道富銀行 (STT) 2014 Q2 法說會逐字稿

Good morning, and welcome to State Street Corporation's second quarter 2014 earnings conference call and webcast.

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

This conference call is also being recorded for replay.

State Street's conference call is copyrighted, and all rights are reserved.

This call may not be recorded or rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation.

The only authorized broadcast of this call will be housed at the State Street website.

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

(Operator Instructions)

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

Thank you, Stephanie.

Good morning, everyone, and welcome to our second quarter 2014 earnings conference call.

Our second quarter earnings materials include a slide presentation.

Unless otherwise noted, all the financial information discussed on today's webcast will reflect operating basis results.

Please note that the operating basis results are a non-GAAP presentation, and this webcast includes other non-GAAP financial information, reconciliations of our non-GAAP measures, including operating basis results to GAAP basis measures referenced on this webcast and other related materials such as the slide presentation referenced on the call, which can be found in the investor relations section of our website.

Mike Bell, our Chief Financial Officer, will refer to the financial highlights presentation when he provides an overview of our financial results for the second quarter of 2014.

Before Jay and Mike begin their discussion of our financial performance, 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 2013 annual report on Form 10-K and its subsequent filings with the SEC.

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

Any such forward-looking statements speak only as of today July 22, 2014.

The Corporation does not undertake 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.

Our strong second quarter results reflect growth in core servicing and management fee revenue, driven by both higher global equity markets and that new business.

With respect to our market-driven revenues, we experienced the typical seasonal uplift in securities lending as well as increased demand on our current Enhanced Custody program which has been a driver to growth over the past few quarters.

Additionally, foreign exchange trading performed well with higher volumes in both direct and indirect trading execution methods despite extremely low volatility for the industry.

And IR also performed a bit better than we expected due to a higher level of interest earning assets from new business and higher client deposits.

On the expense front, we continue to be focused on controlling expenses across the organization.

While we continue to perform as we anticipated on operating expenses, we are experiencing increased pressure from regulatory compliance costs.

Now, I'd like to provide a brief economical overview and review the second quarter global equity market performance, the trading environment and how our revenues were impacted.

The US economy bounced back solidly during the second quarter following a very weak first quarter.

Lower unemployment, increased household wealth and improved credit conditions are combining with a still very accommodative monetary policy to support an improving outlook for the US economic recovery.

Global equity and fixed income market performance was stronger in the second quarter.

The S&P 500 daily average was up nearly 4%.

The EAFE daily average was up 2.5%, and the Barclays US aggregate index was up 2%.

The Federal Open Market Committee's June policy statement affirmed that the economy was rebounding, and as such, announced that the Fed would continue tapering its asset purchases each month with a view towards ending them in the fourth quarter.

We expect the Fed to leave administered interest rates unchanged at a very low level the rest of the year and begin to gradually increase in the middle of next year.

The Eurozone continues to the lag US recovery, remaining weak and uneven, even as rising geopolitical tensions and a potential reintensification of the debt crisis continue to present downside risks.

With growing -- with growth persistently weak and unemployment still extremely high, inflation is uncomfortably low and is expected to remain low for a prolonged period.

Against this backdrop, the ECB took action in early June to ease its monetary policy stance.

As widely anticipated, it reduced administered interest rates, including a cut to the deposit facility rate paid on excess reserves to below zero.

We're closely monitoring market conditions including market interest rates, which have generally remained positive, swap markets, and client deposit behavior.

On the positive side, our view continues to be that global growth will reaccelerate over the next few years as growth picks up in advanced economies and stabilizes in developing economies.

With respect to the trading environment, State Street benefited from higher global equity markets.

During the second quarter we saw an increase in investor risk appetite, which was favorable to our asset mix.

Clients increased allocations to both emerging market and maturing market equities and reduced allocations to money market funds.

As a result, we saw a slight pickup in US transaction volume, reversing the low transaction volume trend we saw over the last few quarters.

Both dynamics were positive contributors to our service and fee revenue.

As reflected in this quarter's results, we continue to see strong and steady demand for our products and services globally.

Our second quarter 2014 new asset servicing wins totaled approximately $250 billion, representing a range of clients and sectors.

58% of those assets were from outside the US, which is an increase from prior quarters, perhaps signaling improved confidence in the global economic outlook and a result of willingness of clients, particularly in Europe, to change service providers.

Also included in our new business wins are 26 new alternative asset servicing mandates.

New assets to be serviced that remain to be installed in the future periods total $243 billion, and our current pipeline is strong.

In our asset management business, we experienced net inflows of $18 billion for the second quarter, which was the best quarter of flows since the third quarter of 2012.

The flows were driven primarily by net inflows of $10 billion into ETFs, $12 billion into institutional mandates, and money market funds of $1 billion, partially offset by net outflows of $5 billion from short-term collateral pools.

We intend to build on this new business momentum for the rest of the year.

Now, I'd like to turn the call over to Mike who will review our financial performance for the quarter and outlook for the balance of the year.

Thank you, Jay.

Good morning, everyone.

This morning I'll start my review on slide 9 where we've noted several financial highlights for the second quarter and for the six months ended June 30, which I'll refer to as year-to-date.

Unless noted separately, we will reference only the non-GAAP operating basis results in my comments today.

By way of summary, second quarter results were improved in what remains a challenging operating environment.

We plan to continue to focus on our top priorities, driving core revenue growth, investing in growth opportunities, controlling expenses, and managing our strong capital position.

Regarding the first half of 2014, EPS increased approximately 8% from the first six months of 2013.

Year-to-date total revenue increased approximately 4% compared to the year ago period.

Importantly, year-to-date core servicing and management fee revenue increased approximately 7% compared to the same period in 2013, primarily reflecting the benefits of higher equity markets, net new business, and the impact of the weaker US dollar.

EPS for the second quarter of 2014 increased to $1.39 per share from $0.99 in the first quarter of 2014 and from $1.24 in the second quarter of 2013.

As a reminder, our first quarter 2014 results included the seasonal effect of $146 billion of deferred incentive compensation expense for retirement eligible employees and payroll taxes.

Second quarter results also reflect the seasonal increase in our securities finance business that typically occurs in the second quarter.

Compared to the second quarter of 2013, the increase in EPS was primarily due to a strong increase in core servicing and management fees, a lower operating basis tax rate, and the impact of our share repurchase program.

These positives were partially offset by lower market-driven revenues and higher expenses.

Compared to the second quarter of 2013, total expenses increased approximately 4% primarily due to higher compensation and regulatory compliance costs, including the impact of the weaker US dollar.

Our second quarter 2014 pre-tax profit margin was 32%, down slightly from the second quarter of 2013.

The operating basis effective tax rate was lower than normal this quarter due to some one-time items.

We do expect a higher operating basis tax rate in the second half of the year.

Turning to slide 12, I'll provide additional details of our operating basis revenue for the second quarter of 2014, primarily focusing on the notable variances to the second quarter of 2013.

Second quarter 2014 servicing fees performed very well up, approximately 7% compared to the second quarter of 2013.

The increase primarily reflects stronger global equity markets, net new business, and the impact of the weaker US dollar.

Second quarter asset management fees increased 8% for the second quarter of 2013, primarily due to stronger global equity markets.

Money market fee waivers were $10 million in the second quarter, flat with the first quarter and up from $8 million in the second quarter of last year.

Trading services revenue increased modestly compared to the first quarter, primarily due to higher foreign exchange revenue as a result of higher volumes partially offset by lower volatility.

Compared to the second quarter 2013, trading revenue was lower, primarily due to lower FX volatility.

Compared to the second quarter of 2013 securities finance revenue increased primarily due to new business in Enhanced Custody.

Enhanced Custody represented 25% of our second quarter securities finance revenue and more than 100% of the growth compared to the prior year quarter.

Enhanced Custody also benefited from the seasonal increase in our securities finance business.

Processing fees and other revenue increased from the second quarter of 2013 including higher revenue associated with our tax advantage investments.

Our net interest revenue decreased from the second quarter of 2013 primarily due to lower yields on interest-earning assets, partially offset by lower interest expense and a higher level of interest-earning assets.

Average interest-bearing assets increased from the first quarter, primarily driven by a higher level of client deposits.

In addition, year-to-date net interest revenue has benefited from higher short-term euro market rates than we had expected.

Offsetting these positive factors and placing pressure on net interest revenue are factors that include the sustained low interest rate environment, the recent reduction in euro market interest rates, and our portfolio's reinvestment in the higher-quality liquid assets to meet the new liquidity requirements.

Many of you have had questions regarding the impact of the European Central Bank lowering the overnight deposit rate to negative 10 basis points and the related impact on our deposit pricing.

While overnight rates have come down since the June 5 announcement, which is placing pressure on our net interest revenue, market rates still remain slightly positive.

We continue to evaluate our options and are monitoring the actions of other market participants.

Based upon our current assessment of market conditions, we now expect full-year 2014 operating basis net interest revenue to be in the range of $2.25 billion to $2.28 billion, assuming that client deposits and market interest rates continue at second quarter levels for the remainder of the year.

Now, let's turn to our operating basis expenses on slide 13.

Our second quarter 2014 compensation and employee benefits expenses increased approximately 6% from the second quarter of 2013 due to new business support, higher incentive compensation, the impact of the weaker US dollar, annual merit increases and higher regulatory compliance costs, partially offset by savings associated with the business ops and IT program.

Information systems and communication expenses increased from second quarter 2013 due to higher infrastructure costs.

Transaction processing expenses increased from the second quarter of 2013, reflecting higher volumes and higher equity values in the investment servicing business.

Occupancy expenses of $115 million increased compared to the year ago quarter.

Occupancy expenses in the second quarter of 2014 included a one-time recovery of $5 million.

Compared to the second quarter of 2013, other expenses decreased 3%, primarily due to a $9 million credit associated with Lehman Brothers related recoveries in the second quarter of 2014 and lower legal and sales promotion expenses, partially offset by higher regulatory compliance expenses.

Now, I'll provide you some details on our June 30, 2014 balance sheet.

As you can see on slide 14, our overall approach to managing our investment portfolio has not changed, and we have maintained a high credit quality profile.

Our interest rate risk position was also in line with our position at last quarter.

Additionally, the after tax unrealized mark-to-market gain as a June 30 was $456 million, which improved from last quarter primarily due to narrower spreads and a decline in longer-term interest rates in the second quarter.

Now, I'll turn to the next slide to review our capital position.

As you can see, we maintain a strong capital position, and that strength has allowed us to deliver on our key priority of returning value to shareholders through dividends and common stock repurchases.

As we had previously announced, we completed our Basel III qualifying period, or parallel run, in the first quarter of this year.

As a result, beginning with this quarter, we are now calculating and disclosing our actual regulatory capital ratios under the advanced approach framework of the Basel III final rule.

As of June 30, 2014, our tier 1 common ratio into the Basal III advanced approach was 12.8%.

Under the Basal III standardized approach, which will not going to effect until 2015, our estimated pro forma tier 1 common ratio was approximately 11.3%.

We estimate that our pro forma Basel III supplementary leverage ratios under our interpretation of the US proposed rules issued on April 8 are approximately 6.1% at the holding Company and approximately 5.8% of the bank as of June 30, 2014.

These leverage ratios at both the holding Company and the bank are down slightly from last quarter, due primarily to an increase in the average assets from higher client deposits.

We continue to focus on returning capital to our shareholders.

During the second quarter of 2014, we purchased approximately 6.3 million shares of our common stock at a total cost of approximately $410 million, resulting in average fully diluted common shares outstanding of approximately 435 million for the quarter.

As of June 30, 2014, we had approximately $1.3 billion remaining on our current common stock repurchase program authorizing the purchase of up to $1.7 billion of our common stock from March 31, 2015.

Before I wrap up my comments, I would like to review our current outlook for the remainder of 2014.

For revenues, our results this quarter include the positive effect of the foreign dividend season, which significantly benefited securities finance revenues.

We expect both agency securities lending and Enhanced Custody revenue to revert to lower levels in the third quarter due to the end of the seasonal activity.

In addition, per my earlier remarks, we expect net interest revenue in the second half of 2014 to be below the first half of the year due to current market conditions.

Overall, for the full year 2014, we continue to target 3% to 5% revenue growth compared to full year 2013.

I'd now like to address a question which I suspect is on investors' and analysts' minds, which is the outlook for operating leverage.

Due to the expense pressure from regulatory compliance, it will be more challenging for us to achieve our goal of positive operating leverage for 2014 unless we experience an improvement in market-driven revenues.

Specifically, it's important to highlight that regulatory expectations for GSIBs like State Street have continued to increase.

Importantly, it's not just related to compliance with new rules; it's across all areas of the Company including risk data aggregation and reporting, risk management and governance, recovery and resolution planning, client onboarding and transaction monitoring systems and documentation requirements.

The amount of effort to fully comply with these expectations is higher than what we've previously expected.

As a result, we currently expect 2014 regulatory costs to be higher than our earlier expectations.

In the meantime, we continue to focus on managing other elements of our expense base to offset some of the impact of the higher regulatory expenses.

This includes continuing to execute on the severance program announced in first quarter.

In aggregate, we currently estimate that our operating expenses for the third quarter of 2014 will be approximately $20 million higher than the second quarter levels, primarily reflecting increased regulatory costs, offset to some extent by other savings.

We also currently expect fourth quarter expenses to be approximately in line with third quarter expenses.

And with that, I'll turn the call back to Jay

Thanks, Mike.

And Stephanie, we are now available to answer questions, so you might open the lines.

(Operator Instructions)

Alex Blostein, Goldman Sachs.

Great, hey.

Good morning, guys.

Good morning.

First question on expenses, what's changed since the prior guidance?

What did you guys learn over the course of the quarter that led you to believe that expenses zone regulation will exceed the $40 million number that you provided in the past?

And then secondly, I guess more importantly, I think the question a lot of investors will have is once you get to through this, how should we think about these level of expenses heading into 2015?

I.e., is this a catch-up benefit for whatever reason that you didn't really anticipate in the past, and that's just a ramp that were seeing this year and then we'll see some easing into 2015?

Or how should we think about expenses on regulation beyond this current period?

Alex, it's Mike.

I'll start regarding your question around 2014.

The main thing that is different from what we talked about, say at the investor day, is it's now clearer to us that expectations really across the board by all regulators are higher than what we had previously anticipated., And just as a reminder, we are a global company, obviously, and what we have found is that expectations across the globe are higher for GSIBs then we had previously anticipated.

And it's really very important to us, Alex, that we maintain good relationships with our regulators, particularly with the Fed.

And we think at this point that it's prudent to plan to spend more resources than we had originally budgeted here for 2014.

As it relates to 2015, I think that's a little early to try to comment on that.

Obviously, as we get closer to the end of the year, we might have some additional updates.

But at this point, I don't see any indication that the expectations are going to ratchet back.

But again, I wouldn't try to comment on spending at this point.

Yes.

Let me just add just a comment on the longer-term outlook, call it 2015 or whatever.

With regard to regulatory compliance expectations, be it capital, be it liquidity, be it any other number of things that we're focused on, we've organized internally to make sure that we not only comply with, but also get organized around aggregating data sources internally so that we create something that's sustainable.

And over time, I would expect that the cost would ramp down.

There's an effort to get things organized and effective, but efficiency is also front of mind for us as we go through this process.

Understood.

Thanks for that, and my second question is just around the balance sheet.

When I look at the balances are big, we've see a similar trend with the other trust banks this quarter as well.

How sticky do you think these are?

It looks like a lot of it actually came from on the US side.

Maybe you could talk a little bit too the sources of this excess cash that just keeps coming in.

And have you guys given any thought to potentially repositioning the balance sheet and buying some securities with all of this excess cash that sitting in with the Fed right now?

Sure.

Alex, this is Mike, I'll start.

You're absolutely right that we did see a significant increase in client deposits in Q2 relative to Q1.

Unfortunately, most of that is in really the category of excess deposits.

So, we estimate that there was approximately a 50% increase in excess deposits from the Q2 relative to Q1 on average for the quarter, and our policy is basically to take excess deposits and place them with the Central Bank.

At this point, there hasn't been any change in our philosophy, and we don't think it would be prudent to turn around and invest those excess deposits in longer-term securities at this point.

But again, that's something that we're monitoring.

It's something that we are very cognizant of, particularly as it relates to the new liquidity coverage ratio requirements which will be effective January 1, 2015.

More information to come there.

Understood.

Thanks so much.

Thanks.

Ken Usdin, Jefferies.

Hi.

Good morning, everyone.

Mike, can you elaborate a little bit more on the offsets against the higher compliance costs?

First of all, relative to that up $30 million to up $40 million, can you size what the new increased expectation is?

And then, do you also have plans to -- given that this is different versus your original expectation, are there plans to offset those costs in either salaries, incentive compensation plans for management or other parts of the business?

Sure, Ken.

First, let me talk first about the $20 million increase that we expect Q3 relative to Q2, and then let me come back to the first part of your first question.

First, I'd emphasize, Ken, that the $20 million is obviously a current estimate, so it subject to change and it is subject to some one-offs.

Some of our expenses, either plus or minus, can be lumpy.

But with that caveat out of the way, I'd point to really several pluses and minuses in Q2, just along the lines of what you were alluding to.

First of all, the -- we did have $14 million of expense recoveries in Q2 that dampened our overall aggregate expenses in Q2 that we don't expect to recur in Q3, so that was 2014.

We also have an extra payroll day in both -- in Q3 relative to Q2 and that -- we have the same number of payroll days in Q4 and Q3.

But it is an increment of approximately $5 million going from Q2 into the Q3.

Then, the other pluses and minuses that I would highlight here.

First, as we said in the prepared remarks, we do expect that regulatory compliance costs will be higher in Q3 than Q2.

We also anticipate that we'll continue to have net new business over the course of Q3 that will likely require some expense to service that revenue.

Then importantly, we've got a couple areas of offset.

We've got the savings, Ken, from the Q1 severance actions that we took, and again, we expect a large amount of those savings to come in in Q3.

And then we're also looking at some other savings opportunities along the lines with what you've described, and that could include redeploying existing resources to the regulatory compliance areas so that it's not incremental expense, it is just a redeployment of existing resources.

We're looking hard at that.

As you mentioned, the management incentive comp, I might add, unfortunately, adjusts automatically for the higher expenses, so that will represent some partial offset as well.

So, basically, that -- those are the pluses and minuses that we're really focused on as it relates to Q3 and Q2.

And as I've said in the prepared remarks, we would expect Q4 to be in line approximately with Q3 as being our current outlook.

On your question on the overall level of regulatory compliance expenses, we are in the process, Ken, of working through those detailed plans.

And I don't know that it would be very meaningful to you to give you an updated number.

I think it would connote false precision.

And since we are reviewing opportunities to redeploy existing staff, it's -- the growth amount of spending would not be the amount that would expect to fall to the bottom line.

I think the more meaningful number would be to focus on the plus $20 million sequentially.

Okay.

And Mike, my second question just regards to LCR compliance.

Can you tell us where you are?

Earlier in the year, you mentioned considering making changes -- potential changes to the way that the balance sheet is structured and your investments are --where your investments are heading.

Can you talk to us about LCR compliance and any anticipated changes to that?

Yes.

Ken, first of all, at the end of Q2, we estimate that we would've been in compliance with the new requirements for LCR for 1/1/2015, and that's a result of diverting more as our assets on our balance sheet to the level I high-quality liquid assets that are required.

Now, I would anticipate that there'll be a little more migration in the second half of the year to a higher level of level 1s.

And so therefore, there's a little bit more dampening of NIR coming in the second half of the year, but that was reflected in the NIR estimates that I gave you for the full year.

Okay.

Got it.

Thanks, Mike.

Glenn Schorr, ISI.

Hi, thanks.

On the -- obviously you have the [DVARB] season driving the securities on loan balances higher and producing the seasonality in the quarter.

Is there anything else in there that helps drive the revenue beat like better spreads, higher interest and hard-to-borrows?

Anything like that?

Glenn, it's Mike.

A couple of the things helped us out here in Q2 that I would highlight.

First of all, in terms of the core servicing fees, we benefited from a couple things that Jay emphasized in his prepared remarks.

First, we did see a sequential increase in transaction revenues of approximately $5 million Q2 versus Q1, and so that was a welcome change from the decrease that we had seen in the prior quarter.

And again, there's several moving parts there, but we think some of that reflects the fact that there was some index rebalancing that took place in second quarter which, again, led to our clients generating more transactions.

So, that helped us.

As I said -- and then the other one was the change in the mix of flows.

We saw some additional risk on behavior in Q2 relative to Q1, specifically with some cyclical rotation back into emerging markets, which was a welcome change.

And then beyond our core servicing fees, as I said in my prepared remarks, Glenn, the -- we did benefit from short-term market rates being higher than we had anticipated for the first half of the year in Europe.

Unfortunately, that abruptly changed here in early June with the ECB actions.

But the bottom line is, we had some benefit from the first half of the year in IR that we don't expect a repeat.

And I would think of that as sequentially Q2 to Q3, us losing approximately $10 million of NIR with the change in the European conditions.

Those would be the ones that come to mind.

Okay, appreciate that.

I was trying to get towards that -- this will be a bigger sequential drop than normally, just because there was a bigger sequential uplift.

Let me pick that up.

In securities lending, is that what -- that was where your comments were focused?

Let me just describe what the quarter looked like, and then we can talk through the second quarter, third quarter transition.

Spreads were less of a factor.

The level of M&A has helped the specials within securities lending, but the overwhelming biggest factor, and other than the seasonality of the dividend [ARB] season was Enhanced Custody, which is the alternative direct to hedge fund lending program that we innovated a couple years ago and continue to invest in.

We are starting to globalize that, moving that to Europe and Asia, is our current plan.

Mike referenced in his remarks it was 25% of our revenue in the second quarter in most of the uptake.

I would expect that we would see the drop-off second quarter or the third quarter, but Enhanced Custody is a factor and what I believe is gaining market share in the overall securities lending business.

Appreciate the extra color Jay.

On the -- I know we want to look at expenses in aggregate, but comp particularly, you called out some stuff last quarter like the merit increases.

But we're looking at 6% year on year for the quarter, maybe something more like 8% or 9% for the first six months.

Obviously doesn't match up with what we've seen on the revenue side, but to your point, the fee businesses are growing, the assets are growing.

I guess the question is, how do you balance all that?

Because it sticks out to all of us when we're ripping through the numbers and contributing to the lack of operating leverage.

Sure, Glenn.

No, you are absolutely right.

In terms of year over year, the items that you described certainly have had an impact.

Specifically, if we look at Q2 2014 versus Q2 2013, in terms of comp and benefits, first and foremost, I would highlight the fact that we have had growth in the core fee business and therefore -- we're in the service business.

That requires additional expense to service that higher revenue.

Then the other items are the items that we've talked about previously, which is we did have a merit increase that kicked in April 1 of 3%.

We did have higher deferred management comp this year versus what we had a year ago because the performance year that we had in full year 2013 was higher than the performance we had in full year 2012, which meant that the deferred comp awards that were granted earlier in 2014 were higher.

And then as we talked about last quarter and also at the investor day, we've had higher regulatory compliance expenses.

Some of that has manifested itself in higher staff costs and also then in the other operating expenses around consulting expenses.

And then the final thing I would highlight, Glenn, would be the growth initiatives that we highlighted at the investor day.

Those continue to be key priorities for us.

I would point to something like Enhanced Custody where it was a good thing that we invested in Enhanced Custody in the last few years because that's been more than 100% of the year-over-year growth in securities finance revenues.

And so not every initiative will be a success like Enhanced Custody, but the point is it is important for us to invest in these growth initiative so we remain innovative in terms of the value-added services.

Okay.

I appreciate it.

Thanks.

Robert Lee, KBW.

Thanks, and good morning.

Could you maybe, Jay, give us a little bit more color on the asset servicing trends?

How should we be thinking of that maybe from a potential revenue impact?

When you look at that, any way of sizing it or any more color on the thinking more within the mix and have flow-through revenues?

Yes.

The $250 billion of which, I think we all said $243 billion I think was yet the numbers to be installed.

It is a real mix, got a little bit more of a non-US tilt to it.

It continues to be colored proportionately more in the alternative space and the traditional alternative hedge, but also liquid alts.

We've had a couple of nice wins that are factoring through the revenue line, things that we've reported over the last several quarters.

I would characterize the quarter as a pretty strong quarter from a standpoint of new business committed.

I'd also characterize the outlook from a pipeline standpoint as strong and probably stronger than it's been in a while and a little bit more with -- with a little bit more of an international bent to it.

When you look at the translation into the service fee line, Rob, I thought -- I was pleased with the second quarter service fee growth.

And it factors in, obviously, the equity markets, the -- pretty positive free risking environment from a customer standpoint and this layering in of the new business.

I think if anything, trendwise, a little more positive than we've seen from the standpoint of the quarter's results and the outlook from a pipeline standpoint.

Okay, great.

And then maybe just as a follow-up, just a little bit of a modeling question.

But the tax rate in the quarter was a little low, and I apologize if you addressed this before, but -- and I know you -- the guidance is that it will come back in the second half of the year.

Can you maybe talk about what specifically drove the lower tax rate in the quarter?

Sure, Rob.

There were two primary items that impacted the Q2 operating tax rate.

The first is that we did have some favorable settlements related to prior year tax returns, so that helped us in the quarter.

And then the other factor that helped us in the quarter is that the Q2 operating tax rate is impacted by the rules, the accounting rules that govern the quarterly timing of the recognition of our tax advantaged investments.

And so the net impact of that was that the Q2 rate was lower than what we estimate for the full year average, but we expect -- excuse me -- the second half of the year operating tax rate to be higher than that full-year average.

That was the cause of the temporary favorable in Q2.

Great.

Thanks for taking my questions.

Brian Bedell, Deutsche Bank.

Thanks.

Good morning.

Good morning.

Just to maybe, Jay, just to go back to the servicing line, and thanks, Mike, for outlining the transaction impact.

Can you also outline the US -- or the impact from the US dollar weakening?

And then Jay, if you can talk about to what degree you're seeing the mix shift of new business?

So, into alternative, helping that core fee ratio?

Should we be thinking about that as an improvement in the core fee rate going forward, given you're seeing more assets in the higher-yielding areas?

Yes.

I'll start and then Mike can pick up the currency effect.

I think to your question, Brian, probably the bigger factor in the quarter with regard to the nice uptick in service fees was probably the asset mix, re-risking from a client standpoint.

I would say that the new business layering in, it's hard to characterize any meaningful difference.

I think alternatives have been a theme for several quarters.

And as I spent time in the marketplace, it's pretty clear to me that there is a convergence going on between the traditional loan-only managers that are getting into alts, liquid alts, and the alternative managers going downstream into the traditional distribution channels.

I would say if there was a sweet spot prospectively, that would be the sweet spot.

It's alternatives moving into the traditional, traditional moving into liquids.

More of a US and Europe phenomenon, but growing in Asia as well.

And if you believe that story, I would think that we're well-positioned for that, given the work we've done in alternatives and given the penetration we have in the traditional asset management space where the liquid alts are being generated.

And so Brian, this is Mike, regarding your factual question on the FX impact on GS revenue.

We estimate, Brian, that on a year-over-year basis, so Q2 2014 versus Q2 2013, it's helped us by about 1 percentage point.

So, specifically about $11 million of benefit in that year-over-year comparison on $1.2 billion of revenue.

Then the sequential quarter was much smaller.

It was approximately $3 million benefit in the Q2 versus Q1 comparison for GS revenue.

Okay.

That's real helpful.

And to both of your comments, it sounds like we have some sustainability, but based principally on the or re-risking more than anything else, and of course we get the --

That's -- the business commitment pipeline and re-risking are the three real pluses in my mind in the quarter.

Great.

Thanks for that.

And then just my follow-up question would be, you were talking about the market environment for generating positive operating leverage in the second half.

If you can maybe characterize what type of market environment you think you would need to do that?

Sure, Brian.

Obviously, it's been a challenging first half of the year.

On the other hand, we continue to believe that our full year expectation is for revenue growth of 3% to 5%.

And as I've said, the first half of the year it's been 4% on a year-to-date basis.

But we the benefited by about 1 point from the weaker US dollar on a year-to-date basis, so call it 3% on a constant currency basis.

And then the mix has not been particularly helpful regarding operating leverage.

The core revenues, the core servicing fees and management fees are up approximately 7% versus a year ago.

But the market-driven revenues where we had the highest profit margins have actually been down year-over-year.

That mix has put pressure on us in addition to the fact that we have been at the lower end of that 3% to 5% range on a constant currency basis.

And then on top of that, as I've said in my prepared remarks, the operating expenses, we've got some additional pressure there because of the regulatory expectations.

The bottom line, Brian, is we would need to see a year-over-year increase in the market-driven revenues, and in particular, some rebound in the FX volatility and some help from market interest rates in all likelihood to be able to achieve that result.

Okay.

If we could just assume your current NIR forecast, for example, if you're isolating that, is it fair to say that we would see and improvement in FX volatility to some extent and then a continued improvement in, say, equity market levels and continued pace of a re-risking, and that's what you would describe as a positive environment?

Yes.

I think that's very fair.

Okay.

Great.

Thanks very much.

Luke Montgomery, Sanford Bernstein.

I think last quarter you pointed to processing fees of $125 million to $135 million per quarter, and then you were below that this quarter.

And it looks like you also restated the first quarter results.

Maybe if you could review the movable parts of the taxable equivalent adjustment and update us on your expectations there?

Okay, sure, Luke.

First of all, we did have a product reclass.

Specifically, we provide a currency management service to our transition management clients, and that revenue of $13 million in the quarter was reclassed out of processing and other and into the trading services line item.

If you added back that $13 million, then we actually -- the processing fees and other would have been right in line with what we had talked about previously.

It was that product reclass that just moves revenue from one bucket to the other which caused the lower reported number in the processing fees and other lines.

In terms of your question on the outlook for processing fees and other, we do expect that the second half of the year will have a higher tax equivalent adjustment, particularly driven by a higher volume of tax advantaged investments than what we had in the first half of the year.

Including the tax equivalent -- higher tax equivalent adjustment in the second half of the year, I would anticipate that our processing fees and other would be in the range of, call it $115 million to $120 million for the third quarter.

Again, that's subject to change, obviously, with different one-offs, but that would be the kind of range that I'm currently thinking at this point.

Okay, very helpful.

And then I wondered if you could comment on the MiFID proposal around brokerage commission sharing agreements, which the regulators are calling inducements.

How do you anticipate that might affect your European operations, either in your capacity as a broker or on the investment management side of the business?

Boy, Luke, this is Jay.

I'm not sure can answer that one.

I'm roughly familiar with the MiFID requirement.

It shouldn't have a big effect on any brokerage, because that's something we don't do directly.

Probably have to come back to you on that.

Okay.

Fair enough.

And then I just wanted to circle back on the regulatory spending commentary.

It seems as like you began communicating this pressure a little bit later than some of the other trust banks and some of the asset management.

At least one of them is that peak spending now.

I don't mean this to sound combative, but a skeptic maybe could be a little bit leery of the timing here, given that you were the only one of your peers last year that posted material operating leverage and beat expectations.

Maybe you could just comment on why there seems to be a delayed effect in your case in and why you were later recognizing the need to increase that spending.

I can't speak, Luke, to other folks' representations.

Pretty clear to me that regulatory expectations are a moving target.

I think that whether it's capital liquidity, different levels of reporting that are required, the bar gets raised all the time.

I think for somebody today to say that regulatory expenses has topped out or peaked seems inconsistent to me with what I'm hearing from regulators.

I think from our standpoint, we are addressing the requirements and trying to do it in a way that's durable and sustainable and looks at building internal data models so that we can aggregate information more easily and fluently going forward.

We're trying to put in place an infrastructure that can continue to respond to what I believe will be an ongoing and increasingly challenging level of regulatory requirements.

For us, we've been focused on this all along.

We're continuing to focus on it.

I can't speak to what others' point of view is on this.

Okay.

Thanks a lot, guys.

Ashley Serrao, Credit Suisse.

Good morning.

Mike, going back to the LCR, are you able to size what the revenue drag was this year?

And just for context, where were you at the beginning of the year?

And in terms of being compliant for 2015, do you mean 80% or higher?

Okay.

Actually, several questions there.

First of all, I do anticipate that we'll be well higher, well north of 80% and year end.

And again, we estimate that we're north of 80% here at Q2.

Again, our expectation is not to be close to that 80% minimum line.

But instead to really demonstrate that we have ample liquidity relative to the Fed expectations in particular.

And in terms of sizing it, round numbers, by the time we get to the end of the year, I would anticipate that the higher level of high-quality liquid assets represents a drag of approximately $10 million a quarter for Q4 2014 relative to what we might of been pro forma without that higher level of level I high-quality liquid assets

Got it.

So, when we think about 2015, we should think about maybe a drag possibly half that size going forward?

Or is that too aggressive?

Yes.

Ashley, I think that's in the ballpark.

Again, it's really early for us to be giving a lot of guidance around 2015, but I think your sizing it approximately right.

To the nearest half it would be about a half.

Okay.

And then I had just a follow-up question on funding this quarter.

The rate on other short-term borrowings was negative.

Any color there?

Is this supposed to reverse going forward?

Sure.

Ashley, what that really reflects is an accounting reclass.

Basically, this relates to a block of muni assets and a product that we use for tax-free money market funds.

Specifically, we had an accounting reclass that pointed now the interest rate swap to the asset side of the balance sheet rather than the liability slide, as indicated on the average rates page.

Specifically, if you look up at the state and political subdivisions line item, you can see that that went down for the quarter.

And that's the accounting reclass where the impact of two quarters were of this interest rate swap got reflected in Q2 and that line item.

I would expect then, all other things equal, that Q3 could jump higher than the 3.3%, something closer to, call it the high 3%s in Q3 as the accounting reclass -- the disproportionate impact in Q2 get changed.

And that had been an equal offset to the other short-term borrowing rate, so I would anticipate the other short-term borrowing rate in Q3 to be something just north of zero.

It would be the average of the 1.57% in Q1 and the negative 1.2% in Q2.

It would be something -- a small positive in Q3.

All right.

Thanks for the color there.

And just moving onto sec lending and Enhanced Custody offering.

It seems to be gaining a lot of traction.

I was just curious, who is your incremental customer there today?

Is it just -- are they switching just from the agency program that you have?

And how do you envision your competitors responding to this, because it's pretty impressive growth that you are putting up.

Yes, Ashley, let me take that.

I think we all know how this works.

As opposed to lending securities to a prime broker who might lend them on to a hedge fund, we're lending securities directly to the hedge fund on a book entry basis, so there's less folks in the chain, more efficient process, attractive from a hedge fund standpoint.

Most of the activity would be bypassing the prime broker, I think is probably a fair way to look at it.

And interestingly, I think many of the prime brokers out there are evaluating with a backdrop of the new capital requirements, how much and what type of prime brokering they are looking to do so it seems like we've hit the market at a good juncture.

Competitively, we were way out ahead of this.

We were working on this for three, four years, and the last couple of years it's really started to hit its stride.

The traditional competitors are focused on it, but quite a ways behind.

I also might add that our deep penetration in the alternative servicing marketplace positions us ideally for this because we are dealing with those counter parties, those hedge funds, and even the liquid alt marketplace with the low leverage 130-30 funds are also users of this Enhanced Custody.

So, that gives you a little color on how it came to be and what the competitive landscape looks like.

All right, great.

Thanks for all the color and thanks for taking my questions.

You're welcome.

Mike Mayo, CLSA.

Hi.

Good morning.

I have two questions, one easier and one, I think, harder.

But the easier question is, why did the balance sheet grow as much as it did, up $20 billion?

And the difference between period end assets, $280 billion versus average assets $235 billion.

Those are big numbers.

Is that risk off?

Is that a bunch of client wins or some other change, and do you think those funds will be sticky?

Yes.

Mike, it's Mike.

The -- first of all, as we noted in our prepared remarks, the vast bulk of that balance sheet growth Q2 versus Q1 was, in fact, an increase in excess deposits.

We estimate that the excess deposits were up approximately 50 -- excuse me, approximately 50%, or $14 billion Q2 versus Q1.

And that's on average for the quarter.

On your question on spike at the very end of the quarter, again, we have seen that, the trust banks have seen that pretty consistently, really over the last year where as funds are looking for a safe haven at the quarter end reporting date, we have been treated as that safe haven.

I don't anticipate that the spike that we saw at June 30 is a harbinger of things to come here in Q3.

I would note that the best bulk of those excess deposits left at the beginning of July, just as we've seen in prior quarter ends, and in terms of the excess deposits that we have, even on average for the quarter, we would anticipate that the majority of those excess deposits would likely move to a different place as short-term interest rates go up.

Obviously, we haven't tested that hypothesis yet because short-term interest rates have been particularly sticky and particularly low.

And then my other question relates to -- how much is the negative operating leverage for 2014, a statement on State Street versus the environment?

It's been a 3.5 years since you had the IT and ops program and 3.5 years later, we're hearing negative operating leverage.

In your defense, what I've heard you say is, look, interest rates are lower for longer.

That hurts NII.

The regulatory environment's tougher, that hurts the expenses.

On the other hand, I note that headcount is flat year-over-year, at least in the first quarter at 29,500.

And I'm just wondering how much you have left of the $575 million to $625 million of savings.

Mike on that last question, we do anticipate the -- getting the stub expense saves of $50 million in 2015 as we fully capture the rest of the run rate and from IT and ops transformation.

The other headwind that you didn't mention that I would ask has been FX volatility.

FX volatility is at historic lows.

That has certainly been unhelpful to us in terms of our ability to generate favorable operating leverage because as we talked about at the investor day, those market-driven revenues like FX and like NIR are our highest margin revenues.

And it's tough to generate positive operating leverage in that kind of environment.

How much have you actually achieved of the IT and ops of the $575 million?

In terms of the run rate, we've achieved on a run rate basis the savings that we anticipated for 2014.

We'll obviously capture the saves in Q3 and Q4, but they are already in the Q2 run rate.

Again, we anticipate the stub of $50 million in 2015, but at this point, we've achieved the run rate savings for 2014.

And Mike, I would just got -- to try to raise this up a level, we've had some success with operating leverage.

We've got a little bit of expense headwind that we talked about with regard to regulatory.

But if you look at -- I'd say a real positive is the service fee, management fee.

And if you look at the sustained recurring headwind, it's really the net interest revenue.

If you look at the impact that that has on a trust bank as far as the percentage of revenues and the fact that that's been grinding down over the last couple years, we really need a turn in that volatility would help.

And then I look at the health of the core service fee lines and boy, that makes me feel pretty good.

I think in that grinding down interest rate environment, we've been, as you pointed out, becoming more efficient.

That doesn't go away, that's embedded into who we are.

A little bit of help on the rate side and on the volatility side would turn operating leverage pretty quick.

We're trying to get there without that.

And then last follow-up, just the headcount, it was 29,530 in the first quarter, what was it this quarter?

Or if you don't have the exact number, how are you think about headcount?

Because with all the initiatives that you've undertaken it hasn't really gone down.

Yes, Mike, I don't have that headcount number right at my fingertips.

But I think importantly, one of the things that we're looking at carefully is around the headcount for regulatory compliance costs relative to that trade-off with outside consultants.

So, we're really trying to manage the overall dollars as opposed to artificially trying to push the headcount number down, which would likely show up as higher consulting expense.

The other thing I would say which I don't think report, but I look intensely internally, is where that headcount's located.

And there's been a steady migration of that headcount from higher cost locations to lower-cost locations.

While the FTEs may be the same, the cost per FTE is continuing to go down on a conscious basis.

How many people and regulations, then?

Maybe that's the difference.

If you have more in regulation and less elsewhere, maybe that's being masked?

Yes, Mike, again, I wouldn't try to give you a specific number at this point because again, we're -- in effect, virtually all of us are spending more time on regulations.

Trying to do a precise analysis of the FTEs related to regulatory compliance, other than saying it certainly is up, I would not try to quantify that number, I think it would be false precision.

All right.

Thank you.

Geoffrey Elliott, Autonomous Research.

Hello.

When you think about the Fed stuff and you tighten next year, how do you think the mechanism of tightening, whether it's raising interest on reserves, reverse repo rates, doing something else, is going to impact the customer behavior and then feed through into your balance sheet profitability?

Do think it more matters what option they go for?

Sure, Geoffrey, it's Mike.

First, we do expect that we may see some Fed tightening next year, which ideally would lead to higher short-term interest rates.

That certainly has the potential to help out our net interest revenue for next year.

In that kind of situation, as I said earlier, we do anticipate that perhaps a large chunk of the excess deposits that we had on our balance sheet at Q2 would migrate off the balance sheet and find a different home.

And while there'd be a small negative impact from that on NIR, I would remind you that we're only earning approximately 20 basis points of net interest margin on those excess deposits.

That impact I would expect to be manageable and probably more than offset by the favorable impact of an increase in short-term market interest rates.

And of course longer-term, Geoffrey, that's also helpful, some shrinkage in the excess deposits is also helpful in terms of managing our capital ratios.

Again, net/net, I would view that as a positive impact if that happens in 2015.

I think there -- it's an insightful question, because you've heard from the Fed, I think they've signaled pretty clearly that this -- it could be the of different this time around with regard to using other tools other than just rate tightening, paying more in excess deposits, using repo.

I think Mike's right, which is as rates go up, funds will find better uses for their excess deposits than State Street.

On the other hand, there's a point at which if the Fed increases the rate that they pay in excess deposits, it will depend on where overall rates are.

That could be a real positive for us if given the excess deposits we're holding, if the rates get -- go up on that.

And then, how do those deposits actually seeing -- impact the LCR?

Is there any impact, or is it a wash because you'd lose the high quality liquid assets that those deposits are assumed to go out anyway under the LCR calculation?

Yes.

We would expect that to be a wash, Geoffrey, because as you've said, the excess deposits are assumed to run off at 100% in the calculation.

Thank you.

Cynthia Mayer, Bank of America.

Hi.

Thanks a lot.

You mentioned some costs associated with installing net new business in 3Q and I'm just wondering, is that more than normal and why you would call that out?

And I guess bigger picture question is, do some types of wins like alternatives require more upfront costs than others.

And what is your mix shift mean for your upfront costs of installation?

I think the -- to the first question, Cynthia, we always call it out.

I think the nature of -- I think what Mike was getting at was the nature of when the revenue is driven by service fees, it comes with a certain amount of costs to not only implement that business but support it on an ongoing basis.

With regard to the amount of upfront cost, it really is probably less relevant to whether it's a traditional, alternative or a pension fund and more related to the size, sophistication of the implementation itself.

I would say in a more simplified traditional implementation, call it a quarter or two quarter, which is probably 70% of the new business, there tends not to be an extraordinarily upfront.

There is some lead expense.

And in that 30% where you have a large, sophisticated, multi jurisdictional implementations, DFA comes to mind most recently, there's a little bit more upfront cost which would precede the implementation.

Okay, great.

And then just a more big picture question on regulatory costs.

I think way back when you guys used to talk about regulatory pressures as also a business opportunity because your clients are seeing it too.

And it seems like the commentary has really shifted to you guys are getting hit by a lot of regulatory costs, but we're not hearing so much about whether you're still seeing it as a business opportunity for your clients.

I'm just wondering, are you still seeing it as an opportunity, or is it the type of regulatory costs or just really different lawyers, et cetera, from the type of services you provide?

Do still see that as an opportunity?

Yes.

Absolutely, Cynthia.

And in fact, I would surmise that the banks are ahead of the investment managers and the pension funds with regard to the, what I call the regulatory tsunami that's coming.

But when you look at our investor services business, the requirements for risk management, for compliance, for reporting, for data aggregation, it is extreme.

We organized in the last year a new set of activities under what we call global exchange which is designed to focus on that opportunity, and it's been very active.

Customers in the investment management and the asset owners segment are really struggling with their ability to get their arms around their data to feed compliance regulatory risk management systems.

I would say the opportunity is ever present, and it's probably bigger prospectively because of this lag effect of banks being first through the pipe year.

Okay, great.

Thanks a lot.

Jim Mitchell, Buckingham Research.

Hey.

Good morning.

Just want to dive the little bit more into the custody fees.

I think this sequential improvement was probably the biggest we've seen since the end of 2012.

You highlighted the increased activity levels being about $5 million, but the rest seem to be from new business wins and market.

How -- can you give us just a little bit more -- I think, Jay, you've highlighted emerging markets as a big driver on the downside and the fee rate.

It seems like we got a little bump in the fee rate this quarter.

Is that the biggest delta X, the pickup in volumes, or what else is driving that big sequential jump?

I'm just trying to get a sense of how we think about momentum into the third quarter.

Sure.

It's Mike.

First yes.

The single biggest help event in that ratio of fees to assets is as you correctly concluded, was the mix shift change into emerging markets.

That was particularly helpful to us in that quarter.

Now, again, I would emphasize, just as we have in the prior quarters, that we do think that that ratio of service fees to assets is a relatively imprecise measure.

But to answer your question factually, yes.

That mix shift plus the $5 million sequential improvement in transaction fees was what I would particularly highlight there.

Okay.

That's helpful.

And then maybe just a follow-up on the deposit side.

I appreciate your comments that most of the deposits are runoff, but I think we've said that for four quarters in a row and the average balance sheet has grown every quarter.

Is -- have you guys -- is there any insight on what's driving this dramatic quarter over quarter growth that we've seen over the last four quarters?

And what's your conviction level that it does runoff and stay off, because it seems like we're always continuing to raise our balance sheet expectations going forward.

Yes.

First of all, Jim, we have yet to see a period where market interest rates have increased.

We have to test the hypothesis that what happens to these excess deposits if short-term rates rise.

We do have conviction that those deposits will likely find it more economic to find a different home in that environment.

But until we test that hypothesis with some real data, there's not much else we can do to prove it to you.

And as a result, the trust banks continue to be safe havens at quarter end for a number of our clients.

Great.

Fair enough.

And are you assuming -- did you disclose what your assumptions are for the remainder of the year on your balance sheet side in terms of your NIR forecast?

Yes.

It assumes that -- the range that I provided in the prepared remarks assumes a flat level with average Q2 levels.

Now, again, there's going to be variance around that.

I don't know whether it will end up being plus or minus, but given that we only earn approximately 20 basis points of net interest margin on those excess deposits, I don't think that will be a significant overall factor to the NIR for the full year.

All right.

Okay.

Thanks a lot.

Thanks.

Brennan Hawken, UBS.

Good morning.

Good morning.

Just a quick question on the planned preferred equity capital raise that you guys have mentioned in the past.

Any change to your thinking around that or any clarity on timing?

Sure.

No.

The short answer is no change in our thinking around the prefs.

We do believe that ultimately we will issue at least another $500 million of prefs in order to optimize the ratios under the Basel III risk-based capital ratios.

And in terms of the timing, we will continue to look at market conditions and a number of other factors.

At this point, I wouldn't have anything else to communicate on when the timing of that ultimate $500 million.

Okay, and then a quick one.

I know we've beaten the hell out of this dead horse, but I'm going to give it another shot.

I hear you that the environment's been rough and doesn't exactly bode well as far as the operating leverage.

But we've been saying that for a while and continuing to wait for the revenue environment to get better.

Can probably feel like we're waiting for good [dough] here.

What -- do you all have something in mind where there's some sort of line to cross that would get you more aggressive to think about another cost-cutting program?

How much -- how can we think about how much flexibility do you have in your expense base?

From the color, I would think you really don't have any, but sometimes you find when push comes to shove that there's greater flexibility than you had previously thought of.

Is there any way that you can help us think about that?

Brennan, the -- let me give it a shot.

The -- we're trying to strike the right balance between investing, and in spite of all this pressure that we have, we are investing.

If you look at IT as a proxy for that, it's been a pretty consistent throughout that.

And we think that this period will at some point change and rates will go up and volatility will change.

And in the meantime, we're trying to scrape along and extract some operating leverage while still spending for the long term.

There's always expense leverage, but we're trying not to take away from the future.

We're trying to manage expenses to create operating leverage, which is our goal for this year.

That's how I'd respond to that.

Okay.

Thanks.

Thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning.

You guys reported that the pretax operating margin improved in the quarter, I think you said to 32%.

On the new business, how long does it take for your new business wins to reach that type of operating margin?

It depends, Gerard.

I'd go back to my earlier reference to, let's say two-thirds, three-quarters of the business is more, I'd call it routine.

Somebody brings up a new fund, we convert a small or midsized pension fund due in 30, 90 days.

It doesn't take long in those cases for us to achieve profitability, target profitability because you have some preparation ahead of time, but it doesn't take quarters to get profitability.

In the case of the larger, more complex, that might lag out a little bit just because of the implementation costs and getting things settled in.

That would be my response.

Okay.

And Mike, regarding the LCR, there's -- in the proposal, there is some changes that apparently are coming to the calculation of the LCR.

Have you guys seen or heard of any of those changes, and would they benefit you in that your LCR ratio would actually be greater than where you think it is now if those changes actually come to pass?

Yes, Gerard, it's Mike.

We're obviously monitoring that situation very carefully.

I wouldn't anticipate that having a major impact on the comments that I made earlier in terms of the impact.

But I don't really want to try to speculate any more than that until we see what the final rules are.

Okay, and then lastly, Mike, you talked in your prepared remarks about obviously what the ECB did with the interest rates, the overnight rate going to a negative number, and you're exploring different options now or considering different options as well as monitoring the competitors.

What are some of the options that you guys are considering if that actually becomes more negative or just stays this way for an extended period of time?

Well, Gerard.

This is Jay.

If market rates actually went negative, we can charge for deposits and that's not unprecedented.

We've done that in two European markets over the course of the last couple of years.

That's one option we could -- we'd minimally have conversation with customers that are leaving deposits and explain the economic predicament and help them determine whether they want to continue to leave deposits with a cost or find some other economic offset for that.

But it's not unprecedented.

We did it in Switzerland and one other market, and Denmark over the last couple years.

Actually charged for deposits.

Great.

I appreciate the insights.

Thank you.

At this time, there are no additional questions.

I'll turn it back over to management for closing remarks.

Thanks, Stephanie, and we would just thank you for your participation today and look forward to talking to you at the end of the third quarter.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.