道富銀行 (STT) 2011 Q3 法說會逐字稿

Good morning and welcome to State Street Corporation's third-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 reply.

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 expressed 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'll conduct a question-and-answer session.

(Operator Instructions).

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

Please go ahead.

Good morning.

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 risk -- the sections on risk factors concerning any forward-looking statements we may make today.

Any such forward-looking statements speak only as of today, October 18, 2011, and the Corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I'd also like to remind you that you can find two slide presentations, one regarding the Corporation's investment portfolio and the other about our progress in executing our business operations and Information Technology Transformation program, as well as our third-quarter 2011 earnings news release, which includes reconciliations of non-GAAP measures referred to on this webcast in the Investor Relations portion of our website.

Now I'll turn the call over to Jay.

Thanks Kelley, and good morning.

Before reviewing our earnings results for this quarter, I'll briefly address the recent White Paper released by Trian Fund Management, a shareholder of State Street's on Sunday, October 16.

Trian's White Paper suggested ways we could improve shareholder value, many of which have been underway at State Street for more than a year.

We continually search for ways to drive value across our operations and always listen to ideas from shareholders.

In that spirit, members of State Street's senior management have met with representatives of Trian on a number of occasions to discuss our business.

Despite the challenging operating environment over the past several years, our business has remained resilient.

We have continued our track record of profitable growth and have maintained the strongest capital position among our closest peers.

With the approval of the Federal Reserve and within the context of growing our business, we intend to continue to return capital to our shareholders.

We believe our third-quarter earnings results underscore the underlying strength of our franchise.

With that said, I want to emphasize that the purpose of today's conference call is to discuss these results.

We will not be taking any questions on Trian.

I'd like to now return the focus of today's call to our earnings results.

I'm pleased with what we've achieved in the third quarter of 2011 in the face of volatile equity markets and continued uncertainty in Europe.

Compared to the third quarter of 2010, revenue from our fee generating businesses increased 18% and our total operating basis revenue increased 12%.

Compared to the second quarter this year, our fee revenue declined about 3% due primarily to a decline in securities finance revenue from the seasonally strong second quarter.

We added about $245 billion in new assets to be serviced in the Asset Servicing business and had negative $15 billion in net flows at State Street Global Advisors, excluding $35 billion of planned asset sales and accounts we manage for the U.S.

Treasury.

This morning, I'll provide more detail behind the wins we achieved in the third quarter as well as the installation timing.

I'll also comment on our outlook for the global economy with an emphasis on the situation in Europe, our progress in executing against our business operations and IT Transformation Program, as well as our capital plans.

Let me turn now to provide some highlights of the third quarter and recent trends we've observed.

Of the $245 billion of new servicing mandates won in the third quarter, we've already installed about $65 billion of the business won and expect to install about $180 billion during the fourth quarter of 2011.

We continue to enjoy a broad range of wins in terms of clients, services and geographies.

Of the $245 billion we won, $42 billion or 17% were from the US and $203 billion or 83% were non-US mandates, $156 billion from Europe and Middle Eastern clients, $32 billion from Asian clients, and $15 billion from Canadian clients.

Volatile markets have made US consumers nervous due to concerns about Greece, European banks and the pace of the US recovery.

As a result, they have continued to move out of equities over the past five weeks into bonds and municipal funds.

Similarly, in Europe, investors are avoiding equities that have been selling out of emerging markets after having been overweight in both 2010 and 2011.

In both Europe and Asia, investors are investing closer to their home countries and are limiting their cross-border investing.

Cash continues to collect in bank deposits as investors stay on the sideline until the Euro zone reaches some decisions on the sovereign debt crisis as well as the recapitalization of the banking systems.

Another trend we're observing is clients moving toward alternative investments, in particular private equity and real estate funds, both of which we service through our Alternative Investment Servicing business.

Clients are also looking to outsource more services, so our pipelines remain strong, reflecting significant business opportunities.

From the Middle East and Africa, we generated $18 billion of the quarter's new wins, fueled by our strong position serving the sovereign wealth fund sector.

In the Alternative Servicing area, demand remains strong.

This quarter, we added 25 new mandates in our Alternative Investment Servicing business and our alternative assets under administration increased from $789 billion as of June 30, 2011 to $793 billion as of September 30, 2011, despite a general contraction in equity markets.

At State Street Global Advisors, gross new mandates totaled $88 billion in the third quarter, of which $12 billion is scheduled to be installed later this year.

We continue to benefit from our concerted effort to cross-sell products between Asset Servicing and Asset Management.

For example, of our top 100 Investment Servicing clients, about 75% have a portion of their assets managed by SSGA.

In addition, SSGA's portfolio solutions offering is attracting investment servicing clients, especially pension funds and a significant majority of our hedge fund and mutual fund clients invest in ETF managed by SSGA.

Like our Investment Servicing business, the SSGA wins were globally diverse and represent a variety of different investment strategies -- $36 billion from the US, $43 billion from Europe and the Middle East, and $9 billion from Asia.

Continuing a trend from recent quarters, most of the new business came from passive and ETF strategies.

Let me now share our outlook for the global economy.

While growth has slowed in the US, principally due to the continuing weakness in the housing market and the stubbornly high unemployment rate, most of the focus now is on Europe, especially the peripheral countries and the uncertainty created by the debt crisis.

As investors worry about the stability and safety in the European market during the third quarter, our clients place with us, on average, an incremental $15 billion of deposits compared to the second quarter.

In Europe, very recent news suggests that the leaders there are working to fashion a fiscal solution for weaker countries.

But should this initiative fail, it will continue to weigh heavily on the capital markets and economies of Europe.

As a result, with our investment portfolio, we continue to focus our euro-denominated investment activities in stronger northern European countries and in higher quality asset classes.

This outlook only underlines the slow and somewhat fragile global recovery.

I continue to believe that this low growth rate concern about the financial institutions in Europe should result in consolidation in the financial sector, consolidation which we are prepared to take advantage of with our strong capital position.

Our business operations in the Information Technology Transformation Program is progressing well, in fact ahead of schedule.

When we first launched the program, we indicated that we expected the 2011 expense savings would be slight.

We now expect those savings in 2011 to be approximately $80 million since we were able to accelerate some of the projects within the program.

Through this program, we continue to expect to achieve a 400 basis points improvement in our operating basis pretax margin compared to 2010 by the end of 2015, all else equal.

I'm pleased with the progress we're making with this program and I'm confident in our ability to execute against it.

It is going to substantially transform State Street, both in terms of service to our clients, more rapid development of new products, as well as a significant reduction in our expenses.

In a few minutes, Ed will provide more specific information about the business operations and IT transformation program.

I also want to update you on our capital position which remained strong in the third quarter.

We continue to await the capital requirements for systemically important financial institutions.

At this time, we expect to know those requirements by the end of this year, enabling us to evaluate the effect on State Street and on our expectations for Return On Equity.

In the third quarter, we purchased approximately 5.8 million of our common shares which brought the total shares purchased in 2011 to 10.7 million, leaving about $225 million from the original plan yet to be purchased in 2011.

We also announced a quarterly dividend of $0.18 per share in the third quarter.

Due to the strength of our capital position, we were able to take these actions while maintaining the flexibility to respond to future acquisition opportunities should they become available.

Regarding our recent acquisitions, the Investment Servicing business that we acquired from Intesa San Paolo in Mourant International Financial administration business continued to be in line with the goals we announced.

In addition, the acquisition of Bank of Ireland's Asset Management business continues to perform well and in line with our expectations.

We recently announced two small acquisitions, Complementa in Switzerland and Pulse Trading in the United States.

Based in Switzerland, Complementa provides investment performance measurement and analytics to asset managers, banks, pension funds, family offices and insurance companies primarily in Switzerland and Germany.

With this acquisition, we'll significantly strengthen and differentiate our investor service capabilities across the European continent.

This transaction closed on October 3, 2011.

The pulse Trading acquisition enhances our electronic trading capabilities by adding an equity crossing platform which we plan to cross-sell to our existing client base.

This transaction is expected to close in the fourth quarter of 2011 pending regulatory and other closing conditions.

I'll now turn the call over to Ed, who will discuss our results for the third quarter, provide further details about our business operations and IT Transformation Program, discuss the performance of our investment portfolio and our capital position.

Then I'll return to make some final remarks before we open the call to questions.

Thank you Jay.

Good morning everyone.

As Jay said, this morning I'll review four areas, first the results for the third quarter, second our progress in executing the business operations and Information Technology transformation program.

Then I'll summarize the performance of and outlook for the investment portfolio, as well as worldwide interest rates and the impact on our net interest margin.

Finally, I'll review our strong capital position.

I'll present the results comparing the third quarter to the second quarter of 2011.

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

Our servicing fee revenue decreased by 2% due to weaker average equity markets, offset partially by net new business.

To put this decline in context, daily average equity markets, as measured by the S&P 500 and the MSCI EAFE Index, were down about 9% compared to the second quarter.

Asset Management revenue declined about 8% due to the weaker average month-end equity valuations offset partially by the impact of net new business installed.

For comparison, average month-end equity markets as measured by the S&P 500 and MSCI EAFE Index declined about 11% compared to the second quarter.

Regarding Trading Services and Securities Finance, foreign exchange revenue increased 21% compared to the second quarter of 2011 due to higher volatility.

Brokerage and other revenue declined 8% compared to the second quarter due primarily to weaker revenue from transition management.

Securities Finance revenue in the third quarter of 2011 decreased about 38% to $85 million in comparison to the seasonally strong second quarter.

Securities on loan averaged $368 billion for the third quarter of 2011, down from $379 billion for the second quarter of 2011 and from $382 billion for the third quarter of 2010.

Average lendable assets for the third quarter of 2011 were about $2.28 trillion, down 4% from $2.37 trillion in the second quarter of 2011 and up 5% from $2.17 trillion in the third quarter of 2010.

As of September 30, 2011, the duration of the securities finance book was approximately 12 days, down from 18 days in the second quarter of 2011 and from 24 days in the third quarter of 2010.

Processing fees and other revenue increased 29% to $90 million in the second quarter of 2011.

This increase was primarily due to $22 million of gains related to real estate and leases.

Net interest revenue increased slightly, about 2% in the third quarter of 2011 compared with the second quarter of 2011, primarily due to an increase in earning assets driven by an increase in client deposits.

Compared to the second quarter, in the third quarter, clients left an incremental $15 billion in average deposits with State Street, the impact of which contributed to slightly higher net interest revenue and a lower net interest margin.

Including these incremental deposits, operating basis net interest margin in the third quarter of 2011 was 144 basis points.

Excluding those deposits, net interest margin would have been about 157 basis points compared to 161 basis points in the second quarter.

We maintain tight controls on expenses.

Our salaries and benefits expenses decreased 4% or $44 million in the second quarter of 2011 to approximately $965 million due to reductions in incentive compensation and benefits achieved from the business operations and IT Transformation Program.

Salaries and benefits included about $13 million in non-recurring costs related to the implementation of this program with another $5 million recorded in several other expense lines of the income statement.

We continue to make progress against our annual compensation to revenue target of 40%.

In the third quarter of 2011, salaries and benefits expense was approximately 40.0% of total revenue, down from 40.8% in the second quarter, which was down from 41.8% in the first quarter.

As of September 30, 2011, our year-to-date ratio was 40.9%.

Other expenses were $258 million, up about 6% compared to the second quarter due to increased securities processing costs.

Included in other expenses are certain costs to meet the increased regulatory and compliance requirements we face.

In the third quarter, we recorded about $65 million in restructuring charges and have recorded $75 million year-to-date associated with the business operations and IT Transformation Program, as well as about $20 million of integration costs associated with Intesa, Mourant, and Bank of Ireland acquisitions.

We at expect additional restructuring charges of between $45 million and $65 million in the fourth quarter associated with the business operations and IT Transformation Program.

We continue to expect a total of $400 million to $450 million of restructuring charges over the life of the program.

As of September 30, 2011, we have recorded aggregate restructuring charges of about $230 million composed of severance associated with headcount reductions, Information Technology vendor transition costs, and actions taken with respect to real estate consolidations resulting from the implementation of this program.

In response to your requests, now I'd like to provide additional detail about the net savings we expect to achieve through the business operations and IT Transformation Program.

We have provided a presentation in the Investor Relations section of our website for your reference.

On the third page of the presentation, I list the goals of the program -- positioning us for accelerated growth with the financial goal of achieving annual run rate pretax savings of between $575 million and $625 million by the end of 2014 for full effect in 2015.

We continue to expect to achieve 400 basis points of improvement in our operating basis pretax margin compared to 2010, all else equal, in 2015.

By implementing this program, we also intend to enhance service excellence and innovation, deliver operating efficiencies, standardize and further automate processes, and increase the efficiency use of technology for product development.

To describe this program, we have divided it into two components, Business Operations Transformation from which we expect to achieve approximately $440 million of annual pretax run rate expense savings by the end of 2014 for full effect in 2015, and Information Technology Transformation from which we expect about $160 million in annual pretax run rate expense savings over the same period.

These estimates are based on improvement from operating basis expenses in 2010, all else equal.

Again, we expect the full effect to be experienced in 2015.

For convenience, we have used the midpoint of the range of expected expense savings.

For your reference, on Page 4 in the presentation, I list the expected performance of the entire program, most of which we have previously disclosed.

The next page, Page 5, describes the three drivers of the business operations transformation -- transforming and standardizing our processes, continuing to automate our key business processes, and developing additional centers of excellence around the globe, shown in the first three rows on the chart.

Relative to the first driver, in order to transform our business operations, we expect a standardized 14 core processes at State Street, primarily by continuing to execute our successful lean methodology and then to further automate those processes.

Lean is a process that we embraced about three years ago.

It is similar to Six Sigma, which you may be more familiar with.

We estimate this driver should account for about 10% of the projected $440 million pretax run rate expense savings.

The second driver - we intend to further automate our business processes in order to eliminate as much manual processing as possible, which is expected to reduce cost as well as operational risk to both State Street and our clients and which should account for about 30% of the projected $440 million.

The third driver -- we've already begun a program of establishing centers of excellence using a globally distributed footprint to balance our workload in a more flexible global operating model.

We expect this driver to account for about 60% of the projected $440 million expense savings.

Approximately 95% of the projected $440 million expense savings from this component of the program are expected to be reflected as a reduction in the salaries and benefits line.

On the next page, Page 6, we have listed the three drivers of transforming our Information Technology across State Street, as shown in the first three rows on the chart -- one, introducing new technology architecture; two, optimizing our IT processes; and three, optimizing our workforce.

Regarding the first driver, in order to transform our Information Technology, we are planning to move hundreds of core applications to a private cloud, leveraging new technology architecture, which will reduce cost and improve our ability to deliver new business products and services to our clients.

We estimate that we will achieve about 20% of the projected $160 million in savings from this component of the program.

The second driver -- we intend to deploy lean methodology to all of our IT processes across State Street and with our strategic servicers.

This is consistent with what we've been doing in the business operations for the past several years.

These benefits are estimated to be about 40% of the projected $160 million in expense savings expected from this component of the program.

Regarding the third driver, as we announced in July, we have expanded our Information Technology service provider relationships with IBM and Wipro in order to support components of our technology infrastructure and application maintenance as well as support systems.

Finally, we intend to leverage the benefits of these relationships to more efficiently and effectively deploy our IT services globally, a driver which we estimate will save us about 40% of the projected $160 million expense savings expected from this component of the program.

Approximately 165% of the expense savings from Information Technology Transformation component are expected to be reflected as a reduction in salaries and benefits due primarily to the implementation of the expanded IBM and Wipro relationships.

Information Systems and Communications expense is expected to increase by an amount equal to approximately 65% of the total IT transformation benefits, partially offsetting the expected improvement in salaries and benefits.

On to Page 7, the financial benefits of these two programs.

We have previously said we expect slight savings in 2011, originally about $30 million.

However, given the difficult environment, we accelerated some of our projects and were able to migrate some job functions to lower-cost locations.

We now expect to achieve about $80 million in annual pretax run rate expense savings this year and to still achieve about $200 million pretax run rate expense savings by the end of each of the next three years, as shown in the bottom row of this table.

As shown on the far right, the estimates in the table are based on a pretax run rate expense savings of about $600 million by the end of 2014 for full effect in 2015.

$600 million represents the midpoint of the estimated $575 million to $625 million range we provided when we announced this transformation program.

On average, we expect to get about 75% of the total annual pretax run rate savings, or $440 million, in 2015 from the business operations transformation component.

The other 25% of the total pretax run rate savings in 2015 is expected to come from the Information Technology Transformation component.

From this component of the program, we expect to achieve annual pretax run rate savings of about $160 million in 2015.

So you can see that we expect to achieve $540 million in annual pretax run rate savings by the end of 2014 for a total annual run rate savings of about $600 million in 2015.

105% to 115% of the program's overall expense saves are expected to come from a reduction in salaries and benefits, partially offset by an expected increase in Information Systems and Communications expense of between 10% and 20%, reflecting the incremental costs of the enhanced strategic service provider relationships.

The Other Expense and Occupancy categories on our income statement are estimated to decrease by an amount equal to 5% of the overall pretax net operating benefits.

These estimated savings only refer to the business operations and Information Technology Transformation Program.

Actual Company expenses may increase or decrease due to other factors.

We plan on updating these numbers quarterly, assuming no material changes, and will also report on actual savings in relation to the estimates on an annual basis.

On Slide 8, this slide provides our expected achievements in 2012.

Fourteen key business operations processes are to be substantially affected by hundreds of initiatives that are to be implemented through the business operations and Information Technology Program.

We expect to establish two additional centers of excellence so we have a total of seven overall, achieve 20% of our targeted automation benefits and establish two new low-cost locations to balance our global footprint.

We also expect to scale the cloud computing platform, rationalize the IT application portfolio, and enable major application migrations in 2013 and 2014.

We intend to realize 20% of the benefits from streamlining our IT applications in 2012.

By the end of next year, we expect to have substantially completed the transition of the relevant Information Technology maintenance and support functions to our strategic service providers.

Now let me turn to the investment portfolio.

Our investment portfolio as of September 30, 2011 increased about $700 million to $107.1 billion compared to June 30, 2011.

During the quarter, we invested about $10 billion in highly-rated securities at an average price of $101.85 and with an average yield of 1.94% and a duration of approximately 2.08 years.

This is a lesser amount than we have invested in the previous two quarters because, as we have discussed with you, we invested early in 2011 to capture what we perceive to be good investment opportunities.

The $10 billion of purchases was composed of the following securities -- $1.6 billion in U.S.

Treasury securities; $3.8 billion in agency mortgage-backed securities; and $3.2 billion in asset-backed securities, including about $1 billion of foreign RMBS which were mostly UK, and the remaining $2.2 billion were invested in US securities backed by credit card receivables, student loans, and floating-rate auto receivables.

The remainder was invested in smaller amounts in various miscellaneous assets classes.

The aggregate net unrealized after-tax loss on our available for sale and held to maturity portfolios as of September 30, 2011 was $259 million, a deterioration of $165 million from June 30, 2011 and an improvement of about $245 million from December 31, 2010.

The deterioration of the net unrealized after-tax position compared to June 30, 2011 was due primarily to a modest widening of spreads partially offset by lower interest rates.

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

In this quarter's investment portfolio presentation, you will note that, on Page 5, we added an additional column to capture the impact on treasury and agency securities that were downgraded by S&P in August.

Excluding this column, the additional downgrades are primarily in non-US RMBS.

The effect on our investment portfolio was not meaningful and affected securities are performing well.

As of September 30, 2011, our portfolio was 89% triple or double-A rated.

The duration of the investment portfolio was 1.09 years, down from 1.33 years at June 30, 2011, due to the sale of longer-dated fixed-rate securities, purchase of floating-rate securities and an overall lower level of interest rates.

The duration gap of the entire balance sheet was 0.9 years -- I'm sorry, 0.09 years, down from 0.28 years at June 30, 2011, due primarily to the previously mentioned shorter portfolio duration.

We're often asked about the potential impact on State Street of the uncertainty in the Euro zone.

We do not own any sovereign debt from the peripheral countries of Greece, Spain, Portugal, Italy or Ireland in our investment portfolio.

In our RMBS book, we hold about $1.1 billion in securities from those peripheral countries, about $400 million from Italy, about $400 million from Spain, and about $100 million each from Ireland, Greece and Portugal.

All are performing well, all are prime mortgages and the mortgages backing the securities all have relatively low loan-to-value ratios.

On Page 11 of the investment portfolio presentation, we list all of our holdings and show the average rating as well as the asset types we hold.

Our primary non-US holdings are in British, Australian, German, Canadian and Netherlands securities, totaling 91% of the non-US investment portfolio.

I'll now review some of the assumptions we used 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 U.S.

Treasury securities and very highly-rated agency mortgage-backed and asset-backed securities.

As of September 30, 2011, 61% of our investment portfolio was invested in floating-rate securities and 39% in fixed-rate securities.

Excluding any impact from the unusually high level of deposits placed with us as a result of the recent market disruption and given third-quarter performance and our expectations for the fourth quarter, we still expect our net interest margin to average near the lower end of the 160 to 165 basis point range in 2011.

Our assumptions for 2011 are based on several factors.

First, the ECB did not raise rates another 25 basis points and it also appears that the Bank of England may not raise rates another 25 basis points by the end of the year, both assumptions that we expected last quarter.

The ECB and the Bank of England holding rates at their current levels will reduce net interest income by about $35 million to $40 million annually, all else equal.

The Federal Reserve has indicated that it keeps -- intends to keep the overnight fed funds rate at 25 basis points into 2013 and that the yield curve retains its current steepness.

While it is a bit premature to provide an outlook for net interest margin in 2012, given the persistent low rate environment, we expect it to decline slowly, much as it is expected to do for the rest of this year.

You'll recall that our operating basis net interest margin in 2010 was 168 basis points, and we're expecting it to be in the lower end of the 160 to 165 basis point range in 2011, excluding the impact of the unusually high level of client deposits in the third quarter.

Excluding the impact of the retention of those deposits and all else equal, we expect the 2012 net interest margin to behave similarly to that of 2011.

Another key assumption affecting our outlook for revenue in 2011, we continue to expect the S&P 500 average about 1265 in 2011, up about 11% from 1140, the average in 2010.

Finally, I'll briefly review our capital ratios.

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

As of September 30, 2011, our total capital ratio stood at 19.6%, our Tier 1 leverage ratio stood at 7.8%, our tier 1 capital ratio stood at 18.0%, our tangible common equity ratio was 7.1% and our Tier 1 common ratio was 16%.

Based on our understanding of the Basel III regulations and the information published by the BASEL Committee and the Federal Reserve, we estimate our capital ratios under BASEL III as of September 30, 2011 to be our total capital ratio 14.5%, our Tier 1 leverage ratio to be 6.0%, our tier 1 capital ratio to be 12.8%, and our Tier 1 common ratio to be 11.7%.

So in conclusion, the economic outlook has continued to deteriorate over 2011.

Pressure from economic uncertainty, coupled with the headwinds created from the low interest rate environment and with expected increased compliance costs, has led us to focus intensely on growing revenue, executing our business operations and Information Technology Transformation Program, as well as controlling expenses in general.

We believe we have done a good job on all of these three measures in the first nine months of 2011.

Now, I'll turn the call back over to Jay.

Thanks Ed.

Since the global economy is recovering much more slowly than economists originally predicted, we're being increasingly vigilant about expense control.

Given the difficult environment, I'm pleased that we achieved positive operating leverage compared to the second quarter of 2011, a testament to our attention to controlling expenses.

The momentum of new business wins across all geographies in both Servicing and Asset Management remains strong.

As an expense pressures intensify for our clients, they are increasingly looking to outsource more services to us.

At the same time, clients are facing regulatory pressures and look to us for additional products and services to support them.

We are continuing to invest in new products which address these client needs while continuing to differentiate us from our competitors.

I'm pleased with the progress we've made in executing our business operations and Information Technology Transformation Program.

As we reported this morning, the pace of the program is (technical difficulty) ahead of forecast.

Our capital position remains strong, positioning us well for new capital standards while maintaining flexibility if the right acquisition presents itself and enabling us to increase our returns to shareholders.

Overall, I believe that it is the steady execution of our strategy that has enabled us to perform well during the first nine months of this challenging year for the markets and for our industry.

Before we begin taking questions, I'd like to remind you once more that the purpose of today's call is to discuss our third-quarter earnings.

We ask that you please limit your questions to topics involving our financial and operational results.

With that, now I'd like to open up the call to questions.

(Operator Instructions).

Glenn Schorr, Nomura.

So quickie -- I heard all your comments on the new business front which is still great considering the backdrop.

On the deposit front, can you give us a two parter -- one, where are the deposits coming from, and two, what do you do with them?

In other words, what kind of duration are you thinking in your mind with these deposits and what do you do on the asset side?

It's a conundrum, but --

Yes Glenn, it's Ed.

In the third quarter, our average deposits were, in our estimation, about $15 billion over what the normal level is.

They were around $33 billion as opposed to $18 billion, which is more normal.

Most of this is DDA; most of it is coming from US customers.

We have consistently been treating excess deposits around quarter end for the last several years as transitory deposits.

As a result, we leave them at the Fed or the ECB or the Swiss National Bank as the case may be.

In this quarter, they were left at the Fed, and we are earned 25 basis points on them.

Got it.

So does that mean it's a quarter-end phenomena and some -- they come in and out?

Yes.

That's been the case throughout the last couple of years.

Glenn, if you recall going back to a couple of years ago, year-end '08, I think we had $70 billion.

That's a point estimate, not an average.

I gave you the average in my earlier numbers.

But yes, they ebb and flow, and we treat them as though they're going to be not here for a long period of time.

Interesting.

So given just the economic unrest in Europe, I've been under the assumption that we'd see some deposit growth there as well as some new business flow.

It looks like you got a little bit on the new business flow side, but you're not really seeing a heck of a lot of flight to quality on the deposit side?

In this quarter, it happened to be more US.

In prior quarters, other quarters, it's been weighted more towards Europe.

It just depends on the way things go in the quarter.

I think, on the new business side, we do see a flight to quality with regard to our pretty consistent performance around acquiring new assets and new customers.

On that front, is the pre [pipe-pipe] conversations picking up, given everything that's going on?

I know, if I was an administrator, I'd probably be looking around right now.

Is your question is pipeline visibility?

Yes.

It's I'd say consistently strong.

I wouldn't say necessarily up or down, but we continue to have a broad range of conversations, everywhere from traditional investment managers to I continue to report any alternative asset classes.

A lot of that business is previously insourced with a private equity real estate firm being outsourced.

So I would say that the other side of this depressed environment is that it is good for business because our customers, whether they're pension funds, investment managers, or alternative managers, are looking for some relief around either expense, responding to new regulatory reporting, so the core business is good.

I can see that.

Last one --.

Glenn, we're going to have to move along because this call went a little long, so I want to give some others a chance.

Sorry to interrupt you.

No worries, go for it.

Ken Usdin, Jefferies.

Thanks, good morning.

Ed, could you just take us back through the margin comments?

I think I understood you as saying that the 2011 margin was excluding the weight from the liquid deposits, so I guess my questions are can you just confirm that, and what it means for the fourth-quarter margin as a starter?

Yes, I gave you both numbers, with and without.

The 144 basis point number included the excess deposits, the $33 billion average number, if you will.

If we take those out for the third quarter, it was 157.

I know what it was, but I'm saying your guidance for the low end of 160 to 165 is based on using that 157, not the 144.

That's correct.

Okay.

So the question is, I would presume that those deposits are going to be pretty sticky even though you consider them transitory.

So can you give us a thought on just presuming that's now kind of a run rate for now, what gives you the confidence that the margin can only drip given that, in the last few quarters, you've reinvested $25 billion at around a 1% reinvestment yield with the portfolio still in the 2.5%-ish type of range?

We're not assuming that those deposits stay.

That's a conservative assumption.

We are not taking them and putting them into the portfolio to any long duration or anything like that.

So we continue to have them at the Fed.

Just as a point of information through this call, through as of last night, the deposit level has stayed a little bit elevated.

So that's just a point of information for you the first couple of weeks of this quarter.

In terms of why the margin won't decline more precipitously, to your question, it's mainly because of the effect of us being 61% in floaters, and that's principally driven in Europe.

(technical difficulty) getting the benefit of (technical difficulty) end of the (technical difficulty) curve being somewhat elevated.

So while the US-based (technical difficulty) reinvest, in the lower rate environment we're getting an uptick in Europe which will modify the decline in US related margin.

So that's why we feel pretty comfortable with what we're saying about the margin overall declining slowly.

This last thing, just can you give us some clarity on, if the ECB cuts from here, what's the risk to the margin from the ECB -- if the ECB were to cut?

If the ECB were to cut, and all else equal in terms of the -- we're talking about roughly a $20 billion non-dollar investment portfolio, that's worth about $20 million in NIR annually per 25 basis point of (technical difficulty).

Got it.

Thanks very much.

That's not something that really will impact 2011; that's more a 2012 comment.

Of course, if it happened in November or December, the run rate on an annual basis is helpful just to understand that.

Great.

Thanks.

Brian Bedell, ISI Group.

Good morning folks.

Just to clarify once again on the 2012 NIM outlook, when you said behaved similarly to 2011 and we look at get sort of 1Q '11 starting out at about 166 on a core basis and drifting down to the 157 area, basically are you saying that, under the scenarios that you outlined, we should expect around, say, roughly 10 basis points of NIM pressure from current levels through, say, the end of 2012?

A little early to give precise guidance, but our comments were intended to guide you that way.

I don't want to comment on whether it's 10 points or 12 points at this point.

We'll give some guidance on the fourth-quarter call more specifically, but the slow decline that has been evidenced over the last year is what we're trying to signal.

That's good.

Great.

Then just on the cost save program, the 400 basis points operating margin, what operating margin are using for 2010?

I know there's a lot of different ways to calculate that, but what's your actual number that you're basing it from?

We're using our operating basis pretax margin of 28.8%.

Got it.

Then just a couple of things on the quarter.

The core servicing fees were very good.

Was there any negative impact from the dollar strengthening?

Immaterial.

On average, for the quarter, the dollar strengthened 2% against the euro and 1% against sterling, so no material effect.

Great.

Then on the securities processing costs, they were a little -- I guess I would -- it would imply they were $15 million higher in the third quarter versus second, based on your comment of that being responsible for the delta?

Do you view that as an elevated level or do you think you can improve upon that?

I think the securities processing costs, as we talked about over time, can move around a bit.

They depend quarter-to-quarter on exactly what happens.

So I wouldn't say that's a run rate by any means.

We've had some quarters this year and in recent years where they've been actually pretty low, so a $10 million or a $15 million increase in a quarter is not a big delta there.

Then just lastly, on the $13 million of non-recurring comp, and I think you said about $5 million in some other buckets.

Should we be adding that to the $85 million restructuring cost number to get at a more sort of nonoperational run rate?

We're trying -- that's money we're spending in order to execute on our business operations and IT Transformation Program.

We're trying to highlight that as being something that's in the run rate that probably goes away once we're done executing.

That's part of that $15 million to $20 million that you've been talking about?

Right, exactly.

We need to move to the next question.

Robert Lee, KBW.

Good morning guys.

I appreciate the additional color on the new business wins; I think it's very helpful.

I guess since we're always going to ask for more, could we possibly get some additional insight on the $200-odd billion, $245 billion of wins, kind of by -- a breakdown by alternative, pension, fund, just -- and any color around kind of just in a general sense typically what kind of maybe a typical kind of revenue mix would be?

You know, is $5 billion of alternative new wins kind of the equivalent of like $100 billion of pension or any kind of metrics along those lines?

Yes, know, it's hard.

The mix is varied.

That's the good news, which is there is no one single engine firing.

I think we're firing globally across asset classes.

You saw a big European component this quarter which I think is encouraging and probably indicative of the times.

The alternative continue to be a strong theme throughout this.

I would say the mix of business, the preponderance of it is multi-product kind of complex deals.

The other thing I would add is -- I didn't mention it specifically, but you may remember Scottish Widows was an early outsourcing deal that we had in the UK.

They've recently concluded to re-up that deal and add a number of additional assets.

So some of the context is customers concentrating more of their activity with us.

But it's really hard to give you two or three summary points.

It's quite varied in the number of [eggs], which again I think is the strength in it.

Great, I appreciate that.

I'm just curious.

I mean of course M&A has been a consistent part of how you think of capital.

Just curious, with everything going on in Europe, are you starting to finally see that activity pick up?

It kind of felt like there was kind of a lot of expectations but maybe not a lot actually going on and you're actually starting to see people say, okay, now I need to do something, and conversation -- pace of conversations is accelerating?

I would say without being specific it feels to me like we're getting closer to that time.

I think if you -- we're all following the plight of the European banks and their need to either recapitalize or strengthen capital levels.

I think that most of that has been more discussion and less action.

But I think, as that moves to action, it's likely that we'll see opportunities.

I assume your reference i9s to the custody books of business in Europe?

Yes.

So it just feels like we're moving in a positive direction.

On a smaller scale, I mentioned the Complementa acquisition as well as the Pulse Trading.

To me those in a different sort of way represent some of the pressures that the world is feeling.

Small companies that don't -- no longer have the ability to invest or leverage from a revenue side their product.

In both of those cases, I think they're small but nice pickups which add great enhancement our product mix and through which we should be able to leverage pretty materially the revenue side.

Great.

One last quick question for Ed.

I'm just curious, a little bit more of a near-term modeling question, but of your $80 million run rate, I mean any sense of how much of that is kind of in the numbers as of Q3?

On the savings?

Yes.

Q3 numbers have about $18 million in there.

So there's a little bit of a back-end loading I guess in Q4 from the --

A little more in Q4 in terms of run rate, yes.

Great.

Thanks for taking my questions.

Alex Blostein, Goldman Sachs.

Just to follow-up on expenses, if we just kind of think about it maybe a little bit differently, so you guys are currently running with about $1.7 billion per quarter in expenses.

Ed, can you give us a sense how much of that is sort of fixed versus variable expenses?

Then can we just assume that the bucket that's sort of fixed will just subtract the run rate numbers and savings that you guys are giving out (inaudible) in 2012, the $170 million number?

It obviously depends over what period of time you're trying to define fixed and variable expenses, Alex.

So in terms of --

Just like on a year-to-date basis.

Yes, on a year basis, I think it's -- what you're proposing is fair in terms of taking the salary and benefit savings out of that number.

Again, we have to anchor it all back to 2010 as our starting point.

The business has grown since 2010.

But I think, if you look at over a year and call it the salary component and the related benefit costs variable, I think that's a fair characterization of it.

Did that answer your question?

Yes.

So of the $1.7 billion on total expenses, you would I guess think of salary and benefits as 100% variable?

Over a year within the context of the business ops and IT program?

Yes.

We're saying that most of the savings, more than 100% of the savings for the program will be coming out of that line over the life of the program.

Right, understood.

Then on capital deployment, I now I guess obviously the situation with the regulators (inaudible) fluid, but can you talk about your preference looking out into next year?

Dividend raises from current levels are $0.18 a quarter versus buybacks.

Then if you could also address the acquisitions in Europe more from the perspective of potential size of how big or small you guys would be looking for?

Sure, let me start that one Alex.

Just to reframe the parameters here, we'll go into, at the end of this year, the next annual stress test.

We'll get parameters in December and then deliver off our own self-evaluation stress test in January and should hear by the end of the first quarter from the regulators how they viewed our stress test and capital available for deployment.

With regard to preferences and priorities, I'd say it's always a point-in-time assessment, but we would like to get more capital back to shareholders, so buybacks are a bit of a priority for us.

I'd also say that, from an acquisition standpoint, the other part of your question, if you looked at the landscape of what's possible and tried to size those acquisitions, very broadly half $0.5 billion to $2 billion is kind of a broad range of if we're talking about -- I suspect your question is pointed at custody roll-up acquisitions.

They'd be in that broad framework of $0.5 billion to $2 billion.

Answer your question?

Yes.

I Appreciate it.

Thanks.

Howard Chen, Credit Suisse.

Just to follow-up on that last point on capital planning because you make some fairly constructive commentary within the release, just given the strength of the underlying business and the stock price, just hoping to get your thoughts on maybe taking up the payout ratio.

We see -- I know you can only speak for yourselves but we're seeing other firms not up nearly as much probability as you all, but seemingly taking up kind of their payout ratio or capital return in the back half of the year.

The back half of this year?

Like right now.

Yes, I think, if I understand your question, the Fed guidance is annual guidance, and so we get our next shot at having that discussion at the end of this year leading into next year.

The payout ratio, with regard to capital, I think was pretty consistent among the banks.

We think, based on the strength of our capital, the relative risk of our business profile, that we should be in pretty good shape going into this year's stress test, and will argue for more flexibility with regard to returning capital to shareholders.

I think the factors that -- so those are the factors unique to us.

I think the other factor would be how the regulator views the broad environment and what criteria they put forward against which we'll run our stress test, but we feel pretty good going in.

Great.

Then just another follow-up on the NIM and sensitivities, I realize the environment is fluid.

You mentioned the sensitivity to an ECB cut.

But what about potential sensitivity of things like the benefits of what we see into LIBOR and [Twist] in the States?

Is there any sort of potential offset there?

We haven't seen much of an effect on us, and specifically our mortgage-backed element of the portfolio, because of Twist.

It looks like spreads are about 10 basis points tighter when all is said and done so far based on Twist, so not a huge effect.

I think with three-month LIBOR widening out a bit and Fed fund staying where it is, there's a little bit of potential upside on securities lending, for example, if that were to maintain itself and volumes were to stay where they are.

I mean, but overall, our interest rate risk position is fairly low with where we are with floaters, the mixture of floaters and fixed, and our shock and ramp tests are pretty low, a little bit bigger than they were in June, given that we have a larger balance sheet, but overall we're in a pretty low interest rate risk position so the sensitivity would not be that great.

Okay.

Then finally, thanks for all the details on the long-term efficiency program in the slide deck.

Just realizing this is an invest to ultimately save initiative, could you provide a bit more details on maybe sort of the gross spending and net saving by year or quarter?

I think that would be helpful if possible.

Let me just -- While Ed warms that question up, Howard I just remind you that I think it's often lost because of the focus on expense saves during the time, but I believe this is going to transform this company with regard to how it delivers new products to the market and how it responds to how it picks up the pace of responding to industry needs.

So I don't want you to lose sight of that, but with that, Ed, do you want to comment on the --

Sure.

Howard, if you look at Page 7, what we're trying to present there is, by year, by component of the program, what we believe the net benefits to be before nonrecurring project-related expenses.

So we break out the nonrecurring in order to show those expenses that we're incurring in order to execute the program but that we think will drive to 0 as you see out in 2015, and their cost basically incurred to execute on the program.

Everything that we are spending that we believe will be an offset to our savings, i.e.

it's a permanent increase in expenses in order to execute the program or for whatever reason, relative to this program, is included in the net benefit numbers in the two lines, Business Operations, Transformation and Information Technology Transformation.

The only other element of cost other than the non-recurring that we're breaking out are the expected restructuring charges which I've already talked about.

Okay.

Great, thanks Ed.

Point well taken, Jay.

Thanks for taking my questions.

Mike Mayo, CLSA.

Can you quantify the pipeline.

I guess you talked about installed business, but your total pipeline, where is that now and how does that compare to the start of last quarter?

I don't know that we give necessarily pipeline visibility, but if you go back three quarters, we've been running, as far as committed business, in the $250 billion to $350 billion a quarter.

I think last year probably closer to $350 billion down to $250 billion.

So if I look at the visible pipeline, that doesn't seem like an unreasonable rate going forward as far as translating prospects to clients.

So it's party similar to what it's been.

Yes, it's very steady.

Your comment about consolidation in Europe, so you're still looking to do some deals in Europe perhaps?

I think the screen that we put over that is the strategic screen.

We make these acquisitions because we think it positions us for future growth.

Then I think as, given the environment, we'll be ever more discerning about price paid.

So if it falls into the strategic sweet spot and it meets our hurdle rate for pricing, then we are a buyer.

What about the trade-off between repurchasing more of your own stock versus acquisitions?

Where is that tipping point?

When your stock is really low, maybe it makes sense to buy more stock.

If the stock goes up to $50, maybe it makes sense to do more deals.

How do you think about that?

Yes, we think about it as a point-in-time assessment.

We're constantly looking at acquisitions where we're trying to measure the flexibility that will get through the stress test as far as our ability to purchase shares.

I think we, at a point in time, you look at stock price and make that determination.

But we're obviously very focused on that.

Then separately, if you -- you get this question all the time -- if you take all the expense savings that you expect and add it to the pretax margin, your margin could be even higher than I guess the 33%.

What you're saying, you're saying 400 basis points higher than what it was in 2010.

That was 29%.

Add 400 basis points, you get to 33%.

So I guess it could be even higher.

So I think just looking at this, it implies that you're going to reinvest one-third of the savings and let the other two-thirds him the bottom line?

Am I reading that correct?

No.

I think what we're saying is that 400 basis points of margin lift, pretax margin lift from 10 to 15, is a translation of that $600 million on a direct basis.

So we're saying, all else equal, which is we are in this constrained environment from the standpoint of equity markets, interest rates and the like, but all things being equal, that $600 million translates into 400 basis points of margin lift.

So you're assuming it all hits the bottom line then because --?

Yes.

So I guess you're, okay, maybe assuming some revenue loss there, or I guess you don't want to give forecasts so many years out.

But how do you think about the revenues out there, because that goes into the assumption?

Yes, I think the revenues, if you break down the revenue equation, I think that we have demonstrated that we've performed pretty well in the core line items.

We would expect that to continue and over time to get some help from markets and interest rates and cross-border investing and spreads which help our securities lending and other businesses.

So we would project that we can continue to run at this rate from a revenue standpoint with hopefully some upside.

Then last question.

You said, of your top 100 servicing clients, there's -- 75% of them have some portion of their assets with SSGA.

Can you give the dollar amount of the overlap in revenues, those assets that are managed by SSGA for 75% of the top 100 servicing clients.

What's the dollar amount of the revenues of that business?

I wouldn't have that off the top of my head, but what I would say is that you can assume that those top 100 customers are some of the top 100 financial institutions across the globe, so the SSGA comment is that not only is there cross-sell, but I think when you look at SSGA's business and its upside, a lot of it's above cross-sell.

So once you have a relationship with a big financial institution and you get your foot in the door, that's generally the best prospect for the next asset class to sell.

Thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning.

Jay, you mentioned that you expect to hear about the SIFI buffer by the end of the year.

Are you guys expecting to be a global SIFI or just a national SIFI?

That's a -- the expectation for the end of the year is largely tied to the Dodd-Frank legislated SIFI, systemically important financial institution.

Further, that would be we think designation which would largely have tier 1 capital in the 7% to 9.5% is kind of broadly thought to be the range.

I think the global SIFI, which is -- my understanding doesn't add additional capital but puts you into a different [call] on a global scale, much less visibility on -- other than the broad considerations of size, complexity, interconnectedness and the like.

So we really don't have any visibility on what the thinking is of trust banks in that group.

Okay.

Assuming you're just a national SIFI, what are you guys comfortable with in terms of the buffer?

What do you think is appropriate for you folks?

You just gave us a range which is commonly talked about for the bigger banks.

Where do you think you guys fit in?

I wouldn't comment on that.

I think that you've got to look at -- and you can do this yourself -- you look at the above 50 billion financial institutions or banks in this country and look at the range of types and complexity and the regulators are going to slot us in some way there, I'd be guessing, to put us in a certain bucket.

On the expense savings that you guys talked about, Ed, you detailed in great detail what you expect, the $600 million.

From a static basis using your year-end '10 non-interest expense number of just around $6.8 billion, do you actually think your numbers would decline when we get to the final number or is it just going to reduce the rate of growth?

When we get to the final number, hopefully what we've done is -- has been to grow the Company in the interim and take the $600 million of expense out.

So I would expect that the overall level of expense in 2015 will be higher than what it was in 2010.

Then finally, just coming back to your net interest margin comment about the operating margin in '10 being 168 basis points, then if you exclude out those extra deposits, you're going to be in this range of 160 to 165 for this year at the lower end.

If we keep those deposits in, as you pointed out last night that are still there, where would you think that margin would be if those deposits end up staying for most of the quarter?

Probably in the range of 5 to 8 basis points lower for the full year.

Good, thank you.

I think we need to wrap it up now Christie.

That concludes our question-and-answer session for today.

I hand the program back over to management for any further comments or closing remarks.

We would just say thank you and look forward to speaking with you at the end of the fourth quarter.

This concludes today's conference call.

You may now disconnect.