations which are not new but have been -- we have been tracking for quarters if not years, and most of them around just characterization or clarifications of what reinvestment pools they are in.

But nothing new, Nancy, nothing material or nothing -- no change from prior outlooks.

All right.

Thank you very much.

Brian Bedell, ISI Group.

Ed, a quick question on the net interest revenue strategy or the -- basically the investment portfolio strategy.

As we go into 2011, if we do get more pressure on longer-term yields, I think you had mentioned quite a while ago about a broad range, if the Fed stayed on hold for a very long time, we'd have a NIM that could be in the 140 to 150 basis points range.

Could you just talk to that, if that still holds?

And then what type of strategies would you employ on the balance sheet to mitigate that?

And also if you're willing to say how much you expect to reprice in 2011?

Yes.

Let's back up and put that -- those numbers in context.

Because those are the ones we put forth on investor day, and we were trying to give you a couple of scenarios for how 2010 could shape up, and it was predicated on the March 31 balance sheet and what we tried to define as a normalized environment.

Okay?

The purpose was to try to give you a sense of what we thought, given a whole list of assumptions, was a normalized NIM for the company.

As I recall, we were talking about a Fed Funds rate being around 3% in a more normalized environment, and we gave you some spread relationships off of that.

So today's world is materially different from what we assumed in that presentation, and just to give you a couple of facts relative to where we are today in the third -- where we were in the third quarter versus investor day.

For example, we did not assume any of the treasury repositioning that we have done in the second quarter.

We have actually experienced slower prepayments overall than what we had experienced, what we expected to experience when we put out that normalized picture of the NIM.

And as I mentioned earlier, the balance sheet is slightly smaller than what we assumed was a normalized balance sheet.

So the world is different.

I mean, we feel pretty comfortable about the guidance for the year being slightly above the 165, but I really don't want to get too far out there and go into 2011 at this point, other than to say that if rates continue to stay low, that will put downward pressure on NIM, which may be obvious.

And our philosophy is not to reach for yield, not to try to figure out how in a low rate environment with the 10-year going below 250, for example, that we can maintain NIM.

So at some point, you know, there will be more of a compressing effect on NIM as rates stay low for a longer period of time.

But overall we're looking at continuing to do what we're doing within the context of not reaching for yield.

Yes, I think the big debate is just how much of a compression?

Obviously it's starting out now at 177 BPS, that's pretty good.

You've got a very good running start into this.

And I think some people are concerned that, you know, the NIM would compress say sub 140 or worse.

And I was just trying to see if there are some things you could do on both the liability side of the balance sheet, as well, in terms of reducing deposit costs?

Well, we always look at both sides of the balance sheet.

We have a group in our treasury function which is charged with looking at our liability costs and making sure they fit within the pricing construct of our overall customer relationships.

We don't talk about that a lot because we seem to focus a lot on the investment portfolio, but we do look at both sides of the balance sheet from a cost and return perspective.

And you had the 56 basis point deposit costs on the US deposits, which was up from 28 BPS, second to third quarter.

So it seems like there's a lot of room to take that back down.

I guess maybe just a quick comment of why it went up, 2Q to 3Q?

I think that was just on a very small balance.

I wouldn't read anything into that in terms of a trend, Brian.

I don't have the exact number, but it was an increase in rate on a very small amount of principal.

So that should normalize back to --

Yes, yes.

Okay, that's good.

And then just on the -- maybe if you can talk about -- a little bit about the makeup of both the new wins.

You talked quite a bit about it, but I guess my question really is, are there any other large mandates within that $477 billion?

Or is it really a lot of small, new business add-ons from existing clients?

Brian (multiple speakers)

For example (multiple speakers)

Go ahead.

No, I was going to say, Babson, PineBridge and New Jersey and Ohio are not in that number; correct?

That's correct.

And I would say it's a mix.

There's a large number of mandates within there.

There are some more sizable mandates in there, you know, some of whom are -- have to remain confidential, so in both the prior quarters we were able to give you a few more meaningful names.

We're not able to do that this quarter.

So it's a mix.

There are some sizable transactions in there that have to remain confidential for various reasons.

And as I said, the most encouraging thing to me, not only from a standpoint of the number -- so it's not just a couple of big deals -- the volume and also the diversity.

Yes, and that's -- so I mean of the 800 billion that you plan to install over the next couple of quarters or so, I would think the overall fee rate of those assets are higher than your existing core base, given they're more oriented towards alternatives and mid office and fund accounting and admin.

Is that a fair statement?

That's probably too big a leap given that the mix is very diverse.

I think you can look at the gross number and interpret something from that, but I don't think you can really take the leap on it being higher-yielding assets based on the -- being alternatives oriented or being middle office.

Right.

Okay.

And then maybe just on -- in the terms of what moved it from second to third quarter, if you can talk about the impact from additional six weeks of Intesa.

And then also foreign currency appreciation, in terms of the actual servicing fee line.

Yes Brian.

In terms of the servicing fee line, the weaker dollar contributed in the range of about 1/4 of the increase on a sequential quarter basis, so $32 million increase sequentially, so $8 million of FX.

And overall on Intesa, it was significant.

Our growth -- just to put it in context, our growth without the acquisitions would've been about flat on the servicing fee line for the quarter sequentially.

But overall Intesa is well on track, as Jay said, to reach our objectives, both from a standpoint of revenue, customer retention and our EPS guidance for the year.

Right.

Okay.

And then just very -- lastly on the expense line, the $50 million insurance recovery, I know it's hard to predict what recoveries will be in the future, but I guess, is it fair to look at a core run rate on that other expense line as the [189] plus the 50?

Or do you think you're operating a little better than that in future quarters?

And/or will Intesa expense saves improve that line?

You know, I mean, I said last quarter that I thought we could average around -- I think it was around [215] or so for the third and fourth quarters of this year.

I think we're probably around there, maybe a little higher, so add the $[50] million in and haircut it a little bit for the fourth quarter number.

Got it.

Okay.

Great.

Thank you.

John Stilmar, SunTrust.

I just have one question for you.

As you're looking out and you think about the mix of your business, especially with the emphasis on alternatives and the trends that you've certainly highlighted with alternate sources of revenue and macro variables post the financial reform, do you think that we can start seeing a little bit more of operating expense improvement on a dollar basis?

Or would we start looking at it a little bit more on operating margin basis?

Or is it that we think that we're in potentially an investment cycle commensurate with the degree of change in order to have revenue sustainability beyond sort of 2011?

Let me try that one, John.

You know, I think that underlying even through this stressful period over the last couple of years, we continued to invest.

You know, we continued to build new products, create new capabilities, which I think has sustained our ability to win new customers and drive business forward.

I would say over the longer term, if you look at the assets we're either managing or assets that we're servicing, we're bringing onboard, I think that's done in a period of depressed market based revenues, whether it's net interest revenue, foreign exchange driven by cross-border and securities lending, which we talked about.

So I think over time we're continuing to try to drive market share on the core businesses that we know and we're good at, and doing that broadly across the globe, and we think that as we come through trough, this headwind that we speak about the market based revenues, that we should be able to generate more operating leverage to the bottom line.

Okay.

So it's more of a return for market normalcy to give the expense leverage, more so than looking for actual dollars of expense improvement next year?

I just want to make sure I don't --

Yes.

-- get too optimistic.

Yes.

And let me -- I read your question a little bit differently.

So my commentary there was more the long term.

In the short term if we continue to face constraints, as I think was -- Ed picked up earlier, we're looking at every aspect of the expense line, not sacrificing investment for new product development and other things that we think are long-term healthy for the business, and as you would expect, we are anticipating that we could be in a period of a sustained or longer term market headwinds.

We're looking at where we do work, we're looking at different process improvements.

So we're working expense line pretty hard back here for the short and long term.

Wonderful.

Thank you gentlemen.

We will take one more question.

Andrew Marquardt, Evercore Partners.

I just want to circle back on the margin discussion.

Just to be clear, should we then not consider the prior comments from the analyst day about normalized margin of [175] to [185]?

Is that out the window now?

Or how do we think about that?

No, I think that given the assumptions we laid out on the investor day presentation, Andrew, that that is still a valid presentation, where -- again, with all the caveats in terms of a normalized Fed Funds level and a normalized balance sheet, I think that that's still an appropriate analysis.

Okay.

But the near-term pressure part of it in terms of Brian's earlier question may not be valid in terms of the [140] to [150] kind of near term if rates are different?

Well, I mean, the world is a lot different now, and -- at least as we see it evolving in the fourth quarter, than the assumptions we laid out on investor day.

So I mean, we are very comfortable, as I said, with what we said for the full year NIM, which is slightly above the [165], and that's obviously materially above what we said was the low case for 2010 given those assumptions at investor day.

Then did you mention -- so the guidance implies kind of fourth quarter maybe [165]-ish -- how to think about the degree of pressure going into the next year if rates are where they are today?

No, other than to acknowledge there will be pressure if rates continue to stay low.

We haven't given any 2011 NIM guidance at this point.

Then the last question is just on the capital levels, and can you just remind us where you're targeting for internal purposes, what metrics and what level.

Well, publicly we have stuck with the goals we have had, which have been out there for a long time.

I mean, the world has overtaken those.

Our high-end of [TC], for example, is 4.75%.

We're obviously well above that and continuing to build capital as we drive toward more certainty relative to the regulatory landscape.

So we haven't updated them.

Once we get more certainty in terms of the Basel III, Dodd-Frank, etc., we will do that.

Got it.

Then last question -- I think I saw on your release your reconfirmation of your long-term financial goals.

Is that -- are those still valid?

Or are you still reaffirming those?

Yes, we stand behind those, with I guess the caveat that Ed mentioned, which is further clarification on capital will help refine that hopefully over the course of 2011.

Okay, I think we are finished.

Thanks everybody.

Look forward to talking to you in January, after the fourth quarter.

This concludes today's conference call.

You may now disconnect.