道富銀行 (STT) 2011 Q1 法說會逐字稿

Good morning, and welcome to State Street Corporation's first-quarter 2011 conference 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's call is copyrighted.

All rights are reserved.

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

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

(Operator Instructions).

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

Before Jay Hooley, our Chairman 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 2010 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 statement speaks only as of today, April 19, 2011, 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 first-quarter earnings 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.

I am pleased to report that 2011 is off to a strong start.

This morning, I will review some of our recent accomplishments, as well as provide more detail behind the strength we're seeing in our core businesses.

This strength is enabled by our vast global reach and is being driven by our industry and product leadership in key areas, such as alternative asset servicing, investment manager operations outsourcing, and exchange traded funds.

During 2010, we established a strong foundation by putting some issues behind us while continuing to drive growth in our core businesses.

Some of our recent accomplishments that support this point include -- in our core asset servicing and asset management business, our new business wins continue and the pipeline remains robust, reflecting significant business opportunities.

We completed the federal reserve's capital plan review and have increased our quarterly common share dividend to $0.18 per share and announced the board's authorization for us to purchase up to $675 million of our common stock in 2011.

We continue to maintain our strong capital position and believe we now meet or exceed the 2019 Basel III capital ratios as we understand them, and also are in a position to respond to acquisition opportunities that are consistent with our overall strategy.

Our investment servicing business that we acquired from Intesa Sanpaolo and the acquired Mourant International financial administration businesses are exceeding the goals we set with opportunities for cross-selling.

As a result of our expanded capabilities, we have added new clients in both of these businesses.

We acquired Bank of Ireland's asset management business in January, and that team has begun to work with SSgA to leverage our extensive global distribution network.

We started to implement the operations and IT transformation program we announced last quarter and expect to see modest net savings this year.

We expect this program to enhance service to our clients and accelerate our ability to bring new products to market.

Just looking at the quarter briefly, we achieved positive operating leverage comparing the first quarter of 2011 with the first quarter of 2010 on an operating basis.

During the first quarter of 2011, we added about $300 billion of new servicing mandates.

We have already installed about $115 billion and expect to install a remaining $185 billion in 2011.

Of the $390 billion left to be installed as of December 31, 2010, we still have about $275 billion remaining to be installed in 2011.

So a total of about $460 billion yet to be installed in 2011.

These wins are diverse in terms of product, service and geography.

Of the $300 billion we won in the first quarter, $87 billion or 29% were from US and $213 billion or 71% were from non-US mandates.

$170 billion from European clients; $36 billion from Asian clients; and $7 billion from non-US North American clients.

Significant new wins include servicing for mutual funds, wealth managers, hedge funds, as well as investment manager operations outsourcing.

In particular, Deutsche Asset Management just renewed its long-term contract with us as did [Lufthansa].

First State of Australia signed a new servicing agreement with us and Martin Currie just assigned a new investment manager operations outsourcing agreement with us.

In Europe, we are seeing considerable requests for potential clients for hedge fund servicing, [usage 4] fund administration, and investment manager operations outsourcing.

From the Middle East and Africa, we've seen $17 billion in new wins this quarter.

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 a 46 new clients in our alternative investment servicing business, and our assets under administration increased from $660 billion as of December 31, 2010, to $772 billion as of March 31, 2011.

According to the ICFA annual fund survey, we are the largest provider of alternative investment servicing in the world.

Hedge funds assets for which we provide administration grew to $469 billion as of March 31, 2011.

Kenneth Hines, President of Hedge Fund Research, predicts that hedge funds and hedge fund of funds will easily exceed $2 trillion by the end of 2011.

Asset owners are increasingly allocating to this asset class and a record number of new funds are being created.

In addition to hedge funds, private equity assets for which we provide administration totaled $243 billion and real estate assets administered totaled $60 billion as of March 31, 2011.

In the first quarter, SSgA won net new business of $29 billion, which excludes the acquisition of Bank of Ireland's asset management business.

Gross new mandates totaled $[170] billion in the first quarter, of which $17 billion are to be installed later this year.

The wins are globally diverse and represent a variety of investment strategies.

$109 billion from the US, $45 billion from Europe, and $14 billion from Asia, as well as $2 billion from Canada.

Most of the new business continues to be in passive equity strategies.

Overall, I continue to be encouraged by the volume and diversity of new business prospects as well as the impressive record of wins in competitive situations.

I want to take a minute and comment on our foreign exchange business.

We have a very comprehensive range of foreign exchange services that we offer to our clients.

First, we execute foreign exchange transactions with clients and investment managers that contact our trading desk directly.

These are executed at individually negotiated rates and we term them direct foreign exchange.

Next, clients choose to execute foreign exchange transactions to one of our electronic training platforms like Currenex.

And thirdly, clients or their investment managers may elect to root foreign exchange transactions through our asset servicing business.

We term this type of transaction indirect foreign exchange.

The revenues from our indirect foreign exchange business have been relatively stable throughout 2010 and through the first quarter.

We enhanced the manner in which we have been disclosing our execution trade details to clients in the fourth quarter of 2009.

In our view, clients select indirect foreign exchange because it provides considerable benefits to them and their investment managers, including mitigation of operational and settlement risk and operational efficiency, particularly with respect to smaller sized transactions.

Ed will provide additional detail about the sizing of our indirect foreign exchange business shortly.

Let me now share our view of the current economic environment.

The recovery in the United States appears to be strengthening, but is partially overshadowed by the continuing weakness in housing prices, as well as increases for the consumer in food and gasoline prices.

Market economists are now forecasting real annualized GDP growth in the United States of about 3% for 2011.

In addition, Europe and the Middle East continue to present financial and political uncertainties.

The ongoing weaknesses in Portugal, Ireland, and Spain are of global concern, and the tragic earthquake and tsunami in Japan are adding to the uncertainty.

Addressing the devastation in Japan, I want to take a minute and recognize the exceptional performance of our employees in Japan who worked under extraordinary circumstances to meet the needs of our Asia Pacific clients, who, themselves, were coping with an incredibly difficult situation.

They work for their clients' benefit whether from home or from the office without consideration for their discomfort.

I specifically want to commend them for their efforts and their dedication to our clients.

I will now turn the call over to Ed, who will provide further detail about our financial performance in the first quarter.

Then I'll return to provide comments affecting our outlook for 2011.

Then we will open up the call for questions.

Ed?

Thank you, Jay.

Good morning, everyone.

This morning I will review three areas -- first, the results for the first quarter; second, the investment portfolio, investment decisions we made in the first quarter, as well as our outlook for worldwide interest rates and the impact on our net interest margin; and finally, I will review our strong capital position.

First, the results for the first quarter of 2011 compared with the first and fourth quarters of 2010.

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

First, a general overview of the first quarter of 2011 compared with the first quarter of 2010.

The growth in core revenue was due primarily to the three recent acquisitions, the growth in new business and improved equity markets, as well as an increase in trading services revenue.

The improvement in net interest revenue was primarily due to deposits associated with the servicing business we acquired from Intesa Sanpaolo, and stronger deposit flows from other clients.

Trading services revenue improved from the prior year's first quarter, primarily based on stronger foreign exchange revenue, as well as strength in both electronic trading and transition management.

Securities finance revenue continued to be weak, primarily due to lower volumes, offset partially by higher spreads.

Turning to expenses, expenses increased from the first quarter of 2010, primarily due to the impact from the three acquisitions.

We earned $0.88 per share on an operating basis, a 17% increase from $0.75 in the first quarter of 2010 on a revenue increase of more than 10%.

Now for a detailed look at the results of the first quarter compared to the fourth quarter of 2010.

Our servicing fee revenue increased by 3% due to higher average equity valuations and new business installed.

Asset management revenue increased 7% due to favorable average month-end equity valuations and the impact of the acquisition of the Bank of Ireland's asset management business in January 2011.

Providing further details on trading services and securities finance, foreign exchange revenue declined 6% compared to the fourth quarter of 2010, primarily due to lower volatilities, offset partially by higher volumes.

Brokerage and other revenue increased 2% compared to the fourth quarter of 2010, primarily due to an increase in electronic trading.

Let me amplify Jay's remarks on our foreign exchange services.

I will review the three principal ways in which we execute foreign exchange transactions with our clients.

First, we enter into foreign exchange transactions with clients and investment managers that contact our trading desk directly.

These trades are all at individually negotiated rates.

We refer to this as direct foreign exchange.

The second way clients may choose to execute foreign exchange transactions is through one of our electronic trading platforms.

Our compensation is based on a transaction fee for this service.

And finally, clients or their investment managers may elect to route foreign exchange transactions to our dealer or sub custodians through our asset servicing operation, which we refer to as indirect foreign exchange.

We enter into those trades as a dealer and set rates based upon a published formula.

We believe our clients value our indirect foreign exchange service offering because indirect foreign exchange is primarily used by clients and investment managers for smaller-value transactions so they can take advantage of the highly efficient trading execution which mitigates settlement and operational risk and offers potential pricing advantages by determining execution prices for each investment manager on a net basis.

Among other things, for indirect trades, we aggregate multiple orders or lots to determine how much of each currency is needed, set net rates and take care of execution and settlement.

As a result, the customer obtains a net rate and avoids the cost of managing the process of executing what generally would be a series of smaller-value transactions and we take responsibility for the risk of errors and settlement failure that otherwise would remain with the customer.

Let me size the portion of the total foreign exchange revenue derived from indirect foreign exchange.

Total revenue at State Street in 2010 for all types of foreign exchange transactions was approximately $825 million.

About $335 million or 41% of the total foreign exchange revenue was due to indirect transactions.

Approximately $215 million or 64% of the revenue from indirect transactions was from US clients.

And of that US indirect revenue, about $22.5 million or 10% was sourced from US pension clients.

I hope this information helps you better evaluate our foreign exchange business.

Compared to the fourth quarter of 2010, securities finance revenue in the first quarter of 2011 declined 4% to $66 million due primarily to lower volumes, offset partially by higher spreads.

Securities on loan averaged $359 billion for the first quarter of 2011, down from $368 billion for the fourth quarter of 2010 and down from $412 billion for the first quarter of 2010.

Average lendable assets for the first quarter of 2011 were about $2.34 trillion, up slightly from $2.28 trillion in the fourth quarter of 2010 and from $2.29 trillion in the first quarter of 2010.

As of March 31, 2011, the duration of the securities finance book was approximately 21 days, up from 17 days in the fourth quarter of 2010, and flat with the level of the first quarter of 2010.

Processing fees and other revenue increased 30% from the fourth quarter of 2010.

The increase is primarily due to revenue from various sources, none of which is individually material.

Net interest revenue declined slightly, about 1% in the first quarter of 2011 compared with the fourth quarter of 2010 despite a slight increase in earning assets.

The decline was primarily due to lower yields on fixed-rate assets following the repositioning of the investment portfolio in the fourth quarter, as well as two fewer days in the first quarter, offset partially by lower funding costs.

The net interest margin in the first quarter of 2011 was 166 basis points, up 1 basis point from 165 basis points in the fourth quarter.

Including conduit-related discount accretion of $62 million in the first quarter of 2011, net interest margin was 185 basis points compared to 207 basis points in the fourth quarter of 2010.

As of March 31, 2011, of the approximately $1.3 billion in discount accretion we expect to accrete into interest revenue over the remaining terms of the assets, we continue to expect about $200 million, including the $62 million in the first quarter to accrete in 2011.

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

In the first quarter of 2011, we recorded about $4 million in net gains from sales of available for sale securities, and separately, about $11 million of OTTI, resulting in $7 million of net losses related to investment securities.

The OTTI was primarily due to changes in the timing of expected cash flows.

We maintain tight controls on expenses due to continuing uncertainty [into] the global markets.

However, our salaries and benefits expenses increased 4% or $39 million from the fourth quarter of 2010 to $974 million, due primarily to the timing of benefits expenses, which included higher payroll taxes.

Our other expenses line increased about 10% to $231 million due primarily to the impact of $40 million of insurance recoveries in the fourth quarter of 2010.

Our operating basis effective tax rate for the first quarter was 28%, down from 29.5% in the fourth quarter of 2010, due to a favorable geographic mix of earnings.

We expect the operating basis effective tax rate in 2011 to be about 28%.

Now let me turn to the investment portfolio.

Our investment portfolio as of March 31, 2011, increased about $9 billion to $103.9 billion compared to December 31, 2010.

During the first quarter, we invested about $15 billion in highly-rated securities at an average price of $99.82 and with an average yield of 1.17% and a duration of approximately 1.13 years.

The $15 billion was primarily composed of the following securities -- 96.2% of which are rated AAA.

$3 billion in US Treasury bills; $4.5 billion in agency mortgage-backed securities; $6.6 billion in asset backed securities, including about $1.9 billion of foreign RMBS, mostly UK and Dutch issues; about $1.8 billion in securities backed by credit card receivables; and about $1.6 billion in student loans.

The remainder was invested in smaller amounts in various asset classes.

The aggregate net unrealized after-tax loss in our available-for-sale and held-to-maturity portfolios as of March 31, 2011, was $352 million, an improvement of $152 million from December 31, 2010, and an improvement of about $1.9 billion or 85% from December 31, 2009.

The improvement in the unrealized after-tax loss compared to December 31, 2010, was due primarily to improvement in spreads, partially offset by higher rates.

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

As of March 31, 2011, our portfolio was 90% AAA or AA rated.

Compared to the fourth quarter of 2010, the duration of the investment portfolio is about 1.59 years, down from 1.70 years due to the sale of longer dated fixed-rate securities and the purchase of floating-rate securities.

The duration gap of the entire balance sheet is 0.4 years, down from 0.53 years at December 31, 2010, due to both the shorter portfolio duration and the issuance of long-term senior debt to pre-fund next year's maturities.

Despite additional downgrades of certain of our securities from major rating agencies, the effect on our investment portfolio was not meaningful and the securities affected are performing well.

The majority of the downgrades were in non-agency ABS and MBS asset classes.

I will now review some of the assumptions we use in determining our 2011 outlook for net interest revenue and net interest margin.

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

As of March 31, 2011, 57% of our investment portfolio was invested in floating-rate securities and 43% in fixed-rate securities.

We now expect our net interest margin in 2011 to be in the upper half of the 155 to 165 basis point range, down from the level of 168 basis points achieved in 2010.

Our assumptions include that the Bank of England rate remains at 50 basis points; that the ECB incrementally increases rates a total of 75 basis points in 2011, the first 25 basis points of which occurred on April 7, 2011; that the federal reserve keeps the overnight fed funds rate at 25 basis points for all of 2011; and that the yield curve retains its current steepness.

We continue to expect the S&P 500 to average about 1265 in 2011, up about 11% from 1140, the average in 2010.

Finally, I will briefly review our capital ratios.

In the first quarter, State Street Corporation's capital ratios under Basel I remain very strong.

As of March 31, 2011, our total capital ratio stood at 21.6%.

Our Tier 1 leverage ratio stood at 8.7%.

Our Tier 1 capital ratio stood at 19.6%, and our TCE ratio was 7.4%.

Based on our understanding of the Basel III proposed regulations and the information published by the Basel committee, we estimate our capital ratios under Basel III as of March 31, 2011, to be our total capital ratio, 12.6%; our Tier 1 leverage ratio to be 6.3%; our Tier 1 capital ratio to the 11.4%; and our TCE ratio to be 7.4%.

In conclusion, as we begin 2011, we continue to face headwinds from the low interest rate environment and increasing regulatory costs.

However, we are pleased with our operating basis results for the first quarter of 2011.

These results testify to the strength of our revenue and servicing and investment management, as well as our success in managing net interest revenue and our ability to control expenses.

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

Thanks, Ed.

I believe that we took steps over the past two years to improve our risk position, and the results of the first quarter testify to the strength of our core business and the expense controls we put in place.

We were pleased to increase our dividend and received board approval to repurchase up to $675 million of our common shares in 2011.

The US recovery seems to be moving ahead, and several of the European markets are showing signs of recovery.

However, the issues in the Middle East and Japan as well as several European countries are waiting on a broader global recovery this year.

We're making progress against our plan to transform our operating model through technology improvements and have been recognized in the industry as a leader in the deployment of private cloud computing.

We continue to deepen our relationships with existing clients and to add new clients globally as you can see by our results in the first quarter.

I'm also very proud of the gains we have made from a corporate social responsibility standpoint.

Most recently, we were named among the top 20 greenest banks in the world for our environmental practices, which is an increasingly important area of focus for our clients, our shareholders, and our employees.

Overall, I am pleased with our performance in the first quarter and remain confident in our ability to continue to drive growth in our core businesses.

Now Ed and I are happy to take your questions.

(Operator Instructions).

Ken Usdin, Jefferies.

Ed, I was wondering if you can just run through again the amount of -- and the servicing side especially -- the conversions that happened this quarter versus the amount won and then kind of just your forward pipeline on conversion activity.

Yes, let me start that one.

I think the -- what we tried to do in the script was to build from the commitments in the fourth quarter of last year that are yet to be installed, which would be installed in 2011, combined with the uninstalled portion of the first quarter.

And we get to, I think it's $460 billion in assets, that will -- that are to be installed.

And I'd say you could probably use the next couple of quarters as the likely timeframe when they would be installed.

Is that your question?

Yes.

Yes, I just want to try to get a kind of a timeframe pace as far as how that layers in over the course of the year versus how much was actually installed in the first quarter.

Yes, the $300 billion that was committed in the first quarter, $115 billion was installed.

And we expect to install another $185 billion.

I don't have that for the fourth quarter.

And as you know, the nature of these commitments are pretty varied, which is why I think you can generally look at a one- to two-quarter lag from commitment to implementation.

Right.

Okay.

My second question, just for Ed.

Ed, the core margin was obviously just up a tick.

I think most had expected it to be slightly down, and you're talking to the upper half of the range now.

So, do we now get the slippage?

Or I guess what would cause any slippage of the margin from here, and what factors are in your control to even maintain it from the current 155 level?

Yes, let me take you through the reasons for the over performance on the margin in the first quarter, certainly against what we expected.

And the flip side of a lot of these would be risk to the margin for the rest of the year.

But the 166 in the quarter was driven by a couple of things.

One, we invested well ahead of what we had planned.

We invested $15 billion out of the $26 billion that we had to invest coming into the year.

We saw good opportunities, both in the US and Europe to put some trades on, and we did that.

So that contributed.

We saw stronger than anticipated client deposit flows.

And obviously, if those continue for the rest of the year, that underpins our assertion that we will be in the upper half of the range for the year.

And we also saw, related to that, obviously, earning assets being higher than what we thought coming in.

And the last factor is that we saw a steepening at the short end of the euro curve.

And that's pretty important to the performance for this quarter and the rest of the year, given that most of the European assets are floaters.

So we got some pick up there.

So just a follow-up, so then I would presume that the euro hike from this quarter, that's not really fully run rated?

And I guess then, what are the factors that would lead to the margins ripping at all from the current 166?

What do we still need to consider if anything as far as either reinvestment rollover or any other factors you want to point out to?

Well, I think it's, again, if the stronger client deposit flows, which we're assuming will continue do not -- assume -- do not continue, that will be a drag on the margin.

If, for some reason, the ECB doesn't increase 75 basis points as we have assumed, that will be a drag on the margin.

If, for some other reason, supply is less than we anticipate in terms of getting the remaining $11 billion invested, that could also pull it down.

But our assumption now is that those things will play out and that's the basis for the upper half guidance on the margin.

Okay.

I guess I'm just struggling then to see why wouldn't it even just stay above the high end?

Like why would it even reach broaching the low end if you're starting above the high end?

Well, you know, we thought coming into the year 155 to 165 was a good peg for the margin based on what we did in terms of the portfolio repositioning and the effect of that coming in.

We assumed a pace of reinvestment that we have exceeded because opportunities have presented themselves.

And we assumed that the ECB would stay flat all year and they've -- that's not been the case for the first 25 certainly.

And based on recent comments, we think it's going up.

So our view has changed, but we're still cautious relative to the rest of the year.

Okay.

I understand.

Thank you.

Alex Blostein, Goldman Sachs.

So, Jay, in your earlier comments, you alluded to the fact that expense savings might start coming through on a net basis I guess in 2011.

I guess our understanding was that we're not going to see much of that until 2012 and beyond.

Can you just give us an update of how much I guess in net savings you could see from your restructuring plans this year and beyond?

Sure, Alex.

The ops and IT initiative which we announced in the fourth quarter -- 2011 is a year where in the early part of the year we're doing some investing and then we are starting to generate some of the improvements towards the back end of the year.

So on a net basis, it's slightly positive, I think is what we would say, with the greater gains coming in the out years.

The only thing I would add to that is, since we announced the plan, and we announced the plan with some previous activity leading up to it, we're really tracking to that.

So I think we will see the slight improvement in 2011 and we feel very confident about the long-term plan as well.

Got you.

And then just a question on capital, clearly it continues to build quite nicely here to your one common, over 10% at the Basel III.

I understand you're doing a little bit of a buyback this year.

What are the plans I guess longer term?

And what steps do I guess you need to take to buy back more stock even potentially this year?

I think the way we look at capital and the way we look at it through the capital plan was, more on a total return to shareholder, which combines the dividend and the buyback.

And I think if you looked at the banks that went through the capital plan review, we're in line with the return to capital of those banks.

I guess the way we look at it prospectively is, we look at acquisition opportunities versus share buybacks.

And I continue to think that we will see some acquisition opportunities, particularly as you think about the core custody franchise and some of the subscale players that largely are in Europe.

So we're trying to stay nimble, delivering returns to -- delivering capital to shareholders through the vehicles I mentioned, and yet also be well capitalized, should acquisitions come about.

Got you.

Thanks.

Mike Mayo, CLSA.

So just to clarify, 3% of your FX revenues relate to US pension clients.

Is that correct?

I believe that's right.

Yes.

[22 on 8, 25].

Correct.

Right.

That's of the indirect, as we described.

So would that mean you don't see a decline in FX margins as structural?

Keep going.

Ask --

In other words, FX -- the decline.

Yes.

Just simply it's down 6% linked quarter for you guys.

Is this just a seasonal blip, volatility is not as strong, or is there something more permanent taking place here?

No, no, I think it's just -- to me it's volatility.

I think we've seen volumes were reasonable during the quarter and I think you've seen volatility was slightly off in the fourth quarter.

So I don't see anything structural there.

And the pretax margin, do you see that coming down?

Just in FX?

The pretax margin in FX?

No, I think that the -- I commented that over the proceeding five quarters, the revenues around -- and again, indirect FX have been relatively stable.

And your acquisition of Currenex, does that differentiate you versus others?

Is that helping or is that not much of a factor?

It's absolutely helping in that, you know I think -- we've tended to focus on a pretty narrow aspect of the foreign exchange marketplace.

I think we are differentiated in that we have a comprehensive range of foreign exchange capabilities.

Currenex being just one, but FX Connect also being a market leader in the aggregation and netting of trades.

So, we've seen those electronic trading businesses grow at double-digit rates, close to 20%, for years.

And then a separate question, you have $460 billion of business yet to be installed divided by $22 trillion of assets under custody.

So should we expect a 2% boost in your assets under custody in the first quarter -- in the second quarter?

Sorry.

You know I think, as I mentioned earlier, it's difficult because you've got -- it tends to be the longer the duration of the implementation cycle, the meatier the revenues just because of the nature of middle office and the like.

So it's hard to make it that linear.

And Mike, remember, some of the wins are cross-sell so we already have the custody.

We sold them an additional service, like investment management or operation outsourcing, for example.

If they did have it before, then we're just adding that service and we're going to get more revenue for it.

But you won't see it impact the assets under custody.

And then last question is a big picture conceptual question, looking back a number of years.

If in the past, State Street has had a 1% ROA with leverage of 17 times and that allowed you to have a 17% ROE, how do you get a 15% ROE if you still have a 1% ROA with say 10 times leverage?

That would imply an ROE of under 15%.

Should we expect ROEs to improve from the 1% historical level?

Well, Mike, I think that that still is an answer that's to be determined based on what the regulators do, relative to capital.

Too early to tell.

And as we have said previously, once we get certainty in terms of what the new rules are for capital, we will update our ROE guidance.

How about just the ROA trends?

Is there any reason to think your return assets would be better in the future than it's been in the past?

You know, that depends a lot on the environment, right?

If you're looking at -- depends how far you go back in the past too, I guess, but I don't think I really want to go down the path of ROA prospectively versus ROA historically until we get the total picture laid out for us.

All right.

Thank you.

Brian Bedell, ISI Group.

Speaking on FX, and just looking at the last two quarters, for example, your FX sequential growth rates have outperformed basically all the peers.

Can you talk about things that you are doing organically to improve that?

Or is there something else sort of underlying in the revenue capture rates?

You know, I think, Brian, it's probably a follow-on to the prior comment, which is foreign exchange can be executed many different ways depending on the customer, the circumstance and the trade that's being contemplated.

And I think having the full suite of capabilities allows us a greater opportunity to capture foreign exchange in whatever form it's being traded in.

So that's probably where I would leave that.

Okay.

I guess my question too was, are you effectively, or have you effectively cross-sold FX in the last two quarters to new clients that came on during 2010?

And also Intesa Sanpaolo, have you effectively increased the [growth over there]?

Yes, I get the question.

Yes, I think so.

I don't think anything has changed, but one of the consequences of the pipeline and the new business and the new customers is the ancillary activity that connects with that.

So I would say in the more traditional add a customer or add a service, I think we're doing a pretty good job of penetrating a cross-sell.

I think in the case of, probably more Intesa Sanpaolo's customers, again, it's probably still early days, but we're doing a pretty good job of getting in and understanding what other capabilities we could sell.

And we have a pretty good track record of past roll ups or acquisitions to do a pretty good job cross selling.

So it's early days, but we're making some headway.

Great.

And then on the pricing in the asset servicing business, for the new wins that you are bringing on, are they coming on generally higher fee realization rates versus the legacy business?

You know, I would say, Brian, it's hard to say broadly they are any different than -- I would say though, that more of the deals these days, we just -- in fact we just announced a deal today that's representative of this with Martin Currie; represent this middle office componentry, which where we have an excess of 60% market share across the globe.

More and more investment managers are looking to their suppliers for a deeper level of outsourcing.

We're well positioned there.

And as I said before, the more involved and integrated the sale is, the greater opportunity we have for good margins.

So I would say the more complex, the better the margins, the more simple, the tighter the pricing.

Right, okay.

And then just lastly on the expense side, Ed, the other expenses were lower than I expected this quarter.

Was that totally due -- I know that we had the $40 million insurance recovery, but was the remainder totally due to lower processing errors?

And is that $230 million run rate a realistic run rate for the remainder of the year?

Well, I mean the main driver was the lack of the insurance recovery as you noted, Brian, but we did have a very good quarter from a processing standpoint, so there's a little bit of contribution there.

And, as far as that line going forward, it can move around.

It's a line that we focus on a lot, and I want to go too far out and start making predictions about that line on a quarterly basis for the rest of the year.

But it is a line that has performed pretty well and we have put a lot of emphasis on it.

And just one last one, just on the comp side, we should expect comp to go down in the second quarter I would assume, given your retirement eligible options expense in the first?

Yes.

Yes.

You know, again, assuming consistent performance, I think the way to think about the comp line relative to revenue over the entirety of the year is in that 40% range that we have talked about.

Great.

Thanks so much.

John Stilmar, SunTrust.

Just a quick question with regards to your balance sheet.

We've obviously seen a pretty big growth in securities, and that obviously flows through to the net interest margin.

Can you talk to how that happened over the quarter and whether that still is persistent and whether that's just a general flight to quality or something else that we should be thinking about in terms of the longer term for the business?

Well, we look at the balance sheet as being a customer-driven balance sheet.

So we get customer deposits mainly out of our asset servicing business and have to invest in the portfolios, the vehicle by which we do that.

We had a very busy quarter on the investment portfolio front.

I would say a very productive quarter.

We got ahead of what we thought our plan called for in the quarter coming into the year because of opportunities presenting themselves.

We had a big challenge, given that we did the portfolio repositioning in the fourth quarter.

That, as you may recall, was an incremental $11 billion that we needed to redeploy.

We've invested about $15 billion of the total that we had facing us this year.

That's $26 billion in total, $11 billion on the redeployment and $15 billion of regular portfolio runoff.

And we've been following the same strategy we've historically followed, which is AAA/AA, asset-backed, mortgage-backed and US Treasury.

So portfolio has been performing pretty well.

As you know in the quarter, the OTTI levels were fairly, fairly small.

And we are obviously dependent on what market opportunities present as to what we invest in going forward, but our plan is to follow the same strategy.

Okay, John, I would just add that one of the reasons that we highlight so frequently the new business flows and new activities is that if there's custody involved, deposits flow.

So I think there's some correlation between the new business, the growth, the new custody assets and the deposit volumes that flow in.

Okay, thank you.

And then with regards to the servicing fees and -- can you give us some context in terms of new business wins, whether you're winning them from existing clients?

Or actually, whether the wins are coming from relationships that the new clients had with previous custodial banks?

Or whether is this really providing ancillary services?

On a prior call, we were given a statistic about new business wins being kind of two-thirds from -- we're really stealing market share.

I was wondering if you could share some context about that and whether it's just really -- and if there's any sort of geographic footprint that also influences your answer.

Thank you.

Yes, let me just try to give you a little color on that, John.

I'm not sure we can be precise with the percentages, but the -- a couple of points.

One, I referenced the alternatives, like hedge fund and private equity.

That's been a big growth area for us.

And I think if you look at, in fact, as recent as this week, there are forecasts about the growth of the hedge funds.

We see our asset owner customers increasingly allocating to hedge funds.

In the hedge fund world, I would say the sales there tend to be either take away from competitors, or more often, it's an internal hedge fund outsourcing activity.

So that would be expansion of market or new business.

With regard to -- if I focused on the new business, the higher end of the new business, the bigger deals let's say, I would say it tends to be a customer consolidating positions with a single provider.

So, and I would go back to -- because it's recent, I think we just put it out very recently; Martin Currie is a little bit of a prototype in that we had a small portion of their business.

They insourced middle office.

They took a look at their business and decided that they wanted to outsource the middle office and select a single provider.

I think it was with three or four different providers.

And so they elected to consolidate all of that with us.

The other thing I would say is that particularly in the upper end of the market where there's a middle office component involved, it's rare that if we really want that customer that we won't be successful in a competitive bid situation.

So I think our product set is comprehensive.

We're doing quite well competitively.

Thank you so much.

Gerard Cassidy, RBC.

Good morning.

Jay, as a follow-up on the middle-market comments, when you pitch your customers, what kind of cost savings do they normally see if they decide to consolidate into one provider?

That's hard to say, Gerard.

And I think it's -- it happens in two ways.

Probably the obvious way is economies of scale; if you consolidate from four providers to one, there is probably some pricing advantage you are going to get in the marketplace.

But I would say the bigger and more subtle change here is that using Martin Currie, that the overhead that they have to deal with four different suppliers, four different data feeds, the cost that they achieve internally by going single supplier is pretty significant, and I would guess probably outweighs the cost of the marginal improvement in pricing they get from suppliers, which is why it's happening.

Okay.

Right.

In terms of the new business that you had this quarter, how much of it was middle-market related business?

Oh gosh.

We haven't --

Well we had Martin Currie, then we renewed Deutsche.

There was one other one we can't mention, but --

I would say, Gerard, if, again, you look at the bigger deals, there is probably a 70/30 split between the bigger deals driving more of the activity, you look at half to two-thirds of it were the middle office component and increasing.

Okay.

Is there any way that we as outsiders can look at your numbers and figure out what percentage of the business is coming from middle-market, if this is potentially a growth area maybe over the next 5 to 10 years?

We try to give you a little direction in that of the $24 trillion in assets that we administer, that it's up to $8 trillion now; is that right, Kelley?

Yes, it's about $8.1 trillion.

$8 trillion that has a middle office component to it.

If you were to track the growth in total AUA versus growth in middle office, you would see a stark different.

AU -- or the middle office growth would be considerably higher from a percentage standpoint.

Let us think about that as we go forward if there's a way to give you a little bit more color on that.

Sure.

And then a question for Ed, with the news with Standard & Poor's yesterday putting the US on a negative credit watch, if they actually downgrade the US to AA from AAA, would that change your views on how you would invest putting our money to work in US treasuries?

And also, does it affect the weightings on the risk weighted asset -- the capital allocation under Basel III, if it is -- if they are downgraded to AA?

No, It wouldn't change our outlook, our approach.

We have about, at the end of March, about $6.4 billion in US treasuries across the maturity spectrum.

Obviously, we hope that that doesn't happen, but it would not change our view in terms of how we invest.

And relative to the risk weighting, there is no effect.

Modest -- a very small effect.

Thank you.

Jeff Hopson, Stifel.

On the pricing environment, it seems that given the pressure that all of the competitors are seeing, there's maybe a little more religion.

But can you comment on the behavior of the market and your ability to eventually, potentially offset some of the negatives that you have seen in terms of interest rates, et cetera, to more appropriately price the business that you are providing?

Yes, as far as the pricing environment, I think it's become more visible to our customers through our dialogues around the need to, in the case of existing customers, improve the economics and relationships given some of the falloff in market-based revenues.

We've actually had some fee increases recently as a result of that.

And in addition, the discussion more likely goes to what additional services we can provide to those customers.

So, I think that we've been dealing with this market environment for a while, so it's more visible to customers.

And I think that the way we go forward with this is additional cross-sell, additional activities to customers, pricing increases were we can get them.

I haven't seen -- I think your question, Jeff, has there been any meaningful change in competitive pricing in the last quarter?

I haven't really detected that.

Okay.

Thank you.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

Just a couple follow-ups.

One on NIM.

Ed, you mentioned the 155 to 165, you know, not really changing that range, and I understand that your view on European rates was improving.

Is there anything that happened that is coming in lower than expected in that outlook?

Or are you just being conservative?

Well, there's nothing that has come in that has disappointed us in the first quarter relative to our going-in view of the NIM for the year.

Okay.

And then on the buybacks, have you already started your buyback program?

We don't want to comment on that.

Okay.

I was just wondering if there's anything related to understanding the [SIFY] buffer first before you're going to start that.

Or is there anything related to your timing around whether or not you end up at what level of SIFY buffer.

No; we don't think we need to have clarity on the SIFY buffer before we were to do anything.

Okay, super.

Thanks.

Howard Chen, Credit Suisse.

Thanks for the commentary on the ECB hike.

Is there a way to more specifically frame the potential impact and timing of that benefit to the overall NIM, Ed?

Yes.

I would think it would ramp during the year.

If you remember, Howard, we thought that there would be a slight degradation in terms of the ramp for the NIM over the year based on our going-IN assumptions for the year, from the 168 in the fourth quarter, slightly down on a sequential-quarter basis throughout the year, settling within our 155 to 165 range.

If it plays out the way that we are now assuming and the ECB goes up to 175, ratably over the year, two more -- 25 basis point hikes, I would expect to not see that ramp down that we saw, but an improvement to settle in for the average for the year between 155 -- I'm sorry, the upper half of the year range, 160 to 165.

Great, thanks.

And then just within the context of that, what's your current thinking on the deployment of that excess liquidity that you have in Europe?

And what do you want to see to more aggressively deploy that?

Well, I mean we're still conservative in our thinking about Europe.

We still have some money at the ECB at the end of the quarter.

We are going to proceed with our plan.

Our longer-term objective is to build out the non-dollar portfolio.

We've been doing that for several years.

And we will continue to do that, but only investing in AAA and AA asset-backed and mortgage-backed securities, so it is continuing what we've been doing.

Okay, thanks.

And then just finally, staying in the theme of Europe, just I know you mentioned you thought the deals that you've done in 2010 were going well.

But can you give us a little bit more detail on just pacing of client retention or versus your accretion targets at the time?

That would be helpful.

Thanks.

Yes; I would say on that, Howard, the -- we're above expectations almost on all fronts.

The bringing on the integration of the business is well underway now that we've got several quarters of experience with both of those businesses.

The client retention has exceeded expectations, which were high anyway.

And as I commented on earlier, the cross-sell is progressing well, but there's more to do there.

So, I think that they are well underway.

They're in a position where if something else were to come along, I don't think that finishing up those integrations are an impediment to any other activities we might pursue.

Great.

Thanks a lot, Jay.

Thanks a lot, Ed.

Cassandra, we'll allow one more call because it's coming up to 10 o'clock and I realize it's a busy schedule this morning.

Rob Lee, KBW.

Thanks for taking my question.

I know you're pressed for time.

I apologize if you mentioned this earlier in the call, but I jumped on a little bit late, but can you talk a little bit about trends in the asset management business, kind of what you saw in the quarter, how you see that playing out?

And if we look beyond the recent acquisition of the Bank of Ireland's business, kind of what your appetite is for acquisitions within asset management and where that could be?

Sure.

Happy to do that, Rob.

You know, we reported net new business of $29 billion in asset [Jay] on the asset management side.

And a little bit more color on that; still good flows into passive; $31 billion is the passive number.

$5 billion in ETFs.

A little bit less on the cash side.

So, I think consistent with this barbell approach that many investment management are pursuing, which is more allocation to the alternatives, more allocation to the passive, we continue to pick up mandates on the passive side.

We closed the Bank of Ireland asset management acquisition in early January.

That's come on as expected.

And we're trying to take that fundamental active strategy and deploy it through our distribution network at SSgA.

With regard to acquisitions or other outlook, I think we're in a good space relative to our quantitative passive ETF solutions orientation.

But if there was something that made sense, we always consider ways to incrementally improve our product set or address a new geography.

So kind of open-minded on that front.

And if I could ask maybe one follow-up question.

You've talked about it for today and in prior calls, as have some competitors, that a fair amount of new business is existing clients kind of consolidating.

Two things, consolidating business with one provider, but also this trend towards middle office outsourcing, which has been going on for a while now, and I guess appears to have accelerated post the crash or crisis.

If you look at your book of business considering how important it is to your net new business kind of mining that, if you think of middle office outsourcing in particular, do you feel that there is just still a lot of kind of pipeline out there of clients who just haven't gotten to that point?

Or is there any way you think that hey, there's another year or two of this trend and then people who are going to do it have done it and you've got to kind of look somewhere else for some incremental growth?

How do you think of that kind of pipeline?

It's -- I would say anecdotally, the pipeline feels as strong as it's ever been.

So I don't think that there's -- it feels like it's ending anytime soon.

I guess let me just give you some high level metrics.

This might help.

The custody base of business that the global custodians have faced off against is in the $110 trillion kind of range.

And, we're north of $8 trillion (technical difficulty) [middle] office and we're 60% of the market that's outsourced.

So that gives you some sense of dimensioning.

I do think that the middle office tends to be more appropriate for the larger, more complicated asset managers, although not exclusively.

We've seen it across the spectrum.

So I think it's a trend that, as you rightly point out, has accelerated through the recent global financial crisis, and I think it's going to run for a while.

We need to -- Cassandra, we need to close now.

That concludes our Q&A session.

Do you have any closing remarks?

No; just we look forward to talking to you at the close of the second quarter.

Thanks.

Thank you, ladies and gentlemen, for attending today's conference call.

You may now disconnect.