道富銀行 (STT) 2012 Q4 法說會逐字稿

Good morning, and welcome to State Street Corporation's fourth-quarter and full-year 2012 earnings conference call and webcast.

Today's discussion is being broadcast live on State Street's website, at www.State Street.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.

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) In the question-and-answer session, the Company has requested that you limit your questions to no more than two, and return to the queue if you have a follow-up question.

This will permit multiple participants with questions for the management team to ask them on the call.

Now I would like to introduce Valerie Haertel, Senior Vice President of Investor Relations at State Street.

Thank you, Christy, and good morning, everyone.

Welcome to our fourth-quarter and full-year 2012 earnings conference call.

Our fourth-quarter and full-year 2012 earnings material include a presentation that Jay Hooley, our Chairman, President and Chief Executive Officer; and Ed Resch, our Chief Financial Officer, will refer to in their remarks.

Reconciliations of non-GAAP or operating basis measures to GAAP measures referenced on this webcast, as well as other materials, can be found in the Investor Relations section of our website.

Before Jay and Ed begin their discussion of our results, 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, and as a result of various important factors, including those discussions in State Street's 2011 Annual Report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review those filings, including the section on risk factors concerning any forward-looking statements we make today.

Any such forward-looking statements speak only as of today, January 18, 2013.

The Corporation does not intend to revise such forward-looking statements to reflect events or changes after today.

Now I would like to turn the call over to our Chairman, President, and CEO, Jay Hooley.

Thanks, Valerie, and good morning, everyone.

As Valerie noted, our remarks will follow the financial highlights slide presentation that we issued with our earnings press release this morning.

And this morning, Ed and I will focus our remarks on the fourth quarter, and make select comments regarding our full-year 2012 financial results.

Then we'll share some initial observations about our expectations for 2013.

While 2012 was another challenging year for the financial services industry due to the global economic backdrop, and increased regulatory requirements, we remain committed to our strategic and operational priorities.

In the fourth quarter, we delivered on those priorities, driving new revenue growth, while leveraging the scale of our core business and returning capital to shareholders.

And as we begin 2013, I'm confident that we'll continue to deliver on these priorities this year.

I'm going to make a few comments on our performance, which you can follow on the slide deck.

And I'll begin on page 3.

On an operating basis, fourth-quarter 2012 earnings per share increased 12% to $1.11 from the third quarter, and 19% from the fourth quarter of 2011.

Revenue growth, coupled with prudent expense control, including the savings realized from our business operations and IT transformation program, produced positive operating leverage on a sequential quarter, year-ago quarter, and full-year basis.

This morning, we announced additional actions we have taken to lower our expenses going into 2013 to align with our business outlook for the year.

We announced a reduction of approximately 630 positions, or about 2% of our work force.

While decisions regarding our people are among the most difficult we make, we fully recognize the need to adjust our work force in locations around the globe, in response to a challenging and changing revenue environment.

These reductions underscore our continuing efforts to create a leaner, more efficient, and more profitable enterprise.

Now I'd like to make a few comments regarding the business environment, equity markets, and clients activity.

The global equity markets rose during the fourth quarter with the EAFE daily average increasing 5.2% and the S&P 500 daily average increasing 1.2%, those as opposed to the third quarter.

While the economic situation in Europe appears to be stabilizing, concerns around the US fiscal cliff kept many investors on the sidelines in the fourth quarter.

But during the quarter, equity markets improved, but clients remained conservative until the backend of the fourth quarter, when we saw noticeable re-risking by some of our clients, as they shifted allocations from more conservative fixed-income investments to domestic and global equities.

As we begin 2013, client re-risking has continued, as you've seen from recent data, market data, about equity flows.

In spite of what feels like a positive start to the year in client risk appetite, we remain conservative in our expectations for the market, and cautious regarding investors' willingness to take on additional risk.

If I turn to our revenue and new business results in the fourth quarter, we continue to generate solid core fee revenue and experience momentum from significant business wins.

Total operating basis revenue increased 3% to $2.46 billion from the third quarter of 2012, and 7% from the fourth quarter of 2011.

Our fourth-quarter results include the acquired Goldman Sachs Administration Services business that we closed in October 2012.

Importantly, we experienced some early cross-sell success, as we introduced our new clients to an expanded range of State Street services.

Core fee revenue, comprised of asset servicing and asset management fees, increased 4% from the third quarter to $1.4 billion.

Our fourth-quarter results reflect continued strong demand for our products and solutions across our global client base.

The fourth quarter was the strongest quarter of the year for new business and asset servicing.

New asset servicing mandates were $649 billion, split roughly 86% from the US and 14% from outside the US.

And of that $649 billion, $143 billion was installed prior to December 31, 2012, and $506 billion is expected to be installed in 2013.

Also included in our new assets to be serviced are 92 new alternative asset servicing mandates.

If I turn to our asset management business, State Street Global Advisors had a strong quarter and year, due to improved global equity markets, strong long-term flows into higher yielding strategies, and disciplined expense controls.

Net new assets to be managed totaled $24 billion for the quarter, and that excludes net outflows and short-term cash collateral related to securities lending.

Of the $24 billion, $13 billion went into ETFs, with the remainder flowing into the institutional channel, including passive equity strategies and fixed income, as well as some money market assets.

Within ETF product line, asset classes gaining new inflows were the SPDR S&P 500 Fund, the Gold Fund, and the high-yield fixed-income fund.

Of note is that year-to-date, ETF assets under management is at a record level of $340 billion, reflecting a 24% increase year-over-year.

In both asset servicing and asset management, our pipelines continue to be strong and well-diversified.

If I move you to slide 4. Market-driven revenue remains under pressure from subdued capital market activity, low levels of volatility, and low interest rates.

In trading services, foreign exchange trading revenue for the fourth quarter increased, compared to the third quarter, due to higher direct FX volumes, while volatility continues to be challenging.

Securities finance revenue declined in the fourth quarter as compared to the third quarter, as a result of spread compression between the fed funds to three-months LIBOR rate, as well as lower volume.

Our net interest margin on an operating basis declined to 136 basis points in the third quarter, due to persistent low interest rate environments and the continued high levels of excess deposits.

Now if I turn to expenses.

So, we continue to demonstrate good control over our expenses while continuing to invest selectively in the business to fuel future growth.

While fourth-quarter operating basis expenses increased 3%, we achieved positive operating leverage.

We're pleased with these expense reductions related to -- generated to date through our business operations and information technology transformation program.

And in the fourth quarter, we were able to accelerate some expense savings from the program, achieving $112 million in incremental pre-tax savings in 2012, and $198 million of cumulative expense savings through the end of 2012.

Our transformation program remains on track to deliver the expected savings in 2013 and through the end of 2014.

I'm also pleased that we achieved a comp to revenue ratio of 39.4% for the full year, reflecting our emphasis on strong expense control.

Let me now move you to slide 5. Our financial strength and disciplined approach to capital management have enabled us to maintain consistently strong capital ratios under Basel I and the proposed Basel III standards, based on our understanding of the proposed rules.

In early January, we submitted our 2013 CCAR plan for the Federal Reserve, which included a capital distribution program of dividends and share purchases, that we believe is consistent with our strong capital positions and earnings capacity.

The amount and form of our capital distributions is contingent upon the Federal Reserve not objecting to our request.

And we expect to receive the results of their review in mid to late March.

Distributing capital to our shareholders through common stock purchase and dividend programs remains a top priority, as we continue to be very cautious in our approach to acquisitions.

In the fourth quarter, we purchased approximately 11 million shares of our common stock for $480 million, and we declared a $0.24 per share common dividend.

And as of December 31, there was approximately $360 million remaining available for purchase through March 31, 2013 under our $1.8 billion authorization.

So, in summary, we're focused on growing revenue, carefully controlling expenses, and creating value for our clients and shareholders him.

Now I'd like to turn the call over to Ed to take you through the financials in a little more detail.

Ed?

Thank you Jay, and good morning, everyone.

I'll begin my comments on slide 8 of the earnings presentation, which shows a summary of operating basis fourth-quarter results.

My comments this morning will be based on our operating basis results as defined in today's earnings news release.

GAAP results are presented earlier in the presentation and in the release.

Revenue increased 3.2% from the third quarter to $2.5 billion and 7% from the fourth quarter of 2011.

Earnings per share demonstrated solid growth, up 12% from $0.99 in the third quarter, and up 19% from the fourth quarter of 2011.

Additionally, we generated positive operating leverage on sequential quarter, year-ago quarter, and full-year basis.

Return on equity of 10.3% increased from 9.6% in the third quarter of 2012.

We purchased $480 million of common stock during the fourth quarter at an average price of $43.99 per share, resulting in approximately 468 million average diluted shares outstanding during the quarter, a reduction of 12.5 million average shares in the sequential quarter comparison.

Slide 9 shows a summary of our full-year results.

Revenue for full-year 2012 increased 1.7%, primarily from net interest revenue, servicing and asset management fees, offset by lower trading revenues.

Our core asset servicing and asset management fees performed well in 2012 in a difficult economic environment, with servicing fees up 1% and management fees up 8% from 2011.

Both increases are due to improved equity markets as well as new business, partially offset by the impact of a stronger dollar.

2012 market-driven revenues included an approximate 10% increase in net interest revenue to $2.4 billion, due primarily to higher interest earning assets, partially offset by lower asset yields.

Our net interest margin for the year averaged 146 basis points compared to 152 basis points.

The year-over-year decline in our net interest margin was in large part driven by the $16 billion of average excess deposits in 2012, which was higher than we had originally projected at the beginning of last year, and higher than the $10 billion we averaged in 2011.

2012 trading services revenue declined 17% from 2011, due to continued weakness in foreign exchange revenues.

Foreign exchange revenues for the year decreased 25%, due to low volatility, partially offset by higher volumes.

Expenses were well-controlled in 2012, increasing 1.7% from 2011, slightly less than revenue growth, resulting in 3 basis points of positive operating leverage.

Incremental expense primarily reflects new business and regulatory requirements.

Earnings per share increased 5.9% to $3.95 for 2012.

And our ROE was 9.7%, slightly lower than 2011.

For full-year 2012, the Company purchased approximately 33 million shares of its common stock at a total cost of $1.4 billion.

Now let's turn to slide 10 to discuss fourth-quarter revenue drivers.

As you can see, we continue to demonstrate strength in our core business.

Servicing fees increased 4.5% to $1.2 billion on a sequential quarter basis, due to $24 million in revenue contributions from the acquired Goldman Sachs Administration Services business, net new business, and stronger global equity markets.

Compared to the fourth quarter of 2011, servicing fees increased 8.8%, due to the impact of a stronger global equity market, net new business, and acquisitions.

Investment management fees at SSGA were up 3.6% from the third quarter, due to higher performance fees and stronger global equity markets.

Compared to the year-ago quarter, investment management fees were up almost 29%, driven by stronger equity markets, net new business, and higher performance fees.

Performance fees in the fourth quarter were $8.2 million, up $4.3 million and $6.1 million from the third quarter and the year-ago quarter, respectively.

Money market fee waivers were approximately $5 million in the fourth quarter, flat compared to the third quarter, and down 60% versus the prior-year period.

Total trading services revenue, compared to the third quarter of 2012, increased 4.7%, driven by higher brokerage and other revenue, including transition management and foreign exchange revenue.

Foreign exchange revenue increased 2.6% from the third quarter, due primarily to higher direct foreign exchange trading, offset by lower volatility and a decline in indirect foreign exchange from the third quarter of 2012.

Our volumes in electronic foreign exchange trading increased in the fourth quarter on a sequential basis.

The increase in average daily volumes across all of our electronic FX platforms during the fourth quarter was about 5%.

In comparison, for the same period, the primary interbank foreign exchange platform vendor's electronic brokering system and Thomson Reuters reported an 8% and 12% decline, respectably, in the average foreign exchange daily volumes traded across their platforms.

Foreign exchange revenue decreased 21% when compared to the fourth quarter of 2011, primarily due to lower volatility, partially offset by higher volumes.

Securities finance revenue was $74 million, a decline of 19% and 18% from the third quarter of 2012 and the fourth quarter of 2011, respectably.

The decreases from both periods reflect lower spreads and volumes.

Securities on loan averaged $305 billion for the fourth quarter of 2012, a decrease of 5% from the third quarter and 10% from the fourth quarter of last year, due to lower overall demand.

Processing fees and other revenue has been adjusted in the fourth quarter and in all prior periods presented, to reflect a tax equivalent adjustment related to tax credits generated by tax advantaged investments, such as renewable energy and low income housing.

This adjustment enables management to compare revenue from all investments on a tax equivalized or pre-tax basis, similar to adjustments recorded to net interest revenue related to tax-exempt securities.

For your benefit, we have included a table in Addendum B of the earnings presentation, outlining the effected line items with and without the adjustment for the fourth quarter of 2012, as well as its effect on selected financial ratios.

The adjustments, which are $36 million for the fourth quarter and [$126 billion] for the year, are offset by an equivalent amount of income tax expense, and has no impact on our net income or earnings per share.

Processing fees and other revenue increased 37% from the third quarter of 2012, primarily due to a $12 million increase in revenue from joint ventures, which included a $7 million gain from the sale of an asset.

Additionally, the quarter included a $10 million gain from the sale of a Lehman-related assets.

Processing fees and other revenue increased 92% from the fourth quarter of 2011, primarily due to a $25 million negative fair value adjustment related to exiting the fixed income trading initiative in the fourth quarter of 2011, as well as an increase in revenue associated with tax advantaged investments.

Net interest revenue on a fully taxable equivalent basis declined 1.8% from the third quarter, primarily due to the lower yields on earning assets as a result of the persistent low interest rate environment.

As we have noted, higher-yielding fixed-rate securities in our investment portfolio are maturing or paying down, and being reinvested at lower rates, while floating-rate assets are resetting at market rates.

Our net interest margin was 136 basis points in the fourth quarter of 2012, compared to 144 basis points in the third quarter of 2012, and 140 basis points in the fourth quarter of 2011.

During the quarter, excess deposits remained elevated, averaging approximately $15 billion, a slight decrease from $16 million in the third quarter.

Turning to expenses on slide 11, you can see that overall expenses were well-controlled for the quarter.

Total expenses increased 3% compared to the third quarter and increased 4.8% from the year-ago quarter.

Included in expenses for the fourth quarter of 2012 is $13 million related to the acquisition of the Goldman Sachs Administration Services business that was closed on October 15th of 2012.

Compensation and employee benefits expenses were down slightly compared to the third quarter, despite the incremental compensation assumed with the Goldman transaction and the support of new business.

Compared to the fourth quarter of 2011, compensation employee benefits increased 4.9%, due to higher benefit and incentive compensation costs, merit increases granted earlier in the year, and acquisitions, partially offset by the savings realized from our business operations and IT transformation program.

In the fourth quarter, the compensation to revenue ratio was 37.2%.

Excluding the taxable equivalent adjustment for tax advantaged investments included in processing fees and other revenue, the compensation to revenue ratio was 37.7% for the quarter.

Compared to the third quarter of 2012 and the fourth quarter of 2011, information systems and communications expenses increased 10.9% and 20.0%, respectively.

The increases from both periods were primarily related to the planned transition of certain functions to service providers as part of the business operations and IT transformation program, as well as additional costs to support growth in the business.

These expenses are expected to continue to ramp up, with a slight increase over the fourth-quarter run rate into 2013, as we finalize the program implementation and transition to our service providers.

Business operations and IT transformation program continues to be on track.

Realization of expense savings accelerated during the fourth quarter, and we achieved $112 million in incremental pre-tax expense savings for full-year 2012, which is slightly ahead of our third-quarter guidance of $90 million to $100 million of expected savings for 2012.

In the fourth quarter, our nonrecurring expenses related to business operations and IT transformation program were approximately $36 million.

These nonrecurring expenses should trail off in 2013 and 2014 as we near completion of the program.

The cumulative expense savings through the end of 2012 were $198 million.

For 2013, we continue to anticipate achieving approximately $220 million in incremental pre-tax expense savings, resulting in approximately $418 million of cumulative savings.

For the entire program we expect to achieve, consistent with our initial forecast, cumulative pre-tax savings in the range of $575 million to $625 million by 2015, compared to year-end 2010, all else equal.

Now turning to transaction processing, these expenses were up about 5% from the third quarter, due to both higher market levels and volumes in the asset servicing business.

Lastly, other expenses increased approximately 5% from the third (technical difficulty) [quarter] of 2012, driven by higher legal and regulatory costs, partially offset by a one-time Lehman-related client recovery of $14 million.

Now I will turn to the balance sheet and investment portfolio highlights on slide 12.

As outlined in the top half of the slide, the key elements of our strategy remain unchanged.

Our investment portfolio, as of December 31, 2012, was $120 billion, an increase of $5 billion from September 30, 2012.

We have a solid credit profile, with 89% of our portfolio securities rated AAA or AA.

The duration of the investment portfolio was 1.7 years at December 31, 2012, an increase from 1.5 years at September 30, 2012.

As of December 31, 2012, 53% of our investment portfolio was invested in floating-rate securities and 47% in fixed-rate securities.

The aggregate net unrealized after-tax gain in our available-for-sale and held-to-maturity portfolios as of December 31, 2012 was $698 million, compared to a net unrealized after-tax gain of $577 million as of September 30, 2012.

The improvement in the quarter was due primarily to narrower spreads.

During the fourth quarter, we invested about $11 billion in primarily AA-rated securities at an average price of [$101.5], with an average yield of 1.75% and duration of 4.28 years.

Of the $11 billion, we invested $6.2 billion in agencies and agency debentures, and $3 billion in asset-backed securities, with the remaining investments spread among various asset classes.

The duration gap of the entire balance sheet at year-end was 0.36 years, up from 0.28 years at September 30, 2012.

The increase was primarily due to fixed-rate portfolio purchases.

Turning to capital, slide 13 has a summary of our strong capital position.

Our capital ratios are displayed on this slide.

As of December 31, 2012, our Tier 1 common ratio was 17.1%.

Our estimated pro forma Basel III Tier 1 common ratio under the Basel III NPRs, as we currently understand them, was 10.8%.

Also, as of December 31, 2012, the estimated pro forma Tier 1 common ratio under the Basel III NPRs, including estimated effects of scheduled run-off and anticipated reinvestment of the securities affected by the SSFA through January 1, 2015, would be 11.9%.

These estimates are subject to change based on several factors.

As you know, the Basel III rules are not yet filed, and certain of our models are still under review by the Federal Reserve.

As a reminder, in the third quarter of 2012, the Company issued fixed-rate perpetual preferred stock and it redeemed its floating-rate perpetual preferred stock to take advantage of favorable market conditions.

As a result, we declared and recorded two preferred dividend payments in the third quarter, and accordingly, did not record a dividend in the fourth quarter of 2012.

We expect to return to the normal pattern of declaring quarterly preferred dividends in the first quarter of 2013.

To summarize our fourth quarter, our strong performance was driven by solid core fee revenue growth and a continued focus on controlling expenses.

There were several one-time items totaling approximately $36 million on a pre-tax basis that favorably impacted our results, most of which I discussed when explaining sequential quarter changes.

Slide 14 outlines our outlook and assumptions for 2013.

Looking ahead to 2013, we expect a continued challenging market environment despite the recent rise in equity markets.

We're assuming, for planning purposes, for the S&P to increase 5% above 2012's daily average, and the EAFE to increase approximately 2% above the 2012 daily average.

With respect to net interest margin for 2013, we currently expect our average earning assets to grow in a range of 1% to 4%, and our operating basis net interest margin to be in the range of 130 to 140 basis points, assuming interest rate spreads and prepayment speeds remain at their current levels through 2013.

The impact of the expiration of the Transaction Account Guarantee program resulted in approximately $7 billion of deposits leaving our balance sheet since December 31, 2012.

Given the expiration of TAG, and absent any significant US debt ceiling impacts, we expect to invest the remaining customer deposits in either highly liquid money market type assets, including central bank deposits, or in investment portfolio assets, depending on our assessment of the deposit characteristics.

We expect to remain on track to deliver an additional pre-tax savings of approximately $220 million in 2013 from our business operations and IT transformation program.

And we remain focused on controlling expenses across the Company.

We expect the compensation-to-revenue ratio to continue to decline in 2013, as we realize incremental savings from our business operations and IT transformation program.

Our expectation is for a continued challenging operating environment in 2013.

In light of this uncertainty, we will not provide a specific compensation-to-revenue target for 2013.

We will continue to report the progress of our business operations and IT program each quarter.

I would like to remind you that, as in previous years, the first quarter of 2013 compensation and benefits expense will be higher, due to the effect of the accounting treatment of equity compensation for retirement-eligible employees and payroll taxes.

We expect the incremental amount attributed to equity compensation for retirement-eligible employees and payroll taxes in the first quarter of 2013 to be approximately $125 million, up from the $100 million incremental amount in Q1 2012 over Q1 2011.

To align our expense base to the challenging environment in 2013, particularly related to our market-driven revenues, we recorded acquisition and restructuring costs of $139 million, primarily related to a reduction in force of approximately 630 positions.

Most of the reduction in headcount will be completed by 2013, and we expect the payback period of about a year-and-a-half, due to the timing of employee departures.

The effective tax rate on an operating basis for full-year 2013 is expected to be generally consistent with the last two years in the range of 23% to 25%.

And finally, and importantly, we will continue to optimize our strong capital position, and return capital in the form of share purchases and dividends.

Now I'll turn the call back to Jay.

Thanks, Ed.

Let me briefly conclude our comments with three points.

One, in the fourth quarter, we delivered solid results in a very challenging economic environment, and demonstrated core business momentum.

We continue to invest in our business, expanding the range of solutions we're able to deliver to our clients, balancing this investment with aggressively controlling our costs.

And I remain confident in the secular trends that underpin the prospects for growth in this business, and I believe we have the right focus in the short-term to position us well for continued strong performance.

I'd like to say we appreciate our ongoing dialogue with shareholders, and look forward to continuing to update you on the progress of our Company.

And with that, I'd like to open the call to questions, Christy.

(Operator Instructions) Howard Chen.

Jay, you led your commentary noting the recent re-risking that you've seen across the business.

I realize we're probably early in that process, but can you help us size how much you believe that cumulatively maybe weighed on your servicing fees last year?

And how much you potentially have kind of recaptured so far with what you've seen?

Yes, I would say it's probably hard to size it, Howard, but I would just -- directionally, you know, we saw it at the back end of the fourth quarter, kind of into December, where there was a noticeable move of clients rotating from fixed income or lower risk assets into equities, and then as well as some cross-border assets.

Europe was a fair amount of that focus.

And then, you've seen -- as we've turned the corner into 2013, you've seen some industry stats with regard to equity flows.

That trend continues.

I think, you know, your question is really pointed towards that effect in the fourth quarter of 2012 fairly moderate.

Not a big factor, given where it fell in the quarter.

Great.

Thanks, Jay.

And then, separately, I wanted to clarify the expense commentary.

On the additional work force actions that you announced today, what do you anticipate the savings relating to those are?

And I wanted to confirm that that's incremental to the business ops and IT transformation program that you've all been working on for a few years now.

Thanks.

Yes, it is, Howard.

It is absolutely incremental.

The savings are in the range of $90 million annualized, so the payback is about 18 months on it.

And as I said, driven by largely the timing of the departure of the employees.

Okay, great.

So, just a quick follow-up on that, Ed.

If we put everything together, your rate and market outlook for the year, the acquisition that was done, I know you don't want to guide to a comp ratio, but how do we think about the puts and takes of overall expenses 2013 versus 2012?

Well, I mean, again, it's largely driven by the -- first of all, operating leverage is paramount, right?

So, our thinking coming into 2013 is we're driving toward a year where we have positive operating leverage.

Related to that, though, is the issue of how robust or not the market-driven revenues may or may not be in the year.

So, that will largely drive the expense performance, I would say.

But we're not planning on robust market-driven revenues, as I hope I've noted in my comments.

So, our expectation is that we'll be able to drive -- our plan is to drive positive operating leverage notwithstanding that.

Okay?

Now there are puts and takes.

We expect to achieve $220 million on the ops and IT.

We expect to achieve some benefit, as I said, on the reduction in force.

But I'm not in a position to give you a number for the full year on expense growth overall, Howard.

Understood.

Thanks so much.

Ken Usdin.

Ed, I was wondering if you could just kind of walk us through the changes in some of the tax stuff and where it's located, relative to the improvement on the forward tax rate that you're expecting?

How does that all net out, versus just kind of a re-showing and restating?

Was anything incremental?

Or is this just a logical restatement or showing it differently?

Well, there's a couple of things, I think, to your question, Ken.

One, in terms of the way in which we're presenting the tax advantaged investments, we think that's a more meaningful presentation.

So we're just presenting them similarly to how we present municipal securities, i.e., grossing them up to present them on a pre-tax basis.

Okay?

So, the effect there is for the year to increase the processing fee and other line by $126 million, okay, and their related impacts to the tax line.

So, no net effect.

In terms of the tax rate for the year and moving forward, we expect 2013 to be broadly similar in terms of the effective rate to 2012.

Okay?

That is driven by an assumption of relatively the same mix.

And if the market opportunities present themselves, an increase in tax advantaged investment activity during 2013.

Right.

And so the 24%, 26% -- the 23%, 25% guidance, that was definitely lower than you had been thinking about previously, though?

And -- but part of that's presentation and part of that's what you're investing in differently?

I'm sorry, Ken, can you repeat the beginning part of that question?

I'm just trying to understand the tax rate of 23% to 25% going forward is definitely lower than you had expected it previously.

And how much of that is just the presentation change versus any incremental investment that you're making that affect it incrementally?

Yes, I mean, if there's an incremental effect in 2013, it's because of an expected increase -- again, assuming the opportunities are presented to avail ourselves of more tax advantaged investment opportunities.

Okay, got it, got it.

All right.

And then the second question, I just wanted to come back on the net interest margin outlook, and understanding, though, that the range that you gave is a little broader, but it's certainly in line with how you've been talking about it versus a full-year 2012.

What I wanted to try to understand is at what point do we get to a -- even and all things equal on rates, how close --- how much closer are we to the bottoming of the margin?

So on full-year, a full-year would presume that you're still exiting '13 lower each quarter.

But are we closer by the end of this year to getting flattened out on the margin?

Closer.

But again, assuming the lower environment persists for the next couple of years, our estimate is that it would bottom out at around [120] of net interest margin and that's toward the end of '14 -- 2014.

Okay.

So the same context of the annual rollovers will still happen, unless there is a meaningful change in the rate environment?

Yes.

Okay, got it.

And then the last thing for me is securities finance -- everyone is seeing the challenges in the business.

With regards to activity and spreads, can you just give us a little more color of what's going on within that business line?

How quickly does that business or could that business react to a change in the improvement on the broader side?

Does it lag?

Does it lead?

Any color there would be helpful.

Thanks.

Yes, let me take that one, Ken.

I think it probably lags a recovery in the economy and re-risking.

And that business is really a byproduct of leverage put on by hedge funds and the demand for borrowed securities.

So I would say with recovering economic environment, re-risking, I think you'd see a greater demand for borrowed securities.

The business can ramp very quickly.

The customers that have committed their securities to the program continue to have their securities committed.

And it's really just a matter of demand in the market, you know, which can change quickly.

Spreads, as you know, get influenced by the market, so the volume can flip pretty quickly.

Thank you, guys.

Thank you.

Robert Lee.

The first question I had -- if it'd be possible to get a -- I'm kind of curious a little bit about fee differentials between the alternative business and the traditional asset servicing business.

I mean, you broke out a little bit the contribution from the recent acquisition.

But if I think of the [$1 billion], you know, [$1.5 billion] of servicing fees, I think, number one, it'd be helpful to get some sense of how much of that is being driven by your ALT's business, which I'm presuming is growing at a faster rate.

And any kind of color you can give on how kind of the fee dynamics may differ between that and the rest of the book, which I know it's hard to do.

It varies all over the place.

But any kind of color you can give on kind of the mix and trend would be great.

Yes, let me try that.

The new business flows are actually pretty balanced between long-only and alternatives.

But we continue to cite alternatives because there's been continuous growth there.

And we think, given our market position, we're capturing more share than most.

I'd say the fee dynamics are pretty similar.

In the alternatives business, we have a middle office, back office component.

Fees are quite similar in the alternative business.

Increasingly over the past couple of years, some custody of cash has been included in the product mix.

So, not a real difference.

I would say we continue to highlight it because, in the alternative segment, we get growth two ways.

As flows come in and customers grow, we get growth that way, but there's still more outsourcing that's going on in the alternative segment, particularly in the private equity and the real estate segment.

Hopefully, that helps.

It does.

But maybe just a follow-up.

I mean, in thinking about within the total revenues, I mean, is it still kind of in the -- well, would it be in the kind of mid-teens kind of range proportion of the total?

I'm just trying to -- because obviously, from a modeling perspective, it may just kind of help a little bit with (multiple speakers) --.

Yes, let me -- give us a minute.

Maybe we can give you some direction on that.

So, percentage of service fees?

Alternatives as a percentage of service fees is what you're trying to get at?

Yes.

Brian Bedell.

Can you hear me?

Yes, we've got you Brian.

Okay, great.

We'll take your question and then we'll try to come back and answer Robert's question.

Sure.

Yes, yes, okay.

I guess along the lines of the new asset servicing mandates, can you give us a sense of, first of all, how much, in addition to the $506 billion that's going to be converted in 2013, how much is left to be installed from prior new wins?

And then just talk a little bit about the cross-sell that you alluded to with the GSAS business.

It looks like the operating margin there is around 45%.

I was trying to get a sense of sort of along the lines of Rob's question, how incrementally positive the growth in that business can be for your overall servicing effort and for operating margins?

Yes, let me try to take those couple questions, Brian.

I'll give you a little color on the $630 billion.

Ed, maybe, can talk about the GSAS margin that we saw in the fourth quarter.

You know, overall, robust quarter for new business growth, as I mentioned in my comments.

Pre-mix some -- a couple of large competitive wins that we saw where we had pretty good pricing on, which we're happy with.

The -- you know, I gave you the breakdown of the $630 billion, what was installed last year and what will be installed this year.

And this year, it will roughly phase-in over the three quarters of the year.

And by the way, I said $630 billion -- it's really $649 billion of business mandates.

Ed, do you have the last quarter what was installed and what's left to be installed?

That was another question Brian asked.

I do not have it at hand, so we'll have to follow-up with Brian.

We'll follow up with you on that one, Brian.

With regard to the GSAS business, let me talk a little bit about the cross-sell, and then Ed can comment on the margins that we've experienced in the quarter.

You know, as I mentioned when we announced the acquisition of the Goldman Sachs Hedge Fund Administration business, we thought it was a great business, a sterling set of customers, but we also thought that we had a broader product set that we could sell to that customer base.

And in the early days, we've seen some success -- largely around reporting services, things like PF reporting, which is a routine reporting requirement for hedge funds.

We have a pretty nice little service offering.

Many of the customers have taken it up.

We've engaged them in conversations about additional products and services that we can bring on; still feel highly confident about the retention of 90-plus-percent of that client base.

So, it's largely playing out the way we thought we would and we're still pretty excited about it.

Ed, on the margin in the fourth quarter, you want to comment on that?

Sure.

The margin was benefited by a little bit lower level of expenses in the quarter, Brian.

We're looking at the business as being around a 35% margin kind of business pre-tax.

So, we did better by about $3 million on the expense line than we projected.

And we closed at October 15.

Everything is on track.

Revenue is coming in, customers are retained.

But I'd be thinking about it more in a 35% type margin context as opposed to 45%.

We got a little bit of a benefit in the quarter.

Okay, that's helpful.

So, better than your core servicing business, it sounds like?

A little bit.

And then just on the balance sheet, so your expectation looks like around $170 billion size balance sheet, if I have that correct for 2013 by your guidance?

Is that 1% to 4% off of 2012 averages?

Yes.

Yes.

Okay.

And too -- getting to that bottom of $120 billion, I mean, if we get yield curve steepenings -- so no rate tightening, of course -- but if we get the treasury curve moving up, let's say, 50 basis points or so over the next 6 to 12 months, and MBS yields maybe not coming up quite that much, but directionally moving there -- always hard to say exactly how much upside, but does that $120 billion -- if we continue to get that curve steepening in 2014, does that $120 billion become obsolete and you'd start to get to the point where you get expansion from this $135 billion-ish range?

Yes, probably, but I mean, the $120 billion is the answer to the question of what happens to the margin if rates stay at these levels and very low for a protracted period of time, i.e., through 2015, as the Fed's comments would suggest.

If we have a different set of market rates that we're dealing with because the world's changed, then that $120 billion would change.

And you're describing a scenario where $120 billion would go to some number higher than $120 billion, in all probability.

All right, great.

And so then just for the maturity schedule, roughly what's rolling off of your book every year that you can deploy into new securities?

I can give you the run-off that we're planning on for 2013.

The run-off is just about $20 billion, and that is split just about 50/50 floating and fixed.

And as we see 2014, if you want to go out that far, it's $22 billion and that's split about $10 billion on floating -- I'm sorry, $12 billion on floating and $10 billion on fixed, roughly.

And then just lastly, as your projection is coming down from the fourth quarter, I assume you're assuming excess deposits begin to roll off.

Would that be incrementally helpful to them as well?

Yes, it would.

And it's incorporated into my comments on the NIM expectations for this year, as we see the effects of TAG, which I noted hitting our balance sheet.

We don't expect a decline in total customer deposits.

We just expect a decline in what we have called excess deposits.

So, the deposits that we have and retain we'll invest accordingly.

Right.

Okay, great, thanks so much.

Thanks, Brian.

Glenn Schorr.

First question is, if you look over the last, say, four or five quarters, assets under custody grew nicely.

Servicing fees actually grew pretty well, just not as much.

And I'm assuming that's a little bit of the mix shift and the de-risking that happened through 2012.

So, I guess if the re-risking holds, doesn't have to zoom up from here, but if it holds what we saw in the last couple of weeks, 2013 -- could we expect the reversal, meaning servicing fees grow at a higher pace than AUC, just on the positive mix change?

You know, I think the -- as you heard, Glenn, in my comments, the re-risking or the rotations to higher-risk assets back-end of the year, first part of the year, has been positive.

Our base case assumes that doesn't sustain itself, based on whether it's the debt ceiling or any other number of factors that could influence investor behavior.

So that's our base case, which I think is prudent.

If the re-risking, if the rotation into equities and global equities were to sustain itself throughout the year, which would be a very positive case, then, yes, I think you would see that correlation between service fees and custody assets.

Again, it's not our -- you know, we've (multiple speakers) --

(multiple speakers) Not the base.

We've seen this before over the last couple of years, of a quick start and no follow-through, which is what we're assuming is going to happen.

Understood.

Hope you're wrong.

(multiple speakers)

Yes, me too.

(laughter) In FX, I think you compare nicely to a bunch of different peers of different flavors.

Assuming in my mind that Currenex has a little something to do with that, but curious of the mix of business within FX?

Yes, the -- I'll let Ed give you the specifics, but we did have a -- I think the FX environment is still not great.

Volatility continues to be constrained.

We've got a multifaceted, and we think, quite attractive foreign exchange proposition.

You know, multiple ways to deliver foreign exchange.

And I think what we saw in the quarter is success not only in our direct foreign exchange, which is where most of the positive quarter-to-quarter came from, but, as Ed mentioned, we also continue to see growth in Currenex, which is the high-speed foreign exchange platform where we not only grew, but as the rest of the industry was down from a volume standpoint, we were up.

So, I think the trend is good and we think we're well-positioned.

Hopefully, volatility comes back and it gets even better.

Yes, it was a good quarter, Glenn, from the perspective of volumes really across the board.

The direct business and custody FX increased slightly a little bit over 1%.

FX Connect was up over 8%.

Currenex was up over 2%.

So from a volume perspective, a pretty good story really across all execution methods.

Great.

Final one.

In asset management land, you're obviously in a sweet spot and it shows in your flows.

Curious what -- where margins are at these days, and just overall profitability trends, as I think that's the one area that you probably do have a pretty positive outlook on.

Yes, I think the story of the fourth quarter, I'm pleased with.

I'm also pleased with the whole year.

I think we saw a pretty steady flow of net new flows into that business, ETF being probably the dominant theme pretty consistently through the year.

And equally, we did a good job in controlling expenses.

So, I think we had a story in the SSGA, our asset manager, where the flows were good and they generated positive revenues.

And we got good operating leverage, based on our good expense control.

As far as margins (multiple speakers) --

(multiple speakers) The margin is clearly improved.

I don't have it.

We'll have it in the 10-Q segment footnote, Glenn.

Okay, I appreciate it.

Thanks, guys.

Alex Blostein.

I just want to go back to the expense discussion for a second.

When you look, I guess, at the run rate right now -- so like $1.7 billion for the quarter, maybe there's a little bit more of a couple of one-offs that helped you guys.

So, call it like $1.73 billion or so.

So you're annualized, I guess, it's like [$6.9 billion].

Just from a core business perspective, what do you guys think you need to grow that by on an annualized basis to keep kind of with the business momentum and the core businesses?

And on top of that, I'm assuming we'll obviously layer on the savings, but can we try to tackle the question this way?

Yes.

I mean, and unfortunately, I guess, Alex, the question is again answered in terms of how the market-driven revenues perform.

And as I said, we're looking at the year cautiously from that perspective.

That's part of the reason why we took the actions that we announced today to better calibrate our expense base to that market outlook.

I will say, though, that overall for the year, from a planning perspective, we're coming in assuming, planning on generating positive operating leverage for the full year.

Okay.

And that's with a conservative, muted, you could say, look on the view on the market-driven revenue.

So, that's the way we've done it.

I can't put a specific number on it in terms of what we think that that $6.9 billion is going to move to, but we're incorporating all the costs activities that we talked about, the ops IT, the reduction in force that we announced today, and our planning.

Okay.

But I guess the reduction in force is really not hitting the numbers in 2013, right?

This is going to be like a 2014 effect, and it's incremental to the [140] that you highlighted?

Yes, the employees will be leaving over the course of 2013, which is why there's not going to be a full-year effect in 2013's expense numbers for those departures, that's correct.

Okay.

And then just following up on the last question, when I look at the business types that you guys are winning on a lot of the alternatives, a lot of middle office, the fee rate on those tends to be a little bit higher.

If we, I guess, extrapolate from the numbers that you've given us, it feels like the Goldman business was maybe about 4 to 5 basis point type of fee rate.

So, I guess holding everything else equal, assuming that there's no incremental pickup in risk appetite, and things kind of stay as they are, should we still -- shouldn't we still see an improvement in the kind of the core servicing fee rate, just given the mix shift in the business?

Yes.

I think broadly, Alex, it was really the question I answered to the -- in the answer to a prior question, which is, if we see the mix shift -- mix shift being two things.

One, the shift in mix of investments that our customers invest in, obviously, a positive.

You know, when we talk about alternatives versus more only to make that broad differentiation, we're seeing pretty good growth in both sides of those.

So, there's less of a mix shift effect on revenue growth from that.

Are you still with us, Alex?

I'm still on.

Yes.

Okay.

And just, I guess, the last one on securities lending, the balance just seems like you keep going down.

Any sign of stabilization?

Where do you guys see this dropping out?

You know, I think -- I would have thought it was dropped out now.

It's really a demand in the market question.

I think it's hovered for many quarters on the [350 to 300] range.

There's just not much demand for borrowing of securities.

So it's hard to call it.

I do -- to my earlier point, I think markets heal, customers re-risk.

That's when you're likely to see the demand for borrowing recover.

And when it recovers, I think you'll see it bounce in the securities lending business.

Got it.

All right, thanks, guys.

Mike Mayo.

On the business operation transformation program -- so, I guess you have $200 million of savings the last two years, and you look for $220 million of savings this year and that would, say, $200 million in 2014, roughly.

So, in other words, this should be the biggest payoff year from this four-year kind of endeavor.

And so I'm just wondering how you feel about getting that big payoff?

I mean, you started before many others in the industry to change how you operate.

How is the expected ROI tracked according to expectations?

How far along are you in your cloud transformation?

And what other color can you give us from the operational side?

Sure, let me start that, Mike.

And you're right, the first two years ending '12 were $100 million a year roughly; ramps to $220 million this year, and $214 million is the plan that we've had from the beginning.

You know, the progression has been correcting some or improving some processes, moving to centers of excellence.

And then the third leg of that is really introducing new technology to further automate those core processes.

And we're squarely midstream in it.

I think we've been pretty on track with regard to the performance against our original plan.

I have a high level of confidence that we're going to achieve our 2013 goal.

We are operating under our private cloud environment.

I think we have roughly 50 applications that have been operational for over a year.

So, that's been tested.

And confident that the technologies in place -- we're building systems as part of this.

There can always be some slippage when you build systems, but it's not one system.

It's hundreds of applications.

So, I think I have a lot of confidence that we'll stay the course on this.

Not only will we stay the course, but we will achieve the targets that we set out for 2013 as well as '14.

Is there (multiple speakers) --?

Let me just make one more comment, Mike.

Because I know you appreciate this.

I just want -- to me, this is about efficiency, effectiveness, reducing costs, eliminating errors, but it's really the transformation that's going to enable us to introduce new information-based products and services to our customers.

So it has that dimension to it, too.

Go ahead.

Is there one quarter or one date when you say you shut off the duel systems and you go live from development to the main platform?

Yes.

I mean you have to run multiple systems until you get through this.

When is the day?

Well, there isn't, because fortunately -- and I say this fortunately -- it's not one system; it's not 10 systems.

There's some 200 projects, so it's many systems or applications that we're redeveloping to -- and we're redeveloping them in the cloud in parallel.

So, there's -- as a result, there's no day, there's no quarter.

It -- they -- it happens throughout 2013 and 2014.

As a result, I think that it's a less risky proposition, in my opinion.

Why is this the biggest payoff year?

It's just the way it ramped.

Initially, the -- you know, initially, we had process improvements.

We moved to lower-cost locations.

The technology -- the efficiency effect from the application of new technology has proportionately higher payoff than the human side of it.

All right, thank you.

You're welcome.

Vivek Juneja.

On NIM, what changed in your NIM guidance, your prior ranges have come down?

You'd earlier talked about '014 being just around 130 and now the '013 is going to 130, 140?

Given that the 10-year has moved up a little bit, and you're expecting the TAG deposits have started to go out, so which would help NIMs.

Could you explain what's changed that guidance?

Yes, Vivek.

We've previously said we thought 2013 would be in the range of 130 to 140.

I think that our comments this morning are consistent with that.

It wasn't 135.

Okay, I thought it was (multiple speakers) --?

No.

We may have spoken and just used the midpoint of the range as a point of discussion, but our overall thinking in terms of 2013's NIM has really not changed.

And in terms of the U.S. Treasury 10-year being at [180, 190] today, in actuality, even if that was the rate that persisted throughout all of 2013, the effect as we model it would be maybe in the range of $15 million or $20 million, in terms of our net interest revenue.

So, a basis point or two on NIM.

And the reason for that is because we have $10 billion -- as I mentioned earlier, $10 billion of fixed-rate assets rolling off, and our budgeted rate for the year is about [160].

So you can do the math on that.

The 30 basis point differential will apply to that on average for half a year, would give you the $15 million or $20 million improvement.

So not much of an effect, again, assuming the curve doesn't change shape, just steepens.

Right.

And given your commentary about the $120 billion towards the end of 014, so should that imply more like a $125-billion-ish than average '014?

Well, again, if the question is assuming rates stay low for a protracted period of time and the curve doesn't change, $120 billion is our estimate of where the margin would bottom out in '14.

If we have a steepened curve from where we are today through 2014, then the $120 billion would be a higher number, okay?

Okay, great.

And one other question.

On the comp expense in the fourth quarter, was there anything related -- it was flattish, it seemed like.

So nothing -- any change related to incentive comp accruals, anything like that, that we need to be aware of?

Nothing significant.

I mean, we went through the normal year-end process of setting incentive compensation in accordance with the Company's overall performance.

Okay, great.

Thanks.

Jay Hooley Sure.

Luke Montgomery.

Obviously, there's been a pretty sizable moving your stock price over the last quarter.

Currently, I think about 15% higher than the average purchase price for Q2 or Q4, sorry.

Does that change your appetite for buybacks and perhaps how you're going to execute your capital distribution goals this quarter or for this coming year?

And obviously, we haven't had a look at your CCAR plan for 2013, but it sounds like you have aggressive goals to distribute capital.

So would you have any flexibility under your plan to consider a special dividend in lieu of buybacks?

Yes, the recent change in the stock price doesn't change our outlook.

We put our CCAR plan in earlier in the year.

The -- you know when we look at really a distribution between buybacks and the dividend rate, you know there's some guidance around dividend rate from the Fed.

Special dividend is something that we've thought about but haven't really considered.

Do you have to build that into your CCAR plan?

Or is it something you can default to if you -- if the stock price runs up too much?

No.

I think you absolutely have to build it in.

And my sense will be, it wouldn't be encouraged by the Fed because of the one-time nature of it, versus the laddered effect of either buybacks or dividends.

Okay, thanks.

That's helpful.

And then I just wanted to come back to Glenn's question on SSAA's margin.

You noted the progress this year, so that's great.

But it continues to look a bit lower than some of your peers I think would be comparable to you.

So I was wondering if you might conjecture as to why that is?

Is it because your product suite is more commoditized?

Is it cost allocation related to the overall business?

Is it ad hoc bundled pricing with custody services?

And then what addressable steps do you think you could consider to improve your margin more?

Yes, Luke, let me -- it's hard to get good comparisons, I think, as a starting point.

We think that we obviously have a mix which is more anchored around passive strategies and cash.

You know I think that, as opposed to looking at trying to reconcile our margins versus others, our objective has been to improve the margin.

And we think we're on a track to do that on a sustainable basis.

What we've done to invest in areas of the business that we think have higher growth prospects, whether it's defined contribution segment, ETFs, continuing to expand outside the US, while at the same time, much as we've done for the whole firm is really take a hard look at the cost model and say, what's essential and necessary?

What's not necessary?

And how to create more efficiencies.

The benefits that State Street realizes as a result of IT and operations also translate to SSGA.

So, I look at it more from a standpoint of how do we continuously widen the margin, improve the business, grow the top line, as opposed to trying to compare it discreetly to other models in which, in many cases, are not apples-to-apples.

Got you, thanks.

And then a final one.

I'm sure you're aware that BNY Mellon is establishing a CSD in Europe.

They're indicating that that has strategic benefits with respect to collateral management internalization of settlement, maybe linking to T2S.

So I'm wondering if you think it places you at any competitive disadvantage that you're not going to offer these services?

Or if you'd be interested in making a move into the upstream market?

Yes.

You know, we -- the centralized securities depositories that is an opportunity of the regulation in Europe is changing.

And we took a pretty long look at whether or not that made sense for us.

You know, we, through our subcustody arrangements, we used CSDs all across the globe.

And concluded that while it might be an opportunity for some, we had better opportunities in other parts of our business from the standpoint of return on capital.

It would get us into a new regulatory regime.

We think it's kind of a cost re-entry to get into the CSD world.

So we've taken a good look at it and concluded that we've got better options.

Okay.

Thanks for taking all my questions.

You're welcome.

Josh Levin.

If this re-risking you're seeing, if this really is the beginning of a sustained trend and your business starts to improve, and that really looks sustained, how does that impact your thinking about your cost-cutting program?

It doesn't change it.

I think that the cost-cutting effort is really about creating sustained efficiency in the operating model.

And it was conceived in an environment where there was pressure on that, but the closer we get to it, it's a no-regrets move.

It's a way to improve on a sustained and structural basis the operating costs to run this business.

And it not only has cost efficiencies, but it should lower error rates, and will position us for being able to produce new products on the back of a cloud environment that will enable kind of real-time data information and analytics.

So, we're going to do nothing but stay the course.

Okay.

And then on capital return, as you think about how much to return, I mean, you -- how do you think about the relationship between the fact that you're overcapitalized relative to your long-term target, but your near-term outlook, earnings outlook, is somewhat cloudy just because of the environment we're in?

How do you think about the relationship between those two items?

Well, I think the CCAR process itself brings those issues together quite nicely.

And it's an exercise that we do, obviously, for submission to the Fed, but it allows us internally to look at, over multiple periods, what we think the earnings opportunities are for the business, what our capital position is, how that gets affected by things we do in the future.

And so, it's all blended in.

It combines the organic growth potential of the business, as well as the starting capital position, and the required capital requirements as Basel III starts to unfold and become implemented.

So it's all ready to grow.

Thank you.

Andrew Marquardt.

Just back on expenses, can you guys just clarify a little bit in terms of what's different about this new initiative versus the original one?

And sort of kind of when you step back, kind of why is it needed if you had this kind of long-standing big initiative IT cloud expenses over the last couple of years?

Thanks.

So you're referring to the initiative -- the reduction in force that we announced this morning.

Yes.

We -- again, we've been living in a constrained revenue environment for some time.

And as I mentioned a few times, we -- our base case is we're going to continue to live in that environment.

And the IT and ops transformation is a structural redo of how we're offering services to our customer, as I mentioned previously.

We also look at all other parts of our business and say, are there ways to become more efficient?

Are there ways to apply process improvements?

Are there things that we've done historically that aren't critical and necessary today?

So it's really just part of an ongoing effort to make sure that we're looking at everything, to make sure that we're as lean and as efficient as we can be, while at the same time, not disturbing customer service levels, our ability to invest in high-growth businesses, and do the things that are productive for us long-term.

So it's just really good management discipline.

And -- well, that sounds like the original kind of IT cloud initiative.

And it -- so is -- are we to read in this recent staff reduction as an offshoot of that in incremental?

Or that's just part of the culture going out of it?

The IT and ops transformation was really targeted at our core global asset servicing business, where we do, for the $24 trillion in assets that we service, we conduct many different transactional activities.

In fact, around 18 different transactional activities is where most of the work gets done.

And it was the redo, it was the change, the process change, where we do the work and change the technology around those core activities that are the IT and ops transformation project.

There's a whole bunch of other places in the Company where we spend money to support different business lines and staff functions.

And it's really those other things that are largely targeted by this announcement we made this morning.

Got it.

Okay, that's helpful.

And then in terms of the ultimate benefit from the original IT cloud initiative going back, you had long talked about the ultimate benefit $600 million pre-tax, but then ultimately, a 400 basis point benefit to your operating margin, if I recall correctly.

Does that still hold in this new environment?

Yes.

We believe it does, Andrew.

I mean, I'll give you some numbers which takes you through the first two years of the project, where, as we've noted, we've achieved about $200 million of the overall program.

And again, predicating these comments on 2010, which is our base year, okay, we have gotten 200 basis points of margin, which we count against what we'll call the core business.

And the core is expanded 160 basis points, okay, in total.

And adjusting for the one-timers, that brings the margin, the starting margin, down by 170 basis points.

Those are mainly, as you recall, insurance recoveries that we got in 2010.

So, the core expanding 1.6% over the first two years, with the accomplishment of the 200 basis points against the program.

Considering that our market-driven revenue specifically trading services have been rather weak over those two years we think is, while not certainly in excess of what we expected, it's tracking in the right direction and showing positive momentum, in terms of the effect of the ops and IT program.

All right, that's helpful.

And then should we ultimately -- I mean, does that all still roll up to operating margins in the low 30s ultimately, in the out years?

Yes.

I mean that's -- I mean, we started with the margin around 28% and we estimated 400 basis points improvement.

Again, predicating against 2010, all else equal, which so far, relative to the trading services, it has not been.

But yes, with those assumptions, we would expect 28% pre-tax margin to improve to around 32% pre-tax margin.

Got it, okay, thanks.

And then just lastly, Jay, any update on the CFO search, how that -- where that stands now?

Yes, let me just give you -- as we announced, Ed has come to me and said he'd like to hang up his spikes in 2013.

And as a result of that, we are going through a process looking at suitable replacement candidates.

And you know, we're in the middle of that right now.

Nothing really to update.

Ed has assured me he would stay on through a smooth transition.

So, nothing really to update other than in subsequent quarters, as we do have something to report, we'll certainly bring it forward.

Thanks, guys.

Your final question comes from the line of Cynthia Mayer.

I guess just to come back to the question of the servicing fee rates, is it possible to tease out a little bit the impact of global versus US on those fee rates in the quarter, as opposed to a rotation to equity?

And maybe by giving some sense of how many of those fee rates are tied to global versus US within equity?

And then along those lines, could you give us a sense of how your wins are breaking down?

Let me start that with the last part of the question.

I'm not sure we're going to be very helpful on the front part.

The wins, the $649 billion was roughly 85/15 -- 85 US, 15 non-US.

That's sourced, so that would be US-based customers.

That's a little bit of a different mix than what we've seen.

That's a little bit more tilted to the US.

I think we've been running more probably 50/50, non-US/US.

So, that's on the win side.

On the --

I'll take a stab at it.

I don't have specific numbers for the fourth quarter, Cynthia, but I think the way that it might be helpful to think about it is that approximately 40% of our revenue is from outside of the US.

So, that's one way to think about the servicing fee line.

I think that that's valid.

From a pricing perspective, I think it's also valid to look at the non-US business as being generally higher priced.

And it's higher priced but is also higher cost against it.

So, net-net, you probably have around the same pre-tax kind of margin for that kind of business.

And again, I don't have specific numbers that I could quote you with, but that -- quote to you, but that's where we are.

I think, too, if you look at State Street from an asset servicing perspective, we're probably around 50/50 in terms of equity versus fixed income, maybe a little bit more -- you know, more skewed to the equity markets than some of our close-in competitors.

So, hopefully, that gives you some guidance in terms of your question.

Yes.

That's really helpful.

And then I guess maybe to poke into a more esoteric area, it looks like your transition management revenues were up pretty well this quarter.

And I'm just wondering if you could give a little color on that business?

What is it that drove that?

Is there a seasonal component to that?

Maybe a sense of how profitable that is compared to other businesses.

Yes, you know, the transition management -- it is a little bit narrower business.

Just -- you know, but just for the broad audience, when an investment manager is going to replace a manager in their asset allocation mix or make moves, they might hire somebody like State Street to execute that change.

So it's a transactional type activity.

It is a little bit lumpy, in that it's driven by manager rotations, either in and out of asset classes or in and out of managers.

We've got a, I think, a highly competitive product across the globe in transition management.

So we're -- we compete quite well in that space.

I think the quarter was probably the result of a little bit more market-based activity and us being successful in winning those deals.

I think, generally, transition management has been, against historical rates, a little bit soft over the last several quarters, as a result of maybe lack of conviction by investment managers around market direction.

You know, as people do change and as you see broad-based moves and asset allocations, or even managers transition management activity, you'd expect to see that pick up.

Great.

Thanks a lot.

Great.

Let me just -- that was the last question, but there was a question that Robert Lee asked that I think we have an answer to, so I'll ask Ed to respond to that.

Yes.

There's actually one from Rob and I think one from Brian Bedell that I think got cut off on, so I just wanted to answer both of them.

First, Rob asked about the revenue on our alternatives business broadly.

And the answer to the question is about 15% of our servicing fee revenue on an annual basis, around $600 million annual is the revenue associated with our alternative asset servicing business.

Secondly, Brian, I believe, asked how much was remaining to be installed from our wins in 2012?

And the answer to that is $550 billion, including what we won in the fourth quarter.

So for all of 2012, what remains spilling over into 2013 is $550 billion of assets to be installed.

Thanks, Ed.

And thanks, everybody, for joining us on the call today.

I'd just remind you that we have our own Investor and Analyst Forum, which will be held on February 28 at the Mandarin Hotel in New York.

And hope to see all of you then.

Thank you.

That does conclude today's conference call.

You may now disconnect.